Chapter

The World Bank in Adjustment and Economic Growth in Africa

Editor(s):
Gerald Helleiner
Published Date:
March 1986
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Author(s)
Luis de Azcarate

It should be clear that the subject—the role of the World Bank1 in adjustment and growth in Africa—cannot be adequately covered in a paper of this kind. I have chosen to look at it mainly from one angle and to discuss the evolving role of the Bank in the hope that what is being lost in detailed analysis of the Bank’s activities in the present difficult period will be compensated by some gain in historical perspective. One of the more interesting and perhaps useful aspects of the Bank’s role has been the effort of the Bank to adapt to changing and different conditions in member countries and to learn from experience. Whether such efforts have been successful is not for me to judge, even though the paper will point to some successes and to some problems.

The first part presents the background of Bank activities during what I call the first period, that is, from the initial operations in Africa (the first IBRD loan was made to Ethiopia in 1950; the first IDA credit to Sudan in 1961) to the turbulent period of the late seventies. The second part reviews the impact of the shocks of the seventies, whose combined outcome has created new and more difficult conditions for development, and the countries’ policy responses. The “new development agenda” that the countries and the aid community, including the Bank, face together since the beginning of this decade is the subject of the third and longest part of the paper.

Supporting Growth: The First Period

This part presents a sketch of the conditions and problems faced by African countries at the time of their gaining independence, around 1960 for the majority of sub-Saharan countries, and the main currents of thought that provided the intellectual underpinnings for development policies and aid. It then reviews the main aspects of the World Bank’s activities during the period and finally assesses some of its achievements and weaknesses.

Initial conditions

At the time of independence a quarter of a century ago, the countries of sub-Saharan Africa presented a new challenge to the international community. All these countries were unmistakably poor, although in very different degrees. Per capita incomes in some better endowed countries of the West African coast, for example, were probably five or six times higher than those of the Sahelian region. Infrastructure was embryonic, and the levels of literacy dramatically low. Social conditions reflected in the lowest life-expectancy rates in the world were, to say the least, unsatisfactory.

But the challenge was not seen as overwhelming. Africa was, after all, a continent of immense untapped resources; no major macroeconomic imbalances obtained; export activities were well developed, and the demand for African primary commodities was expected to grow in line with the overall fast expansion of the industrial countries. Public aid would provide the additional financing necessary to sustain the growing volume of imports needed for the “modernization” of the young economies of the continent; direct private foreign investment would eagerly compete to develop the natural resources, especially minerals, that required large, lumpy amounts of investment to encourage the required technology and management skills. Foreign private industry would also seek to share in the expansion of domestic markets through direct investment in manufacturing. Private bank lending on the other hand was not expected to play a great role, except of course for normal external-trade financing.

No one expected development to take place rapidly and everywhere at once. The agenda was daunting since income levels were so low, but it was also clear and had a dominant imperative: investing for growth.

Evolving thinking on development

Development strategies were hotly debated in the fifties and sixties, and the economics profession thrived on the production of innumerable formal or informal models of growth and development. Africa was rarely the region of reference; Asia or Latin America were. Thinking on development evolved as follows.

The dominant theme was that growth is determined by capital formation (or rather by the stream of income from a growing capital stock). But there were variations on this theme. The “first-things-first” view held that there was a natural sequence in capital formation starting with infrastructure or as it was often called, “social overhead capital,” as a precondition for more directly productive capital. Another view suggested the need to advance on all fronts at the same time (“balanced growth”) in order to create simultaneously incomes and markets and to do it fast (“big push”) in order to avoid freezing the economy in lines of production corresponding to a state of comparative advantage that might entail deep and prolonged dependence on external trade and foreign capital.

Gradually the role of human capital came to be recognized as a critical ingredient of the production equation, and education and health came to be considered not only, as in established national-accounting principles, as a form of consumption but also as productive “assets.” Related to this view, although not directly emanating from the same intellectual current, concern for poverty alleviation became a dominant feature of development literature and, among policymakers, dissatisfied both with the state of the low-income countries of Asia and Africa and with the persistence of large segments of absolute poverty in the more rapidly growing economies of Latin America, Southern Europe, or East Asia. Here also a virtuous association between poverty alleviation and increased productivity was found to exist, or at least was thought to exist, with the implication that more productive assets had to be allocated to the-poor.

Foreign capital in general and public aid in particular were seen in the main current of economics as potentially playing a dual beneficial role. Since investable resources, at low per capita incomes, were insufficient, foreign savings would complement domestic savings and increase the rate of capital formation. At the same time they would relieve the foreign-exchange bottleneck that was considered as an additional and separate scarce resource. Indeed, in addition to large aggregate savings, developing countries could not afford economically to produce certain goods, especially capital goods and other specialized inputs that could only be imported. An inflexible and undiversified structure of production required a complementary, specific factor, namely foreign exchange. This was the essence of the “two-gap” models of growth on whose basis many projections of capital needs were made and the analytical justification of international aid was built. The Bank was seen then as ideally suited to provide much needed untied foreign exchange. It was also to be a source of technical assistance, although this function was not much emphasized in the early periods of the Bank.

Role of the Bank

When the Bank began its assistance activities in the newly independent states, the “product” (as we called it these days) had been shaped by 15 years of experience in other developing areas as well as by the intellectual currents just mentioned.

Thus, as they did in other parts of the world, economic missions from the Bank sought to assess countries’ creditworthiness, that is, their capacity to borrow and service debt on IBRD terms (the interest rate on IBRD loans gradually moved from 4.5 percent in the 1950s, to 7 percent in 1970, and to 8 ½ percent in 1975), or alternatively, their eligibility for IDA, as well as to determine their capital requirements in light, among other things, of the availability of other official development assistance, and identify sectoral investment opportunities.

Lending was almost exclusively for specific projects, and the wellestablished “project cycle”—identification, appraisal, negotiation, supervision—was faithfully adhered to as it had proven its worth in many other countries in ensuring sound technical, financial, and economic standards for Bank-financed operations.

The evolution of lending to Africa is shown by sectors in Tables 1 and 2 for the period 1965–84. During the period 1965–80 there was, first, an uninterrupted progression of lending resulting in more than a fourfold increase in nominal terms between the two quinquenniums, corresponding to an average annual growth rate of about 10 percent over the 15-year period. More than half (52 percent) of total lending in the initial stages (1965–74) was for infrastructure (transportation, telecommunications, and energy, which, at that time, was almost exclusively electric power). This proportion fell to onethird, however, in the next five years. Concomitantly, lending for the main, directly productive sectors (agriculture and industry) increased sharply from 30 percent to 43 percent of the total. This movement, in turn, reflected two new but interrelated directions in the Bank’s assistance strategy that broadly paralleled and in some cases spearheaded the evolution of development thinking.

Table 1.World Bank Lending to Africa by Purpose, FY1965–84(millions of U.S. dollars)
Average
1965–741975–801981198219831984
Agriculture/rural development87.2510.2782.1587.0631.4785.7
Education36.2158.1249.7130.7202.324.9
Energy61.0209.0153.5362.4309.5521.3
Industry141.3267.9265.3481.8483.2731.6
Nonproject11.067.1277.0220.0210.9471.7
Population, health and nutrition2.75.012.523.021.830.5
Technical assistance8.8113.656.736.593.9
Telecommunications12.729.815.2173.722.0128.0
Tourism5.526.0
Transportation145.7370.3507.1366.2375.1463.7
Urban development2.944.751.0120.0154.0117.0
Water supply and sewerage15.0109.8157.6181.5154.2376.9
Total421.41,807.72,584.62,703.02,600.93,645.2
Of which:
IDA171.0653.11,151.2839.81,230.91,212.9
IBRD250.51,154.61,433.41,863.21,370.02,432.3
North Africa97.7682.0772.2901.5807.31,276.9
Source: World Bank Data Files.

Including Development Finance Companies.

Source: World Bank Data Files.

Including Development Finance Companies.

Table 2.World Bank Lending to Africa, by Purpose, FY1965–84(percent)
Average
1965–741975–801981198219831984
Agriculture/rural development20.728.230.321.724.321.6
Education8.68.79.74.87.80.7
Energy14.511.65.913.411.911.6
Industry19.814.810.317.818.620.1
Nonproject2.63.710.78.18.112.9
Population, health and nutrition0.60.30.50.90.80.8
Technical assistance0.54.42.11.42.6
Telecommunications3.01.60.66.40.83.5
Tourism1.31.4
Transportation34.620.519.613.514.412.7
Urban development0.72.52.04.45.93.2
Water supply and sewerage3.66.16.16.75.910.3
Total100.0100.0100.0100.0100.0100.0
Source: World Bank Data Files.

Including Development Finance Companies.

Source: World Bank Data Files.

Including Development Finance Companies.

First, with at least most components for the basic infrastructure in place, there was a need for more forcefully pushing material production or, in modern parlance, effecting a shift from the nontradables to the tradables sectors, that is, toward exportables and import-substitutes. This shift was especially needed after the first oil price increase of 1973–74 to pay for the much heavier import bill of the oil-importing countries (i.e., all sub-Saharan countries except, at that time, Nigeria, Gabon, and the Congo). Higher non-oil commodity prices gave impetus to this movement in the mid-seventies.

Second, there was growing concern for issues of employment and poverty. This led the Bank to focus attention on these problems in its economic and sector work and to direct lending toward medium- and small-scale enterprises, which typically employ more workers per unit of capital invested, through loans usually providing finance as well as technical assistance through intermediary institutions (development finance corporations). Indeed, much of the six-and-a-half-fold increase in the volume of lending under “industry” between 1965–74 and 1974–80 reflects this new orientation. But more important, following Mr. Robert McNamara’s Nairobi speech of 1974, lending for rural development assumed top priority in Bank operations in general and for Africa in particular. Together with more traditional lending (i.e., for commercial export-oriented projects), the agricultural sector became, and has remained, the largest single beneficiary of Bank lending, reaching a peak of 30 percent, in dollar terms, in FY1981. Within the sector, the most ambitious integrated rural-development projects sought to reach the majority of the rural population of the designated area through provision of credit, inputs, extension services, marketing facilities, as well as needed infrastructure (such as feeder roads) and a minimum of social services (including maternity care and functional literacy programs). The objective was to intensify farm and nonfarm rural employment, foster cash crops as well as food crops within the existing farming systems, and generally enhance the quality of rural life, thereby reducing, but not arresting, the flow of rural emigration. Not all rural projects had such extensive attributes, but the thrust of the operations was certainly directed toward fulfilling a multiplicity of objectives involving small farmers. Such complex projects needed strong management and effective monitoring. This was provided for, in these projects, through the creation of autonomous management units, often with rather strong doses of expatriate technical assistance.

Rural development projects have been implemented in 20 sub-Saharan countries in a variety of contexts, in Nigeria and practically all the Sahelian countries, in Malawi and Rwanda, in Kenya and Sierra Leone, and elsewhere.

Also related to concerns over employment and poverty were the Bank’s attempts at innovation in urban projects. These were designed to create jobs in the so-called informal sector, through simple credit cum technical assistance operations, and to provide housing (“sites and services”), water supply, and sewerage facilities at costs sustainable in terms both of users’ charges and of capital requirements from central and local governments.

Similar principles guided the Bank’s work in education where gradually greater priority was given to primary or basic education. While the share of this sector in Bank lending to Africa had remained modest (below 10 percent), training components included in other projects (agriculture, industry, energy, transport, technical assistance) together represented (and still represent) amounts at least equivalent to those involved in direct education lending. The effort toward developing “human capital” was therefore commensurate with the promotion of infrastructure and production, although it represented only a modest contribution relative to the needs of a rapidly growing population. Other sources of official and private assistance and most important the governments themselves were extremely active in developing education at all levels. The real progress achieved in this area has been noted in several Bank reports on sub-Saharan Africa and in the World Development Report of 1980. No less remarkable have been the educational achievements of North African nations.

Achievements and weaknesses

The Bank’s assistance to Africa during the first years emphasized investment projects, microeconomic institutions and gradually more directly productive activities and the alleviation of poverty, with the reasoned expectation that the latter two objectives could be effectively combined. There is no reason to doubt that, in some unmeasurable way, Bank lending contributed to African growth and was instrumental in building a stronger institutional base. But there have been some serious weaknesses and in retrospect it appears to a certain extent that we did not help prepare the countries well enough for more difficult times.

First, we were not very good at predicting the turbulences of the seventies—not the drought, of course, but also not the oil price increases, not the commodities price fluctuations, not the recession, not high interest rates, not the evolution of aid itself. In this, we were perhaps no worse than others, but not distinctly better either. We were not therefore in a good position to advise borrowing governments on policies that would have permitted them to adapt better to the changing external environment.

Second, in the course of our operational activities (including technical assistance which first appeared as a lending operation in FY1976 in East Africa and in FY1977 in West Africa) we were not very good at strengthening the macroeconomic managerial capacities of our borrowers, whether in terms of institutional reforms or training and human resource development in general. Institution building was essentially project specific, not always effective at that and too loosely linked to existing public institutions.

Third, our economic and sector work often lacked robust analytical underpinnings, policy focus, relevance, or practicality. It was oriented mainly at providing the Bank with needed information on general economic conditions, creditworthiness, IDA eligibility, overall capital requirements, and main sectoral-investment needs; it was much weaker in providing relevant analysis of the policy framework for lending.

Fourth, and closely linked to the above, the policy dialogue with governments was rather unspecific and above all not fully integrated into the Bank’s country-assistance strategy except in a basic sense through our assessment of the country’s creditworthiness—but even this did not necessarily mean an effective dialogue with governments when issues arose.

Finally, despite the careful process of selection, design, and supervision, the projects financed by the Bank have not always withstood the erosion of time or the turbulence, domestic or otherwise, of the environment. This is an aspect which would require careful evaluation by country and by sector (and which is carried on in the Bank by the Operations Evaluation Department), well beyond the scope of this paper. Suffice it to say for our purpose here that the “stock of assets,” whether physical, human, or institutional, built through a cumulated amount of lending in excess of $15 billion up to FY1980 for about 800 projects was not as robust as one would have wished, even if possibly stronger than would have been the case in the Bank’s absence. In some important areas, particularly rural development and livestock, the rate of absolute failure, that is, zero or negative economic rates of return (ERRs), or only relative success, that is, ERRs significantly below appraisal but still positive, is much higher in sub-Saharan Africa than for the rest of Bank borrowers. Perhaps this is because too much was expected in too short a period, because not enough attention was paid by the Bank to the maintenance and operating capacity of borrowing entities, or because the projects supported by the Bank did not always fully reflect governments’ real priorities. Probably the cause is a combination of all these factors.

******

Despite these and other problems the first period of Bank involvement, corresponding to what may perhaps be called the formative years of the newly independent nations of Africa, was one of reasonable progress for many African countries. Growth of GDP exceeded 4 percent in all countries except in the low-income semi-arid group (see Table 3), quite a respectable achievement considering initial conditions. The Bank was instrumental in contributing to expansion of the physical and human capital base and in building up development institutions. The Bank very much contributed, I believe, to introducing the “project” and the “project cycle” concepts, even though, as noted above, this approach had its own weaknesses. At the same time, independent African development was beginning amidst a favorable environment of rapid growth in industrial countries, rapidly expanding world trade, and widespread support for foreign aid and multilateralism.

Table 3.Growth Rates of GDP in Africa, 1960–83(percent)
Average
1960–701970–80198119821983
Low-income countries4.01.91.10.52.7
Low-income semi-arid2.43.21.80.12.0
Low-income others4.21.81.00.62.7
Middle-income oil importers4.34.82.03.50.1
Middle-income oil exporters3.74.9-3.7-1.1-2.1
All Africa3.94.2-0. 10.90.0
All except oil exporters4.03.21.91.81.8
Note: Figures include Egypt, Morocco, and Tunisia, and exclude South Africa. The figures, which are weighted by GDP, also exclude the three higher-income oil exporters, Algeria, Gabon, and Libya, whose combined GDP is 25 percent of total African GDP despite constituting only 5 percent of the total African population.
Note: Figures include Egypt, Morocco, and Tunisia, and exclude South Africa. The figures, which are weighted by GDP, also exclude the three higher-income oil exporters, Algeria, Gabon, and Libya, whose combined GDP is 25 percent of total African GDP despite constituting only 5 percent of the total African population.

These achievements and these factors, however, proved insufficient to help African countries withstand without much damage the assaults of a world environment turned more hostile.

Shocks, Reactions, and Policy Responses

For most African countries the turbulent period from the first oil shock of 1973–74 to the second large price increase of 1979–80 and the 1980–82 world recession has been devastating. The upturn in industrial countries since 1983 has had little positive effect on the continent, among other reasons because commodity prices have generally remained depressed. And the current drought has added untold human suffering in more than a dozen countries. More than ever, in contrast to the large low-income countries of Asia, let alone the most dynamic economies of East Asia or Latin America, Africa stands out as a special case.

A serious understanding of the impact of exogenous shocks and the policy response can only be expected from a country-by-country study. Such an analysis cannot even be attempted here. I will only offer what, I believe, are a few valid generalizations on both the main problems and the policy responses. In doing so, I will abstain also from any systematic review of statistics, which can be found elsewhere, and use numbers only by way of illustration.

Drought, food, and the agricultural problem

The great drought of 1972–74 and the even more terrible current one have dramatized the food problem of Africa. The first Bank report on sub-Saharan Africa and the two subsequent reports2 have noted the generally declining per capita food production and the rising trends of food imports over the last 15 years or so. At the same time the volume of African agricultural exports has marginally declined between 1970 and and 1982 (by about 10 percent), and so has their share in world markets.

Aside from the climatic factors, which are obviously of major importance, but also still poorly understood, the underlying issues seem to be technical, human, institutional, and economic, often all at the same time. Summarily stated, the constraints by now well identified are the following.

At the technical level no satisfactory, proven technical packages adapted to local conditions, for example, drought resistant varieties, have been found for the Sudano-Sahelian zone. Neither have water retention systems nor livestock development systems been found that would both be more productive than traditional forms of husbandry and as well adapted to local conditions.

The human problem has several dimensions. Continued population growth in rural areas has resulted in growing demand for social services which is not being met. One of the consequences of unsatisfactory living conditions in rural areas is the emigration of the younger, more dynamic, entrepreneurial members of the community. Increasing land scarcity, given the state of technnology, is observed in both the drier Sahelian zone and in the more ecologically favorable coastal regions and highland areas where settlement densities are greatest, although there are great intercountry variations; hence shorter fallow periods, deforestation, erosion, lower yields, and growing conflicts between herders and farmers. Finally, agricultural projects suffer from scarcity of managerial and technical skills to which technical assistance has sometimes provided only a transitory solution, and sometimes not even that. Most seriously, failed agricultural schemes have developed farmers’ resistance to change rather than acceptance of it.

Institutional weaknesses have emerged in essentially two areas. First, central ministries in charge of rural development are still too often the weakest ones in organization, staffing, policy design, and finance, and they have remained too far removed from, in some cases unconcerned by, the projects being supported by foreign aid both because of their own weakness and because of external donors’ excessive emphasis on autonomously managed operations. Secondly, inefficient marketing and input delivery systems continue to result in high intermediate costs and lower than economically justified farm-gate prices. Marketing boards and similar agencies in charge of export crops, which could be and often have been efficient, have tended to become bloated bureaucracies. Government monopolies or quasimonopolies of trade in domestic food (especially cereals) have almost universally proved either coercive or ineffective as they attempt to buy and sell at administratively fixed prices unrelated to underlying market conditions. Lack of financial means has prevented them from effectively dampening sharp market price fluctuations through timely purchases and sales.

For a long time the most pervasive economic issue in agriculture has been the persistence of distorted incentives. This has been abundantly illustrated and discussed in Bank reports and many independent analyses. Such distortions extend from overvalued exchange rates that favor imports and depress producer prices, through excessively subsidized inputs and credit which result in de facto rationing (since supplies are limited by the amount of subsidization that budgets can afford) and therefore inequitable and inefficient allocations.

But the task of setting prices at more economic levels has been made more difficult since the mid-seventies by the erratic behavior of world prices. This has had a number of adverse consequences. Thus, the sharp increases in prices of imported cereals coinciding with the severe drought of 1972–74 made it extremely difficult, until food aid began to flow, to regulate domestic markets. Boom and bust periods in coffee, cocoa, and tea prices led to sudden unanticipated revenue windfalls followed by no less abrupt declines in a period of only three or four years, greatly complicating fiscal and investment policy in the countries concerned.

External shocks and policy response

All African countries are small and open (with external trade sectors typically representing 20–40 percent of GNP) and therefore particularly vulnerable to external shocks. Vulnerability is aggravated by structural factors, that is, a narrow export base and an infant industrial sector, as well as by persistent policy factors such as those discussed above, that is, overvalued exchange rates and other price and quantitative distortions that almost universally create an anti-export bias.

The magnitude of the shocks (understood the movement in terms of trade and the slowdown of foreign demand for the country’s exports)3 has been estimated, according to one methodology,4 to have been equivalent in 1973- 78 to a 4.4 percent loss in GNP for the oil-importing countries of sub- Saharan Africa (with variation of between 8.8 percent for the middle-income countries of Eastern and Southern Africa (excluding South Africa) and 0.5 percent for the corresponding group in Western Africa). The shocks were, as expected, favorable (+ 12.4 percent) for the oil-exporting countries of the region. They were generally most severe and also more uneven during the 1979–82 period, ranging from adverse impacts equivalent to 10–15 percent of GNP for Kenya, Côte d’Ivoire, or Tanzania to mildly positive impacts again for the oil exporters.5 Morocco also was seriously affected (−7 percent).

Only specific country studies could do justice to the complexity and diversity of the initial situations, the impact of the shocks on various parts of the domestic economies, whether favorable or unfavorable, or the different policy responses. But here also I will venture some stylized facts which, in my view, reflect the essence of the policy responses and explain much of this episode’s outcome. These facts relate to debt, the public sector, and pricing.

The debt explosion

The growth of sub-Saharan African debt after 1975 has been quite extraordinary, as shown in the following table, and reflects two kinds of policy reactions, which in many countries happened in sequence.

Initially, as part of the so-called “recycling process,” international private capital became much more easily available and African countries that enjoyed a commodity boom (including oil), as well as others not so fortunate, were seen as new, attractive borrowers. Most countries took advantage and borrowed. Commercial banks and suppliers’ creditors, with or without backing from export credit agencies, competed to provide funds. Countries that had hardly ever borrowed from private sources also succumbed or were led to succumb. Subsequently oil-importing countries, doubly hit by the second round of oil price increases and the collapse of commodity prices (Côte d’Ivoire’s terms of trade, for example, declined by 25 percent in 1979–81), not unnaturally chose to borrow more. Presumably, this was done because of expectations that export prices would recover, or because adjusting to the new situations seemed a less politically and socially attractive alternative than foreign borrowing. When it appeared that the external environment was not improving, and it did not improve until 1983–84, the borrowing policy of many countries turned out to have created more problems for the future than it had solved in the short run. The debt problem is therefore to a large extent the result of failure, quite understandable, to anticipate major and rapid changes in external conditions. The pace of increase in total debt in the second half of the seventies and the associated hardening of terms should in themselves, however, have been warning signals of possible future difficulties. There were also complicating factors in other areas to which I now come.

Debt of Sub-Saharan Africa
19721983
Medium- and long-term debt
(billions of dollars)11.179.8
Of which (percent):
Financial markets14.336.2
Suppliers’ credits14.34.4
Nonconcessional bilateral5.212.2
Total nonconcessional (percent)34.052.8
Source: Kathie L. Krumm, Sub-Saharan Africa Debt, CPD Discussion Paper (Washington: World Bank, January 1985). Numbers are from the World Bank Debt Reporting System and cover 39 countries. The figures do not include short-term debt (trade debt), which according to the Bank for International Settlements increased from $2.6 billion in 1977 to $6.5 billion at end of 1983.
Source: Kathie L. Krumm, Sub-Saharan Africa Debt, CPD Discussion Paper (Washington: World Bank, January 1985). Numbers are from the World Bank Debt Reporting System and cover 39 countries. The figures do not include short-term debt (trade debt), which according to the Bank for International Settlements increased from $2.6 billion in 1977 to $6.5 billion at end of 1983.

The public sector expansion

The period also witnessed a rapid expansion of the public sector in Africa. While total public expenditures of central governments alone in 36 sub-Saharan African countries increased from 16.5 percent of GDP in the midsixties to 29.5 percent in 1981, the real growth spurt occurred in 1974–80. Other measures of the public sector (e.g., investment and employment) show the same pattern of expansion since the mid-seventies. The point here is not whether such a trend is good or bad in principle, but rather that some aspects of this rapid structural change had negative implications.

First, there is the crude fact that expenditures increased much more than resources, resulting in growing public-sector deficits (including those of public enterprises), which in turn were reflected in greater inflationary pressure from accommodating monetary policies and were ultimately translated into unsustainable external deficits.

Second, the pace of expansion stretched the public sector’s managerial capacity, with adverse effects on implementation as too many projects were attempted simultaneously (an effect felt on numerous Bank-supported projects).

Third, and perhaps most damaging in the long term, the quality of public investment, and public expenditure in general, declined badly. In particular, new investments undertaken with commercial-bank financing and suppliers’ credits were often of weak intrinsic economic merit, overdesigned, and overpriced. This is one of the factors behind the declining return on investment highlighted in the recent Bank report on sub-Saharan Africa. Other forms of incremental public expenditure included accelerated expansion of government employment and more subsidies.

Price distortions

While admittedly it is difficult to measure price distortions, that is, the distance between actual prices and prices that reflect opportunity costs (as reflected, for example, by import and export prices at the border), that such distortions increased after 1974 is suggested by two interrelated observations. One is the acceleration in inflation rates and the other the movement of real effective exchange rates.6

Inflation was not historically a general problem in Africa. The average rate of consumer price increase was less than 3 percent a year in 1960–70, but grew three times faster in the following decade with periods of markedly accelerated growth in 1975 and again in 1981 (see Table 4). Rapid inflation is never uniform across or within sectors and is always a source of distortions. One reason is that bottlenecks appear in the short term, raising the price of specific goods or factors of production relative to their long-run scarcity value. Another reason is that governments try to maintain prices of basic necessities (food) or “strategic” goods, such as energy or transport, as low as possible, making them artificially cheap relative to the general price level. In effect, this means imposing administrative rationing and more often than not encouraging parallel markets, that is, different prices for the same good, one of them often being foreign exchange.

Table 4.Inflation Rates,1 1973–82(percent)
197319751977197919811982
Africa
(non-oil)9.315.418.117.820.415.9
All Africa7.619.217.114.318.612.2
Source: International Monetary Fund, International Financial Statistics Yearbook, 1984; World Bank Data Files.

Weighted by GDP in U.S. dollars for the corresponding years.

Source: International Monetary Fund, International Financial Statistics Yearbook, 1984; World Bank Data Files.

Weighted by GDP in U.S. dollars for the corresponding years.

Overvalued exchange rates had been identified in several African countries well before the shocks of the seventies, but they appeared more or less tolerable in the presence of low inflation and abundant aid inflows. After 1974, however, the general tendency was toward further appreciation of real exchange rates because inflation was not offset by compensating changes in nominal rates. Thus, the study of the African Center for Monetary Studies cited in the first Bank Report on Sub-Saharan Africa of 1981 found that in 18 out of 19 countries reviewed, the real exchange rate had increased between 1963 and 1977–78. Another study for broadly the same period found 19 cases of real exchange appreciation out of 27 countries. The real exchange rate also appreciated for Egypt and Morocco. While changes in the upward direction have been much less general in the more recent years, between 1980 and 1983 there was still further appreciation of the real effective exchange rates in 16 sub-Saharan countries, of which 9 appreciated by more than 20 percent. Real depreciation on the other hand has occurred in 16 countries, mainly those belonging to the franc area and those where the degree of overvaluation was highest in the seventies (e.g., Ghana, Uganda, Zaïre).

Real appreciation over time does not necessarily imply overvaluation. Overvaluation has to be demonstrated at each point in time. The presumption, however, is that one leads to the other when, as in the case of African countries, appreciation is associated with widening current account deficits. The extent of overvaluation from the point of view of balance of payments sustainability is a matter for the Fund in which the Bank is not institutionally expert. There are at least two reasons, however, why the Bank is concerned by exchange rates and why, therefore, I mention them as a problem here. One is precisely because of their impact on the balance of payments and therefore on the need for external financing, of which the Bank is a source. The second is because exchange rates affect relative prices, that is, domestic versus foreign prices and ultimately prices of tradables versus nontradables (the relative price which many economists nowadays call the “real exchange rate”), and thereby resource allocation, which, of course, is of concern to the Bank.

******

A general consequence of these developments—the debt explosion, the public sector expansion, and the pricing distortions—has been the creation of greater rigidities in the economies concerned. These rigidities complicate the task of policymakers at a time when adjustment is to be the order of the day.

Rigidities were created in at least five ways. Additional debt, first, has imposed new contractual obligations that cannot be modified except through rescheduling exercises. Rescheduling thus becomes a (painful) part of the adjustment process. Second, to the extent that a number of low-priority projects were financed during this period, economies were burdened with operating and maintenance costs, without corresponding economic benefits, and these costs are difficult to compress or eliminate, especially when it involves laying off workers. In some cases, costly transformations of plants have to be undertaken; in other cases, the solution may be privatization (more easily said than done) or introduction of protective measures to keep the operation alive, again at a real though less visible cost to the community. Third, increased recruitment into the public sector cannot be easily reversed; hence the commonly observed excessive wage bills in government budgets relative to expenditure on material inputs and equipment. Fourth, equally difficult to reverse are the consumption or input subsidies introduced or increased when finance became more abundant during the short-lived export booms of the seventies or when inflation accelerated. Fifth, but not the least of all, severely overvalued exchange rates are notoriously difficult to correct, for political and other reasons.

A New Agenda

At the outset of this decade, then, we faced a set of problems more complex than ever before. The world depression that lasted until 1983 represented an additional shock, and so did the decline in oil prices for the oil exporters. The new agenda for Africa is more difficult and also more compelling.

The new agenda is a difficult combination of immediate and longer-term issues, some of which have begun to be seriously tackled while others remain almost untouched. This section highlights its main dimensions and then reviews the Bank’s response.

Growth and adjustment

The problem in 1980 was not just growth but also adjustment. Adjustment in the first instance meant reducing external current account deficits, which totaled about $4–5 billion in 1980 (excluding Nigeria, which then had a surplus), to sustainable levels. This usually meant a relative reduction of rather enormous proportions since current-account deficits had typically increased by three or four times relative to their “normal” levels of before 1975. In the second half of the seventies they varied between 6 and 20 percent of GNP, even more in a few cases. As for the growth objective, it was not just a matter of continuing unfinished business. It was rather reestablishing the conditions for resumption of growth where the process had been interrupted; creating such conditions for growth in the semiarid areas in particular, where there had been very little growth before; and reversing declines in a few cases where the combination of adverse factors and ill-conceived policies had been particularly damaging.

What has happened in the course of the last five years is significant, but it has not fundamentally changed the task ahead. In brief, the process of adjustment has begun in earnest almost everywhere on the continent, but it is far from complete. The growth record, on the other hand, has been poor, and prospects are not bright. The agenda remains.

In its simplest macroeconomic terms, the implication of having to face massive adjustment problems while the growth objective remained so necessary was—and to a large extent still is—that external resources have gone to finance balance of payments gaps rather than investment. Of course, external capital always helps the balance of payments, by definition, and is not antithetical to capital formation. The point is that the bulk of external resources over the last few years had to be used to maintain essential imports of food, energy, and current inputs for agriculture, for industry, and for the maintenance of infrastructure. Even so, all requirements have not been fulfilled, by a far stretch. Indeed, real imports (excluding food aid) have declined. In the meantime, new investment has suffered.

As can be seen from Table 5, the rate of gross domestic investment in the 1960–70 decade was fairly uniform across the various groups of (sub-Saharan) African countries at close to 16 percent of GDP. It went up to nearly 19 percent in the first half of the 1970s, again without great variation among countries. The differentiated impact of the investment boom can be seen for the period 1975–80 with rates among countries between 18 and 28 percent. By 1983 the (estimated) average was down to 12.5 percent. (Strangely enough the investment rate seemed to be highest in the semi-arid, low-income countries.) It is unlikely that these rates increased in 1984.

Table 5.Gross Domestic Investment in Africa, 1960–83(annual average, as percentage of GDP)
Estimate
1960–701970–751975–80198119821983
Low-income countries14.116.917.817.79.310.6
Low-income semiarid14.517.820.517.919.019.2
Low-income others14.216.817.417.78.710.2
Middle-income oil importers16.020.823.022.822.217.9
Middle-income oil exporters16.520.226.627.226.118.0
All Africa15.719.423.724.019.814.8
All except oil exporters15.118.820.220.014.012.5
Source: World Bank Data Files.
Source: World Bank Data Files.

Not surprisingly, GDP growth rates (see Table 3) have fallen dramatically from around 4 percent for the whole of Africa in each of the two decades up to 1980, to virtually zero since 1980. Declines in per capita incomes and consumption are, of course, the consequence.

At the same time, resource gaps and current account deficits of oilimporting countries following adjustment programs have been reduced to about half their peak levels of 1980–81. The costs of adjustment in terms of capital formation and growth have been severe, but given the dimension and unsustainability of external deficits, the trade-off was essentially unavoidable.

The agenda for the future therefore clearly includes a need to re-establish investment levels and to improve returns on capital.

Population

The issues of fast and accelerating population growth have been dealt with extensively elsewhere (see, for example, the World Development Report, 1984) and need not be discussed here in any detail. But it would be a serious mistake to think or pretend that these issues are not at the heart of the current problem of adjustment and growth. In that sense the term “crisis” so often cited in regard to Africa is misleading if it evokes only an image of a sudden and brutal phenomenon. Population growth never appears as a problem in any one year, and it has been very generally and conspicuously absent as well from the traditional five-year framework used by planners all over Africa.

It is well to remember that from the first oil shock, to take a convenient date, to today, the population on the African continent has increased by about 25 percent, or 100 million people. Continuation of the same rate of demographic expansion will mean an addition of 125 million people over the next ten years. The frightening power of compound interest is perhaps a cliché but it is not a worn out one!

The central concern, of course, is not with population density and availability of land on the continent as a whole. Indeed, larger populations would be ultimately desirable for several little-populated countries. However, the question of excessive settlements does arise in the semiarid zones. The consequences—deforestation, shortened fallow periods, herder-farmer conflicts, soil erosion, and rural emigration—have been mentioned earlier. And even in the humid, coastal countries availability of good, easily accessible land is no longer a factor of growth; deforestation there is also a problem.

The main concern is with the pace of population increase—at 3 percent a year or more, the highest in the world—and with the growing proportion of children and job-seekers that such an increase implies. The problem is the attendant social costs to the country in terms of health, education, and urban facilities requirements. Hence, at a time of constrained domestic and external resources, virtually all African countries face a painful trade-off between meeting the basic needs of a growing population and investing in directly productive capital formation. The trade-off would be much easier over the long haul if significant declines in the demographic growth rates were achieved. In the meantime, elements of a solution have to be sought, among other means, through improved agricultural techniques and more effective, low-cost health and education systems.

Use of national assets

A further general problem has emerged in the course of the last crisis decade: the deterioration of African nations’ assets. The issue has already been touched upon, but it merits separate mention here because of its implications for future growth and thereby also for current domestic policies and the direction of aid.

Natural resources, man-made capital, and human capital are all at stake. While there is no precise estimate of the magnitude of the resulting loss in productive value—of any of the major components just mentioned, let alone any aggregation for any particular country or region, there are some partial direct or indirect estimates7 which are easily corroborated by simple observation in country after country. They all point to a serious problem.

The factors at play are essentially three. Population growth, as already mentioned, puts pressure on natural resources in an obvious manner. It also affects, though more indirectly, social infrastructure resulting, for example, in a lowering of education standards (at primary as well as in some cases higher levels) which in turn means a deterioration of human capital. Second, as previously noted also, the declining rates of gross domestic investment must imply net disinvestment, overall or in some sectors, in probably all countries where such rates are below 12 percent of GDP. Third, even when total investment levels implied maintenance of existing capital stock and even some net additions, common observation confirms that current maintenance expenditures on roads, buildings, plants, and machinery, have long been neglected and have recently been among the first victims of budget cuts. Fourth, both governments and aid donors have traditionally favored new projects rather than financing rehabilitation of existing assets. Finally, foreign exchange constraints that have limited imports of current inputs have resulted in vast unused capacity in industry. (In extreme cases, such as Ghana until the recent past, average utilization rates were as low as 20 percent.) When such situations persist, existing assets inevitably deteriorate.

As emphasized in successive Bank reports on Africa, maintenance and rehabilitation should attract top priority in public expenditure programs. When applied to all but strictly nonviable projects (which should be scrapped) such expenditures yield the highest economic returns.

External resources and debt

Gross disbursements to sub-Saharan Africa from all sources increased steadily from the 1960s until 1977, approaching $5 billion at that date. They increased massively in 1978, to somewhat under $8 billion, on account of a doubling of private loans (in excess of $4 billion) and have hovered between $9 and $10 billion since then; that is, they have declined marginally in real terms over the five years to 1983. In net terms, that is, after repayment of principal, the amounts were at historic highs because of the generally favorable terms of official assistance and small volume of private debt. This situation has also changed since 1978. Repayments in 1978–83 have on average represented 20 percent of gross disbursements and will be a significantly greater proportion in 1984–87, in part because of the accumulation of previously rescheduled debt. Interest payments, also a small item in the typical African balance of payments until the late 1970s, have grown even more as average terms of debt have hardened.8 Thus, debt service ratios—estimated at 16 percent for all of sub-Saharan Africa in 1983—represent a relative burden (with respect to exports) more than twice the level before 1974 on average; and reflect serious servicing difficulties for about 15 countries that have had to reschedule debt. In the absence of further reschedulings African debt service in the second half of this decade would jump to levels well in excess of 20 percent of projected exports on average, again signifying much higher levels for some of them.

The debt management problem in the African context is treated in detail in a separate paper9 and does not need further comment at this point. I shall simply conclude by noting that the agenda here includes two closely interrelated aspects: the debt problem which needs a country-by-country approach as situations vary widely (but should not exclude some commonality in approaches) and the general issue of shrinking net resource flows to Africa at a time when policy reforms are taking hold throughout the continent and external support is more needed and deserved than ever.

The Bank’s Response

The previous section has highlighted some of the central problems needing priority attention from both the African countries and the aid community, noting further that while these issues have come to the fore since the beginning of this decade, and despite some progress in various areas they are all still with us. Indeed, the prospects for easy solutions are simply not there: the possibility of recurrent spells of drought in the course of, say, the next ten years cannot be ruled out; the possibility of much enhanced export revenue is not consistent with the rather mediocre outlook for commodity markets; the difficulties in mobilizing concessional aid are well known; renewed commercial lending is problematic in view of the continuing debt difficulties of several countries and not desirable in any significant degree for countries with limited creditworthiness; policy reforms undertaken by many African governments will take time to yield results; and meanwhile population will continue to increase.

The Bank for its part has tried to respond flexibly and in a variety of ways: by diversifying its lending instruments, through shifts in sectoral allocations and types of projects, by intensifying its catalytic role in mobilizing resources and through intensified cooperation with other agencies, notably the Fund, and through a more systematic exchange with governments on policy issues. In these various undertakings we have had to capitalize on past experience—both successes and failures.

Resource transfer

I would like to review here three questions: commitments, disbursements, and additional resources.

For Africa as a whole, as shown in Table 1, the level of Bank group commitments has approximately doubled between the 1975–80 average and 1984 to more than $3.6 billion. The proportionate increase has been quite similar for IBRD and IDA, though obviously IDA is much smaller (about one-third of the total in FY1984) in absolute terms because of well-known resource constraints. Sub-Saharan Africa10 receives much higher levels of IDA credits on a per capita basis than other low-income recipients (the main ones being India, China, and Bangladesh): about one-third of all IDA funds have been directed to sub-Saharan Africa under the last two and the current (FY1985–87) replenishments, whereas Africa has only about one-fifth of the IDA-eligible countries’ population. The situation is quite different for the IBRD in which none of the recipient African countries is a major borrower; the prime constraints on further flows to Africa from the IBRD are creditworthiness, policy, and performance. These also apply to IDA countries.

Resource constraints, creditworthiness, and policy considerations will result in a sharp drop in total Bank commitments for FY1985. A small decline of only about $100 million may occur on IDA lending as every effort has been made to protect current levels (and a somewhat increased share) for Africa, but a $1 billion drop in IBRD lending is a likely outcome, mainly affecting sub-Saharan Africa.

Disbursements of IBRD and IDA together have increased at almost the same pace as commitments between 1978 and 1983 (1984)—to nearly $1.3 billion. However, as past IBRD loans continue to be amortized there is a danger of rapidly diminishing net disbursements in the event new IBRD lending does not resume its previous pace. While it is of course in the nature of the normal “debt cycle” that eventually all borrowers should have net outflows, it is clear that this stage should not yet have been reached anywhere in Africa (although such episodes as “oil booms” have created transitory capital surpluses).

In order to assist countries facing serious financial constraints, both external and domestic, the Bank initiated a special action program in March 1983. This effort did not involve new resources but aimed at accelerating disbursements on ongoing projects and through new operations to countries where the execution of priority public investment programs was threatened by foreign exchange and public revenue shortages. Eligibility naturally required that the countries themselves make their best efforts to mobilize resources and apply them to priority projects only. For ongoing operations, the program involved restructuring of projects to reduce costs, provision of revolving funds, increased cost sharing by the Bank and IDA, “front loading” of disbursements relative to original plans, and supplementary financing for groups of projects in difficulty. It involved also more or larger new lending operations with quick disbursing characteristics (see following section).

Over its two years of implementation the program has been quite successful, and it is estimated that the consequent net increase in disbursements for IBRD and IDA worldwide has been about $1.6 billion in FY1984 and will probably be $3.5 billion for FY1984–86. The amounts involved, however, have gone primarily to IBRD borrowers, while IDA beneficiaries have for obvious reasons continued to be constrained. Nevertheless, in terms of countries (25) and number of operations (75), sub-Saharan Africa has been the primary beneficiary. Thus, while the special action program has not resulted in large increases in disbursements to Africa, it has been instrumental in protecting priority projects from unusual financial difficulties and has thereby assisted in the adjustment process.

Finally, the Bank’s efforts in mobilizing additional funds for sub-Saharan Africa have met with success with pledges of at least $1.1 billion (of which almost $700 million are in direct contributions to the new facility) obtained at a recent (early 1985) conference in Paris. The facility came to operation by July 1, 1985, and its resources are intended to be fully committed in a matter of three years (on IDA-type terms). No precise allocation procedures have been designed yet, but the overall objective is clearly to provide fast-disbursing financing in support of reform programs undertaken by African governments along the lines indicated in the Bank’s recent report on sub-Saharan Africa.11 While the amounts involved are significant and most certainly needed, the new facility approximately corresponds to no more than restoration of IDA VII at its originally intended minimum level of $12 billion, assuming a one-third share for sub-Saharan Africa. Since the facility is therefore only one element in the total resource effort, other flows of official development assistance and, in some cases, commercial lending will need to be expanded.

Diversifying lending instruments

The first structural adjustment loan, approved for Kenya in FY 1980 (an IDA credit of $55 million), marked a sharp, qualitative reorientation from pure project lending which generally, and in Africa almost exclusively, characterized previous Bank lending there.

In fact, there has been a remarkable diversification of Bank lending instruments over the last five years in response to both changing needs of borrowers resulting from the unusually difficult times and adjustment efforts by governments. In an effort to classify operations the Bank has recently determined five principal categories that apply equally to IBRD loans and IDA credits.

  • 1. Specific investment loans

  • 2. Sector operations

    • a. Sector involvement and maintenance loans

    • b. Financial intermediary loans

    • c. Sector adjustment loans

  • 3. Structural adjustment loans and program loans

  • 4. Technical assistance loans

  • 5. Emergency reconstruction loans

In effect, these categories cover a continuous range, and specific operations may share in characteristics common to two or more categories.

Africa as a whole has received loans or credits under all categories. Table 6 lists, in chronological order, those operations which form the more novel part of the Bank’s activities in the continent. As can be seen from the list, more than 30 operations, in five years, for 19 countries, the coverage has been wide and the amounts, approaching $1 billion in FY 1984, as well as the proportion, increasing from 8 to 27 percent of total lending to Africa, have been quite significant.

Table 6.Sector, Structural Adjustment, and Reconstruction Loans in Africa, 1980–85
AmountPercentage

of Total

Lending
YearCountryName of Loan/CreditIDA/

IBRD
(millions of dollars)
1980KenyaSAL IIDA55.029
1980SudanAgricultural rehabilitationIDA65.038
1980UgandaReconstruction IIDA72.5100
1981MalawiSAL IIBRD45.038
1981MauritiusSAL IIBRD15.050
1981SenegalSALIBRD/IDA60.058
1981TanzaniaExport rehabilitationIDA50.054
1981ZimbabweManufacturing rehabilitationIBRD/IDA65.0
1981Zimbabwet rehabilitationIBRD42.0100
1982Côte d’lvoireSAL IIBRD150.040
1982UgandaReconstruction IIIDA72.066
1983GhanaReconstruction importIDA40.055
1983KenyaSAL IIIBRD/IDA130.968
1983MalawiFertilizer creditIDA5.09
1983SudanAgricultural rehabilitation IIIDA50.038
1983TogoSALIDA40.049
1983UgandaAgricultural rehabilitationIDA70.071
1983ZimbabweManufacturing export promotionIBRD70.629
1984GhanaExport rehabilitationIDA76.061
1984Côte d’lvorieSAL IIIBRD250.7100
1984MalawiSAL IIIDA55.054
1984MauritiusSAL IIIBRD40.066
1984MoroccoIndustrial trade policyIBRD150.457
1984NigeriaFertilizer importsIBRD250.057
1984Sierra LeoneAgricultural sector IIDA21.5100
1984UgandaReconstruction IIIIDA50.041
1984ZambiaExport rehabilitationIBRD75.077
1985BurkinaFertilizer projectIDA13.7
1985Guinea-BissauReconstruction importsIDA10.0
1985MadagascarIndustrial assistanceIDA40.0
1985ZambiaAgricultural rehabilitationIDA25.0
Summary:19801981198219831984
Total Amount192277222406969
Percentage of Bank lending to Africa81181627

This set of operations, comprising structural adjustment loans to six countries and a variety of sectoral loans to others, does not by any means exhaust the range of activities through which the objectives of overall adjustment and growth are being pursued. It includes, however, those where the interrelationship between the two goals is closest as a result of two principal characteristics of the operations in question.

The first is the quick-disbursing character of these loans. Whereas regular loans (i.e., categories 1, 2a, 2b and 4 of the list above) typically disburse in five to seven years as the physical execution of the project advances, the structural adjustment loans (SALs) and sector loans take only between a few weeks and, say, 18 months.12 They will also finance either a broad range of general (but priority) imports not specified in detail (not “appraised”) in advance, under SALs and some of the sector loans (those for Morocco and Uganda, for example), or a short list of specifically needed inputs for a sector (fertilizers as in Nigeria, or replacement parts and pieces of simple machinery for Ghana and Zimbabwe).

These financial characteristics clearly make these loans a form of balance of payments support. Indeed the size of each particular loan is, within the overall programing constraint, geared to the foreseeable foreign exchange needs of the country. But a caution is in order here: these operations are not intended as “gap-filling” exercises, in connection, for example, with debt rescheduling, any more than are disbursements under regular projects. They are part of medium-term country assistance programs designed by the Bank with the governments concerned, and disbursements will be made only when conditions agreed under the loan are fulfilled.

This latter point relates to the second characteristic, which is the policy reform program in support of which the loan is made. The scope, detailed content, and timing of the policy measures vary greatly. SALs to Africa, as to other countries, however, in varying degree all cover five main areas: medium-term public investment programs (size, composition, and programing systems); the external trade regime (usually seeking to correct the antiexport bias implicit in overvalued exchange rates and protective systems by moving toward a more uniform level of protection of domestic activities and by removing quantitative restrictions); resource mobilization (including such varied aspects as level and administrative management of foreign debt, cost recovery systems for public services, interest rates, and financial intermediation); public enterprises (improving management, pricing, employment practices, and contractual relationships between enterprises and government, sale or transformation of enterprises, and the like); prices and incentive systems (where actions are sought to correct major distortions, particularly in agriculture and energy).

Sector loans, in turn, include reforms of the same type, but narrowed in scope to the issues of the particular sector. For example, the fertilizer loan to Nigeria supported reforms in the fertilizer subsector such as reductions in subsidies, commercialization of fertilizer retail channels, and improvements in procurement and marketing methods.

Discussion of the rationale for the particular measures that, in the Bank’s view, form a desirable package of policy reforms would go beyond the scope of this paper. The general objective can be stated as the pursuit of greater efficiency in the use of resources through greater reliance on economic incentives, that is, a set of prices that best reflect real scarcities. Such prescriptions do not rule out the existence of an active public sector or various forms of government intervention, both of which are needed to correct private sector deficiencies and market failures.

A number of lessons from these new forms of lending have been learned already. These, in brief, are as follows.

First, preparation of SALs and similar operations, especially for the first and second time, requires large amounts of policy-focused economic and sector work and, from the earliest stages, continuous exchanges with the government concerned. These procedures will ensure mutual understanding, prevent false starts, and avoid exaggerated expectations.

Second, it is more important and more effective to design a program focused on essential and feasible reforms than to seek overall coverage. While the urge to be comprehensive is perhaps a natural reflection of the extent of the problems faced by many countries, there is clearly a danger in attempting too much relative to a government’s political and administrative capabilities.

Third, expectations as to the time needed to effect policy changes, especially institutional reforms, have often been overoptimistic. Such changes must be conceived within a period of several years and supported through a succession of SAL or similar operations. Another lesson is clear regarding timing: while undertaking reforms during a crisis may instill a sense of necessity that may previously have been lacking, it is even better to tackle problems before a crisis.

Fourth, an important dimension—indeed, one which is the essence of the kind of structural adjustment supported by the Bank—is in the durability of the changes sought, in other words their institutionalization. Immediate changes in prices or levels of expenditure may be needed to pursue shortterm stabilization. Ensuring that future price changes can be effected more smoothly or preventing abrupt cuts in investment or consumption require closer monitoring, more realistic programing, and more systematic policy analysis—rather than cyclical spurts of planning activity—by the central government and parapublic agencies. Introducing the necessary changes in organization, in personnel, and in habits is what institutional reform is about. Such changes are also needed to increase management flexibility and therefore improve the response to exogenous factors not foreseeable at the time that structural adjustment programs are prepared.

Sectoral allocations and types of projects

The sectoral composition of the Bank’s lending program to Africa (see Tables 1 and 2) has changed in the last quinquennium in ways that reflect both the concerns expressed in the “new agenda” and the lessons from experience noted earlier.

Agriculture’s priority is reflected in the continuing share in total lending: about one fourth on average over the last four years. The absolute amounts, however, have not increased steadily, and its share is less than the peaks attained at the end of the 1970s and in 1981. There are two reasons for this. The first is simply that other sectors, where lending has been modest in the past, are naturally becoming more important. Industry is the main case in point. This sector now absorbs about the same volume of lending as agriculture, reflecting the effort of governments, with Bank support, to diversify production and exports. The second reason is that the relatively high rate of failure with agricultural projects (including livestock) has indicated the need for a pause and a reassessment of the present portfolio in this sector and probably for some reorientation of the program (see below).

The growth, in absolute and relative terms, of nonproject lending is a reflection of the SALs and sector loans discussed in the previous section.13

As noted earlier, the emphasis on infrastructure (transportation, energy, telecommunications) has naturally diminished over the years even though as an overall strategy it still absorbs the greatest share of Bank lending (about 28 percent in FY1984). Within this category, for obvious reasons, energy has regained some of its past importance (in relative terms) and the number of projects has increased greatly in the last few years with more operations in the oil and gas subsectors.

Finally, the continuing concern for poverty alleviation and the need to meet the costs of rapid urbanization have led to a modest (relative) expansion of lending for urban development and water and sewerage.

In terms of types of projects the trend in recent years has been and will continue to be in two directions that directly address problems noted earlier. One is maintenance and rehabilitation. This is accomplished through regular projects, for example, to repair roads and provide equipment and technical assistance to public works departments, and also to a large extent through sector lending of the kind discussed a propos the diversification of lending instruments. For example, the import reconstruction and the export rehabilitation credits to Ghana financed spare parts and equipment renewal for the transport sector, and for the cocoa, timber, and gold-mining subsectors. Groups of public enterprises in need of rehabilitation and revolving capital benefit from SALs (Senegal, Côte d’lvoire, Malawi, Togo) or from sector loans (Madagascar, Morocco).

The second line of “new style” projects mainly is being developed in agriculture where two major needs have become increasingly manifest: research (especially for food crops) and an appropriate institutional framework (for research, for national extension services, for marketing, for policy analysis). These incipient projects involve a financial dimension and an immediate impact which may be more modest and less visible than more traditional agricultural or area-development projects, but are nonetheless building the foundations for future agricultural progress. Institution building, including strengthening of existing institutions, is also, as noted earlier, an essential component of SALs and sector-adjustment operations.

Resource shifts within the Bank

The priority given to Africa, and sub-Saharan Africa in particular, is also manifest in the reallocation of the Bank’s administrative and staff resources. Over the last four years the Bank has been reallocating relatively more resources toward the departments that deal with sub-Saharan Africa (the Eastern and Southern Africa and the Western Africa Regional Offices) both to help develop the pipeline of operations for future years and to increase the scope and enhance the quality and relevance of economic and sector-policy work. For FY 1985, within an overall zero-growth budget for the total complex of the Bank’s operating departments, increases in staff resources have been authorized for only the two African Regions. In 1982, 20 (later 25) new positions for secondment of staff to governments in IDA-eligible sub- Saharan countries were also authorized and have been filled. The number of Bank resident missions also has been increased, so that out of 33 such offices in developing countries worldwide, 21 are now in sub-Saharan Africa.

Finally, the Bank has, in agreement with the government concerned, reactivated or created aid-coordination arrangements (consultative groups or otherwise) in addition to the eight that were in existence before 1984. For example, two such new groups met at the end of 1984, for Ghana and Senegal, and financing pledges in support of the policy reforms undertaken by these two governments were made which would probably have been difficult to obtain otherwise.

Collaboration with the Fund

Active collaboration between the Bank and the Fund has become much closer on African countries over the years for two interrelated sets of reasons. In the first place, it is a practical necessity, resulting from the much more extensive, and in cases more prolonged, involvement of the International Monetary Fund since the mid- or late-seventies in countries where the Bank has been active for a long time (see Table 7). In the second place, it has become increasingly clear that the issues of stabilization, adjustment, and growth cannot be dissociated from one another. Thus, the primary concerns and areas of competence of one institution relate directly to the activities of the other.

Table 7.Stand-By and Extended Fund Facility Programs in Africa, FY 1980–84
19801981198219831984
Central African RepublicS-BS-B(S-B)S B(S-B)
Congo(S-B)
Côte d’IvoireEFF(EFF)(EFF)(EFF)
Egypt(EFT)(EFF)(EFF)
Equatorial GuineaS-B(S-B)
EthiopiaS-B(S-B)
Gabon(S-B)EFE(EFF)(EFF)
GambiaS-B(S-B)S-B(S-B)S.B
Ghana(S-B)S-B
GuineaS-B(S-B)
KenyaS-BS-BS.BS-B(S-B)
Liberia(S-B)S-BS-BS-BS-B
MadagascarS-B (X2)(S-B)S-BS-B
MalawiS-BS-B(S-B)S-BEFF
MaliS-BS-B
MauritaniaS-BS-B(S-B)
MauritiusS-BS-BS-B(S-B)S-H
MoroccoEFFS-B(S-B)S-B
NigerS-B
RwandaS-B(S-B)
Senegal(S-B)EFFS-BS-BS-B
Sierra LeoneS-BEFF(EFF)S-B
SomaliaS-B(S-B)S-BS-B(S-B)
SudanEFE(EFF)S-BS-B(S-B)
TanzaniaS-B(S-B)(S-B)
TogoS-BS-B(S-B)S-B(S-B)
UgandaS-B(S-B)(S-B)S-BS-B
ZaïreS-B(S-B)EFF(EFF)S-B
Zumbia(S-B)EFFS-B(S-B)
ZimbabweS-B(S-B)S-B(S-B)
Note: Parentheses indicate a continuing program. Where, in a given year, a new program replaces an existing one, only the new program is indicated.
Note: Parentheses indicate a continuing program. Where, in a given year, a new program replaces an existing one, only the new program is indicated.

For example, as already noted, the question of the appropriate nominal exchange rate (a primary concern of the Fund) cannot be dissociated from the question of the level of domestic producer prices (which is of direct interest to the Bank); the objective of overall fiscal balance (of concern to the Fund) is closely linked with the generation of public savings (of concern to the Bank); the size of the public investment program, a component of aggregate demand, interests the Fund, while the composition of the program is typically reviewed by the Bank and clearly the two aspects are not entirely separable; similarly, the Fund will be concerned by the level and growth of domestic credit, but the Bank is interested in the sectoral allocation of credit and may be particularly concerned by the financial health of specific recipients of credit, such as public enterprises.

These interconnections and areas of overlapping interest require that diagnostic analyses and policy recommendations be, in some fashion, coordinated and made consistent. This is done through systematic exchange of information (while preserving the confidentiality of information given by a government for use by one of the institutions only), as well as exchange of ideas and comparison of economic projections in respect, for example, of future availability of external financing in support of a particular program.

Where major adjustment issues are at stake, both institutions have to coordinate their programs and their financing. For all countries where SALs have been approved by the Bank, Fund-supported programs were already in place or were initiated in close parallel. This has been done because in such cases there was invariably a need for demand-management measures to address a short-term balance of payments deficit, while policy and institutional reforms addressing more directly the supply response over the medium term were covered under general or sectoral structural-adjustment programs supported by the Bank. Also, the financing plan for the balance of payments requires, in most cases, involvement of several sources of funds—the Fund, the Bank, other official bilateral and multilateral agencies, and, as the case may be, commercial banks as well. Coordination of the financing package is done simultaneously or in steps, formally (as in consultative groups chaired by the Bank) or informally through a succession of bilateral contacts, by the Fund or the Bank, or both. In frequent cases debt rescheduling is an important component of the financing plan. As is well known, rescheduling through the Paris Club (official creditors) and the London Club (private creditors) today requires prior agreement on a program between the Fund and the country concerned. As the medium-term character of adjustment programs, especially in Africa, has been increasingly recognized by the parties concerned, the Bank has been asked by the Paris Club to present its views on particular countries’ medium- and long-term prospects in anticipation of eventual rescheduling exercises. This should contribute to a better integration of actions to resolve the debt problem within longer-term adjustment and growth programs.

Because programs supported by the Bank and Fund are closely interdependent, collaboration between the two institutions is necessary. This, however, is a complex affair, considerably more complex than coordination between the various professions involved in building a house, to take a popular analogy. Differences between the two institutions therefore do occur occasionally: regarding the evolution of the external “parameters,” or the governments’ capacity to implement desirable measures, or the likely supply response of the economy, and so on. These are areas where there is no revealed truth, and opinions may naturally diverge. They can best be resolved by continuing dialogue and acceptance of compromise in the best interest of the countries which both institutions seek to assist. At the same time, agreement on the twin objectives of adjustment and growth are fundamentally shared by the Bank and the Fund.

Conclusions

The paper has covered the widening range of the World Bank’s activities in the many and diverse countries of Africa over a long period of time. Even so, the coverage is not complete. For example, the activities of the International Finance Corporation and this institution’s plans for a broader involvement in the development of African private enterprise have not been mentioned. Neither could this review be specific in respect of particular countries or particular Bank operations.

Even within the confines of this presentation, there is no firm conclusion I can offer. As I emphasized earlier, the agenda that has emerged since the beginning of this decade is still very much with us, even though real progress has been achieved both by the African countries and by the aid community. Africa has shown remarkable resilience in the face of adversity, and governments almost everywhere on the continent have begun to implement serious adjustment programs. Some additional concessional resources are being mobilized from a group of industrial countries (quite apart from their response to the drought), and most bilateral aid programs now give high priority to Africa.

The Bank for its part has tried to improve prospects for Africa by adapting and diversifying its lending instruments, by providing better focused and relevant advice to governments undertaking policy reforms, by actively seeking to mobilize additional resources, and by strengthening coordination with other sources of assistance, bilateral and multilateral, notably with the Fund.

Efforts in all these directions will have to continue, but we need continuously to assess the direction and efficiency of the Bank’s country assistance. We must interrogate ourselves and try to find answers satisfactory to all on issues such as the following. Regarding the appropriate policy content of structural and sectoral adjustment lending: what is the minimum, feasible reform package that will have a real impact? Regarding issues of balance: to what extent should new forms of lending displace regular projects that more directly promote investment? Regarding directions: how can the objectives of poverty alleviation and rural development be protected or restored? How can efforts within Africa be effectively supported toward economic integration which so predominantly and justifiably feature in the Lagos Plan of Action?

All these questions involve difficult trade-offs—or else they would not be difficult questions. The Bank will continue to seek realistic answers to them in the context of a continuing and strengthened partnership with those primarily interested, that is, the African countries themselves, which ultimately will reap the benefits, if the answers are right, or bear the costs, if they are wrong.

Comments

Philip Ndegwa

I enjoyed reading Mr. de Azcarate’s paper for many reasons. His historical analysis is useful in understanding the evolving relations between African countries and the World Bank and some of the factors behind a number of past policy changes in the Bank’s approach to Africa. Incidentally, Mr. de Azcarate’s analysis also reminds us that the science of modern development economics is very young indeed and is still evolving. Mr. de Azcarate’s paper is also refreshingly frank in some parts. For example, he accepts that the World Bank’s approach to African problems in the past may have had some shortcomings. I shall say more about this important matter later. Finally, in his reflective moments, Mr. de Azcarate offers a number of excellent observations and ideas for the future.

For these, and other reasons, careful reading of Mr. de Azcarate’s paper will show that he has achieved more than what he modestly says, in his introduction, was his intention. Though I regret that my discussion must be highly selective and some of the comments I shall make might sound rather critical, I am sure that it is more a matter of emphasis than major difference in objective or philosophy.

Mr. de Azcarate does not, as he says in the first sentence of his paper, discuss adjustment or stabilization. He has concentrated on what he calls “the evolving role of the Bank” in Africa. It may be that Mr. de Azcarate recognized, and, if so, quite rightly in my view, the difficulty of discussing stabilization or adjustment when these subjects are narrowly defined to mean that the main policy thrust should be on reduced demand. Such a definition, in the context of the overall situation facing African countries, with low and declining incomes, dependence on one or two commodities for export earnings, a lack of integration of national economies in the sense that monetization of the economy has a long way to go, high and rising unemployment, and disintegrating infrastructural facilities partly because of lack of spares, is difficult to understand or accept intellectually. As I have said elsewhere, in the situation in which African countries, especially sub-Saharan African countries, find themselves, so-called stabilization programs should be consistent with, and pursued within, measures aimed at raising the rates of development in general. If that is not done, the programs will not make much sense. In fact, one could think of cases and circumstances in which such programs could make the whole national situation worse.

Author’s Note: The views expressed in these comments are not necessarily those of the Central Bank of Kenya nor of the Government of the Republic of Kenya.

The paper lacks a sense of immediacy or urgency although the desperate situation facing most African countries calls for urgent and appropriate attention. In fact, it would appear as if the author seems to think that continuation of the present rather gentle and evolutionary response to the crisis facing Africa will be sufficient. In my view, the situation facing Africa is unique and alarming, and unless urgent and adequate measures are undertaken now, the future is going to be a horrible one, with things getting out of hand and resulting in the actual disintegration of some of the countries.

The author does not (perhaps because of modesty) stress the importance of the World Bank (and the Fund) to Africa within the prevailing and foreseeable international environment of development assistance and trade. There can be no doubt whatsoever that the role of the World Bank in Africa is now of critical importance and will continue to be so for the next 15 to 20 years. This is so because of the nature of the development problem in the continent, because of the size of the countries and the fragile structure of their economies, because of the African countries’ so-called lack of creditworthiness, because of their present levels of external indebtedness, because of the falling levels of official development assistance, and so on.

A few more words on this point are in order. First, it is true, as Mr. de Azcarate says, that Africa’s share in the distribution of IDA resources has increased recently. But that needs to be seen historically because, for many years, most of IDA resources went to Asia, with Africa getting only a little. The main point, however, is that Africa desperately needs a greater flow of concessionary resources, and the Bank should respond to that need with the same commitment it did for Asia when most of IDA resources went to that region. That commitment needs to be, for a number of good reasons, deliberate and publicly declared.

Second, I want to say something about the structural adjustment loan program of the World Bank. Mr. de Azcarate’s paper contains an excellent section on the lessons learned so far from this program. In particular, I like the reasons he gives to explain the difficulties encountered in preparation and implementation of SAL in a number of cases. Taking Kenya as an example, there is no doubt whatsoever that the reasons indicated by Mr. de Azcarate are responsible for preventing the World Bank from reaching agreement with Kenya for the third SAL. In particular, the SAL program for Kenya has involved too broad a coverage of areas in which reforms should take place. Moreover, the time scale expected for implementation of policy changes has been completely unrealistic. The fact that this is happening in a country which has performed very well and to the satisfaction of the Fund in virtually all the major policy areas on which the World Bank and the Fund usually focus (exchange rate policy, interest rate policy, wages policy, fiscal policy, import liberalization) indicates clearly that there is something seriously wrong in the design of SALs, at least for Kenya.

I am spending a bit of time on the SAL because it is precisely the kind of program that is needed in dealing with the African crisis. Unfortunately, the difficulties encountered in the administration of SALs appear to be used as an excuse to move away from that kind of program to the so-called project forms of support. While not condemning project-based programs, especially when they are well designed, it is my view that SALs and the extended Fund facility program of the Fund are the appropriate mechanisms needed in dealing with the African crisis. Further, those mechanisms should be used as learning processes and opportunities for promoting meaningful dialogue between the World Bank, the Fund, and donor countries. One feels that there is much too much rigidity on the part of the Bank and the Fund: a reasonable degree of flexibility is absolutely necessary in the African case.

Mr. de Azcarate does not deal explicitly with an important question: why has development performance in Africa been so hopelessly poor? For example, why are people in some countries now poorer on average than they were 20 years ago and after the two U.N. Development Decades? As we continue to see, many explanations have been given, with the emphasis put on those explanations which serve one’s intentions better. Some of the explanations offered include too rapid rates of population growth, unfavorable terms of trade, misguided economic management policies, and activities of multinationals. In offering these and other explanations there has been a growing tendency to allocate blame—with the donors stressing the internal weaknesses in the African countries, and with the latter stressing external factors and the injustices of the existing international order.

Fortunately, the World Bank’s recent reports on Africa have helped to stimulate a more objective discussion of the matter. It appears to me, however, that these reports, and now also Mr. de Azcarate’s paper, minimize the effects of external factors in Africa’s development. In fact, in Mr. de Azcarate’s paper there is no reference at all to the growing protectionism now being practiced by the industrial countries. While that protectionism is particularly serious for the middle-income countries of Latin America and Asia (because they produce more manufactured goods for export) there is no doubt that both tariff and nontariff barriers in the industrial countries are a major problem for a number of African countries, especially those with recognizable opportunities of performing better economically through exports.

It appears as if the donor countries are now concentrating, in explaining why Africa has not achieved better economic development performance, on internal factors as a way of justifying their reduced levels of support to African countries. The argument appears to run something like this. If only African countries could rely more on the market mechanism and do something about their rates of population increase, their agricultural pricing policies, their exchange rate policies, and corruption, development would be assured. But, in my view, while measures in those areas are needed and should be undertaken immediately where that is not being done, they will never be sufficient for the job. Appropriate international measures are also desperately needed. As we discuss the “new agenda,” however, African countries can do no more than take note of the “new politics” of the donors and its consequences: reduction in aid, more protectionism, and the fact that desired and necessary reforms in the international economy will not be introduced in the near future. In any case, it is now clear from the experience of the last few years that at the international level the industrial countries are interested only in those measures of direct and immediate advantage to themselves.

One other thing we have learned over the last few years is that only the poor countries are expected to practice rational economic principles (e.g., to rely on the market, not to adopt protectionist measures, to avoid government budget deficits). In the industrial countries such practices are regarded as sensible. Obviously what we are seeing is exercise of political power with its inevitable consequence of double standards and other selfish measures.

When one looks at the situation in those terms, it becomes clear that the World Bank and the Fund have a most important role to play in educating their rich members and applying more effort and imagination in raising resources for their African members.

An important area in which the World Bank can and should do something to help Africa is in the parastatals sector. A lot has been said in recent years about parastatals in Africa, and I believe that many African countries are now convinced that policy changes and reforms in that regard are necessary. The World Bank and its International Finance Corporation could be extremely useful in mobilizing private external capital required in the reconstruction of the parastatals. The Bank’s thinking at one time appeared to be that government departments could not be entrusted with the responsibility of implementing certain projects because of civil service salary structures or because of the need for more direct donor involvement, and therefore parastatals had to be established in order to receive the Bank’s support. Many parastatals continue to contribute a great deal to the development of the countries concerned. What is now needed is a kind of second-stage operation in the development of parastatals which involves reorientation of the overall policy, changed working relations with government, consolidation, and privatization or divestiture where feasible. The Bank should be an active participant in this process.

We are happy to hear from Mr. de Azcarate that the Bank will continue to pay attention to the maintenance and rehabilitation of the existing infrastructural facilities. This is to be welcomed because in many parts of the continent existing roads and railways are in a deplorable and deteriorating state, and therefore the first job should be to put them back into working order, just as this is what needs to be done in the industrial sector. In the case of transportation facilities, however, there is need for the Bank to extend its interest. In particular, better road and rail links between African countries are desperately needed to support intra-African trade and economic cooperation in general. It is not always recognized that in addition to a lack of communication links between neighboring countries in some cases, transportation of goods in Africa is at least 50 percent more expensive than in Asia. The World Bank is well placed, because of its experience and influence, to play a leading role in overcoming this major obstacle to African countries’ development based on economic cooperation and other forms of self-reliance.

I have dealt with Africa’s external indebtedness in some detail in a paper prepared for the Third World Foundation Conference to be held in Zimbabwe later this year. For the present purpose I would like to make several points. First, the small figures involved should not give the impression that the debt problem in Africa is small. The President of the World Bank has himself said that many sub-Saharan African countries face serious debt problems. Second, the debt situation in Africa must be seen as an integral part of the overall development problem facing the continent and not as something that can be dealt with in isolation and on a country-by-country basis. In that sense, I am in disagreement with what Mr. de Azcarate says in his paper. Third, the debt situation, the declining overseas development assistance, and the growing unwillingness by private sources of capital to lend more to Africa all mean that the World Bank and the Fund must give more support, direct and indirect, to African countries.

Mr. de Azcarate has a few paragraphs on what he refers to as the Bank’s collaboration with the Fund. I am sure all my colleagues will be happy to hear that there is now active collaboration between the Bank and the Fund in dealing with African countries. The two organizations have the same interest in most of the macroeconomic policies, such as exchange rates, internal prices, and trade policies. But unfortunately the programs through which they deal with African countries are not closely coordinated. For example, it is not easy for a country to deal with a Fund stand-by program while also working on a Bank’s structural adjustment loan program that has a different time frame. Even receiving different missions which ask more or less the same questions can be very expensive to African countries. I have suggested to the two organizations that the best way in which to promote collaboration between themselves, on the one hand, and the African countries, on the other, is through simultaneous programs of structural adjustment loans and extended Fund financing.

No one disagrees with the intentions of the “new agenda.” What needs to be stressed, however, is that the new agenda calls for a new thinking and philosophy for the World Bank and for other donors and a new thinking and philosophy for the African countries themselves. I want to give one good example of how this new thinking and philosophy would work. That example concerns food supply. I believe all those concerned now accept that food aid will not solve the food problem in Africa. The solution is greater food production, and what the donors should therefore do is give much greater support to agricultural production within the continent itself. Within that program the countries able to produce agricultural surpluses would be encouraged to do so, and those surpluses used as food aid to those countries unable, maybe because of such factors as climatic conditions, to produce adequate food for themselves. Financial resources are needed to support farmers, build roads and storage facilities, and also to finance surpluses. On the part of the African countries, there must be a firm recognition that in addition to more effort and appropriate policies to achieve greater agricultural production (better farmer prices, appropriate land policies, better oriented extension services) economic cooperation in agriculture is as important as in industry.

In other words, a departure from the past is needed in dealing with food supply. It is also needed in other sectors: we should not rely on a gentle evolutionary process to deal with the development crisis facing African countries. In that connection we should also now move to more realistic ways of analyzing the problem by looking at the real situation in physical terms. What needs to be done to reduce unemployment by, say, 50 percent? How are the increasing numbers of people to be fed? What about literacy, water supply, shelter? When one looks at those physical requirements needed in 2000 (and we do know already how many people there will be in Africa then), it becomes clear that the present techniques of looking at the problem are inadequate. In terms of the usual orthodox economic analysis, achievement of those physical targets would need growth rates of incomes never heard of before, and certainly several times the rates normally used in orthodox economic planning. Since that income approach is not useful, what other approaches and strategies do we use? In short, a “new development economics” is also needed.

John Williamson

I was pleased that Governor Ndegwa suggested that structural adjustment lending and the extended Fund facility should be done jointly because that is a cause which I have also attempted to explore. It does not appear to have evoked any sympathy among the developing countries. Indeed, the latest communique of the Group of Twenty-Four had what appeared to be an explicit repudiation of that idea. I think that what worried them is what they call “cross conditionality,” which is the notion that neither the Bank nor the Fund would lend unless the conditions of both were satisfied. Ideally, that type of consideration ought not to be there; but we have seen that among many African governors those misgivings are very real. I want to suggest to the Fund staff that one of the requirements that would need to be met in order to give reassurance to countries that it was a good idea to go ahead with joint Fund-Bank programs would be an assurance that the Fund would be prepared to reinforce success rather than to demand additional policy changes whenever it makes a loan. This issue has arisen in the past in the case of India. The Fund, as I understand it, essentially took the view that the Indians had brought their macroeconomic policies into order and all its management wanted was assurances that they would remain in order. That was a very proper attitude. Unfortunately, there have been other countries, equally deserving, that have not obtained that type of response from the Fund. I wonder what would happen in the African Department if, for instance, a request for support came from Botswana (which was used by the Fund staff as an example of a country that is managing its policies well). Would the Fund staff be prepared to take the bureaucratic risk—it is a risk—of simply saying, “Your policies look good to us; we are prepared to endorse them as they are?” Or would they demand further changes? The bureaucratic risk is that if they do the latter and the program then breaks down, they end up in that uncomfortable corner since the country performed as it was required in terms of the instruments, but it did not achieve the objectives. In that case somebody in the Fund is going to want to know why the staff agreed to a program like that. This bureaucratic risk is one that the Fund staff ought to be prepared to take in order to give countries the confidence to undertake programs jointly with the Fund and the Bank. I think the Bank also would have to make some adjustments. Mr. de Azcarate said, in effect, that “when we have a structural adjustment lending program we think of all the things that the Bank would like to see done in the country.” I think the Bank has to be a little more disciplined in its structural adjustment programs if countries are going to see them as the constructive way forward in the future that, in principle, they ought to be.

Let me also add a word on the international context. When we speak of the burden of adjustment, that plea is clearly directed to the international community, the major industrial countries, and not to the management or the Fund staff as such. Let me suggest that sharing the burden of adjustment is not a good slogan to use in that context. The reactions which you will get if you use that slogan among the industrial countries are complex. Americans may think you are joining with them and calling on the Japanese to relax their trade restrictions; the Japanese may think that you are joining with them and calling on the Americans to reduce their budget deficit; or they may all think that you are calling on them to reinstate inflation; and none of those would win a sympathetic response. Clearly, the policies regarding aggregate demand that are pursued in the developed countries are a matter of vital importance to developing countries, as well as developed countries, and it is surely legitimate for developing countries to express their views on those issues in councils like the Interim Committee and the Fund Executive Board. Indeed, I would very much hope that in those fora, the developing countries would try to strike a blow against the rather primitivist tendency in economic philosophy, incorporated in the Fund’s current World Economic Outlook, where one finds the view expressed that budget deficits in Germany or Japan are going to do all sorts of terrible things to the world economy. Surely, none of us believes that. So, there are certainly some issues which can legitimately be raised there.

But more crucial for developing countries is the issue of protectionism. That is where developing countries could make some very specific points, in a very telling way, because that is where their interests are on the same side as the rhetoric of the developed countries. The next time President Reagan lectures the International Monetary Fund Annual Meetings about the “magic of the market,” it might be useful if somebody from a country like Swaziland were to get up and say, “Well, let us have a free world market in sugar and let us see the magic of the market work in that context. Give us a chance to adjust. We think we can do it perfectly well if you give us a chance.” That, I think, would have far more impact than suggestions for sharing the burden of adjustment. Let me also add that the attitude which the developing countries are taking at the moment, in regard to a new GATT trade round, is a great mistake. They have more potentially to gain from this than the industrial countries and they should be in the forefront of pushing a new GATT trade round which would have developing-country interests at its center.

Reply

Luis de Azcarate

Let me try to respond to comments directly relevant to my subject, which has been the role of the Bank in adjustment and growth in Africa. I shall for convenience consider them under six headings: IBRD and IDA allocations, role of structural adjustment loans and other instruments, debt, food, urgency of the “crisis,” and Bank-Fund collaboration.

IBRD and IDA Allocations

What limits IBRD lending to Africa in the first place is not resources; it is the state of countries’ creditworthiness. What limits IDA lending in the first place is the level of resources. Performance, that is, policy performance, however, is an important factor for both; for IBRD-eligible countries because poor performance will weaken or altogether destroy their creditworthiness, for both IBRD- and IDA-eligible countries because poor performance will mean lower returns on the use of scarce resources.

Of course, we realize that creditworthiness and performance are judgmental matters. We use such quantitative measures as are available and meaningful as well as our staff’s best qualitative judgments to determine IBRD and IDA eligibility in principle. At this time only a handful of countries (in sub- Saharan Africa) are IBRD borrowers; you are well aware which. Some also are “blend” countries receiving both IBRD and IDA funds, that is, when creditworthiness is still limited and per capita income below the IDA eligibility threshold. Some have in recent years graduated from IDA into full IBRD status (e.g., Cameroon), others have in fact become pure IDA when their margin of creditworthiness has eroded (e.g., Senegal).

While we realize that Africa’s needs are enormous and most countries face special difficulties, we cannot at this time consider allocating more than about one third of IDA-7 resources to sub-Saharan Africa, for the reasons I indicate in the paper. With that share the per capita allocation to sub-Saharan Africa is on average much higher than for any other eligible group of countries. Despite the relative financial strength of China and India, these countries have very large masses of poor people. Bangladesh, for example, faces developmental difficulties as intractable, or worse, than many African countries. An allocation from IDA of 50 or 60 percent, as suggested in one of the papers presented to us, is frankly not a reasonable proposition at this time.

Let me add an important note in this connection. Much more than in the past, I suspect the donors to the special facility for Africa, and to IDA as well, will judge the merits of concessional assistance to Africa (however insufficient we may all think its level is) on the basis of results. This means an obligation for the Bank to apply these scarce resources where the conjunction of need and policy actions by governments offers the best chances for success for promoting adjustment and growth.

Role of Structural Adjustment Loans and Other Instruments

Governor Ndegwa says that the structural adjustment loans is precisely the kind of program that is needed in dealing with the African crisis but he notes also that there is something seriously wrong in the design of the structural adjustment loans at least for Kenya. He also sees “the difficulties encountered in the administration of structural adjustment loans…as an excuse to move away from that kind of program to the so-called project forms of support.”

I think I can summarize my views on this by saying that a diversified diet is best. And as a result of the evolution I describe in my paper, I believe the Bank does now offer a wide selection of instruments to all its borrowers. Structural adjustment loans certainly have their place in the menu for some countries under some circumstances. Associated with the quick disbursing aspect of the loan or credit—a most valuable component in times of balance of payments difficulties—they support a coherent and broad package of policy reforms designed to permit or enhance future growth. But they are also complex, time-consuming operations in design and preparation. They are hard for governments to implement at the desired pace in all their components. They are difficult to monitor and therefore to assess as successes or failures. And there is no agreed analytical model underlying them as there is, to some extent, in the case of Fund programs.

In advocating a diversified diet I do not want to dissuade any country from considering structural adjustment loans (in fact, I believe more structural adjustment loans are currently under preparation for Africa than for any other region) but rather suggest that one should not minimize the merits of other forms of lending that also respond to real needs. Regular projects, first, are needed to raise gradually the levels of investment which are now at dangerously low levels in most countries, as I note in the paper. At the same time, projects can be of very different kinds and address maintenance and rehabilitation requirements and not just new fixed investment.

Sector adjustment lending, in turn, which has been growing fast in the last few years, can combine several advantages. These loans focus on fewer, sector-specific objectives and policy actions and thereby establish a simpler, more direct link between lending and performance. They are also less complex to prepare; at the same time more detailed, and still manageable action programs can be designed, provided of course that appropriate sector work has been carried out before. Being more focused and simpler, they are easier to monitor. Finally, the application of funds may be for general balance of payments purposes, or to meet sectoral current input requirements or to finance elements of a sectoral investment program over a period of time or a combination of the above. Also, a sector can be defined functionally, say, to encompass a group of public enterprises across traditional sector boundaries.

Debt

Governor Ndegwa comments that “the debt situation in Africa must be seen as an integral part of the overall development problem facing Africa and not as something which can be dealt with in isolation and on a country-bycountry basis.” He disagrees with what I say on this.

Since I say very little on this topic in the paper let me try to be a little more explicit. First, I do mention in the paper the two issues of debt and resource transfer as being “closely interrelated” and I think therefore that I am in agreement with Governor Ndegwa on the first proposition of his commentary. I do think, however, that in considering these two issues together, as he suggests, a country-by-country approach is more advisable than one solution that would cover all of Africa or a large number of countries at the same time. One quite empirical reason is that this approach has worked rather effectively so far, at least by avoiding the worst (i.e., country default or bank collapses). Second, as mentioned in my paper, country debt situations differ widely within Africa (some have large commercial bank debts, others little, some mainly trade arrears, others heavy debt with official bilateral donors, others more debt with multilateral “preferred” creditors, others with East European countries and so on). Overall economic prospects are also different from one country to another. Also, blanket solutions across countries would raise problems on equity grounds: creditors, I suspect, are probably more willing to relieve the debt of those countries that are trying to help themselves more vigorously.

But all this, again, is not to say that “the solution” is at hand. Indeed for the most indebted African countries, the years 1985–87 are going to be most difficult (in part because of past reschedulings). It is those countries also that obviously most need measures of debt relief through Paris and London Clubs where appropriate, additional external resources from the Bank, the Fund, and others, and adjustment policy measures. All this said, the search for imaginative approaches should obviously continue.

Food

In calling for “a new thinking and philosophy for World Bank and other donors” in order to meet the “new agenda,” Governor Ndegwa focuses on food supply. This is an appropriate example. Let me simply say in this respect that the Bank is quite prepared to assist in accelerating food production in Africa, as it has in the past. All rural development projects include food output components, but I have noted also in my paper that rural development projects had faced technical, institutional, and management problems and that new approaches were needed. It should be noted also that policy reforms in agriculture, as we discuss them with African governments as part of our sector work or in the context of lending operations, are meant to address the problems of food production, food marketing, food exports and imports as much as those of export crops. While, as for any other operation, we are concerned that programs to enhance food production be cost effective, we recognize at the same time that determining the cost and value to be attached to ensuring food security and not just increases in output is a difficult question in concept and in practice. The Bank is currently working on this important issue.

Urgency of the Crisis

I suppose Governor Ndegwa’s main criticism of my paper is that it “lacks a sense of immediacy or urgency although the desperate situation facing most African countries calls for urgent and appropriate attention.” Governor Ndegwa adds “…the author seems to think that continuation of the present rather gentle and evolutionary response to the crisis… will be sufficient.”

If this is the impression given I certainly have failed to convey at least an important part of the intended message, for which I must apologize. On the other hand, urgency is of course a matter of scale: at least I hope to have shown in the paper that over the long history of Bank involvement in Africa there has been a rather remarkable evolution of the Bank’s approaches and instruments and a real effort at adapting to the continent’s specific needs.

When one looks back at only the last four or five years—a short period for a large international organization established about 40 years ago—it is hard, I believe, not to consider the following as real achievements: the introduction of structural adjustment loans—a completely new instrument; the special action program; the development of various forms of sector adjustment lending; the replenishment of IDA, albeit at unsatisfactory levels, under extremely difficult circumstances; the establishment of the special facility in less than one year’s time. Furthermore, the Bank has during this period shifted considerable administrative and staff resources toward the operational units in the Bank dealing with Africa. Finally, I think the Bank as much as any other institution can also be credited for having publicly called attention to the plight of sub-Saharan Africa, not least through the issuance of three special reports since 1981 (to which Governor Ndegwa refers), and for having reiterated the need for prompt action (including on long-run issues such as population) by the countries themselves and by the international community. Moreover, together with the Fund, we have sought to mobilize other external resources in cases where these were urgently required in support of major policy reform programs. Ghana is a case in point.

Nevertheless, the Bank is not a crisis institution. It is not well equipped to respond to the immediate needs arising from sudden balance of payments difficulties, drought, or other natural disasters. Other national and international organizations are. Nonetheless, the Bank does assist in reconstruction operations with quick-disbursing loans, say, following an earthquake or civil strife. In Africa we have done so for Nigeria and Uganda, for example.

When we talk about the African crisis, however, we all have in mind, I suppose, that set of problems that is precisely not amenable to quick solutions: population growth, the allocation of investment resources, the sluggish growth of agriculture, institutional reform in the public sector, and the like. It is in these areas that the Bank, in my view, has shown considerable flexibility and imagination, although much remains to be done, and we are by no means entirely satisfied by the results so far.

Bank-Fund Collaboration

Governor Ndegwa notes that “Bank and Fund programs…are not closely coordinated,” that the time frames of stand-by Fund programs and Bank structural adjustment loans are different, and that “separate Bank and Fund missions asking more or less the same questions can be very expensive to African countries.” He calls for “simultaneous programs of structural adjustment loans and extended Fund financing.”

Because, as Governor Ndegwa rightly indicates, there are areas of overlapping interest between the Bank and the Fund, coordination of actions between the two institutions is essential. While subscribing entirely to this general principle, I also noted in my paper that legitimate differences of views on the relevant issues could occur and that the governments in the end have to make the final choices in a consistent manner.

Nevertheless, beyond these broad principles (and both the Fund’s and the Bank’s board of directors have again recently reviewed and discussed these principles in depth), practical coordination and resolution of differences is best done on a country-by-country basis.

At the same time, I should be quite frank and admit that (in my own experience) while some governments tend to detect lack of coordination at the slightest appearance of differences between the staff of the two institutions, others also become very suspicious that total coordination might mean “ganging up” against the government or imply a de facto imposition of cross-conditionality between the Fund’s and Bank’s respective programs. I am sure you all realize that sometimes the staffs of our two institutions have to achieve a delicate balancing act!

I agree with Governor Ndegwa that the alliance of extended Fund financing and structural adjustment loans programs is a natural one. Indeed, such combination was the case for the first programs implemented in Africa: Kenya, Senegal, and Côte d’Ivoire are examples. The programs of action under each type of arrangement, however, do remain distinct as they fulfill complementary but different objectives, follow different processes, and are monitored under different sets of quantitative or qualitative standards. Furthermore each institution retains, as it should, complete independence of judgment as to the degree of achievement of the agreed programs by the government. In short, there are good or at least natural reasons why the respective programs supported by the Bank and the Fund may not move in full harmony.

The question of disbursement provides a good example. In designing a program the Fund will make an assessment of all the projected financing flows to the country over a given period. These naturally include disbursements from Bank loans and IDA credits based, I suppose, on the tentative projections that appear in our loan documentation. But besides the fact that these projections tend to be optimistic, the actual rate of disbursement for each operation will depend on the particular pace of advancement of each operation, be it road construction, crop development, or some policy action under a structural adjustment loan or otherwise. Acceleration of implementation in one case may compensate for deceleration in another, or it may not. In other words, the profile of total disbursements from the Bank to a particular country is a function of a complex set of factors most of which will not be directly related to the financing plan of the balance of payments. Under the best of coordination efforts, therefore, plans and “actuals” may diverge. Realism in projecting the future as well as frequent and prompt exchange of information between Bank and Fund staff will, as in other areas of coordination, help minimize such discrepancies.

Throughout the paper “the Bank,” unless otherwise specified, refers to the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).

Accelerated Development in Sub-Saharan Africa: An Agenda for Action (Washington: World Bank, April 1983); Sub-Saharan Africa: Progress Report on Development Prospects and Programs (Washington: World Bank, July 1983); Toward Sustained Development in Sub- Saharan Africa: A Joint Program of Action (Washington: World Bank, August 1984).

These estimates do not include the impact of events such as drought or political disturbances.

See B. Balassa Adjustment Policies and Development Strategies, 1973–1978, Discussion Paper, Development Research Department (Washington: World Bank, November 1982). The “impact” on GDP in this and the study cited below refers to changes in GDP relative to the historical trend, had this trend continued. These estimates do not include the impact of events such as droughts or political disturbances.

See B. Balassa and D. McCarthy Adjustment Policies in Developing Countries 1979–83, An Update, World Bank Staff Working Paper, No. 675 (Washington: World Bank, 1984). The measurement methodology between the two periods varies in some respects, and the numbers given here should be taken as orders of magnitude.

It is well known that price indices are deficient for most countries, but the movement of prices is inescapable in whatever statistics exist. The real effective exchange rate is here measured as import-weighted change in bilateral nominal exchange rates, adjusted by the ratio of the domestic price index to the import-weighted combination of consumer price indices in the trading partners.

For example, Food and Agriculture Organization (FAO) and Bank studies have found that potential accessible domestic supply of fuelwood in the Sahel is only 20 percent of the natural forest cover (i.e., the volume of wood that can be cut annually without depletion of the capital) creating a large gap between demand and supply which is in fact covered by abusive woodcutting. By the turn of the century, demand (35 million m3 of firewood) will be more than twice sustainable supply (15 million m3). In other studies the FAO has estimated that deforestation destroys 3.6 million hectares a year in Africa.

The grant element of total public and publicly guaranteed debt declined to 15 percent in 1982 against a 38 percent average for the period 1970–74. See the Bank’s Sub-Saharan Africa Report, 1984, Table 17.

By Mr. Brau of the Fund.

North Africa comprises IBRD borrowers only.

Toward Sustained Development in Sub-Saharan Africa (August 1984).

SALs (and other sector adjustment loans) are generally disbursed in two tranches—the first when conditions of effectiveness of the loan have been met, the second when a number of specified agreed policy actions have been taken to the satisfaction of the Bank.

The figures in Tables 1 and 2 refer to a somewhat more restrictive definition of “nonproject” lending than the one discussed previously as illustrated by the list of operations in Table 6.

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