- Gerald Helleiner
- Published Date:
- March 1986
The serious economic and financial problems affecting African countries are both generic in that they are common to other developing countries and specific in that some are peculiar to sub-Saharan Africa (SSA).
The papers prepared for this symposium more than adequately delineate the global or aggregative factors that have caused the present crisis in sub- Saharan Africa. The first oil price increase worsened the terms of trade of oilimporting SSA countries as it did of other oil-importing developing countries. SSA countries, as the papers bring out clearly, met this problem by greater recourse to external borrowing, in large measure from the commercial markets. This appeared appropriate when world trade was buoyant and money could be borrowed from commercial markets at negative real rates of interest. The much more serious crisis that affected oil-importing developing countries following the second oil price increase affected African countries perhaps even more severely. Once again, terms of trade turned sharply adverse and this circumstance coincided with the global recession which seriously weakened export markets of African countries and was also responsible for a sharp downward turn in the prices of their major export commodities. Protectionist tendencies were also strong and gained further momentum in the industrial countries. The increase in interest rates and the consequent additional burden (in domestic currency) of debt servicing at a time when exchange earnings were themselves under pressure aggravated the debt crisis, especially in the context of the larger proportion of external debt owed by African countries to private financial institutions. Higher interest rates made access to the commercial banks prohibitively costly (even assuming a willingness on the part of the lenders to provide more credit). All this also coincided with the withdrawal of various special facilities introduced by the Fund in the wake of the first oil crisis (Trust Fund, oil facility) or their severe constriction (compensatory financing facility, extended Fund facility). The combination of more severe external payments and a drying up of external financing facilities affected all developing countries, but African countries suffered perhaps more in view of their greater vulnerability to external shocks and greater external dependency in trade and finance. The drought in SSA further added to the pressure on their external payments position by increasing the need for food imports and also widened the domestic gap between supply and demand with its inevitable inflationary consequences. The combined result has been that growth in most SSA countries has slowed down sharply. In combination with continuing high levels of population increase of 3 percent or more, this has meant declining per capita income, fewer employment opportunities, and consequent social and political tensions.
African countries, therefore, are bearing the weight of adverse cyclical and conjunctural factors on underlying structural inadequacies. There is clearly a wide consensus on the need for adjustment in the face of the current crisis, but—and this is not surprising—little agreement on how adjustment is to be financed and on what terms. Structural inadequacies call for structural adjustment in respect of the irreversible element in the deterioration in terms of trade, but the superimposition of conjunctural factors also calls for the more conventional short-term adjustment financing. Unfortunately, this period also witnessed a pressure on the Fund’s own resources which was, I believe, a factor in the tightening up of its conditionality. The dominance of countries wedded to orthodox demand management in the decisionmaking levels of the Fund was also a factor in reducing the availability of Fund assistance and hardening the terms on which such assistance was provided.
The adjustment process, it was recognized, needed financial underpinning on the sound principle that finance without adjustment would be pointless and adjustment without finance not feasible. Nevertheless, the terms on which finance was provided, with its heavy demand-management orientation and the tight performance criteria laid down, made the adjustment program itself difficult to implement.
Given the structural basis of the maladjustment, obviously the correction would have to be structural and therefore gradual and over at least a medium time frame. The extended Fund facility was instituted in the 1970s with precisely these objects in view, but by the early 1980s had become an endangered species. There were, to be sure, examples of such arrangements, but by and large these arrangements collapsed for one reason or another, and there were many victims of this collapse in Africa. At present, there is only one extended Fund facility program in operation in Africa and this itself is testimony to the fact that few African countries have been able to avail themselves of this facility because of difficulties in satisfying the rigorous criteria of policy change expected of them under such programs. It is easy to be critical of domestic policy inadequacies as a factor explaining the collapse of such programs. Papers by the Fund staff itself make this point. Domestic financial policy inadequacies often are equated with expansionary credit policies, and it is easy to derive from this the need for curtailment of domestic credit expansion, which is at the core of demand-management prescriptions. If, on the other hand, the problem is of failure of supply, as often is the case, demand management is not likely to help and would only aggravate the problem associated with reduction in incomes and purchasing power caused by supply failures. Though it has been argued on behalf of the Fund that, consistent with the principle of uniformity of treatment, it seeks to tailor its adjustment packages to the specific requirements of different countries, observed experience has shown that most adjustment programs contain a standard mix of policies consisting of curbs on domestic credit expansion, import liberalization, and policy adjustments in interest and exchange rates, producer prices, and the operation of parastatals.
What can be done about adjustment in Africa? As I see it, the main issues that need to be addressed are (a) growing food insecurity in many African countries, (b) the weakening of export markets and export commodity prices, and (c) increasing aid dependency. It would be presumptuous for anyone to suggest answers, but I would strongly endorse the line taken by Mr. Loxley in his paper about the need for alternative approaches to stabilization, both on the practical ground of the failure of the present approaches and the theoretical argument based on the structural character of the problem. There is hence a need to fit the adjustment program in as an element of growth and investment and not as a distinct, let alone contrary, exercise. Growth in its widest sense is no more than a structural transformation of an economy, and structural adjustment in the medium term can be regarded as having ingredients of success only when it is treated as an element of investment and growth. I would entirely agree with Mr. Loxley’s structuralist approach and his view that strengthening the food production base should command high priority. Further, in the sub-Saharan context, despite the fact that external trade constitutes a significant proportion of GDP in relation to, say, low-income Asia, it is a matter for discussion whether the external sector should be corrected through more emphasis on exports if this will increase the exposure and vulnerability of African countries to the vicissitudes of international economic conditions. In the light of food insecurity, the adjustment effort should place emphasis, as Mr. Loxley pointed out, on stepping up the production of basic and essential commodities, especially food. To the extent to which this is done, both the vulnerability to external trade variations and domestic inflation would be corrected by adequate food supplies. The Indian experience in this area is not without significance. Import substitution—in this case of a basic wage good—may have greater relevance in the medium term than export expansion. The second relevant area of structural adjustment is intraregional trade, consistent with the Lagos Plan of Action. As regards exports to areas outside Africa, it is debatable whether they should take the form of a further augmentation of supplies of presently exportable and exported commodities or whether there should be selective diversification of exports with greater value added.
While I fully endorse the general thrust of Mr. Loxley’s paper, I must express my reservations about one point, his suggestion that the quantum of investment in SSA countries needs another look while greater attention is paid to the quality of investment and increasing the returns on investment. Apart from the higher costs and delayed returns involved in cutting back investment expenditures, resulting in underfunding of ongoing projects, even assuming such cutbacks are feasible politically or otherwise, there is a more serious economic argument. Cutting back on infrastructure can only compound problems for the future. No one can dispute the importance of quality of investment and the need to obtain higher returns. Low productivity of capital is a luxury that poor countries can ill afford. Capital is their scarcest resource, and every effort obviously needs to be made to reduce incremental capital output ratios (ICORs). Some papers refer to the need for “quick-yielding” schemes. In their very nature infrastructural investments are not quick yielding. The returns on them also compare unfavorably with returns on investments directly related to productive activity. But without infrastructural investment, even production-related investments cannot be expected to yield returns adequately or even quickly. Unfortunately, ICORs for infrastructural investment tend to be high for inherent technological reasons but without infrastructural investment we cannot have low ICORs elsewhere. Even enhancement of food production requires considerable lowyielding and slow-yielding infrastructural investment. A price must thus be paid in the early stages of development for providing necessary infrastructure. Here we have a problem with the Fund’s demand-management programs that set (in most cases) subceilings on credit extension to the government sector as part of credit ceilings in the list of performance criteria. Infrastructural investment is generally the domain of the public sector (as the private sector in most developing countries is either unable or unwilling to enter the area in any substantial way). The requirements of such investment as part of structural adjustment could run counter to the prescription of severe limits to public-sector borrowing. If ceilings on domestic credit expansion (DCE) have to be set, there is indeed a case for not subdividing it into the public sector and the rest—a subdivision deriving from a suspicion or even conviction about the suboptimal efficiency of the public sector in all cases. In any event, from the point of view of overall monetary expansion and accepting for the moment the logic of the somewhat simplistic monetary model applied by the Fund, it is the overall expansion of DCE and not of its subsectors that should be relevant.
Further, in the operation of the programs, instead of a rigid application of the ceilings (as at present) where even a small degree of noncompliance of subceilings (even if the overall ceiling is complied with) invites suspension of drawings in the absence of waivers (and waivers are becoming infrequent), consideration should perhaps be given to a prorating of the drawing in relation to the extent of performance or, putting it another way, the degree of deviation from the ceiling. This would be clearly better than the present all or nothing approach. One could also refer to the suggestions made earlier to establish a range of ceilings rather than a specific figure. The information and data base in several developing countries do not permit such precise quantification, and one is reminded of the old adage that it is better to be vaguely right than precisely wrong. Precise quantification is also related to specific dates. But markets are fragmented and imperfect, and sometimes seasonal factors, including weather, make fulfillment of performance tests on specified dates difficult. Sometimes there is a temptation to window-dressing and this can give rise to institutional memories that could affect the Fund’s perception of the credibility of and its confidence in the country concerned.
If one accepts that structural adjustment in the gradual and medium term, and concentrating on supply augmentation is the alternative, two questions arise. First, what is the role and relevance of the Bank’s structural adjustment lending program in Africa? Second, what is the role for the Fund in this situation?
As regards the first, structural adjustment lending that provides quickdisbursing assistance untied to projects is certainly welcome, but the conditionality prescribed by the World Bank on macroeconomic policies comes close to the conditionality prescribed by the Fund that has been the cause of so many problems. Superimposed as it is on the Fund’s conditionality, it constitutes, in Mr. Loxley’s phrase, a “double dose of external leverage.” SALs have been marked by a fairly standard set of policy prescriptions relating to the operation of the pricing system, interest rates, exchange rates, the trade regime, and the like—all very similar to the standard prescriptions enjoined on borrowing countries by the Fund in its supply-oriented aspects. Growing collaboration between the Fund and the Bank would, in normal circumstances, have been a welcome feature, but when one institution makes a precondition for sanctioning loans or permitting tranche drawings that the country must arrive at an agreement with the other, borrowing countries find they have little outside choice, especially with the deterioration in the overall aid climate and the slowdown in commercial bank lending. Structural adjustment lending was designed to provide countries with a line of finance for a long enough period, beyond the normal period of the extended Fund facility to effect necessary structural adjustment, but SALs, though untied to projects, are a far cry from the program lending for which developing countries have been pleading. The stringent conditionality accompanying SALs deprives them of the type of flexibility associated with program lending. If they are to serve the purpose for which they were instituted, clearly conditionality needs to be suitably tailored to the structural characteristics of the borrowing country. SALs are, in a manner of speaking, extended extended Fund facilities. Their similarity of policy mixes makes one wonder whether, in the light of experience with extended Fund facilities, there is any reason to be more hopeful about SALs. Though SALs were introduced with considerable fanfare about four years ago, there is already some evidence of disenchantment with their performance and even their appropriateness. The use of sector adjustment loans is a recognition that SALs perhaps are taking on more in policy reform than they can effectively handle. SALs certainly would help where countries need a program of assistance to induce fuller utilization of existing capacity, and it would perhaps be appropriate to look at them as instruments for more efficient and optimal utilization of capacity rather than as instruments of wide-ranging policy changes. At the same time, SALs are no substitute for the more conventional project financing with its stress on supporting investment.
In other words, conditionality should be broad based and country specific rather than based on a standard mix of market-oriented policies on the supposed ground that these policies are better geared to provoking the appropriate supply responses. The alignment of policies with market forces does not fit well with the diversity of social and economic systems of the members of the two international financial institutions. Even in Africa there is wide diversity in economic organization and there are varying degrees of state intervention in the economic process.
If they are to be successful, adjustment policies have to be framed within a viable and feasible framework. Ignoring social tensions and political compulsions is an invitation to failure of the programs. Fund conditionality guidelines recognize the importance of social and economic conditions, but in practice the standard mix of demand-management policies and marketoriented supply policies has not evidenced an awareness of political and social realities in Africa and elsewhere. There are, of course, a few examples of reasonably successful Fund programs where the appropriate emphasis on supply augmentation has figured (e.g., India), but these are all too few. The more general case is for deflationary adjustment, though the Fund was designed to provide finance to correct maladjustment without undertaking deflationary adjustment. Financial accommodation from the Fund was seen as an alternative to deflationary adjustment and not as its instrument. Unfortunately, contemporary experience points the other way.
In the ultimate analysis the ability of the Fund and the Bank to assist countries undertaking adjustment programs also calls for additional financial resources for these institutions. Mr. Sanusi’s paper rightly refers to the inadequacy of Fund resources and calls for an enlargement of quotas with more weight to the developing countries. This is altogether appropriate. SDR allocations also need to be resumed again with more weight for developing countries. The political economy that marks these issues, however, does not suggest that we are likely to have either of these in the near future.
Where then do we go? To suggest that conditionality should be softened will not get us very far. As long as the powers that control the Bank and the Fund take their current position, we cannot seriously expect any softening in their stance with regard to conditionality. It is not so much softening that we have to plead for but conditionality appropriate to the circumstances of the borrowing country, an acceptance of the need for gradualism (and not shock treatment) for the correction of the maladjustment, and the provision of adequate finance on terms that do not add significantly to the debt-servicing bill. One-year stand-by arrangements are relevant to disruptions in economic activity that are amenable to correction in the short term, but are clearly not appropriate where the problem is more fundamental. In the case of the Fund, this calls for a reversion to greater use of the extended Fund facility and full restoration of the enlarged access policy. The recognition of the structural character of the problem fits ill with the current preference for oneyear stand-by arrangements, characterized by their short-leash approach. Formulating a program on a three-year frame but using one-year stand-by arrangements seems a contradiction. Three one-year stand-bys do not make one three-year extended Fund facility, as the whole conspectus is different in the two cases. Apart from this, there is need to restore the low conditionality character of compensatory financing facility, not merely making it, in Mr. Sydney Dell’s phrase, “the Fifth Credit Tranche,” as at present. Equally, there is need to restore the full access rights originally envisaged under the enlarged access policy. The perverse result of an increase in quotas under the Eighth Review has been that the absolute limits of access to Fund’s resources have been reduced for most African countries. If the enlarged access policy is not to be a misnomer, the reversion to earlier levels is necessary. The Trust Fund repayments should also be effectively redeployed in the form of new Trust Fund allocations. I would prefer this to the return flow being used for an interest subsidy account. The point has been made about Fund facilities not being cheap and that further recourse to the Fund would add to the burden of debt servicing. African countries already face a serious debtservicing problem, and for many of them there is a real possibility of a negative transfer of resources. In this context I would suggest that the Fund reinstitute the facility it once had on a general basis, but now allows only in exceptional cases, of permitting countries to pay their Fund charges in local currency. The charges would remain a liability for the country and under normal circumstances would cut into the reserve tranche through increasing the Fund’s holding of national currencies above 75 percent. This could be met by treating charges accumulated as a floating facility that does not cut into the reserve tranche. It might be argued that the Fund needs current income in SDRs to be able to pay interest to the creditor countries of the Fund. A symmetrical exercise of adding to the creditor countries’ positive balances with the Fund the interest to be paid to them should meet this particular objection. A point has been made by the Fund that it seeks to play a gap-filling role and catalyze resources from other contributors, be they banks or governments. While this is understandable, the failure to obtain the full quantum of the desired minimum of resources should not cause the Fund to withhold its own contribution. This could only aggravate the problem for the deficit country.
The measures outlined above are within the domain of the Fund’s Executive Board and perhaps the Interim Committee and do not call for the type of amendment to the Articles or reference to the Board of Governors as would be the case with regard to quota increases, SDR allocations, and the like. These reforms are undoubtedly important and necessary, but in all realism one has to accept their improbability in the near future.
Given the circumstances of low-income countries, particularly in SSA, these modifications in policies and procedures would be first steps. Even they may not be enough. A reference may also be made to the need for more equitable sharing of the burden of adjustment. The present system makes the entire burden of adjustment devolve on borrowing deficit countries. In the discussions we have heard about the Fund’s role in surveillance and its efforts to bring about a measure of reciprocal adjustment by the surplus industrial countries through its regular consultations with them. Notwithstanding statements to this effect, the results of such surveillance on domestic monetary policy more compatible with international monetary and exchange rate stability and on reducing the rigors of protectionism and expanding capital flows to the developing countries do not indicate any such positive influence. If surveillance indeed has had such effects it must be regarded as a very well kept secret. The answer, therefore, lies perhaps in adjustment through collective self-reliance in Africa through greater food security, through greater effort in reducing the dependence of domestic economies to external vicissitudes in trade and development assistance and in conserving investible resources, both domestic and external, for the betterment of social conditions at home. This is a strategy, as Mr. Loxley points out, quite different from the thrust now followed by the international institutions of integrating countries more into the world economy. But it is also a strategy consistent with the adjustment and growth needs of Africa and one endorsed in the Lagos Plan of Action.
One final point. No one questions the seriousness of the African crisis nor the inadequacy of existing financial flows in relation to that critical situation. By all means the point should be made that Africa should get more, but I hope not to be misunderstood in saying that the case for assistance to Africa stands on its own and not in terms of comparing it with assistance to other regions of the world. A reference was made in one of the papers that three countries in South Asia, namely India, Bangladesh, and Pakistan, get 50 percent of IDA money. Apart from the fact that the present level of IDA assistance to these countries is below this figure, it needs to be pointed out, as Mr. de Azcarate has done in his paper, that in per capita terms African countries got more concessional funds than their South Asian counterparts. The net aid to India, for instance, is about $2 per head per year, which can by no means be regarded as large, given the poverty in the country. There are perhaps more absolute poor in the South Asian subcontinent than the entire population of Africa. Poverty is grim and degrading wherever it occurs and should not be viewed in regional or continental terms. I would, in all humility, submit that such comparisons only strengthen those seeking to divide developing countries from presenting a common front for additional resource transfers to the developing countries. Africa’s needs are clearly great and have an independent justification, and that itself should be a sufficient argument for increased assistance.