Structural adjustment and reduction in Africa

A lack of rapid, broad-based growth lies at the heart of Africa’s economic problems. Can strategies help?

Kamran Kousari Special Coordinator for Africa United Nations Conference on Trade and Development (UNCTAD) 1

he failure to attain rapid and broad- ⅙ Staff are not expected to play more than Tbased growth in Africa is at the heart a supportive role in the preparation of of the continent’s problems. Over the past the papers. two decades, growth in income in sub- ⅙ A “joint staff assessment” (JSA) by Saharan Africa (SSA) has barely kept pace the and IMF of, fi rst, the with population growth, and longer-term “Interim Poverty Reduction Strategy growth projections at around 3.5 per cent Papers” (I-PRSPs) and, ultimately, the are half the levels required to meet inter- fi nal versions of the PRSPs is required national poverty alleviation targets. Slow before they are endorsed by the Boards and erratic growth in SSA has also been of the two institutions as the basis of accompanied by regressive changes in in- the relevant package. come distribution. The decline in average per capita income for the poorest 20 per cent “Ownership” of the PRSP process has of the SSA population was twice that for the been a contentious issue. Some of the con- population as a whole between 1980 and cerns expressed in this respect have been 1995. Hollowing out of the middle class has summarized in a joint IMF/World Bank become a prominent feature of income dis- review of the PRSP experience: tribution in many developing countries.2 … Some NGOs contend that alignment of donor strategies to the PRSPs will always be The new elements in poverty a trivial matter because the content of the reduction programmes strategies will necessarily be determined largely by the agendas and preferences of the donors, especially the Bank and the Fund … Country ownership and participation. Governments write into the PRSPs what they An important novelty in the post-1999 ap- already know the donors want to hear … proach to poverty alleviation is the prepa- [and] this will be the case as long as the Bank ration of PRSPs by recipient countries as a and the Fund must endorse the strategy as a prerequisite for reduction of their debt and condition for concessional assistance. for concessionary loans and grants. Broad- based participation by civil society organ- As far as the participation of the poor izations, stakeholders and the poor is also is concerned, a comparison of the policy required. The new framework also defi nes aspirations of the African poor with the the role and involvement of the staff of the policy recommendations in the PRSPs sug- two Bretton Woods institutions in various gests that there are signifi cant divergences stages of the design and implementation of between the two. For example, while the poverty reduction programmes: poor place emphasis on employment, the

59 policy recipes call for a reduction of rigidi- distribution in the short term, with attend- ties in labour markets; or where the poor ant consequences for poverty. Accordingly, aspire to lowering school fees at all levels such transitory effects should best be dealt and to free curative health care, the em- with through appropriate compensatory phasis in PRSPs is on provision of primary measures, rather than by giving up macro- education and preventive health, with user economic stability. In such cases, it is recom- fees for higher levels of education and mended that a poverty and social impact curative health care. analysis (PSIA) be undertaken. Although, according to recent reports, the World Bank and poverty reduction. has now started undertaking a signifi cant An important issue in the current approach number of PSIAs, as yet, no signifi cant work to poverty reduction is how to reconcile on poverty and social impact analysis ap- country ownership and participation with pears to have been completed. Furthermore, the conditionality attached to aid and there seem to be defi nitional problems as to debt reduction. The original rationale for what should constitute an adequate PSIA. conditionality was to protect the fi nancial As noted by HIPC ministers at their recent integrity of the Bretton Woods institutions meeting, “analysis of the links between (the International Monetary Fund and the macroeconomic and structural policies World Bank) and, in particular, to preserve and poverty reduction remains among the the revolving character of IMF resources. weakest areas of most PRSPs”. Over the years, however, conditionality became tighter, gradually encompassing Stability and growth. The mainstream a large number of areas, including actions policy advice in responding to external related to the restructuring and privatiza- shocks is to tighten macroeconomic policy if tion of public enterprises, of the shock is not just a temporary one. Bear- markets, trade regimes, pricing and mar- ing in mind a secular decline in the prices of keting policy, public sector management, commodity of most poor countries, public safety nets, the agricultural sector, tight macro policies have led to weak, erratic the energy sector, the fi nancial sector and growth resulting in increased poverty. more recently issues of political and eco- Regarding the balance between growth nomic . and price stability, prudent, non-infl ation- There is now a general recognition that ary budgetary policies and monetary imposed by the interna- restraint constitute the main macroecon- tional fi nancial institutions go beyond omic elements of guidelines on poverty- their respective areas of competence. reducing strategies. Paradoxically, SSA is Slow progress in streamlining condition- a region of the developing world that has ality was one of the “strong concerns” ex- rarely experienced hyperinfl ation, and it pressed by Heavily Indebted Poor Coun- is signifi cant that the African poor do not tries (HIPC) ministers in their declaration consider infl ation as a major issue affecting at the 6th HIPC Ministerial Meeting, held their ; their concern is contraction- in London on 5 March 2002. ary macroeconomic policies.

Public spending and . The role of Stabilization, adjustment the budget is particularly important in and poverty poverty reduction strategies supported by the Bretton Woods institutions. Thus, Macroeconomic and structural policies. it is necessary to assess public spending The IMF recognizes that macroeconomic in terms of its overall impact on growth as stability may require some temporary sac- well as its direct impact on poverty. On the rifi ce of growth, possibly to the cost of the domestic side, high interest rates resulting poor. Similarly, measures to attain stability from tight monetary policies constitute a may lead to regressive changes in income serious impediment to poverty reduction

60 programmes by raising interest payments opening up of the capital account in Africa. on government debt at the expense of Opening of the capital account is endorsed social spending, as well as by distorting as a pro-poor policy in the IMF’s PRSP income distribution. This problem may be Sourcebook. However, efforts in the region aggravated by capital account liberaliza- to integrate into the global fi nancial sys- tion, which often necessitates maintaining tem and to attract private fl ows through a high interest rates on domestic assets in rapid of the capital account order to attract foreign fi nancial capital or have resulted in greater volatility, with prevent capital fl ight. attendant consequences for It is essential to attain a reasonably instability and misalignments. rapid growth in public revenues in order to increase social spending and avoid fur- Trade reform. Trade policy advice in pov- ther debt accumulation. In this respect, erty reduction programmes calls for main- policies are of particular importance. In taining liberal trade regimes, reduction of general, the recommendation in PRSPs is import tariffs and avoidance of non- to lower taxes on corporate and personal barriers. African PRSPs have generally incomes because of their adverse effects on followed this advice. Although a number investment and capital fl ows and lowering of studies have concluded that trade liber- trade taxes. The only remaining options alization in developing countries does not for increasing public revenues are intro- adversely affect employment, these fi nd- ducing a broad-based consumption tax, ings have been roundly criticized on both usually in the form of VAT, and improv- methodological and empirical grounds.4 ing tax administration and broadening the In general, evidence suggests that the tax base. But at the same time, as recently effect of trade liberalization on wages, noted by the World Bank, indirect taxes income distribution and poverty differs tend to augment poverty because they are among countries, depending on the do- generally regressive. mestic and international conditions under which it is implemented. In SSA, liberali- Reforming the fi nancial system. The zation has largely been the policy response shift to fi nancing public defi cits by means to the failure to establish effi cient, competi- of government debt papers on tive industries in labour- and/or skill-in- terms under conditions of very thin fi - tensive sectors. Contrary to the situation nancial markets has produced very high in East Asia, it has taken place before a and volatile real interest rates, leading to successful drive. Increased foreign rapid accumulation of domestic debt. High competition brought about by rapid im- interest rates have also contributed to the port liberalization has led to the wholesale stagnation of private investment. Public closure of industries, with an even greater investment has equally been hit by interest impact on jobs, pay and poverty because rate payments from the budget. The redis- international competitiveness could not be tribution of income from the productive improved despite substantial cuts in real segments of the society in favour of the wages in manufacturing.5 rentier elements has also tended to under- A signifi cant indicator of the drift into mine the incentives to invest within the de-industrialization in SSA is the elasticity economy.3 In short, in the light of this expe- of industrial value added with respect to rience, it is diffi cult to share the optimism GDP growth, which has declined by over of PRSPs regarding the positive impact of 50 per cent in the past two decades. As fi nancial liberalization on growth, distri- pointed out by the United Nations High- bution and poverty in Africa. level Panel on Financing for Development, past mistakes in trade and industrial Capital account liberalization. Recent policies cannot justify going to the other years have witnessed the increasing extreme and denying limited, time-bound elimination of exchange controls and the protection for certain industries so as to

61 provide an opportunity for actively nur- needed for higher levels of investment turing the development of an industrial and input use by farmers themselves. The sector. provision of a stable market environment, Clearly, the long-term solution lies predictable output prices and input sup- in improving the productive capacity of plies at affordable costs, the easing of the region and resolving the deep-seated fi nancial constraints on small-scale farm- imbalances and distortions in the inter- ing and signifi cant improvements in the national trading system in areas of export physical and technical environment are interest to African countries. Furthermore, the necessary components of such a re- adequate attention has not always been orientation, and all of them call for active paid to forces of protectionism in indus- engagement of the public sector. trial countries in designing trade policies in structural adjustment programmes. Growth: Removing Agricultural policies. The recommended the external constraints policies for the agricultural sector include exchange rate corrections, withdrawal of The analysis in the previous sections sug- governments from agricultural markets, gests that the new focus on poverty, rather the dismantling of marketing boards and than revising and improving the structural deregulation of markets for agricultural adjustment programmes, merely adds new inputs and outputs. elements to them. The result has been that farmers have The emphasis on ownership and partici- suffered not only from declining output pation in poverty reduction programmes prices but also from rising input prices appears to grant considerable autonomy for food crops and the elimination of fer- to countries in the design of safety nets tilizer subsidies (World Bank, Can Africa and targeted anti-poverty spending pro- Claim the 21st Century?, 2000, pp. 184–189). grammes. However, the freedom of action Such observations have led the World of recipient governments in determining Bank to conclude that “market-friendly the nature and content of macroeconomic reforms have also sometimes hurt the stabilization and structural adjustment rural poor ... Agricultural market liber- programmes, or more generally of their alization without the institutional frame- development strategies, continues to be work … could have serious consequences severely constrained by conditionalities for poor people”.6 However, the fi nal ver- attached to multilateral lending and debt dict is still that, on balance, “market-ori- relief. ented reforms ... reduced anti-agriculture A major concern is that while the cur- bias and generally increased agricultural rent approach rightly emphasizes the cen- growth”7 and despite the problems con- tral role of rapid and sustained growth in fronted, in Africa “reforms need to be poverty alleviation, it does not call into further consolidated” by encouraging question the very stabilization policies and private fi rms to enter output and input structural reforms that have barely suc- markets and by strengthening property ceeded in bringing about growth and re- rights (World Bank, Global Economic Per- ducing poverty in Africa over the past two spectives and Developing Countries, 2000, decades. It therefore stands to reason that pp. 184 and 196-197).8 the new emphasis on poverty alleviation African farmers need much greater in- should be founded on a careful and frank vestment in the sector, and the emphasis independent assessment of the effects of put on higher on rural those policies and reforms on economic infrastructure in recent PRSPs and offi cial growth and income distribution. development assistance packages is to be Another concern relates to the direct welcomed. But offi cial policies need to go impact of stabilization and adjustment further and seek to create the conditions on poverty. Although the new approach

62 recognizes that these policies may have greater domestic policy effort, even of the unfavourable consequences for the poor, right kind, and good governance cannot very little attention has so far been given make up for inadequate external fi nancing to social impact analysis, although such and the adverse effects of protectionism in analysis is necessary to determine the industrial countries. kind of measures needed subsequently. A third source of concern is the ap- proach adopted in anti-poverty policies Notes in two key areas, namely, education and 1 This article is based on an UNCTAD study health. As in structural reforms, here too entitled From Adjustment to Poverty Reduction: What there is a tendency to adhere, to the maxi- is New? The study is part of UNCTAD’s annual mum extent possible, to market principles publications on Economic Development in Africa (UNCTAD/GDS/AFRICA/2, August 2002). How- in the provision of education and health ever, some of the views expressed in the present ar- care, relying on across-the-board user fees ticle are the author’s and do not necessarily refl ect except for primary education and basic those of the UNCTAD secretariat. health services. That the rich may benefi t 2 See UNCTAD Trade and Development Report, more than the poor from such services 1997, Part Two, Ch. III-IV. does not provide a rationale for introduc- 3 For an earlier analysis of African experience on ing across-the-board user fees but calls for fi nancial liberalization, see UNCTAD Trade and De- more ingenious schemes that differentiate velopment Report, 1998, Part Two, Ch. V, sect. B.1(a). 4 between the poor and the rich in their ac- The most prominent of these studies is Pa- pageorgiou et al. 1990. Liberalizing Foreign Trade in cess to these services. Developing Countries: Lessons of Experience, 1. Wash- Even if considerable improvements can ington, DC, World Bank. See also Matusz and Tarr. be made in policies and governance in the 1999. Adjusting to Trade Policy Reform.World Bank Dis- recipient countries, the success of the new cussion Paper 2124. For critical reviews, see Green- approach depends crucially on removing away, D. 1993. “Liberalizing foreign trade through rose tinted glasses”. Economic Journal, No. 103, and the and resource Buffi e, E. 2001. Trade Policy in Developing Countries, constraints on capital accumulation and Cambridge University Press. growth in poor countries. Increased aid, 5 See UNCTAD. 2001. Economic Development in and greater market access all Africa: Performance, Prospects and Policy Issues, Table have their part to play in this respect. 10 and related text. Thus, to increase the probability of suc- 6 World Bank. World Development Report cess of the strategy to reduce poverty in 2000/2001, pp. 68-69. On the impact of these reforms on poverty in the United Republic of Tanzania, see Africa and other poor regions, as reaf- Social Watch. 2002. The Social Impact of Globalization fi rmed in the Millennium Summit, calls in the World, p. 162. for a reconsideration of the respective re- 7 World Bank. World Development Report sponsibilities of national authorities and 2000/2001, p. 67. the international community in providing 8 World Bank. 2000. Global Economic Perspectives the conditions needed. In the last resort, and Developing Countries, pp. 184 and 196-197.

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