Chapter

A View from the IMF

Editor(s):
I. Patel
Published Date:
December 1992
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The Context for Adjustment

The performance of the African economies in the last two decades, and of sub-Saharan Africa in particular, has been disappointing.1 For Africa as a whole, real per capita gross domestic product (GDP) showed no improvement; the growth of about 1 percent a year during the 1970s was offset by a similar rate of decline during the next decade (Table 1). For sub-Saharan Africa, real per capita GDP remained stagnant during the 1970s and fell by nearly 1 percent a year during the 1980s; during the same time, other developing countries recorded moderate growth.

Table 1.Selected Economic Indicators: African Countries and Other Developing Countries, 1971–90
African CountriesOther Developing Countries1
AllSub-Saharan

countries
AllLow-income

countries
(Average annual change in percent)
Per capital income
1971–800.93.22.0
1981–90-0.9-0.81.1-2.0
Terms of trade
1971–805.1-0.98.91.8
1981–90-4.4-3.9-1.2-0.9
Export volume
1971–802.11.14.11.6
1981–90-1.51.94.36.9
Inflation
1971–8014.118.521.49.7
1981–9016.621.858.432.6
(Average share in national income in percent)
Domestic investment
1976–8127.627.316.0
1982–8820.224.115.8
National saving
1976–8124.127.311.7
1982–8817.723.212.7
(Percentage)
External debt, 1990
Relative to exports233.3359.3125.7454.2
Relative to GDP53.375.728.861.4

Unfavorable external factors have clearly played a significant role in this outcome. By far the most important was the decline in Africa’s terms of trade. A 60 percent improvement in the terms of trade during the 1970s (largely attributable to developments in oil prices) was followed by a drop of about 50 percent during the 1980s—consistent with a continuing decline for many non-oil exporting countries. Terms of trade developments were particularly adverse for sub-Saharan Africa, where a 9 percent drop in the 1970s was followed by a further 33 percent slide during the 1980s, or over three times the decline experienced by other developing countries. Africa also suffered from the international recessions during the mid-1970s and again in the early 1980s, and the sharp rise in real interest rates associated with the turn by industrial countries to anti-inflationary policies in the early 1980s.

For the 1980s, several indicators signal major difficulties in the structural transformation of Africa.2

Investment activity. Our data suggest that Africa’s domestic investment rate fell sharply to about 20 percent of GDP, well below that for other developing countries (see Table 1). More important, the rate of return on investment has been dismal, declining to 2.5 percent in the period 1980–87 (World Bank (1989)), reflecting inefficient use of resources and unproductive investment priorities.3

Savings performance. Africa’s domestic savings rate also fell sharply, to an average of only 18 percent, again well below the average level registered for other developing countries. This steep decline is not solely related to adverse external circumstances; it may also indicate inappropriate domestic policies.

Exports. Its export volume fell at an average rate of 1½ percent a year, compared with an annual increase of 4 percent for other developing countries. More important, looking behind the aggregates, various studies indicate that for primary products, traditionally a major source of export earnings for Africa, the region’s share of total world exports fell significantly—in some cases drastically—between the early 1970s and mid-1980s (Akiyama and Larson (1989)).

Unfavorable external circumstances undoubtedly complicated the tasks of economic management for policymakers in Africa. Abrupt policy shifts, sometimes reflecting swings in the ideological pendulum, created further uncertainty and instability in the environment for economic decision making in many countries.

Thus, the starting point for structural adjustment in Africa was considerably weaker than in other regions, the challenges facing governments more daunting, and the economies more vulnerable to further external shocks. Furthermore, adjustment has been made more difficult by weaknesses in basic institutions, infrastructure, and social services. In many instances, ineffective public administration over time eroded the institutional framework. For example, unsound banking practices, excessive financing of state budgets and of parastatal enterprises, and lack of competition have kept banking systems fragile. Inadequate legal frameworks for protecting private sector activity hampered the development of a dynamic private sector and, sometimes by plan, but sometimes by default, economic development came to rest unduly on the public sector.

Within the public sector, a number of constraints limited the administrative capacities. Because of financial difficulties, wages were often kept too low and not differentiated sufficiently to attract qualified personnel, essential for the design and implementation of policy reforms. In many instances, the public sector became overextended and inefficient, intervening in areas in which it lacked the necessary technical and managerial expertise. Furthermore, expenditure policies did not always give priority to the maintenance and improvement of physical infrastructure, nor of human capital. Mechanisms for budgetary control and monitoring were often found wanting.

These structural rigidities would, under the best of circumstances, take many years to correct; for Africa, the precarious external environment adds another dimension to the problem.

Despite this discouraging background, signs of progress have emerged. For an increasing number of countries, economic performance is improving. Moreover, consensus on the requirements for effective economic policies is growing in Africa. It is now widely recognized that sustainable economic growth and a strong external position can only result from comprehensive macroeconomic and structural policies. Recent experience in Africa shows that well-designed and implemented structural adjustment policies can lead to a recovery in growth, and views are converging on those specific policies that are likely to succeed.

The scope of the tasks ahead is broad. A collective effort on the part of the donor community, the World Bank, and the IMF is needed to support Africa. Central to this process is a favorable global economic environment. Key factors include an open world trading system, the level of real interest rates, and the adequacy of external financing on appropriate terms. At this time, when Africa is making difficult policy choices, much is at stake in the outcome of the Uruguay Round, in the macroeconomic policies of the industrial countries, and in further progress in resolving debt problems.

At this stage and for the foreseeable future, adequate external financing will be crucial for investment to help maintain and build infrastructure and to meet other pressing social needs, given that domestic saving takes time to respond to policy reforms. For those countries with the heaviest debt burdens, financing will have to be provided by the official sector on concessional terms. Given Africa’s structural difficulties and macro-economic imbalances, the World Bank and the IMF are naturally expected to provide policy advice, help mobilize official assistance, and provide financing as appropriate.

The results of structural adjustment are not likely to be immediate. As structural adjustment takes hold, the effects of policies should begin to emerge and the financing need be thereby reduced. It is to be hoped that Africa’s reliance on official assistance for exceptional balance of payments financing would decline over time. In some cases, this is already evident. In the interim, of course, there is a clear need for an appropriate policy setting in Africa to ensure productive use of scarce domestic and donor resources and to foster a better return on investment (see below). Over the longer term, aid could be expected to shift gradually from exceptional balance of payments financing assistance to more traditional forms of assistance to directly develop infrastructure and human resources.

Recent Approaches to Structural Adjustment

In the second half of the 1980s, 35 African countries adopted structural adjustment programs supported by the IMF, primarily in the context of arrangements under the structural adjustment (SAF) and enhanced structural adjustment (ESAF) facilities, but also through stand-by and extended arrangements. The experience of programs under the facilities has been relatively encouraging as regards the resumption of growth, including export diversification in some cases.

For a large number of countries undertaking comprehensive structural adjustment,4 growth in the last few years has improved, compared with earlier periods; in many cases, real growth rates have averaged 4—5 percent annually, representing a considerable gain in per capita terms (Table 2). Where progress was substantial, policy implementation was strong in both macroeconomic and structural areas. This suggests a close link between the comprehensiveness of policies and improvement in economic performance. This recent experience is broadly in line with the World Bank’s findings, for all regions of the world, that countries adopting structural adjustment have on average grown faster than other countries.5

Table 2.Growth Performance in African Countries with IMF Arrangements, 1986–90
CountryAverage

GDP Growth Rate

During Three Years

Preceding First Program
Average GDP Growth

Rate During

Program Period

and Subsequently1
Overall Experience
Improved growth

performance2
Gain in per

capita income3
(In percent)
Arrangements under the SAF or ESAF
Benin-1.04
Burundi52.93.5XX
Central African Republic5.11.0
Chad7.05.1X
Equatorial Guinea
Gambia, The5-3.45.4XX
Ghana56.45.5X
Guinea5.665.76XX
Guinea-Bissau4.865.8XX
Kenya55.15.0X
Lesotho2.78.3XX
Madagascar51.62.4X
Malawi52.34.2XX
Mali57.34.5X
Mauritania53.03.6XX
Mozambique-2.14.4XX
Niger5-2.01.7X
Sao Tome and Principe2.36,4
Senegal50.83.1XX
Sierra Leone52.51.44
Somalia55.03.04
Tanzania52.84.26XX
Togo52.64.46XX
Uganda-0.35.3XX
Zaïre52.62.6
Stand-by and extended arrangements7
Algeria1.74
Cameroon-2.5-4.94
Congo3.9-1.3
Côte d’lvoire-2.10.6X
Egypt6.7-0.76
Gabon3.9-2.9
Morocco4.44.9XX
Nigeria-1.33.2XX
Tunisia3.42.7X
Zambia-0.13.34X

It should be stressed that any assessment of the contribution of structural adjustment programs—for example, as in a comparison of economic performance during the pre- and post-adjustment program periods—is a complex undertaking.6 Such assessments need to include a comparison of the actual results against possible, alternative outcomes in the absence of such an adjustment. The assessment also needs to sort out the role of exogenous factors and the strength of policy implementation—factors that cannot always be quantified in summary indicators. For structural adjustment, an added complication is that structural changes cannot be readily quantified, nor can the effects be easily measured. More important, structural effects may not yet have been reflected in shorter-term economic outcomes. To the extent that there has been a basic redirection of policies toward market-oriented reforms in an increasing number of instances in Africa and that there has been qualitative improvement in economic management, the contribution of structural adjustment programs may have been greater than that captured by the typical quantitative indicators of economic performance.

Elements of Structural Adjustment

Growth-oriented structural adjustment has typically involved the following core elements: an enhanced role for market forces, a stable macro-economic environment, an adequate scope of structural reforms, and gradual integration with the world economy.7 For Africa, with a legacy of structural rigidities, there is also an urgent need to build infrastructure and strengthen regulatory and institutional systems. In addition, successful reform efforts cannot ignore the linkages between economic and social objectives.

An Enhanced Role for Market Forces

A priority in recent reform efforts has been to adjust prices to levels that reflect resource scarcity. This often entails easing or removing administrative controls on most prices and adjusting the administered prices that remain. Appropriate price signals and incentives can help strengthen the private sector, on which rests much of the economic future of Africa. By largely removing day-to-day management of prices from the authorities’ policy agenda, greater attention can be given to other, more pressing, issues such as financial and structural reform. With a transparent mechanism in place for pricing, the issue also becomes less politicized.

Correct price signals are needed urgently in the area of agricultural output. Until the mid-1980s many African countries relied on state enterprises to market their main agricultural products, using administratively determined producer prices. By and large, these enterprises were unable to maintain producer prices in real terms, thereby discouraging agricultural production in favor of urban employment and leading to smuggling at the expense of legal export activity. Against this background, reforms of agricultural marketing systems and setting producer prices at competitive levels have, therefore, been key elements of structural adjustment. We have found that the supply response to adjustments in producer prices can be swift, not least through redirecting flows of output through the official instead of parallel channels. For instance, in Ghana, maintaining realistic producer prices at internationally competitive levels over time has reversed the declining trend of cocoa production, as well as provided timely signals for export diversification.

Adjustment and flexibility is most urgently needed in those prices that have a direct bearing on the macroeconomic environment, such as the exchange rate and interest rates. Through the mid-1980s, there was reluctance in most of Africa to adjust official exchange rates, despite growing overvaluation that impeded the development of exports and led to parallel exchange rate markets. In a recent study of commodity exports, the major African producers of such crops as coffee, cocoa, and cotton on average allowed much greater increases in their real exchange rates from 1970 through the mid-1980s (Table 3) than did competing producers in other regions (Akiyama and Larson (1989)).

Table 3.Real Exchange Rates in Selected Countries, 1970–871
Country197019751980198519861987
Sub-Saharan Africa100179376319298306
Burundi100170314357384381
Côte d’lvoire100185405250346420
Cameroon100213358278372470
Congo100189300240319376
Ethiopia100144299430388379
Gabon100212395295407465
Ghana1001931,095503382310
Gambia, The100190324269236286
Burkina Faso100178300206260292
Kenya10088160135142147
Liberia100167258304315331
Madagascar100201318252283206
Mauritius100164280215250263
Niger100186374253317341
Nigeria100220549793425205
Rwanda100208357448512586
Sudan100207337292334336
Senegal100243342282389429
Sierra Leone100139231370212279
Somalia100165451459342300
Swaziland100155277195212268
Seychelles100224398435504570
Togo100204343223301347
Tanzania100182322564399264
Zaïre100233559193236239
Zambia100157259165101118
Zimbabwe100161229184204230
Brazil100147179145162186
Colombia100136265241210207
Indonesia100213283254233199
Malaysia100183251276267276
Source: Takamasa Akiyama and Donald F. Larson, Recent Trends and Prospects for Agricultural Commodity Exports in Sub-Saharan Africa, Working Paper WPS 348 (Washington: The World Bank, December 1989),

During the second half of the 1980s, however, exchange rate policy shifted substantially; more countries were willing to adjust their exchange rates to more competitive levels and to move toward market-determined systems. Empirical evidence for Africa suggests a clear correlation, particularly over the medium term, between exchange rate movement and growth in export volume. For example, strong export growth was experienced in The Gambia, Ghana, and Lesotho following substantial real effective depreciation. In contrast, export performance in Tanzania and Uganda was weak when the real effective rate either remained unchanged or appreciated. The experience also suggests that exchange rate policy needs to be supported by early removal of related structural rigidities. In some instances, a substantial depreciation of the exchange rate in real effective terms was not sufficient to promote exports because other essential policy elements were missing. For example, in Madagascar, notwithstanding a substantial real effective depreciation in the mid-1980s, export volume picked up only after liberalization of imports in 1987 and the abolition of state monopolies and liberalization of domestic and external trade in 1988.

Recent experience in Africa and beyond would lead to the conclusion that where economic progress has been satisfactory (including export diversification), a common factor has been depreciation of the real exchange rate and liberalization of trade policies, both supported by financial restraint. Thus, priority needs to be given at an early stage of structural adjustment to moving rapidly toward a realistic exchange rate, and to achieving adjustments in other key prices. Liberalization of trade, at least in terms of allowing market-based allocation of scarce foreign exchange and of abolishing import quotas, has been shown to be particularly significant for efficient allocation of imports; it often permits higher capacity utilization of the existing capital stock and much needed modernization (and hence some transfer of new technologies) and promotes export diversification. Greater attention to trade liberalization in the early phases of the structural adjustment process could thus improve the overall outcome.

In this context, it could be noted that the debate on exchange rate policy continues in Africa, with some postulating a return to multiple exchange rate systems based on administrative choice rather than on market-based solutions. IMF experience has shown these systems to be highly inefficient; they introduce distortionary elements in exchange rate management and drain scarce administrative resources.

Much of the criticism of exchange rate adjustments has focused on their potential inflationary impact. Nominal devaluations, if not supported by firm fiscal and monetary policies, can indeed lead to inflation. The experience in Africa suggests that where monetary expansion was kept under effective control after an exchange rate adjustment, inflation decelerated after the initial price impact had subsided. For example, in Madagascar, the real effective exchange rate was depreciated by as much as 50 percent during 1986 and 1987, but the rate of inflation still remained around 13 percent until the end of 1987. Inflation only picked up subsequently when monetary expansion accelerated. Thus, firm financial policies are the key to avoiding frequent adjustments of the nominal exchange rate, and to securing a sustainable improvement in competitiveness.

There has also been some advocacy of differential interest rates and selective credit control policies. In practical terms, a major weakness of credit controls is that the final allocation of credit may not be altered as desired while administrative resources are wasted in the evaluation process. More generally, such policies constitute implicit taxes or subsidies. Artificially low deposit interest rates are an implicit tax on depositors, discouraging savings. When banks lend at below market rates, because they rely on the central bank to refinance loans to favored sectors, they promote inefficient industries and weaken monetary management. Interest subsidies provided by the central bank also reduce transfers to the budget and thus affect the fiscal position. The accumulation of contingent liabilities resulting from such loan operations places the burden of risk on the government, which may be forced to intervene to guarantee the stability of the banking system. Also, direct controls on interest rates and credit may retard the development of the financial sector, including the introduction of new savings instruments to better mobilize domestic resources.

Financial sector reforms aimed at the mobilization and more effective allocation of domestic savings need to be supported by better supervision and prudential regulation of institutions, to prevent financial failure and maintain public confidence.

Role of Macroeconomic Stability

Experience under structural adjustment has shown that for sustainable growth, macroeconomic stability must be achieved in a lasting way. The World Bank has also concluded, from its recent experience with adjustment programs, that a stable macroeconomic framework contributes to the success of structural adjustment in every major area of the economy and that programs that focus mainly on microeconomic and sectoral policies are more likely to fail when a stable macroframework is not in place.8

Key policy elements of successful macroeconomic management have included financial restraint and the correction of cost and price distortions, including those of the exchange rate and interest rate (as noted above).9 Such policies along with a sound financial system, have helped to raise domestic financial savings, discourage outward capital outflows, and over time attract private transfers from abroad (e.g., Bolivia, The Gambia, Ghana, and Senegal). In contrast, overexpansionary fiscal policy, high inflation, and distorted prices have led to declines in savings rates and have failed to attract private transfers from abroad in several cases (e.g., Burundi, Niger, and Zaïre).

In Africa, experience has shown the importance of a two-pronged approach to economic management, with stabilization and structural policies playing a mutually supportive role. Demand-management policies need to be buttressed by strong structural measures, focusing in particular on basic fiscal and public sector reforms necessary for lasting macro-economic stability. Conversely, a stable macroeconomic environment is essential for carrying out structural adjustment, as well as effective sectoral policies. High rates of inflation and financial instability have frequently disrupted or complicated the implementation of structural and institutional reforms. The momentum of structural policies is weakened when economic managers must divert limited technical and administrative resources to deal with crisis management. Banking sector reform is often not feasible in the absence of a minimum degree of financial stability. Trade liberalization can be costly in terms of foreign exchange when it is not accompanied by a realistic exchange rate and sufficiently tight domestic policies to moderate the pressure on imports. Price adjustment—often a first step in public enterprise reform—and civil service reform is even more politically sensitive in the face of accelerating inflation.

A fundamental strengthening of the financial position of the public sector is itself a key structural element. This is necessary to rebuild social and physical infrastructure. For fiscal adjustment to be compatible with strong economic growth, the revenue base must be broadened and wasteful expenditure curtailed. To maintain public sector services at an appropriate level and efficiency, such services must be economically priced. Overall, financial discipline by both the central government and the public enterprise sector is a critical underpinning of structural adjustment.

Adequate Scope of Structural Reform

Consistency and Sustained Implementation

For successful structural adjustment, careful attention needs to be given to the sequencing of reforms, the speed of their implementation, and the ability of institutions and economic agents to respond to a changing environment. From the experience so far, two main lessons seem apparent.

First, reforms must be carefully conceived and sequenced because of the underlying linkages. For instance, for countries with severe debt problems, large fiscal deficits, and high inflation, a certain degree of macro-economic stability needs to be achieved before undertaking trade policy reforms. Where there are serious distortions and institutional and infrastructural deficiencies, trade reforms may need to be complemented by other policies aimed at improving domestic competition and easing market rigidities. This would imply a parallel easing of unduly restrictive labor laws, price controls, and marketing regulations.

Second, structural reform measures must be better prioritized. This need is particularly urgent in the African context, given weaknesses in the administrative framework and the careful technical preparation required in each structural area for successful implementation. Limitations of technical and administrative capacity have given rise to difficulties and delays in implementing structural measures in the past. This experience should not be taken to imply that the pace for structural reforms should be gradual. Rather, emphasis should be placed on careful prioritization, concentrating initially on reforms aimed primarily at securing a smooth working of macroeconomic policies. These include, for example, tax reform and the reform of the public sector. Because some reforms in these areas take time to develop, technically and politically, early attention should be given to them.10 The financial environment in a number of countries has been very weak, with a virtual breakdown of the basic functioning of the banking system in some extreme cases. Technical assistance to strengthen the banking system should be stepped up to promote private financial savings and financial intermediation.

More generally, technical and financial assistance from international organizations and bilateral donors (e.g., in such areas as public expenditure review, public investment and public enterprise, and civil service reforms) should also be strongly encouraged since these reforms are critical to improving savings performance and the efficiency of investment. In all areas, close attention should be given to ensuring a timely provision of assistance. At the same time, donor assistance is likely to be more effective when it is well coordinated and supports a coherent set of policy reforms. There is need to avoid conflicting advice, reduce demands on the already strained administrative capacities of recipient countries, and further streamline procurement and disbursement procedures. In coordinating this international effort, the policy framework paper process, with the recipient countries in a central role, can be useful. The policy framework paper could set out the policy objectives, the required measures, and the financing requirements in a medium-term framework. Strengthening technical assistance among donors will have an important bearing on enhancing the structural content of programs.11

Because the structure of each economy and its social and political context is different, the optimal approach to reform will vary from one country to the next. There are no simple formulas; careful study and preparation are required, supported by a willingness to make adjustments as the reform process proceeds. The Fund’s experience thus far with structural adjustment programs supported by the SAF and ESAF has shown that satisfactory performance has depended on the strength and coherence of agreed policies and sustained implementation over time, and close working relations with the Bank and donors in sectoral areas.

The Regulatory Framework and Institutional Reform

The effectiveness of structural adjustment policies will depend on the support given by institutional improvements. Freeing agricultural output prices, for instance, will encourage a supply response, but its magnitude is likely to be larger under an adequate infrastructure for transport and sound credit institutions. Recent reform of agricultural marketing boards in Africa is a good example of the way in which institutional reforms play a key complementary role to such policy adjustments as price decontrol (e.g., Malawi and Zambia).

Experience suggests that a recovery in private activity has generally taken longer than expected and followed—with a lag—credible assurances of fundamental reforms in economic management. This experience applies to Africa as well. Recognizing the problem of weak administration and institutions, several countries have embarked on comprehensive programs of administrative reforms (e.g., the Central African Republic, The Gambia, Ghana, Madagascar, Mauritania, and Senegal). The seemingly slow private sector response so far may have reflected, in part, the long gestation period involved in such reforms, and the need for strengthening the legal and regulatory framework. The response of the informal sector, however, may have been considerably stronger but difficult to measure.

In addition to a leaner, better disciplined, better trained public service with adequate incentives for highly qualified employees, special attention has been given to strengthening the economic management capabilities of governments. This includes redefining the role of the public sector from that of control and direction, to provision of physical and institutional infrastructure to support the private sector. This approach has aimed at setting a simple regulatory framework based on transparent rules and eliminating excessive intervention to give confidence to private sector investment. For public enterprises, financial discipline has also called for giving them clear mandates, managerial autonomy, and monitorable performance indicators.

Early attention needs to be given to promoting foreign direct investment and a return of flight capital. Until recently, the macroeconomic environment and investment policies of most African countries have not been sufficiently enticing to investment from abroad. A more stable financial environment would promote foreign direct investment, which could also be further encouraged through a variety of policies, such as the removal of administrative allocation of foreign exchange and streamlining other regulatory requirements, a competitive banking system, reasonable marginal tax rates on company profits, and adequate expenditures for maintenance and investment in socially productive infrastructure.12

A stable and transparent judicial system is also a key element of institution reform. Absence of a well-defined legal framework for foreign investors, for instance, is thought to have been a major obstacle to investment flows into Africa. A legal framework that clearly defines contract and property rights can reduce uncertainty and promote a more stable and competitive business environment. Adequate legal underpinnings and a framework for public accountability are key elements of institution-building reforms. In all these processes the role of the government is critical.

Linkages Between Economic and Social Objectives

Structural adjustment can significantly effect the distribution of incomes and thus social equity and welfare. There is growing recognition that adjustment efforts must take into account the effects of certain measures, especially on the most vulnerable or disadvantaged groups of society.13 Closer attention is therefore being paid to the social aspects of adjustment, for example, the effects of civil service retrenchment, and protecting basic health and education expenditures from budgetary cuts. The international community should support efforts by governments to ease the short-term adverse impacts of certain adjustment policies on these groups, through appropriate adjustments to the policy package, or through targeted assistance without sacrificing the overall objectives of economic reforms. The aim should be to bring the necessary adjustment with the least amount of hardship to the most vulnerable groups. Donor assistance is important, both financially and in terms of technical advice. Proper consideration of the impact of economic policy measures on the poor can produce stronger public support for an adjustment program, making it more socially sustainable.

Integration with the World Economy

A more outward orientation of policies has been an essential element of successful structural reform. Greater openness imposes on domestic producers the discipline of international competition and enhances prospects for growth through efficiency and exports. Thus, structural adjustment programs have sought to open the economy to foreign trade, through policies aimed at reducing or eliminating discrimination against tradables and promoting private enterprises that are competitive by international as well as local standards.

In Africa, as elsewhere, past strategies of import substitution often misdirected investment and led over time to balance of payments difficulties. Import restrictions, in effect, are a tax on exports and inhibit export-led growth. We are learning from the experience of many East and Southeast Asian countries that have had strong growth led by dynamic export sectors. Efforts are now under way in Africa to reform trade policies. A more open orientation along with a stable macro policy environment has already led to strong export growth and diversification and attracted much needed foreign capital and technical expertise in a number of cases (e.g., The Gambia, Mauritius, and, more recently, Madagascar).

Concerns have been expressed to the effect that rapid import liberalization may undermine the development of nascent industries and lead to a deterioration of revenue performance and to shifts in expenditure patterns, with the consumption of imported luxury goods increasing. In our experience, the problem of revenue loss typically stems from inefficient tax and customs administration, rather than from the removal of import restrictions and tariff adjustments. When revenue loss might be expected, alternative revenue-raising measures and a broadening of the tax base should be considered, giving due regard to equity and efficiency aspects. Reforming the tax system is complex and difficult, and increasing levels of technical assistance may be required for these purposes.

Questions have also arisen concerning possibilities for African economic integration. Regional projects with large externalities should have the potential of being cost efficient; however, regional trade integration requires the elimination of domestic distortions as well as the harmonization of policies in a number of key areas, particularly trade policies with the rest of the world. Such regional policies should also ensure that African exports are competitive in industrial countries, which are potentially by far the largest markets for Africa. In the context of their adjustment program, individual countries can facilitate efficient regional integration by eliminating distortions in domestic economies, reducing trade barriers, liberalizing markets, and securing competitiveness. The Fund is placing increasing importance on these issues in its country work and is undertaking more in-depth analysis of trade issues in developing countries, including those in Africa.

The industrial countries can contribute to successful integration of Africa with the world economy, through further opening of their markets. As noted earlier, an open global trading system and adequate levels of financial assistance will play a key role in the future growth performance of Africa.

Conclusions

Economic performance in Africa during the past decade has been disappointing: for sub-Saharan Africa, real per capita GDP fell by nearly 1 percent a year on average. External circumstances have played an important role, with the unfavorable terms of trade being the leading factor. But there is now a broad consensus that part of Africa’s decline rests with domestic economic policies that have had the effect of discouraging production, exports, and investment and have not dealt effectively with exogenous shocks. To promote sustainable growth, policy reforms are often now needed in the areas of exchange rates, credit policies, government budgets, and a range of structural reforms to ease deep-seated rigidities.

Recent experience offers some grounds for optimism. A number of countries have embarked upon comprehensive programs of structural reform, reflecting a significant change in the economic thinking and priorities among the leadership in Africa. Early results have been encouraging, with a recovery of growth having been experienced in a significant number of cases. More important, a consensus is developing in Africa—as in other parts of the world—regarding the nature of effective economic policies. It is now widely recognized that sustained growth and external viability can only result from consistent and steady implementation of comprehensive policies in both the macroeconomic and structural areas. Furthermore, there is a growing convergence of views concerning the specific types of policies that are likely to be successful, even though their application must vary according to the circumstances of each country.

This paper has examined in some detail the main elements of this emerging consensus on the main policy requirements of sustainable structural reform. The core elements that have been emphasized include the need to give greater scope at the earliest stage to market forces, and to adjust key prices to reflect resource scarcity; the need to create and maintain a stable macroeconomic framework; the need for structural policies with appropriate scope and sequencing; the need to better integrate the domestic economy with the world economy through more open trade and exchange systems; and the overriding need to rebuild institutions and social infrastructure.

Recent experience also suggests that the structural adjustment process in Africa could take more time than initially expected. Removal of deep-seated rigidities through structural reforms can add flexibility and adaptability to the region’s economies and help reduce their vulnerability to future shocks. The process is still evolving, however, and lessons are still being learned. Most important, we have come to the conclusion that design and implementation of structural measures are technically complex and time consuming and that many difficult issues on the appropriate sequencing of certain measures remain. Until structural reforms take hold, macroeconomic stability is also fragile, prone to setbacks. Thus, the entire adjustment process is challenging; it requires sustained commitment from governments, the private sector, and the donor community.

The experience of Africa in recent years provides evidence that comprehensive structural adjustment policies of the types described above, when well designed and implemented, can indeed contribute to a recovery of growth. The effectiveness of adjustment depends as well on adequate external assistance in policy and financing, and a favorable global environment. The IMF, in collaboration with the World Bank and the donor community, stands ready to support the reform process in Africa in the 1990s by helping countries design and implement appropriate macro-economic and structural policies, helping to catalyze additional assistance, and providing direct financial support through its various facilities.

Over the next few years and under current policies and prospects, a large number of countries in Africa could be expected to remain engaged in full-fledged structural adjustment. On present trends, a number of countries would have graduated from reliance on exceptional balance of payments support while several others will have just initiated their reform effort. In many cases, comprehensive structural and institutional reforms will need to be deepened and broadened in a medium-term process with the collective support of the international community—both in terms of technical advice and financial assistance.

The IMF can play an important part in this process. In assisting Africa, our effort will continue to be focused on the macroeconomic and related structural policy areas, in close collaboration with the World Bank. As described in this paper, reducing macroeconomic imbalances is a key precondition for initiating structural adjustment, and continued macro-economic stability and structural policies are mutually supportive. We will continue to ensure that IMF resources—a large part of which will be in concessional terms through the structural adjustment and enhanced structural adjustment facilities over the next few years—are available to member countries pursuing strong policy reforms and having a balance of payments need. Our aim would be to help them achieve a financial situation in which the structural adjustment process can be sustained primarily with development assistance, and a domestic policy framework that is sufficiently flexible to cope with external shocks. At the same time, we also recognize that even with a strong headway having been made in economic restructuring, some African economies will remain vulnerable to adverse external developments and the macroeconomic framework fragile over the next few years, given the size of the initial problems that need to be addressed.

To help countries buffeted by external shocks, we will ensure timely IMF support—in policy advice and financial resources as appropriate to return countries to a stable financial path. More generally, we will continue to operate the various facilities in a flexible manner and continue to examine how best to adapt or extend some of the existing facilities to support reform programs, including those in Africa. We have also committed ourselves to examine more closely the social aspects of adjustment, with a view toward better addressing them in adjustment programs. We are working with donors as well as with the World Bank to coordinate external assistance more effectively in support of structural adjustment.

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In this paper, sub-Saharan Africa is defined as all African countries, except Algeria, Morocco, Nigeria, South Africa, and Tunisia. Unless otherwise indicated, all data are drawn from the IMF’s World Economic Outlook, and from IMF staff papers on programs supported by the structural adjustment and the enhanced structural adjustment facilities (SAF and ESAF) of the IMF,

Aspects of Africa’s external indebtedness in relation to recent economic performance are addressed in the discussion paper by Boorman and Chopra.

See World Bank (1989).

For example, Burundi, The Gambia, Lesotho, Madagascar, Malawi, Mozambique, Niger, Senegal, Tanzania, Togo, and Uganda.

The World Bank (1990). It was concluded that after taking account of the effects of initial conditions, external shocks, and the amount of external financing, those countries that entered full-fledged adjustment programs in 1985–88 had a larger increase in the average rate of GDP growth than other countries.

For a recent survey of research on the effects of Fund-supported adjustment programs, see Khan (1990),

For an overview of the main conceptual issues underlying structural adjustment, see the paper by Streeten (1987).

World Bank (1990),

A narrow interpretation of the Policy content of Fund programs has at times given way to the misconception that such programs are designed with the sole objective of reducing aggregate demand, through the use of contractionary monetary and fiscal policies. Supply side policies intended to increase domestic output at any given level of domestic demand arc, however, an integral pan of Fund programs. These include policies aimed at improving the efficiency of resource use, such as through the reduction of distortions caused by price controls, trade restrictions, and rigid tax systems. Other policies, designed to enhance incentives for domestic savings and investment and to increase the inflow of foreign savings, seem to raise in the longer term the rate of growth of capacity output.

The IMF has sought to strengthen technical assistance in the areas of tax reform, improvements in tax and customs administration, and expenditure control mechanisms. Additional technical assistance is required in such areas as budgetary formulation, monitoring and control, and the development of macroeconomic information systems for policymakers.

The IMF has been paying increasing attention, including in the context or policy framework papers, to ways in which the technical assistance provided by it and by donors could help strengthen policy implementation in its member countries under Fund-supported adjustment programs. Attempts have begun in recent policy framework papers to identify more systematically the needs for such assistance and its proper sequencing, and there would seem to be scope for further improvements in coverage in this area.

In this connection, see International Monetary Fund (1985).

For a discussion of the issues, see the paper by Heller and others (1988),

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