Abstract
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African adjustment
Many readers will have been interested in the article “Africa’s Adjustment and Growth” (June 1989) by Charles Humphreys and William Jaeger. I am worried about two points in particular in that article, both relating to the question of terms of trade: The article, and the World Bank Report on which it is based, specifically refers to changes in terms of trade as an “exogenous shock,” which should be eliminated from the data before testing the success or otherwise of adjustment programmes. Some of us believe that adverse changes in terms of trade, far from being “exogenous,” are related to the export expansion inherent in debt pressure and the devaluations and shift toward export crops recommended simultaneously to indebted countries.
Terms of trade are not included in the data presented in the article. But from the main Report we can deduce that, in fact, the terms of trade of countries with strong adjustment programmes deteriorated compared with those without such programmes, so that their capacity to finance imports through earned exports did not relatively improve. That they better maintained their import and investment supporting their economic growth is therefore really due to the increase in financial support for countries adopting such programmes, accompanied by a sharp reduction of external funds for nonadjusting countries.
Professor H.W. Singer
University of Sussex, England
Mr. Humphreys responds:
Mr. Singer argues that policies to increase exports are undesirable because expanding a country’s exports to meet debt service will depress its terms of trade. The argument reflects a legitimate concern that simultaneous increases of commodity exports by several countries may reduce world prices and, in some cases, total export revenue. But the argument is weak analytically and empirically.
A country’s terms of trade are determined by a complex set of primarily external phenomena, not just increased exports. With few exceptions, African countries account for extremely small shares of world exports (the entire region accounts for only about a sixth of combined worldwide exports of its ten major nonoil commodities). Africa lost about a third of its world commodity share during the 1970s and early 1980s. Improved productivity and lower costs through technological change may also lead to declining commodity prices. Rising import prices have contributed as much as falling export prices to Africa’s recent decline in terms of trade.
Data from the main Report do not support Mr. Singer’s view; nonoil export prices rose for both adjusting and nonadjusting African countries, on average, in 1985–87, while export volumes rose in the first and fell in the second group. Irrespective of the causes, however, African, as well as other developing countries are likely to continue to face weak prices for their commodity exports and stagnant or deteriorating terms of trade.
The real issue is how to respond. The obvious conclusion from Mr. Singer’s logic is that Africa should further reduce exports, presumably on the belief that this would raise export prices and revenue. While the point might be valid for developing countries as a group, no individual country is likely to escape deteriorating terms of trade by exporting less. More important, the evidence of the past 10–15 years in Africa is that export contraction has led to import contraction and increased dependence on foreign aid. To avoid import contraction—and the social and economic costs associated with it—a country’s best option in the short run may be to expand exports. In the long run, the country must raise productivity in traditional exports (which has helped Africa’s competitors offset declining prices), diversify its export base (which reduces vulnerability to volatile prices), and increase domestic production of imported commodities. Better macro- economic management, greater price flexibility, and better public resource use would help achieve this. Complementary investments and other measures may also be needed.
Another suggestion on debt
The excellent article on intractable debt problems of the Sub-Saharan African countries by Joshua Greene (June 1989) leads me to suggest another option which may hold promise.
Generally, the Paris Club reschedules debt falling due during the life of the underlying Upper Credit Tranche Stand-by of the IMF, usually less than three years. Several years ago, a tentative step toward a more comprehensive approach was reflected in the now-failed MYRA—Multi Year Rescheduling Agreement—but the MYRA left untouched the definition of Consolidation Period as that coterminous with an IMF Stand-by. Before attempting the MYRA, a number of debtor governments appeared before the Paris Club, each time with more debt to reschedule due to the capitalization of interest and arrears.
In selected cases, it may make sense to reschedule the entire stock of debt, granting a grace period of perhaps ten years, to be followed by an amortization period of the same duration. Although the Paris Club’s Agreed Minute requires the debtor to seek “comparable relief” from other creditors, it is unlikely that the commercial banks, which hold most of the debt of these countries, would be willing to reschedule and capitalize interest, if only because of the policies of bank regulatory agencies in the OECD countries. These banks, however, may be more willing to undertake a generous rescheduling position rather than write down their debt. At least such rescheduling would not run the same risks of decapitalizing national banking systems.
It is interesting to note that such a rescheduling was negotiated in the case of Indonesia 30 years ago, and Indonesia has yet to return to its creditors for additional debt relief. Pakistan and India, each of which has its own export credit schemes, have yet to be guests at the Paris Club.
Albert H. Hamilton
First Washington Associates, LTD
Arlington, Virginia USA
Photographs on pages 12,16, and 33 by D. Zara; pages 18, 36, 40, and 45 by P. Hughes-Reid; and pages 4, 8, 24, 29, and 43 by M. lannacci. Art on pages 26,30, 35, 44, and 47, and charts by IMF Graphics Section.