Structural Adjustment and Poverty Reduction in Africa

Structural adjustment and poverty reduction in Africa A lack of rapid, broad-based growth lies at the heart of Africa’s economic problems. Can poverty reduction 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 World Bank 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 aid 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 Conditionality 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, deregulation 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 exports 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 governance. and price stability, prudent, non-infl ation- There is now a general recognition that ary budgetary policies and monetary conditionalities 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 welfare; their concern is contraction- in London on 5 March 2002. ary macroeconomic policies. Public spending and taxes. 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 liberalization 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 exchange rate 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, tax 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-tariff 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 market 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

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