- Gerald Helleiner
- Published Date:
- March 1986
I would like to organize my comments around the question of the larger economic environment and its relation to adjustment prospects and programs and give some thoughts on the institutional setting that might foster an adjustment process more suited to the current needs of African countries.
The international environment is characterized by extraordinarily low commodity prices, high interest rates, low levels of import demand in a large part of the developed world, particularly Europe, and reluctance by private financial institutions to lend. All these phenomena are the result of governmental policy and the overall operation of economies in the industrial world. These policies and the way recovery is developing in the industrial countries will have an important bearing on the prospects for an effective adjustment process in the developing countries and particularly in Africa. A few obvious points. The policy of the United States as regards the mix of fiscal and monetary policy and its impact on interest rates have a direct bearing on financial operations of African countries. Levels of interest rates have also, I believe, played a role in the behavior of commodity prices recently, and they have had less direct effects, for example, through their impact on African markets in Latin America.
Moreover, of particular interest to Africa is the speed with which growth takes hold and is transmitted to Europe. This is important, because Europe uses more imported raw materials than does North America and because ties between Africa and Europe are closer than between Africa and other parts of the developed world. So, the whole question of government policy in Europe and European prospects for growth is of great importance. Then, of course, the general financial climate, the adequacy of aid programs, the operations of the multilateral institutions, and the prospects for SDR creation are of particular importance. The new trade negotiations will also affect the external environment of developing countries. A key question for African countries is the extent to which agricultural and related processed products find their way onto the agenda of these negotiations.
I have reviewed these well-known points because of their importance to the adjustment process. Suitable adjustment programs can be formulated only when the external environment is not subject to large, sudden, and unpredictable shifts. What is required is an environment which, if not stable, is at least predictable so that countries can identify the external circumstances to which they are expected to adjust. Now, however, these circumstances encompass a large and growing U.S. budget deficit, a large and growing U.S. trade deficit, a dollar that has risen sharply and is viewed by most observers as seriously overvalued, and rising unemployment in Europe. Few observers believe that these trends can continue. When they change, these trends will alter the external environment. This means that the external situation to which developing countries are being asked to adjust will change further, requiring still further adaptation by these countries. This is an unsatisfactory situation, and certainly developing countries have a strong interest in promoting external stability by encouraging policy coordination in the industrial countries.
If domestic adjustment is influenced by external factors, it is equally true that such adjustment also shapes the external environment. For example, the sharp improvement in trade accounts required in many Latin American countries was accomplished by massive import cuts. This destroyed major export markets for the economies of the North, contributed to the poor economic performance of the North, and has had unfortunate consequences on the demand for African exports and commodity prices. The sudden improvement required in Latin American trade accounts has also led to an unprecedented export push by these countries and is intensifying protectionist pressures.
Devaluation plays a rule in expanding the output of commodities and in depressing their prices. The interrelationship between adjustment and commodity prices is not limited to exchange rate policies, however. In a number of African economies there are plans to expand commodity output that are independent of devaluation. These plans often call for the expansion of a minor export crop. Expansion is viewed at the country level as prudent since it involves the diversification of both production and exports. But again the overall implications for commodity prices of a simultaneous push by a number of individual commodity producers to increase production can be questioned. The policies followed in response to the need to adjust will thus have an important bearing on the operation of the commodity economy. This impact needs to be faced squarely and to be understood fully.
In summary, adjustment programs could be greatly facilitated by a better external environment. That environment, however, will itself be influenced by the character of the adjustment process. As regards African countries, the relationship between domestic policies, the supply of primary commodities, and their prices requires close attention.
Let me turn to the design of Fund programs. Professor Loxley has presented us with a detailed and interesting paper on the adjustment process and adjustment programs and has put forward an alternative program inspired by the structuralist critique of Fund programs. This critique holds that when differences between aggregate demand and supply cannot be bridged by prospective external financing, the resulting gap should be closed as much as possible through increasing supply, directed as needed toward exports and import-competing activities. This is an important concept, because such a process would allow adjustment to be accompanied to the greatest possible extent by growth. Adjustment through supply expansion usually requires restructuring production so as to maximize export revenues and produce more import-competing goods when this can be done efficiently. This in turn requires appropriate incentives to these activities and a reorientation (usually an increase) in investment. Such a process necessarily takes longer to bear fruit than do simple demand contraction and cutbacks in imports. Consequently, adjustment through supply expansion requires more external financial support than do other types of adjustment programs—a point which has been made explicit by Professor Loxley and also by Mr. Mohammed.
If then one is to turn to the Fund and ask it to operate more in this kind of framework, there are two implications which need to be faced squarely. First, the Fund would need more resources and, second, the Fund membership would need to modify somewhat its interpretation of the Fund as a strictly monetary institution. I think it is perfectly feasible and proper for developing countries to request changes on both fronts. But it needs to be said that the prospects for gaining acceptance for these changes are not bright at the moment.
What, then, are the alternatives? The various institutions and governments concerned with the external support of development in a particular country experiencing external payments problems could examine, with the country concerned, its own proposals for medium-term adjustment. This examination would start with the external accounts, with the increase in output necessary and feasible to increase exports or substitute for imports, and with the associated investment program (not only its magnitude but also its composition). Consequences could then be drawn for macroeconomic management. In such an analysis, the macroeconomic demand variables would be the last part of the puzzle to be put in place. This framework certainly has many disadvantages; it is clumsy, and raises and perhaps magnifies all the questions about collaboration between the Fund and the Bank, but it does at least provide a means to examine the size of the required adjustment. If the size of the adjustment implies excessive increases in unemployment, the components would be re-examined to develop a more balanced program. Would not bilateral donors perhaps see advantages in increasing the overall level of resources or in changing the composition of the projects to be financed, if that would mean a less severe retrenchment? In such a framework, Fund programs, although of limited duration, could be seen as part of a medium-term adjustment program.