The IMF, the World Bank and the African Debt: The Economic Impact 0862328306, 9780862328306

Citation preview

THE IMF. THEW BANK THEAF

M swig H

?sa

NDEBT

Bade Onimode

The IMF, the World Bank and the African Debt Volume 1 The Economic Impact

ZED/IFAA CO-PUBLICATIONS Ben Turok, AFRICA: WHAT CAN BE DONE? (1987) Nzongola-Ntalaj^, REVOLUTION AND COUNTER-REVOLUTION IN AFRICA: Essays in Contemporary Politics (1987) Eboe Hutchful (editor), THE IMF AND GHANA: The Confidential Record (1987) Bade Onimode, A POLITICAL ECONOMY OF THE AFRICAN CRISIS (1988) Ahmed Samatar, SOCIALIST SOMALIA: RHETORIC AND REALITY (1988) Chidi Amuta, THE THEORY OF AFRICAN LITERATURE: Implications for Practical Criticism (1989) Bade Onimode (editor), THE IMF, THE WORLD BANK AND THE AFRICAN DEBT (1989) Volume 1: The Economic Impact Volume 2: The Social and Political Impact

The IMF, the World Bank and the African Debt Volume 1 The Economic Impact Edited by

Bade Onimode

The Institute for African Alternatives

Zed Books Ltd London and New Jersey

The IMF, the World Bank and the African Debt Volume 1: The Economic Impact was first published by Zed Books Ltd, 57 Caledonian Road, London N1 9BU, UK, and 171 First Avenue, Atlantic Highlands, New Jersey 07716, USA, with the Institute for African Alternatives, 23 Bevenden Street, London N1 6BH, UK, in 1989. Copyright © Individual contributors, 1989. Editorial copyright © Bade Onimode, 1989. Cover design by Andrew Corbett. Typeset by Opus 43, Cumbria. Printed and bound in the United Kingdom at Biddles Ltd, Guildford and King’s Lynn. All rights reserved.

British Library Cataloguing in Publication Data The IMF, the World Bank and the African debt. Vol. 1: The economic impact 1. Africa. Governments. External debts I. Onimode, Bade 336.3’433’6 ISBN 0-86232-829-4 ISBN 0-86232-829-2 pbk

Library of Congress Cataloging-in-Publication Data The IMF, the World Bank, and the African debt / edited by Bade Onimode. p. cm. Co-published with the Institute for African Alternatives. Includes index. Summary: v. 1. The economic impact — v. 2. The social and political impact. ISBN 0-86232-828-4 (v. 1) : $49.95 (U.S.). - ISBN 0-86232-829-2 (pbk. : V. 1) : $15.95 (U.S.). - I$BN 0-86232-830-6 (v. 2) : $49.95 (U.S.). - I$BN 0-86232-831-4 (pbk. : v. 2) : $15.95 (U.S.) 1. Debts, External-Africa. 2. Loans, Foreign-Africa. 3. International Monetary Fund-Africa. 4. World Bank-Africa. I. Onimode, Bade. II. Institute for African Alternatives HJ8826.I54 1989 336.3’435’090--dc20 ^ 89-8871 CIP

Contents

Abbreviations Contributors

vii xi

Acknowledgements Introduction Bade Onimode

xii 1

Part One: Theoretical and General Perspectives

9

1. Keynote Address: Impact of IMF—World Bank Policies on the People of Africa Emeka Anyaoku

11

2. The Bretton Woods System and Africa Laurence Harris

19

3. IMF and World Bank Programmes in Africa Bade Onimode

25

4. Structural Adjustment Policies in African Countries: A Theoretical Assessment Bright Okogu

34

5. Reinforcing International Support for African Recovery and Development Commonwealth Secretariat

45

Part Two: Case Studies 6. The Chronology of Crisis in Tanzania, 1974—86 Werner Biermaim and John Campbell

67 69

7. Tanzania: The Pitfalls of the Structural Adjustment Programme 89 Haroub Othman and Ernest Maganya 8. Somalia: Economics for an Unconventional Economy Vali Jamal 9. Sudan and the IMF, 1978-83 SafwatFanos

99 123

10. The Role of the IMF and World Bank in Zambia Caleb Fundanga

142

11. IMF—World Bank Impact on Zimbabwe Arnold E. Sibanda

149

12. Impact of IMF—World Bank on Lesotho D. Mabirizi

160

13. South Africa’s External Debt Crisis

172

Laurence Harris

14. A Future Independent Namibia and the IMF—World Bank: Policy Alternatives

192

Wilfred Asombang

15. Structural Adjustment: The Case of West Africa

206

R.S. Olusegun Wallace

16. Impact of IMF—World Bank Programmes on Nigeria

219

Adebayo Olukoshi

Index

235

Abbreviations

ACGS ADB ADP ANC APPER ASUU BFF BHN BTA C CAP CBN CCM CDR CEAO CFA CFF CG CKD CMA CMB CMEA COCOBOD CPI CSER CSS DEG DFRRI DMU ECA ECLA ECOWAS EEC EFF EIU EPZ ERP ESAF FADP FAO FDI FEM FEMAC FOS FRELIMO GAPEX GATT

Agricultural Credit Guarantee Scheme African Development Bank Agricultural Development Programme African National Congress African Priority Programme for Economic Recovery Academic Staff Union of Universities Buffer Stock Financing Facility basic human needs basic travelling allowance Cedi Common Agricultural PoUcy Central Bank of Nigeria Chama cha Mapinduzi Committee for the Defence of the Revolution Communaute Economique de I’Afrique de L’Ouest Communaute Francaise AMcaine Compensatory Financing Facility (World Bank) Consultative Group ‘completely knocked down’ Common Monetary Area Cocoa Meirketing Board Coxmcil for Mutual Economic Assistance Cocoa Marketing Board Consumer Price Index Council for the Development of Social and Economic Research Compagnie Sucriere Senegalaise Deutsche Entwicklungsgessellschaft Directorate of Food, Roads and Rural Infrastructure Debt Management Unit Economic Commission for Africa Economic Commission for Latin America Economic Community of West African States European Economic Community Extended Fund Facility Economist Intelligence Unit Export Processing Zone Economic Recovery Programme Enhanced Special Adjustment Facility Funtua Agricultural Development Project Food and Agricultural Organisation foreign direct investment Foreign Exchange Market Foreign Exchange Management Committee Federal Office of Statistics Front for the Liberation of Mozambique General Agricultural Products Export Corporation General Agreement on Trade and Tariffs

viii

Abbreviations

GDP GNP GRZ lAP IBRD IDA IDM IFAA IFAD IFC ILO IMG IMF ISRA JCC K KSWC KTL LDC LIBOR LLA LNDC M MAN MNC MOJA MYRA N NACB NANS NARD NBC NEC NESP NGO NIC NIEO NLC NMA NPN NRM NTB NTOA NUBIFE NURTW OATUU OAU ODA OECD

ones ONCAD

Gross Domestic Product Gross National Product Government of the Republic of Zambia International Association of Pharmaceuticals International Bank for Reconstruction and Development (W*ld Bank) International Development Association Institute of Development Management Institute for African Alternatives International Fund for Agricultural Development International Finance Corporation International Labour Organisation Interim Management Committee International Monetary Fund Institut SenSgalais de Recherche Agricole Joint Consultative Committee Kwacha Khartoum Spinning and Weaving Company Kaduna Textiles Limited less developed country London Inter-Bank Offered Rate Lesotho Liberation Army Lesotho National Development Corporation Maloti Manufacturers Association of Nigeria multinational corporation Movement for Justice in Africa Multi-Year Rescheduling Agreement Naira Nigerian Agricultural and Co-operative Bank National Association of Nigerian Students National Association of Resident Doctors National Bank of Commerce National Executive Council National Economic Survival Programme non-governmental organisation newly industrialised country New International Economic Order Nigerian Labour Congress Nigerian Medical Association National Party of Nigeria National Resistance Movement non-tariff barrier National Transport Owners Association National Union of Banks, Insurance and Financial Employees National Union of Road Transport Workers Organisation of African Trade Union Unity Organisation for African Unity Official Development Assistance Organisation for European Co-operation and Development Office of the Head of the Civil Service Office National de Co-operation et d’Assistance pour le Developpement

Abbreviations OPEC OUP PAAERD PAI PDS PMB PNDC PTA R RBDA REDS RIS RMA ROAPE RSA RSF SACU SADCC SAP SAL SAP SARB SDR SECAL Sh SFEM SIDA SOE SSA SWAPO TNC TNDP TSA Tsh TYPIP UDC UN UNCTAD UNDP UNESCO UNICEF UNIGES UNIN UN-PAAERD URT USAID USDA WAI WIM

Organisation of Petroleum Exporting Countries Oxford University Press Programme of Action for African Economic Recovery and Development Parti Africain de I’lndependance Senegalese Democratic Party Produce Marketing Board Provisional National Defence Council Parent Teacher Association Rand River Basin Development Authority Reserve Fund for Debt Service Research and Information Services Rand Monetary Area Review of African Political Economy Republic of South Africa Revenue Stabilisation Fund Southern African Customs Union Southern Africem Development Co-ordination Conference Structural Adjustment Facility Structural Adjustment Loan Structural Adjustment Policy South African Reserve Bank Special Drawing Right Sectoral Adjustment Loan Shillings Second-Tier Foreign Exchange Market Swedish International Development Agency state-owned enterprise Sub-Saheiran Africa South West African People’s Organisation transnational corporation Transitional National Development Plan Tanzania Sisal Authority Tanzanian shillings Three Year Public Investment Progreunme Uganda Development Corporation United Nations UN Conference on Trade and Development UN Development Programme UN Economic and Social Council UN Children’s Fund Union Nationale des Groupements Economiques Senegalais UN Institute for Namibia UN Programme of Action for African Economic Recovery and Development United Republic of Tanzania United States Agency for International Development United States Department of Agriculture War Against Indiscipline World Integrated Model

ix

Institute for African Alternatives (IFAA) Director: Ben Turok, BSc Eng. MILS. BA(SA). MA(DSM) Prof Bade Onimode (Nigeria) Chair Dr Tsehai Berhane-Selassie (Ethiopia) Dr Fatima Babikar Mahmoud (Sudan) Dr Kwame Ninsin (Ghana) Prof. Haroub Othman (Tanzania)

Prof Abdoulaye Bathily (Senegal) Prof Ben Magubane (South Africa) Mr Shepherd Nzombe (Zimbabwe) • Prof Nzongola-Ntalaja (Zaire) Hon. Dr E. Mwanongonze MP (Zambia)

IFAA was established in 1986 to promote policy research and discussion on the contemporary problems of Africa. Its headquarters are located in London, UK, and consist of a suite of offices, a lecture hall, a common room and study rooms. Facilities are available for visiting Research Fellows from Africa. A network of IFAA Resource Centres is being established in seven African countries.

Conferences, Workshops, Seminars A major annual conference is held at IFAA with invited speakers from across Africa. There is also a special conference on African women. Workshops are held on a specialist basis and seminars on particular topics. Proceedings are generally recorded and published.

Lectures and Classes IFAA holds a series of lectures on particular topics from time to time. Classes are run on such topics as History of African Women, Problems of Development, Neocolonialism, South African Liberation, etc. A residential three month course on African Women: Transformation and Development is under preparation. IFAA is an Independent Centre of the University of London and runs joint Diploma and other courses with the Centre of Extramural Studies.

Publishing IFAA publishes its conference proceedings, books by IFAA associates, textbooks for African universities, and occasional papers. IFAA issues a bi-monthly newsletter, IFAA NEWS, and a quarterly bibliography of African books, IFAA BOOK LISTINGS. Address: IFAA, 23 Bevenden Street, London N1 6BH, UK. Telephone: 01-251 1503, Telex 923753 Ref W6019

Contributors

Chief Emeka Anyaoku is Deputy Secretary-General of the Commonwealth, based in London. Wilfred Asombang is a lecturer at the United Nations Institute for Namibia, Lusaka, Zambia. Dr Werner Biermann is a lecturer in economics at the University of Dar es Salaam, Tanzania. Dr John Campbell is a lecturer in economics at the University of Dar es Salaam, Tanzania. Dr Safwat Fanos is a lecturer in economics at the University of Khartoum, Sudan. Dr Caleb Fundanga is Deputy Permanent-Secretary, Ministry of Finance, Lusaka, Zambia. Dr Laurence Harris is Professor of Economics at the Open University, Milton Keynes, UK. Vali Jamal is Senior Economist in the Rural Employment and Policies Branch of the International Labour Organisation, Geneva. Dr D. Mabirizi is a lecturer in law at the National University of Lesotho. Dr Ernest Maganya is Deputy Director of the Institute of Development Studies, University of Dar es Salaam, Tanzania. Bright Okogu is a member of Hertford College, Oxford University, UK, and lecturer in economics at the University of Jos, Nigeria. Adebayo Olukoshi is Research Fellow at the Nigerian Institute of International Affairs, Lagos, Nigeria. Dr Bade Onimode is Professor of Economics at the University of Ibadan, Nigeria, and Chairperson of the Board of the Institute for African Alternatives. Dr Haroub Othman is Director of the Institute of Development Studies, University of Dar es Salaam, Tanzania. Dr Arnold Sibanda is a lecturer in the Institute of Development Studies, Harare, Zimbabwe. Dr R. Olusegun Wallace is a lecturer in economics at the University of Exeter, UK.

Acknowledgements

The papers included in these two volumes were originally presented at a Conference in London in October 1987 on the roles of the International Monetary Fund (IMF) and the World Bank in Africa. The idea for that Conference emerged from the first Council meeting of the Institute for African Alternatives (IFAA) in October 1986, at which the Council took the view that the rapid deterioration of the African crisis coincided with the simultaneous expansion of the Fund and Bank programmes in Africa and that this warranted an urgent major evaluation of the impact of their pdlicies and programmes on the peoples of Afiica. A number of individuals and organisations contributed generously both to organising the Conference and to producing these two volumes. The Institute for African Alternatives is particularly grateful to the DeputySecretary General of the Commonwealth, Chief E.C. Anyaoku, for delivering the keynote address to the Conference and for arranging other forms of assistance from the Commonwealth Secretariat. IFAA is also greatly indebted to NORAD, SAREC, OXFAM, War on Want, Christian Aid, and the Joseph Rowntree Charitable Trust for their financial support of the Conference; and to the Joseph Rowntree Charitable Trust for a financial contribution to the production of these two volumes. Grateful thanks also to those who contributed papers to the Conference which, in turn, stimulated four days of frank and constructive discussion. Finally, I would like to express the gratitude of the IFAA board to the institute’s small staff whose hard work under immense pressure made the Conference a major success, and particularly to its director, Ben Turok, who managed the administrative details of the Conference with tact and efficiency, and who has been of assistance to the editor in the production of these two volumes. Bade Onimode IFAA Chairperson

Introduction Bade Onimode Africa’s external debt has deteriorated from crisis to disaster and is now a continental catastrophe. The BBC in September 1987 quoted UNICEF to the effect that 1,000 African children were dying each day as a result of the calamity and that one million children had already died. In some quarters, the debt crisis is regarded as a silent and undeclared economic war for the recolonisation of Africa. Its goals include a desire to: i) arrest the rising prices of raw materials in the 1970s which led to The Second Slump (Mandel, 1980) in Western countries; ii) curb the alleged radicalism of the Third World in demanding a new international economic order (NIEO); iii) arrest putative industrialisation in poor countries, increasingly seen as a threat to manufactured exports from the creditor countries; iv) arrest the growing effectiveness of Third World nations or regional groups in dealing with regional conflicts in such areas as Southern Africa (i.e., curbing the role of the so-called ‘frontline’ states which at times have even included Nigeria), the Horn of Africa, the Middle East and Central America. Debt has compounded the composite African crisis which started in the 1970s as a crisis of underdevelopment laced with both agrarian and refugee crises. By the end of the 1970s, 22 of the world’s 31 least developed countries by UN classification were in Africa. In the 1980s, approximately six African economies have actually collapsed, 15 are currently on the verge of disintegration and almost all the rest are grinding to a halt.

Debt structure and causes By December 1987, Africa’s total external debt had risen to $228 billion, about half that of Latin America but around double that of Brazil alone. Even though about 70 per cent of this debt is owed to official creditors (governments and multilateral agencies like the IMF and the World Bank), the burden of the debt is crushing. Interest and amortisation charges have soared from $8 billion in 1985 to $19.5 billion in 1987 and to over $26 billion in 1988. The net payment by Africa to the IMF alone was $1 billion by 1986. By then Africa had the highest proportion of debt to gross national product (GNP) in the world at 55.1 per cent. Total debt as a ratio of exports of goods and services increased from 167 per cent in 1982 to 230 per cent by 1987. Correspondingly, the debt service ratio (i.e., debt service payments as a percentage of annual export earnings) which was only 15 per cent in 1980 rose to over 50 per cent in 1987 for sub-Saharan Africa, with 62 per cent for Ghana, 67 per cent for Zambia, 84 per cent for Equatorial Guinea and 204.6 per cent for Mozambique. Africa’s debts have been growing at the alarming rate of more than 23 per cent p.a., which is greater than the growth rate of exports and of GDP. Thus, while income per capita in Zambia was $470 in 1984, debt per capita was $429 — the corresponding figures for the Ivory

2

Introduction

Coast were $620 to $490 and for Benin $270 to $148. In Volume Two, Cheryl Payer categorises the dominant causes of the debt crisis as external and thus contradicts the claims of the IMF and World Bank that Africa and other debtor countries are responsible for their own debt crises. Besides the^arlier-mentioned motives for the debt war, other external factors which have contributed to the emergence of the crisis are the collapse of commodity exports and prices in the 1980s, deteriorating foreign loan structures and lending terms, interest rate manipulations, adverse effects of the crisis in the core capitalist countries, the exploitative activities of multinational corporations, the fleecing practices of international financial institutions, the untying of foreign loans and exchange rate fluctuations. Thus, according to Economic Commission for Africa (ECA) sources, Africa lost a staggering $19 billion in the year 1985—86 on top of an earlier loss of $13.5 billion during 1980—83. The collapse in the world market prices of cocoa, coffee, tea, copper, bananas and oil products also imposed a foreign exchange loss of another $2.2 billion during 1979—81. This is additional to the loss of 25 per cent in the purchasing power of Africa’s debts from concessional official sources to private commercial banks, whose share of the debts rose from 32.5 per cent in 1971 to 39.5 per cent by 1980, and higher since. As debts with variable interest rates increased, the real interest rate on Africa’s debt rose from about 0.7 per cent in 1970 to 1.7 per cent by 1986. The average interest rate on all types of loans to Africa also rose ft-om 4.2 per cent in 1971 to 10.1 per cent by 1982, and obviously higher since. The Organisation for African Unity (OAU) has estimated that $20.4 billion will be required during 1986—90 to pay rising interest charges on Africa’s current debt. A historical dimension is provided by Harris’s paper on the Bretton Woods system. He traces the evolution of the system in its Mark I (1944—71) and Mark II (post-1971) phases respectively. He shows that, whereas the IMF and World Bank were preoccupied with the reconstruction of Europe after the Second World War during the first phase, they have since then concentrated on Third World problems. In both periods, however, their basic rules of operation remained the same, and were dominated throughout by the United States and Western Europe with their shared capitalist ideology. Hence, the first priority of these institutions has been to reconstruct and maintain the world capitalist system in which multinational corporations can trade, invest and move capital across countries without hindrance from national govern¬ ments. For this reason they treat each member country individually so as to exercise maximum power over them, and to insist on free enterprise or market forces in their conditionality or stabilisation programmes. The extortionate practices of the international banks and other financial institutions have also contributed to Africa’s debt crisis. Thus, in addition to deteriorating lending terms, there have also been rising capital exports from Africa with an overall net capital export from several countries. Rising external control over capital flows between Africa and the rest of the world, the withholding or selective granting of credit subject to IMF conditionality

Introduction

3

(even for loans under the Lome Convention) and the adverse review of the creditworthiness of the debtor countries have all aggravated the crisis. Multinational corporations (MNCs) have also been systematically decapitalising Africa and the rest of the Third World and this has worsened the debt problem. MNCs control about 80 per cent of Africa’s trade in mineral and agricultural raw materials, and manipulate their prices to impose huge losses on primary producers. There is now abundant data on the net export of capital from Africa by MNCs; from Nigeria alone, they recorded a net export of capital of over $2.7 billion during 1970—80. Two of the many notorious mechanisms of exploitation by MNCs involve the net repatriation of super-profits — $13.5 billion during 1970—80 (much of it through transfer-pricing involving the over-invoicing of imports and the under-invoicing of exports) — and a technology rent of $35 billion from the debtor countries in 1982 alone. The untying of loans by the IMF, World Bank and other foreign lenders has also facilitated the ‘transfer’ of these loans into private bank accounts abroad as ‘flight capital’ (or Hot Money, Naylor, 1988) by corrupt leaders. By 1988 the total value of this corrupt flight capital in Swiss bank accounts was estimated at $67 billion. This is one major reason why debtor countries cannot generate enough returns on these foreign loans to repay them. Yet, in the past, much of this external loan money was tied to specific projects, especially by the World Bank. The tying of African currencies to erratically fluctuating foreign currencies like the dollar has also imposed on debtor countries huge losses in foreign exchange. But it should also be stated that internal factors in the debtor countries have contributed, albeit secondarily, to the debt crisis. Corruptly inflated contracts for kick-backs, unproductive investment in stadia, new capital cities and similar prestige projects, an anti-rural bias in government programmes, large and chronic budget deficits, official collusion with MNCs and large military spending are critical here. Thus, during 1978—88 when Africa’s arms expenditure was reported to have increased 15 times, African countries squandered about $120 billion for military purposes.

Debt responses and conference themes Against this background various international efforts have been directed at a resolution of the African debt crisis. In July 1985, the OAU adopted the African Priority Programme for Economic Recovery (APPER) for 1986—90. It estimated a cost of $128.1 billion for the programme out of which Africa was to provide $82.5 billion and raise the remaining $45.6 billion from external sources. On the basis of APPER, the OAU requested a special session of the UN to discuss ‘the critical economic situation in Africa’. This led to the adoption in May 1986 of the UN Programme of Action for African Economic Recovery and Development, 1986—90 (UN—PAAERD). Unfortunately, this UN programme has been criticised as

4

Introduction

the reinstatement of the World Bank’s Berg Report Towards Accelerated Development in Sub-Saharan Africa, previously discredited for attempting to undermine the OAU’s Lagos Plan of Action for Africa’s economic integration and collective self-reliant development. Other initiatives have included an IMF symposium in Kenya in 1985 and a conference organised by the Scandinavian Institute of African Studies in 1987, the respective proceedings of which were published as Africa and the IMF (Helleiner, 1986) and The IMF, and the World Bank in Africa (Havnevik, 1987). The OAU reviewed the UN—PAAERD in Nigeria in mid—1987 and the EGA published the results. The September 1987 conference organised in London by the Institute for African Alternatives (IFAA) set out to assess the impact on the people of Africa of IMF and World Bank programmes. It focused on four main afeas: i) the objectives and evolution of the international monetary system which created the IMF and the World Bank at a conference at Bretton Woods, USA, in 1944; ii) the effect of the Fund and Bank programmes on the economic sectors of individual African countries and on social groups in different countries; iii) the overall impact of these policies and programmes on Africa as a whole and on the world economy; iv) suggested alternative policies, programmes and solutions for Africa’s recovery and for the reform of the Fund and Bank. Volume One deals with the first two themes, while Volume Two deals with the other two themes. The alternative policies are summarised at the end of Volume Two. The conference looked at case studies from nineteen African countries, most of which are reproduced in these two volumes.

Major impact on African countries In order to assess the impact of Fund and Bank programmes on Africa, it is important to underscore the peculiar character of IMF and World Bank policies and programmes. The Fund’s programmes in Africa are shaped by its general tranche policies which consist of the Extended Fund Facility (EFF) established in 1974 and the standby arrangement (Havnevik, 1987). The EFF enables a member country to obtain credit or Special Drawing Rights (SDR) from the Fund beyond its quota contribution for up to two to three years, subject to its satisfying certain preconditions and performance criteria which together form part of IMF conditionality (e.g., devaluation, subsidy withdrawal, trade liberalisation, budget cuts, credit squeezes, privatisation of public enter¬ prises, etc.). A standby arrangement, on the other hand, usually runs for a year (though longer term arrangements are now available) and allows a member to draw beyond the first two of the five tranches (each of 25 per cent of its quota) and is subject to Ihe member undertaking a stabilisation programme for its balance of payments. Since 1974, Fund lending to Africa has increased most under tranche

Introduction

5

policies. As of the end of 1977, lending under conditionality to Africa stood at SDR 0.15 billion; it rose to SDR 4.7 billion in 1985 before falling to SDR 4.5 billion at the end of 1986. Thus, total Fund exposure to Africa increased from SDR 0.9 billion at the end of 1977 to a peak of SDR 6.6 billion in 1984 before dropping to SDR 6.1 billion at the end of 1986. By then, 30 out of the 45 countries in the Fund’s African Department were reported to have accumulated debt under the tranche policies to an average of 134 per cent of their quotas, while Zambia, Ghana, Kenya, Uganda, Ivory Coast and Malawi had drawn over 200 per cent of their quotas in the 1980s. By the end of 1986, the Fund also had such Special Facilities as the Compensatory Financing Facility (CFF), Buffer Stock Financing Facility (BFF), Oil Facility and the Concessional Credits that include Trust Fund Loans and the Structural Adjustment Facility (SAF). A new Enhanced Special Adjustment Facility (ESAF) is under way. But all these other Fund sources provided only SDR 1.6 billion to Africa by the end of 1986. The World Bank focused on medium- to long-term project-tied loans to the Third World countries until the 1970s. From 1979, however, it introduced Sectoral Adjustment Loans (SECALs) and in 1980 Structural Adjustment Loans (SALs). Both are designed for purchase of imports and are subject to conditionality or stabilisation programmes. During 1979—86, 25 out of the 52 SECALs were to sub-Saharan Africa for $1.1 billion, while up to 1985 the Bank had granted 6 out of its 31 SALs to sub-Saharan Africa. In the 1980s, therefore, both the Fund and Bank policies and programmes in Africa have converged under structural adjustment lending, subject to cross-conditionality from both institutions. The papers and the subsequent discussions during the conference were almost unanimous on four major issues. First was the fact that the imposition of cross-conditionality as a structural adjustment programme (SAP) or economic recovery programme (ERP) had become typical of both the Fund and Bank in the 1980s, in contrast to an earlier rural development or anti-poverty bias on the part of the Bank, dating back to colonial times in some cases. Second was the view that these programmes had generated severely adverse effects on the overall economies of these countries, especially with regard to agriculture, manufacturing and foreign trade. Third was the view, contrary to that of the Fund and Bank, that these adjustment policies and programmes had produced no ‘success stories’ in Africa. Finally, the conference underscored the urgent need to review and replace these Fund—Bank policies and programmes with alternative ones more socially relevant and country-specific in the light of the peculiar conditions prevailing in different African countries. The papers by Bierman and Campbell as well as Othman and Maganya on Tanzania, Fanos on Sudan, Jamal on Somalia, Sibanda on Zimbabwe and Olukoshi on Nigeria all showed how loan negotiations with the Fund led eventually to the imposition of cross-conditionality on each country. The conference’s discussions revealed how, in almost every country, the Fund and Bank insisted on their uniform programmes of devaluation, liberalisation.

6

Introduction

deflation, etc., regardless of any earlier stabilisation initiatives of national governments and their peculiar problems. The negative impact of these programmes on the economies of the African countries is also emphasised in the case studies. Othman and Maganya (Tanzama), Fanos (Sudan), Jamal (Somalia), Sibanda (Zambia) and Olukoshi (Nigeria) showed how the adjustment programmes in these countries had aggravated the national crisis. The growth rate of GDP had fallen to —1.7 per cent in Tanzania during 1980/81 and —0.6 per cent the following year, while the trade balance remained in deficit. In Sudan, the debt service ratio rose to 150 per cent, the trade balance worsened and unemployment rose to about 40 per cent, while in Zaire the economy collapsed. In Somalia, adjustment policies disrupted the economy; in Zambia, it was so disastrous that it provoked violent riots and had fo be scrapped; while in Nigeria, it reduced the growth rate of the GDP, exports and savings in addition to increasing unemployment. In all these countries, adjustment programmes led to drastic reductions in real incomes. About the only positive economic impact has been the reduction in imports and enforced local sourcing, due mainly to reduced export earnings. Large budget deficits have also been cut. Likewise, they had adverse social and political effects and these are discussed in Volume Two. Initially during the conference, representatives from the Fund and Bank claimed that Ghana, Kenya and Ivory Coast were their success stories. But Jonah’s paper on Ghana in Volume Two revealed sharp reductions in real incomes, rising external indebtedness with increasing inequalities and the desperate plight of the poor to challenge the model of Ghanaian success, while numerous speeches by Kenyans present rejected the success-story scenario. The rising debt and unemployment of the Ivory Coast with a worsening trade balance seem also not to add up to an adjustment success. Alternative policies and programmes to those of the Fund and Bank were also prepared at the conference. Individual presenters of the case studies suggested alternatives, while the last sessions of the conference were devoted to extensive analyses of present policies and their alternatives. The criticisms focused mainly on the harsh terms of access to Fund and Bank funds (especially the IMF), the inappropriateness of many of the policies in the cross-conditionality and the fact that these policies and programmes were not based on serious analytical and empirical studies of the African countries to reveal the long-term structural nature of their problems. The conflict between theory and policies, policy objectives and policy measures, and between policies, as well as the uniform insistence on shock (short-term) demand management for essential supply constraints, were also highlighted. The proposed alternative policies and programmes are summarised in Volume Two. They fall into two main categories — short-run solutions and medium- to long-term measures. Both sets of alternatives are informed by two critical considerations. One is the physical inability of African countries to repay their debts under existing adjustment programmes and also survive. This derives from the catastrophic impact of the debt war on the economies

Introduction

7

and people of these countries. Hence, the insistence that it is better to take less (capital out) than to give more (loans). The other relates to the need to transcend the debt crisis and to deal with its deeper underlying structural causes. In this regard, it has been aptly shown that, even if the debts were all now written off and nothing else was done, there would not have been an enduring solution. Hence the need to address an alternative development model for African countries along the lines of the inward-looking national and collective self-reliance of the OAU’s Lagos Plan ofAetion. The need to put Africa’s recovery in its appropriate international context of global solidarity was also emphasised. The analogy between the current debt crisis and that of the 1930s is relevant here. So is the need to reorganise the Fund and Bank away from their traditional domination by the United States and Western Europe, which makes them unbridled champions of world capitalism, into truly multilateral institutions, that will be controlled democratically by both rich and poor countries, able to respond compassionately to the legitimate requirements of all the regions of the world. This is in the abiding recognition of the conventional wisdom of economic theory that adjustment is the collective responsibility of both deficit (debtor) and surplus (creditor) countries in the correct appreciation of the logic of global economic interdependence. It is not possible to sustain the growth and prosperity of Western countries by putting Third World countries under permanent economic siege. The indivisibility of peace on this planet also argues against such a myopic strategy. Since the IFAA conference of 1987, the OAU and the Organisation of African Trade Union Unity (OATUU) have both organised international conferences on ‘Africa’s Debt and Debt Surviving’. Both conferences emphasised the same concerns raised at the (IFAA) conference while the OATUU conference in particular shared the policy alternatives enunciated at our IFAA conference.

References EGA (1987), The Abuja Statement, Addis Ababa. Havnevik, Kjell J. (ed.) (1987), The IMF and the World Bank in Africa — Conditionality, Impact and Alternatives, Uppsala, Scandinavian Institute of African Studies. Helleiner, G.K. (ed.) (1986), Africa and the International Monetary Fund, Symposium Papers, Washington DC, IMF. Jolly, R. et al. (1987), Adjustment with a Human Face, New York, UNICEF. Korner, Peter, et al. (1986), The IMF and the Debt Crisis — A Guide to the Third World’s Dilemmas, London, Zed Books. Mandel, E. (1980), The Second Slump, London, Verso. Naylor (1988), Hot Money. Onimode, Bade (1988), A Political Economy of the African Crisis, London, Zed Books.

8

Introduction

Cheryl Payer (1974) The Debt Trap — The IMF and the Third World, New York, Monthly Review Press. Cheryl Payer (1982) The World Bank — A Critical Analysis, New York, Monthly Review Press. Jacobo Schatan (1987) World Debt — Who is To Pay? London, Zed Books. UN (1986) Africa — UN Programme of Action for African Economic Recovery and Development, 1986—1990, New York and Addis Ababa.

Part One Theoretical and General Perspectives

1. Keynote Address: Impact of IMF—World Bank Policies on the People of Africa Emeka Anyaoku It used to be the case that interest and concern with the affairs of the IMF and the World Bank were virtually the preserve of government policy makers, academic researchers, and top executives of the big banking and commercial institutions. It is clearly no longer so. In very recent years, the IMF and the World Bank have become more widely known in most Third World countries, especially in Africa. Not long ago, the IMF even found its way into the political lexicon of places like Jamaica where it became fairly common in local colloquialism to hear the question, ‘Do you want to be IMF’d?’ Recently in Nigeria, not usually academically minded but always a socio¬ economic force to be reckoned with, the ‘market women’ played no little part in the national debate on whether Nigeria should or should not accept an IMF loan. I believe therefore that the theme of the conference is timely in view of the current developments in Africa and the responses thereto by the international community. Perhaps the most attractive and at the same time challenging aspect of this conference is that it aims at an objective examination of the impact that the policies of the two institutions have had on the people of Africa. Africa’s experience so far with the IMF has been mixed. There are places like Ghana, where it can be said that the experience has so far been a happy one; but there are also places like Zambia, where relations with the IMF which started on the basis of what seemed a promising marriage have recently ended in a frustrating divorce. An analysis of the factors contributing to these varied experiences and of what possible alternatives may be recommended in each case would be of value to policy makers and interested observers alike. The composition of the participants at this conference should ensure that deliberations will be informed by both academic and empirical perceptions. With the continuing deterioration in the economic situation of most countries in the sub-Saharan African region, for reasons on which there is often a divergence of views, the search for growth-oriented adjustment programmes and the need for increased external support for them have been at the centre of international attention. In recent months, at meetings of the Paris Club, the World Bank and the IMF, the United Nations Africa Steering Committee, UNCTAD and even at the Venice Summit of the seven Western industrial nations, the issues of debt relief and increased adjustment-related lending in support of African recovery have come into special focus. In all these forums and others, a consensus is emerging that there is need for special measures to provide adequate new concessional finance, in timely fashion and on appropriate terms, in support of the region’s adjustment process.

12

Theoretical and General Perspectives

There is no controversy about the necessity for structural adjustment in most African economies. Put in perhaps simplistic but no less apt language, many African countries have reached a position similar to that of a family in a crisis that has made it inescapable for it to adjust or change its production, consumption and-’investment patterns if it is to continue to survive and be able to obtain the means essential for its growth and future prosperity. While the part played by external factors cannot be overlooked, in the 1985 OAU Priority Programme for Economic Recovery, African heads of state and government acknowledged that domestic policy failures have some responsibility for the crisis and that reform was urgently needed. With added momentum provided by the OAU Programme to the process for adjustment, African governments have intensified their efforts towards the implemen¬ tation of reforms and adjustment programmes, including sometimes programmes that have contained very radical and drastic changes. The pace, intensity and direction of reform varies according to the prevailing political and economic situation. But across the continent, countries are increasing the prices they pay farmers for food and cash to boost production, reducing government regulation of the economy to allow market forces to determine prices and the allocation of resources; cutting back public expenditures and employment to balance the budget and to encourage investment in more profitable or essential sectors; and devaluing currencies to remove price distortions and increase rural incomes. They are also substantially increasing their investment in agriculture, with a view not only to food self-sufficiency but also to the well-being of the vast majority of people, especially those in the rural areas. The expectation is that these measures will increase production and reduce dependency on external assistance and free a number of constraints that inhibit growth. They are also expected to encourage greater private initiative and domestic foreign investment. Both the IMF and the World Bank have been deeply involved in subSaharan Africa’s pursuit of structural reforms and balance of payments adjustment. While the IMF has had a number of stabilisation programmes in operation in African countries for many years, the entry of the World Bank into ‘policy-related lending’ is a more recent innovation, largely starting from the introduction of its Structural Adjustment Loans (SALs), the first of which were made in 1980. Considerable additional momentum was added to this trend through the introduction of Sectoral Adjustment Loans (SECALs), which assumed importance in 1983. The need to provide concessional assistance to poor countries suffering from protracted balance of payments difficulties and willing to adopt medium-term policy reforms was further recognised when a Structural Adjustment Facility (SAF) was set up in the IMF in 1986. Twenty-two out of 34 low-income countries in sub-Saharan Africa have or are about to initiate programmes with the Bank or the Fund, or both. Yet, very sadly, despite the major reform efforts during the 1980s, in 1987 the average inhabitant in most of sub-Saharan Africa had no additional income, could dispose of no more consumption, and had far fewer imports

Impact of IMF—World Bank Policies on the People of Africa

13

than in 1965. Far more seriously for future prosperity, there is less investment per capita than a generation ago. In other words, the gains that were made in incomes and living standards during the 15-year period from 1965 to 1980 were all lost in the next seven years. On the other hand, the debt-servicing obligations of these countries rose very sharply. In 1980, debt servicing as a proportion of exports was less than 9 per cent, today it is nearly 30 per cent. The World Bank estimates that if the economies of sub-Saharan Africa had grown in the 1980s at the rate experienced in the 1970s, per capita income would now be 45 per cent higher. These statistics, stark as they are, provide only a partial measure of the setback to development since there has also been a serious, if unquantifiable, rundown in basic infrastructure as well as a depletion of the stock of ecological capital as a result of growing environmental degradation. Within the aggregate picture, it is often the most vulnerable social groups which have suffered most from the slowdown in development. UNICEF has accumulated evidence of a deterioration in nutritional status and school enrolment and a serious slowdown in reducing childhood mortality. Slow growth has also undermined the prospects of young people joining the labour force and there is a growing problem of underemployed, disaffected youth. As the World Bank president has pointed out, if the reform effort is to be sustained, there must be ‘tangible results and perceptible speed to avoid economic stagnation and political upheaval’. It thus becomes important that programmes are designed so as to provide, at minimum, no further declines in living standards and at least some improvement in investment levels, so necessary for long-term growth. For most of the countries concerned, adequate external resources are absolutely essential to support adjustment efforts and to secure their success. Let me try to give you a sense of the quantum jump in finance required. For sub-Saharan African countries as a whole, the World Bank estimated resource requirements of some $13.2 billion per annum over 1986—90 and a financing gap of $2.5 billion per annum to return to per capita import levels of 1980—82. While the International Development Association’s allocation of half its concessionary credit for 1988—90 (the ‘Eighth Replenishment’) to the region has filled some of the gap, in the meantime the gap has grown wider due to the precipitous decline in real commodity prices and the harsh external environment. More recent estimates by the World Bank for six countries — Zambia, Zaire, Senegal, Niger, Madagascar and Tanzania — suggest that just to maintain their 1985 per capita consumption these countries will need, over the next three years, an additional $700 million over and above the expected concessional flows. For them to return to the 1980—82 per capita import level would require an additional $2.2 billion. Thus, while the eighth replenishment of IDA will provide an additional $1 billion per annum over the next three years to these countries, in itself it will be inadequate to meet the region’s resource needs. This underlines the importance of the World Bank’s catalytic role in mobilising additional

14

Theoretical and General Perspectives

bilateral resource flows as well as in helping to secure debt relief. Action is required now. The encouraging recognition given by leaders at the Venice Summit that the problems of some of the poorest countries were uniquely difficult and required special treatment, needs to be translated into practical action. While moves are already in place to extend the grace and repayment periods at the Paris Club on rescheduled official debt, it is vital that these measures be supplemented by interest rate reductions on rescheduled debt. This will help reduce the debt burden — not just stretch it out. Similarly, the conversion of past aid loans into grants could also reduce indebtedness. Here I must compliment the Canadian government for its decision to write off its $325 million debts owed by seven French-speaking African countries and that similar action in respect of some Commonwealth African states would be announced next month at the Commonwealth Summit in Vancouver. There are undoubtedly other measures that could help. What is important, however, is that debt relief (or aid) must lead to additionality of resources, if it is to support growth-oriented strategies. As for the IMF, the position of African countries has not been helped by the fact that repayments to the Fund increased sharply in 1986, causing overall net flows to turn negative by $450 milhon. With mounting repayments due over the next few years, there is a strong danger that this negative trend will continue and even accelerate. Market rate interest charges on outstanding debt to the IMF of over $6 billion will add to the drain. An abrupt withdrawal of the Fund’s financial engagement, at a time when many Afiican countries are struggling with promising economic recovery programmes under the handicap of severe financial stringency, would not only increzise their difficulties but would risk destabilising their recovery efforts altogether. New lending on terms appropriate to the poorest countries is necessary if the Fund is to continue its financial and other support of African reform programmes. Since 1986, the Structural Adjustment Facility (SAF) has been in place to provide financial support to poor countries on concessional terms and with longer repayment periods. The resources available to the facility have been tiny, however, compared to the requirements. This highlights the paramount importance of trebling its resources to SDR 9 billion, as proposed by Managing Director Camdessus, so as to ensure that the Fund is not a net receiver of funds at this critical juncture for sub-Saharan Africa. Both the IMF and the World Bank need to do much more to secure adequate financing for the region’s adjustment efforts. Without this financing, the future outlook for sub-Saharan Africa would indeed be very bleak. Apart from the vital question of adequate finance, important questions also arise about the period of adjustment and conditions attached to Fund and Bank supported adjustment programmes. The question arises as to whether the IMF and World Bank have really adapted enough to meet the particular needs and circumstances of Africa. Clearly, important lessons have already been learned from past experience. In particular, early IMF programmes had on the whole too short-term an orientation to be able to

Impact of IMF-World Bank Policies on the People of Africa

15

address Africa s structural problems and often ignored the institutional and political constraints facing governments. The result was import strangulation which not only made the investment required for recovery impossible, but damaged the limited and painfully accumulated existing capital stock. In many instances, it resulted in unnecessary output losses because of the underutilisation of import dependent productive capacity. In its 1986 World Economic Outlook, the Fund itself acknowledged that its programmes had been biased towards a reduction in economic activity. Health and educational programmes also suffered. There was also too rigid a quantitative targeting so that there was a high chance of disruption in what were often politically and economically risky programmes, even though the general direction of change was as desired. It is now recognised that adjustment programmes should emphasise growth — increasing supply rather than stabilising economic activity through demand reduction. The IMF’s new Structural Adjustment Facility is intended to set programmes in a medium-term framework and to pay greater attention to underlying structural problems than would be possible under a normal stabilisation arrangement. SAF programmes also use benchmarks to illustrate the direction of change and measure progress. There is nonetheless concern that these benchmarks should not become strict targets as under normal stabiUsation programmes. The World Bank too has learned from its experience with structural adjustment lending. It now acknowledges that it was initially overly optimistic in its expectation of the time required to implement structural reforms and that the early programmes were often too complex and the conditions too wide-ranging for successful implementation. Thus, there is a clear effort underway in the two institutions to move away from overly ambitious short-term programmes towards medium-term adjustment. There is also now broad agreement — both within institutions and among governments — on the major elements of medium-term adjustment, particularly the need for supply-side measures aimed at increasing efficient export production and import substitution. It is widely recognised, for example, that measures are required to mobilise domestic resources more effectively, and to improve the efficiency of public sector resource allocations. Other measures where there is agreement include increased economic incentives, through the price system and trade reforms, and institutional reforms. But there are also areas of dispute: some reflecting differing political and economic philosophies on such issues as the role of government and the private sector, the importance of income distribution, or the degree of outward orientation of the economy. Take, for example, the relative roles of the public and the private sectors. There is widespread acceptance, even in African policy-making circles, that governments have frequently and inappropriately over-extended the public sector. But it would be counter-productive to push private sector expansion too fast or too far. Inefficiency in public monopolies does not necessarily create a case for private monopolies. The mix of state and private sector activity varies, and

16

Theoretical and General Perspectives

should vary, with the specifics of individual countries’ economic, political and administrative structures. Indeed, many public sector enterprises were set up because the private sector offered inadequate services or no services at all. For external agencies to push national governments too far on this or other such issues*could risk the credibility of otherwise sound and agreed programmes. Concern has also been voiced about the pacing and sequencing of policies. There is considerable controversy on specific policies. How much time, for example, is needed for stabilisation to take effect before countries embark on adjustment? Looking at ‘three success stories’ (Japan, Korea and Taiwan), some argue that a significant interval is needed between stabilisation and the beginning of export-led growth. In contrast to what has been relatively standard World Bank orthodoxy, they also suggest that incentives for export-led growth may need to precede import liberalisation. It is not surprising that differences arise not only on policies but also on their correct implementation, even when there is agreement on objectives. This is because of the complexity of the development process, differing economic policy orientations, and the power of interest groups within countries. As a senior Bank official has stated, ‘The policy problems of restoring growth in the medium term are far too complex and our understanding of the impact of policy on economic performance is far too incomplete for differences not to arise.’ It is even more difficult to build the necessary political consensus around reforms that affect powerful interest groups. Are the Bank and Fund doing enough to help African countries to cope with the political, social and other concerns arising from adjustment? More recently a greater understanding of the need to protect poor and vulnerable groups during the adjustment process has emerged. Based on the judgement that a quick restoration of growth was probably the most effective way to protect the poor, the Bank’s initial support for adjustment relied almost entirely on improving the efficiency of resource allocation and on strengthening public and private institutions. More recently, following studies by UNICEF and the Bank, the World Bank has started paying greater attention to the social costs of adjustment, particularly in assisting governments to redirect basic social expenditures towards the poor and to compensate the poor directly through better targeting of programmes. Among the specially vulnerable groups to which such programmes should be targeted are African rural women. While recent initiatives are welcome, it is important that compensatory programmes are an integral component of adjustment programmes, and not optional or ad hoc responses to them. Moreover, while adjustment lending is essential, it is equally important that the Bank does not lose sight of its fundamental role in long-term poverty alleviation. Not only does such lending have a moral imperative but, as UNICEF and others have shown, it has extremely high rates of return. Africa’s immediate needs are clearly for the rehabilitation and the expansion of its productive sectors but the region faces a number of

Impact of IMF- World Bank Policies on the People of Africa

17

long-term constraints on development. These include an excessive depen¬ dence on a few commodities, an inadequate transport infrastructure, a low level of human resource development, rapidly rising population, rapidly increasing deforestation and desertification, and a poor level of agricultural research. As short- and medium-term ‘adjustment’ proceeds, the question increasingly arises as to how this adjustment should be integrated with policies to deal with these long-term constraints to development. Adjustment policies have often been at odds with these longer-term objectives. Can more be done to help countries pursue short-term programmes without compromising long-term development? Fiscal corrections have often been made by sacrificing physical infi’astructure and human resource development. Sub-Saharan Afiica has never been equipped with adequate transport infrastructure and much of what was constructed in the earlier years is rapidly reaching the end of its effective life. Without improving infrastructure, production-oriented strategies cannot succeed. Financing requirements for rehabilitation, reconstruction and expansion are massive. In addition to rural feeder networks, the region’s main import and export supply routes need major investment. For example, in the case of SADCC countries particularly, improved supply routes are imperative if these countries are to reduce their dependence on South Attca. But even more significant are the cutbacks that are sometimes having to be made in education, training and health. While population is rising faster in Africa than any other continent, the education sector which saw admirable expansion in the years immediately after the end of colonialism is now in most countries suffering from a reversal in both the quality and quantity of services it provides. As for health, while conditions have improved in the past two decades, scarce resources mean that access to health is extremely limited. The experience of successful development, in Asia particularly, points to the critical importance of human resources, from basic literacy among men and women to a growing supply of more advanced technologists. Development also requires a wide range of crucial public services, such as research and technical advice for small farmers and industrialists, which are being run down in many countries in the interests of short-term economy. As the Bretton Woods institutions are urged to place greater emphasis on adjustment programmes, there is inevitably closer co-operation between them. There is, for example, formal co-operation between the Fund and the Bank in jointly developing what are called policy framework papers for Structural Adjustment Programmes. Useful co-operation between the two institutions, including the co-ordination of structural adjustment pro¬ grammes and the mobilisation of resources with other multilateral and bilateral donors, is important. But this must not leave open the way for the intrusion of cross-conditionality as a means of exerting concerted pressure on the borrowing country. The issues of conditionality and cross-conditionality raise highly sensitive issues concerning the freedom of ‘sovereign’ governments to choose the

18

Theoretical and General Perspectives

policies which, in their judgement, will best promote the interests of their peoples. Of course, no government, least of all one in need of help from the outside, can be truly sovereign in the sense of being entirely free of external constraints in the formation of national policies in the related areas. But experience has shown that there is validity in questioning the extent to which all the ‘policy conditions’ set out in stabilisation and adjustment programmes should be instigated by external agencies and thrust upon reluctant governments. For the more there is a genuine meeting of minds on policies between governments and external agencies, the more the chances of success in achieving the stated objective of conditionality. It is thus a matter of particular concern that governments have often not been sufficiently closely involved in the evolution of SAF arrangements, in part because a draft agreement is worked out and approved by the Staff and Management of the Bank and the Fund before it is discussed in depth with the country concerned. As a consequence, there has in some cases been criticism either that the SAF may not genuinely reflect the policy priorities of the government or that the government may not have obtained the necessary political support within the country to ensure effective implementation. Cannot greater harmonisation of interests between the institutions and African countries be achieved through, for example, government involvement in the early stages of the preparation of the lender’s guidelines and, if need be, with the use of outside experts to give more balanced judgement on issues? Now for my final point. However much sub-Saharan African countries increase their domestic reform efforts and even if the estimated financial requirements materialise to prevent a further fall in living standards, the outlook for African countries must also in part depend upon the international economic environment and hence on the policies of industrial countries. At present, there is every prospect that growth-oriented adjustment will fail in many countries, including African ones, because the international environment is not supportive. Much will depend on the advances that are made in macro-economic co-ordination between industrial countries. It will also depend on progress that is made in other forums of international economic co-operation, for example, by GATT in taking a decisive stand against protectionism and by UNCTAD in the field of commodities. But in acknowledging the importance of the external environment and support for Africa, it is necessary to stress African peoples’ responsibility to maximise their efforts towards greater self-reliance. Some of the acknowledged success stories of the Bretton Woods institutions have occurred in both developed and developing countries where whatever support was obtained from the IMF and/or the Bank served mainly to augment national sacrifice and determination to succeed. I trust therefore than an important outcome of this conference will be how such successes can be replicated in Africa.

2. The Bretton Woods System and Africa Laurence Harris Overuse has deprived the word ‘crisis’ of any precise meaning or significance, but Africa’s crisis in the late 1980s is definitive. The sharp worsening in the economies of sub-Saharan Afiica; the suffering of the people; the certainty that it will worsen in the next few years; and, above all, the absence of effective world policies to change the main parameters, give a substantial push toward growth for the continent as a whole and raise living standards all combine to make crisis a very real presence. The crisis is inescapable wherever we look and all statistics reflect it. Although developing countries as a whole experienced growth of their Gross Domestic Product at an average annual rate of 3.3 per cent in 1980—85, sub-Saharan Africa experienced a fall in GDP over that period (averaging 0.7 per cent p.a.). Taking population growth into account, living standards declined more sharply: in 1980-86 GDP per capita fell by an average of 3.4 per cent p.a. in sub-Saharan Africa, the region where, in any case, life expectancy (at 50 years) is lower than anywhere else. As African countries’ growth has collapsed, their external debt burden has increased to unmanage¬ able proportions. Sub-Saharan countries’ total external debt is estimated to have doubled between 1979 and 1986 to more than $72 billion. Since their exports have shrunk as commodity prices have fallen, their debt-service obligation as a percentage of exports has more than doubled from 14 per cent in 1979 to 31 per cent in 1987. With almost one third of export earnings earmarked for debt service, these countries’ precarious living standards are at the mercy of any further fall in the prices of export commodities like that which reduced Africa’s export earnings by $19 billion in 1986. While this crisis has unfolded in the 1980s, the IMF and World Bank have made Africa a central concern. The World Bank has had a temporary Special Facility for sub-Saharan Africa, and it has pledged that half of new concessionary credit to be disbursed by its International Development Association in 1988—90 (from the ‘Eighth Replenishment’) will be com¬ mitted to sub-Saharan Africa. The IMF began to devote a major proportion of its financing facilities to Africa in 1979. Of all its new conditional credit committed in 1979 and 1980, 30 per cent was for African countries, whereas in 1970—78 they accounted for only 3 per cent. The new IMF credit facility (Structural Adjustment Facility) was initiated in March 1986 to provide concessional long-term credit to low-income countries with protracted balance of payments problems and has been directed mainly to sub-Saharan Africa with two thirds of the amount it has committed so far being designated for those countries. The crisis in Africa and the two institutions created at Bretton Woods are, therefore, firmly enmeshed now. But what do they have to do with each

20

Theoretical and General Perspectives

other? What is the connection between today’s desperate situation in Africa and the two institutions, created in the quite different world of more than 40 years ago as pillars of a very different world economic system? Upon the answers to these questions rests the answer to the most vital question: what are the implications for African countries of involvement with the IMF and World Bank? The conditions the Fund and Bank attach to credit and the supervision of borrowers’ economies that they carry out are presented as routes to ‘adjustment with growth’. The institutions, like their critics, recognise that the policies they require from borrowing countries do hurt many in those countries but, unlike their critics, they argue that these costs will enable structural adjustments to be made which will generate new growth, that the costs will be short-lived, and that they will be lower than the costs*of any alternative. By contrast, in this paper I argue that in their present roles the IMF and World Bank are wholly unsuited to solving Africa’s problems: the pain of their medicine will not create a bounty of health and growth. Many critics have proposed marginal changes in Fund and Bank policies, but I argue that the harm they do stems from the structural position of these institutions, their in-built role in the world economy, so that change has to be more fundamental and wide-ranging. Those arguments are based on four theses about the Fund and Bank.

Thesis 1: Bretton Woods system, Marks 1 and 11 The Bretton Woods system has changed and is now in its second form, but this Mark II has the same fundamental principles and structural position as the original. When it was first established, the Bretton Woods system (Mark I) did not have the relation to the Third World that it does now. The IMF was designed principally to regulate the financial relations between the advanced capitalist countries rather than those of the Third World. Following the success of the financial co-operation between the UK, US and France instituted in the 1936 Tripartite Agreement, Bretton Woods instituted a system of fixed, stable exchange rates between the major powers’ currencies with other currencies, too, being fixed to them. To enable governments to maintain stable rates by, for example, buying their own currencies on the foreign exchanges if their exchange rate falls, the IMF was to provide short-term loans of foreign exchange. Bretton Woods Mark I lasted until 1971. During this period a new basic element of the system was developed, the principle of conditionality which enabled the IMF to dictate the policies of borrowers (conditionality was built into the system in several major statements and finally codified and consolidated in 1979). While the Fund was actively involved with several independent Third World countries in this period, its principal attention was on the pound, the franc and the currencies of the other industrialised

The Bretton Woods System and Africa

21

capitalist countries. In building a post-war world order, its main aim was to achieve conditions where governments would dismantle all exchange controls and permit free trade and freedom for capital movements. Under the IMF’s supervision, convertibility of the major currencies was established gradually over that period (although not completed until later). At the same time the World Bank was providing credit for specific projects in Third World countries while its own presence as a first-class and sophisticated borrower on international capital markets helped those markets to be re-built on a strong base. Bretton Woods Mark II is not organised around a system of stable exchange rates which governments have to maintain by intervention. With this change and the accomplishment of convertibility for the major currencies, the IMF’s role since 1971 has been different. It has become almost exclusively concerned with balance of pa)nnents credit to Third World countries and, through conditionality, with the re-orientation of their economic policies ais a whole. At the same time, the World Bank has shifted from project finance to structural adjustment loans which relate to restruc¬ turing Third World countries’ economies on a broad scale. However, although Bretton Woods Mark II is different from Mark I, its two fundamental characteristics remain unchanged. First, the IMF, the World Bank, and the system they operate are subject to US hegemony and dominated by the interests voiced through the US government. Second, they are fundamentally committed to an ideology of freedom for international trade and capital movements (although in practice they do not pressurise all countries equally to this end). This principle of free trade and capital movements has held continuous sway, from the significance the original negotiators at Bretton Woods in 1944 attached to ‘multilateralism’ to the World Bank’s World Development Report of 1987 devoted to arguing that poor countries’ ‘progress depends upon the ability to trade relatively freely with the rest of the world.’ It has been linked with the system’s first fundamental characteristic, the hegemony of the US, since the beginning when the North American negotiators at Bretton Woods struggled for the principle of multilateralism in order to gain access for American exporters and investors to the Commonwealth and Sterling Areas where British firms and banks had hitherto had protected access.

Thesis 2: Construction of a free international market The main role of the IMF and World Bank is the construction, regulation and support of a world system where multinational corporations trade and move capital without restrictions from national states. The objectives of ‘multilateralism’ and ‘free trade’ which are so deeply and fundamentally rooted in the structure of the Bretton Woods institutions are integral to their key role: the institutions’ first priority is their commitment to creating and maintaining a world system of trade and financial markets

22

Theoretical and General Perspectives

free from impediments imposed by national politicians. The emphasis this key role deserves is in contrast to the common perception of the Fund and Bank, and to their stated aims, which are to assist individual member countries; in this thesis, their policies for individual borrowers are wholly subordinate to their prior responsibility for constructing a world system on these lines. The key nature of this overriding commitment has manifested itself through all the various phases of Fund and Bank strategies. When, in the 1950s and 1960s, Third World countries were adopting import-substitution industrialisation behind protective tariffs and import and exchange controls, the IMF formulated its ‘conditionality’ against import and exchange controls, while World Bank finance was aimed at projects and then programmes which fostered export promotion as an alternative to import restrictions. After the IMF aim of general convertibility was largely achieved and international capital markets developed to new levels in the 1970s, the IMF became, more fully than ever before, the guardian of the interests of international banks (further tipping the scales in their favour in their dealings with national governments) while the World Bank has made export promotion and import liberalisation (rather than meeting domestic needs) the main priority of its structural adjustment programmes. Both the IMF and the Bank have encouraged the development of local capital markets and stock exchanges in Third World countries linked into international financial markets. The ‘conditionality’ the Fund attaches to its stand-by arrangements (for upper-tranche finance and for special financing facilities such as the Extended Fund Facility) is the clearest manifestation of the institution’s overriding commitment to constructing a world system where capital and trade flows are free from national controls and where the role of national states in finance and investment is cut back. The main elements of conditionality have been experienced by people throughout Africa. They are set out both as performance criteria to be observed by borrowers after the start of an arrangement and, increasingly, as prior actions that have to be carried out by the country before a stand-by arrangement is approved. First, trade and exchange restrictions must be reduced or, at least, not extended. The currency must be devalued severely to stimulate exports and discourage imports without state controls. In some countries devaluation has been achieved by the IMF insisting on the replacement of exchange controls by the extreme market mechanism of auctioning foreign exchange: Zambia has attempted such auctions (but now stopped them) effecting an 84 per cent devaluation of its currency between September 1983 and March 1987, while Nigeria which has partially auctioned its foreign exchange since 1986 has devalued by 79 per cent over that period. Second, state borrowing and associated variables such as domestic credit creation must be controlled and, frequently, price subsidies must be abolished so that the country’s production is determined in accordance with inter¬ national market prices. Associated with this are injunctions to reduce state

The Bretton Woods System and Africa

23

investment and increase opportunities for foreign capital. The imposition of these core policies on the whole range of borrowers has the effect of opening Third World countries throughout the world as elements in international commodity markets and capital markets.

Thesis 3: Domination through individual country approach Although the institutions’ key objective is the construction of an inter¬ national market system, their power comes from operating on a country-bycountry basis. Therefore, assisting individual countries appears as if it were their principeil objective. The power of the Fund and Bank to influence states’ policies arises because balance of payments financing and the external financing of development projects and programmes are necessary requirements for individual countries’ development strategies. Increasingly, Fund and Bank approval is required even for the commitment of finance by other official bodies and as a precondition for private finance, so their power is much greater than the resources these institutions themselves can commit. The ‘adjustment policies’ they impose are seen as necessary prerequisites to enable the borrower to achieve viable growth; however, if my earlier thesis is correct, their main aim is global, and national growth is quite secondary to it. Critics of the IMF and World Bank, however, generally assume that the institutions’ main concern is the individual country. Reform proposals, as a result, focus on suggesting better ways of achieving growth for the borrowing countries. For example, the Report of the Intergovernmental Group of 24 adopted in June 1987 makes a carefully considered and technically thorough case for the policies the IMF imposes on individual borrowers to be based on ‘growth exercises’ in addition to the usual ‘financial exercises’, for conditionality to be changed accordingly, and for related reforms. UNICEF has sponsored proposals for ‘social protection measures’ to be built into IMF and World Bank adjustment programmes. And the Overseas Development Institute has been typical of many bodies in suggesting that IMF adjustment programmes should be more long-term and flexible. All such reform proposals assume that the institution’s main concern is the individual national economy and their concern is, as a result, only with a small change of the ‘trade-offs’ within that: some greater emphasis on growth and less on balance of payments equilibrium; some greater social protection for the poor to give a stronger humanitarian and political underpinning to structural adjustment programmes; or some greater and more flexible emphasis on relative prices with less emphasis on macro-economic policies. Such reform proposals have in recent years proved to a large extent easily acceptable to the institutions. The address given by Mr Camdessus, the IMF Managing Director, to UNCTAD VII was indicative of the readiness to accept such reform proposals even more

24

Theoretical and General Perspectives

readily. But such reforms do not affect the core of the institutions’ role because they do not address the Bretton Woods orientation toward global objectives.

Thesis 4: Collective action against Fund and Bank African and other Third World countries can change their relations with the IMF and World Bank by acting on a concerted basis. The IMF and World Bank deal with countries on an individual basis while addressing themselves to a global objective of integrating Third World countries into an international market system. The terms of Third World countries’ relations with the institutions cannot be changed by dealing as individual countries with institutions whose fundamental role is global. Instead, Third World countries have to take concerted action to change their relations with the institutions. And since the global objectives of Fund and Bank are for the creation of a world system where international capital’s trade and investment flows are unrestricted, the Third World’s concerted action has to address itself to the control of international trade and investment. The last two decades have demonstrated that concerted action and policies by the Third World are difficult partly because of the different circumstances and interests of different Third World countries. But, equally, strong movements have been mobilised at times such as the widely supported moves for a New International Economic Order at the end of the 1970s. These experiences suggest that, at particular periods and in circumstances where there are relatively common interests, concerted actions can be built. I suggest that African countries are in that position today. Their position is so desperate; IMF and World Bank policies are worsening their crisis; and, above all, the African countries’ position is relatively similar so that they can have relatively common interests in a concerted strategy. The launch of a concerted strategy to change the international system and the role of the Bretton Woods institutions within it is now an urgent necessity for Africa, and its impact would be real.

3. IMF and World Bank Programmes in Africa Bade Onimode An appreciation of the impact in Africa of IMF and World Bank policies and programmes requires the identification of these activities. On a regional basis, this is perhaps best done in functional categories so that the specific listing of individual policies and programmes can be done at the national level. Such an approach would then focus on the broad objectives, assumptions, implementation and socio-economic consequences of the programmes on the African people. This necessitates an historical perspective. Even though the activities of the IMF and the World Bank have become prominent in the 1980s, they date back to the colonial era. By 1953, for example, a World Bank mission had arrived in Nigeria at the invitation of the colonial government to advise on various development programmes in different sectors of the economy. The report of this mission formed much of the technical basis for the country’s first post-colonial plan of 1962—68, actually drafted by two Americans. In this way, the World Bank helped develop not only some of the colonial policies of underdevelopment in Africa, but also many of the post-colonial policies of neo-colonial capitalism. Since 1960, when Nigeria joined the World Bank Group (i.e.. World Bank, International Development Association (IDA) and the International Finance Corporation (IFC)), the country has also been interacting with the IMF. This fairly long contact with these institutions applies also to most other African countries. As the African crisis worsened in the 1970s, the relationship between Africa and these agencies deepened so that by 1979 the continent hosted as much as 30 per cent of the Extended Fund Facility for desperate countries. TTie stated objectives of IMF—World Bank policies and programmes in Africa have been to (i) offer neutral technical advice, economic diagnoses, strategies and models; (ii) fight poverty (as exemplified by the anti-poverty rhetoric of the former World Bank President, Robert McNamara); (iii) adjust disequilibria in the balance of payments in the interests of the growth of free international trade and payments; and (iv) in the 1980s, to assist with economic recovery from depression and external debt. Until the second half of the 1980s, when both the IMF and World Bank started operating a joint structural adjustment programme to achieve all four objectives, there had been some division of labour between the two agencies.

Types of IMF—World Bank programmes in Africa In this paper I intend to treat the IMF and World Bank together, except where specific distinctions are required. The reasons for this approach are

26

Theoretical and General Perspectives

their joint location in Washington, systematic consultation about each other’s activities, regular co-operation (even complementarity), their identical ideological perspectives, similarity of objectives and common programmes under structural adjustment. As such it is possible to identify four major IMF—World Bank programmes in Africa. They are: (i) anti-poverty pro¬ grammes; (ii) growth-oriented programmes including infrastructural development; (iii) balance of payments stabilisation programmes; (iv) structural adjustment programmes (SAP) or economic recovery programmes (ERP). Of these, the first two are the main concerns of the Bank, the third of the Fund, while the fourth is a joint concern of both institutions. 1. Anti-poverty and growth programmes The anti-poverty and growth programmes of the Bank are closely related as both share the objectives of alleviating mass poverty and increasing economic growth. The main difference between them is that the anti-poverty programme has a rural and agrarian focus. Both the World Bank and the IMF implicitly or explicitly endorse the colonially imposed role of primary production by Third World countries on the bogus basis of comparative advantage. Since this production is located in the rural economy of poor countries, the Bank sustains a large and growing rural programme in Africa. It is organised around agricultural development projects (ADPs) and funded by loans from the Bank. The programme involves irrigation schemes (dams), large agricultural plantations mainly for export crops, livestock and forestry, new agricultural inputs (machinery, chemicals, seed varieties) and some rural infrastructural facilities like roads, water and education. These are all intended as a means to raise agricultural productivity, rural incomes and the general welfare of the majority of the population who are poor rural dwellers. Similarly, the growth programme of the Bank is intended to expand the productive capacity of poor countries, accelerate their pace of economic progress and thus alleviate their poverty. This growth programme, however, is essentially urban-based. Its major foci include the provision of such infrastructural facilities as railways, clean water, electricity, highways, waste disposal, education and export development. Most loans for these projects go ultimately to parastatal organisations, municipal authorities and other levels of government. Since the 1970s, a population programme has been added to this growth effort, the basic idea being to arrest the rapid population growth of small countries so as to reduce the pressure on such resources as food, utilities and social services. 2. Balance of payments’ stabilisation programme The stabilisation of balance of payments is the primary function of the IMF. The purpose is to assist with the elimination of disequilibria in the balance of payments of member countries through either drawing from their contribution to the Fund (this is the First Tranche), or their request for Extended Fund Facility (the Second Tranche) which attracts tough

IMF and World Bank Programmes in Africa

27

preconditions. The Fund’s commitment to payments adjustment is to ensure the free flow of international trade and its growth without exchange restrictions. As Africa’s primary exports of agricultural and mineral raw materials have been facing dwindling demand due to the use of synthetic substitutes and the imposition of low prices and restrictive trade practices by her advanced trading partners, her external trade problems have become cumulative. The combination of poor terms of trade, unstable and declining export earnings and a chronically unfavourable balance of trade situation has led to persistent and deteriorating balance of payments deficits and crises. Thus, between 1985 and 1986 alone, Africa lost a staggering $19 billion in export earnings. These adverse developments have led to an extension of the IMF’s balance of payments stabilisation programme in Africa. Thus, whereas up till 1977/78 most of the Fund’s facilities were taken by the advanced capitalist countries, Africa is now taking an increasing share of these loans. Since the 1980s, as the African crisis has deepened, the continent’s borrowing from the Fund has become so alarming as to constitute a critical component of the African debt crisis. In the circumstances, the IMF has been imposing tougher and harsher preconditions, or conditionality, on its extended loans for balance of payments’ stabilisation. Yet, before 1978, when the advanced capitalist countries who are the major sponsors of the IMF were its major borrowers, these harsh preconditions were virtually non-existent. They had either not yet been formulated or were not enforced. A typical conditionality package includes massive retrenchment of workers, trade liberalisation, cumulative devaluation, privatisation of public enterprises, free entry for multinational corporations, abolition of exchange, price and wage controls, withdrawal of subsidies across the board, a credit squeeze, budget cuts and general deflation of the economy. These preconditions and conditions are imposed on virtually all borrowers from the Third World, regardless of the particular conditions of their economies. This last point has earned the IMF the popular stricture of being a doctor who prescribes the same medicine for all patients. A debtor country must accept these preconditions before either official or private foreign creditors will agree to offer it relief. 3. IMF—World Bank’s structural adjustment programme The structural adjustment programme (SAP), or economic recovery programme (ERP) as it is called in Ghana and elsewhere, is one of the numerous policy responses to the crisis of the 1980s. Structural adjustment loans seem to have been originated in 1980 with a World Bank loan of $200 million each to certain South Asian countries, including the Philippines. SAP represents a special effort to deal with the current crisis in a co-ordinated manner that involves overseeing an entire economy, rather than just its agricultural or external sector. In the process, while the Bank still retains its anti-poverty programme, it now integrates this as a component of overall structural adjustment, which also embraces the

28

Theoretical and General Perspectives

Fund’s balance of payments adjustment. In this IMF—World Bank hybrid programme, the dominant preoccupations are with the external sector of the economy and its foreign exchange shortages, as well as industrial policy. So, for example, while an IMF team looks into the balance of payments and exchange problems of a debtor country, a World Bank team discusses export promotion, industrial policies and appropriate tariff structure. Either institution may then pronounce on the national budget, credit limits of commercial banks, structure of interest rates, wage policy, the desirability of specific industrial projects and so on. In this way cross-conditionality is imposed by the Fund and the Bank on the same country. There are two basic similarities between SAP or ERP and the IMF’s stabilisation programmes. One is that both programmes are based on essentially the same preconditions with the distinct addition that SAP or ERP offers a major leverage over the industrial policy of the debtor country. It can be used for recommending the closure of specific existing or planned industrial enterprises, for promoting certain export industries funded through export-promotion loans, and for creating Export Free Zones, as in Southeast Asia (Philippines’ structural adjustment loan involved this). The second similarity is that the acceptance of the preconditions of both is also a precondition for the offer of debt relief (e.g. debt rescheduling) by private foreign banks and export houses. Hence, under SAP or ERP, when a country turns down an IMF loan and goes ahead to take a World Bank loan, it has not really made a policy change. A special feature of SAP is that it is usually regarded as ‘shock treatment’ to an economy. This is why its initial duration is about two years, its loan is fast disbursing upon fulfilment of the conditionality (popularly called ‘the pill’) and it is generally deflationary in the name of imposing ‘financial discipline’. But after the initial two years, a SAP victim may then have to go through about eight other three-year programmes before it is finally pronounced ‘cured’ or ‘fully adjusted’ — some speak of SAPs as having a total duration of 25 years!

Basic roles of IMF—World Bank in Africa The nature and implication of these programmes of the IMF and the World Bank lead directly to a discussion of their roles in Africa. This involves two basic perspectives — that of the Bank and Fund, on the one hand, and the African on the other. Both will be outlined briefly before suggesting alternative roles, policies and programmes for both institutions and their affiliates. IMF—World Bank perception of Iheir roles From their annual reports, regional programme summaries and other publications in relation to their Articles of Association, the perceptions

IMF and World Bank Programmes in Africa

29

held by Fund and Bank of their roles in Africa can be discussed. It should be noted, however, that there are internal divisions within both multilateral institutions about some aspects of these roles. These will be indicated below. Before the 1980s, the basic roles of the IMF were identified with balance of payment stabilisation, while those of the World Bank Group were the eradication of poverty and the acceleration of economic growth. Within its central balance of payments role. Article 8 of the IMF’s statute enjoins it to promote trade and free international payments that would eliminate exchange restrictions. The Fund’s stabilisation programme has involved missions, reports and recommendations for the control of inflation, devaluation, liberalisation, export promotion and general demand restraint. The Fund has over the years also argued that these roles imply that it has a role in economic growth. But, at best, this growth function is subsidiary to its external sector roles. Similarly, the Bank has also been focusing on agricultural promotion, emphasising agrarian reforms, pushing more resources into the rural economy and promoting population control policies; it has thus generally concerned itself with accelerated growth, the subject of the 1981 Berg Report entitled Towards Accelerated Develop¬ ment in Sub-Saharan Africa. So, while the Fund has focused on the external sector, the Bank has been preoccupied with the agricultural sector or rural economy in the overall interest of advancing the economic growth of Africa. Like the Fund, the Bank’s role in Africa has involved it in sending several missions, preparing reports and making wide-ranging policy recommendations on agrarian reform, infrastructural development, pricing policy, export promotion, etc. Since the crisis of the 1980s, however, both institutions have synthesised their roles under the structural adjustment programme. While they see themselves as performing their traditional statutory functions, they have acquired two joint roles that were previously latent. These are the maintenance of ‘financial discipline’ in African countries and the general monitoring of the economies of these countries. While ‘financial discipline’ is designed as an antidote to the alleged general financial disorder in the poor countries, the monitoring function is supposed to supervise the implementation of the adjustment programme and the economic recovery of these debtor countries. In all these roles, the Fund and Bank see themselves as acting at the invitation of African countries and in supportive assistance to them. So their policies and programmes are supposed to be those of the respective countries, once they have been adopted. Even the tough loan preconditions are supposed to be negotiated, accepted by the debtor countries and converted into integral components of their national economic policies. In a sense, therefore, even the tough conditionality package is merely an objective, self-evident, neutral and technical set of economic solutions to the problems of the African and other poor countries. The Fund and Bank

30

Theoretical and General Perspectives

claim that they do not impose anything — countries run to them and invite them to become involved in their economies. By implication, African and other poor countries are solely responsible for their economic predicament and should be grateful for the generous assistance of the Fund and Bank. African perception of EMF—World Bank roles in Africa With the roles of the Fund and Bank in Africa falling into two broad periods (pre- and post-1980), the African perception of the roles of these institutions has varied in approximate correspondence to those periods. Thus, before 1979, when African countries started seeking the Extended Fund Facility of the IMF and were confronted increasingly with tough preconditions, the roles of the institutions did not attract popular attention, and the African perception of the roles of the agencies was largely that held and promoted by the multilateral institutions themselves. In that casual, almost naive era of export boom in the 1970s, both institutions were regarded as basically neutral, technical lending agencies involved with UNCTAD, FAO and other UN specialised agencies in securing the goals of the UN’s so-called development decades. The Fund was seen as specialising in the solution of international payments and exchange problems, while the Bank assisted with agricultural programmes and offered technical advice on development strategies. Thus, slogans like ‘trade is the engine of growth’ and policies of import-substitution industrialisation were popular with most African countries. The major grumble then was the skewed distribution of power in favour of the advanced countries in both agencies, and even this criticism was restricted to elite academic and diplomatic circles. Tough negotiations involving con¬ ditionality and IMF stabilisation packages were still restricted to a few African countries — Ghana, Zaire, Sudan, Zambia, etc. But this was the calm before the storm. As the African crisis deteriorated and more countries were confronted with tougher lending conditionality when they turned to the Fund with balance of payments crises, a harder perception gradually emerged. Initially, the Fund was the object of resentment in isolated countries like Ghana, Zambia and Sudan where it introduced conditionality first. But as more countries were pressured from the preconditions of Extended Fund Facility to the even tougher con¬ ditionalities of SAP or ERP, a harder, more pervasive and sophisticated perception of the roles of the multilateral institutions developed. Riots, demonstrations, and national debates over loan conditionality changed the African perception of the agencies. Some of the sharpest views came from Tanzania and Nigeria where the institutions were accused by President Nyerere and others of attempting an economic recolonisation of Africa. Even accommodating or moderate Zaire complained of IMF staffers taking over its Finance Ministry and Central Bank in the name of monitoring adjustment or economic recovery. These reactions reflected a second and more general perception of the role

IMF and World Bank Programmes in Africa

31

of the agencies, namely that the imposition of deflationary measures caused severe hardships, especially among the middle and lower strata of society, aggravated the crisis and made economic recovery elusive. Beyond that, the view developed that the balance of payments preoccupation of the agencies was actually a commitment to the construction of a global system of free capitalist trade, foreign investment and payments dominated by private capital for capitalist accumulation. The emphasis placed on the external sector, balance of payments, foreign exchange and even export promotion came to be seen as part of a global design to increase the structural dependence of poor countries as a means of integrating them more tightly into the international capitalist system. The structural adjustment or economic recovery programme is now seen as a strategy for ensuring that African countries pay their debts, and a means of gaining effective leverage over the industrial policy of the poor countries. Trade liberalisation, tariff restructuring and related policies are seen as being designed to dump manufactured imports and wreck the industrialisation of these countries — hence current discussions of the de-industrialisation of Africa by these multilateral institutions. The focus of conditionality on market forces, privatisation of state enterprises, deregulation, open door policy to multinational corporations and so on, has also led logically to the view that the IMF and the World Bank are trying to impose a capitalist model of development on the poor countries. With the tough demand that debtor countries must first obtain clearance from the IMF (i.e., accept its loan preconditions) in order to obtain any debt relief from official and private foreign creditors, many in Africa and the rest of the Third World also perceive the Fund and Bank as imperialist debt col¬ lectors. This is regardless of the validity and morality of these external debts. While it is possible and fashionable, especially in the Fund and Bank, to insist that these perceptions of the roles of the Fund and Bank in Africa are erroneous, they underscore a basic point. Although there was a time when these African views coincided with those of the two institutions and no questions were raised, the African perception has diverged significantly, even in usually well-informed circles. There is clearly now a problem with the objective and desirable roles of these institutions in Africa. This is particularly so since, as multilateral agencies, the Fund and Bank will have to continue to operate on the continent. But they cannot be expected to persist in doing so at cross purposes with the African countries. Hence the need for dialogue and the elaboration of alternative roles, policies and programmes for the IMF and the World Bank Group in Africa — and the rest of the Third World.

Alternative roles for IMF—World Bank in Africa Unfortunately, most of the existing reform proposals for the Fund and Bank are based on the role perception of these institutions and the current

32

Theoretical and General Perspectives

international status quo. A central feature of these reforms centres on longer adjustment periods and flexible policies for the beleaguered countries. These proposals imply that the grossly exaggerated roles assigned to the external sector, to balance of payments, foreign exchange and exports in these countries are appropriate. Thus successful adjustment to the imposed specialisation of these countries in primary production is also correct. Consequently, so must be adjustment based mainly on the monetary facade of credit, prices, exchange rate and budget. Are these really the fundamental structural problems in the poor countries — or in any economy, at that — and not the structures of production, consumption, technology, external dependence, distribution and related variables? To what goal or norm should adjustment lead? The proposal to share the burden of adjustment between debtor and creditor countries, as required by theory, answers some of these questions. But it does not go far enough. These considerations prompt the observation that any adjustment or recovery within the existing international capitalist division of labour, predominant primary production in poor countries, foreign domination and mass poverty can, at best, only be a temporary palliative that postpones the evil day. For more durable results, the roles of the IMF and World Bank Group in Africa (and the rest of the Third World) require urgent critical rethinking. This is first with respect to the philosophy that informs these roles in terms of their basic objectives, effective targets for adjustment and their pervasive consequences. The conflict between growth and development, thus, has to be faced squarely. So far, IMF and World Bank programmes have generated some growth without development, in terms of meeting the basic needs of the national majority, effectively raising domestic productive capacity, de¬ creasing external dependence and generally transforming the economy structurally. Power or control over decision-making at international and national levels is also critical. The Third World currently exercises no real power over decision-making in the Fund and Bank, which are dominated by the advanced capitalist countries. At the national level, it is not possible to eradicate poverty without transferring some real power over resource allocation to the marginalised rural majority in Africa. What has been called ‘integrated rural development’ is essentially paternalistic, superficial and discredited. The target populations that are to benefit or lose from specific Fund and Bank policies and programmes need to be more carefully identified and served. In this regard, stabilisation and adjustment or recovery programmes have so far benefited mainly the rich and strong — importers-exporters, bankers, business-people, technocrats and politicians (including military leaders) and their multinational allies in most countries. The burden of adjustment, however, falls mainly^ on the weak and poor who are least able to bear it workers, peasants, women, children, pensioners, old people and students — as well as the gradually proletarianised ‘middle class’.

IMF and World Bank Programmes in Africa

33

It is also not clear why anti-poverty programmes should exclude industrial promotion for domestic purposes. Yet, ‘integrated rural development’ focuses only on the production of raw materials and food. Why does the World Bank not promote agro-based or rural industries for meeting domestic needs? Surely this is more rational than its heavily importdependent export promotion? Commitment by Fund and Bank to Africa’s continued specialisation in primary production is both undesirable and unacceptable. While industrialisation may not be an end in itself, Africa has, with the massive collapse of commodity markets, reached the limits of export-oriented primary production. The persistent failure of Africa to generate an agrarian revolution tied to agro-allied industries must be faced squarely now. The urgent need to re-conceptualise the roles of the Fund and Bank in the African debt crisis has been made by the Organisation of African Unity (OAU) itself. The UN’s Programme of Action for Africa’s Economic Recovery and Development (UN-PAAERD), which is essentially the reincarnation of the discredited Berg Report of the World Bank, is not an adequate basis for this review. Hence the continuing restlessness of the OAU and OATUU (Organisation of African Trade Union Unity) on the matter. Tough rescheduling postures and the cajoling of African countries to take even more loans, which they cannot conceivably service in future, are not really helpful either. As the export of capital from Africa exceeds the capital inflow on a persistent basis (i.e., net capital outflow), more serious thought should be given to the possibility of debt cancellation or its conversion to grants. The point cannot be overemphasised that a recolonised Africa or the collapse of African economies will not be in the long-term interest of the world economy and of global peace.

4. Structural Adjustment Policies in African Countries: A Theoretical Assessment Bright Okogu The economic crisis facing the African continent has been the subject of extensive discussion both at the popular, intellectual and policy levels for some time now. However, it has assumed an even more intense degree since about 1982 when the international debt crisis became an issue on the international scene. African countries have been in a rather peculiar situation as far as these debts are concerned. They have had to face what may be regarded as the ‘paradox of small debtors’. On the one hand, the fact that they owe some debt ties their hand in relation to their creditors, while on the other, these debts are not large enough to enable them to have the sort of leverage which Brazil and Mexico, for example, have enjoyed in their negotiations with their creditors. They thus suffer the worst of both worlds, being unable to operate their economies with a free hand while, at the same time, not having the muscle through not having a large enough capital borrowing. It has become the practice of creditors to insist that countries seeking debt rescheduling and new borrowings must meet the International Monetary Fund’s (IMF’s) preconditions for such dispensation. These conditions, which have their theoretical roots in monetarist doctrines, show no sensitivity to the peculiar underdeveloped nature of the economies and, as a result, the prescriptions have had the effect of threatening their very survival. One such conditionality has been the insistence that the currencies of these countries be devalued.’ After years of deadlocked negotiations, some countries were forced to adopt the half-way house of a two-tier exchange rate, with a long-term view to finding the correct exchange rate at which the currency would eventually settle. Zambia adopted the foreign exchange auction policy in November 1985, followed about a year later by Ghana and Nigeria. They have now in essence effected a devaluation of their currencies. Although only a limited amount of time has passed since the adoption of these policies, there are suggestions that far from improving economic conditions, they have worsened them and, in the process, raised fresh challenges to the very survival of these economies. In any case, some of the theoretical assumptions on which such policy prescriptions are based appear dubious and this raises fundamental questions regarding their long-term usefulness. The IMF analysis of the economic crisis facing African countries (and other LDCs) stems from a belief that the level of domestic consumption relative to domestic production capacity is too high. Consequently, there needs to be a general squeeze in domestic aggregate demand in order to

Structural Adjustment Policies in African Countries

35

‘live within one’s means’. Furthermore, because of the magnitude of the external debt burden, such a policy of domestic contraction would release resources for the external sector and enable these countries to meet their debt obligations. In addition, certain domestic adjustments to the internal structures of the economy are envisaged which would ensure a more efficient allocation of resources between competing needs, and therefore bring about improved efficiency and increased productivity. In particular, the policies include a cut in public expenditure, the removal of food and other types of subsidies, the liberalisation of trade, foreign exchange and price controls, and a reduction in the external value of the local currency. Other policies, directly related to the above, include a reduction in the real wage rate of workers so as to increase the share of profits in the overall national income, and a possible privatisation of state enterprises, especially those that are not self-sustaining. The loosening of government controls on the economy is envisaged as a means to fostering efficiency and competition, while lower wages and higher profits are expected to increase the investment potential of the economy. Similarly, trade and exchange liberalisation are envisaged to facilitate the flow of scarce foreign exchange to the most efficient areas of the economy. The criterion for measuring this efficient resource allocation is primarily the economic concept of ‘willingness to pay’, which translates in the reality of the African economic situation to the ‘ability to pay’. In other words, a purely trading company (specialising in imports of flimsy luxuries) which has no interest in real productive activities, but has a sufficiently large turnover, will be judged to be more efficient in its use of scarce foreign exchange as long as it can afford to pay a higher amount of local currency for every unit of foreign exchange. This last point leads directly to the policy of devaluation. Devaluation is held to be useful as part of structural adjustment because it will have the effect of making the country’s goods more competitive on the international market while reducing imports, and thus improving the balance of payments position. Related to this, farm and other domestic products, which are no longer attractive because of cheap imports of competing goods, will be favoured by a devaluation that raises cash crop prices in local currency. There is hardly any doubt, however, that the mass importation of rice into Nigeria, for example, had the opposite effect and contributed to the decline of the local rice producing capacity of the country. Not only was the imported rice of better quality, it was relatively cheaper as well. An integral part of these policies includes the abolition of state-owned marketing boards which bought agricultural products at prices determined by the boards. Although well-organised marketing boards could have a positive role in commodity price (and income) stabilisation schemes (Gustafson, 1958, Newbery and Stiglitz, 1981), there is hardly any doubt that they have been used largely as a medium through which the state in Africa has appropriated surpluses from the agricultural sector (Williams, 1985). Countries like Ghana, Ivory Coast, and Nigeria before the oil boom

36

Theoretical and General Perspectives

relied on surpluses from these boards to provide the financial basis of their economies, without paying adequate prices for the products of this sector. A related reason for the deliberate low price policy for agricultural products apparently had to do with a desire to provide the growing urban industrial sector with cheap food (Okigbo, 1987), probably because these countries erroneously saw their development as depending primarily on quick industrialisation based on the permanent exploitation of a static agrarian sector and docile peasantry. Consequently, rural—urban migration and the collapse of the agricultural sector soon followed, as the terms of trade between agriculture and industry shifted decidedly in favour of the latter (Harris and Todaro, 1970). Clearly there are real issues of policy, such as those relating to agriculture, which need to be addressed. However, it is not obvious that the linking of the need for a policy change in this direction with some of the other policies of structural adjustment is an inevitability, considering some of the adverse side effects of these other policies. We move now to a closer look at some of the aspects of structural adjustment.

The foreign exchange auction The system by which available foreign exchange is auctioned was adopted by Zambia in November 1985. This was a compromise arrangement, following long arguments with the IMF (backed by creditor and donor countries) over the recommendation of devaluation. Nearly a year later, Ghana adopted the same principle, followed a week later by Nigeria. The objective was to allow free market forces of supply and demand gradually to determine the value of the national currency. It suited both parties because the ‘invisible hand’ could be blamed for whatever exchange rate emerged. There was also the secondary motive of competing directly with the parallel market where exchange rates were sometimes up to a ratio of 5:1 compared with the official rate. The reasoning was that, if foreign exchange could be made available legally to those who need it through the auction system, this would scupper the development of the parallel market, and encourage citizens who had foreign exchange abroad to repatriate it. Furthermore, the system whereby public officials presided over the allocation of foreign exchange, with the implied bureaucratic delays and corruption, would be removed. In moving to the auction system, govern¬ ments had the blessing of the IMF—World Bank and other international creditors, as evidenced by the release of external funds to help the projects get off the ground. Unlike the case of Ghana and Nigeria, the Zambian case was a pure auction system, at least for the first year. The latter two countries had a two-tier exchange rate system under which certain identified transactions, mostly governmental, were at the more favourable first tier. Zambia reserved a certain amount of foreign currency for the needs of government and a few other predetermined sectors, although they

Structural Adjustment Policies in African Countries

37

still had to pay whatever the going market rate was. Zambia had a total weekly auction of $5 million, Ghana $2.7 million and Nigeria $50 million. The Nigerian auction was later raised to $75 million, and then to $90 million before returning to $75 million. The changing of foreign exchange supply to the market in the Nigerian case was a reflection of the concern of the monetary authorities at particular times when the market-determined exchange rate threatened to move beyond the government’s unofficial band. The exchange rates at these auctions were determined by the rate which cleared the market for that week. In the case of Ghana and Zambia, with fixed foreign exchange supplies, the market rates were purely demand-determined, and this was reflected in the fact that they fluctuated widely as demand intensified. With regard to Zambia, after the first auction on 11 October 1985, the Kwacha which had been at K2.20 = $1, fell to K5.01 = $1, to stabilise after a few weeks in the region of K5.66 = $1. In November 1986, the Kwacha reached its lowest point at K15.29 = $1. This was part of the build-up to the food riots which followed within weeks. Not only did food and other prices rise generally in response to the deteriorating currency, but the government, in order to further placate the IMF, introduced greater austerity measures in the form of the removal of food subsidies. The price of the staple food, maize, which had been set at K38 per 50 kilo bag, was raised overnight to K82 at a time when the minimum wage in the country was K70 per month. Following the riots, the government reversed the policy and announced the suspension of payments of the $430 million trade arrears due to a shortage of foreign exchange. On 28 January 1987, in order to prevent further deterioration of the Kwacha, and the debilitating effects on the economy, the government suspended the auction system. In its place, there was to be a government-determined floor and ceiling beyond which the currency would not be allowed to move. The floor was set at K12 and the ceiling at K9 to the dollar. In March 1988, a genuine two-tier exchange rate regime was introduced. The first tier was fixed at between K9.5 and K12 to the dollar for government transactions, while the second rate of between K13 and K15 to the dollar applied to all other transactions. However, by the last auction of April, the Kwacha had fallen to K21.01 = $1 — a mere 10 per cent of its value at the start of the auction 17 months earlier! Within days, the government abolished the auction system, fixed the exchange rate at K8 = $1, and announced its break with the IMF’s structural adjustment policies. Henceforth, it was to rely on mobilising domestic resources for its own development, although "details of how this was to be done were unclear. In announcing the break with IMF policies. President Kaunda noted that the real per capita income of Zambia had ‘fallen by two thirds since 1981’ (International Herald Tribune, 7.5.87) to under $200. A few days later, the World Bank suspended fund disburse¬ ments to Zambia. Commenting on the break with the Fund, the London Daily Telegraph (18.6.87) wrote: ‘Few Western observers in Lusaka blame Zambia for breaking with the IMF — the Fund’s ideas were right, but were

38

Theoretical and General Perspectives

carried out much too clumsily. And it was demanding a much faster rate of debt repayment than Zambia could handle.’ In explaining the break with the auction system, the governor of the Bank of Zambia said that the system was actually contracting rather than reviving their economy (African Concord^ 16.7.87). Ghana had been gradually devaluing its currency, the Cedi, since the early 1980s, following structural adjustment agreements with the IMF, but it was only in September 1986 that it started its currency auction system. At the start, the exchange rate was C90 to the dollar, having been devalued in January 1986 from C60 = $1. Following the auction, it deteriorated to about Cl53 = $1, with the first-tier rate at around C90 = $1. The parallel market rate at the beginning of 1986 was C150 to $1, but, after the start of the auction, it deteriorated to about C300 = $1. It will be recalled that one of the main objectives of the auction system, especially in the case of Ghana, was to try to eliminate the parallel market and encourage the remittance of funds by Ghanaians working abroad through official banking channels. In the February 1987 budget speech, it was announced that Ghana was moving to a single-tier exchange rate system; the value of the Cedi was to continue to be determined by auctions but all transactions would be at the auction rate.^ By the first week of August 1987, the rate stood at about Cl62 to the dollar. There have been some reported improvements in economic activities since the introduction of the stabilisation programme in 1983. For example, cocoa output has risen from 159,000 tonnes in 1983 to 210,000 in 1986, following the increase of producer prices from about 20 per cent to 40 per cent of the world price, and real GDP grew by 5.3 per cent in 1986. Impressive as this may be, it must be borne in mind that, in the end, this is growth from a very small base to which the economy had sunk in the previous several years. In fact. The Independent (2.4.87) remarked that, with some luck, Ghana might, by the year 2000, be able to attain the level of output which it had in 1960. In fact, it is more likely that the recorded increase in output is really the result of a decline in cross-border cocoa smuggling after domestic producer prices were raised, rather than an increase in production per se. The increase can hardly be attributed to new production. After all, it takes several years for cocoa to be planted, nurtured and harvested. Similarly, the rate of inflation is reported to have been reduced from about 122 per cent in 1983 to 35 per cent in 1987, but this was more the result of the tight credit squeeze in the economy than of the increased availability of goods which, in the end, is really what matters most. More importantly, the development path being carved out by the adjustment measures appears to be destined, if it succeeds, to intensify the dependence of African economies on the outside world, and deepen the raw-material-producing relationship which has been their lot from colonial times. The implication of this development has to be seen within the context of the extreme (mostly downward) fluctuation in the prices of primary commodities for several years now.

Structural Adjustment Policies in African Countries

39

In the case of Nigeria, the exchange rate had been quietly devalued by the Central Bank from the beginning of 1986, after the conclusion of the national debate on the IMF option. In December 1985, the Naira stood at about N1 = $1, having declined from about N1 =$1.50 earlier in the year. Following the first auction, it stood at about N4.50 = $1. By the sixth auction, the government intervened when the auction rate went below N5 = $1 in the market, on grounds that the commercial banks were bidding too highly. The foreign exchange supply was raised from the original $50 million per week to $75 million. On 12 February 1987 the government once again intervened, but this time because the exchange value of the Naira was too high at N3 = $1. On that occasion, the government fixed the exchange rate at N3.50 = $1. This action clearly suggested that the government had identified the exchange rate band around which it wanted to see the currency settle. On the whole, the monetary authorities intervened in the auction market on five occasions during the period of the two-tier system, either to prop up the value of the Naira or to depreciate it. Meanwhile, the first tier rate on which government transactions were based had been allowed to depreciate gradually so that, in early July 1987, both tiers converged, and in the first week of August stood at about N3.54 = $1. What emerges from these experiences is that the effective values of the respective currencies fell significantly under the auction system. But even then, it would appear that their ‘true’ market values were not allowed to emerge, due to government interventions. Clearly supply could not keep up with the demand for foreign exchange, and this produced a deterioration in the ‘price’ of the currencies, with the necessity for government inter¬ vention. The Zambian paradigm was the classic case of the inadequacy of supply. However, even though the other two countries managed to avoid the ‘stop-go’ experience of Zambia, this is no indication that their systems worked to the satisfaction of all customers. In all three cases, the Central Bank had a number of authorised dealers (mostly commercial banks) which were allowed to bid for foreign exchange on behalf of themselves and of their customers. Thus from the beginning, there was a certain in-built framework of non-competitive pricing. The few banks allowed to bid for scarce foreign exchange could not be expected to behave as though the market was operating competitively. Although it may have represented an improvement on the original system whereby bureaucrats decided who obtained foreign exchange, the new system seems to have transferred the same powers to bank officials, if only because of inadequate supply, and the exchange rates emerging from the auctions did not really reflect the marginal valuation of foreign currency. Perhaps the most obvious indication of the fact that the rates did not really reflect the open market valuation of foreign currency in these countries came from the fact that the parallel market rates persistently remained above the auction rates. In Ghana, for example, the parallel market rate in September 1987 stood at about C450 to the dollar compared to the C162 formal auction rate. Similarly, in Nigeria the parallel

40

Theoretical and General Perspectives

market rate was in the region of N5 to the dollar, as compared to the auction rate of N4.2 to the dollar. Even after taking account of the higher transaction costs in the parallel market, these still constitute a significant spread, which raises the theoretical possibility of arbitrage opportunities between both markets. In Nigeria, for example, an inter-bank foreign exchange market has developed, in which banks trade foreign exchange among themselves. In theory, this means that banks can bid for foreign exchange in the auction market for the express purpose of re-selling same in the inter-bank secondary market, or even in the parallel market. Indeed, at the 29th auction on 4 June 1987 eight banks were disqualified on the suspicion of bidding purely for re-sale in the inter-bank market. Another important consideration concerns the structure of the industries which usually received the auctioned foreign exchange. It was argued earlier that the criterion of ‘ability to pay’ which governed ^the auction system was not necessarily the best approach to ensure the most efficient utilisation of scarce foreign exchange from the point of view of development. It is also important that the use to which successful bidders put their foreign exchange allocations accords with the long-term developmental needs of the economy. In the experience of Zambia, the only country for which this type of information was available, it turned out that 90 per cent of the foreign exchange auctioned went to only 100 fi.rms. Of these, 99 per cent were foreign-owned. In referring to the abolishing of the auction system, the Governor of the Bank of Zambia pointed out that these foreign companies had taken advantage of their superior liquidity position to obtain most of the foreign exchange auctioned. This would not have been so serious if their import priorities were in consonance with those of the economy. However, he noted that many of the expatriate firms expended the scarce foreign exchange frivolously on some goods that were readily available locally, including dog food! (African Concord, 16.7.87).

Structural adjustment and the resource gap One of the problems of any LDC economy is that of under-investment, resulting in a low national income. One of the objectives of structural adjustment and liberalisation is to reduce the resource gap by improving the trade balance and encouraging a net capital inflow. However, attempts to redress the situation through the encouragement of increased foreign investment and borrowing have contributed to the current economic crisis by increasing the resource gap even further. The low and falling national income, and hence low savings, brought about by the need for adjustment, coupled with the capital outflow, almost certainly guarantee that real long-term development will be more difficult. In other words, the import or trade gap is bound to increase-not only because of an increasing net outflow of capital, but also because the deficit on the trade account may actually widen as a result of structural adjustment policies.

Structural Adjustment Policies in African Countries

41

A major objective of economic liberalisation is the hope that the flow of foreign investments into the country will increase, because of the easing of trade and exchange restrictions. However, there are at least two theoretical reasons why this may not happen, or at least not to a significant degree. First, trade and exchange liberalisation makes it easy for multinational companies to export directly to these countries without the previous difficulties with import licence and profit repatriation. Thus, from their factories abroad, they stand to increase net profits by expanding output with the implied cost advantage of economies of large-scale production. In other words, they will be trying to maximise the export advantage afforded them by the new policies, rather than setting up factories in the poor countries. The usual argument of cheap local labour being an advantage is no longer quite relevant in this case because, over the last two or three decades, certain countries, mostly in Southeast Asia, have fulfilled this role. Compared to the real wages obtaining in these countries, African wages are probably still quite high, and it is not obvious that the governments can reduce them sig¬ nificantly without serious political problems. Second, there is still a large element of uncertainty in the minds of international investors regarding the ability and stamina of the state in Africa to stem the tide of opposition to overall adjustment policies, and, by implication, how long the programmes can be continued because of the serious hardship imposed on their people. The Zambian experience is a case in point. Under such circumstances, the inflow of foreign capital may not be forthcoming. If these simple, yet powerful, arguments were to hold, the resource gap may in fact widen with structural adjustment policies, as net capital outflow continues. The experience of Ghana in the early 1980s (Rothchild and Gyimah-Boadi, 1986) and of Cameroun in 1987 (African Concord, 20.8.87) are cases in point. Thus, liberalisation could loosen the constraint on the outflow of capital without improving the balance on the trade account, or without achieving the more subtle objective of encouraging the inflow of capital. It is true, of course, that a policy which squeezes the local economy and releases resources for meeting external debt obligations can be expected to produce some praiseworthy results in terms of clearing some debts, and this is clearly an important aim of these governments. However, it is unlikely to achieve much more than this, at least in the short to medium term. This can hardly be expected to produce a real improvement in the savings and investment position of the country. If the aim of these policies is to aid economic growth and recovery through increased invest¬ ments in these economies, rather than primarily to squeeze more debt payments from them, then it is hard to see how they can achieve this objective.

Policy suggestions and conclusion I have argued that current structural adjustment policies are deficient in their analysis of the economic crisis in Africa. These criticisms are based

42

Theoretical and General Perspectives

not only on the practical difficulties of implementation, but also on grounds of theory, as well as the pace of introduction of these adjustment policies. The theoretical weakness arises from ignoring the peculiar characteristics of an under-developed economy. Even the structures which a pure market ecdtiomy requires for effective operation are absent, so that attempts to impose a pure market solution on the problem result in an undermining of these economies. Such factors as profit repatriation and debt payments, skewed income distribution, and currency auctions that amount to massive devaluation produce perverse results, even beyond the short run. The structural adjustment programmes as currently applied are primarily deflationary. The economies have become leaner, but it is doubtful that they have also become fitter. These policies probably increase, rather than reduce, the resource gap in these countries. The present situation is clearly unsatisfactory, and there are serious doubts, even at the theoretical level, that the wholesale application of structural adjustment policies can produce real improvements. Hence the need for alternative recovery programmes in Africa. Some of the policies under SAP, such as those relating to changing the terms of trade between the rural and urban sectors of the economy, are, however, clearly desirable. In particular, fairer prices to peasants is a move in the right direction. However, the beneficial effects of some of the others are less obvious, and could in fact do serious damage. Desirable as non-interference may be, there is a case for retaining some degree of control on the economy, if only to guide it along a development path which may ultimately lead to self-sufficiency in key areas like agriculture. It has been the experience of Ghana, Nigeria and Zambia that this sector has not been able to benefit from the foreign exchange auction system because it lacks the liquidity to bid competitively with others. Even in the case of Zambia where a certain amount of the foreign exchange was reserved for priority sectors at the auction rate, they were unable to compete because they could not mobilise the necessary local cash resources. Perhaps combining the beneficial effects of paying better prices to peasants with a system whereby they are not required to pay the auction price could be useful. It should also lay less emphasis on the production of cash crops. A strong agricultural sector with domestic linkages is the basis for long-term recovery. The need for ‘positive discrimination’ in favour of agriculture is thus important because this sector of the African economy is extremely fragile, and needs action beyond pure market competition. The currency auction system and domestic credit allocation must make provision for certain priority sectors of the economy which should enjoy preferred treatment. This may raise problems of implementation, but they are not insurmountable. On the macro side, the SAP policies as currently applied emphasise only demand-side solutions, and the need to squeeze the local economy so as to release resources for debt payments. They do not make a distinction between types of products — luxuries or necessities, producer or consumer goods and, consequently, ignore the real effects of the skewed income

Structural Adjustment Policies in African Countries

43

distribution in African countries on the structure of consumption and production. Consequently, the poor have suffered most hardship from the indiscriminate application of adjustment policies. Structural adjustment programmes should have an in-built cushion so as to limit their worst effects on the poor. African economies are completely integrated into an international system of markets in which they operate as dominated partners. As they have no control over the market, they are most susceptible to externally generated shocks and crises. The expected increase in output of tradable commodities (if it actually materialises) could precipitate another down¬ ward price spiral, leading to further depression of the external sector. The emphasis on adjustment policies designed to increase the export capacity of primary commodities from LDCs can only intensify the North-South dichotomy and raise fundamental questions. The emphasis should be on food production and the construction of linkages between cash crops and domestic processing industries in order to meet local needs. It is also becoming increasingly obvious that African economies, like many others in the Third World, lack the capacity to meet their external debt obligations. For many countries, the ratio of debt service to export earnings is well over 100 per cent. Thus, even if they were to spend all their foreign exchange earnings to service their debts, they still would not be able to cope. The current pace at which policies are trying to squeeze debt repayment from them threatens the very survival of these economies. From this realisation, many creditor-banks have started to ‘trade’ their debts, albeit quietly, on secondary debt markets. Under this practice, a creditor bank sells its debt to a third party at a discount (some of the reported cases of Latin American debts carry discounts of up to 90 per cent). If indeed the international community wishes to see a solution to the economic dilemma of Africa, some arrangement among international creditors to cancel some of the African debts or convert them into grants or local currency at a discount could encourage local interests to ‘buy’ these debts for the purpose of reinvesting the proceeds in the local economy. A system could be evolved which links debt payment to the need for reinvestment in the local economy in order to rejuvenate it. Ultimately, the solution to African economic problems will have to come from Africans themselves, and this can hardly be done without concerted mobilisation of the human and material resources of the continent for inward-looking and self-reliant development. That is the only way to break away from the cycle of bargaining with the outside world from a position of perpetual weakness.

44

Theoretical and General Perspectives

Notes 1. Other aspects of the conditionality include the removal of all forms of subsidies, trade liberalisation, cuts in government budgetary allocations and general austerity. 2. Prior to that time, oil and drug imports, as well as debt servicing, had been at the first tier rate of C90 to the dollar.

References Gustafson, R.L. (1958), Carryover levels for grains: a method of determining amounts that are optimal under specific conditions, Washington: Technical Bulletin no. 1178, US Government Press. Harris, M.P. and Todaro, J.R. (1970), ‘Migration, unemployment and develop¬ ment; a two-sector analysis’, American Economic Review, 60. Newbery, D.M.G. and Stiglitz, J.E. (1981), The Theory of Commodity Price Stabilisation, Oxford: Clarendon Press. Okigbo, P.N.C. (1987), SEEM, SAP and All That, University of Nigeria, Nsukka Faculty Week lecture. Rothchild, D. and Gyimah-Boadi, E. (1986), ‘Ghana’s economic decline and development’, in Ravenhill, J. (ed.), Atica in Economic Crisis, Basingstoke; Macmillan. Williams, G. (1985), ‘Marketing without marketing boards; the origins of state marketing boards in Nigeria’, Review of African Political Economy, no, 34.

5. Reinforcing International Support for African Recovery and Development Commonwealth Secretariat While sub-Saharan Africa appears to have recovered from the worst effects of the 1982—84 drought, it continues to suffer from declining real incomes and increasing impoverishment. At the height of the famine, 30 to 36 million people in sub-Saharan Africa were at risk from famine. The number at risk is still over 15 million. In the famine year (1984), five million young children died in Africa from mulnutrition and related causes; in 1987 the figure will be closer to the ‘normal’ annual level of four million. There was ample rain in 1985 and 1986, the best in the decade, across much of the African continent; total agricultural and food production increased. For the first time since 1980, some GDP growth was achieved in sub-Saharan Africa in 1985. Nevertheless, even in that year, population was still growing faster than output and average incomes declined, albeit more slowly than in previous years. The pace of decline is likely to go up again in 1987. Desperately serious problems of hunger and poverty will remain for the rest of the century, and probably beyond. How desperate depends critically on how much international support Africa obtains. The outlines of Africa’s current economic crisis are well known. Declining output levels, heavy unemployment, high inflation and widening current account deficits are symptoms of the overall deterioration in Africa’s economic activity over the past decade. Average growth of per capita GDP slowed from 3.6 per cent per year during 1965—73 to 0.3 per cent per year in 1973—80; over 1980—86, it fell on average by 3.4 per cent annually. Inflation has remained high at over 15 per cent throughout 1980—86; and the combined current account deficits have increased from an average of $5 billion during 1973—80 to an average of $10 billion during 1980—86. The increases in the deficits have, by and large, not been financed by a net inflow of medium and long-term debt, but rather by a draw-down on reserves, a build-up of short-term debt, purchases from the IMF, the accumulation of payments arrears and debt rescheduling. More importantly, the size of the deficits understates the magnitude of Africa’s problem. The deficits would have been much larger had imports not been massively cut, slowing down growth but avoiding even more serious balance of payments problems. Yet the picture is not universally bad. There have been significant achievements in sub-Saharan Africa. Some countries have grown im¬ pressively by international standards — Botswana, Cameroon, Kenya and Swaziland, for example. The proportion of children enrolled in primary schools in sub-Saharan Africa has risen from 42 per cent in the mid-1960s to 71 per cent (in 1982) and from 28 per cent to 60 per cent among girls. Secondary school enrolment has risen from 5 per cent to 15 per cent. The

46

Theoretical and General Perspectives

number of people covered by each trained doctor or nurse — though vastly in excess of levels in industrial countries — has almost halved over the last two decades. Transport and communications, especially the links between African countries, have been considerably improved. But even these achievements are threatened. The fundamental causes of Africa’s economic crisis are complex. Some lie in history — in the colonial experience with the fragmentation of the continent into over 50 countries; some lie in nature — the proneness to drought; and others — like rapid population growth — are simply not amenable to short-term solutions. The ability of African governments to shape their political and economic futures has been made even more difficult by a series of shocks. Of these, the most adverse in scope and duration have been the two oil shocks and their aftermaths. The sharp decline in output and accelerated rates of inflation in the industrial countries after each oil shock resulted in reduced demand for Africa’s exports and a weakening of commodity prices. As a result of the increased cost of imported oil and the demand for essential imports of food, fertilisers, oil and producer goods, compounded by low world demand for African exports, African economies experienced widening current account deficits. The severity of the external environment can be gauged from the fact that income losses due to the deterioration in Africa’s terms of trade were as much as 10 per cent of GDP in 1974-75 and again in 1979-82. Some countries registered losses as high as 25 per cent of GDP during the latter period. By contrast, the income losses of the industrial countries due to adverse terms of trade were approximately 2 per cent of GDP after each oil shock. The third shock for these countries was the depression of the early 1980s, from which many of these countries have not recovered. Insufficient concessional and declining non-concessional flows, reduced export opportunities and sharply decreased imports have all compounded development problems. Domestic policies also played a part in Africa’s economic decline: anti-rural bias expressed in the lack of support for agricultural development through pricing and other incentive policies; overvalued exchange rates that discriminated against exports and tended to favour the urban population over rural areas; high levels of protection for urban-based industries; mounting fiscal deficits; and a variety of burdensome govern¬ ment interventions in the production process that slowed Africa’s growth. Such policies, by and large, have exacted the inevitable penalties — an erosion of productivity and entrepreneurial energy. And that, inevitably, has exacerbated long-term structural problems and translated into sluggish economic growth. The medium-term outlook for sub-Saharan Africa is bleak. As Table 5.1 shows, the World Bank has made growth projections for various regions of developing and industrial countries. Its ‘high case’ scenario for the decade 1986-95 assumes an average annual per capita GDP growth rate of 3.9 per cent in industrial countries, resulting from a combination of favourable

Reinforcing International Support for Recovery and Development

47

macroeconomic and structural policies, labour force growth, and improved productivity from technological progress. This would create a favourable economic environment that would facilitate policy reforms in the developing countries. Under such promising circumstances, developing countries as a whole would equally enjoy an average per capita GDP growth rate of 3.9 per cent per year. But for sub-Saharan Africa, per capita GDP growth rate would be only 0.7 per cent per year. By contrast, the ‘low case’ scenario assumes no major policy changes — the US fails to cut its budget deficit by much, European unemployment stays high, a rising tide of protectionism, and no further trade liberalisation. In such circumstances, sub-Saharan Africa is projected to show zero per capita GDP growth per year in 1986—95. Table 5.1

Economic performance of developing and industrial countries Country group and indicator

1965—73 1973—80 1980—86

1986—95 High Low

Industrial Countries Growth of GDP per capita Real interest rate^ Inflation rate^

3.7 2.3 6.1

2.1 1.3 10.1

1.6 5.9 1.7

3.9 2.5 2.7

2.0 4.6 3.3

All developing countries Growth of GDP per capita Growth of exports Primary goods Manufactures

3.9 4.9 3.7 11.6

3.2 4.7 1.2 13.8

1.5 4.4 1.3 8.4

3.9 7.3 3.6 10.3

2.0 3.6 2.2 5.1

Low income countries Growth of GDP per capita Growth of exports Primary goods Manufactures

2.9 2.0 1.7 2.4

2.5 4.7 2.8 8.2

5.4 5.4 3.1 8.4

4.8 7.5 2.6 11.3

2.8 3.9 1.6 6.0

Sub-Saharan Africa Growth of GDP per capita Growth of exports Primary goods Manufactures

3.6 15.0 15.3 7.5

0.3 0.1 -0.1 5.6

-3.4 -1.9 -2.2 4.0

0.7 3.9 3.3 9.6

0.0 2.0 1.8 4.4

a) Average six month dollar-Euro currency rate deflated by the GDP deflator for the United States. b) Industrial countries’ weighted GDP deflator expressed in dollars. c) Excluding South Africa. Source: World Bank, World Development Report 1987.

This paper examines some of the critical development problems which impede the reversal of economic decline in sub-Saharan Africa, and considers the co-operation required between Africa and the international community if the decline is to be halted so that consumption and living standards can gradually increase. The central message is that the current

48

Theoretical and General Perspectives

situation is desperate and unlikely to improve without a major concerted effort by African countries and their development partners. The key challenges include innovative ways to deal with the debt crisis; improvements in the trade and external environment; adequate financial support to ensure growth alongside adjustment; and the removal of some long-term constraints to development. The paper analyses these challenges, primarily from the perspective of the 29 low-income countries of subSaharan Africa.*

Dealing with the debt crisis In terms of developing countries’ overall indebtedness, which was approaching one trillion dollars ($1,000 billion) at the end of 1985, the indebtedness of sub-Saharan Africa appears modest at first sight. At the end of 1985, the total stock of sub-Saharan Africa’s debt was $85.59 billion, of which $42.28 billion was owed to official creditors. But this picture is misleading. It is the data concerning the size of the debt in relation to these countries’ GNP and their capacity to service this debt that provide a truer picture of the overwhelming debt problem they face. The debt ratio (the total debt outstanding over annual earnings from exports of goods and services) doubled in the period 1980—83 to over 200 per cent and has stayed at that level since. In 1985, total debt as a proportion of GNP was 55 per cent. For the 29 low-income sub-Saharan countries, the figures are even more dramatic. At the end of 1985, debt represented 425.5 per cent of annual exports and 80 per cent of their GNP — virtually twice the level of indebtedness of developing countries as a whole. The low-income — and partly overlapping sub-Saharan Africa — ‘debt problem’ should be treated in most respects as distinct from that of major middle-income debtors. For the latter, there has been a major liquidity crisis caused by adverse international economic conditions (high real interest rates and slow growth in industrial countries) and by an excessive accumulation of commercial liabilities. But there is no reason why most middle-income developing countries should not, over the longer term, be able to use substantial amounts of external commercial finance for development and be in a position to service debt. The low-income debtors, especially in Africa, are in a different position. They face a long-term and deep crisis of poverty and underdevelopment; they require on the whole concessional rather than commercial finance; and their high level of dependence on a narrow range of export commodities, at a time of poor commodity prices, makes it extremely difficult to ensure that debt, on commercial or non-commercial terms, can be serviced. A distinctive feature of low-income sub-Saharan African debt is the high proportion of it owed to official creditors: roughly 50 per cent in 1985 and expected to be 75 per cent in 1986—88. This presents two problems in particular. One is that a substantial segment is non-reschedulable debt

Reinforcing International Support for Recovery and Development 49 owed to multilateral institutions — the World Bank and IMF;^ the second is that debt relief on bilateral official debt is currently restricted by the conventions which operate within the Paris Club. In addition, because of the revolving nature of IMF credits, net flows from the IMF to low-income Africa have shifted from over $800 million annually in 1981-83 (when a number of drawings were made) to negative flows in 1986. Several sub-Saharan African countries have consequently found themselves in arrears on payments to the IMF or the Bank, or both. Commercial bank lending has also collapsed. While the amount of bank credit provided to low-income African countries has always been modest, since 1983 even these modest flows have halted. Since 1983, these countries have been making net repayments to the financial markets, as indeed has sub-Saharan Africa as a whole. For example, the region received net transfers of $2.3 billion from the financial markets in 1982, but by 1985 it was making net payments (including amortisation and interest) of $2.8 billion. The end result has been that total debt service payments for sub-Saharan Africa have risen from $5 billion (including $0.3 billion to the IMF) in 1980 to $9.6 billion (including $1.5 billion to the IMF) in 1986. In 1987, after taking account of the anticipated rescheduling payments, total debt service payments are expected to be $10.8 billion (including $1.8 billion to the IMF). 3 Including debt service payments to the IMF, the debt service ratio is expected to have risen from 16.7 per cent in 1980 and 35.8 per cent in 1986 to 37.7 per cent in 1987. The debt servicing outlook beyond 1987 remains particularly bleak for low-income African countries. Multilateral and bilateral concessional assistance loans made in the 1970s are now coming due for repayment, so that these countries will face continuously rising amortisation obligations in 1987—97. There is an overwhelming need to approach Africa’s debt problem in a more comprehensive fashion. The problem cannot simply be seen as one of coping with short-term balance of payments and liquidity constraints, but has to be recognised as closely related to long-term poverty, the solution of which requires the fundamental transformation of these economies. It is encouraging that there is growing consensus among developed country governments that a determined and long-term effort is needed to alleviate the debt burden of low-income countries; and there have been some important recent developments. The Venice Summit acknowledged that these countries have ‘unmanageable debt burdens’ and gave a qualified welcome to various forms of debt relief. UNCTAD VII recognised that the problems were uniquely difficult and required special treatment. It supported substantial debt relief, including consideration being given to lower interest rates for existing debt. With the launching of the ‘Lawson Initiative’ at the Spring Bank—Fund Meetings, with other proposals emanating from Canada, France and elsewhere, and with the new impetus provided by UNCTAD VII to the debt strategy, there are now good prospects for advance in four main areas:

50

Theoretical and General Perspectives

1. Action within the Paris Club context to extend grace and repayment periods and to reduce interest rates on official rescheduled debt. Official debt rescheduling through the Paris Club has proved an important, and usually very quick, mechanism for agreeing on the basis for rescheduling official loans ^ mainly export credit debt. A majority of the beneficiary countries (18 in 1986, 21 in 1985) were low-income countries from sub-Saharan Africa. The Lawson proposals improve existing arrangements in two main ways. First, they extend repayment periods for low-income countries from, typically, 10 to 20 years and include grace periods that can extend from the current five to ten years. This concession will reduce the growing need to reschedule already rescheduled debt. The latest low-income reschedulers — Zaire, Mauritania, Somalia and Mozambique — have been offered ‘Lawson terms’ in respect of repayment, and Mozambique and Somalia also in respect of grace. The second way involves a reduction in interest rates to a few percentage points below market levels on outstanding debt. This would have an earlier impact than extended grace periods. Since interest rates are not at present negotiated in the Paris Club, this particular proposal might require individuail creditors honouring its spirit in bilateral negotiations; 2. In terms of the finance available from the multilateral institutions, the recent agreement on IDA-8 at $12.4 billion has been an important step. Also needed is action on the IMF Managing Director’s proposal to treble the size of the Structural Adjustment Facility to SDR 9 billion over the next three years. Such sharply stepped up financing will help ensure more adequate financing for growth-oriented adjustment; it is also the minimum necessary to ensure that new Fund lending matches repayments; 3. There is a need to convert aid loans into grants for the poorest countries. This has been used for many years. UNCTAD’s most recent estimate is that the total nominal value of debt relief granted since 1979 has been $6.2 billion, of which $3.5 billion was in the form of debt cancellation. Another major device — as in the case of UK aid to India — was the conversion of foreign currency obligations to local currency ones which could then be used as counterpart funds for aid projects. About half the total relief has benefited the least-developed countries. It has been estimated that if all donors offer relief comparable to that already granted, the least developed countries would save around $100 million in debt service; a modest gain. The ‘Lawson Initiative’ envisages conversions being extended by donors which have previously declined to offer much — mainly the United States and Japan. This would represent a significant concession for poorer countries. But a key issue is whether the relief granted would represent additional aid. A major deficiency of past loan conversions has been the lack of it. One of the problem»s of debt relief within static or slowly growing aid budgets is that it will be financed by cutting aid to other countries —^aggravating their problems in turn; 4. A commitment to an aid policy which ensures that debt relief and aid together represent additional net flows, and are co-ordinated. A good deal

Reinforcing International Support for Recovery and Development

51

has been done to set in place World Bank Consultative Groups (CGs) and UNDP Round Tables in sub-Saharan Africa; there are now 34 such groups as against three in 1980—82. However, there are potentially two important elements in net flows which are not yet embraced by co-ordination mechanisms but could increasingly be: debt relief, including that now proposed under the ‘Lawson Initiative’, and the combined private sector recycling of Japanese surpluses. Without better co-ordination between concessional flows and debt relief, it is difficult to ensure that low-income countries will in fact receive the additional flows so badly required. Co-ordination is not, however, a purely mechanical, administrative exercise. One of the concerns among recipients is that, in an environment where finance is scarce and rationed, conditionality is both more severe and concerted — the notion of ‘cross-conditionality’. The link between the World Bank and IMF which is implicit in the Structural Adjustment Lending (SAL) programmes is already seen by many recipients as establishing IMF conditionality as a precondition for Bank SAL and, indirectly, for other fast-disbursing, structural adjustment lending co-ordinated with Bank programmes. Paris Club rescheduling is also conditional on an IMF programme. The issue is giving rise to growing concern over how to achieve improved co-ordination while avoiding cross-conditionality. There are other issues that have not so far been addressed by the recent initiatives and also require attention. One concerns the need for longer consolidation periods; that is, the period for maturing debt that is rescheduled. To date, creditors have been unwilling to consider multi-year rescheduling of debt (MYRAs) for African countries on the grounds that successive reschedulings, evolving according to the particular needs and circumstances of each debtor, are more flexible than MYRAs. In the case of the Ivory Coast, the only African country to negotiate one, Paris Club creditors did not reschedule interest but only rescheduled successively smaller amounts of principal. By contrast, under recent successive rescheduling agreements, 95 per cent of principal and interest on loans from governments and on guaranteed export credits were rescheduled. While the successive rescheduling agreements may be more generous in their terms than MYRAs, they have placed major administrative burdens on the resources of already stretched ministries and can result in a bunching of maturities. There is also much greater uncertainty for the government in planning its debt payments if it knows (and creditor governments know) further rescheduling will be necessary but does not know what the terms will be. Paris Club arrangements have also tended to be linked to IMF stand-by programmes, usually of 12—18 months’ duration. The short-term economic management perspective encompassed in these programmes can cut across the medium-term perspective needed for structural adjustment. Additional action is also required on the other major portion of Africa’s

52

Theoretical and General Perspectives

official debt — the debt owed to the World Bank and regional development banks, and payments due to the IMF. A number of ideas have been under consideration by governments and it is now urgent to come to common conclusions on what should be done. It might be useful, for example, to extricate the IMF from its position as a short-term creditor to the poorest countries, by creating a new multilateral facility which could replace short-term lending by international financial institutions at near market rates with concessional financing geared to medium-term structural adjustment. The Bank could also play a strengthened role in mobilising additional resources, ensuring needed debt relief and assisting the poorest debtors in setting out the appropriate adjustment and development framework. Another issue concerns the need for better dovetailing of rescheduling negotiations and the resumption of export credit cover. Despite some recognition of the problem and adaptation of procedures, there is often difficulty in restoring export credit cover after a Paris Club rescheduling agreement. Even where agreements restore cover, export credit agencies are tending to become selective and cautious. The maturity period for export credits could be lengthened; this would have the advantage of better matching the maturity of the loan with the pay-back period of the project.

Overcoming trade constraints Commodity production and exports play an extremely important role in Africa’s economic performance and most of the constraints posed by Africa’s trade relate to export commodities, which account for around 80 per cent of the region’s total export earnings. In the 1960s and throughout the commodity boom of the early 1970s, Africa’s export performance was quite satisfactory, but after the first oil shock, it slipped badly, both absolutely and in relation to other developing regions, and it has never recovered. While part of the difficulty stems from poor domestic per¬ formance, particularly in the agricultural sector, many of the constraints lie beyond the control of either individual countries or the region as a whole. International action and co-operation are essential to reverse the downward trend. Sub-Saharan Africa’s volume growth of trade (excluding Nigeria) averaged only 0.6 per cent per year in the period 1973—80, and it declined for the next three years. In 1985, it rose by a modest 2 per cent. Slow growth of export volume has been characteristic of the weakness in Africa’s export performance. The region’s share of non-fuel exports of developing countries fell steeply from 18 per cent in 1960 and 18.6 per cent in 1970 to 9.2 per cent in 1978 and has not recovered. More seriously, Africa has lost its market share in those commodities which form its staple exports. Its share of world exports of cocoa fell from 80 per cent in 1961—63 to 69 per cent in 1977—79; of groundnut oil from 54 per cent to 41 per cent; and of

Reinforcing International Support for Recovery and Development

53

palm oil from 55 per cent to only 4 per cent. This poor volume performance has been exacerbated by the decreased purchasing power of these exports — a trend which has been consistently downwards since the 1970s. TTie total export earnings of sub-Saharan Africa (excluding Nigeria) have remained at around $25 bilUon each year since 1982 — which is no higher than the 1978—80 average and well below the single peak-year figure of $30 billion in 1980. Oil is particularly important — about half of the total regional GDP for sub-Saharan countries comes from the oil exporting countries. The sharp decline in oil prices in 1986 has hit these countries badly, with losses to exporters of around $7 billion. To some extent, this loss has been compensated for by the reduced oil import expenditures of some $2 billion for other countries in the region. Overall, the effects on individual countries have varied considerably. For example, the losses have been primarily concentrated in Nigeria; the benefits of lower prices have been important for Ghana, Kenya, Tanzania and Zimbabwe. Disappointing export receipts have resulted in a sharp decline in import performance — a problem exacerbated by debt-servicing difficulties. The decline in import volumes in the 1980s has been a major cause of the significant underutilisation of existing capacities in the agricultural and manufacturing sectors, and in the deterioration of the economic infra¬ structure, as well as in social services. The negative impact of sub-Saharan Africa’s terms of trade has been such that in 1985 they were 10 per cent below the 1970 levels for the region as a whole; with over 20 per cent average falls in some countries (including Zambia, Sierre Leone, Ethiopia, Zaire and Liberia). This represents an accumulated annual loss of approximately $11 billion in the period 1980—85. While the causes of this disappointing trade performance are not all exclusive to the sub-Saharan region, some special features can be distinguished. For most countries in the region, the major underlying problem has been their dependency on a limited range of primary products. In addition, poor agricultural performance has led to increased food imports, decreased exports of agricultural goods and a deterioration of the external payments situation. The 1970s and early 1980s saw falls in the export volumes of cocoa, coffee, groundnuts and their oils, oilseed cake and meal, palm kernel oil, palm oil, sesame seed, bananas, cotton, rubber and sisal. In all of these products, the sub-Saharan countries’ share of developing country exports fell, reflecting an inability to compete in a difficult overall market situation. A similar pattern is evident for non-agricultural commodities; for example, the region’s exports of copper, iron ore and zinc decreased from 1970 to 1982, a period in which world trade in these products increased. A distinctive feature of world commodity markets over the last few years has been that they have weakened, even in the face of some economic recovery in developed countries. Non-fuel prices at the end of 1985 were 22 per cent below 1980 levels, 20 per cent below the 1960—80 average and

54

Theoretical and General Perspectives

the lowest since the Second World War. There are several causes but, by and large, this trend reflects two main developments. The first is technology and the lesser use of raw materials in modem technological processes. The impact of increased recycling (e.g., in cloth, paper, steel and aluminium), the substitution df new inputs (e.g., optical fibres replacing copper in telecommunications; plastics and ceramics replacing metals in auto¬ mobiles) have all increased in recent years. This has resulted in the weakening of the link between developed country growth and developing country commodity export trade, so that recovery in the industrial countries has not resulted in increased demand and/or prices for many commodities. As prices have fallen, producers have sought to increase output in an attempt to raise export revenue. Heavily indebted producers especially, seeking to run trade surpluses, and with depreciated' real exchange rates under their adjustment programmes, have sought to boost production and exports. The cumulative effect has been to weaken world markets for commodities where demand prices are inelastic. Pressures of oversupply have affected most commodity exports, and only coffee has seen some price rises. Commodities such as sugar, tea, copper and tin (and potentially cocoa) have large stocks or surplus capacity overhanging already depressed markets. The downward trend in commodity markets also reflects increasing protectionism in the major consumer countries, notably in the EEC and the US. Often allied to increasing domestic production support measures for the same or substitutable commodities, it has had a significant impact on sub-Saharan commodity exports. Developing commodity exporters face high tariffs and other trade barriers in industrial countries on their processed commodities, such as cocoa, coffee, tea, beef and fish, manufactured tobacco, leather products, processed aluminium and copper. These tariffs often constitute a serious barrier to efforts by sub-Saharan African countries to diversify into higher value-added processing of their commodities. Tariffs escalate with each successive stage of processing and market entry is made even more difficult by similar escalations of non-tariff barrier (NTB) structures. International commodity agreements have not so far had much success in stabilising commodity prices. Financial support for these agreements has not been forthcoming and their management has proved difficult. The recent decision of the USSR to ratify the Common Fund Agreement reached at UNCTAD now makes its implementation possible. If adequate financial support is forthcoming, the Fund might breathe new life into commodity price stabilisation arrangements. Currently, in the absence of effective price stabilisation arrangements, reliance is placed mainly on the stabilisation of export revenues through compensatory financing facilities. This has the merit of providing direct relief for producers without the economic and political difficulties surrounding market intervention. But from 1981 to 1986, the IMF’s Compensatory Financing Facility (CFF), and the much smaller Stabex/Sysmin, compensated developing countries

Reinforcing International Support for Recovery and Development

55

for only an eighth of the $12 billion by which these countries’ annual average export earnings from non-fuel commodities fell. One of the reasons drawings have been limited is the highly restrictive test of co-operation with the Fund. For drawings under the upper tranche of the CFF (i.e., drawings above 50 per cent of quota), the test of co-operation has in practice required the concurrent operation of a stand-by or an extended arrangement. A second problem has been the inadequacy of resources available for the CFF. A major problem confronting most countries is their excessive depen¬ dence on one or two commodities for foreign exchange; and one clear implication of the adverse price trends for most primary commodities is that more efforts and fundamental policy changes are needed to diversify African countries’ exports into processed raw materials, manufactures and traded services. Increased international support is critical in assisting the process of commodity upgrading and export diversification. More significantly, sub-Saharan trade prospects are largely dependent on the expansion of the world economy and improved international co-operation in the trade field. There is already growing recognition that a return to liberalised world trade, and an improvement of the rules under which such trade is conducted, would be of benefit to all countries, developed and developing. The on-going Uruguay Round of multilateral trade negotiations is an opportunity for not only ‘rolling back’ existing protectionist measures, but also addressing the rules of the trading system. In particular, it must address specific interests of sub-Saharan Africa such as more liberalised trade in agricultural, tropical and natural resource products, as well as trade rules governing safeguards, dispute settlement procedures and provisions for differential and more favourable treatment of developing countries. Progress in the trade round should be supplemented by unilateral liberalisation, wherever this is possible.

Ensuring growth with adjustment For most sub-Saharan countries, the decline in economic performance and the unfavourable external environment have brought increased pressure to ‘adjust’ — to prevent unsustainable external (and internal) imbalances arising. These programmes involve critical policy decisions which are extremely difficult to take in any economy, and particularly so in economies which are already desperately poor and vulnerable. In some countries, the political will to persist with far-reaching reform programmes already shows signs of weakening, and continued progress will be possible only if governments can demonstrate evidence of improved growth and consumption prospects. One major problem has been the immensely difficult external and domestic environments within which many of these reforms are being undertaken. Reforms in sub-Saharan Africa have been initiated against a

56

Theoretical and General Perspectives

background of declining per capita consumption and investment. Since it has been difficult to compress consumption in countries where these levels are already low, the level of domestic investment has fallen sharply over the last five years in sub-Saharan Africa. Based on all known sources of additional aid flows and basic commodity trade prospects, the outlook for many sub-Saharan countries is for minimal growth and continued decline in per capita consumption. During the 1980s, aid donors have been responsive to the special needs of sub-Saharan Africa but more assistance is urgently required. Aid receipts by sub-Saharan Africa showed a significant increase until 1986, despite the overall sluggish trend. In constant prices and exchange rates, they rose by 22 per cent in 1981—85 but they did not increase in 1986. As a proportion of total ODA, sub-Saharan African receipts represented 25 per cent of the net ODA in 1980 and 31 per cent in 1986. Aid has become an increasingly important source of external finance for sub-Saharan Africa, accounting for 73 per cent of total receipts in 1986, compared with 56 per cent in 1980, while most of the remainder is accounted for by other forms of official development finance. In spite of these efforts, however, substantial external financing is still required if the region’s resource gap is to be closed. The World Bank, for example, estimates that the additional external financing requirements for the 14 largest low-income, debtdistressed African countries, which have adjustment programmes, will average about $1.5 billion annually between 1988 and 1990. One-half of the additional finance will be required to meet debt-service payments in excess of a ‘threshold’ or manageable debt-service ratio of 25 per cent. Since 1980, the World Bank through Structural Adjustment Loans (SALs) and Sector Adjustment Loans (SECALs), and more recently through its Structural Adjustment Facility (SAP), has been deeply involved in sub-Saharan Africa’s pursuit of structural reforms and balance of payments adjustment. There has been growing recognition — if belated — that the cost of pursuing some of the earlier stabilisation programmes with their short-term approach has been too high in sub-Saharan Africa. Often the deflationary adjustment measures necessitated by short-term balance of payments arithmetic resulted in the ‘import strangulation’ of many African economies. This has not only made the investment required for recovery impossible, but often damaged the limited and painfully accumulated existing capital stock. In many instances, it resulted in unnecessary output losses because of underutilisation of partially import-dependent productive capacity. The joint Programme of Action launched at the September 1984 World Bank—IMF annual meetings sought to correct the causes of Africa’s economic decline through improved formulation and implementation of rehabilitation and development programmes, together with more closely co-ordinated donor assistance ' to support national priorities and programmes. For the poorer IDA-eligible sub-Saharan countries, a special assistance facility was also set up in the World Bank, with donor

Reinforcing International Support for Recovery and Development

57

contributions of $1.5 billion to supplement assistance of $3 billion from IDA-7 over the period 1984-87. Approximately half of IDA-8, or $6 billion, will be directed to sub-Saharan Africa. The need to provide concessional assistance to poor countries suffering from protracted balance of payments difficulties and willing to adopt medium-term policy reforms was further recognised when a Structural Adjustment Facility (SAF) was set up in the IMF in 1986. The greater concessionality and longer maturity of SAF programmes (0.5 per cent interest, and repayment periods of five and a half to ten years) are intended Table 5.2

Sub-Saharan Africa: stand-by and Structural Adjustment Facility (SAF) arrangements reached from January 1986 to June 1987 ^ SAF eligible countries

Stand-by arrangements Date

Burundi Central African Rep. Gambia, The Ghana Guinea Madagascar Mauritania Mauritania Mozambique Niger Senegal Sierra Leone Somalia Tanzania Togo Uganda Zaire Zaire Zambia

Period Total amount (months)*’ (thousands SDRs)

Date

Total amount (thousands SDRs)

8 Aug. 1986

20

21,000

8 Aug. 1986

20,069

1 June 1987 17 Sept. 1986 15 Oct. 1986 3 Feb. 1986 17 Sept. 1986 26 Apr. 1986 4 May 1987 — 5 Dec. 1986 10 Nov. 1986 14 Nov. 1986 29 June 1987 28 Aug. 1986 9 June 1986

12 13 12 13 17 12 12 12 12 12 20 18 22 22 12 24

8,000 5,130 81,800 33,000 30,000 12,000 10,000

1 June 1987 17 Sept. 1986

14,288 8,037

—

28 May 1986 15 May 1987 21 Feb. 1986

Total

-

10,110 34,000 23,160 33,150 64,200 23,040 214,200 100,000 229,800 932,590

Non-SAF eligible countries

Congo Cote d’Ivoire Gabon Nigeria

SAF arrangements (period 3 yrs)

Stand-by arrangements

29 Aug. 1986 23 June 1986 22 Dec. 1986 30 Jan. 1987

Total

20 24 24 12

22,400 100,000 98,685 650,000 871,085

a) No extended arrangements were agreed in this period. b) Rounded to nearest month. Source; IMF Survey, June 1987.

— —

—

—

—

—

22 Sept. 1986 —

11 17 10 14 29

June Nov. Nov. Nov. June

15,933 —

1987 1986 1986 1986 1987

— -

15 June 1987 15 May 1987

28,670 15,839 39,997 27,213 20,774 — —

46,812 —

136,770 374,402

58

Theoretical and General Perspectives

to permit a gradual return to external viability, and to give greater attention to growth issues and underlying structural problems than would be possible under a stand-by arrangement. As shown in Table 5.2, 11 sub-Saharan countries have so far negotiated such programmes; the process has been facilitated by tht fact that, with two exceptions (Mozambique and Uganda), these countries already had or have simultaneously negotiated a stabilisation arrangement with the Fund. But if the SAF is to be effective, its resources need to be vastly augmented. There has also been considerable concern about the conditionality attached to the use of SAF funds, particularly in view of the limited resources so far available. Of particular concern is the use made of ‘benchmarks’ in SAF programmes and the ‘prior actions’ which may be required of a country before disbursements can be made under the programme. Benchmarks are, of course, helpful in illustrating the direction of needed policy reforms and in measuring progress toward reaching policy objectives. There is concern, however, that benchmarks should not be used as rigid targets on which the attainment of further disbursements depend. Economic uncertainties in small, open and generally fragile economies make highly specific quantitative targets often inappropriate, while the statistical limitations of a number of low-income countries in providing accurate quantitative data can make such assessments problematic in any event. Other concerns relate to the lack of close involvement by government, which can affect the political support within the country needed for its effective implementation. The World Bank Group has also been closely involved in structural adjustment lending and has become more sensitive to the special requirements of Africa. During FY 1987'* the bank negotiated 33 adjustment operations with 29 countries, of which 13 were SALs and 20 SECALs; 25 low-income sub-Saharan countries had adjustment programmes (SALs or SECALs). There is as yet no comprehensive assessment of the impact of these adjustment programmes. There are, however, a number of lessons that can be drawn from the experience of the early 1980s, as well as concerns that require further review. For example, the Bank considers a country’s commitment to a particular reform package and its ability to stick to the reforms to be the two most important determinants of the ultimate success of the policy package. It has also acknowledged that it was originally overly optimistic in its expectation of the time required to implement structural reforms, that the early programmes were too complex and the conditions too wide-ranging for successful implementation. Fortunately, there is now broad agreement on the main elements of reform that are needed. The focus should be on the supply side and aimed at increasing efficient export production as well as import substitution. Supply-side measures should be supported by responsible monetary and fiscal policy in order to expand savings and investment. There is also widespread agreement on the main elements of previous supply-side policy

Reinforcing International Support for Recovery and Development

59

error in Africa. In fact, the common elements in the approaches to policy requirements by the multilateral institutions and bilateral donors, on the one hand, and by African governments, on the other, now far outweigh the differences. Areas of dispute still exist: some reflecting differing political and economic philosophies on such issues as the role of government and the private sector, the importance of income distribution, the degree of outward orientation of the economy, or the timing and sequencing of the required policies. These are not surprising in view of the complexity of the development process, differing economic policy orientations, and the power of interest groups within countries. The Bank acknowleges that ‘the policy problems of restoring growth in the medium term are far too complex and our understanding of the impact of policy on economic performance is far too incomplete for differences not to arise.’ It is even more difficult to build the necessary political consensus around reforms that affect powerful interest groups. Differences in perspective between government and the Bank, important as they are, should not, however, obscure the convergence of views on the broad direction of policy reform. It would be misleading to exaggerate these conflicts among policy makers who agree on the broad direction of change. The challenge for the Bank and governments is to design reform programmes which meet specific country circumstances. For example, on the relative roles of the public and the private sector, there is now widespread agreement, even in African policy-making circles, that governments have frequently and inappropriately overextended the public sector. But it would be counter-productive to push private sector expansion too fast or too far. Inefficiency in public monopolies does not necessarily create a case for private monopolies. The mix of state and private sector activity varies, and should vary, with the specifics of individual countries’ economic, political and administrative structures. Indeed, many public sector enterprises were set up because the private sector offered inadequate services or no services at all. For external agencies to push national governments too far on this or other such issues, could risk the credibility of otherwise sound programmes. For the programmes of structural reform to succeed, they must aim for some modest growth in living standards. After years of declining per capita incomes and consumption, adjustment measures must offer some hope of improved living standards. It may, for instance, be appropriate to define the objectives in terms of annual per cent growth rates which provide, say, at least 1 per cent annual growth in per capita consumption. It is also necessary to protect poor and vulnerable groups during the adjustment process. This would clearly have implications for the length of the programme and for the financial requirements to sustain such growth. But if countries are prepared to undertake such courageous and politically risky programmes, it is essential for the international community to provide the necessary resources to ensure the modest growth in per capita income needed to sustain long-term efforts.

60

Theoretical and General Perspectives

To support adjustment programmes, donors must not only increase their aid budgets, but concentrate their assistance as far as possible on low-income countries implementing them. Undoubtedly, the highest returns in Africa are typically to be reaped from the provision of untied foreign exchange for increased inputs fdr the rehabihtation and full utilisation of existing capital stock, rather than the creation of new capital. Moreover, while adjustment is essential, the Bank must not lose sight of its fundamental role in long-term development and poverty alleviation. Not only does such lending have a moral imperative but, as UNICEF and others have shown, it has extremely high rates of return.

Relaxing the long-term constraints on development While Africa’s immediate needs are for the rehabilitation and expansion of its productive sectors, the region faces a number of long-term constraints on development. These include an inadequate transport infrastructure, a low level of human resource development, rapidly rising population, creeping deforestation and desertification, and a poor level of agricultural research. Donor support is essential not only for African countries’ long-term structural reform efforts, but also to address these long-term constraints. Sub-Saharan Africa has never been equipped with adequate transport in¬ frastructure. This inadequate infrastructure in many countries is rapidly reaching the end of its effective life. Without improved infrastructure, production-oriented strategies cannot succeed. Financing requirements for rehabilitation, reconstruction and expansion are massive. In addition to rural feeder road networks, the region’s main import and export supply routes need major investment. In the case of SADCC countries particularly, improved supply routes are imperative if these countries are to reduce their dependence on South Africa. The population of sub-Saharan Africa is growing faster than that of any other continent. Its growth rate has accelerated from an average of 2.3 per cent per year in 1960 to 3.1 per cent today. The population problem in Africa is not that there are too many people, but that the explosive growth in population is putting increasing stress on resources. Lower rates of population growth may well be the most important requirement for sustained development in Africa. The progress achieved so far in subSaharan Africa is limited in relation to the task ahead; governments at present finance a very small share of family planning expenditures. Increased donor support is vital. Currently, only 0.5 per cent of ODA is at present directed at family planning activities in Africa, much less than the 1.5 per cent recorded for all developing countries. Appropriate population strategies are also critical for human resource development. While health conditions in sub-Saharan Africa have improved in the past two decades, the limited financial resources mean that

Reinforcing International Support for Recovery and Development

61

access to health care is extremely limited in most African countries. Greater emphasis is clearly needed on primary health care projects, perhaps by funnelling a larger share of their resources through non-govemmental organisations (NGOs) which, in a number of African countries, already serve as a useful vehicle for providing such care. As with health, the education sector is suffering a reversal in both the quantity and quality of services it provides. Primary enrolment rates declined in 12 poor countries during the 1980-83 period. Additional resources are clearly needed to maintain the momentum of primary education, both to meet the enrolment requirements of a growing population and to ensure the adequate supply of books and other requirements. Degradation of land — soil erosion, declining soil fertility and rapidly increasing desertification — is now posing one of the most serious challenges to large parts of Africa. Tlie area of forest and savannah woodland has declined since the turn of the century and there have been major losses in farm tree stocks. The decline in tree stocks is accelerating under several influences — consumption of fuelwood is rising with population growth, and so is land clearance for subsistence agriculture, thereby reducing soil moisture and increasing soil erosion. Seedlings and mature trees have been lost to ill-managed livestock, and commercial logging has gone on without adequate reinvestment in forest reserves. The World Commission on Environment and Development has argued that it is poverty which is the major source of environmental stress, so that the main remedies are to be found in mechanisms that raise living standards and reduce pressures leading to overcropping and overgrazing, the elimination of forest cover for firewood and the spread of urban squalor. The requirements include increased resource flows to African countries, growth-oriented adjustment, redistributive policies designed to give priority to basic needs and measures to reduce population growth. Within this general policy framework, there is a need for African governments to ensure that there is a better integration of natural resource management with country economic planning, and for donors to ensure that new investments contribute to sustainable development. In particular, a high proportion of funds should go to projects where the objectives of growth, poverty alleviation and environmental protection are complementary. In Africa, most farming remains at rudimentary subsistence levels and major advances in agricultural research, such as those that revolutionised wheat and rice cultivation in Asia, have not taken place. There has been no breakthrough for millet, which accounts for 80 per cent of cultivable land in the Sahel and other dry areas; nor for most root crops, which are the basic staple food in Africa. A long-term programme to strengthen agricultural research in sub-Saharan Africa must aim to build up scientific knowledge, strengthen the country-level institutions and make better use of existing local research capacity. A short-term priority has to be the adaptation of existing technology to local farm conditions. While donors have funded much of the agricultural research in Africa, their policies have

62

Theoretical and General Perspectives

not only led to duplication of effort, but compounded the problem by frequently changing priorities and setting unrealistic demands for immediate results. While the World Bank’s special programme for African agricultural research is a good beginning, the financial implications for the effective adaptation of netv technology go far beyond the resources currently being allocated for this purpose.

An Africa-wide effort Clearly, part of the solution to sub-Saharan Africa’s economic crisis has to come from the North, which alone can provide the large-scale development assistance, debt relief and balance of payments financing which is urgently needed. But, with imagination and vision, greater co-operation within Africa, in the context of strengthened South—South co-operation, could form part of a positive response to the crisis. What might be involved is a programme of action in the three broad areas of critical importance to African development — food and agriculture, trade and industry. At the centre of Africa’s current crisis is the problem of hunger and, in some countries, famine. The need for adequate food supplies must remain in the forefront of African policy makers’ concerns. To a large extent, the remedies lie with national governments in correcting existing policy distortions. But this is only part of the answer. There is need for new technology in the form of better seeds, cheap and appropriate fertilisers, and improved distribution of agricultural inputs and output. Because of the similarity of crops and ecological conditions, African countries could mutually benefit from sub-regional co-operation. Joint efforts are appropriate for new research into drought-resistant seeds and other vital inputs. Regional training programmes — of extension officers, agronomists and post-graduate specialists in new biotechnologies — is another potential area for co-operation. New advanced technology aids to agriculture — satellite reconnaisance, for example — require regional co-operation. The objective is not to establish new sub-regional or regional institutions. Africa already has several such institutions. What seems to be needed is a systematic review of the impact of current agricultural research in the region, and the main issues and problems requiring urgent resolution and concerted action. Such an exercise could also form the basis of practical South—South programmes of technical assistance, for the success stories in other parts of the Third World may have relevance for Africa. For example, India has successfully developed some 15 semi-arid zones; that technology might be adapted to Africa. Co-operation in the field of regional food security is also important — this could include early warning systems for food production shortfalls, especially in areas close to national borders but far from capitals. The establishment of regional buffer stocks is another possibility. There is also scope for renewed efforts at the regional level in the trade field. Past efforts have achieved far less than their original intentions; in part.

Reinforcing International Support for Recovery and Development 63 this reflects a genuine motivation which exceeded either the resources available or the ability of regional authorities. It also reflects the impact of external pressures which were not perceived at the time of the launching of these efforts. While some of the constraints still remain, they are now more clearly recognised and can be more realistically addressed. Major constraints include the vast differences in the levels of industrial development, in resource bases and in the overall financial and trade infrastructures of the individual countries of the region. With constraints of such magnitude, only a gradual and selective approach can hope to build a base for long-term sustainable results. For instance, it is probable that a generalised tariff-cutting approach to trade liberalisation between member countries may not, for the present, be a viable approach for the sub-Saharan region; what may, however, be possible is a more selective approach. There seems to be scope for programmes of sectoral or product-based regional trade liberalisation which do not place unequal burdens on individual member countries or cause significant increases in overall costs. Obviously, the scope for such liberalisation, and the scale of benefits are, in part, related to the foreign exchange savings which would accrue. This is, in turn, linked to the need for improved regional clearing and payment schemes. Existing schemes have highlighted the difficulties arising from persistent imbalances in trade flows between economies of differing strengths, and from shortages of foreign exchange. Only if these problems are adequately addressed, and where necessary supported by external assistance, can such schemes be expected to function in an effective manner. There is also a need to investigate the potential for greater harmonisation of import procedures and long-term import needs to facilitate trade within the region. This could incorporate such basic issues as the harmonisation and simplification of documentation, or could eventually involve joint purchasing of imports. In industry, experiences of regional co-operation in Africa have so far produced very few practical results. One of the basic problems has been that countries have found it hard to agree on the allocation of large-scale industry among member countries and on the level of access to regional markets that such industries should have. But, so far, very little attention seems to have been given to promoting an investment process that would involve patterns of specialisation between small and medium-sized enter¬ prises in different partner states, associated with the strengthening of indigenous entrepreneurship. Co-operative arrangements and joint ventures between such enterprises could be encouraged to take advantage of economies of scale not only within the intra-group market, but also in international markets, including the possibility for joint sub-contracting with outside firms. The vision has to be three-dimensional: national. South—South and international. Such an approach requires concerted policies with respect to the promotion of joint investment activities, including the development of indigenous entrepreneurship and the provision of pre-investment services

64

Theoretical and General Perspectives

and export promotion facilities to small firms. This in no way diminishes the importance of seizing opportunities for joint action in setting up large multinational enterprises, where such opportunities exist. It also does not imply a less active role for governments in the integration of production. The effective iihplementation of measures of regional and inter-regional co-operation inevitably poses the problem of financing. In this area, however, the African Development Bank (ADB) could play a larger role. As a continent-wide organisation, whose resources are currently being increased substantially, it is well suited to channel financial resources to selected regional development projects with development potential and to act as a catalyst to encourage other donors and private lenders to do likewise.

Conclusion The challenges for Africa and the international community are formidable. Action is required on virtually all fronts. Some of it is urgent and required to survive the immediate crisis; other action is longer-term but equally essential if the basis for sustained growth to the end of the twentieth century and beyond is to be laid. African countries have their own internal agendas to pursue in undertaking the necessary transformation and reform of their economies. But it is clear that they will not succeed, or will be far less likely to do so, without the generous and sustained support of the international community. High on the priority list will be adequate financial and technical support to African countries in the formulation and implementation of growthoriented adjustment programmes. Not only must such programmes meet balance of payments objectives, structural change criteria and income distribution considerations, but they must ensure that the social long-term economic and environmental objectives are steadily pursued so that the next generation faces a more promising world. But aid to economic programmes will not be enough. Debt relief is also an essential part of the co-operation needed from the international community. Underdevelopment, poverty and the long-term nature of Africa’s problems mean that Africa, by and large, is unable to service non-concessional debt. New and imaginative solutions to reduce the debt burden and increase the overall flow of resources are required. Greater co-ordination among donors on how to meet overall financial requirements (aid and debt relief) would be an important element of the process. A more favourable environment is equally crucial. Higher growth in developed countries through improved co-ordination of policies is needed if these countries are to become more amenable to increasing concessional and private flows to Africa and to reducing protectionism. Access to markets is essential if Africa is to move away from its enormous dependence for exports on a small range of commodities to become a more diversified

Reinforcing International Support for Recovery and Development

65

exporter of processed commodities and other products. The list of requirements is long — but so are the needs. Intra-regional co-operation and international co-operation must go hand in hand if Africa is to reverse its decline and move forward to self-sustaining development.

Notes 1. Low-income Africa is defined as those countries that had GNP per capita of not more than $400 in 1985 and are heavily dependent on official development assistance (ODA) for external financing. 2. World Bank credits have not been rescheduled in the past in order to preserve the Bank’s preferred creditor status. There has been reluctance on the part of all Bank members to permit rescheduling as this could affect the cost at which the Bank borrows and, in turn, the cost of its lending. IMF drawings are neither reschedulable nor cheap — they are provided at about 6 per cent interest currently (variable at six-monthly intervals), and are usually payable within five to seven years. 3. They were, in fact, put at $27 billion by the IMF in December 1987 at the Addis Ababa Conference of the Organisation of African Trade Union Unity [editor]. 4. The World Bank’s fiscal year (FY) runs from 1 July to 30 June. FY 1987 refers to the July 1986—June 1987 period.

Part Two Case Studies

6. The Chronology of Crisis in Tanzania, 1974—86 Werner Biermann and John Campbell Global depression in the early 1980s affected Third World countries irrespective of the degree of their integration into the world economy: Asian and Latin American newly industrialised countries (NICs) and the ‘retarded’ African agrarian exporters all experienced dramatic economic and political deterioration. Due to their advanced economic base, the NICs were able to pursue fairly autonomous economic policy measures, whereas the agrarian economies were forced to link recovery to structural adjustment programmes. The demand for structural adjustment is widely recognised as a frontal approach launched by multilateral lending agencies (the IMF and World Bank) and the core capitalist countries, and exhibits a decided disdain for social reality in the Third World due to an orientation towards short-term targets that contradicts the long duration required for development. Also, structural adjustment has been accompanied by mediocre financial support which reflects the underlying political orienta¬ tion of IMF policy, namely, an economic reorientation which necessitates a mobilisation of domestic resources with the goal of fostering export orientation that will benefit the advanced core countries. For these reasons, the IMF is perceived as an agent which forces a sharp global redistribution of resources to the core. Tanzania, prominent in the past for its model of social transformation, has also been noted for its sustained struggle against the Fund (indicated by the vigorous opposition of that country’s leadership to the IMF and the metropolitan creditors). However, perceived from within the country, this position was nourished partly by a Third-Worldist search for a new social/ development paradigm in the wake of successive failures elsewhere. In part also, inconsistencies of domestic politics, rather than a struggle against subordination to the world market, formed a major vector of action. Thus opposition to the IMF originated from a preservation of the political balance born of a socialist experiment which had already been all but abandoned during the villagisation programme. The domestic constellation notwithstanding, the imposition of structural adjustment by metropolitan creditors portrays a pattern of dominance with little theoretical justification, and represents nothing other than geo¬ political manipulation. The results of this in Africa have revealed complete failure, viz., the cases of the Sudan, Egypt, Zambia and Morocco. Nevertheless, structural adjustment constitutes the major challenge to which the Third World is currently exposed. The demand for its implementation will be discussed in the Tanzanian context.

70

Case Studies

The first rupture of reconstruction: 1974 The origins of the present crisis date back to 1974 when Tanzania faced her first major balance of payments deficit.' Though shortlived and quickly superseded by a ^booming export performance, this crisis, nevertheless, exposed the structural weakness of Tanzania’s political economy; the pre¬ eminence of agricultural exports as the basis of economic development combined with the outstanding role of imports needed for the reproduction of the economy. Exports consisted of agrarian raw materials, produced mainly by smallholder peasants whose capital input was extremely modest due to the persistence of family labour and archaic techniques of cultivation. In the case of private and state-owned plantations, labour-intensive methods of production were prevalent. That sector’s higher yields and output originated from the combination of agri-chemical inputs, new crop varieties and seasonal labour. The ensuing extension of the farming season allowed for intensified surplus extraction from wage labour, which allowed for the prosperity of the plantation economy. In the absence of a significant domestic industrial sector, development necessitated surplus generation from agriculture and exports were needed in order to pay for the import of industrial equipment. Due to the predominance of smallholders, the stimulation of agrarian output/surplus necessitated simple commodity incentives (and limited prospects for capital accumulation). The adequate supply of commodities at realistic prices had to be provided for the rural sphere of circulation. Therefore, the domestic industrial sector played a crucial role in securing market participation from the smallholders. This basic economic relation exposed the critical weakness of Tanzania’s model of reconstruction which depended on a synchronisation of agriculture and industry. A pre¬ ponderance of imports formed the limits of industrial surplus generation, which put an additional burden on the cash crop sector, that had also to provide a significant part of state revenues. This matrix provided sufficient justification for the state to establish tight control over peasant producers; these economic requirements not¬ withstanding, ideological legitimation fostered an over-developed state. Hence, the implementation of subtle controls in Tanzanian politics during the 1970s. The quest for control received further support from the export side where i) market shares were too insignificant to allow for an active price policy (cf. coffee, cotton, tea); or ii) markets were controlled by processing industries, as in the cases of cashew nuts, pyrethum and tobacco; iii) finally, markets were declining, e.g., sisal, or where factors such as the substitution of polyethylene had combined to alter conditions of grain harvesting. World market prices and conditions underwent rapid changes which conditioned economic growth in Tanzania. This constellation provides one reason for the country’s poor balance of payments position in 1974, to

The Chronology of Crisis in Tanzania, 1974—86

71

which must be added the impact of the first ‘oil shock’ in whose wake market prices quadrupled. These external factors were combined with food shortages caused by insufficient rainfall.^ Hence, the Tanzanian govern¬ ment was forced to buy grains on the world market, spending 50 per cent of the country’s export earnings. Unlike later situations, food aid was not immediately available because of general shortages among the major surplus countries.-’ Government embarked on a two-fold policy. First, it instantly reduced imports of consumer goods; second, it approached the IMF for financial support to which it was legally entitled as an ordinary member of the Fund (Nyirabu, 1981: 53-61). Between November 1974 and August 1975, Tanzania drew the first of the two tranches of her quota with the IMF. These tranches, designed to overcome short-term im.balances in a member state’s balance of payments, were not linked to any conditionality. The activation of SDR 20 million was, therefore, easily performed. Furthermore, the country received SDR 20.6 million from the Fund’s Oil Facility in 1975, and, one year later, drew SDR 21 million under the Compensatory Financing Facility (Kamori, 1984: 223). A record harvest in 1975 and a booming world market for coffee quickly lifted the major impasse on Tanzania’s balance of payments; economic performance was restored as was the previous pattern of growth. Having declined from 4.45 per cent in 1973 to 2.2 per cent in 1974, growth occurred at 4.6 per cent in 1975. This quick recovery suggested to the political leadership that the ‘crisis’ was ephemeral in character; consequently, the Third Five-Year Development Plan scheduled for implementation in 1975, and postponed in the wake of the crisis, did not seriously consider recent experience (Daily News, Dar es Salaam, 14.6.76 and 18.6.76). Economic targets, tools, and priorities drafted in late 1974 (Rwegasira, 1984: 63f.) remained unaltered. The coffee boom produced a current account surplus with the assistance of an import licensing policy, which was maintained after recovery. Hence, the Bank of Tanzania’s Annual Report identified 1975/76 as a period of economic and financial recovery. Growth continued through 1978 at 5.9 per cent, only slightly below the targeted 6 per cent of the Third Plan. The period of growth came to an abrupt halt in the wake of the Ugandan war to which Tanzania had responded rather hesitantly.^* The ensuing military engagement depleted the country’s financial resources — foreign exchange reserves and domestic credit facilities alike. As was later revealed, the 12-month campaign cost $300 million in direct costs, and a total of $500 million if effects on redirecting production, transport and services for the war machinery are added. Arms and ammunition, mainly of $oviet and Eastern European origin, were bought for cash, as is indicated by the decline of the foreign exchange reserves to below a two weeks’ import equivalent (Financial Times, 26.4.79 and 11.6.79). This depletion of resources had been anticipated by the import liberalisation of early 1978 which followed IMF recommendations.’ Foreign

72

Case Studies

exchange was spent mainly on consumer goods, from whence the domestic market experienced prolonged shortages under the post-1974 import licensing regime (Financial Times, 28.2.79). At the same time, the coffee boom ended with the recovery of Brazilian production, and hence Tanzania’s current account surplus diminished. In 1979, the overall balance of payments became negative; current account deficits could not be balanced — as had previously been the case — by capital inflows.

The outbreak of crisis: 1979—80 The country again resorted to IMF facilities and a first tranche for balance of payments support amounting to $40 million was released in April 1979. At the same time, the Tanzanian government approached the major donor countries with a request for increased aid, or a redirection of aici to immediate import support. In a second move, the government appealed for new aid of £200 million. Aware of the hostility which Tanzania’s military engagement had incurred in the OAU, the country’s leadership was cautious and expected a negative response. Hence, it automatically tabled an alternative, a request for support and servicing of commercial bank loans. However, the major donors were not prepared to grant Tanzania emergency assistance, presumably since extraordinary support might have aggravated political relations in sub-Saharan Africa (Financial Times, 26.4.79). Tanzania, a major recipient of foreign aid in Africa, had hitherto maintained a high degree of political autonomy, due primarily to the diplomacy of non-alignment.^ In consequence, the provision of foreign aid was spread among a variety of donors and could be easily balanced as no donor gained sufficient influence to enable it to exert political pressure. The 1978 change of loans into grants by the country’s major creditors should rightly be regarded as the apogee of Tanzanian diplomacy (New African, 1980: 15). Henceforth, a rapid deterioration was discernible as evidenced by the country’s isolation in the aftermath of the Ugandan war and the subsequent non-availability of new grants. A deficit current account balance for the first time since independence that was not covered by a positive capital account balance was combined with declining export earnings. Furthermore, a good export performance required the immediate replacement of transport and machinery due to over-capacity utilisation during the war. These requirements made extraordinary financing imperative. This level of credit had to be under IMF auspices precisely because inter-state credit negotiations were unsuccessful. At this point, divergent ideological positions emerged within the Tanzanian leadership. While the Minister of Finance supported an agreement with the IMF, the majority of the National Executive Council (NEC) preserved a hostile attitude to the Fund, which requested economic adjustment in accordance with its Article IV regulations. Apparently, opposition stemmed from anxiety about impending social service cuts, an area that had been a major legitimating factor for the country’s socialist policies (Blue and Weaver, 1977), and increased external examination of

The Chronology of Crisis in Tanzania, 1974-86

73

hitherto uncontrolled practices with regard to personal appropriation (Shiyji, 1976). President Nyerere openly criticised the IMF whose economic project appeared to him to be directed against poor workers and peasants. His non-conciliatory approach received additional clarification in his 1980 New Year speech at the Reception of the Diplomatic Corps. What had previously been regarded as a balanced Tanzanian diplomacy was replaced by a radical outlook which further antagonised the country’s major donors, as did the breaking-off of negotiations with the IMF in November 1979, when they proved unwilling to support Tanzania against the wishes of the IMF (Guardian, 9.11.79 and Daily News, 2.1.80). This state of affairs differed from 1974 when Tanzania faced political reservations about her social model, but when sympathy prevailed. Worse, the economic situation portrayed a bleak scenario hardly comparable to the first crisis, as exports did not recover, due to the outbreak of global depression during which the period of ‘easy credit’ ended abruptly. In order to maintain levels of industrial output — and thereby commodity supplies to rural producers — government increased the money supply by 37 per cent and domestic credit facilities by 62 per cent. Parallel to these measures, government expenditure grew by 74.5 per cent. This inflationary policy temporarily bridged deficits with regard to the production base of the economy. The solution to this problem seemed likely to be achieved through a conciliatory gesture by the IMF whose managing director drafted a personal letter to President Nyerere. Its apparently apologetic content opened the way for a new round of negotiations in April 1980, with agreement achieved in September. In spite of the hard conditions to which this extraordinary credit of £107 million was linked, it remained the only viable alternative because of Tanzania’s poor harvest of 1980, when it was officially calculated that less than 25 per cent of the required amount of maize could be produced domestically that year. Consequently, scarce foreign exchange had to be directed to food imports, which aggravated the already precarious situation of the industrial sector (New African, June 1980: 87 and Sept. 1980: 52; Guardian, 5.7.80). Since the IMF abstained from insisting on devaluation, the major objection of President Nyerere was eliminated. The Fund appeared to have compromised (more likely for political than economic reasons). Under a substantial critique by the Third World, the future performance of the IMF rested on assuming a conciliatory role to which an agreement with Tanzania (an influential member of the Non-Aligned Movement) would supposedly contribute. Furthermore, the IMF was under severe pressure as requests for financial support from the LDCs had multiplied since the outbreak of the global depression.’ For Tanzania, the agreement translated into negotiations with the World Bank about a structural adjustment loan, negotiations that were blocked hitherto in the wake of the IMF controversy. This long-term, interest-free loan untied to specific projects was supposed to be for $50 million per annum, in addition to the $65 million that Tanzania was already receiving

74

Case Studies

under previously concluded agreements. The understanding with the Fund, however, was short-lived as the agreement was suspended after only one drawing (Holman, 1982). By December 1980, Tanzania had failed to observe the limitations on government borrowing and imports (^Financial Times, 7.7.81). This suspension necessitated a new round of negotiations which were resumed by June 1981, in spite of President Nyerere’s critique. Negotiations focused on a three-year Extended Fund Facility of more than £250 million. Although the Tanzanian media kept strict silence, an agreement must have been concluded. According to IMF official data, the Fund cancelled loan agreements worth $5,000 million in April 1982 to some 15 countries; the list also contained a $170 million loan to Tanzania.

Years of decline: 1981—84 Meanwhile the economy entered a fourth consecutive year of crisis: the depletion of foreign exchange curtailed imports, which affected the performance of cash crops and the industrial sector. Hence the GDP contracted while pressure on external trade increased. Drought further reduced food supplies and made food imports necessary. Again, government took recourse to inflationary practices while a decline of revenue was matched by another rise in taxes.* The external trade position portrayed a very bleak picture, as Table 6.1 reveals. Table 6.1

External trade position 1976—85 (US$m)

External reserves 1976 1978 1979 1980 1981 1982 1983 1984 1985

112 100 68 20 19 5 21 38 38

Imports 722 1,263 1,218 1,406 1,325 1,194 943 840 972

Trade deficit 89 638 521 695 411 682 440 471 646

Reserves as % of deficit 126% 16% 13% 3% 5% 0% 5% 8% 6%

Source: IMF, 1986a: 32 and 10; World Bank, 1985: 109.

The above figures indicate that Tanzania accumulated payment arrears through reliance on suppliers’ credits. The country’s impending insolvency alarmed the private banks, which drastically reduced their credit lines and finally cancelled them in 1984 (IMF, 1986a: 32; Club of Paris, 1986). Suppliers’ credits had been favoured by the Bank of Tanzania after

The Chronology of Crisis in Tanzania, 1974-86

75

extraordinary funding from the donors had not materialised in 1980, and the Central Bank conceded overdrafts to importers. Imports were financed by commercial credits at a time when the LIBOR rate exceeded the 20 per cent margin. Between 1979 and 1983 these credits amounted to $708 million, whereas prior to 1979, the country had used less than $100 million (1974-1978) of suppliers’ credits (World Bank, 1985: 108). While in 1980 commercial credits formed 6 per cent of Tanzania’s external public borrowing (EEC, 1982: 12), such credits amounted to 33 per cent three years later. Combined with annual export earnings of less than $400 milion, debt repayment was hardly feasible. This constellation alarmed international banking capital which put pressure on the donor states to acquire adequate cover for these apparent bad debts. Tanzania in turn depended on an agreement with the IMF because no donor was willing to create a precedent, i.e., to guarantee bank credits prior to an IMF agreement (Lever and Huhne, 1985: 5 If.). Had this occurred, the search for a global solution to the debt crisis would have been aggravated as other debtor countries might have followed the Tanzanian precedent. Therefore, the solution of the Tanzanian crisis had an international dimension; henceforth inter-state negotiations were in¬ fluenced by the Bank’s requests; a reiteration of the 1978 model in which loans were converted into grants was precluded. Meanwhile, the Tanzanian economy suffered a further decline. In 1981, GDP fell by 1.7 per cent, followed by a 3.2 per cent decline in 1982 (Minister of Planning, 1983: 5). This contraction translated into dilapidation so that i) industrial capacity utilisation fell below 40 per cent which diminished imports, further exacerbated industrial performance and resulted in sub¬ stantial commodity shortages; ii) government, on the other hand, increased money supply and aggregate credit; iii) this conjuncture of inflationary practices and supply shortages forced rural producers into either barter trade or onto the parallel market. The parallel market owed its existence to foreign exchange scarcity and the overwhelming dependence on external trade for domestic growth. Consequently, speculation in ‘hard currency’ became profitable with commodities illegally secured via Kenya and Rwanda. In the case of peasant surplus production, highly attractive prices could be offered precisely as the depleted urban markets accepted exorbitant retail prices. In short, the system of state-controlled prices collapsed, thus destroying one pillar of the socialist matrix of legitimation — protection of the poor. This trend forced the government and the Party to adopt emergency measures in the introduction of a National Economic Survival Programme (NESP) in May 1981.9 Government substituted inflationary policies for deflation — recurrent expenditure was translated into rural producer price increases (Minister of Planning, 1982: 6—7; Baguma, 1982: 18). This redistribution was accom¬ panied by drastic cuts of salaries and social services, and another sharp increase in taxation. It was expected that through price incentives cash and

76

Case Studies

food crop production would be stimulated. The Survival Programme, however, did not produce the expected results, precisely because price increases remained below the inflation rate and parallel market returns. The Programme was a failure and a new one was substituted in 1982. The 1981/82 Itudget fully acknowledged the austerity measures which the Survival Programme had anticipated. The market price for maize, Tanzania’s staple food, doubled from Tsh 1.25 per kg to Tsh 2.50, while the taxation of daily amenities (beverages and tobacco) increased from 35 per cent to 100 per cent. Furthermore, development projects were drastically curtailed from the previous year’s 23 per cent allocation of budget funds to 5.8 per cent (Financial Times, 7.7.81). The economic rationale underlying budget policy was evident. Restoration of domestic food supplies translated into redistributicfn of foreign exchange earnings for industrial rehabilitation. Furthermore, a heavy tax and a freeze on salaries mobilised new resources and that was politically desirable precisely because of the pro-worker stance of the Party. In the ‘Areas of Action’ section of the budget, a first hint of future activities could be detected as the Ministry of Planning had observed that five of ten state corporations had borrowed (in 1980) more than their average annual purchases, whereas lending to the ten corporations by the National Bank of Commerce (NBC) was $308 million by December 1980 — nearly double the annual value of official crop purchases. As producer price increases failed to activate peasant production, the Party announced a dramatic change of policy — the revival of co-operatives (disbanded in 1976 and taken over by national crop authorities and parastatals).“ Structural adjustment programme: 1982—85 Reforms were overdue because of the catastrophic situation of food supplies; domestic purchases declined from 253,000 tons in 1978/79 to 107,200 tons in 1984/85, necessitating imports of 87,000 tons (1978/79), and 266,700 tons six years later (MDB, 1984: 14). The revitalisation of co-operatives was also favoured by the World Bank which demanded the drafting of a more realistic economic programme, especially with regard to rural producer prices (World Bank, 1981; Payer, 1983). This new scheme, called the Structural Adjustment Programme (SAP), was launched during the Parliamentary discussion of the 1982/83 budget. According to the Minister of Planning, SAP would enable Tanzania to revive the economy without prejudicing government policy on socialism and self-reliance. SAP anticipated substantial IMF and World Bank loans for a three-year period.The implementation of SAP, however, met several obstacles, such as: i) an economic policy of extended recurrent expenditure by the state which contradicted IMF policy (IMF, 1984); ii) the persistence of enlarged government deficit spending led to an increase of government borrowing by 27.5 per cent between June and December 1981; hi) market price increases for staple foods'^ that were to accompany a minimum wage rise from Tsh 480 to Tsh 600 per month; with a substantial part of recurrent

The Chronology of Crisis in Tanzania, 1974—86 77 expenditure blocked for apparently political reasons so that the proposed total expenditure cuts in the 1982/83 budget by 1 per cent seemed improbable; iv) finally, new producer price increases in August 1982 hardly provided adequate economic incentives: the coffee price rose by 33 per cent, tea by 25 per cent and sugar cane by 24 per cent which failed to match the rate of inflation (Financial Times, 7.7.81, Daily News, 27.5.82 and 8.8.82). The events of August 1982 underlined the state of disarray within government. The World Bank was obliged to withhold transfers to Tanzania as the government had fallen behind in its repayment of principal and interest on World Bank loans. Two months later, Tanzania pledged to repay more than $15 million to the Bank, and its lending resumed in November (Times, 27.8.82). This episode further underlined the erratic course of Tanzanian politics: on the one hand, substantial support was expected from the Bank for SAP but, on the other, the government failed to meet basic preconditions. Thus, in November, negotiations with the IMF and the Bank started; apparently Tanzania had been driven back to the negotiating table by a clearer realisation of the dire state of the economy. In this same period, the major bilateral donors, with the exception of the Scandinavian countries, curtailed aid because of Tanzania’s inability to meet even interest payments on external debt.^^ Curtailed aid strengthened the position which the donors had pursued in the previous round of negotiations, namely, to avoid any precedent for exceptional financing. None of the creditor countries was willing to grant Tanzania fresh aid with the exception of the Scandinavian states whose banking system was not as deeply affected by the global debt crisis as European and US banks. Despite the unsettled issue of financial support for SAP, the Tanzanian government oriented its economic policy in accordance with SAP (the prevailing optimism about an agreement presumably stemmed from the increasingly eroded position of the anti-IMF faction within the government). Having resisted an IMF agreement on the grounds of its presumed devastating impact on the poor. President Nyerere now found himself manoeuvred into a comer.'* In the wake of soaring inflation, a mushrooming parallel market, real wage cuts and general shortages, an IMF agreement was increasingly seen as a relief rather than an additional burden (Dimsdale, 1983: 14—17). This change of mood reflected widespread frustrations with government policy. At the same time, on-going IMF negotiations were also interpreted from a nationalist perspective so that apprehensions about an impending loss of political autonomy remained a valid argument in a society whose socialist model had been generally appreciated. This latter ideological element backed the anti-IMF position (Matheson, 1985: 66) and gave the negotiations an overt political dimension. Political tensions were also heightened by the IMF delegation which linked its reservations about national economic performance to a fundamental critique of that country’s socialist orientation (Singh, 1984).’’ This shift of the Fund’s approach reflected the altered international climate. Whereas in

78

Case Studies

1980 the IMF had been obliged to improve its reputation among African debtor states, the deepening global depression made conciliation un¬ necessary.'** Further, crisis management among the core capitalist countries had significantly tilted politics into a hard-line posture against the Third World (Jackson? 1985: 1089f.).'^ Such a tilt moulded bilateral negotiations between the Fund and Tanzania with IMF conditionality leaving no room for manoeuvre or compromise. Hence, the August 1982 negotiations were abandoned in a mood of hostility. Towards reconciliation: 1984 The superficiality of this hostility was underlined by the next steps which the Tanzanian government took. The 1983 and 1984 budgets were based on exactly those deflationary measures which the Fund had demanded'during the abortive negotiations (IMF, 1984; 1986a; 1986b), i.e., streamlining public borrowing and restricting money supply (Minister of Planning, 1983: 26f.). Furthermore, the Fund’s credo of liberalisation of economic forces was partly fulfilled by the 1984 budget with the abandonment of state monopolies, marketing boards and crop authorities, while smallholders were helped by the liberalisation of domestic trade linked to the abandonment of subsidies on staple food. These measures notwithstanding, there remained areas of conflict, particularly over adjustment of the national currency and the definition of the country’s future growth pole. Since the outbreak of crisis, the Tanzanian government had devalued the shilling against the dollar several times: in January 1979 by 10 per cent, again by 10 per cent in March 1982, 20 per cent in June 1983 and 26 per cent in June 1984 (Global Stats, 1986: 8160). This adjustment was considered insufficient by the Fund which demanded a devaluation in the range of 300 per cent because the Fund had identified external trade as the growth pole. Tanzania, on the contrary, maintained that growth stemmed from domestic demand (Addison, 1986: 8 If.). Therefore, Tanzania opted for a modest devaluation. According to its calculations, the generation of domestic demand (smallholder producers and urban salariat) would increase through adjusted devaluation based on rehabilitated consumption power, an increase of industrial productivity matching the rise of import prices, and improved export performance outflanking negative terms of trade. Consistent with such a position, any dramatic devaluation would solely benefit the export sector and imports would not be forthcoming due to prohibitive price increases. A massive devaluation, therefore, would mean further hardships for low-income groups while overall economic recovery was not discernible. Hence, government favoured a gradual currency adjustment. It was expected that through austerity measures the worst effects of devaluation could be avoided. Indeed, the government strengthened its bargaining position vis-a-vis the IMF through: i) the introduction of direct taxation in August 1982 which consolidated revenues; ii) through the introduction of a development levy in 1984; and iii) by abolishing food subsidies (in June 1984) which reduced state expenditure thus ensuring that market prices

The Chronology of Crisis in Tanzania, 1974—86 79 were more in line with demand and supply. The reaction of the Tanzanian public was different from that of Egypt in 1978, Sudan in 1979 (Bhagat, 1980: 26f.), Tunisia in 1984 (Browne, 1984: 15f.) or Zambia in 1986 (Mukela, 1987: 65); the public abstained from ‘bread riots’ when government announced general austerity measures. The reason for this apparent apathy originates, in part, from the absence of organised mass political struggle (Mueller, 1980: 221) and partly from the role played by the Party (CCM) in depoliticising the population. The handling of the austerity measures and the public reaction to it formed the litmus test for the adoption of further adjustment measures, which assumed greater momentum as the country’s major donors reserved a $400 million fund to be released immediately an agreement with the Fund was concluded. Further, the World Bank was prepared to activate its structural adjustment loan following acceptance of IMF conditionality. This loan, first negotiated in 1980, had been blocked in the aftermath of the abortive IMF negotiations (Nyirabu, 1981: 72f.). Finally, Tanzania’s main supporters — the Scandinavian countries — increasingly altered their position and also insisted on an agreement with the IMF (SIDA, 1984: 1).^° Parallel to these external factors. President Nyerere seems to have undermined his domestic standing in the wake of the initiatives against ‘black market racketeers’ and corruption (in early 1983) among the elite. This was because prosecutions carefully avoided prominent political figures whose involvement in the rackets was publicly known.^^ Meanwhile, the economic crisis had deepened and instant measures of recovery seemed more urgent than ever. The budget presentation for 1984/85 unequivocally admitted disarray in foreign trade, which had driven the economy into a crisis, recovery from which depended on the rehabilitation of exports. This fully acknowledged IMF arguments and received additional backing from the Economic Survey for 1984 which had pointed out that foreign exchange earnings financed only 46.6 per cent of imports in 1983 and 41 per cent in 1984 (Minister of Planning, 1985: 5). Lack of imports negatively affected the performance of the country’s cash crop sub-sector, notably with regard to fertilisers and transport (foel and equipment). According to the Minister of Finance, estimates of Tanzania’s debt repayment obligations on medium and long-term loans exhibited alarming features, as Table 6.2 depicts. Table 6.2

Debt repayment obligations 1980—85 1980 1981 1982 1983 1984 1985

Amount due A 88.7 105.0 82.9 179.8 240.4 262.0

(US$m)

Exports B 711 563 413 379 369 326

A/B 12.5% 18.7% 20.1% 47.4% 65.1% 80.4%

Sources: Minister of Finance, 1985: 4; IMF, 1986a: 32; and World Bank, 1985: 109.

80

Case Studies

These figures also indicate that neither devaluation nor producer price increases would be sufficient to restore export performance, precisely because smallholder producers had responded negatively to similar incentives before. Somewhat unexpectedly, given the changing political alignments taking place, reservations about IMF prescriptions disappeared. A revision of agricultural policy (Ministry of Agriculture, 1983; Msambichaka et al., 1983: 15—21) was seen to be hardly sufficient unless it was accompanied by additional concrete measures, i.e., the rehabilitation of commodity exchange (which depended fundamentally on the performance of external trade). Thus precisely as the economic matrix dilapidated, not recovery but reconstruction was required.

In search of long-term recovery The frontal assault by donors, the World Bank and the IMF has led Tanzania to gradually abandon its model of ‘socialist’ development, and to substitute in its place a new strategy which seems to allow the state to consolidate its position — politically and economically — albeit at the expense of the long-term interests of the population. Such an about-turn necessitated an entirely different approach to the IMF. Henceforth, the quest for long-term schemes prevailed over instant adjustment. However, according to the short-term balance of payments function for which the Fund was designed (Killick, 1984: 199), negotiations with the IMF appeared to be increasingly regarded as a step towards reconstruction. Assessment by the Fund required more substantial measures than the austerity policy adopted in 1984. This new problem, however, did not prevent the Tanzanian Minister of Finance from fighting for an agreement and new loans, as he outlined in his 1985 budget speech. The economic facts supported his position: not only had the SAP programme failed (Minister of Planning, 1985: 2), but the economy also rapidly deteriorated with gross domestic fixed investment (which in 1970 equalled 38.6 per cent of domestic demand) turning negative since 1980 to the tune of 35.2 per cent. In other words, investment had been abandoned in order to spend. By 1985, the populist economic policy faced an historical impasse as was outlined dramatically by President Nyerere’s decision not to seek re-election in the 1985 presidential election. The impending leadership change probably spared the country social turmoil, partly because the incoming leadership promised a more pragmatic approach vis-a-vis the economy. Henceforth, concerns about the material situation prevailed over theoretical and political reservations about an IMF agreement. Indeed, over the preceding years material hardship had drastically increased for several reasons. First, real wage reductions in the range of 40 per cent between 1981 and 1984 had occurred.^^ Also, price increases followed the withdrawal of subsidies^'* and further contractions of commodity supplies (Africa Now, Sept. 1984: 73) placed the populist model

The Chronology of Crisis in Tanzania, 1974-86

81

under severe stress. Shortages of staple food contradicted this adjustment policy as both producers and the urban masses suffered: the former were apparently prepared to increase production but abstained so long as commodity exchange remained inadequate. In addition, the reduction of subsidies on fertilisers and fuel led to increases in production costs which made the growth of marketable output unfeasible (Rake, 1986: 39). The urban population was driven to parallel market practices, while post-1984 import liberalisation led to exorbitant prices of even basic commodities. These trends showed that economic recovery necessitated external financial support, for an increase of domestic food supplies requires commodity inputs. In this way it was hoped that the extremely lopsided demand-supply situation of the urban market, the cause of the parallel economy, would be eliminated. Local light industries operated at a capacity utilisation rate of approximately 20 per cent and their contribution to GDP consequently fell from 1 per cent (1980) to 0.4 per cent in 1985 (Minister of Planning, 1985: 4). Industrial rehabilitation necessitated access to foreign resources as did the restoration of the unbalanced urban market. Devaluation was, therefore, seen as necessary. After the presidential and general elections of October 1985, the new leadership embarked on a two-fold strategy. First, devaluation was introduced by the free floating of the Tanzanian shilling in April 1986; second, an economic recovery programme was drafted on the basis of which the World Bank and other major donors were approached under the auspices of the Club of Paris. With an agreement achieved in principle, government presented its 1986/87 budget which included those elements on which the Fund had insisted. Since longer-term relief had already been agreed upon, the Tanzanian government could now more easily accept IMF conditionality (the agreement was signed in August 1986). With funding secured, the issue of outstanding commercial credits was resolved through substantial re¬ scheduling under the Club of Paris in September.

The 1986 package The quick rapprochement after six years of struggle cannot be explained solely in terms of power politics, either domestic or involving the IMF and the core countries. Between 1980 and 1985 the Tanzanian leadership had struggled to resolve the economic crisis autonomously, an approach which had even led to an autarchic trend. Internal adjustment had exposed the subordinate and transitional character of the socialist model, i.e., the predominance of market mechanisms. More important, however, was the apparent gap between the ideological propositions and social reality. The peasant economy lacked the required level of relations of production which would have made redistribution of surplus towards industry viable; further, production relations were primarily family-centred. Both factors explain

82

Case Studies

the meagre successes of the ujamaa model, and also help to explain peasant withdrawal from market relations in the wake of crisis (Mapulo, 1985: 132). The introduction of a new agricultural policy at the height of the crisis appears to have given peasants greater autonomy with respect to the market¬ ing of their produce (Naali, 1985: 154; Msambichaka et al., 1983. 125). Additionally, the state is gradually losing its legitimation function as part of the gradual economic adjustments, rather than by any abrupt political rupture, which underlines the transitional and ambiguous character of the social experiment. Domestic changes also included a divergent approach vis-a-vis the external world. The inward-looking, nationalist model had generated an ideological dichotomy between a progressive Third World and exploitative metropoles — a position with regard to world politics which seems fairly valid. At the same time, however, it exhibited an enormous disdain for the social potential of classical capitalism (Ominami, 1986), which appeared as ignorance when it came to administering its end of the world market nexus.^® Political adjustments reflected a domestic economic re-orientation and translated into a less confrontational attitude vis-a-vis the IMF. Pragmatism was substituted for African socialist ideology, and resulted in the successful negotiation of a long-term recovery support package which followed the IMF agreement.^^ The 1986 recovery programme, designed for three years, required a capital input of $3,200 million. The country’s major donors agreed to transfer $800 million annually in addition to $100 million in a World Bank structural adjustment loan. The programme placed strict emphasis on smallholder production for which $550 million is reserved.^*^ The intention was to enable Tanzania to resume her debt repayment obligations. The 1986/87 budget also contained a further devaluation of the shilling which, after two months of floating, had fallen from Tsh 17 to the dollar to approximately Tsh 30 to the dollar. The new rate was fixed at Tsh 40 to one dollar, a devaluation by 135 per cent (Financial Times, 13.6.86). Furthermore, total government expenditure was frozen at 1985 levels, while development expenditure was increased with one third of the development budget designed for agriculture. Finally, the budget focused on substantial producer price increases, which in the cases of coffee and cashew nuts grew by 80 per cent and 54 per cent respectively. Both recurrent expenditure cuts and devaluation were appreciated by the IMF which apparently saw its conditions being implemented (Africa Economic Digest, 28.6.86 and 4.10.86). The August 1986 agreement originated from this budget and the intention of Tanzania to adhere strictly to the austerity policies.^® This agreement, which included a stand-by facility of SDR 64.2 million, is strikingly low when contrasted with the massive Club of Paris loans, and seems to indicate that long, rather than short-term, adjustment has been identified as the target (the public statement by President Mwinyi that the agreement ‘was a victory for Tanzania’ appears to underline such an interpretation). The debt rescheduling scheme of September covers payment arrears of

The Chronology of Crisis in Tanzania, 1974-86 83 approximately $600 million for which a five~year grace period was agreed with repayments during the subsequent ten years,and finally secured bank credit. How dangerous the situation had been for bank capital was revealed in IMF data which shows that the banks had withdrawn suppliers’ credits after 1984^' when Tanzania failed to make repayments. In September 1986, approximately $600 million was overdue (Africa Economic Digest, 4.10.86). With this kind of background, it became easier to appreciate the apparent speed with which the agreements were concluded! Conclusion With the foreign exchange crisis ‘solved’, Tanzania can expect to consolidate her newly adopted export-oriented model. Furthermore, a less restricted interaction of domestic economic forces is envisaged — emphasis is to be placed on smallholder producers with industry itself occupying an auxiliary role. Even so, the adoption of the IMF programme is not aimed at the improvement of relations of production, or at interlinkages between agriculture and industry (the prerequisite of development), nor will the IMF package enhance employment or improve the maintenance of social services and related infrastructure. ‘Development’ defined in terms of ‘socialism and self-reliance’ had in fact already been abandoned under the various emergency schemes, viz. National Economic Survival Programme and Structural Adjustment Programme, and possibly as long ago as the large-scale ujamaa schemes. The central issue of the transitional period had been how to activate, co-ordinate and control agrarian producers to fulfil the targets on which the state depended. The Tanzanian state has failed in its resource mobilisation campaign, which has necessitated fundamental readjustments in domestic relations of production, and in its linkage with the world economy. The realisation of these readjustments has caused conflict and a protraction of the IMF negotiations. The recent IMF agreement, therefore, appears as a consolidation of extant political relations and not a rupture. This constellation notwithstanding, the extent of external interference to which Tanzania — as well as many other Third World nations — is subjected would be unthinkable for any metropolitan state. That it has occurred simply underlines the enduring inequalities vested in the capitalist core countries, and in their power to manage the forces of the world economy to their own advantage.

Notes The paper emerged from the lEDES (Paris I) research programme on Structural Adjustment and Accumulation in Africa. A first draft had been presented at the Institute’s research seminar in January 1987. The authors appreciate the comments which led to some conceptual reorganisation. Our special thanks are to Marie-France L’Heriteau and Jean-Marc Fontaine.

84

Case Studies

1. Green et al. (1980: 7—12) mention a minor balance of payments crisis in 1970/71. 2. According to Green et al. (1980: 94); this position is questioned by numerous authors, see inter alia Bryceson (1981), Mapulo (1985), and notably Coulson (1982). These authors argue that factors related to villagisation provoked peasant withdrawal. 3. After that crisis, food aid resumed; however, grain policy needs analysis in terms of power politics because the US deployed grain as a policy instrument to restore lost influence in the wake of the October War (1973) and the first oil shock. 4. An account of this war from a Tanzanian perspective is presented by Avirgan and Honey (1982); the official Tanzanian position Blue Book on the War Against Amin’s Uganda is reprinted in Mathews and Mushi (1981: 305—12). 5. Payer (1983: 791f.) argues that the World Bank added to this pressure. 6. For a eomprehensive analysis of Tanzanian foreign policy see Mathews and Mushi (1981), still the only secondary source material available. 7. In 1979 the Fund approved SDR 445.2 million to African states which increased to SDR 1,833 million one year later, and reached SDR 4,295.5 million in 1981. After that date, the volume of Fund approvals declined to SDR 1,384.9 million in 1982, although the number of applicant states increased. See Zulu and Nsouli (1985: 4f.). 8. According to calculations by Mtatifikolo and Semboja (1985: 2f.) tax revenue equalled 36.3 per cent of GDP in 1982 while in 1964 its contribution had been equivalent to 14.9 per cent. 9. On NESP, see the findings of an IDM workshop, and particularly the introduction by Mmbaga (1982: 1-14); for the document, see Ministry of Planning (1982). 10. Capital budget was reduced by about 30 per cent in real terms, cf. Rwegasira (1984: 65). 11. Food deficits persisted that year and caused imports of $87.4 million {News Agencies, 12.9 and 6.10.81 quoted by ARB/ES). In addition, the country had to apply for Emergency Food Aid of c. 260,000 tonnes (Times, 28.12.81). 12. According to the Tanzanian planners, a combined IMF/IBRD credit in the range of $690 million was expected in addition to a $360 million suppliers’ credit, while import support of $528 million was expected — the total foreign crediting amounted to $1,578 million for the period 1982-1985; see Ministry of Planning (1982: 14). 13. The true market price of maize was calculated at Tsh 3.80 per kg while the official price was Tsh 2.50 per kg (Financial Times, 7.7.81). 14. The official inflation rate was calculated at 30 per cent; hence, real expenditure cuts in the range of 30 per cent were announced, cf. Africa Economic Digest (25.6.82). 15. Bilateral aid cummitments ($ million) Year

Commitment (A)

1978 1979 1980 1981 1982 1983 Source: World Bank ( OJH.S: 108).

99.5

123.6 156.7 178.1 112.3 63.3

Disbursement (B) 90.6 101.3 49.2 97.8 70.2 n.a.

A/B% 82

31 55 63

The Chronology of Crisis in Tanzania, 1974—86

85

16. In his interviews with the international press, former President Nyerere emphasised his concerns about the devastating impact the IMF policy would have on the ‘less privileged social groups’; see inter alia Africa Now (Dec. 1983: 97f.) and Africa Report (Nov./Dec. 1985; 4f.). 17. According to Green (1984: 74), adviser to the Treasury until 1984. 18. Those African countries applying for IMF funding in 1980 were of geo-political relevance notably for the US: Egypt and the Sudan as regards the Near East, Zambia and Zimbabwe in the context of Southern Africa. 19. Depth of crisis initiated concerted actions between private banks and the IMF (Wachtel, 1986: 125f.). The core countries gave backing for the recovery of commercial loans; the IMF, instead, concentrated on the LDCs, a task for which it was badly equipped, cf. Bird (1982; 15f.), Browne (1984: 14f.), Cunha (1985: 21f.) and Helleiner (1983: 22-5). 20. Since the outbreak of crisis the Scandinavian countries had granted extraordinary balance of payments support of $112 million (1981); $92 million (1982); $61 million (1983) and $49 million (1984) according to IMF data (1986a: 32). Reduction of this support accompanied redefinition of its purpose; prior to 1984 that money could be spent by the Tanzanian government to cover deficits; after that date, the transfers were designed as import support, i.e., loans through which to buy Scandinavian produce. 21. See the fairly accurate accounts by Dimsdale (1983: 14f.); New African (March 1982: 23f.); Africa Now (Dec. 1984: 55f.); and African Business (June 1986). 22. Since 1980 the public sector’s contribution to GDP had doubled to more than 32 per cent (Ministry of Planning, 1985). 23. Minimum wages increased from Tsh 480 to Tsh 600 per month in 1981 (Financial Times, 7.7.81), followed by the next increase in 1984 to Tsh 810 (DNS, 15.6.84). 24. Immediately after that announcement, maize prices increased from Tsh 2.50 per kg to Tsh 6.60 (DNS, 15.6.84) and reached Tsh 7.60 in September (Africa Now, Sept. 1984: 73). 25. Mueller (1980) identifies post-Arusha developments with ‘Narodism’; she argues that the populist state blocked any advances as regards development of relations of production and embarked on a policy of absolute surplus value extraction. Her model, irrespective of its conceptional basement, deserves attention as a contribution towards de-mystifying the ‘Tanzania debate’. 26. Tanzania’s foreign policy in the 1970s was highly successful as it was adjusted to the division of power on a global scale. The quest for US hegemony, however, rendered that policy approach redundant while the changes of power structure eclipsed Tanzanian diplomacy. 27. In the Tanzanian case, acceptance of the IMF conditionality combined with activation of fresh aid assistance; hence, that shock which many countries under IMF structural adjustment experienced could obviously be avoided. The country’s leadership publicly announced that long-term economic rehabilitation would be struggled for, which indicated the intention towards an IMF/IBRD package deal (Monitor Dienst, 2.1.86; 10.1.86 and 21.5.86). Furthermore, instant material improvements occurred as the unofficial exchange rate deteriorated dramatically from 1:8 (in relation to the official one) in May 1986 to approximately 1:1.3 in August 1986 (Daily Nation, 15.6.84 and Ikiara, 1986: 28). 28. 0.60 per cent of recurrrent expenditure will be spent on fertilisers and

86

Case Studies

machinery while 25 per cent of the development budget is devoted to smallholder schemes; investments for rural development equals 0.70 per cent of the total budget; see Bundesstelle fiir Aufsenhandelsinformation (31.7.86). 29. The ‘letter of intent’ by the Tanzanian Minister of Finance (Msuya to Larosiere, Dar es Salaam, 8 August 1986) contains a detailed list of immediate policy measures. 30. According to the ‘Agreed Minute of the Consolidation of the Debt of the United Republic of Tanzania’, Paris, 18 September, Club of Paris (1986: 2). 31. ‘Latest estimate of the IMF’, Notes attached to the Agreed Minute, Club of Paris (1986).

References Official documents Club of Paris (1986), Agreed Minute of the Consolidation of the Debt of the United Republic of Tanzania, Paris, 18 September (confidential). EEC (1982), Tanzania’s Economy 1981/82. Report prepared by the Economic and Commercial Officers of the EC Member Countries in Dar es Salaam under the Chairmanship of the Royal Danish Embassy (confidential). — (1983), The Tanzanian Economy, recent developments and prospects, EG/CD (confidential). IBRD (1981), Economic Memorandum on Tanzania, Report no. 3036 — TA, Washington, DC. — (1985), World Debt Tables, External Debt of Developing Countries, Washington, DC. IMF (1984), Tanzania — Recent Economic Developments, SM/84/256 (confidential), Washington, DC. — (1986a), Tanzania — Staff Report for the 1985 Article IV Consultation, SM/86/23 (for agenda), Washington, DC, 7 February. — (1986b), Tanzania — Stand-By Arrangement EBS/86/183 Supplement, Washington, DC, 29 August. SIDA (1984), Background Paper for Tanzanian-Nordic Symposium (confidential), Stockholm, 17 November. Ministry of Agriculture (1982), The Tanzania National Agricultural Policy (Final Report), October. — (1983), The Agricultural Policy of Tanzania, 31 March. Minister of Planning, Speech by the Minister of Planning when presenting the Economic Survey and the Annual Plan to the National Assembly, various years. Ministry of Planning (1981), The National Economic Survival Programme (NESP). — (1982), The Structural Adjustment Programme for Tanzania. Books and articles Addison T. (1986), ‘Adjusting to the IMF?’, Africa Report, May/June. Avirgan, T. and Honey, M. (1982), War in Uganda, The Legacy of Idi Amin, Dar es Salaam. Baguma, R. (1982), ‘The National Economic Survival Programme (NESP)’, in

The Chronology of Crisis in Tanzania, 1974—86

87

W. Mmbaga and R. Baguma (eds), The Tanzania National Economic Survival Programme, Dar es Salaam. Bhagat, H. (1980), ‘Mixed blessings’ in New African, Feb. Bird, G. (1982), The International Monetary System and the Less-developed Countries, Lx>ndon. Blue, R.N. and Weaver, J.H. (1977), A Critical Assessment of the Tanzanian Model of Development, DSP, Occasional Paper no. 1, Washington, DC. Browne, R.S. (1984), ‘Conditionality: a new form of colonialism?’ in Africa Report, Sept./Oct. Bryceson, D.F. (1981), ‘The national grain supply problem in Tanzania, 1961—1978’ in Journal of the Geographic Association of Tanzania, no. 19/20. Coulson, A. (1982), Tanzania: A Political Economy, Oxford. Cunha, A.G. (1985), ‘Toward a new deal’ in Africa Report, May/June. Dimsdale, J. (1983), ‘Rhetoric meets reality’ in Africa Report, Nov./Dec. Global Stats (1986), ‘Analysis of economic growth — Tanzania’ in Africa Research Bulletin, April. Green, R. et al. (1980), Economic Shocks and National Policy Making: Tanzania in the 1970s, The Hague. Green R. (1982), ‘Industrialisation in Tanzania’ in M. Fransman (ed.). Industry and Accumulation in Africa, London. — (1984), ‘Sparring with the IMF’ in Africa Report, Sept./Oct. Helleiner, G. (1983), ‘The IMF and Africa in the 1980s’ in Canadian Journal of African Studies, vol. 17, no. 1. Holman, M. (1982), ‘Africa’s struggle to meet the Fund’s demands’ in Daily News, 6 April. Ikiana, G.K. (1986), ‘Second time around for export incentives’ in African Business, May. Jackson, H.F. (1985), ‘The African crisis: drought and debt’ in Foreign Affairs, vol.63,no.5. Kahama, C.G. et al. (1986), The Challenge for Tanzania’s Economy, London. Kamori, D. (1984), ‘International economic relations’ in Tanzania: Twenty Years of Independence (1961—1981), op.cit. Killick, T. (1984), ‘IMF stabilisation programmes’ in The Quest for Economic Stabilisation: The IMF and the Third World, London. Lever, H. and Huhne, C. (1985), Debt and Danger: The World Financial Crisis, London: Penguin. Mapulo, H. (1985), ‘The state and the peasantry’ in I. Shiyji (ed.). The State and the Working People in Tanzania, Dakar: CODESRIA. Matheson, A. (1985), ‘A notable year for Nyerere’ in Africa Report, Jan./ Feb. Mathews, K. and Mushi, S.S. (eds). Foreign Policy of Tanzania 1961—1981, Dar es Salaam. Mmbaga, W. (1982), ‘Tanzania and the NESP’ in The Tanzania National Economic Survival Programme, op.cit. Msambichaka, L. et al. (1983), Agricultural Development in Tanzania, Dar es Salaam. Mueller, S. (1980), ‘Retarded Capitalism in Tanzania’ in R. Miliband and J. Saville (eds). The Socialist Register. Naali, S. (1985), ‘State control over cooperative societies and agricultural marketing boards’ in The State and the Working People in Tanzania, op.cit. Nyirabu, C.M. (1981), ‘IMF and Tanzania’s experience’ in Bank of Tanzania Economic and Operations Report, June.

88

Case Studies

Ominami, C. (1986), Le tiers monde dans la crise. Essai sur les transformations recentes des rapports Nord-Sud, Paris. Payer, C. (1983), ‘Tanzania and the World Bank’ in Third World Quarterly, vol. 5. Rake, A. (1986), ‘Tanzania strikes a deal with the World Bank’ in African Business, June. .* Rwegasira, D. (1984), ‘Development planning’ in Tanzania: Twenty Years of Independence (1961—1981), op.cit. Shivji, I.G. (1976), Class Struggles in Tanzania, Dar es Salaam. Singh, A. (1984), ‘Notes on the economics and politics of devaluation’ in Africa Development, vol. 9, no. 2. Wachtel, H. (1986), The Money Mandarins. The Making of a Supranational Economic Order, New York. Zulu, J.B. and S.M. Nsouli (1985), Adjustment Programs in Africa: The Recent Experience, Washington, DC.: IMF.

7. Tanzania: The Pitfalls of the Structural Adjustment Programme Haroub Othman and Ernest Maganya Since Tanzania is still within the orbit of the world capitalist economy, this paper begins with the current state of affairs of the world economy and its future trends (Loxley, 1986). Capitalism in the 1980s is undergoing a period of sustained crisis, the recovery of leading countries like Japan notwith¬ standing. It is a crisis which affects more adversely the countries of the ‘periphery’ and is characterised by shrinking markets for primary com¬ modities and an upsurge of protectionism. The prospect of the world economy improving in the near future is very dim; and the ‘economic wonder’ of ‘fordism’ (Lipietz, 1986), which brought about mass production, mass consumption and mass democracy, is gone forever. The social fabric built upon the ‘fordist’-oriented world economy is undergoing profound decomposition, something felt within both the metropole and the ‘periphery’, and it also affects the pattern of dominance between the two. One must observe, therefore, that not only an understanding and grasp of the dynamics of the economies of the individual countries is imperative, but account must be taken of the present conjuncture of the world economy. This has not happened so fzir in the case of the Structural Adjustment Programme (SAP) being offered by the World Bank and the International Monetary Fund. Most of the policy prescriptions contained in these packages are based on the positive scenarios that development by growth envisages, regardless of the ‘changed times’. Furthermore, these policy packages are oriented to the free market ideology. For instance, beyond the technicalities of the 1981 World Bank Report on sub-Saharan Africa (SSA) is a rigidly formulated political programme that is anti-state involvement in the management of the economy. The policy of substituting state-centred development for the ‘free play of market forces’ mostly affects, to use the parlance of UNICEF, the most vulnerable sections of the population by way of negative distribution. This approach contains a number of implications or consequences for a Third World economy: 1. that it is impossible at this conjuncture for the exporters of agricultural raw materials, who do not control the price mechanisms in the world market, to accumulate enough; 2. the adjustment programmes recommended by the Fund and Bank put undue emphasis on trade and integration into the world market, at a time when most commodity markets are collapsing and a new, perhaps more permanent, protectionism is being established. Such programmes eliminate the possibility of ploughing back the profits of commodity exports into investments because the structural adjustment regime has to observe the financial conditionalities imposed by the Fund and Bank. In such a situation

90

Case Studies

it becomes impossible to create an internally generated, self-sustaining development process; 3. the SAP entrusts the fate of the working population of the African countries to the alleged egalitarian nature of free competition but this cannot work due to the disarticulated and rigid nature of most of the economies of the SSA countrie?. A critical review of the theoretical formulation of World Bank

and IMF policies While one can agree with some of the analyses of bourgeois scholarship with regard to the economies of SSA, one must object to the political and ideological premises that underlie them. The World Bank and IMF have, in their intellectual literature on these countries, concealed their political motives behind technocratic solutions. Although the theoretical foundations of Fund and Bank policies have been emphatically oriented towards the free market, these institutions accepted ‘socialist’ experiments and mixed economies in SSA during the decades of continuous expansion in the 1960s and 1970s. However, when this favourable economic constellation entered into its present crisis, these institutions activated their ideological arsenal: the socio-political framework of the SSA countries was now targeted as the major reason for the decline of these countries. That tended to make policy makers operating within the paradigm of market forces extremely insensitive to the negative social consequences of these policies on the working population of Africa, and uninterested in suggested variations within the same paradigm aiming at alleviating the suffering of the weakest strata of society from the process of re-adjustment (Jolly and Comia, 1984; Comia et al., 1987; ILO, 1986). The validity of much of the empirical findings by the World Bank and IMF on the economies of the SSA notwithstanding, these institutions have in the past contributed to the socio-economic matrix whose failure they solely explain in domestic terms. Any suggestion, therefore, of an alternative strategy must take that fact into account, as shown by Loxley with regard to Tanzania (1986:12): The starting point for the drawing up of alternative approaches must be the recognition that a good deal of the diagnosis of the IMF and the World Bank has substance, even if one might use broader political explanations for the emergence and nature of the problems. SSA governments have undoubtedly pursued policies which have had an anti-rural bias and this has contributed to declining rural surplus and, in some cases, total production.

In Tanzania, except for the brief period 1967-70, the World Bank has been the major development partner and policy ‘co-formulator’, particularly in the area of agricultural production (Dinhem and Hines, 1983). Policies for competitive real excimnge rates Perhaps the most important and most controversial of all the World Bank—

Tanzania: Pitfalls of the Structural Adjustment Programme

91

IMF conditionalities is the need to keep real effective exchange rates competitive in order to stimulate exports and restrain imports. The purpose is to reduce the extent of the foreign exchange crisis, a problem common now to most SSA countries. It would be difficult not to agree with the World Bank analysis that the foreign exchange crisis has reached such an alarming level that corrective measures are necessary, though the use of devaluation as a solution is highly controversial. The problem with this conditionality (i.e., devaluation), lies in the theoretical assumption that devaluation enables the government to pay better producer prices, stimulate agricultural production and exports, and consolidate internal revenues. The classical condition for this is that the sum of the export and import elasticities of demand should be greater than unity. The SSA countries have undergone different forms of devaluation, the extreme case of ‘efficient’ devaluation being that of the auctioning of foreign exchange. But as the recent case of Zambia has shown, devaluation in itself only exacerbates the problems. The elasticity condition is usually not satisfied, among other shortcomings. This has made even those countries that wanted to plan their economies in a scientific way realise that it is impossible to do so under Fund—Bank conditions. When Tanzania, for example, adopted the IMF package in June 1986, the exchange rate was fixed at 40 Tanzanian shillings to the US dollar (Tsh 40 = US$1); by April 1987 it had soared to Tsh 58.55, and by mid-July it was at Tsh 64.71 to one US dollar. These fluctuations make it difficult to undertake medium-term planning, as required by the country’s five-year development plan, let alone long-term planning in the twenty-year development plan. Maintaining budgetary and monetary restraints The need to bring government expenditure in line with revenue and control inflation is a central aspect of IMF conditionality. Though some SSA countries are modest in their inflation rates compared to those of Latin America, or even Israel, their rates of inflation still have devastating impacts on their economies. The need to contain inflation, therefore, is urgent and necessary. The typical free market-oriented mechanisms for controlling inflation are cuts in public expenditure, wage and salary freezes, and a general reduction in purchasing power. The agricultural sphere of realisation is, therefore, negatively affected, and the ensuing poor performance of this key economic sector makes economic recovery less likely. Eventually the fight against inflation will only lead to higher inflationary rates. In the past, extensive government borrowing was said to have accelerated inflation. But the present deflationary trend is accompanied by higher interest rates, and referred to as a ‘credit squeeze’. Higher interest rate policy and ceilings on bank credit make bank borrowing by the smallholders or peasants extremely difficult, and add to the stagnation of the key agricultural sector. The net effect of these policies is to help the private sector and that

92

Case Studies

segment already under the control of international agro-business. The overall improvement in agriculture is, therefore, based on the undermining of the co-operative scheme which, in the Tanzanian case, has been identified as the crucial vehicle for radical rural transformation. Reform of public'*enterprises and improved allocation of public funds One of the critical conditionalities of the IMF and World Bank is the general crusade against real, or imagined, expansion of the public sector. Indeed, most of the above fiscal and monetary policies, like higher interest rates, objectively aim at reducing the importance of state enterprises. In the case of Tanzania, as Table 7.1 shows, the parastatals have not performed badly, despite all the criticism levelled against them, both domestically and internationally. Table 7.1

Tanzanian state support to parastatals Year

State subvention

1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

420.7 625.5 1,314.3 1,189.4 1,167.1 1,598.1 1,293.3 1,367.1 1,689.1 2,971.3

Contribution from parastatals 85.2 106.1 75.1 95.1 113.6 200.0 210.2 142.7 199.0 347.0

(in million shillings)

Real transfer from the state to parastatals 335.5 519.4 1,239.2 1,093.9 1,053.5 1,398.7 1,083.4 1,224.4 1,490.1 2,624.6

Parastatal profits

Parastatal contribution to GNP

626.3 730.4 855.9 1,008.0 1,492.7 2,312.9 1,899.0 2,100.0 2,725.6 3,458.6

1,249.2 1,502.4 1,719.3 1,972.9 1,492.7 3,716.5 3,785.0 5,073.0 5,662.0 7,387.0

% to GDP 11.9 15.0 10.1 9.1 9.5 13.0 11.7 13.5 13.6 14.0

Source: Ministry of Finance, Economic Development and Planning, Implementation of the Policy of Socialism and Self-Reliance in the Economic and Financial Sectors, paper presented to the Symposium on Twenty Years of the Arusha Declaration, Dar es Salaam, 1987.

From the Table it can be seen that there is no empirical evidence of parastatal inefficiency, and the criticism of these parastatals by the IMF and the World Bank lacks both theoretical and empirical bases. The commendable feature of Tanzanian economic policy has been that, despite a weak economy, it was able to give subventions to state enterprises, while at the same time investing heavily in such areas as adult literacy, primary education and a relatively well functioning health care system. The following figures emphasise the point: Tanzania has 3.7 million children in primary schools, over 40,000 students in secondary school, and 4,500 in its two universities. It has attained a literacy rate of 85 per cent; has 150 hospitals, 2,600 dispensaries, and one doctor per 26,000 people. It has reduced the infant mortality rate to 137 per 1,000 births and raised life expectancy to 52 years. Some 50 per cent of the population have access to clean water. These modest achievements are now being quickly eroded in the current depression and under pressure from IMF—World Bank programmes.

Tanzania: Pitfalls of the Structural Adjustment Programme

93

Their aim is not to consolidate the public institutions, but to cripple them through budgetary cuts and excessive fiscal and monetary controls. The secondary school system, to all intents and purposes, has now been commercialised. The Economic Recovery Programme (ERP) launched in June 1986 to encompass IMF conditionalities, has imposed school fee rates, regardless of parental ability to pay. As of January 1987, parents were expected to pay ‘contributory’ school fees annually at rates ranging from 350 shillings for secondary day schools without food (with food = 700 shillings) to 2,000 shillings for secondary boarding schools, and from 1,500 to 2,500 shillings for non-university technical and other colleges. The extent of the burden can be gauged from the fact that the minimum money wage in 1987 was 1,260 shillings.

Structural adjustment programmes in Tanzania: formulation, implementation and future trends In the face of the 1979 economic crisis, the Tanzanian leadership failed to come up with a comprehensive alternative programme. Both the National Economic Survival Programme (NESP) and SAP I and II underrated the depth of the crisis, and appeared as conjunctural corrections rather than substantive structural changes. Given this policy lacuna, and a development process heavily dependent on foreign aid, the ‘International Ministry of Financiers’, as Julius Nyerere aptly termed the IMF, ‘happily’ intervened. Whatever rationale has been provided for signing the agreement with the IMF, the toll on the Tanzanian working people has been clearly evident. Despite slight improvements to the minimum wage, the living conditions of the people have deteriorated even further, and the inflation rate has persisted at its high level. The real income per capita measured at current prices should have been Tsh 5,998 and not Tsh 1,164. This wide gap exemplifies the material hardship to which the working population has been exposed. While cuts in real incomes can be accepted under certain conditions, it is questionable whether such negative redistribution can support recovery in agriculture which is the country’s key sector. There is no doubt that if such a policy is pursued over a long period, as seems to be the case now, it can be counter-productive. Increase of agricultural incentives through higher producer prices Because of its commitment to social infrastructural improvement, the Tanzanian government in the past kept agrarian producer prices at a relatively low level (Ellis, 1982; Ellis and Ellen, 1980; Msambichaka et al., 1983). The World Bank, over and above the general argument on producer price levels, introduced the question of relative prices between food and cash crops. Indeed, it argued that the relatively higher prices for Tanzanian food crops in the 1970s contributed to the decline in the volume of cash crops.

94

Case Studies

This line of thinking, of course, conforms with the Bank’s obsession with export-led growth. The reality, however, as Dinham and Hines (1983) have ably shown, is that there was a systematic neglect of food in Tanzania. The fact that peasants preferred, and still prefer, to grow food crops is accounted for more by the fact that the cost of production is far lower than in perennial cash crops, and the parallel market prices for food crops relatively higher. For these reasons, plus the fact that food crops also meet the subsistence needs of peasant households, food crops are preferable to peasants, even given the differentiated pricing policy adopted under World Bank—IMF influence (URT, 1986). Table 7.2 compares the producer prices for both food and cash crops before and after the adoption of the Economic Recovery Programme. Table 7.2

Agricultural producer prices for selected export and food crops (in Tsh) 1985/6

1986/7

28.20 16.10 11.75 4.90 16.25 8.75 47.38 29.13 25.38

50.75 29.00 18.10 7.60 16.90 9.10 49.25 30.30 26.40

5.80 8.80 6.60 3.30

6.30 9.60 7.20 3.60

4.40 13.20

4.80 14.40

% increase

Export crops Coffee arabica Coffee robusta Cashew nuts Tea Cotton Grade A Cotton Grade B Tobacco (flue cured) Tobacco (fire cured) Barley

80 80 55 55 30 30 30 30 30

Food crops Maize Paddy Wheat Cassava Sorghum Beans

Source: The Economist Intelligence Unit; no.4, 1986 (Dar es Salaam).

While one might generally agree that better producer prices can activate peasants to produce more, the problem of peasant production is much more complex than prices alone. It is too early to assess the effectiveness of the differentiated pricing policy, but the results for the 1986/87 agricultural season do not give a conclusive picture. Generally, due to a combination of good weather and the initial impact of higher producer prices, the peasants managed to produce one of the biggest maize harvests in the Tanzanian post-independence period. It is estimated that about 2,210,000 tons of maize were produced in 1985/86 as against 1,549,000 tons for the 1984/85 season. The performance in the production of cash crops did not, however, show any significant changes. Coffee production, for example, declined from 53,400 tons in the 1985/86 season to 44,000 tons in the 1986/87 season. The only exception was the production and

Tanzania: Pitfalls of the Structural Adjustment Programme

95

sale of cotton which increased two-fold from 200,000 bags in 1985/86 to 400,000 bags for the 1986/87 season (URT, 1987: 2). One fact that needs to be emphasised with regard to producer prices and production is that, whatever benefit there may be in terms of increased productivity, this is limited in time and space. As price ceiling levels are reached (Tanzania’s target is 60-70 per cent of the world market price — and this has almost been reached), the only way to increase the volume of agricultural production is through intensified cultivation methods. This needs an increased supply of inputs and the adoption of better and modern methods of agricultural production. In the context of the ever-increasing costs of agricultural inputs and the dominance of the free market ‘incentives’, it is the rich peasants (kulaks) who mostly gain from the Fund and Bank policy. It is, therefore, not surprising that the World Bank Report of 1981 swung the economic policy pendulum back to the 1960s when the emphasis was on the so-called ‘progressive farmer’, or the so-called ‘trickle down effect strategy’. The argument, as the 1981 document put it, was that the ‘progressive farmer’ would be the agent for transformation: ‘In a smallholder based strategy which places production first, larger farmers can be used to spearhead the introduction of new methods.’ Nigeria is used to support the argument: Eventually [the progressive farmers] provide a demonstration effect over the fence to small farmers. This trickle down theory worked because the large farmers proved to be the greater risk takers and thus were more innovative. (World Bank, 1983: 53)

What is not noted is how it is that Nigeria, formerly a net exporter of food, has become a net importer. In fact, Hughes and Stranch (1978) showed that to eliminate malnutrition in Nigeria before 1990, food imports would have to grow between 17 and 21 million metric tons of staples annually. If the Nigerian example is anything to go by, it shows that the ‘progressive farmer’ approach only marginalises the very strata of individual peasantholder for whom the World Bank seems to be fighting. Higher producer prices without other in-built mechanisms in agricultural policies are of no help to the peasantry. The improvement of cash and food crop prices usually accompanies the dismantling of state enterprises and the encouragement of large-scale private farming. Whether this will contribute positively to economic recovery on a national scale is a debatable issue. In the case of Tanzania, from a working class perspective the system of negative redistribution will mould a Tanzanian society different from the one envisaged by ujamaa. The conclusion, therefore, is that even though the ERP might on the surface be seen as supporting the peasantry, its practice has been shown to undermine the economic foundations of society. While previous programmes (National Economic Survival Programme — NESP — in 1981 and the three-year 1982—85 SAP) attempted to correct the balance of payments disequilibria yet maintain equity in income distribution as well as the provision of social services and other basic needs

96

Case Studies

to the majority of the population, the 1986—88 ERP is a typical SAP that conforms with the World Bank—IMF conditionalities. Why the IMF and other international financial institutions came to support the present ERP, but starved the 1982—85 SAP of the necessary funds, is intimately related to the change in the balance of political forces in the country.

Conclusion: the alternative to SAP The 1986 World Bank Report stated the following with regard to Africa: Recovery from the drought has brought lower food prices, and imported petroleum will be cheaper because of the decline in oil prices. This makes 1986 a good year for Africa to accelerate its process of correcting over-valued exchange rates; lower food and petroleum prices will soften the inflationary impact of devaluation on urban dwellers; at the same time, devaluation would help raise the farm prices of agricultural export and partly offset the effects of lower food prices on farmers. (World Bank, 1986: 5)

As is well-known now, 1986 was not that rosy a year for Africa. The bumper maize harvest in Zambia and Zimbabwe was followed by a renewed cycle of drought, and oil prices have been slowly climbing back up to their level of US $28 per barrel. The inflow of funds and investments that was expected with the implementation of SAP and the acceptance of IMF conditionalities has not materialised. The calls for the New International Economic Order have fallen on deaf ears, and the modest targets of the Lagos Plan of Action remain dreams. Like ‘Partners in Development’, ‘Alliance for Progress’, ‘North-South Co-operation’ and such high-sounding rhetoric, SAP is no solution to Africa’s problems of underdevelopment. At most, it will further integrate the continent into the global capitalist orbit as an appendage. The alternative strategy to that being offered by the World Bank and the IMF exists and is possible. Africa is at present being faced with a choice between scientific socialism and barbarism (Ake, 1978), and the only rational choice for an African country faced with poverty and national weakness is scientific socialism (Nyerere, 1969). But there are pre¬ requisites that have to be followed, conditions that have to be fulfilled. Tanzania and other African countries attempting socialist transformation have not only ignored the scientific methods of development and the laws of social progress, but have also not learnt from the experiences of other countries in Europe, Asia and the Caribbean working towards radical transformations of their societies. The result has been a succumbing to the dictates of international financial capital. Recent trends in Tanzania indicate that progressive forces are on the defensive. In certain areas one is seeing not just a tactical retreat, but rather a mood to give up and accept defeat. The signing of the agreement with the IMF in 1986 by the Second Phase Government was, in fact, a testimony against the previous administration. Tanzania went ahead and signed the

Tanzania: Pitfalls of the Structural Adjustment Programme

97

agreement, knowing that, even though over 80 agreements have been signed between the IMF and 23 other African countries, there is no success story anywhere. This indicates the desperate situation of the country. Any serious analysis of the present situation in Tanzania would have to evaluate the entire development strategy, and review in detail all that has happened in the last twenty years. It is true that the policy of socialism remains valid today and the tenets of the Arusha Declaration are as relevant today as when they were stipulated twenty years ago. But how does one move to socialism and the creation of abundance from a situation of low productive forces, underdevelopment and regional instability? As in any society, in Tanzania too it is important that before one comes up with a strategy, a clear class analysis must be conducted so as to understand the composition of class forces. Only on the basis of a rigorous scientific analysis of class formations in Tanzanian society can one plan for the future. What is clear, though, is that there is socialism beyond ujamaa.

References Comia, G.A., R. Jolly and F. Steward (1987), Adjustment with a Human Face — Protecting the Vulnerable and Promoting Growth, Oxford: OUP. Dinhem, B. and C. Hines (1983), Agribusiness in Africa, London. Ellis, F. (1982), ‘Agricultural price policy in Tanzania’, in World Development, 10:4, Oxford. Ellis, F. and H. Ellen (1980), ‘An economic analysis of the coffee industry in Tanzania’, University of Dar es Salaam. Hughes, H. and P. Stranch (1978), ‘Using World Integrated Model (WIM) to evaluate African development prospects’. ILO (1986), ‘World recession and global interdependence: effects on employment, poverty and policy formation in developing countries’, Geneva. Jolly, R. and G.A. Cornia (1984), The Impact of the World Recession on Children, Pergamon Press. Lipietz, A. (1986), ‘Mirage et miracle’, Paris. Loxley, J. (1986), ‘IMF and World Bank conditionality and sub-Saharan Africa’, in The Tanzanian Bankers’ Journal, no. 1, July. — (1987), in G.K. Helleiner (ed.), Africa and the International Monetary Fund, Washington, DC: IMF. Msambichaka, L.A. et al. (1983), Agricultural Development in Tanzania: The First Two Decades of Independence, FES. Nyerere, J.K. (1969), Socialism: The Rational Choice, Oxford: OUP. United Republic of Tanzania (URT) (1987), ‘Hali ya Uchumi ya Taifa Katika Mwaka 1981’, Dar es Salaam. — (1986), Speech by the Minister of Finance, Economic Development and Planning when presenting the Annual Plan and Estimates for Revenue and Expenditure for the Financial Year 1986/87, Dar es Salaam. World Bank (1981), ‘Accelerated development in sub-Saharan Africa, an agenda for action’, Washington, DC.

98

Case Studies

— (1983), ‘Towards sustained development in sub-Saharan Africa, a joint

programme’, Washington, DC. — (1986), ‘Financing adjustment with growth in sub-Saharan Africa 1986— 1990’, Washington, DC.

8. Somalia: Economics for an Unconventional Economy Vali Jamal For a number of years now doom has been forecast over the Somali economy.* Figures are quoted to show that it is a very poor country in terms of average incomes and the proportion of people living below the poverty line, that real incomes have been falling, imports of grains have been increasing, the balance of payments is in ever-increasing deficit, ad infinitum. Some of the figures quoted are so gloomy — for example, the finding that a sizeable percentage of the population fails even to obtain sufficient calories to sustain basal metabolic rate — that one has to wonder how the Somali people survive, let alone thrive. For the fact is that in the rural areas the Somalis maintain themselves at their customary level of living, albeit under the ever-present threat of drought; and in the urban areas, since at least the last decade, they have even enjoyed boom conditions, belying the statistics and estimates based on them. This prompts two questions: i) are the statistics incorrect? ii) is the analysis of the economy faulty? The answer is a bit of both and this paper is concerned with demonstrating this in the context of the food production and consumption situation in the country. What it purports to show is not that the SomaU statistics are inherently incorrect, although in many respects they are, but rather more fundamentally, that in an unconventional economy such as Somalia’s, conventional statistics taken at face value do not tell the whole story about welfare, and may even tell the wrong story. The Somali economy is unconventional in the sense that the bulk of economic activities occur outside the aegis of the national accounts. A large part of the national income arises from remittances of Somali workers abroad, sent in through informal channels; exports and imports occur outside the purview of the government and at essentially free-market exchange rates; and a great part of the internal trade also escapes government control. Moreover, the social structures in Somalia are such that there are no clear-cut divisions along occupational lines such as, for example, wage earners, traders, etc.; rather, most families are composed of multi-occupational groups. These dis¬ tinctions render most macro-economic magnitudes such as gross domestic product, balance of payments and wages highly deceptive, if taken by themselves as reflections of the performance of the economy or of the real welfare of the people. To all this, one must add the one distinctive characteristic of the Somali economy — one-half of the population depends on nomadic pasturalism for their livelihood, a proportion not exceeded in any other country in the world. Not much is known about the production possibilities in the nomadic sector and the images of starvation during periodic droughts contribute to the analysis of the economy in doomsday

100

Case Studies

terms. Pastoralism engenders not only uncertainties about statistics but also serious conceptual problems about the meaning of income figures in Somalia. The analysis one adopts of the Somali economy, of course, conditions the remedies proposed for its continuing functioning — or recovery, for those who believe^that the economy is in long-term decline. If the analysis is faulty, so would be the prescription. If in the extreme case, there is no problem afflicting the economy and yet one is diagnosed, the cure prescribed might do more harm than good. In the last few years, with a persistent diagnosis of various common problems afflicting the Somali economy — basically centring on imbalances in the external and internal accounts — the Somali government has been forced to swallow a massive dose of adjustment policies under the name of ‘structural adjustment’. Alas, the medicine is wrong for Somalia, because the diagnosis is wrong; the medicine might actually be harming the patient. The basic objectives of this paper, then, are to look at the real welfare situation of the Somali people, as depicted by food production and consumption statistics; to analyse the major effects on the economy of external and internal factors; and to examine the premises of the extant remedies for the economy. In doing so, we shall draw upon the analysis of the economy undertaken by the author in 1982 (Jamal, 1982; and 1983). This analysis for the first time broke away from the conventional view of the Somali economy and suggested several new ways of looking at it. As these viewpoints have an evolutionary aspect and will be built upon in the present analysis, we shall first show how these were derived, how they have been received and how many are still valid for the current state of the Somali economy, given whatever new is known about it.

The evolving analysis of the Somali economy Normally, one starts the analysis of an economy on the basis of GDP figures. In Somalia, such figures provide no guide to economic performance nor to welfare because of two overwhelming facts about the Somali economy: i) the predominance of the nomadic sector; and ii) the importance of repatriated money. Each gives rise to two problems — the first in the estimation of livestock production and the valuation to be attached to it, and the second in the estimation of the size of the remittances and their impact on the price level. The two together ensure that conventional figures of GDP and associated magnitudes fail to convey any meaningful picture of the real welfare position of the Somali people or the health of the national economy. Quite a different picture emerges from a scrutiny of the magnitudes that enter into the national accounts and from an analysis of the impact of remittances on the national economy. The national accounts of Somalia are themselves in an evolutionary stage. Many have ‘used’ them but few have scrutinised them. In early 1979

Somalia: Economics for an Unconventional Economy

101

during a case study of income distribution and poverty in Somalia, the author was given access to the first set of national accounts ever compiled in Somalia. Lacking any background data — the initial national accounts were published without these — I tried to derive average income figures for nomads, peasants and townsmen in order to get some handle on relative income levels. These showed nomads’ incomes to be much below those of peasants, which, assuming that the peasants themselves were not much above the calorie-sufficiency level, implied massive starvation among the nomads. From trends in output, there was also an implication that food poverty among nomads had increased sharply since 1970. The implied fall in nomadic production and the implication of massive food poverty among them were of a magnitude to be implausible and an alternative had to be found. That paper also questioned the nature of poverty in Somalia on the basis of the divergence between what was implied by the official figures and one’s perception of poverty. The official figures put the GDP per capita at $100 — or the same as the figure that had been bandied about for a number of years. This was less than half the income I estimated necessary for bare necessities, yet all the evidence indicated that people were well fed, shops were full of goods, tailors were making stylish clothes, a housing boom was on, Toyota truck-taxis had more than doubled in the previous year, and all kinds of imports were arriving through various channels. The evidence also seemed to belie the drop in per capita income that was revealed by the newly estimated figures — from Sh 691 in 1970, Sh 783 in 1972 to Sh 628 in 1978. How were we to reconcile the evident prosperity and boom times with what the figures showed? The answer was sought in terms of inequality and the basic limitations of the data. It was pointed out that the boom was concentrated in Mogadishu and other coastal towns. But more fundamentally the paper for the first time pointed to the distinction between GDP and GNP in Somalia, the difference arising from incomes earned by Somalis abroad. A new set of figures covering the same period became available in December 1979 (Somalia 1979a). This time a wealth of background data was given — in fact, much more than is generally available in most African countries. The figures were scrutinised for the picture they painted of the Somali economy. My starting point was to check the estimate of livestock output in view of the earlier hunch that this was possibly underestimated. The important magnitude was milk production because of the predominance of milk in nomadic diets. For 1978, the official estimate of total milk production was shown to be (in million litres): urban 43.1; rural, 47.2; nomadic, 361.1 — a total of 451.4. These figures implied that the nomadic population (2.78 million in 1978) would get only 0.36 litres of milk per capita per day, which would provide only around 250 calories, leaving a deficit of as much as 1,930 calories to be made up from other sources. Nomads comsume grains, but not to the extent implied. Based on the figures of livestock population and estimates of the proportion of milkanimals and yield, I arrived at a figure for milk production of 2,920 million

102

Case Studies

litres, consisting of 2,557 million litres from nomadic herds, 310 million litres from herds owned by peasants, and 73 million litres from urban herds. This estimate was 6.5 times the then official estimate and, of course, one shuddered to report it. However, it was based on various pieces of evidence which fitjed together: i) coefficients of lactating animals and milk yields from Dahl and Hjort, 1976; ii) consumption surveys of nomads which showed that on average they consumed 2.5 litres of milk per day, exactly the figure obtained from the supply side; iii) interviews with nomads in rural areas, nomads coming to the market in Mogadishu, and civil servants of nomadic origin, all of whom confirmed the importance of milk in nomadic diets. Most importantly, the figure obtained tied up with various other pieces of evidence about the functioning of the Somali economy whereas the official estimate simply did not. The nomads were not perpetually starving; they did derive some part of their calories from grains bartered for milk, but not the overwhelming amount required by official figures; farmers had that sort of grain surplus for exchange but not the sort required by official figures of milk; imports of grains were not excessive, as would be the case if nomads were actually starving. The new estimates of milk production gave an insight into the unconventional meaning attached to income figures in an economy such as Somalia’s. Milk income shot up 6.5 times in keeping with milk production, livestock GDP by 2.4 times, and total GDP by 68 per cent. Nomads came out 2.8 times richer than peasants and, more startlingly, 16 per cent richer than townspeople; actually a nomadic family’s revised ‘income’ was similar to that of an A4 (i.e., fourth highest) civil servant’s. In terms of aggregate GDP, Somalia went from being one of the poorest countries in the world to the ranks of middle-income countries, with an average income of US $406.2 jt became only the 41st poorest country instead of the eighth — richer than Kenya (35th, with per capita income of $330), Indonesia (37th with $360), or Ghana (40th with $390). Obviously these figures do not make any sense from the point of view of welfare comparisons. The problem arises from two combined facts: that Somalia is a subsistence-oriented economy and that different sections of the population derive their subsistence from different types of food — the nomads from their livestock, the farmers from their land and livestock, and the townspeople from their cash incomes. Since livestock-calories are so much more expensive than grain-calories, nomads would always look richer than farmers (and even townspeople) and internationally Somalia would look richer than a grain-consuming economy. This would not be a true reflection of either the real welfare position of the nomads compared to other population groups or of Somalia compared to non-pastoral economies. One should be clear that the valuation problem arises not

Somalia: Economics for an Unconventional Economy

103

simply from the fact that Somalia is subsistence-oriented — most African countries are but because the subsistence of one section of its population, a majority at that, differs significantly from that of others and from that of other African countries. The immediate problem was to derive an estimate of the incidence of poverty. Income figures do not provide an answer because of the valuation problem. The only alternative, given that most rural producers exist within a subsistence orientation and consume different types of foods, was a poverty line in terms of calories. A consumption of 2,200 calories per capita was defined as the threshold of poverty. Those failing to meet this minimum must obviously be counted among the poor; those above would prima facie be able to afford non-food items. Livestock holdings were converted to calories using production coefficients for milk and estimates of meat production. Allowance was made for milk bartered for grain, livestock sold, and food purchased with cash. Similarly, for peasants, their land holdings were converted to calories on the basis of average yields. The poverty line chosen was thus (i) a calorie poverty line, with calories from livestock and grains implicitly counted as equal; and (ii) it was a food poverty line. Thus, the figures obtained would show rock-bottom poverty. In the event, the estimates revealed poverty to be much lower than in previous studies. As these latter estimated total poverty, that was to be expected. But, more fundamentally, a comparison was precluded because the earlier studies were based on the valuation fallacy. Two of the studies took a conventional approach to poverty incidence: estimate the cost of a minimum food basket in towns, top it up by one third to allow for non-food needs, apply rural—urban price differentials to obtain poverty lines for peasants and nomads, and use the estimates against a household budget survey. One could fault these studies on several counts, but for this paper what is unacceptable is the application of an urban poverty line to rural areas in Somalia. In other African countries one does this almost automatically by applying a price differential (the idea being that rural prices are lower), but in Somalia this cannot be done, as the underlying assumption that goes with this procedure — that urban and rural populations have similar consumption patterns — simply does not apply because of the nomadic factor. JASPA’s poverty line, with only 60 calories per day from milk (less than 0.1 litres) and 120 calories from bananas, has no relevance for the nomads; even for the peasants, it would have to be taken with a pinch of salt! In a later study, IFAD (1979) gave elaborate figures of nomadic and farm incomes calculated in the conventional manner, from which two conclusions were reached: (i) ‘the settled rural population depending on crop cultivation is clearly worse off than the nomadic population depending on livestock . . .’ (p.23) and (ii) ‘nearly all of the nomads may . . . be expected to enjoy incomes above the poverty line’ (p.24), whereas nearly all the peasants fell below the poverty line (compare pp.24 and 32 in

104

Case Studies

IFAD, 1979). As has been shown in Jamal (forthcoming), this was a clear case of ‘valuation fallacy’ — comparing monetary incomes of two distinct subsistence-oriented population groups. When this was done in the Somali context, the results that IFAD obtained were fully to be expected, but totally meaningless, because of the significant calorie-price differential in favour of the pastoralists. Effectively, two sections of the population producing and consuming equal numbers of calories were counted as if their incomes differed hugely. Thus, when the author approached the analysis of rural poverty, there were various conceptual problems to overcome: (i) an expensive urban food basket; (ii) use of that basket for rural areas, with price differentials; (iii) application of a monetary poverty line to imputed monetary income for nomads and peasants. The conceptual problems rendered the previous estimates of poverty incidence prima facie wrong, yet they had contributed to the image of Somalia as a very poor country with a majority of the rural population in dire poverty. This reinforced the picture obtained from the FAO figures. The solution proposed was to use a calorie poverty line and to value all production in terms of calories. Production was measured on the basis of coefficients of milk and cereal yields. With this procedure, one obtained a much lower figure for (food) poverty than earlier studies and, again contrary to these studies, about the same extent of poverty among the nomads as peasants. These results are shown below (percentage of population in poverty, c. 1978): Nomads Peasants Remarks

Jamal 33 34 Food poverty

Hopkins 49 67 Total poverty

Hicks 70 70 Total poverty

IFAD 0 75 Food poverty?

Strict comparison with other results is precluded because of the various conceptual problems mentioned previously but two striking figures should nevertheless be noted: the zero figure of IFAD for nomadic poverty and our low figure of farm poverty compared to all others. IFAD’s zero poverty among nomads comes from a low poverty line and failure to take account of inter-regional distributions while our low figure for farm poverty compared to others comes from a very high poverty line of 10 ha for farmers compared to 3—4 ha which would be needed on a subsistence basis. IFAD’s farm poverty line would have been sufficient to feed three average size families. The urban sector Ironically, despite the availability of GDP figures, it was more difficult to write about the urban than the rural economy. This was because of the importance of money repatriated to Somalia from Somali workers abroad — and the system through which it was repatriated, the franco valuta system. At first, one noticed several puzzling and contradictory trends in the

Somalia: Economics for an Unconventional Economy

105

urban economy: wages had more or less stagnated throughout the 1970s, especially in the public sector which accounted for the bulk of wage employment; yet inflation had doubled in eight years, 1970-78; in consequence the most minimum-needs basket cost two and a half to three times what most wage earners earned; yet there were no visible signs of poverty; on the contrary, shops were full of imported goods, necessities as well as luxuries — and people were buying them. The solution to the puzzle was found in the practical consequences of the franco valuta system. Half of it was that the system caused the inflation. Under it the government had allowed traders virtual freedom to import goods with their own sources of foreign exchange. The result was a clamour for funds in the hands of Somalis abroad and a continual increase in its price. In 1978 the franco valuta rate for the dollar was 1.5 times the official rate, in 1979 twice, and in March 1981, 3.2 times. This growing differential was fully reflected in the price of imported goods and thus contributed greatly to inflation in Somalia. The other half of the solution was that the franco valuta system at the same time put money into the pockets of the Somalis in Somalia to purchase the goods in shops. The money dealers remitted the proceeds of the foreign exchange purchased from Somali workers abroad to their (workers’) relatives back home. These proceeds were remitted at the free-market rate. Thus, effectively, the franco valuta system worked to procure imported goods for Somali consumers — bought by Somali dealers, from money earned by Somali workers abroad, and purchased by the workers’ relatives at home. As more and more dealers vied for the foreign exchange, its price rose, but at the same time an equivalent amount of shillings was put into the pockets of relatives in Somalia, so that there was always enough money to buy back the goods: Say’s Law. The impact on the urban economy was phenomenal. It was estimated in 1980 that 150—175,000 Somalis worked in the Gulf (mostly in Saudi Arabia) earning, on a conservative basis, 5—6 times the average Somali wage.^ A large part of this was repatriated to the mother country, especially after the late 1970s, because of the attractive exchange rates offered by traders. On the assumption that one third of the earnings abroad was repatriated an order of magnitude was obtained which showed that repatriated money easily swamped the local wage bill. This was not surprising, considering the stagnation in wages and the small size of the Somali labour force, but repatriated money very nearly equalled two thirds of the urban GDP. There was a second way in which repatriated money reached the Somali economy. This was by way of the proceeds from livestock exports. The government required the traders to remit their foreign exchange earnings at the official rate; the traders could keep anything above this. In 1978, livestock exports amounted to Sh 589 million. In Saudia Arabia, the traders earned $93.5 million for this. The traders would realise the sum needed to repatriate to government with 40 per cent of their foreign exchange earnings. The rest found its way back through the franco valuta

106

Case Studies

system. The system meant the virtual cessation of official attempts to control incomes in the country. The puzzle of wages can be discerned from Table 8.1. Table 8.1

Average wage, non-wage household income, and poverty line, 1970. 1978 and 1980 (shillings per annum)

Average wage Non-wage household income Poverty line Food poverty line

1970

1978

1980

4,284

7,068 27,217 7,008 —

7,790 59,094

11,231 3,468 —

13,836 8,592

1980 in 1970 terms 1,952 14,811 3,468 —

Source: Jamal, 1981, various tables.

Between 1970 and 1980 wages fell by over 50 per cent in real terms, a rate of decline of 7.6 per cent p.a. In contrast, the urban non-wage income increased by 2.8 per cent p.a., or by 32 per cent in the aggregate. Most of the changes actually came between 1978 and 1980 — i.e., in just two years — when wages were nearly halved, whereas the urban household’s non-wage income increased by 9.9 per cent. In consequence, the wage went from sufficiency to poverty, with the 1980 wage failing even to buy a basic food basket, let alone other necessities. These figures appeared to imply both a massive redistribution of income and massive impoverishment among wage earners. In the absence of any evidence of obvious malnutrition or poverty, it was contended that neither of these things actually happened. Four countervailing tendencies were suggested: (i) low-income urbanites had a source of subsistence production, e.g., a cow in the backyard for milk; (ii) they had a second job; (iii) they were members of a trading family; (iv) they received monies from relatives abroad. All four were likely, but the hunch was that (iii) and (iv) played the most important role. The notion of income classes — wage earner class, informal sector class, etc. — was rejected. With the trading group so dominant and wage employment so limited, a wage earner was as likely to belong to a trading household as not, especially when the concept of a household was taken to mean the extended family, as it should be in the Somali context. Thus, while the incomes of some members of the extended family fell, those of others increased, so that the income of the family as a whole increased. Findings and their reception It should be clear from the foregoing discussion that many of the findings in my 1981 study were novel and controversial. The most important of these were: 1. Conventional income figures were meaningless for comparing the welfare position of different sections of the population (and of Somalia

Somalia: Economics for an Unconventional Economy

107

compared to other countries) because of the importance of livestock calories self-produced by one section of the population; 2. Previous estimates of the incidence of poverty were faulty because they were based on a comparison of monetary incomes. Two of them also used an inaccurate survey of nomads and peasants; 3. Milk production was massively underestimated in the national accounts. A new estimate was obtained from livestock population and production coefficients. This squared with diet patterns in the country; 4. Using a calorie poverty line and estimates of grain and milk production, it was shown that poverty in terms of food consumption was at a much lower level than obtained in previous studies. These latter were in any case of doubtful validity because of the valuation problem; 5. Major trends in the urban economy could not be explained in terms of GDP figures because of the influx of remittances from Somali workers abroad. The franco valuta system through which the money was repatriated was a major cause of the inflation in Somalia; 6. Trends in income could not be explained in terms of distinct economic classes — wage earners, traders, etc. — because of the prevalence of multi-occupational extended families in the Somali society.

Crisis and cure To most writers the Somali economy is under perpetual doom and the Somali people live in perpetual poverty. The earliest estimates of GDP put the country in the rank of the poorest of poor countries and although these figures were revised upward subsequently the picture of poverty has stuck. In the rural areas the image was one of nomads constantly in search of food. Badly conceived poverty lines and unrepresentative — and faulty — budget surveys confirmed this image of a people on the brink of disaster. On this picture of doom has been superimposed since the late 1970s a picture of ‘crisis’ based on growing imbalances in the internal and external accounts. ‘Crisis’ in our reckoning is thus different from ‘doom’, doom being the traditional view of living conditions in Somalia, whereas crisis is something that has transpired in the last decade. The crisis may best be depicted in terms of some relevant statistics below: Table 8.2

Indicators of crisis, 1975, 1978 and 1984 1. Trade balance (US$m) 2, Reserves (months) 3, Government deficit (Sh m) 4. Cost of living index (1977=100) 5. GDP p.c. (Sh at 1977 prices)

1975

1978

-73.6 n.a. 44.2 79.4 1,378

-240.5 7.9 991.5 110.2 1,540

1984 -333.0(1983) 0.5(1983) 3,057.6 1,007.4 1,097

Sources: 1 and 2 from World Bank, 1985; 3-5 from Somalia, 1985a, in order, tables 118,86 and 115.

108

Case Studies

Although there are problems in Somalia about trade statistics (a considerable part of both exports and imports pass through unofficial channels) and similarly about fiscal data, there is no doubt that there is a crisis in the balance of payments and in the fiscal accounts. These two crises according.,to conventional theory manifest themselves in inflation and eventually in declining per capita income. As the table above shows, the cost of living increased more than ninefold in just six years after 1978, after maintaining moderate stability up to then. During this time, GDP per capita began to decline, again after registering moderate increases in the few preceding years. Do not these figures provide sufficient proof to support the ‘crisis scenario’? The answer is they do not. The most that may be conceded is that there is a crisis in the formal economy, as shown by external and internal imbalances. In recommending a cure, the conventional theorists bring in another sort of imbalance in the economy, this one of a rather fundamental nature, as the ultimate cause of the crisis. This is ‘government mismanagement’, or interference with the markets, manifested in price controls, proliferation of parastatals, subsidies, etc. This type of interference kills all incentive to produce, particularly for export. The disease having been diagnosed, the cure comprises demand restraint to correct the external and internal imbalances, a liberalisation of the economy to restore long-term equilibrium, and a change in the exchange rate to stimulate export production. How well does the Somali economy fit this model? The simple answer is not too well at all. The reason for this is what we have made the theme of this paper — the unconventional nature of the economy: the dichotomy between the formal and informal economies, the existence of the vast subsistence sector and the way transactions are carried out in these different economies. Let us start with the sector where there is no crisis — or rather where the ‘crisis’ has no visible impact. The rural subsistence sector would clearly qualify for this. This sector is the largest part of the Somali economy, both in terms of numbers employed as well as ‘incomes’ generated. Most production here takes place outside the sphere of market relations‘‘ and, thus, we may assume that it has been immune from external and internal shocks. The idea, if it needs underlining, is quite simple: farmers and nomads will continue to produce food for themselves (with the proviso of the previous footnote) regardless of balance of payment crises or internal price movements. The opposite of this should be the formal urban and rural economies, but the fact is that in Somalia very few transactions take place exclusively in these spheres. In the urban formal economy the impact of crisis should be expected to come from inflation and from the decline in imports. The groups affected should be wage earners and traders, wage earners by the mounting inflation and traders by the falling quantum of imports. The fact is, apart from government employees whose salaries are regulated, everybody else in the urban economy operates in the informal economy,

Somalia: Economics for an Unconventional Economy

109

which is essentially a free-market economy. The informal economy here consists of the repatriated money exchanged at the free-market exchange rate and of imports entering outside the official channels through the franco valuta system. This economy is moreover characterised by the vast network of inter-familial relationships. The implication of these factors for the observed formal market trends is clear: while wages and recorded imports in the formal economy have fallen, one cannot take these to apply to the whole formal sector or to Somali families as they actually are. The evidence we have marshalled in this paper shows that overall total incomes in the urban areas have actually increased as has the quantum of imports. Thus, living standards in urban areas have been sustained at much higher levels than indicated by the official GDP and wage figures. In the rural non-subsistence economy, the impact of the crisis should come from prices transmitted to the producers for food crops and livestock products — in other words from economic management in the form of government interference with markets. Food crop prices were rigidly controlled up to 1980, but then less and less so, till after 1983 they were essentially set by the market. But even when regulated prices applied, peasants were much less affected than might be thought, as they simply withdrew from the formal market and, at least in the rural areas, traded on the open market. As for livestock products there was not even a pretence of price controls. Meat and milk were always sold in the urban areas under free-market conditions and this was also true of livestock exports. The observation with respect to exports provides such a contrast with other African countries that it deserves to be specifically described as it has important implications for the structural adjustment programme now in operation in Somalia. In most African countries agricultural exports are controlled by a marketing board which sets producer prices independently of world prices. There is generally an element of taxation in this, as revealed by the percentage of world parity price (i.e., export price minus essential processing and marketing costs) withheld from the peasants; but quite apart from this, there is another and more important element of taxation in the marketing arrangements arising from the adherence to a fixed exchange rate in the face of massive inflation. The inflation ensures that each year the peasant can buy much less with his produce than before, whereas the country may buy (i.e., import) as much as before. Thus peasants’ terms of trade fall compared to the country’s: the peasant is being taxed through the exchange-rate mechanism. In Somalia, not only are there no marketing boards for livestock exports, but exports take place at essentially free-market exchange rates and the resulting prices are passed on to the livestock owners. Livestock marketing is organised by private traders. The only control government maintains is that the total quantity of exports should be reported officially and earnings remitted at the official exchange rate. Two things happen: a considerable part of exports are traded unofficially and escape government control; and

110

Case Studies

traders get to keep the difference between the official value of exports and the franco valuta value. Thus, there is no question of exports being worth one bundle to the country and another, smaller, bundle to the exporters. The congruent trends in the exchange rate and in inflation ensure that there is no exchange rate taxation in Somalia. Table 8.3 should make this clear. To keep the exposition simple, it will be assumed that producers get a constant proportion of the export price.^ Since the livestock market is competitive this assumption is likely to hold. The data we shall use is in terms of sheep and goats, as these comprise the major exports of Somalia. Furthermore, the two are combined as prices and output have followed similar trends. Table 8.3

Illustrative table showing terms of trade under different exchange rate regimes 1978 1. 2. 3. 4. 5.

Price ($/unit) Exchange rate (Sh/$) Price per sheep/goat (Sh) Franco valuta exchange rate (Sh/$) Franco valuta price (Sh)

6. Import price index 7. Consumer price index

49 6.30 309 8.50 416 100 100

1982 72 15.00 1,080 24.00 1,728 131.4 349

Terms of trade in 1982 with 1978 = 100 8. 9. 10. 11.

External (3 4- 6) Internal official (14-7) Internal franco valuta (5 4- 7) Internal if exchange rate unchanged

112 100 119 42

Sources: Price per head of sheep and goats (in shillings) from Somalia, 1985a, tables pp.71 and 73, converted to dollars at the official exchange rate. Exchange rate from official sources. Franco valuta from Somconsult, 1985, table 4.1. Import price index from UNCTAD, 1984, table 1.2. Consumer price index from Somalia, 1985a.

The first part of the table shows various price figures and the second the ensuing terms of trade. Between 1978 and 1982, export prices of sheep and goats increased by 47 per cent (in dollars), whereas import prices increased by 31 per cent. Thus, Somalia’s external terms of trade for livestock improved by 12 per cent. If there was to be exchange-rate taxation, the internal terms of trade would have to reflect this trend. In fact, because of the operation of the free-exchange market, internal prices increased 4.15-fold (line 5) compared to a 3.5-fold increase in consumer prices. Thus, the terms of trade of the livestock producers increased more than the country’s terms of trade. If prices had followed the official exchange rate (line 2) (marketing board situation), terms of trade would have remained constant. If, in the extreme, the official exchange rate had been maintained at its original level (Sh 6.30 per dollar) internal terms of trade would have fallen to only two fifths of th^ir value four years previously. The second and third cases constitute ‘exchange-rate taxation’, the third in its

Somalia: Economics for an Unconventional Economy

111

hypothetical form being akin to the Uganda case analysed in Jamal, 1985, the essence of which is that the divergence between local inflation and imported inflation denies those working in the export sector the full benefit of their exports. Calculations of real effective exchange rate often encountered these days are based on this notion of external versus internal terms of trade. (See Jamal, 1986 in terms of Tanzanian data). Thus, in the above example an official exchange rate of Sh 16.80 would have restored parity on internal and external terms of trade. In the event, with the operation of the free market in foreign exchange the livestock producers did even better than this. Let us recapitulate our discussion so far. There is a certain type of crisis in Somalia, by now prevalent in most countries of Africa. On the external front, it manifests itself in a trade imbalance. The reason for this decline in exports and the cause of this in turn is said to be low producer prices. On the internal front, it manifests itself in an imbalance in government expenditure, through rampant spending on social services and increasing wages. The two imbalances then feed runaway inflation which further erodes producer prices. The cure for the external imbalance is sought in a readjustment of the exchange rate and the cure for the internal imbalance in demand restraint. Along with this goes a liberalisation of the markets to remove controls on producer prices to induce an increase in supply. We have shown that the Somali economy functions quite differently from the above model. First, there is a vast subsistence sector which operates independently of government-controlled prices or external and internal imbalances. Second, the part of the rural economy that is supposed to be controlled (food crops) escapes control because of the prevalence of a parallel market. Third, the bulk of incomes in the urban areas are determined not through wage and price fixing, but through the operation of the informal economy in which the major influence is repatriated money, the value of which is set in the free market. Finally and most importantly, even the part of the economy that is subject to external forces (livestock exports) operates in an essentially free-market setting. These characteristics of the Somali economy render the standard remedy for the imbalances singularly inappropriate. At the centre of this is devaluation. The Somali economy has actually been devaluing informally for a number of years and the consequences of this have been passed on to the livestock sector. Thus it is incorrect to hold low prices a la Africa as the reason for the external crisis. If prices are low, they are low not because of a fixed exchange rate, but because of external trends. Table 8.4 shows the progress of the exchange rate in the official and parallel markets. From December 1973 until the end of June 1981, the Somali shilling was tied to the US dollar, at the rate of Sh 6.30 = $1.00. Up to the end of 1977, the parallel market rate stayed close to the official rate but thereafter dropped sharply, reaching Sh 16 to the dollar compared to the official rate of Sh 6.30. This divergence reflected the entry of private dealers into the foreign exchange market in response to the freeing of import quotas to

112

Case Studies

Table 8.4

Exchange rate in the official and parallel markets, 1973—1983 (Sh per $) 1973-1977 1978-30.6.81 1.7.81-30.6.82 1.7.82-22.10.83 23.10.83-14.9.84 15.9.84-31.12.84 1.1.85-mid 1985 mid 1985—

Offical market Parallel market 6.30-7 6.30 7-16 6.30 16-24 6.30 to 12.59 24-50 15.23 ' 50-95 17.35 95-105 26.00 105-120 36.00 12088.00

Source: Official exchange rate from IBRD, 1985; parallel market rate derived approximately from Somconsult, 1985, table 4.1.

foreign exchange holders. On 1 July 1981, a dual exchange rate system was introduced, with the original rate of Sh 6.30 applying to essential imports while a 100 per cent devalued rate or Sh 12.60 to the dollar applied to all other imports. After this, there were two technical devaluations followed by an official devaluation in September 1984 to Sh 26 to the dollar. From the beginning of 1985, the dual exchange rate was reintroduced with a Sh 36 rate applying to external transactions of the government and a freely determined rate applying to all other transactions. The starting rate in the free market was posted at Sh 75. By mid-1985 it had reached Sh 88. In the meantime, although there was a narrowing of the differential with the parallel market — from four times to 1.36 times — the devaluations never managed to catch up with the parallel market, and practically all remittance transactions continued to be conducted through the informal channels. This was also true of livestock exports. Given the importance of the free market in livestock exports and its basic competitive character, it is no wonder that the IMF programme failed to bring about a turnaround in livestock exports — the raison d’etre of the devaluation remedy, the cornerstone of IMF reforms in Somalia (as in most other African countries). The fact is, despite the place given to prices in the devaluation remedy, price is not the most important variable affecting livestock output. This argument has often been made in connection with devaluation in other African countries, the reasoning there being that in the context of the ‘economic collapse’ in most African countries, factors such as the breakdown of infrastructure and the non-availability of consumer goods in the shops are equally — if not more — important than prices in determining output. In the Somalia case, that is not the argument. The argument simply is that livestock rearing is not the same as farming. The pastoralist cannot increase output in the same way as a peasant. The growth of the herd depends on the weather conditions and, thus, the only variable the pastoralist can manipulate to change output is the off-take ratio. There are severe limits ta this because of the need for subsistence consumption (this is akin to the peasant case) and because of the long-term

Somalia: Economics for an Unconventional Economy

113

effect on the herd structure (this is different from the peasant case). To postulate that higher prices will bring forth a positive supply response in the nomadic context thus requires considerable faith in markets. Past experience certainly does not bear this out, as the table below shows. Table 8.5

Livestock exports and export prices, 1960, 1964, 1967 and 1970-84 Quantity Value (’000 metric tons) (Sh million) 1960 1964 1967 1970 1971 1972 1973 1974 1976 1977 1978 1979 1980 1981 1982 1983 1984

26.5 48.7 44.9 54.6 57.5 72.4 67.6 58.5 60.3 56.6 68.8 64.6 86.4 89.7 126.8 43.5 20.5

38.2 86.7 93.6 119.9 123.3 160.5 196.7 222.4 277.3 279.5 588.7 555.2 639.2 858.6 2,010.8

Price (Sh per metric ton) 1,441 1,780 2,085 2,187 2,144 2,217 2,910 3,802 4,599 4,938 8,557 8,594 7,398 9,572 15,859

—

—

—

—

Consumer price index

Real price

84 88 93 100 99 96 103 121 165 183 202 249 397 573 703 959 1,843

1,715 2,023 2,242 2,187 2,166 2,309 2,825 3,142 2,787 2,698 4,236 3,451 1,863 1,670 2,256

_ —

Sources: Somalia, 1985a; table p.38 for col. 1; table p.86 for col. 4, for 1977-1984. Figures of quantity and value for 1960, 1964 and 1967 from Somalia, 1979a and Jamal, 1981. CPI for 1970-76 from Somalia, 1979a. 1967 from Somalia, 1979b spliced together approximately. 1960 and 1964, author’s estimates.

Any number of hypotheses could be sustained by these figures: that supply response is normal, perverse, or neutral to prices. The catastrophic decline in exports in 1983 and 1984 which precipitated the latest crisis in Somalia had in fact nothing to do with prices. Saudi Arabia imposed a ban on cattle imports from all African countries from May 1983 after the discovery of rinderpest; between late 1983 and February 1984 there was even a ban on sheep and goat imports from Somalia. ‘The loss of the Saudi cattle market has been a heavy blow to Somalia’s exports. The number of cattle exported dropped to 44,000 in 1983 from 157,000 in 1982; the number of total livestock units exported also declined sharply. Livestock export earnings plummeted to about $32 million in 1984 from $106 million in 1982.’ This quotation comes from a World Bank Report (IBRD, 1985, p.l8) and was deliberately cited not for its factual content (accurate) but for its next sentence: ‘The artificially high value of the Somali shilling in the official market hindered possibilities of diversifying export markets for Somali cattle.’ If, at the prevailing (overvalued) exchange rate, it was profitable to export to Saudi Arabia, it should have been profitable to export to nearby

114

Case Studies

countries too, especially to fill the gap left by Saudi Arabia. Second, the price of Somali livestock in, say, Kuwait is calibrated not in Somali shillings but in dollars, so devaluing would have no impact on export price. Third, the exchange rate was overvalued if one assumes that the operative rate was the official one; at the franco valuta rate that prevailed in livestock exporting, there was no question of overvaluation.

Effects of Structural Adjustment Programme IMF programmes attempt to affect three crucial economic variables: (i) inflation; (ii) export performance; and (iii) economic growth. The test of their effectiveness should be to compare ‘what happened’ to: (a) what might have been, (b) the IMF targets, and (c) the previous year’s performance. In practice, only the third comparison is made because of the absence of a foolproof prognostication of performance (comparison (a)) and the lack of general knowledge of IMF targets (comparison (b)). The IMF itself, at least in its published accounts, eschews making a comparison with its own targets, preferring to use a straightforward before-after comparison. Credit is taken for any improvement. In the Somalia case, the IMF took credit — and the World Bank in their reports gave it to them — for a rise in the rate of economic growth and a fall in the rate of inflation. Export performance — the raison d’etre of the IMF programmes — did not improve and silence was maintained on this score. Table 8.6 shows the trends in GDP growth rate before and after the start of the IMF programme in mid-1981. Table 8.6

Growth rates of GDP and livestock GDP, selected periods (per cent p.a.) 1977-80 1980-82 1980-81 1981-82 1982-83 1983-84 (3 yrs) (2 yrs) (lyr) (lyr) (lyr) (1 yr) GDP at factor cost IMF IBRD Government Memo item Livestock GDP (Govt.)

— -3.0 0.0

7.9 6.4 7.7

4.9 4.3 8.0

10.9 8.5 7.3

4.1 n.a. -14.5

— n.a. 12.6

-3.3

14.0

21.1

7.3

-40.4

42.1

Source: IBRD from IBRD. 1985, p.7; IMF from IMF, 1985, table 5; Government from ECA (T. Jones). 1985, table 1.1.

Three sets of figures are given — not to arrive at a reconciliation but rather to reinforce the point about the great variability of GDP figures in Somalia. Different authorities have been involved in estimating the GDP in Somalia. Since the World Bank and the IMF have been among them, for the Fund and the Bank to put too much faith in such figures is tantamount to believing in a phantom of their own creation. Be that as it may, the point we wish to make here is rather different. Anyone who looks at the growth rate figures in the above table is bound to wonder what sort of economy we have here: zero per

Somalia: Economics for an Unconventional Economy

115

cent growth in one period (Government series), followed by -j-7.7 per cent, —14.5 per cent and -^12.6 per cent. The first thought that would occur would be that this is an agricultural economy subject to huge climatic changes and one would be right — but only up to a point, and only just. The fact is that this is a livestock economy and it is livestock GDP that moves the total GDP. Now if we look at the livestock GDP figures we get a hint about the nature of this aggregate. Huge upheavals are implied, such that growth rate changed in two subsequent years from -40 per cent to ^40 per cent. We marvel not only at the oscillation but also its magnitude. What is going on is ‘livestock change’, the valuation attached to changes in livestock numbers. Between 1982 and 1983 the number of livestock fell and in the national accounts — as required — a negative value was entered for livestock change. Next year, livestock change was positive. What this discussion thus shows is that Somalia’s GDP changes with livestock. Anyone then claiming credit for influencing GDP growth rate has to claim credit for influencing livestock change. There is — in case it needs to be spelt out — no influence from any component of any conceivable IMF package on livestock change. In fact, apart from weather, nobody has argued for the importance of any other factor. Yet, noting that GDP growth spurted from 1 per cent in 1979—80 to ‘5 per cent in 1981 and nearly reached 11 per cent in 1982’, the IMF took full credit (Zulu and Nsouli, 1985, p.20): The policies that Somalia followed during its adjustment program contributed to an improvement in economic conditions. The improvement is all the more impressive if account is taken of the renewed hostilities, poor weather conditions during 1983, and that same year, a ban on Somalia’s cattle in its main export market.

A growth rate of 11 per cent would indeed be impressive! The IMF also claimed credit for bringing down the inflation rate in the period immediately following the first stand-by agreement when government attempted to adhere to their strict conditionalities. The huge resurgence in the rate of inflation (see Table 8.7) in 1984 came after their review of Somalia’s adjustment experience, otherwise one wonders what arguments would have been advanced for it — no doubt creeping laxity in government controls. Table 8.7

Inflation in Somalia, 1970—77 average and 1977 to 1985 ( per cent p.a.) 1970-77 77-78 (7 yrs)

Mogadishu CPI Food CPI

8.6 —

10.2 12.9

78-79

79-80

80-81

81-82

82-83

83-84

84-85

23.7 21.9

59.0 77.5

44.6 40.4

22.6 6.4

36.4 40.5

92.2 114.8

39.0 12.5

Sources; Somalia, 1979 and 1985a.

Undoubtedly some correlation could be found between inflation and the government budget deficit,® but the most plausible explanation is provided by looking at the movement in food prices which had the largest weight in the CPI. In most years, food prices increased faster than the CPI (signifying

116

Case Studies

that those in the food sector managed to protect themselves against inflation); in 1981-82, food prices increased much less than general inflation and in so doing contributed to the fall in the inflation rate. Why did this happen? As we have seen, production increased. Can the IMF claim credit for this? If they did, it would at the most be for the liberalisation rneasures introduced under their instigation — certainly not for the devaluation, which had no impact on food prices.’ And could they claim that liberalisation had such an instantaneous impact? Surely the impact could not materialise till the next harvest. Actually, of course, what happened was that the weather was particularly favourable in 1981 and 1982, contributing hugely to the increase in agricultural output. The increased supplies reaching the market then moderated the increase in food prices. This is a far cry from the implicit explanation of the IMF for the rise and fall in the rate of inflation in Somalia in terms of the budget. In a review of its experience with adjustment programmes in Africa, the Fund’s approach to the design of such programmes was stated to be as follows: There is no such thing as a ‘typical’ Fund-supported adjustment program, although many articles have been written attempting to describe such programs by pointing out the commonality of objectives and instruments. The objectives and instruments, however, are hmited and are clearly common to most countries . . . [but] since no two countries share the same economic conditions, no two Fund-supported programs are alike. Each program addresses the specific problems of the country concerned, takes into account the macroeconomic relationships imposed by the institutional framework, and sets the quantitative targets for the instruments selected. (Zulu and Nsouli, 1985, p.lO).

We might be forgiven for believing that all Fund programmes for African countries are alike, with their emphasis on devaluation and demand restraints. The Somali programme fits exactly this mould; the problem is that the Somali economy does not fit the ‘typical African country’ mould. Without food subsidies, marketing boards and price controls, but with two significant adjustment bonuses, wage restraint and a freely floating exchange rate, the Somali economy could be mistaken for a typical free-market economy. Not taking any of this into account, the Fund simply applied the ‘typical African country’ adjustment programme to Somalia. As for ‘[taking into account] the macro-economic relationships imposed by the institutional framework’, as the Boston university team put it (p.23); It [is] surprising to note that the IMF has not undertaken any systematic economic analysis of Somalia but has implemented a very standard IMF package based on financial considerations only ... It seems almost certain that failure to take into account the forces generating labor emigration to the Gulf states, the role of remittances in the domestic economy, and the way in which parallel markets were functioning has led to a more costly and distorted adjustment to financial disequilibrium than was necessary.

The IMF has been caught in a contradiction in Somalia, although it is doubtful whether it has realised this. It has tried to put fetters on a free-wheeling economy — and the government has, of course, gone along

Somalia: Economics for an Unconventional Economy

117

with this in the futile hope of regaining control over the economy. All African governments by now have the problem of a parallel economy that evades government control, almost always created precisely because of the controls. The prominent parallel market in African countries is in food crops. The smaller (in other African countries) parallel market in foreign exchange is supposed to be captured by devaluing the exchange rate to the free market level. In Somalia the major parallel market and the one the government wishes to capture — after having created it itself® — is the remittance market with its attendant imports. Unlike other African countries, this is the major market in foreign exchange in Somalia and again, unlike other African countries where the objective of the transaction in the parallel market is capital flight, the objective in Somalia is mostly to facilitate the flow of goods from abroad. Government’s main reason in agreeing to the huge devaluations was to encourage the channelling of foreign funds through its banking system so that it could use them according to its own priorities. It has so far met with practically no success in capturing the remittances because (a) the free market always gives better rates and (b) the free market insures safe delivery of money to the remotest comers in Somalia. The banks cannot match this, simply because there are no banks where potential customers and beneficiaries are. Thus, the Commercial and Savings Bank of Somalia has no branch office in the Gulf region and in the opposite direction there are no foreign banks in Somalia. Thus, remittances would have to go through an intermediate bank in Europe or America and then they would be stuck in Mogadishu because there are hardly any bank branches in the countryside. Add to this the fact that most Somalis in Gulf countries are illegal workers, whereas the law in those countries requires that only resident permit holders may make bank transfers, and one can see the futility of trying to channel the funds through the established banks. By March 1982, i.e., some nine months after their promulgation, only two accounts had been opened in the special category foreign-exchange accounts created to attract remittances (Boston University 1983, p.28); by the end of 1985, the figure had not gone beyond 20.

Conclusion We have attempted to build a picture of the working of the Somali economy based on a perception of it as a vibrant economy in contrast to the crisis- and doom-ridden economy depicted in official statistics. In the rural areas, we have shown that much of the sense of doom came from a notion of nomads as very poor people perpetually on the verge of starvation, a perception bolstered by periodic droughts. Although detailed calorie production figures had not been derived, those of the FAO generally confirmed this perception of large sections of the population being at starvation level. Taking these figures at face value actually reveals the situation of the nomads — the

118

Case Studies

majority of the Somali population — to be even more dire than generally perceived, and, since similar figures are obtained for all years, they raise questions about how the Somali people have survived through the ages. This paper has shown that this perception of a doomed nomadic sector arises from a systematic bias in estimating milk production — the main diet of the nomadic'’people. Based on livestock population and production coefficients relating to milk output, we obtain a much higher estimate of milk production than the FAO — and higher than the current national estimate. With this estimate, the situation of the nomads is quite a lot more comfortable compared to the one implied by other estimates of milk production. All along we have emphasised that these figures are in the nature of estimates. Not only that, but that they should also be viewed within a certain perspective. First, our estimate of calorie sufficiency in Somalia is in contrast to the chronic and longstanding deficit implicit in existing figures. It confirms a fact — that Somali nomads survive as a social stratum. What should be emphasised is that the sort of figures we obtain still place the Somali nomads in a very precarious position of just bare self-sufficiency. Moreover, we are using an average figure — over the whole population and over a whole year. Clearly, for some segments of the nomadic population the position could be critical, as it would be for most nomads during the dry season. The final fact to remember is, of course, the ever-present probability of drought. Nomads suffer more in such times than any other section of the population, including peasants. In the urban areas we have also shown that official figures of GDP and wages fail to convey an accurate picture of the Somali economy. If we believe these figures, we would have to conclude, parallel to the nomads, that most urban people must be on the verge of starvation, as all the GDP in the national accounts would not buy even a minimum-needs food basket. Nobody has actually said this because nobody has looked at GDP figures in that light. Most analysts have quoted GDP growth rates and pronounced hard times for the Somali people. The actual situation in the urban areas is quite different. Not only is there very little food scarcity in urban Somalia, there is actually a consumer boom shared by all sections of the population. This boom started in the late 1970s, i.e., precisely from the time that GDP and wage figures depicted catastrophe for the urban population. The explanation of this paradox is provided by the fact that a greater part of the money income in Somalia now quite likely comes from remittances of Somali workers abroad. While local wages have stagnated, these funds have increased continually in local currency terms because of the clamour for foreign exchange in the hands of Somali workers abroad by Somali money merchants intent on importing consumer goods into the country. The price of the Saudi rial is constantly bid up. This is then simultaneously reflected in local prices and local incomes: Somali traders put up the prices of consumer goods in shillings while relatives of Somali migrants receive equivalent local funds to buy consumer goods. Thus, we

Somalia: Economics for an Unconventional Economy

119

get an explanation of the very high rates of inflation witnessed in Somalia since the late 1970s in terms of the system of repatriating remittances to Somalia. This explanation of the remittance economy and its concomitant freely floating exchange rate has a great bearing on the type of remedies suggested for the crisis in the balance of payments. Without a proper appreciation of this, the government, in partnership with the IMF, has embarked since 1981 on a series of measures to restore the balance in external and internal accounts. These measures have included demand restraint, liberalisation of markets and several currency devaluations. As might be predicted, they have had a minimal impact on the targets by which such programmes are generally judged — economic growth, inflation, and balance of payments deficit, and the reason for this is not far to seek as the measures are marginal to the actual functioning of the Somali economy. The vast subsistence sector is immune from any of the adjustment measures while, in the monetary economy, most transactions occur under conditions of the free market — exactly what the adjustment measures are supposed to achieve. Unlike other African countries, at least since the early 1980s, food crops have been marketed without price controls and there are no consumer subsidies on foodstuffs. Even livestock exports take place essentially under conditions of a free market because of the pervading importance of the parallel market in foreign exchange. Thus, international prices are the operative prices in the livestock trade and the informal exchange rate ensures that internal prices of livestock move parallel to the inflation rate. Thus devaluation a la other African countries provides even less of a solution for the apparent balance of payments crisis in Somalia because it is such a marginal measure; it is actually even superfluous as the Somali economy has been devaluing informally over a number of years, and as the informal exchange rate has always stayed above the official rate. The measures implemented to curb inflation have also been ineffective because the major cause of inflation in Somalia is not the deficit in the government budget but the transactions in the remittance market. The rate of inflation declined for a few years after the implementation of the adjustment programme, but this had more to do with the increased supply of agricultural commodities forthcoming due to favourable weather conditions than with any of the monetary/fiscal measures set afoot under the aegis of the IMF. Economic growth is also shown to have increased — and quite sharply — but this was only because of the quirks of Somali livestock data. All in all, the spectacle is one of government and the IMF trying to impose the trappings of a free market economy on Somalia whereas one existed in all but name. Actually in some respects, for example, the abolishing of the free importation of consumer goods, the adjustment measures have militated against free-market structures. The question of what is to be done about the fundamental development problem in Somalia is beyond the scope of this paper. Several reports are

120

Case Studies

available which treat this question. Unfortunately, contradictory pre¬ scriptions emerge because of differing perceptions of the major sector in the Somali economy — the nomadic sector — and because of the failure to take proper account of the workings of the informal economy dominated by remittances. We have attempted to provide some orders of magnitude about these, baseS on whatever statistical material is available and on our own intuitive estimates. Obviously, nothing firm can be claimed, and un¬ fortunately there matters may have to remain for a long time to come because of the slow generation of data in Somalia. Until then, the best service one can render is to subject all available analysis of the Somali economy and all statistics on which they are based to hard scrutiny. This has been done here and this is how this paper itself should be treated. Only thus may we get nearer something that resembles the true Somali economy, and a realistic analysis of the impact of Fund and Bank adjustment programmes on it.

Notes 1. For reasons of space, this article has had to be shortened. 2. World Bank, 1980, table 1 of Annex had placed Somalia as the eighth poorest country in the world in 1978, with a per capita GNP of US$130. Population was taken to be 3.7 million. 3. This was a deliberately conservative estimate, amounting to $6,000 per annum. As the Somalia-based survey (Somconsult, 1985, p.5) found, incomes at the end of 1984 were around $10,000 ‘compared to an estimated average income of $12,000 reported in 1980—81 as confirmed by the emigrants interviewed’. 4. Except insofar as low prices have an impact on production via the ability to purchase inputs. 5. This is not as unrealistic an assumption as it might seem. In the real Somali livestock world, there are several intermediaries between the producers and the export market. So long as producers get a constant proportion of the export price, the argument below can be applied unchanged. Since the livestock market is competitive the above assumption is likely to hold. 6. Although one fails to see quite what: according to the IMF’s own statistics (reproduced in Table 2.3 in IBRD, 1985) overall deficit in the government budget moved as follows (in million Shs): 1975—77 —477; 1978—80 —1,147; 1981-82 -2,740; 1983-84 -2,383; 1984 -7,293. In the IMF staff members’ paper the deficit is related to GDP, thus: ‘The overall defieit of the Central Government was reduced from 9 per cent of gross domestic product in 1980 to about 3 per cent in 1983’ (Zulu and Nsouli, 1985, p.20). The IMF should be grateful they have the privilege of using their own GDP figures. Had they used the government’s figures for 1983, they would have found that the deficit as a percentage of GDP increased, and hugely. Of course as we have argued all along the rise would be spurious because of the nature of GDP data in Somalia; by the same token the fall claimed by the IMF too is spurious. 7. Of course the IMF claimed credit for increased agricultural production

Somalia: Economics for an Unconventional Economy

121

because of devaluation. Liberalisation was also mentioned, thus: ‘Agricultural production particularly benefited during the adjustment program from changes in relative prices resulting from devaluations and liberalised pricing and marketing policies.’ 8. The government legalised the importation of goods under the franco valuta system in the late 1970s to encourage remittances of workers abroad as well as to ease the shortage of goods in the market.

References

Boston University (Allen Hoben et al.) (1983), Somalia: A Social and Institutional Profile, African Studies Centre, Boston University. Dahl, Gudrun and Anders Hjort (1976), Having Herds: Pastoral Herd Growth and Household Economy, Department of Anthropology, University of Stockholm. Economic Commission for Africa (ECA), T. Jones (1985), ‘Report on a mission to the Somali Democratic Republic’, Addis Ababa, ECA. International Bank for Reconstruction and Development (IBRD) (1980a), Somali National Income Accounts, Washington, DC, IBRD, East African Region (mimeo). — (1980b), World Development Report, 1980, Washington, DC, IBRD. — (1981), Memorandum on the Economy of Somalia, Washington, DC, IBRD, Report no. 3284-50. —(1985), Somalia: Towards Economic Recovery and Growth, Washington, DC, IBRD, Report no. 5384-50. ILO/JASPA (1977), Economic Transformation in a Socialist Framework: An Employment and Basic Needs Oriented Development Strategy for Somalia, Addis Ababa, ILO/JASPA. Jamal, Vali (1981), ‘Nomads, farmers and townsmen: incomes and inequality in Somalia’, Addis Ababa, ILO/JASPA (Also issued as ILO/JASPA 1982). — (1983), ‘Nomads and farmers: incomes and poverty in rural Somalia’, in Dharam Ghai and Samir Radwan, Agrarian Policies and Rural Poverty in Africa, Geneva, ILO. — (1985), ‘Structural adjustment and food security in Uganda’, ILO/WEP Research Working Paper, WEP 10-6/WP73. — (1986), ‘Economics of devaluation: the case of Tanzania’ in Labour and Society. — (forthcoming), ‘Defining poverty in a dualistic subsistence context: a comment on Haaland and Keddeman’, in Economic Development and Cultural Change. Somalia (1979a), ‘Estimated aggregates of national accounts in current and constant prices and economic indicators, 1970—79’, Mogadishu, Central Statistics Department, State Planning Commission. — (1979b), Three Year Plan 1970—71, Mogadishu, State Planning Commission. — (1982a), Five Year Development Plan, 1982—1986, Mogadishu, Ministry of National Planning. — (1982b), National Account Aggregates of Somali Democratic Republic, Mogadishu. — (1985a), Agricultural Statistics Handbook, Mogadishu.

122

Case Studies

— (1985b), The New Mogadishu Consumer Price Index, Mogadishu, Central Statistics Office. Somconsult (1985), Report on Flow of Remittances of Somali Workers Abroad, Mogadishu, Somconsult. UNCTAD (1984), Handbook of International Trade and Development Statistics, Genev^ UNCTAD.

9. Sudan and the IMF, 1978-83 Safwat Fanos The development strategy adopted by the Sudanese government in 1973 resulted in a severe deterioration of Sudan’s balance of payments. On the one hand, discrimination against exportable long-staple cotton, Sudan’s main cash crop, led to a decline in cotton exports from 1,292,000 bales in 1972 to an average of 780,000 bales per year between 1974 and 1977. As a result, real exports decreased by around 13 per cent between 1970 and 1977. On the other hand, an expansionary public investment programme that emphasised the use of capital- and fuel-intensive technology coincided with sharp increases in international prices of fuel and capital goods in 1974, and led to an increase of more than 100 per cent in Sudan’s imports. Petroleum imports increased from $52 million in 1974 to $121 million in 1977, and machinery imports rose from $73 million in 1972 to $143 million by 1977. As a result, the current account deficit increased from $65 million in 1973 to $641 million in 1975, and remained over $500 million between 1976 and 1978.1 Of course, a deficit of this magnitude could not be sustained for long. Recommendations to arrest the deterioration in Sudan’s balance of payments came from two competing forces, the Sudanese technocrats at the Ministry of Finance and the Bank of Sudan, and from the IMF. Basically, the IMF called for a devaluation of the pound, liberalisation of payments and deflationary policies, as a means to reduce the deficit, while the technocrats opposed devaluation and advocated import controls and the encouragement of cotton exports. At first, between 1976 and 1978, the government adopted neither set of recommendations for reasons to be explained below. This situation changed in 1978 when Sudan’s creditors tied their financial assistance to its implementation of IMF policies. The politically dominant comprador and parasitic bourgeoisies were unwilling to lose the support of their external allies and, therefore, enforced the policies recommended by the Fund. In my view, these IMF policies were faulty as they failed to address the causes of the crisis. Moreover, they were implemented inconsistently. Thus the country’s social, political and economic crisis deepened after 1978. To understand the failure of IMF policies in Sudan, I will describe the pressures put on the government to implement these policies, then explain how, and why, the IMF policies of devaluation of the pound and liberalisation of payments failed to reduce the deficit in the balance of payments. I will also analyse why the government was unable to implement the IMF’s deflationary policies, and with what results. Finally, I will argue that agricultural production did not increase because the IMF and World Bank were more concerned with privatisation (that is, reducing the size of the public sector), than with overcoming the problems that impeded production. These included shortages of spare parts, intermediate goods and skilled labour.

124

Case Studies

Background to the implementation of IMF policies, 1976—78 During 1975 and 1976, the IMF expressed concern over the increasing deficit in Sudan’s balance of payments, and urged the government to devalue the pound by 30 per cent to encourage exports and to discourage imports. Howevef, the IMF failed to influence the government at that time, partly because the Sudanese technocrats at the Ministry of Finance played an important role in presenting counter arguments to those of the IMF. Basically, the technocrats prepared studies which showed that a depreciation of the exchange rate would not lead to a reduction in imports and an increase in exports, because the elasticities of demand for both Sudan’s imports and exports were low. In other words, a reduction in the dollar value of exports and an increase in the pound value of imports would not lead to a significant change in demand. In addition, the technocrats warned that devaluation would increase the cost of living and the costs of investment expenditures because of their large import content.^ As an alternative to the IMF recommendation of devaluation and liberal¬ isation, the technocrats recommended import controls to reduce the inflow of foreign goods so as to reduce the balance of payments deficit. However, other recommendations by the technocrats concurred with those of the IMF, for example, raising cotton prices to tenants and reducing government current expenditures in order to curb deficit financing and inflation.^ However, the government did not implement the recommend¬ ations of its technocrats because they contradicted the main thrust of its agricultural policy known as the breadbasket strategy. This emphasised food, rather than cotton, production and more, rather than less, development expenditure. Moreover, the government did not follow the advice of the IMF because of its fear of the political repercussions of depreciating the exchange rate and increasing the cost of living. As the Nimeiri regime had barely survived a coup attempt in 1975 and an armed rebellion by the followers of the Umma Party in 1976, it naturally wanted to avoid an increase in its popular isolation. Besides, the regime was aware that deflationary monetary and fiscal policies would reduce development expenditures and lead to a recession, which was politically unacceptable. In addition, the IMF did not have the strong support of Sudan’s Arab creditors at this time. The oil-rich Arab countries that supplied Sudan with more than 50 per cent of its foreign loans had faith in the country’s potential. More importantly, Sudan was still servicing its debt in 1975 and 1976, so its creditworthiness was not in question. However, the financial situation had worsened by 1977/78: debt payment arrears began to accumulate and creditors reduced their disbursements to pressure the government to implement IMF policies. Net disbursements from foreign loans and other capital inflows declined from an average of $480 million per year in 1974—76 to a meagre $35 million in 1977. By this time, the American export credit guarantee agency (Exim

Sudan and the IMF, 1978—83

125

Bank) had stopped authorising guarantees for American exports to Sudan. Saudi Arabia and the other oil-rich Arab countries made it clear in 1978 that they would not extend any new loans until the country reached an agreement with the Fund. Thus, when Sudan asked Saudi Arabia to make up for the shipments of Iraqi oil withheld because of payment arrears, the request was turned down.^ However, the government continued to resist IMF demands, even when, in early 1978, external reserves dropped to $28 million — sufficient for only a few days’ imports. Finally, the Saudis, invited to join the negotiations with Sudan by the Fund in February 1978, promised to give Sudan $700 million on condition that it accepted the Fund’s recommendations.® In June 1978, Nimeiri himself visited Saudi Arabia but failed in his efforts to change the decision. A few days later, he bypassed the objections of his technocrats and announced that Sudan had reached a one-year stand-by agreement with the

IMFJ Why did Saudi Arabia (Sudan’s largest creditor) decide to support the IMF against Sudan? The Saudis and the other oil-producing countries were behaving as prudent creditors, and wanted to ensure that their money would be paid back. They viewed tbe Fund as the agency best equipped to manage international debt crises and to secure the creditors’ interests. Thus, Saudi Arabia increased its IMF quota by $3.3 billion in 1981 to become the sixth largest member, and this entitled it to a permanent seat on the Fund’s Executive Board — a privilege enjoyed only by the USA, Britain, West Germany, France and Japan. Needless to say, a country that becomes a permanent member on the Executive Board of the IMF firmly believes in the objectives of that organisation.® Nimeiri’s decision to support the IMF against the technocrats marked the end of their active participation in negotiations between the Fund and the government. After June 1978, IMF teams dealt directly with the President and his top political aides. That made their task easier as the President and his political advisers were not trained economists and could not argue with the IMF technocrats. In addition, after 1981 most IMF policies implemented in Sudan were announced to the public by the President. As one observer commented: Given the drastic nature of the programme, no Finance Minister could have dared to announce it. The IMF operatives in the Sudan, having lived in the country long enough to appreciate the political treachery of their proposed solutions, decided to go for the kill, so to speak. Hence the preemptive announcement of the programme by the President.®

Sudan’s relationship with the IMF between 1978 and 1983 was formalised in a series of agreements. The first one-year agreement, signed in June 1978, was followed by a three-year extended arrangement signed in May 1979. However, the extended arrangement became inoperative in the third year (mid-1981) because performance deviated from the targets. A new one-year stand-by agreement was signed in February 1982, followed by another in January 1983.’° In addition, the World Bank provided four

126

Case Studies

conditional loans in the early 1980s for the rehabilitation of the agricultural sector. In all these agreements, the objectives of the IMF were stated and restated consistently: The principle objectives of the adjustment programs were to expand the pace of economic activity while containing the deficit on the current account of the balance of payments. The objectives were to be achieved through mutually reinforcing policies including (1) structural reform of the agricultural sector designed to reorient production towards Sudan’s most competitive crops, (2) rehabilitation of the physical infrastructure of the public agricultural schemes, (3) elimination of price and cost distortions, (4) adherence to restrained fiscal and monetary policies and (5) liberalisation of trade and exchange transactions and the fostering of an environment which would be conducive to the inflow of Sudanese expatriate remittances and foreign capital.”

Effects of Fund policies on trade, exchange rate and the balance of payments What was remarkable about Sudan’s experience with the IMF was the extent to which the Fund relentlessly recommended the devaluation of the pound and liberalisation of foreign exchange transactions as the main policy instrument to correct the balance of payments deficit. Even more striking was the fact that the Fund did not change its approach — even after it had proved a failure. Thus, the devaluation of the currency became an endless affair. Before June 1978, there were three exchange rates. The official rate was £S1 = $2.87 and this was applied to all other payments, except remittances which had an incentive rate of £S1 = $1.75. As part of the 1978 stand-by agreement, the official rate was depreciated to £S1 = $2.5 and the effective rate to £$1 = $2.00. In March 1979, the rate for remittances was also lowered to £$1 = $1.50.” The second major challenge in exchange rate policy was part of the three-year extended arrangement and took place in $eptember 1979. The rate for remittances was abolished, while the official and the effective rates were unified at £$1 = $2.00. In addition, an incentive rate, to be determined by supply and demand, was established at £$1 = $1.25. In other words, a dual exchange system was erected whereby the official rate was applied to government exports and imports, while the incentive rate was applied to payments by the private sector. More important were a series of other measures implemented at the same time to liberalise trade and foreign exchange transactions. The barter system was abolished (except with neighbouring countries) together with the surtax and development tax on imports. These measures gave importers the freedom to import what they wanted from where they wanted (abolition of the barter system) and lowered import prices (removal of import taxes). Residents and non-residents were allowed to open accounts in foreign exchange without reporting their sources and to use

Sudan and the IMF, 1978—83

127

these accounts to finance external payments.'^ This last measure was a step toward legalising the parallel market in foreign exchange because the authorities knew that most of those who opened foreign exchange accounts acquired the money from this market. The third major change in foreign exchange policy occurred in July 1981: the parallel market was legalised and all restrictions on currency exchange were lifted. Individuals, companies and banks could acquire a licence to trade in foreign exchange and the rate was totally unregulated by the state. Not surprisingly, foreign exchange shortages pushed the value of the Sudanese pound downward, and, in September 1981, it was at par with the dollar. Using the pretext of closing the gap between the official and the free market rates, the IMF asked for a third official devaluation. In November 1981, the official rate and the incentive rate were unified at £S1 = $1.11. This rate was applied to government payments, while the private sector financed its payments through licensed dealers. The exchange rate of the licensed dealers continued to depreciate because of high demand for foreign exchange to finance imports by the private sector. In June 1982, the exchange rate was £S1 = $0.70 (compared to the official rate of £S1 = $1.11). The government then intervened in the free market and fixed the exchange rate at £S1 = $0.88. However, the IMF reacted by halting its loan disbursements and, in less than two months, the government abandoned its attempt to fix the exchange rate of the licensed dealers.*^ As the gap between the official rate and the market rate widened, the IMF called for a fourth devaluation in November 1982: the official rate was depreciated to £S1 = $0.77 whereas the free market rate went below £S1 = $0.50. By early 1985, the free market exchange rate reached its lowest point, £S1 = $0.20. What did the liberalisation of exchange and trade, plus the successive devaluations, achieve? The IMF and other creditors ‘rewarded’ Sudan by increasing their loan disbursements. For example, following the first and second devaluations in 1978 and 1979, Sudan received a total of $480 million from Saudi Arabia, $250 million from the IMF, $31 million from the Arab Monetary Fund and $30 million from the Dutch commodity financing facilities. Besides, some western creditors wrote off debts amounting to $46 million. West Germany also increased the grant element in its aid to Sudan.'® However, this inflow of loans led to an increase in imports, from 12 per cent of GDP in 1977/78, to 23 per cent in 1981/82, at a time when exports stagnated at around 8 per cent of GDP between 1978 and 1982.'^ Table 9.1 shows the movements in Sudan’s balance of payments between 1978/79 and 1982/83. Some of the increase in imports was caused by increases in the prices of fuel and sugar in 1979 and 1980. As demand for these two commodities is inelastic, devaluation did not lead to a reduction in the quantities imported. On the contrary, with the state’s road building programme, which increased all-weather roads by more than 1,200 kilometres, road transport became

128

Case Studies

Table 9.1

Sudan: balance of payments summary, 1978/79—1982/83 (in millions of US dollars)

'

Exports Cotton

^

Other Imports Petroleum Sugar Other Trade Balance Services Receipts Payments of which: Interest Transfers Private Official Current Account Official capital Receipts Payments Allocation of SDRs Errors and ommissions^ Overall balance Monetary movements Financing gap

1978/79 527.0 320.7

1979/80 581.5 333.4

1980/81 478.9 182.0 296.9

Est. 1981/82 537.0 170.0

. Proj. 1982/83 743.0 270.0

367.0

473.0 -1,795.0 -427.0 -68.0 -1,300.0

206.3

248.1

-1,137.9 -177.6 -28.0

-1,631.4 -393.0 -183.6

-932.3

-1,339.9 -254.0 -122.7 -963.2

-1,054.8

-1,847.0 -450.0 -159.0 -1,239.0

-610.9

-758.4

-1,152.6

-1,310.0

-1,052.0

-104.5 181.0 -285.5 (-77.8) 257.2 240.0

-82.0

-62.1 321.1 -383.2

-48.0

261.1 -343.1 (-70.5) 293.2 209.0

375.0 -423.0

-146.0 400.0

(-105.2) 426.6 304.6

(-148.0) 535.0 350.0

-546.0 (-244.0) 547.0 400.0

17.2

84.2

122.0

185.0

147.0

-458.2

-547.2

-788.0

-823.0

-651.0

347.9 405.0 -57.1

442.1 532.2

412.8 499.0 -86.2

634.0 695.0

235.0 602.0

-61.0

-367.0 —

-90.1

13.0

13.0

11.0

—

103.3

44.1

144.2

46.0

—

6.0

-48.0

-220.0

-143.0

-

-6.0

48.0

220.0

143.0

—

-

—

—

—

416.0

Note: 1. Includes short-term capital inflows and unidentified transactions. Source; IMF, Sudan — Staff Report for the 1982 Article IV Consultation, report no. SM/82/174, 23 August 1982, p.l2.

more important and fuel impprts increased from 1,276,000 metric tons in 1977/78 to 1,546,000 metric tons by 1980/81. For sugar, the failure of the four new publicly owned sugar factories to meet output goals due to shortages of spare parts and labour led to an increase in sugar imports from 171,000 metric tons in 1977/78, to 202,000 metric tons in 1981/82. In addition, the liberalisation of trade and payments led to an increase in the inflow of luxury consumer goods because wealthy families in Sudan were willing to buy these commodities. For example, imports of alcoholic beverages soared from 770,000 litres in 1976/77 to 9,415,000 litres in 1980/81, while the import of cars increased from 3,000 in 1977/78 to 9,000 units in 1981/82.’® As a matter of fact, an overall increase in the imports of consumer goods took place at the expense of capital and intermediate goods, as Table 9.2 shows. The main reason for this shift was that prices of imported consumer goods were not controlled, whereas the prices of capital and intermediate

Sudan and the IMF, 1978—83

129

Table 9.2

Distribution of imports in percentages, 1976/77—1981/82 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 Consumer goods Petroleum Intermediate goods Capital goods

Total

20.3 10.9 29.0 39.8

18.6 10.2 31.2 40.0

17.5 14.0 30.5 38.0

24.3 19.2 29.5 27.0

26.4 20.8 30.3 22.5

27.4 27.4 23.0 22.2

100.0

100.0

100.0

100.0

100.0

100.0

Source; Percentages calculated from table on ‘Volume of imports by commodity’ in World Bank, Sudan: Pricing Policies and Structural Balances, vol.II, report no. 4528a-Su, 10 November 1983 p.41.

goods were, as part of the government’s policy of regulating prices of locally produced goods. Needless to say, the decline in the import of capital and intermediate goods caused production bottlenecks and underutilisation of capacity. Corruption also played a role in unduly raising Sudan’s import bill, and the IMF did nothing to stop it. As the country began falling behind in its foreign payments in the late 1970s because of foreign exchange shortages, credit was difficult to get from official sources. Private businessmen stepped in to fill the gap and to finance Sudan’s imports of sugar and fuel. However, these businessmen charged prices much higher than market prices, costing the country in excess of $100 million per year in the case of fuel only. Yet, these businessmen were always paid in time because of their close links with the Minister of Energy and the Director of the Petroleum Corporation.^* Such quantitative and qualitative changes in imports occurred along with stagnant export earnings. Thus, the IMF’s achievement in Sudan was to provide the country with more loans to keep it living beyond its means! The fact that the successive devaluations did not lead to a reduction in luxury imports says a lot about the pattern of income distribution in Sudan and the effectiveness of devaluation and liberalisation in situations like that. Wealthy families continued to buy luxury imports, regardless of the increases in their prices. Thus, although the prices of passenger cars increased fivefold between 1977 and 1983, because of the currency devaluation, the number of cars imported annually tripled during this same period. Notwithstanding its support for trade liberalisation, the IMF asked the government in 1983 to prohibit temporarily the import of around 40 consumer items, including electrical durables, cars, beverages, canned food and furniture. However, this corrective action came too late and the law enforcing it had loopholes. The penalty for importing any of the prohibited items was not confiscation of goods, but forcing the importer to pay customs duty in foreign exchange. Many importers found they could afford this and still make a profit, and this encouraged them to import prohibited items. It was only in 1986, after the Nimeiri regime had collapsed, that illegally imported goods were confiscated.

130

Case Studies

The massive devaluation of the pound did not lead to an increase in exports either. In fact, the exported quantities of cotton, groundnuts, sesame and edible oil declined, as shown in Table 9.3. Table 9.3

Volume of exports by commodity, 1976/77—1981/82 (metric tons, unless indicated) Cotton (thousand bales) Groundnuts Sesame Gum arable Sorghum Vegetable oil and cakes Livestock products (head)

1980/81

1981/82

969

466

19,375 40,063

260 118,284

34,861 340,829

69,923 45,121 25,518 320,360

31,343 259,785

227,317

176,798

178,884

124,306

258,622

276,675

422,426

499,303

1976/77

1977/78

1978/79

792 223,971 108,617 29,595 108,583

749 135,061 93,444 31,559 58,246

884 40,014 47,265 35,400 55,521

225,165

98,411

172,325

304,653

1979/80

63,642

Source: Sudan: Pricing Policies and Structural Balances, vol.II, report no. 4528a-Su, 10 November 1983, p.31.

The decreases in the export of cotton, groundnuts and edible oil (made of cotton seeds and groundnuts) were due to a decline in production. Specifically, cotton production fell from around one million bales in 1977/78 to 585,000 bales in 1979/80 and 544,000 bales by 1980/81. Likewise, groundnut production decreased from around one million metric tons in 1977/78 to 700,000 metric tons in 1980/81.These declines show that devaluation was not an appropriate policy because the crisis of exports was due to insufficient crops to sell abroad, and not uncompetitive prices. An analysis of the impediments to agricultural production after 1979 is given below. Suffice it to mention here that tenants’ resistance to certain recommendations^^ by the World Bank led to serious tenant -management conflicts in the public irrigated schemes between 1979 and 1980. These conflicts delayed loan disbursements from the World Bank that were needed to rehabilitate the capital stock of the public irrigated schemes — a main cause of the decline in export production. Although cotton and groundnut exports declined, the overall export level was maintained by the increase in exports of sorghum (from $8.5 in 1977/78 to $64.4 million in 1981/82) and livestock (from $26.8 in 1977/78 to $57 million in 1981/82).^'* These increases, however, were at the expense of local consumers who were forced to pay higher prices for these goods. Thus the price of one ruba (equal 6.5 kg) of sorghum increased from £80.76 in 1978 to £81.64 in 1980 and to £82.16 by 1981.^5 In addition, sorghum reserves were depleted and when rainfalls were short in 1983 and 1984, 8udan faced the worst famine in its modern history. The devaluation of the 8udanese pound further led to increases in the cost of living, through its effect on fuel costs and imported inputs. According to official statistics,the rate of inflation was more than 25 per

Sudan and the IMF, 1978—83

131

cent per year between 1977 and 1980 and jumped to more than 40 per cent annually after 1980. Wages, however, were not raised in proportion to the rate of inflation. Between 1974 and 1978, wages and salaries of public sector employees were not increased, although the rate of inflation was around 20 per cent per year. Under strong pressure from the labour movement, the government increased wages for its employees by about 50 per cent during the 1978/79 fiscal year.^"^ However, wages were not increased between 1979 and 1982, which meant a sharp decline in the standard of living of public sector workers. Likewise, wages and salaries of private sector employees were not raised in proportion to inflation.^* Although the standard of living of salaried people was depressed, those groups earning foreign exchange (for example, expatriates, currency dealers, and owners of real estate who rent to foreign firms) benefited fi'om the devaluation of the pound as their incomes increased in local currency. This led to new social cleavages between those who earned foreign exchange and those who did not.^® It was not uncommon to find an unskilled worker who worked in the Gulf for some years saving enough money to start a small business or buy residential land. This contrasted sharply with university graduates who worked in Sudan, yet could hardly save any money. In addition, the devaluations had a regressive impact on income distribution between capital and labour. One study estimated that the 1978 devaluation led to an increase of 5.96 per cent in the income of capitalists and a decrease of 4.5 per cent in labour’s income.^® Consequently, labour’s consumption declined while that of capitalists increased. Finally, the successive devaluations of the currency were harmful because they created an atmosphere of speculation in the country and made the flight of capital legal and easier. Expatriates and exporters did not remit all their foreign exchange earnings because they expected the pound to depreciate in the future and wanted to speculate on it. Furthermore, many business persons neglected their productive investments and bought commodities, gold and real estate for speculative purposes. There was also no incentive for saving because people realised that the purchasing power of the pound was falling and that it was better to spend it. Although it is difficult to estimate the amount of money that left the country after the legalisation of capital export, one of Sudan’s most senior economists has commented: It is widely known that the recent appreciation in the price of the dollar was caused by some non-Sudanese residents selling property and converting its value into dollars for remittance abroad. Many Sudanese businessmen have also found it convenient to invest abroad in property or bank balances and to live painlessly on rent and interest received from outside, without having to face management hazards or pay taxes.

Expansionary monetary and fiscal policies The government exacerbated the financial crisis by following expansionary fiscal and monetary policies. From a monetarist perspective, devaluation

132

Case Studies

becomes effective in improving the balance of payments only if it is accompanied by a strict control of the money supply. Hence, the government must adopt a deflationary monetary policy that makes credit less available and more expensive, for example, by increasing interest rates, setting ceilings on bank lending and reducing deficit financing. Yet in Sudan, tfie government followed expansionary monetary policies between 1978 and 1983, and these were reflected in the annual increases in the supply of money and credit to the private and public sectors. Table 9.4 reveals an annual growth in domestic liquidity in excess of 25 per cent, except for 1979/80. Credit to the private sector increased annually from 28 per cent in 1978/79 to 43 per cent in 1982/83, and over 50 per cent of the credit to the private sector went to financing foreign trade.32 Similarly, the increase in credit to public entities was in excess of 40 per cent annually (except for 1979/80). This excessive liquidity increased inflationary pressures in the economy because it was not paralleled by a systematic increase in domestic production. The real growth rate of gross domestic product declined by 4.8 per cent in 1978/79 and by 0.6 per cent in 1979/80, but then increased by an average of 4 per cent per year between 1980/81 and 1982/83. Table 9.4

Changes in domestic liquidity: 1978/79—1982/83 (%) 1978/79 1979/80 1980/81 1981/82 Money Claims Claims Claims

and quasi-money on government (net) on public entities on private sector

31 25 43 28

21 20 17 29

50 26 46 33

27 11 49 34

1982/83 (estimate) 28 9 50 43

Source: IMF, Sudan: Request for Stand-By Arrangement, 7 January 1983, p.21.

This expansionary monetary policy represented a significant deviation of performance from the targets of the different stand-by and extended arrangements with the IMF. For example, the targeted annual increase in money and quasi-money was 23 per cent in 1978/79 and 20 per cent in 1980/81, while the actual increases were 31 per cent and 40 per cent respectively. In addition, credit to the private sector and public corporations was not to exceed 20 per cent annually between 1980/81 and 1982/83, whereas the actual increases were in excess of 30 per cent for the private sector and 45 per cent for public corporations.^^ As we show below, the government’s failure to adhere to IMF monetary targets was a sign of economic mismanagement and political struggles within the state. Specifically, many public sector employees went on strikes to pressure the government to raise their salaries to cope with the increasing cost of living. In addition, the capitalist class pressured the government to keep interest rates low and to expand credit facilities. With regard to unprofitable public corporations, the government wanted to rescue them rather than face the political repercussions of large-scale

Sudan and the IMF, 1978-83

133

unemployment. This inconsistency in implementing the IMF programme did even more damage to the Sudanese economy: the expansionary monetary policies indirectly increased demand for imports, which were uncontrolled because of liberalised trade and payments transactions, and led to more pressures on the exchange rate and to more inflation. Why did the government fail to adhere to IMF monetary targets? First, the devaluations of the pound increased the expenditures of both the public and private sectors through their effects on imported capital and consumer goods. As the prices of imported fuel, machinery, spare parts and other intermediate goods increased, the public and private sectors had to increase their borrowing from the banking system to finance imports. Ideally, the devaluation of the pound was supposed to force people to reduce or divert expenditures on imports because they had become expensive. However, because many of these imports had no local substitutes (for example, fuel and spare parts) there was a limit to their reduction. Second, monetary expansion was caused by the large borrowing require¬ ments of a number of public corporations, especially in the agricultural and industrial sectors. Acute shortages of spare parts, fuel and skilled labour led to low capacity utilisation and reduced revenues, while expenditures continued to increase because of higher costs of imported inputs. Thus, cotton produced in the public irrigated schemes declin^, which forced them to increase their borrowing from £S172.4 million in 1978 to £8770.5 million in 1982. In addition, sluggish international demand for cotton in 1981 and 1982 (caused by the international depression) increased borrowing by the Cotton Public Corporation by £880 milUon to finance payments to farmers upon delivery of the crop. In the sugar industry, the four publicly owned mills had been operating below installed capacity^^ and had to borrow £8300 million more between 1978 and 1982 to finance their losses. As a matter of fact, the whole public sector performed so poorly that revenues from it contributed a meagre 0.5 per cent of GDP in 1981/82.^^ Third, private sector borrowing increased consistently, from £8384 million in 1978/79 to £81.2 billion in 1982/83.^® The state was unwilling and unable to control and make credit expensive to its allies in the private sector (the comprador bourgeoisie) for fear of alienating them. Thus, the lending rate was fixed at around 13 per cent between 1975 and 1981, and with an annual rate of inflation in excess of that percentage, the real interest rate (defined as the nominal rate of interest minus the rate of inflation) was negative. Thus, it was profitable to borrow money for speculative purposes (for example, buying land, non-perishable commodities, gold and foreign exchange) as the annual rate of increase in the prices of these commodities tended to be higher than the rate of interest. Under pressure from the IMF, the government raised the rate of interest by 4 per cent in 1981 and 3 per cent in 1983. However, the rate of interest remained below that of inflation which, as noted earlier, was more than 40 per cent after 1981. However, the government tried to control private sector borrowing by establishing ceilings on credit by commercial banks, but these regulations

134

Case Studies

were not very successful. The IMF attributed this failure to ‘inadequate banking supervisory structure and the personalised nature of lending. Family relationships and personal friendships between bank managers and business people led to the regular transgression of ceiling targets. More importantly, thes^ targets were bypassed out of political considerations: some of the leading private industrial enterprises had been suffering heavy losses and the government wanted the banks to continue rescuing them. For example, the largest textile mill in the country owned by Khalil Osman and the Kuwaitis (the Sudan Textile Industrial Company), which employed around 8,200 persons, owed local banks more than £S78 million in 1984, while its credit ceiling was fixed at £S15 million.^* Another large textile mill, the Khartoum Spinning and Weaving Company, owed banks around £S13 million in 1982, while its credit ceiling was £S15 million.^^ Overall, borrowing by private industrial enterprises increased from £S96 million in 1977/78 to £S275.4 million in 1982/83, and most of that increase was to finance production expenditures or operating losses.'”^ The fourth reason for the expansionary monetary policy resulted from the government’s failure to reduce the fiscal deficit between 1978 and 1983, which led to its reliance on deficit financing and external borrowing. The budget deficit as a percentage of GDP increased from 5.8 per cent in 1977/78 to 11.3 per cent in 1980/81, but then declined to around 8 per cent in 1981/82 due to the elimination of subsidies on many basic commodities in that year. Almost half of the fiscal deficit was financed through the Bank of Sudan and the rest through external borrowing.'*' This deteriorating fiscal performance was caused by a decline in government revenue from 15.5 per cent of GDP in 1977/78 to 13.6 per cent in 1980/81, and an increase in expenditures, from 21.4 per cent of GDP in 1977/78 to 24.9 per cent in 1980/81. This decline in revenue and increase in expenditure was caused partly by the government’s failure to increase taxes, while it raised the wages and salaries of all public sector employees by 50 per cent in 1978/79. The government was forced to concede these increases because it faced a series of strikes in 1978 and 1979 by tenants, railway workers, doctors, teachers, accountants and bank employees. However, because the deteriorating fiscal situation was unsustainable, and because of pressures from the IMF, the government introduced a series of revenue-generating measures between 1981 and 1983, which increased the revenues to 15.8 per cent of GDP in 1982/83.'*^ However, a large part of that increase came from sharp increases in the prices of many basic commodities consumed by the majority of the population, especially fuel, sugar and bread. Although fuel was not considered a mass consumption commodity, the government’s poUcy of shifting haulage from railways to roads made it a mass consumption item in Sudan. Petroleum prices were increased by 62 per cent in 1981 and were raised again by more than 70 per cent in 1982 and 1983. Overall, the price of one gallon of fuel soared from around £S1.5 in 1980 to around £S5 in 1984. As fuel is used in moving most goods in Sudan, the general level of prices was

Sudan and the IMF, 1978-83

135

affected by these increases. In addition, prices of sugar and wheat bread doubled between 1981 and 1983 and those of milk powder and pharmaceuti¬ cals increased by 80 per cent in 1982/83 as a result of the elimination of subsidies on these commodities. Excise taxes were also raised on most locally manufactured goods such as textiles, footwear, edible oils, soap, tiles, dry batteries and cement.'*^ In the case of cement, the price of one ton soared from £S40 to £8120 as a result of the increase in excise taxes. In fact, in his address to the nation on 9 November 1981, Nimeiri announced that the policy of his government would be to remove all subsidies and to pass on to consumers the price increases resulting from changes in the exchange rate {al-Sahafa, 20.11.81). These price increases raised government revenues by £8231 million in 1982/83, but the resulting burden was felt mostly by the poor and those on fixed incomes who were forced to reduce consumption. Although the government public sector salaries increased by £829 million in 1982/83, that was not sufficient to offset the increases in prices. However, other socio-economic groups such as self-employed professionals and selfemployed skilled workers (for example, mechanics, carpenters and plumbers) were able to raise their fees to keep pace with the rising cost of living. 8imilarly, most business people, especially traders, raised commodity prices to maintain their levels of profits. However, the general increases in prices reduced the purchasing power of the majority of the population and led to a recession which threatened the local bourgeoisie who were producing for the domestic market.'*'' In contrast, the comprador bourgeoisie, which traded in exports and for the most part in luxury imports, was least affected by the decline in purchasing power of the majority of the local populace. On the expenditure side, mismanagement was also rampant: the most distinct feature was the sharp decrease in development expenditure from 30.2 per cent of total government expenditure in 1977/78 to an average of 21 per cent during 1978—80. In fact, between 1978 and 1983 no new project was established and all development expenditures went either to completing ongoing schemes, or to rehabilitating older ones. This sharp reduction in development expenditure led to a recession in 1978—80. To end it, development expenditure was increased again to an average of 30 per cent of total government expenditure between 1980/81 and 1981/82, but then declined to 20 per cent in 1982/83 and 1983/84.'*^ As no new state project was started after 1978, unemployment, almost nil in the mid-1970s, increased significantly after 1978. Unemployment among university graduates reached more than 22 per cent in the early 1980s and was highest among graduates of the Faculty of Agriculture — 33 per cent.'*® In 1982/83, almost 40 per cent of the graduates of the University of Khartoum could not find jobs. There are no statistics to show the rate of unemployment among students from high schools, but it was higher than the rate among university graduates because of their limited skills. The IMF also failed to induce the government to curtail its unproductive current expenditures: more than 80 per cent of current expenditures between 1978 and 1983 went to general administration, local government.

136

Case Studies

defence and security. Expenditures on education, health and economic services were a meagre 11 per cent of total current expenditures, while debt service payments were kept artificially stable at 7.5 per cent (leading to the build-up of payment arrears). Due to the secretive nature of the Nimeiri regime, the IMF provided no statistics to indicate the level of expenditure by the regime’s political institutions such as the Presidency, the Sudanese Socialist Union, the People’s Assembly and the political police. However, it was well known in Sudan that salaries and fringe benefits to their members were among the highest in the country. According to one source, the monthly expenditures of the Presidency, the Sudanese Socialist Union, the Council of Ministers, the Security Organisation and the People’s Assembly were £S36 million, £S24 million, £S24 million, £S35 million and £S14 million respectively.'*’ These unproductive expenditures were further exacerbated in 1980 when Northern Sudan was divided into five regions, each having its own Ruler, Council of Ministers and People’s Assembly. The motives for regionalism were to appease regional sentiments, especially in the undeveloped parts in Western Sudan, to create more political jobs to gain the loyalty of regional notables, and to shift the blame for declining socio-economic conditions to regional governments. The monthly costs of regional governments were around £S26 million in 1980/81. Regional rule, however, did not lead to a reduction in the size of the central administration. On the contrary, in 1983 Nimeiri increased the number of his political advisers from four to twelve. Thus, in addition to the more than 30 Central Ministers and Deputy Ministers, there were Presidential Advisers for Agriculture, Decentralisation, Development, Education, Foreign Affairs, Information, Manpower, Political Affairs, Security Affairs, Social Services, and for Legal Advice to the Cabinet and the State House.'** Given the non-participatory nature of the regime, it is safe to assert that these advisers did little work in return for their salaries. Their jobs were created mainly to appease influential politicians who might otherwise have opposed the regime. According to one of those ex-advisers (Dr Turabi, the leader of the Muslim fundamentalists), ‘the advisers of the President received advice from him and not the opposite’.'*^ In sum, although the country was subjected to IMF austerity programmes, no attempt was made to reduce credit expansion and the unproductive expenditures of the regime’s political institutions. These expenditures increased further after 1983 when the second civil war was started by Southern officers and soldiers dissatisfied with the government’s neglect of the South, its redivision into three regions, and the imposition of Islamic laws. The war costs the government around one million pounds per day.

Supply-side policies The IMF also recommended supply-side policies aimed at increasing Sudan’s production of export crops (to enable the country to service its

Sudan and the IMF, 1978-83

137

debt). However, these policies did not lead to an increase in export earnings because they were resisted by tenants, and because international demand for Sudan’s cash crops was affected by the depression of the 1980s. In 1978, the IMF and World Bank recognised that the recovery of the irrigated schemes depended on the provision of foreign exchange to rehabilitate their capital stock, and on increasing tenants’ returns from cotton to encourage them to grow that crop. However, the World Bank made its rehabilitation loans conditional on certain changes in the production relations of the irrigated schemes, changes that were resisted by tenants for two consecutive years, 1979—81. These changes aimed at further intensifying capitalist relations of production in the irrigated schemes. The World Bank wanted to abolish the ‘joint account’ system and to replace it with ‘individual accounts’ between each tenant and the schemes’ management. The ‘joint account’ was a simplified accounting system whereby all costs of production related to the cotton crop were deducted from gross cotton returns before distributing net profits among the tenants, the government and the schemes’ management.^® The World Bank criticised this system on the grounds that it did not take into account the amount of inputs used by each tenant (that is, it did not reward tenants who used less inputs), and it encouraged tenants to divert inputs from cotton to other crops, such as groundnuts and wheat, returns on which they did not share with the government. Instead, the World Bank asked the government to charge each tenant a fixed rate for the inputs used (that is ‘the individual account’), to be collected upon delivery. Using the pretext that some tenants might not pay input charges, especially for non-cotton crops that the schemes’ manageriient do not market, the Bank recommended opening the door for the private sector to supply inputs because it was better able to collect its money than the schemes’ management. The Bank also recommended allowing tenants to sell their tenancy rights ‘to induce those who are not dedicated farmers to release their lands to those who would take the work seriously’.^* A closer look at these recommendations reveals the following: first, charging fixed rates for inputs secures government revenue and shifts the risks of production to tenants. If production or prices fall for any reason, tenants still have to pay for the inputs used. Under the discarded system, the government shared in the risks of production because input costs were deducted from cotton proceeds. Second, poor tenants would have great difficulty surviving because they would not be able to pay for inputs out of previous years’ savings or obtain credit. This would open the door for rich tenants, especially those involved in trade, to take over the land of the poor ones. The difference between a ‘dedicated farmer’ and one who did not ‘take the work seriously’ could very well be caused by the extent to which each had money to finance agricultural operations. As one farmer succinctly observed: ‘In my village . . . only four or five tenants make a living. They are merchants who shell to the rest of us, and they are bleeding us dry.’^^

138

Case Studies

In 1979, the government began implementing the World Bank recommendations in the Gezira scheme: the ‘joint account’ was replaced by ‘individual accounts’, and fixed land and water rates were imposed. However, tenants resisted these changes and went on a one-month strike. The strike damaged production levels because it was timed to coincide with the seeding season. Having failed to end the strike, the government was forced to retreat. Tenants’ resistance continued throughout 1980 and was only broken in 1981 following the President’s decision to implement the ‘individual account’ regardless of tenants’ opposition. However, the government’s failure to implement the World Bank recommendations between 1979 and 1980 meant that the rehabilitation of the irrigated schemes was delayed. Cotton production began to rise only after 1981/82, following the disbursement of a Bank loan for the Gezira. This loan was used to dredge the main canals, purchase around 200 items of farm machinery and eleven rail locomotives, and to install petroleum tanks in the main centres of production.^^ This experience showed that the Bank was more concerned with changing the relations of production in the irrigated schemes than with rehabilitating them. Cotton productivity rose to its highest levels of around 4.5 kantars per feddan in 1981/82, partly because of the rehabilitation of the schemes’ capital stock, and partly because of high cotton returns, which encouraged farmers to divert inputs to that crop. Perhaps the one positive policy of the IMF and the World Bank in Sudan was to ask the government to pay tenants the international cotton prices converted to Sudanese pounds, using the parallel market rate (£S1 = $1.25 in mid-1981), instead of the official rate (£S1 = $2.00). Following the unification of the official and the parallel market rates in November 1981, cotton prices were converted at the market rate. Unfortunately, tenants did not benefit very much because of the 40 per cent decline in Sudan’s terms of trade in the early 1980s caused by the worldwide depression.

Conclusion Clearly, the various devaluations that were implemented could not close the gap between imports and exports for many reasons. First, because the decline in exports was not due to uncompetitive prices as alleged by the Fund, but to production bottlenecks resulting from foreign exchange shortages, and to a lack of incentives for peasants to grow cotton. The state and the IMF failed to solve these problems between 1978 and 1981, and when they were finally solved after 1981, and cotton production increased, a depression in the advanced countries resulted in sluggish demand. Second, because many of Sudan’s imports (for example, spare parts and intermediate goods) were essentials, they could not be sharply reduced without affecting domestic production levels. In addition, the inflow of consumer goods did not decrease because the wealthy comprador and

Sudan and the IMF, 1978—83

139

parasitic bourgeoisies were willing and able to maintain their conspicuous consumption regardless of the price. In fact, the liberalisation of trade and exchange rate led to an increase in the inflow of luxury consumer goods at the expense of investment goods because profits from the former were higher than those from the latter. The devaluations of the pound also increased the gap between workers, peasants, and those on fixed salaries on the one hand, and the capitalist class and those who earned foreign exchange on the other. The Sudanese government further exacerbated the economic crisis by implementing IMF policies inconsistently: liberalisation policies were accompanied by expansionary fiscal and monetary policies. The results were high rates of inflation and a systematic decline in the value of the pound caused by a high demand for scarce foreign exchange. The failure to restrain the growth of money supply and bank credit was due to the large credit demand by public and private corporations to cover losses caused by low capacity utilisation. The state was unwilling to harm the comprador bourgeoisie or face the political consequences of large-scale unemployment caused by bankruptcies. In addition, the state’s failure to reduce budget deficits meant turning to deficit financing. One of the noticeable failures of the IMF in Sudan was its inability to pressure the government to reduce unproductive current expenditures on institutions like the Presidency, the Sudanese Socialist Union, the State Security Organisation and local government. In contrast, the IMF forced the government to cut develop¬ ment expenditures which caused a recession and increased unemployment. Both the state and the IMF ignored impediments to production such as shortages of power, spare parts, intermediate goods and labour. By focusing primarily on the dismantling of the public sector and reducing the government’s role in the economy, the IMF showed that it was more concerned with expanding the role of the private sector and pushing the philosophy of a free-market economy, than with solving Sudan’s problems. For its part, the state’s failure to curb impediments to productive activities was to be expected because the politically powerful comprador and parasitic bourgeoisie had little involvement in the productive sectors of the economy and cared even less for them.

Notes 1. All statistics taken from World Bank, Memorandum on the Economy of Sudan, Report no. 3652-Su, October 1979, pp.6,46—49. 2. Ali Abdel Gadir Ali, ‘The devaluation debate: a documentary approach’, in Ali Abdel Gadir Ali (ed.), The Sudan Economy in Disarray, London: Ithaca Press, 1984, pp.31—38. 3. Ibid., pp.39—43. 4. World Bank, op.cit., p.5.

140

Case Studies

5. The Economist Intelligence Unit, Quarterly Economic Review of Sudan, 3rd Quarter 1978, pp.7—8. 6. Ibid., 2nd Quarter 1978, p.8. 7. Information obtained from the Deputy Under-Secretary at the Ministry of Finance, November 1983. 8. Mary Bushnaq, ‘Saudi Arabia’s active participation in the International Monetary Fund assists international financial stability’, Saudi Report, VI, 24, 23 July 1984, p.5. 9. Ali, op.cit., p.56. 10. Information obtained from the IMF representative in Sudan, December 1983. 11. IMF, Sudan: Staff Report for the 1982 Article IV Consultation, report no. SM/82/174,23 August 1982, p.2. 12. IMF, Sudan: Request for Stand-by Arangement, 1 January 1983, p.45. . 13. Ali, op.cit., p.49. 14. IMF, Sudan: Request for Stand-by Arrangement, p.46. 15. The Economist Intelligence Unit, Quarterly Economic Review of Sudan, 4th Quarter 1982, pp.7—8. 16. Ibid., 4thQuarter 1978, pp.l3—14, and4thQuarter 1979, pp.l5—16. 17. World Bank, Sudan, Pricing Policies and Structural Balance, vol.I, Report no. 5428a-Su, 10 November 1983, p.84. 18. Ibid., vol. II, p.41. 19. Ibid. 20. Mansour Khalid, al-Sudan wa al-Nufq al-Muzlim, London: Aedam Publishing House, 1985, p.401 (in Arabic). See also The Economist Intelligence Unit, Quarterly Economic Review of Sudan, 3rd Quarter 1984, which mentioned that Sudan paid $5 per barrel of oil above the current market price in 1983 (p.20). 21. In March 1986, Nimeiri’s Minister of Energy, an ex-Prime Minister, and an ex-Director of the Petroleum Corporation, together with five other top-ranking officials, were put on trial for taking commissions worth more than $200 million in return for authorising fuel purchases that cost more than the market price. 22. IMF, Sudan: Recent Economic, pp.64-65. 23. Basically, these recommendations aimed at shifting the risks of production to the tenants by charging them fixed rates for water delivery and machine services, rather than deducting them from proceeds of cotton sales. The Bank also wanted to increase returns to more productive tenants and to penalise those who were less productive. 24. World Bank, Sudan: Pricing Policies, vol. II, p.27. 25. IMF, Sudan: Recent Economic, p.65. 26. Those statistics are severely underestimated because they do not take into account parallel market prices which are widespread, and do not include prices in the rural areas which are higher than those in urban areas because of transport costs. 27. IMF, Sudan: Recent Economic, p. 19. 28. IMF, Sudan: Request for, p.24. 29. It is significant to note that recent Sudanese folk songs depict expatriates (regardless of their jobs) as the ideal bridegrooms who could afford to buy expensive gifts; whereas previous songs praised professionals as the ideal bridegrooms. 30. Mohammed Hag Diab, ‘The income and price effects of the devaluation of

Sudan and the IMF, 1978—83

141

the Sudanese pound’, in Ali, op. cit., p.83. These figures are explained by the fact that workers’ incomes were not increased in proportion to the increase in prices, while capitalists raised their prices and made more profits. 31. Mohammed H. Awad, ‘As I see it: wrong “recipes”, bad results’, Sudanow, May 1982, p.21. 32. World Bank, Sudan: Pricing Policies, vol. II, p.l09. 33. IMF, Sudan: Request for, pp.3—15. 34. As mentioned elsewhere, the two new factories at Sennar and Asalaya had serious technical problems, while the two older mills at al-Guenied and new Haifa were in need of rehabilitation. 35. IMF, Sudan: Recent Economic, pp.25—30. 36. World Bank, Sudan: Pricing Policies, vol.II, p.l09. 37. IMF, Sudan: Staff Report, p.2. 38. Alfred L. Taban, ‘Textile industry: tied up in knots’, Sudanow, July 1984, p.26. 39. Alfred L. Taban, ‘KSWC: Spinning out of control’, Sudanow, July 1982, p.21. 40. World Bank, Sudan: Pricing Policies, vol.II, p.l09. 41. IMF, Sudan: Recent Economic, pp.22—23. 42. IMF, Sudan: Request for, p.25. 43. Ibid., p.24. 44. Economic growth was negative in 1983/84 and 1984/85. See the Economist Intelligence Unit, Quarterly Economic Review of Sudan, Annual Supplement, 1985, p.l2. 45. IMF, Sudan: Recent Economic, pp.3—27. 46. This high rate of unemployment among agriculturalists is mainly attributable to the fact that they cannot find jobs in neighbouring oil-rich countries which are mostly desert ones. 47. These figures were published by the National Alliance for Salvation (a coalition of trade unions and political parties who organised the civil disobedience that led to the overthrow of the Nimeiri regime). Cited in Asad Hayder, ‘al-Mustaqbal fi al-Khartoum’, al-Mustaqbal, 18 May 1985, p.26 (in Arabic). 48. The Economic Intelligence Unit, Quarterly Economic Review of Sudan, 2nd Quarter 1984, pp. 11—12. 49. Dr Turabi made this statement to Le Monde, 14.10.83. Cited in Mansour Khalid, al-Sudan wa al-Nufq al Muzlim, London: Aedam Publishing House Ltd., p.328 (in Arabic). 50. In the Gezira scheme, for example, tenants’ share of net profits was 47 per cent, the government share was 30 per cent, the management share was 10 per cent and the remaining went to a reserve fund (2 per cent), social services (3 per cent), and local government (2 per cent). 51. World Bank, Sudan: Pricing Policies, vol. II, p.ll. 52. Cited in Turner, p.44. Sheil means getting a loan (usually from a merchant) in return for mortgaging the crop before harvest. Sheil involves very high interest rates because of the risk involved. 53. Berhane Woldegabriel, ‘Cotton: a bumper crop’, Sudanow, July 1982, p.26.

10. The Role of the IMF and World Bank in Zambia Caleb Fiyidanga Zambia’s announcement on 1 May 1987 that it was abandoning its IMFinspired adjustment programme marked the end of over ten years of active IMF involvement in the economy, during which the country had moved from a state of modest prosperity to near bankruptcy. This paper will examine Zambia’s economy at the time of the IMF’s first involvement, the nature of the IMF policies that Zambia was forced to adopt, and the break with the Fund.

Early years of the Zambian economy Upon independence in 1964, Zambia inherited a relatively healthy economy solely dependent on the export of copper. This prosperity was based on the prevailing high price of copper and the increasing production of the metal. Up to the beginning of the 1970s, Zambia had a favourable balance of payments and was able to accumulate modest external reserves. The need to restructure the economy away from dependence on copper was expressed in the form of an import-substitution industrialisation strategy. This approach reached its peak after 1968 when the state started to participate actively in the economy through the nationalisation of existing companies. New industries were established to produce final consumer goods from imported raw materials and intermediate goods. At the same time, policies were introduced which protected (through high tariffs) final consumer goods but allowed all machinery and raw materials into the country duty-free. These policies, therefore, made the dependence of Zambian industries on imported inputs a predominant feature. As long as the country could generate adequate foreign exchange, this dependence was not seen as a problem. The problem started to emerge in 1973 when, after the Arab—Israeli war, oil prices rose sharply. For landlocked Zambia, this meant a huge increase in its oil import bill and higher import costs due to increased freight charges. These increases in the import bill coincided with a fall in the price of copper and in the volume of copper production. The fall in the price was attributed to the developed countries’ cautious approach to the use of raw materials from the Third World after their experience with oil. This, in turn, led to an increased use of substitutes for raw materials, a recycling of raw materials (a particularly serious problem for copper which can be recycled many times over), and miniaturisation. By the time these problems started to emerge, the government of Zambia was committed to a huge government expenditure programme through such special policies as free education, free health care, and cheap food. The

The Role of the IMF and World Bank in Zambia

143

import-substitution industrialisation strategy it had embarked on also required a big foreign exchange outlay each year.

Zambia and the IMF The initial analysis of the Zambian situation was that its emerging foreign exchange problem was a cyclical one. It was argued that the fall in the price of copper was temporary, and that it would eventually rise again. It followed that the solution was for the country to borrow to cover the current shortfall in foreign exchange, paying back later when foreign exchange earnings were expected to improve. This analysis was, however, wrong because the underlying factors listed above precluded any return of the copper price to its earlier levels. With this eventual realisation, Zambia approached the IMF. Between 1973 and 1986, Zambia concluded the following loan agree¬ ments with the Fund: 1. 1973 Stand-by Arrangement — SDR 19 million or 25 per cent of Zambia’s quota for one year; unconditional; 2. 1976 Stand-by Arrangement — US$62 million or 81.5 per cent of Zambia’s quota. Conditionality included ceilings on the money supply, overall credit and government credit, plus a 20 per cent devaluation; 3. 1978 Stand-by Arrangement — SDR 317 million or 177 per cent of Zambia’s quota. Conditionality included ceilings on overall credit and credit to the government, reductions in repayment arrears and a 10 per cent devaluation; 4. 1981 Extended Finance Facility — 378 per cent of Zambia’s quota or SDR 800 million. Conditionality included ceilings on overall credit and credit to government, as well as a reduction in government deficit spending from 12 to 7 per cent of GDP. This programme was tied to a three-year World Bank investment programme to re-orient expenditure from infra¬ structure to agricultural and industrial projects. TTiis arrangement was cancelled in July 1982 due to an accumulation of payment arrears, over-shooting of credit ceilings and a rise in the balance of payments deficit; 5. 1983 Stand-by Arrangement — 100 per cent of Zambia’s quota or SDR 270 million. Conditionality included ceilings on money supply, aggregate and government credit, and reduction in government deficit to 5.6 per cent of GDP. The currency was devalued by 20 per cent in January 1983 and later allowed to float. The prices of most goods were decontrolled and wage increases were restricted to 5 per cent. In July 1983, the Zambian Kwacha was pegged to a basket of currencies of major trading partners and a crawling peg was adopted. This resulted in a depreciation of 38.5 per cent; 6. 1984—86 Stand-by Agreement — 83 per cent of Zambia’s quota or SDR 225 million. Conditionality included ceilings on overall and government credit as well as on the money supply. Many of the aspects of the 1983 agreement were retained and, on October 1985, the system of auctioning of foreign exchange was introduced. Interest rates were also decontrolled.

144

Case Studies

Major Fund policies The 1984—86 agreement was far and away the most severe. However, failure to agree to a number of conditions forced the Zambian government to announce on 1 May 1987 that it was abandoning any further dealings with the IMF and was instead adopting its own ‘Restructuring Programme’. The main features of Zambia’s programmes with the IMF in the 1974—86 period were as follows: 1. Exchange rate policy. In general, it was argued that the poor performance of the economy in the foreign trade sector was due to an over-valued exchange rate. The solution, therefore, was devaluation. Early on, the IMF advocated devaluation by a fixed percentage. In • later agreements, more emphasis was on a fluctuating exchange rate, as was the case in 1985 when the auctioning system was introduced. Questions have been raised about the efficiency of the exchange-rate solution in a country like Zambia with structural imbalance. For Zambia, it was argued, a devaluation would result in increased copper sales and a decline in the demand for imports. This reasoning is actually wrong. Sales of copper are determined by the London Metal Exchange Price and the value of the Zambian currency plays no role. It would, however, ensure that more Kwacha is earned per metric tonne of copper sold, but, at the same time, the copper industry and all the other industries in the economy would have to pay more for the various inputs that they import. In a diversified economy, the change in relative prices due to devaluation would result in a switch to local inputs, but this cannot happen in an economy without domestic substitutes for imports. For an exchange rate pohcy to be effective, it needs additionally to be backed by an investment programme for the production of raw materials, intermediate and capital goods. At the height of the auctioning system, the value of the Zambian kwacha had fallen from US$1 = K2 to US$1 = K2I. The auctioning system brought havoc and ruin to a large number of enterprises. It became im^possible to plan financially because the exchange rate was fluctuating by large margins each week. In a similar way, budgeting by the government became meaningless. The stability of the exchange rate in developed countries is assured because of adequate supplies of foreign exchange, but even in such economies the potential loss to business houses is reduced through the existence of forward markets for foreign exchange. 2. Interest rate policy. The IMF has always advocated higher interest rates as part of its monetary policy. In Zambia at the height of the 1984—86 agreement period, interest rates had reached levels of over 35 per cent. With such high costs of borrowing, there was hardly any new investment in the economy. Instead, large numbers of companies were going out of business, thus increasing the already high level of unemployment. The group of borrowers hardest hit were those holding loans with foreign exchange components — a very common loan portfolio in most Third

The Role of the IMF and World Bank in Zambia

145

World countries due to the need to import machinery. These borrowers, apart from paying the high rates, also had to raise more local currency to purchase the foreign exchange whose rate was determined by the auctioning system. Some limited attempts to protect these borrowers through a guaranteed pre-auction rate only led to the government incurring higher deficits since it had to subsidise such borrowers. 3. Free trade policy. The IMF always insisted on the removal of barriers to trade, especially quantitative restrictions to trade. In Zambia, the effects of this policy in combination with the high cost of borrowing made it more profitable to engage in trade than to produce. Consequently, a situation arose where even companies long engaged in production started to bid for foreign exchange to import finished goods. Domestic industries were thus being destroyed by foreign industries. The free trade policy was being enforced without regard to the geopolitical situation of Southern Africa. In the sub-region, apartheid South Africa produces the cheapest goods because of its racist wage policy. By adopting a free trade policy towards South Africa, Zambia, a traditional champion of African liberation, would actually be supporting apartheid, since the nearest cheap source of supply would be South Africa. We all know that even the strongest advocates of free trade, such as the USA, discriminate against those countries whose political orientation they oppose. Economic rationality cannot ignore political rationality. The long-term economic interests of Zambia can only be secured if there is political stability with her trading partners. Continued dependence could lead to economic blackmail by South Africa. 4. Reduction in government expenditure. The main targets for such reductions are subsidies, especially those on goods and services consumed by the poor. Although it is generally accepted that a government cannot maintain subsidies if it cannot raise the money for them, the strongest disagreement with the IMF in Zambia was the timing of the subsidy with¬ drawal. A sudden withdrawal of subsidy on maize meal in December 1986 led to riots on the Copperbelt in which 15 lives were lost. It was precisely after the riots that people started to question the use of a policy which made the government increasingly unpopular with the electorate. 5. Pricing policy. The deregulation of prices is generally favoured by the IMF. Decontrolled prices were favoured in Zambia so as to raise prices and create incentives for producers. While the idea of incentives is good, it has often been argued that, due to the monopoly nature of Third World economies, the prices that finally emerge are not market prices. It is, therefore, the responsibility of every government to protect its people from the monopoly prices, especially since these monopolies are transnational corporations which end up repatriating their monopoly profits. 6. Debt service. One of the most important conditions of IMF agreements is the continued servicing of its loans and those from its sister organisations like the World Bank. In the case of Zambia the debt situation by 1985 was as in Table 10.1.

146

Case Studies

Table 10.1

Zambia’s external debt position, 1985 A. Long and medium-term: 1 Multilateral 2 Bilateral (i) Paris Club (ii) Non-OECD 3 London Club 4 Others (financial and suppliers’ credit) B. Short-term debt 1 Commercial 2 Auction related letters of credit 3 Bank of Zambia short-term credit 4 Oil import facility Total A and B:

US$ million 1,418 1,756 1,019 737 68 577 430 130 164 84 4,627

Source: Bank of Zambia, Annual Report, 1985.

By 1985, outstanding arrears on debt were $581 million. The country’s foreign exchange earnings in the same year amounted to just over $700 million. The servicing of such debt implied an 83 per cent debt service ratio and very little remaining for servicing its industry. Far more important to the budget was that, with the exchange rate of $1 = K20, the servicing of the debt would have meant incurring a huge deficit. By 1985, therefore, the servicing of the debt had become the country’s number one problem. Today the country’s debt stock stands at over $6 billion. The question is what happened to all this money which helped create this debt? Is it possible that so much money flowed into the country without any visible change in the economy? The answer lies in the nature of foreign ‘aid’. A large portion of this debt actually went to providing the salaries and the upkeep of technical experts and acquiring equipment which never really increased the productivity of the country. It is precisely because of this that the role of foreign ‘aid’ is now questioned in Zambia.

The IMF/World Bank and other donors Although what has been stated above relates to the IMF, the same criticism applies to other donors. In general, donors are only willing to co-operate with Zambia when an agreement has been reached v/ith the IMF, i.e., they are willing to work only within the framework of IMF conditionality. It is also generally true that World Bank loans are increasingly for structural adjustment as opposed to the project-lending of earlier years. Since the break with the IMF, the World Bank has virtually stopped disbursing funds to Zambia. Early in 1987 the British government agreed to extend a loan to Zambia, conditional upon an agreement being reached with the IMF. Immediately it became known that no agreement had been reached, the

The Role of the IMF and World Bank in Zambia

147

British government announced that the money was no longer available. A Zambian financial institution has been refused disbursement by the International Development Association (IDA), a member of the World Bank group, of money earlier agreed upon for the computerisation of its operations, even though equipment and consultancy had been arranged. The reasons given were that the country’s exchange rate and interest policies were not appropriate. Yet, it is not the responsibility of the financial institutions to formulate these policies.

Zambia’s new economic recovery programme Zambia’s decision to abandon the IMF recovery programme should be seen in the light of the above. The main theme of its programme is ‘growth from our own resources ’ and its main elements are: (a) Limiting debt service to 10 per cent of net foreign exchange earnings so as to enable the country to use its own foreign exchange resources rather than borrowing. The use of this foreign exchange will be limited to selective sectors. The short-term aim is to increase capacity utilisation in existing industries, while the long-term objective is investment in selective industries to strengthen the economy in those sectors where it has traditionally been weak, e.g., production of raw materials, intermediate and capital goods; (b) Fixing the exchange rate at US$1 = K8. The stabilisation of the exchange rate is aimed at facilitating proper financial planning and budgeting; (c) Re-introduction of direct or official allocation of foreign exchange through the Foreign Exchange Management Committee (FEMAC), which meets fortnightly and is composed of government officials and represen¬ tatives of industry and agriculture. Membership is secret but applications for foreign exchange are made through commercial banks to avoid any contact between applicants and the Committee. The issuing of import licences and the allocation of foreign exchange have been unified to avoid more import licences being issued than the available foreign exchange; (d) Re-introduction of price control. This is now being done by the Prices and Incomes Commission, in consultation with producers and importers to avoid below-cost prices; (e) Lowering of interest rates to between 15 and 20 per cent; (f) Establishment of an export-import bank aimed at supporting productive activities as well as exports; (g) All the above policies will be reviewed continuously and adjusted according to prevailing conditions in the economy by a committee charged with this responsibility.

Prospects for the Zambian economy The break with the IMF implies reduced foreign resource inflows. Some programmes may have to be abandoned altogether, while others may be

148

Case Studies

scaled down. It is at the moment not clear how much foreign resource inflow will be affected, but it is generally felt that, since much of the foreign aid was not contributing to real development, the real impact of its reduced inflow will be very little. All future aid will have to be assessed on the basis of a weightings system as set in the Interim National Development Plan. Any aid, whether grant or loan, which does not meet the set criteria will be rejected. Although many donors have expressed scepticism about the plan, the general mood of most citizens is favourable, which is an important ingredient for success. Efforts to improve the efficiency of the civil service have been doubled. What is important for Zambia is the realisation that, after all, the industrialised countries achieved their development when the IMF did not exist, and that since the establishment of this institution, no less-developed country has actually achieved development uftder its guidance.

11. IMF—World Bank Impact on Zimbabwe Arnold E. Sibanda The present crisis in the world economy, particularly its devastating effects on developing countries, is a general crisis of the capitalist world economy. Three salient features of this crisis can be isolated. It is a crisis whose origins are located in the main capitalist world economies; it is historically specific in terms of its characteristic features; and its impact has affected negatively the economies of the whole world — most damagingly, of course, those of the developing world. ^ In essence, the present crisis involves the global reproduction of the monopoly capitalist world economy which, because of the moribund stage it has reached, witnesses a deepening of its internal contradictions and a sharpening of conflicts between it and the economies over which it exercises hegemony. In this context, therefore, it is proper to note that the imposition of so-called ‘liberalisation’ and ‘structural development’ programmes on developing nations is precisely an attempt to overcome this crisis. It is argued here that the conditions and programmes imposed allegedly for the recovery of the developing economies are ‘irrational’ in the sense that they caimot achieve their alleged objectives, neither are they any longer the conditions for the sustenance of the capitalist system.

Salient features and effects of the capitalist world economic crisis The present world economic crisis is rooted in the seven major countries of the capitalist world — Japan, West Germany, France, Britain, Italy, Canada and the USA. The first signs of the present crisis emerged at the end of 1979. But generally, the 1970s and 1980s emerged as a period of stagnation in the economies of these countries, with sharply deepened periodic crises of over-production. These crises have not only been grave but quite uncon¬ ventional for capitalist economies. The general economic recession no longer disappears even during the brief ‘phases’ between the crises. A sharp drop is experienced in the overall average rate of growth in production and labour productivity. The cyclical disruptions become infused with the more protracted disequilibrium of a structural crisis. The growth of GDP, which averaged about 4 per cent annually in the 1970s, fell to 3.8 per cent in 1979 and to a little over 2 per cent in 1981 and, at best, to a similar level in 1982. Trade has been declining and stagnating as well. World trade growth fell from 7 per cent during 1976-78 to 6 per cent in 1979 and to 1.5 percentin 1980. It was stagnating by 1982. These trends were worsened by the monetary and financial developments which, because of a deliberate policy by the US administration, saw the

150

Case Studies

appreciation of the US dollar effectively depreciating other currencies and generating unprecedented increases in interest rates. This caused fluc¬ tuations in exchange rates and affected capital markets, making the chances of a cyclical recovery remote.^ Groups of countries experienced grave disruptions in4he current account of their balance of payments between 1979 and 1982 but, significantly, the non-oil producing countries had unbearable deficits, forcing them to reschedule or attempt to reschedule their external debts. Concurrently, the economic condition of the capitalist world engulfed the whole world, including the socialist economies, which experienced a marked deceleration in their growth rates. The United Nations correctly located the origins of the crisis: The recession in the Western industrialised countries has been the main reason for the poor results in the world economy. The reduction in economic activity produced both a great increase in unemployment . . . and a weakening of commodities.^

Apart from the sharp decline in the GNP of the OECD countries, falling to 3.7 per cent in 1979 and down to —0.5 per cent in 1982, unemployment grew to levels only comparable to the Great Depression of the 1930s. Over 8 per cent of the labour force (about 28 million people) had no jobs. By 1982, the United States had some 12 million of its citizens out of work, and this was an official underestimate!'* In 1986, it seemed as if unemployment was easing in the US, yet caution was being urged even by observers who could not by any standards be regarded as radical: In this respect the US performance has been comparatively better, the unemploy¬ ment rate having come down to 7 per cent in early 1986. The US inflation rate has not moved up despite the sizeable drop in unemployment . . . but what is the guarantee that inflation will not edge upwards if the dollar should decline.*

Even the acclaimed capitalist ‘success’ story of Japan was expected to have its unemployment level rise by 3 per cent because of the appreciation of the yen vis-a-vis other currencies, the decline in exports to oil-exporting countries and a deceleration in the growth of private investment.* In their report to the Eighth Summit of the Non-Aligned Movement, Research and Information Services of India noted that the structural crisis of the capitalist world economy was reflected in the acuteness of the unemployment problem in the European countries (where the rate of unemployment has continued to surge, standing at 11.2 per cent in 1985, having risen from as low as 3 per cent in 1973). The report declared: The current unemployment situation in Europe has taken on a structural dimension and one which might be difficult to overcome without substantial investment expenditures aimed at improving the growth of the capital stock.^

In its moribund stage, monopoly capitalism cannot possibly effect ‘substantial investment expenditures aimed at improving the growth of the capital stock’. Generally, the capitalist world economy is hit by structural

IMF—World Bank Impact on Zimbabwe

151

crises roughly every 50 years or so. These crises are drawn out and grave. They are marked by stagnation and decline in the major sectors of the economy. In the early 1970s and 1980s, a structural crisis hit ferrous and non-ferrous metallurgy, heavy engineering, shipbuilding, petro-chemistry, auto-industry and traditional electronics. This occurred against a back¬ ground of emerging new industries with new technologies. But because of the law of uneven development in capitalist economies, the rapid advance¬ ment of new industries and technologies fails to compensate for the lag in the older ones, precipitating a tendency to slow down the overall rate of growth. This causes a massive flight of capital from older industries and dozens of enterprises are closed down with millions of workers joining the ranks of the permanently unemployed.

Effects on developing countries The effects of these disruptions on developing countries have been shattering. Their growth rates dropped from about 5 to 6 per cent in the 1960s emd 1970s to less than 1 per cent in 1982, with a marked decline in the volume of exports and in the prices of commodities. UNCTAD’s Group of 77 declared that, ‘The terms of trade for commodities from non-oil exporting developing countries have notably deteriorated since 1978 and present data indicate a further deterioration ... in 1982.’* The 1982 Annual Report of the IMF acknowledged that the cumulative deterioration of the terms of trade for the net oil-importing developing countries between 1971 and 1981 was over 15 per cent; that is, an equivalent of US$45 to $50 billion.^ This resulted in a dire increase in the external debt of these countries. According to the African Development Bank (ADB), African economies made only a modest recovery in 1985, growing at only 2.8 per cent. The Bank forecast that debt repayments would rise to record levels in 1986, while economic growth would at best remain constant at the 1985 level. In their Economic Report on Africa for 1987, the ADB and the Economic Commission for Africa (ECA) noted in their preface that: Efforts by African countries to increase export proceeds were frustrated by weak demand for primary commodites leading to a sharp decline in the value of exports. Though import compression continued, there was a deterioration in the trade and current accounts. The onerous debt servicing burden and dechning net capital flows aggravated the foreign exchange problem. More and more countries had to resort to debt rescheduling exercises that provided only temporary relief.

These conditions underpin a devastating situation for the developing countries (sub-Saharan Africa in particular) which are forced to adopt restrictive measures on investment, imports and growth itself in frantic endeavours to reduce external deficits. Even policies to attract foreign investment are no longer productive because, in this moribund stage of the capitalist world monopoly system, capital prefers to remain as finance capital, drawing far higher interest rates, than as investment capital. Hence the near absence of new productive investments in capitalist countries and

152

Case Studies

no new capital inflows in developing countries. Where investments are made, it is in huge unproductive military-industrial complexes which benefit no one except the monopoly bourgeoisie! It is within such a scenario, then, that developing countries are compelled to attempt to finance their depressed economies by taking on onerous debts with transnational banks, and loans from the IMF and World Bank, accompanied by humiliating, destabilising and atavistic conditionalities aimed at so-called ‘liberalisation’ and ‘structural adjustment’. An African economist has noted the disaster for the African economies thus; The combined current account deficit of the balance of payments rose from about $4 billion in 1974 to close to $10 billion annually in 1978—79. The financing of these deficits partly by foreign borrowing led to a dramatic increase in external debt, from $15 biUion at the end of 1979, contributing to near doubling in the debt-service ratio. Further, international reserves declined sharply as these African countries entered the decade of the 1980s, they faced major financial and structural problems that needed to be addressed. A number of these countries entered into agreements with the IMF with the usual conditionality. But in 1984, a review of experiences under these adjustment programmes . . . showed that during the previous four years, the economic conditions generally, in Africa have not shown signs of improvement. Economic growth has remained low; inflation continued to rise in 1980—81 to an average annual rate of about 25 per cent .... The terms of trade declined sharply, and the current account deficit rose from about$10billionm 1979to an average of about$14billion in 1980—83. These deficits continued to be financed primarily by foreign borrowing with the result that total outstanding external debt rose by about 50 per cent and reached over 50 per cent of GDP. The rising intemationd interest rates contributed to an even steeper rise in the debt-service ratio. ^ *

I have noted elsewhere that The foreign debt of the African countries now stands between $170—$175 billion [now actually estimated at $200 billion] and many of these countries transfer up to 30 per cent of their export earnings to servicing the debt which also takes up to 54 per cent of GDP!*^

Impact of IMF—World Bank policies on Zimbabwe As elsewhere in Africa, Zimbabwe’s economic structure is export-oriented and dependent on vital external inputs. Its incorporation into the world monopoly capitalist system actually accelerated after independence, and this integration occurred without any changes to the structures which internally are dominated by monopoly capital, nor any restructuring towards more internal orientation. At independence, Zimbabwe hosted a huge ‘donors’ conference with the aim of mobilising resources for what was termed ‘reconstruction and development’. For its development programme, Zimbabwe’s economy was to be heavily dependent on external hinds. Between 1980 and 1981, with the expansion of existing under-utilised capacity, the economy grew by 10 per cent — a growth which had not been planned and which fuelled much euphoria, leading to the formulation of an overly optimistic three-year

IMF—World Bank Impact on Zimbabwe

153

Transitional National Development Plan (TNDP). The Plan’s targets included 8 per cent annual growth of GDP, 3 per cent growth of overall employment and growth in material production at an average rate of 8.4 per cent per annum. None of these were achieved. In fact, the GDP growth rate started declining from 1982, with major material production sectors recording negative growth rates: wage employment remained stagnant while the level of unemployment rose. The failure of the Plan was attributed to the effects of the ‘world recession’ and ‘the drought’. But: . . . the point is, no strategy had evolved to prevent disaster occurring in the event of natural climatic calamities, neither was there any programme of progressive re-orientation of the economy away from the monopoly capitalist world system.

After the first year of independence, the balance of payments began to turn against Zimbabwe, forcing the country to request from the IMF a loan of Z$140 million. As usual, the conditionality programme was imposed. It was resisted, but the situation worsened with foreign currency reserves dropping from some $13.5 million in January 1982 to only $8.6 million in September. After an IMF mission in October 1982, the government announced a 17 per cent devaluation of the national currency and the exchange rate was allowed to float until effective devaluation reached nearly 40 per cent. The government slashed its development programme by $200 million and sharply reduced the maize subsidy thus pushing up the price of mealie meal (maize meal, the staple of the Zimbabwean people). Promotions and new recruitment to the civil service were frozen. Foreign currency for buying imports and for holidays was slashed by $50 million. After all these ‘adjustment’ measures, in March 1983 the IMF announced a loan of $375 million to Zimbabwe, of which $59 million was to be made available immediately. The rest was as stand-by credit to be drawn over an 18-month period. The World Bank also made available some US$76 million for Zimbabwe’s export manufacturing firms to finance their imports of necessary raw materials. Officially, it was not admitted that these ‘adjustment’ measures constituted IMF conditionality. They were presented as the government’s home-grown policies, which happened to converge with the IMF’s traditional package! The point, however, is that such packages reveal the ready formation of class alliances, and that a developing country that does not restructure its internal economy, and its relations with imperialism, will find itself forced to do so as a matter of course. More and more commercial loans and aid agreements were signed with Western aid agencies and governments. At the end of 1985, a government minister proclaimed that Zimbabwe had signed for some US$494 million with the World Bank. Yet, these loans are always conditioned on liberalisation and structural adjustments that bring strains to the economy and hardships to the people. That they are strategies to deal with the crisis of Western capitalist economies is crystal clear. Said Mr Carl Tham of SIDA on a visit to Zimbabwe ‘. . . [we] are always under pressure from Swedish

154

Case Studies

companies to promote their exports . . (The Herald, 10.10.85). A mission to Zimbabwe on behalf of British capital declared that ‘socialist Zimbabwe recognises the vital role of free enterprise’, and recommended an accelerated penetration of the Zimbabwean economy by British capital, as well as the use of British aid to boost trade and thus dynamise British monopoly capital (The Herald, 20.2.85).

By mid-1985, Zimbabwe had reached a situation where it would have to devote some $300 million annually for the rest of the decade to servicing its external debt. This implied a debt-service ratio of more than 25 per cent for much of the 1980s. Already, by 1984, 30 per cent of Zimbabwe’s foreign exchange earnings was employed to service external debt.^^ Imperialism always urges neo-colonies to increase exports, yet this strategy clearly does not work. This is because there is no ‘liberalised’ trade and nb ‘free competition’ at this advanced stage of monopoly capitalism. Developing countries’ exports cannot penetrate the protectionist barriers erected by developed capitalist economies against their exports. While developing countries are urged to ‘liberalise trade’, to open up their economies for imports, to stop protecting their nascent industries and to promote their ‘non-traditional exports’, the developed capitalist economies do the exact opposite against developing countries. Like many neo-colonies so advised, Zimbabwe sought loans to promote exports. But the country exports raw materials and semi-finished products. These have low and continually falling prices in the world market. Besides, substitutes are being found, and protectionism is growing against some of its major exports. For example, in early 1985 the US was seeking to protect its tobacco industry by raising protectionist barriers against tobacco imports. Furthermore, the world market for tobacco is shrinking, and a drive to expand production for export could be disastrous in the near future. Cotton is another major foreign exchange earner for Zimbabwe, but already it is being said that the world market is saturated and new developments in production techniques may disqualify Zimbabwe’s cotton. For grain, there is a grain glut! ** Thus, export-oriented strategies have serious medium and long-term constraints. There is even no guarantee that so-called ‘non-traditional exports’ will get to Western markets. Furthermore, there is a serious problem of lack of start-up capital for new enterprises seeking to promote non-traditional exports. Zimbabwe’s economy has experienced an overall decline since independ¬ ence and in 1987 was facing yet another crisis due to foreign currency shortages. The shortage, official opinion submits, is due to payments on the foreign debt, a decline in levels of export earnings, lack of new capital and ‘aid’ inflows and losses through remittances abroad. All these are classical problems of an externally oriented neo-colonial economy. These problems have faced Zimbabwe before, forcing the government between March 1984 and early 1985 to suspend profit and dividend remittances. In 1987, a tight balance of payments situation has had a negative effect on foreign currency

IMF—World Bank Impact on Zimbabwe

155

allocations for necessary imports. The government was forced during the first half of 1987 to cut foreign currency allocations to industry and commerce by an average of 40 per cent and 55 per cent respectively. It should be noted that Zimbabwe’s economy is relatively more integrated internally than most sub-Saharan economies. Generally, agriculture plays such a significant role in the economy that it is common to hear people say ‘once agriculture sneezes, everybody gets a cold’. Given this. World Bank arguments for ‘positive discrimination’ for agriculture would be out of place in Zimbabwe. It is, nevertheless, Zimbabwe’s industrial base that imperialism seeks to demobilise. Because of its dependence on external inputs, it is estimated that the recent cuts in foreign exchange allocations to industry will precipitate a 5 per cent cut in output, with job losses reaching some 60,000.*^ Elsewhere I have noted that: The 1986 freeze on forex allocations had aheady started to show signs of worsening shortages of basic consumer items by the end of that year. In this context inflationary pressures have started mounting. Having fallen to an average of below 8 per cent in 1985, it is estimated to have returned to the ‘traditional’ average of 15 per cent in 1986. ‘«

The government promised to find alternative sources of inputs and explained that the foreign currency cutbacks were necessary to meet debt obligations and pay profits to foreign companies. According to the Minister of Finance: We are squeezing the domestic economy, depriving it of increased foreign currency allocations, benefiting the foreigners, which is going to create tensions at home, that is the price we must pay for investment which came into this country — and also for our good name.*®

The Minister further argued that the squeezing of the domestic economy to benefit foreign capital was ‘temporary’, since the country faced ‘not a structural debt problem’, but only a two-year tight-money problem requiring the tightening of belts. The Minister was indeed brave enough to say this despite the fact that the country had hardly had a breathing space from this same problem which had forced it to borrow from the IMF in 1983 and to freeze remittances abroad in 1984. However, at the end of May 1987, the economic situation worsened and the Minister was forced to act again. Measures were announced in an attempt to ‘stimulate’ a flagging economy being driven to the wall by foreign debt payments, profit remittances and reliance on so-called ‘hard foreign currency’. The measures included cutting the 50 per cent net after-tax profits that external shareholders could remit to 25 per cent; cutting interest rates on surplus funds that foreign shareholders could not remit from 8 per cent to 5 per cent; lifting the 20 per cent non-resident shareholders’ tax and import duty if these funds were used for imports; encouraging companies with access to external funds through parent companies abroad to buy essential imports through no-currency-involved permits.

156

Case Studies

These measures were said to be aimed at saving foreign currency, encouraging investment and expanding employment. These measures should really have been in place before the crisis in order to avoid that crisis. Yet, class alliances in neo-colonies do not permit this. Thus such measures come in late, are half-baked and are always deemed to be ‘temporary’. Thus, they fail invariably to attract the so-called much needed foreign investment. Instead neo-colonial dependencies like Zimbabwe become ‘exporters’ of capital, rather than beneficiaries of capital inflows. Chidzero underlined this thus: Overall, the problem is simply that there is no new money of any significance coming in terms of capital inflows. Direct foreign investment is virtually nil, (my emphasis) and new loans of a long-term nature are coming in, but at a reduced rate.^

The net result has been that the government has been forced to borrow more, and in addition to two new loans obtained from two international commercial banks, negotiations are under way for a $125 million loan from the World Bank. The Bank has demanded further liberalisation reforms that include trade liberalisation (openness to imports), liberalisation of the foreign currency allocation system, reform of parastatals, withdrawal of subsidies and removal of protection of so-c^led ‘inefficient’ importsubstituting industries. With regard to the IMF, the Minister of Finance declared that ‘we cannot reach another agreement with the IMF at present, for a very simple reason — our budget deficit. That is the only reason.’^' Accordingly, the government was reviewing its commitments with a view to ‘adjustment’ in areas such as education, health, civil service, subsidies and defence,while the Minister of Finance announced that parastatals were being reviewed by a commission and promised that these too would face ‘adjustment reforms’. In keeping with the so-called ‘austerity measures’ which accompany imperialism’s conditionality packages, the Minister of Finance announced in June 1987 a wage and salary fi-eeze until January 1988. Prices were not to be frozen but controlled (and, of course, they have never really been). The wage and salary freeze affected the working class hardest because it came just a few days before an annual salary review was due. Real wages had drastically fallen because the review and subsequent piecemeal increase in July 1986 was drastically eroded by subsequent price increases of all basic consumer goods, including bread, maize meal, milk, meat, etc. Debate continues over liberalisation reforms with regard to the foreign exchange allocation system. The World Bank argues that it must be liberalised to defuse the protection of ‘inefficient’ local industries, with more emphasis being given to enterprises that promote exports. However, as I have indicated elsewhere, much as it would seem that the reform of the system is necessary, an allocation system determined wholly by market forces would lead to a de-industrialisation of Zimbabwe so that only those industries heavily linked to foreign monopoly capital, or subsidiaries of this form of capital would survive and prosper.

IMF—World Bank Impact on Zimbabwe

157

Conclusion I have indicated that the present crisis in the world economy has its origins in the major capitalist countries. It has thrown the developing countries into an even deeper and crippling economic crisis characterised by depressed economic activities, rising unemployment, steady erosion of standards of living and looming social crisis. Increased indebtedness forces developing countries into losing vast capital resources through payments on their mounting external debts. The deteriorating terms of trade, fall in prices of export commodities, rising Western protectionism, depress these countries’ ability to boost their foreign exchange earnings and preclude possibilities for maintaining healthy balance of payments situations. The current crisis is a crisis of the reproduction of capitalism at its advanced monopoly stage — its moribund stage. In this context, IMF and World Bank conditionalities and liberalisation programmes are irrational, and meant only to give a longer life to monopoly capitalism . There can be no road to development via IMF and World Bank programmes. There has never been such a road open to a developing country. I conclude, therefore, that IMF and World Bank programmes have a devastating effect on the social and economic fabric of the African countries. Democratic activists in African countries need to address the following strategies squarely in order to achieve real, meaningful and patriotic popular-oriented development for the continent: 1. mobilise the masses for the evolution of popular-democratic structures that are able to formulate development programmes which will be defended resolutely against those of imperialism; 2. establish popular democratic state structures that will be patriotic and adamantly direct the leading sectors of the economy. These state structures should resist imperialism’s attacks on Africa’s nascent industries. These industries need to be protected and revamped. However, those that have become ‘white elephants’ due to neo-colonial developmental programmes based on imperialist advice should be closed. New and dynamic industries which establish backward and forward linkages within the whole economy should be established. Particularly, metal and chemical industries should be set up, and it does not need to be western imperialism which does this; 3. confront relentlessly the neo-colonial dependence mentality of the African petit-bourgeoisie which, due to its class alliances with imperialism, has lost confidence in the potential of not only its nascent local bourgeoisie, but in the masses in general. Thus imperialism, rather than the effort of the masses, comes to be seen perversely as the prime basis for development. This warped mentality has led to a greater incorporation of Africa’s economies into the world monopoly capitalist system, with consequent increased indebtedness and poverty for the masses. Development must be based on local resources as much as possible; 4. struggle for the cancellation of the unpayable debt currently crippling the

158

Case Studies

economies of developing countries. This must include the struggle for the rescheduling of debts at no extra cost, without compromising the standards of living of the people and the development priorities of the nations. African countries must not be afraid to impose sensible limits on their payments on foreign debt. Fear of doing this condemns the people to slavery in the interests of imperialism. A crisis of legitimacy looms over African governments that fail to confront imperialism on exactly this score. However, the African masses need to be awakened even more to intervene without fear against corrupt elements within the domestic ruling group, who selfishly squander national resources that should be used for national development.

Notes 1. See A.E. Sibanda, ‘Economic liberalisation (including forex auctioning) as a viable strategy for Zimbabwe: problems and prospects for sub-Saharan Africa’, paper presented to conference on ‘Foreign exchange auctioning — recent experiences in Third World countries’, 29 June—3rd July 1987, Lusaka, Zambia. 2. Ibid., p.3. 3. See F. Castro, The World Economic and Social Crisis: Report to the 7th Summit of Non-Aligned Countries, Publishing Office of the Council of State, Havana, 1983, p.l3. 4. Ibid. 5. The World Economy in the Mid-eighties, report prepared for the Eighth Summit of the Heads of Non-aligned States, Harare, 3—7 November 1986, RIS, New Delhi, 1986, p.28. 6. Ibid., pp.28—29. 7. Ibid. 8. Castro, op.cit., p.l4. 9. Ibid. 10. ADB and ECA, Economic Report on Africa, March 1987, p.l. 11. F. Odebunmi, ‘The African debt economy: a critique of the role of the International Monetary Fund (IMF)’, paper presented to the Colloquium of African Economists, University of Ouagadougou, Burkino Faso, April 1987, pp.4-5. 12. Sibanda, op.cit., p.i. 13. Transitional National Development Plan, 1982/3—1984/5, Harare: Government of Zimbabwe, 1982. 14. A. Sibanda, op.cit., p.lO. 15. Ibid., p.l3.

16. Ibid., pp.14-15. 17. Special report, Zimbabwe, African Economic Digest, London, April 1987, p.l. 18. Sibanda, op.cit., p.l8. 19. B. Chidzero, quoted in Africa Economic Digest, op.cit., p.l. 20. Ibid., pp.4—5.

IMF—World Bank Impact on Zimbabwe

159

21. Ibid.,p.6. 22. The Minister of Finance declared thus: In respect of those services which are the biggest users of government monies, such as education and health, we are looking into ways of reducing or stabilising the cost, making them more cost-effective, or other ways of financing — not necessarily through direct government finance . . . (my emphasis).

12. Impact of IMF—World Bank on Lesotho D. Mabirizi Most countries in Southern Africa remain in some measure dependent on South Africa (RSA), or to be more precise, on finance capital through South Africa.* Lesotho is most vulnerable; it is entirely surrounded by, and directly tied to, RSA through the Southern African Customs Union Agreement (SACU); depends for most of its foreign trade on RSA;^ belongs to the RSA-dominated Common Monetary Area (CMA); has its currency IQO per cent backed by the RSA rand;^ and has more than 33 per cent of its total labour force employed in RSA. While it is sometimes argued that this dependence has both advantages and disadvantages for Lesotho,"* on the whole, it is undesirable in so far as it undermines government’s power to control the economy. This paper reflects on the impact of the IMF and World Bank on Lesotho against the general background of Lesotho’s declared attempt to reduce its dependence on RSA. In view of Lesotho’s monetary links with RSA, we need first to trace IMF dealings with South Africa, and then assess their ramifications for Lesotho. The difficulty with this approach is that IMF dealings with South Africa caimot be seen in isolation from the entirety of RSA’s socio-economic milieu, so that it is not easy to gauge with precision the impact of the IMF as such on South Africa and Lesotho. Besides, the relationship between RSA’s economy and Lesotho is not entirely direct. Nevertheless, I hope to make it generally clear that the IMF has been involved in the worsening South African socio-economic situation, with an impact felt in Lesotho. As regards the impact of the World Bank, I shall briefly examine its involvement in Lesotho’s agriculture and free enterprise manufacturing, both of which have aimed at raising local employment levels in the wake of a shrinking labour market in RSA. It will be argued that the IMF’s impact on Lesotho through RSA has, especially in the 1980s, been negative on the whole. It is among the factors that have led to the country’s continuing dependence on RSA, and on foreign loans,^ including those from the World Bank. It will also be seen that while the purpose of these loans has usually been to lessen dependence, they have in a number of respects, enhanced it.

The IMF and South Africa’s declining economy It is impossible here to discuss the South African economy in detail. For our purposes, it will suffice to show that, while in the 1960s the economy was buoyant, in the late 1970s and the 1980s, especially in the wake of the world

Impact of IMF—World Bank on Lesotho

161

depression, it has run into crisis.^ This has been manifested in a deteriorating balance of payments, falling value of the rand, monetary reform and borrowing from a number of agencies, especially the IMF. While for the period 1962—72, the annual growth rate in real GDP was 5.5 per cent, in 1972—82 it was 3 per cent, and since 1982 the rate has been negative. The position in the 1980s is summarised in Table 12.1 below. Table 12.1

RSA’s real GDP growth rate in the 1980s Year 1980 1981 1982 1983 1984 1985

% Rate 7.8 5.1 -0.9 -3.3 -4.7 -1.1

It is also reflected in the manufacturing sector, whose earlier rapid growth has, at times, been referred to as the hallmark of RSA’s economic development. Thus, while in 1946 industrialisation contributed 14 per cent of GDP, by 1980 it contributed 23 per cent, while agriculture declined from 13 per cent to 5 per cent during the same period. However, while the annual growth rate of manufacturing output was 8 per cent for 1960—68, during 1967—75 it declined to 6 per cent, and later the decline continued. This appears to have been partly due to the rising capital intensity of the 1960s and 1970s, resulting in increased industrial productivity which, however, did not match the rise in the capital—labour ratio (see Table 12.2 below). Table 12.2

Average capital—labour and capital—output ratio for the economy and for manufacturing industry (constant 1970 prices) Year 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Capital--labour ratio Manufacturing Economy 2,752 3,341 2,867 3,485 3,039 3,616 3,181 3,746 3,274 3,886 3,404 4,064 3,426 4,416 3,647 4,882 3,831 4,940 3,970 5,065 4,389 5,152

Source: South African Reserve Bank, as adapted by F. Cassim.

Capital--output ratio Manufacturing Economy 1.05 2.35 1.11 2.41 1.18 2.51 1.20 2.57 1.24 2.53 1.30 2.65 1.37 2.77 1.52 2.90 1.53 2.95 1.52 2.95 1.34 2.92

162

Case Studies

Thus, the capital—output ratio rose and resulted in a falling rate of profit. This is also one of the factors that explains the fall in real manufacturing investment in the 1980s from R2,346 million in 1980 to R1,408 million in 1984, and the decrease in the index of manufacturing production from 135.6 in 1981 to 119.6 in 1985.^ This crisis in production was hastened by the fact that the growing productivity of increasing capital and production was, in the end, limited by apartheid’s low incomes for the black majority who, therefore, could not meaningfully increase their consumption in accordance with increasing production. This was worsened by unemployment and shrinking export markets under the world depression. This rising industrial capacity remained dependent, therefore, on a small white bourgeois and middle-class market. The economic decline was also reflected in the worsening balance of payments position, due to the tariff barriers behind which manufacturing had developed, the import substitution strategy which depended heavily on imports, and the reliance on transnational corporations (TNCs) which kept exporting portions of their profits, etc. It was also due to the fact that, while manufacturing was the major user of foreign exchange, its exports were limited, amounting, in fact, to 10 per cent of the gross value of manufacturing production for 1970, and a quarter of total exports for the same year.* This balance of payments situation only improved as the price of gold rose in 1978—81, and worsened again as the gold price fell in 1982—85. Another indicator of economic decline was the massive rise in foreign debt. During 1973—81, RSA’s foreign debt rose by about 212 per cent. By 1981, total foreign borrowing amounted to R17,972 million. Indeed, as early as 1976, RSA’s indebtedness to international banks had reached 20 per cent of GDP, and, by 1984, it had increased to 38.2 per cent. This was largely due to decline in foreign direct investment — under mounting political tension — and the rise in long-term loans. As far back as 1975, IMF experts had been to RSA to advise on its rising indebtedness.’ Later, the government recommended monetary reforms, which included the tightening of credit, reducing government expenditure and the tightening of exchange control. The IMF approved the spirit of the reforms, but called for more liberalisation, including having the rand as a freely floating currency. This recommendation was followed % the De Kock Commission. Thus, from March 1980 interest rates were left relatively free, and deposit rate controls as well as ceilings on bank credit abolished. Interest rates rose from 9.5 to 17 per cent in 1981, to 20 per cent in 1982 and 25 per cent in 1985. While RSA has long been a favoured economy of the IMF*’ — a fact demonstrated by the relatively mild IMF demands at the time — it would seem that a large number of IMF (and other) loans came due around the time of these reforms. By the first quarter of 1978, RSA owed the IMF US $485 million, and by January 1979, it still owed the Fund $353 million. In 1982, it was able to get the equivalent of SDR 902.2 million, which was equal to 34

Impact of IMF— World Bank on Lesotho

163

per cent of all currencies allocated to Africa.*^ And, quite typically, these IMF dealings with South Africa helped to keep avenues open to it, especially of loans from transnational banks, which by the late 1970s, had already advanced to RSA a fifth of all loans available for Africa.*^ From December 1981 to September 1984, RSA’s liabilities to these banks doubled from US $9.9 billion to US $19 billion. >4 The goal was that the monetary reforms would result in increased savings and investment, in greater control of money supply and inflation, and that all these, together with attendant loans, would help the economy to recover. This did not happen. Foremost, control of government expenditure led to the reduction of social service costs, which, together with rising unemploy¬ ment and inflation, heightened anti-apartheid protests. Consequently, the government increasingly redirected its expenditure to the military. Military expenditure did, however, have the advantage of assisting to stimulate the economy at a time of falling investment, demand and employment. For example, Armscor, which in 1968 employed only 2,200 people, employed 33,000 by 1985 and its private contractors — which included local affiliates of TNCs — employed another 50,000. Furthermore, the arms industry was generating some US $23 million from exports.*^ On the whole, however, rising mihtary expenditure raised the budget deficits, increased the money supply and inflation, and exacerbated the weakening of the rand with attendant balance of payments problems. Meanwhile, rising interest rates escalated the production costs of many companies, while a consistently rising wage bill, caused by the galloping inflation, led to huge company losses. In 1980—85, bankruptcies increased by 500 per cent. Surviving companies responded by reducing output to cut recurrent costs, and by enhancing monopoly through mergers. This latter practice added fuel to the fires of rising prices, which in turn, led to mounting unemployment, especially in the manufacturing sector which was the major employer, as depicted in Table 12.3 below. The unemployment situation was exacerbated by shaken investor con¬ fidence, resulting in a redirection of investment funds out of the country, which further weakened the rand. This problem was particularly acute after February 1983, when RSA abolished foreign exchange control for nonTable 12.3

Unemployment rates in South Africa, 1975—1982 Year 1975 1976 1977 1978 1979 1980 1981 1982 Source: F. Cassim (1986)

Rate 16.2 16.9 18.4 20.4 21.1 20.8 21.1 22.5

164

Case Studies

residents in line with the liberalisation measures of the De Kock Commission.'^ In this situation of a depreciating rand, falling domestic production and continued world depression, exports declined by 20 per cent in 1980—83, and the terms of trade worsened by 20 per cent over the same period. Meanwhile, in 1985, amidst rising unemployment, inflation, anti¬ apartheid unrest and the State of Emergency there was an accelerated outflow of capital. Thus, IBM, General Motors, Kodak, Barclays, etc., apparently disinvested. Government reacted by revising some aspects of its liberalisation by, for instance, re-introducing the financial rand.'^ In 1986, the rising gold prices, reflecting the depreciation of the dollar, provided some respite — but only a little — as the rand rose slightly.

The impact on Lesotho The impact of RSA’s economy on Lesotho is not altogether direct. This is due to local factors^*^ and the power conferred on the Lesotho Monetary Authority in January 1980 (renamed the Central Bank of Lesotho in August 1982). These powers included acting as depository and fiscal agency for international financial institutions of which Lesotho is a member; acting as banker to government by making all payments connected with the servicing of public debt overseas and, perhaps much more importantly, promoting and maintaining internal and external monetary stability by regulating the money supply and fostering monetary, credit and financial conditions conducive to Lesotho’s economic development.'^' However, we must recall that Lesotho’s currency, the loti, is backed 100 per cent by the RSA rand, and that Lesotho’s trade and employment is closely tied to that of RSA so that socio-economic changes in RSA affect Lesotho closely. Not surprisingly, in the 1980s, as the RSA economy — heated by IMF monetarism and mounting anti-apartheid pressure — deteriorated, real GDP growth rate in Lesotho also fell. In 1982, the rate was 1 per cent, followed by a fall of nearly 5 per cent in 1983. There was some improvement in 1984 and 1985, which recorded real growth rates of 3.7 per cent and 2.4 per cent respectively. On a per capita basis, however, the 1985 growth was negligible as it was neutralised by population growth. The improvement appears to have been the result of some positive change in agricultural performance as the drought ended, aided by rising industrial production — perhaps a reflection of TNCs beginning to look to Lesotho, consequent upon falling profitability and political crisis in the RSA. Lesotho’s interest rates also broadly followed those in South Africa, although Lesotho’s deposit and lending rates were slightly lower than RSA’s because of Lesotho’s higher banking costs, and the Central Bank’s policy to encourage demand for bank credit. Indeed, as interest rates rose in South Africa in 1982—84, those in Lesotho also rose. Similarly, the adjustment of

Impact of IMF—World Bank on Lesotho

165

South African rates downwards since 1985, in accordance with their reflationary policy, has also been reflected in Lesotho. Lesotho also imposed a credit squeeze as interest rates rose. For example, the annual interest in 1983 was only M3.5 million or 2.5 per cent. This included reduced credit for productive investment. However, in 1984, total credit rose by 35.7 per cent while credit to the private sector increased by 38.6 per cent. This indicated rising consumption rather than productive activities, hence a response to inflation. In fact, in 1984, the credit share of the manufacturing and distributive sectors dropped by 3 per cent to 9 and 55 per cent respectively. In 1985, as interest rates fell, credit rose by 29 per cent with government’s share of domestic credit rising from 42.2 per cent to 46.9 per cent, and, in 1986, to 59.1 per cent, reflecting the government’s growing difficulty in meeting its debt obligations as inflation rose, due partly to the RSA situation. As regards the balance of payments, in 1982 there was a current account deficit of M40.2 million, which, in 1984, turned to a surplus of M28.2 million, declined to M15.6 million in 1985 and fell sharply again to a deficit of M22 milhon in 1986. This deterioration was in part due to growth in imports, following increasing industrialisation requiring raw materials which came mainly from RSA.^^ The rising import bill was due also to increased government expenditure and higher consumption demand generated by migrants’ remittances. The worsening deficit also reflected the weakness of the loti, which directly represented the poor position of the RSA rand, and required larger amounts of the loti to meet foreign debts. Government finance has also not been good with continuing dependence on the common customs revenue pool and its provision of about 60 per cent of recurrent expenditure, with taxes and levies providing the remaining 40 per cent. However, as the rand and loti have weakened, customs revenue heis fallen: in 1986—87 by M17 million. The persistent budget deficit, which government had tried to curb since 1982 by cutting down its capital expenditure and freezing civil service employment, has risen steadily again since 1985 due to inflation and currency depreciation. Government has attempted to tackle the situation by introducing a general sales tax, which , since 1982, has been raised four times from 5 per cent to 12 per cent of gross sales value. Company tax for non-manufacturing companies has also been raised from 37.5 to 45 per cent. Given that Lesotho has one of the highest income tax rates in Africa, that the sales tax introduced is a regressive tax, and that the increase in taxes is likely to be passed on to consumers, there can be no doubt that the overall tax burden has worsened, especially for the poor.^^ The most worrying impact of the RSA’s economic situation on Lesotho, however, has been in respect of employment. The rising unemployment situation in RSA, where more than 33 per cent of Lesotho’s labour is employed, has necessarily meant a considerable reduction in the number of

166

Case Studies

Basotho employed in South Africa. The RSA government has for some time been closing employment to foreigners outside the mines, and in 1973—81 non-mine Basotho job migrants fell from 38,000 to 21,000. There have also been determined efforts to drive out illegal immigrants. Consequently, the chances of non-mining jobs for Basotho have shrunk considerably.^® And within the mining sector, the RSA Chamber of Mines and other mine owners have since the mid-1970s been bent on reducing foreign labour with the result that the percentage of foreigners employed by the Chamber has fallen from 79.5 per cent in 1973 to 45 per cent in 1978, and 40 per cent in 1982. Mine owners outside the Chamber have pursued a similar policy. Thus, Basotho immigrants in non-Chamber mines fell from 32.7 per cent in 1976 to 15.7 per cent in 1981.2’ Further, the mines have been trying to professionalise the workforce to facilitate mechanisation in order to upliold profitability under the difficult overall RSA economic situation. The result is that fewer young men can join the mines as older miners have been persuaded to stay on by better pay and longer contracts. Only 5 per cent of the Employment Bureau of Africa’s Basotho recruits for the Chamber of Mines were new recruits in 1981. The figure dropped to 3 per cent in 1982, and to 1 per cent in 1983. Not surprisingly, the number of Basotho migrants to the RSA mines has fallen from 129,000 in 1977 to 115,000 in 1983.2* Besides, ‘technological innovations in gold and coal extraction continue to point to continued changes in factor proportions, with the capital—output ratios rising and labour—output ratios failing.’2^ On the whole, therefore, Basotho migration is likely to continue declining at an annual rate estimated by Eckert at 3.5 per cent between 1980 and 2000.2°

Aspects of the World Bank in Lesotho In these circumstances, the government has necessarily felt pressurised to create alternative employment in both the industrial and agricultural sectors. In view, however, of the limited government resources and the character of government’s development policies, funding of the employment strategies has been undertaken mainly through foreign investment and/or foreign loans. Thus in the 1980s, foreign loans soared as the RSA situation worsened (see Table 12.4). At the end of 1985, the outstanding external public debt stood at M400 million, compared to M258 million at the end of 1984. By the end of 1986, the figure was M392 million. In 1985, interest payments constituted 3 per cent of the outstanding debt, while payments on the principal made up 8 per cent. In 1986, the payments were 2.5 per cent and 4.7 per cent of interest and principal respectively. Compared to the figures for the earlier years, this is a feirly substantial increase in the debt burden, though most of Lesotho’s loans have been long-term and at very low interest rates. As Table 12.4 indicates, a major donor has been the World Bank through its IDA ‘soft window’. But the Bank has been a donor from shortly before

Impact of IMF—World Bank on Lesotho

167

Table 12.4

External public debt at the end of 1985 and 1986 (Maloti million)

1. Suppliers’ Credit 2. Financial institutions 3. Multilateral loans of which: African Development Bank African Development Fund International Dev. Assoc. Other 4. Bilateral loans 5. Total of which: Concessional debt Parastatal debt

Drawn and outstanding End of 1985 End of 1986 2.2 0.0 5.0 14.2 365.4 355.7

Undrawn End of 1986 4.0 13.6 275.8

(55.0) (75.1) (159.3) (76.0) 32.0 404.6

(51.9) (83.8) (150.7) (69.3) 22.3 392.2

(34.6) (117.1) (84.4) (39.7) 10.6 304.0

(343.8) 24.9

(327.4) 24.0

(255.5)

Source: Central Bank of Lesotho, Annual Report, Maseru, 1986.

independence. From then until 1984, the Bank, through the IDA, hits made 12 credits, totalling US $70 milUon. Of this, 50 per cent went to road construction, basic education and technical training. In this way, the bank has helped provide the technical preconditions for private investment, as it usually does. The rest of its credit has gone mainly to agricultural and industrial projects.

Agriculture In agriculture, the bank’s support for the ‘big project approach’,^^ of mobilising the peasantry to increase their productivity and income through credit supply, fertilisers and improved seeds, was a failure. That approach was used in the Thaba-Bosiu Rural Development Project, intended to assist 12,000 peasants to improve their incomes, handle crop production, facilitate marketing and encourage soil conservation measures. The total cost of the project was slightly over US $9 million, of which US $5.6 million came from IDA, and the rest from USAID and UNCDF. This credit was payable to Lesotho in semi-annual instalments from 1983. Interest payments were set at 1 per cent for the first ten years on the principal (1983—93), and 3 per cent on the principal for the next 30 years.^^ Huge amounts of the project funds went into payments to contractors for the benefit of the suppliers and manufacturers. Peasant agricultural production and income, however, seem not to have improved. The evidence points to low peasant participation, falling agricultural production and falling income in the project areas.

The industrial sector The World Bank has also been involved in the industrial sector. Here, the Bank has supported Lesotho’s free enterprise strategy,which accords well

168

Case Studies

with the Bank’s policy attitudes. Under the strategy, foreign investment has, through an incentive package, been attracted to Lesotho to provide much-needed capital, skills and employment. The incentive package includes easy repatriation of profits and capital, tax holidays, training grants, custom-designed ^factories, loans and equity. World Bank loans have specifically supported the operationalisation of the latter five incentives, either directly or through the IDA and IFC. Further, the Lesotho National Development Corporation (LNDC), which was initially operating with most foreign companies, has gradually backed out of them apparently due to shortage of management personnel. But this, too, accords well with the World Bank’s agenda which is against parastatal participation in the private sector. The problem with this ‘hands-off approach to foreign companies is that it becomes more difficult for government to watch their activities, including even illegal actions^^ which jeopardise the host country’s development effort.^® The overall result of the free enterprise strategy has been the influx of a fairly large number of foreign companies. The percentage contribution of manufacturing to the GDP has risen from 5.1 per cent in the 1970s to 10.2 per cent in 1986. However, it has been estimated that on average the sector has contributed only about 1,000 jobs p.a., when the country needs 20,000 jobs annually. This is partly due to the foreign companies’ use of capital-intensive rather than labour-intensive technology, as government would have liked. The foreign investors have been slow to pass their skills to the locals employed, and hardly any linkages exist between the foreign industries created and Lesotho’s local production. The import component in Lesotho’s manufactures also remains very high, with the value-added being low. This situation, as depicted in Table 12.5, has operated unfavourably in respect of the balance of payments. The overwhelming majority of the foreign companies attracted to Lesotho have been South African or TNCs also based in South Africa. Table 12.5

Production for exports and for domestic market by business enterprises (Maloti million)

Turnover Value added Inputs

1983 10.0 1.6 8.4

Exports 1984 1985 25.0 33.8 4.5 6.8 20.5 27.0

Domestic market 1983 1984 1985 161.6 180.7 222.1 17.8 24.7 33.5 143.8 156.0 188.6

1983 171.6 19.4 152.2

Total 1984 205.7 29.2 176.5

1985 255.9 40.3 215.6

Source: Central Bank of Lesotho, Annual Report, 1985, Maseru, p.l7.

The obvious conclusion is that the World Bank-supported manufacturing programme has so far essentially opened doors to foreign capital to invest in Lesotho and repatriate its profits — and, at times, the capital. Officially, repatriated dividends and profits rose from M5.3 million in 1982 to M25 million in 1986.

Impact of IMF—World Bank on Lesotho

169

Conclusion Though Lesotho’s economy has some room for manoeuvre, it is very dependent on RSA due to SACU, the CM A and 33 per cent of its labour force being employed in RSA. As the South African economy deteriorated in the 1970s and 1980s, resulting in worsening balance of payments and a falling rand, the IMF has gone in to assist^’ with advice and loans. The RSA has attempted to open the economy to market forces and to control government spending. These measures have been unsuccessful, and resulted in high interest rates, escalating production costs, falling production, heightened monopoly, enhanced inflation, rising prices, unemployment and a declining rand. The foregoing is not entirely surprising for what is at the base of the RSA economic crisis is the contradiction between the people and the finance capital-supported apartheid system. This has kept the mass of the people at near-starvation levels and unable therefore to support, with increasing consumption, the rising production occasioned by rising capital intensity. Under these conditions, the tendency of the rate of profit to fall — made all the worse by unemployment — has set in, and under worsening economic conditions, anti-apartheid struggles have intensified. To these, government has responded with rising military expenditure, thereby defeating the effort to control aggregate spending. The effect of all of this on Lesotho has been a falling value of the loti, worsening balance of payments, rising inflation and unemployment. In response to unemployment, government has had to rely heavily on foreign debt to finance projects intended to raise employment in industry and agriculture. In both sectors, the World Bank, usually through its IDA ‘soft window’, has been a major donor. In the agricultural sector, as typified by the Thaba-Bosiu project, matters have not gone well. In return for heavy costs and effort, falling production and income have been the rewards to the peasants. In the industrial sector. World Bank-supported free enterprise has yet to record a success. This is because it has so far resulted in only minimal employment creation and has, contrary to government wishes, enhanced Lesotho’s dependence on RSA. Ultimately, the solution to Lesotho’s economic problems will come partly from the solution of the basic questions of democracy in RSA, and the complementary regional economic arrangements that may emerge.^* Despite Lesotho’s limited resource endowment, it should learn to depend less on foreign loans, such as from the World Bank, and rely more on its people and resources for development, through the integration of agriculture and industry.

170

Case Studies

Notes 1. See Makgetla, N. and Seidman, A., Outposts of Monopoly Capitalism: Southern Africa in the Changing Global Economy, London; Zed Books, 1980, especially eh. 10. ■* 2. See Cobbe, J., ‘Integration among unequals: the Southern African Customs Union and development: a comment’. World Development, 8, 4, 1980, pp.329-36; Robson, P., ‘Re-appraising the Southern African Customs Union’, World Development, 6, 1978. 3. The Common Monetary Area was until 1 April 1986, the Rand Monetary Area. See also Codings, F.D., ‘The Rand and the monetary system of Botswana, Lesotho and Swaziland’, Journal of Modern African Studies, 16, 1978, pp.97-121. 4. See Maasdorp, G., ‘The Southern African Customs Union, an assessment’. Journal of Contemporary African Studies, 2, 1982, pp.81—112; Robson, P., ‘Economic integration in Southern Africa’, Journal of Modem African Studies, 5. 4, 1967, pp.469-90. 5. See Wellings, Paul, ‘Lesotho: crisis and development in the rural sector’. Geoforum, 17, 1986, and ‘Aid to the South African periphery’. Applied Geography, 2, 4, 1982, pp.267—90. 6. See Makgetla and Seidman, op.cit., pp.3—15; and Cassim, Fuad, ‘Growth and change in the South African economy’. Conference on the South African Economy after Apartheid, University of York, 29 Sept.—2 Oct. 1986. 7. Cassim, op.cit., pp.l4—21. 8. Ibid., pp.23—30. 9. Makgetla and Seidman, op.cit., p.226. 10. Cassim, op.cit., pp.23—30. 11. See Padayachee, V., ‘The politics of international economic relations: South Afriea and the IMF, 1975 and beyond’, York Conference, note 10, supra. 12. Sutcliffe, M.O., ‘The crisis in South Africa: material conditions and the reformist response’, York Conference, note 10, supra; Seidman, A., Money, Banking and Public Finance in Africa, London, Zed Books, 1986, p.241. 13. Evans, T., ‘Money makes the world go round’. Capital and Class, 24, 1985, p.ll9, making the point that the IMF’s giving of credit is a signal of approval that other TNC banks should do the same. 14. United Nations, Transnational Corporations in South Africa and Namibia, UN Public Hearings, New York, 1986, vol. I, p.53. 15. Ibid., p.66. 16. Central Bank of Lesotho, Annual Report, Maseru, 1986, p.2. 17. Cassim, op.cit., pp.29—30. 18. Ibid. 19. See Mackler, I., Pattern for Profit in Southern Africa, London: Heath and Co., 1972, pp.27—41; Makgetla and Seidman, op.cit., pp.20—21. 20. For example the Lesotho government’s expensive war against the Lesotho Liberation Army (LLA). See Cobbe, J., ‘The changing nature of dependenee: economic problems in Lesotho’, The Journal of Modern African Studies, 21, 2, 1983, pp.293 and 305. 21. See Central Bank of Lesotho,' Quarterly Review, vol. I, 1, Maseru, June 1982, pp.4—9. 22. All data drawn from Central Bank, Annual Reports for 1985 (pp.8—9 and

Impact of IMF— World Bank on Lesotho

171

14) and 1986 (pp.6—10), Maseru, 1985 and 1986. 23. Wellings, Paul, ‘Development by invitation? South African corporate investment in Lesotho’, Development Studies Unit, Working Paper 11, University of Natal, Durban, 1984. 24. Central Bank of Lesotho, Annual Report, Maseru, 1986. 25. Country Reports on Namibia, Botswana, Lesotho and Swaziland, Economic Intelligence Unit, 4, 1986, London, pp.37—38. 26. Cobbe, J., op.cit. 27. Ibid. 28. Central Bank of Lesotho, Annual Report, Maseru, 1983, p.l6. 29. Wellings, Paul, ‘Modem sector development and South African invest¬ ment: a viable strategy for Lesotho?’ Journal of African Studies, vol. 13, 1, Spring 1986, p.6; Robbins, Peter, ‘The South African mining industry after apartheid’, York Conference, note 10, supra. 30. Eckert, J.B., ‘The employment challenge facing Lesotho’, Development Studies Southern Africa, 5, 2, 1983, pp.248—61. 31. Kingdom of Lesotho, Donor’s Conference Report, Maseru, 1984, pp.36—38. 32. See Moody, E., ‘The Big Project approach to development in Lesotho’, South African Journal of African Affairs, 6, 1/2, pp.ll5—20. 33. Nobe, K.C. and Seckler D.W., An Economic Policy Analysis of Soil-Water Problems and Conservation Programs in the Kingdom of Lesotho, LASA Report, no. 3, MOA, Maseru, 1983, pp.83—86. 34. See Mabirizi, D., ‘Lesotho’s free enterprise response’. International Seminar Series, no. 2, University of Zimbabwe, 1987. 35. See Wellings, Paul, ‘Making a fast buck: capital leakage and the public accounts of Lesotho’, African Affairs, 82, 1983, pp.495—508. 36. See Seidman, Makamure, et. al. (eds). Transnationals in Southern Africa, Harare, Zimbabwe Publishing House, 1986. 37. Padayachee, op.cit. 38. See Makgetla and Seidman, op.cit., pp.318—47.

13. South Africa’s External Debt Crisis Laurence Harris In London on 20 February 1986, an extraordinary meeting of bankers approved, in principle, terms for outstanding debts owed by South Africa to foreign bankers. Since the end of the 1970s the world has seen many countries enter into such negotiations on outstanding debts and agree ‘rescheduling’ terms with their bankers, but this meeting fully deserved the special attention it received for South Africa’s debt crisis is unique. Its outstanding special feature is the dominant role played by political developments; the impasse of apartheid, the fragmentation of the forces that traditionally bolstered it, and the prominence of anti-apartheid forces. Most countries’ debt negotiations involve some political element and are shaped by the interplay of domestic and international political forces. In some cases these have been very prominent. The rescheduling of Argentina’s debt after the Malvinas (Falklands) war and of Poland’s after the announcement of martial law have been the most noticeable precedents. The negotiations over Brazil’s, Peru’s, Mexico’s and other countries’ external debts in the first half of the 1980s have also been strongly influenced by political developments in those countries. Nevertheless, the exceptional significance held by political developments makes South Africa’s debt crisis a special case. ^ Since the problem became acute in the summer of 1985, the politics of township revolts, black trade union unrest, ANC actions, Botha’s contradictory stance on reform and anti-apartheid sentiment in the US and Europe determined its course. In October 1985 the Sunday Times (1.10.85) reported ‘Businessmen and bankers inside and outside South Africa are united in believing that the crisis and its resolution are political and not economic’ and they appeared largely correct, at least regarding its immediate causes. In 1985 the debt crisis emerged not because of an immediate shortage of export earnings with which to service the debt, as with many other economies, but because of foreign creditors’ reactions to the State of Emergency declared in July. A second special feature of the crisis was the nature of the debt itself. When Third World countries have been forced to reschedule their liabilities, the debts at the core of the problem have commonly been ‘sovereign debt’, the direct or indirect liabilities of the state, and most have been medium-term loans that, as a result of economic circumstances, the state has found it difficult to service. By contrast. South Africa’s problems centred on the renegotiation of credit to private enterprises and a high proportion of this credit was short-term credit arranged through foreign banks lending to South African banks. The significance of this type of debt over recent years had, in turn, arisen largely as a result of political pressures against more ‘regular’ credit facilities. The third unusual feature of South Africa’s debt crisis has been the appointment of an ‘intermediary’ to produce a solution (at least a temporary

South Africa’s External Debt Crisis

173

one) instead of the usual negotiating machinery. This, too, was prompted by the political sensitivity of the issue, although some bankers now feel that it may become a model for other countries with debt problems. Although South Africa’s debt problems are unique in these ways, there are also several elements that are common to many countries’ experience. Although (following austerity measures in 1984) the current account of the balance of payments has been in surplus, the economy has suffered a severe recession like that which has compounded the difficulties of other debtor nations. Although the international banks have been subject to pressure from their shareholders and depositors against supporting apartheid, they have largely been as much influenced by normal considerations of banking prudence. And although their central banks are sensitive to political and diplomatic problems, their concerns in the debt negotiations have been to prevent disruption to the international banking system. In this paper I describe the development of the debt crisis over seven months, from July 1985 when South Africa declared a State of Emergency in the face of black rebellion to the end of February 1986 when leading banks met the ‘mediator’ in London to agree a temporary solution. I then consider the relative roles of the characteristic political and economic factors and conclude with an assessment of the future role of the debt problem.

Economic impact of State of Emergency On 20 July 1985 the govermnent of South Africa declared a State of Emergency under which it detained hundreds of anti-apartheid activists (who claim to have been tortured in many cases), banned independent media coverage of clashes and gave carte blanche to security forces. It was an attempt to quell the unrest in which some 450 people had been killed by police, rioters and ANC militants in the previous ten months. Above all it was an attempt to break the multi-racial United Democratic Front, a broad-based front of popular organisations generally supporting similar aims to those of the ANC. Similar political crises had had dramatic economic effects: the 1960 State of Emergency imposed after Sharpeville was followed by a severe, but temporary outflow of foreign capital and drop in reserves, and the 1976 Soweto riots also led to an outflow, especially of short-term capital. But in this case the authorities took the view, at least in public, that the Emergency would have no financial effects: the Governor of the Reserve Bank (central bank) Gerhard de Kock told the Citizen (23.7.85) ‘he did not think the [Emergency] measures would materially affect the economy . . . . He did not see a net increase in capital outflow’. This public confidence was misplaced, for a financial crash developed in the following days. It was prompted by the twin shocks of the State of Emergency and the French government’s announcement a few days later of restrictions on French investment in South Africa.

174

Case Studies

The crash was felt principally on the Johannesburg Stock Exchange and the foreign exchange markets as investors switched money out of the country. In the week after the Emergency measures were announced the market value of shares on the Johannesburg Stock Exchange fell by eleven billion rand with brokers describing the wave of selling, principally from the US, Britain and France, as a ‘bloodbath’ (Star, 28.7.85). In particular, there appeared to be a big move out of gold shares into similar investments in Australia and Canada (although this was moderated by the fall in the exchange rate and of the rand which bolstered the profit expectations of gold companies). The gold mines share index fell 72 points in a week to a three-year low of 332. The panic gathered during the week with increasingly hectic selling; the number of bargains struck was estimated at some 3.5 million per day at the start of the week but at over 5 million on Thursday and Friday (Cape Times, 29.9.85). The flow of money out of the country pushed the exchange rate of the rand down to 43.5 US cents by the end of July from the price of 52 US cents at which it had stood at the begiiming of the month. The sharp sales on the stock market and foreign exchanges were not themselves mainly withdrawals of foreign loans, credit from abroad. But they were stimulated by fears that the political crisis signalled by the State of Emergency and the French measures would lead major banks to withdraw lines of credit from businesses in South Afiica. A large proportion of international banks’ loans to South African industry was due for repayment at the end of August and the panic in the last week of July was fuelled by rumours that Chase Manhattan, Citibank, and some others would refuse to renew these loans (London Evening Standard, 31.7.85). These rumours accentuated the fall in the rand as firms rushed to buy dollars (sell rands) forward for delivery in a month, expecting they would need the dollars to repay their renewable loans. Indeed, the truth of the rumours was quickly proved when Chase Manhattan confirmed it would not roll over its loans to the private sector (several years previously the same bank had withdrawn from lending to the South African state). Other banks followed, with Barclays announcing in mid-August that it planned to reduce its South African interests. Whether or not the government believed its public pronouncements that the State of Emergency would have no economic effect, there is no doubt that the financial crisis was severe. Business and other interests combined to press for action to be taken to prevent it worsening. Three options were under discussion: a moratorium on debt repayments; exchange controls on outflows of capital and price disincentives in the form of a two-tier exchange rate; and political reforms to satisfy foreign bankers. The first two were strongly out of favour with banks and business because, to different degrees, they would reverse the recent years’ trends toward increased freedom for markets. All hopes were pinned on the third option — political reforms. As a result, the speech President P.W. Botha was to make on 15 August assumed great significance, but in the end it was..inadequate and the least favoured options (debt moratorium controls and two-tier exchange rate) had to be adopted.

South Africa’s External Debt Crisis

175

From Rubicon speech to debt freeze Mr Botha’s speech on 15 August was widely promoted beforehand as an announcement of major reforms beginning the dismantling of apartheid, a ‘crossing of the Rubicon’. Since a large proportion of short-term foreign credit to the private sector was due for renewal at the end of August it was expected to attempt to offer enough reforms to satisfy those bankers. In the event, it made no real offer of significant political progress, it was strongly criticised by business interests, and the discrepancy between the expectation and the outcome precipitated a second phase of the financial crash that had started at the end of July. The immediate effect of the Rubicon speech was that early the following morning the rand fell by 20 per cent on the Johannesburg foreign exchange. It declined from 45.3 US cents to 38.5 cents before recovering to 42 US cents. Financial interests remained strongly opposed to controls over outflows of money or a debt moratorium, arguing that exchange controls would be ineffective and that if there were restrictions on debt repayments ‘this country’s credit rating would dive and the capital we need to process the raw materials we produce and sell abroad would dry up’ (Business Day, 17.8.85). Business and finance continued to see some type of reform as the main solution and were strongly critical of the President’s failure to deliver even serious promises of any. In a joint statement the two largest business associations. Die Afrikaanse Handelsinstituut and the South African Federated Chamber of Industries expressed regret that ‘at this time of crisis, the state president, in addressing the world at large, was not more specific in pointing the nation more positively in the direction of reform and national reconstruction.’ The financial newspaper Business Day’s editorial argued that if Mr Botha cannot ‘perform better than this then we believe the time has come for him to depart’ (Business Day, 16.8.85). Many observers felt that these developments had ‘effectively ended the close alliance between government and business forged by Botha soon after he came to power in 1978’ (Guardian, 24.8.85). In the absence of reforms it became clear that the debt due for renewal at the end of August would not be renewed and in the absence of financial controls this led to a further flight of money out of the rand and into foreign currencies. By 27 August the rand had reached a record low of 34.8 US cents (closing at 35.6). In the third quarter of 1985, a large increase was recorded in dividend payments abroad by foreign-controlled companies repatriating past, undistributed profits, and, after having been reduced in the second quarter, net capital outflows returned to and exceeded the high levels of the first quarter of 1985. The government was left with no alternative but to take actions which appeared to be panic measures but, upon closer examination, seem to have been carefully prepared. On 27 August the authorities suspended all trading on the Johannesburg Stock Exchange, and all foreign exchange

176

Case Studies

dealing, until 2 September. The next day the Governor of the Reserve Bank flew to London, New York and Washington with no announcement of the purpose of his trip. It was believed that he wanted to obtain the support of the Bank of England and the Federal Reserve Board for special credit facilities, in particular a swap of dollars for gold (Guardian, 29.8.85), although such a .swap arrangement could only raise some $750 million while the short-term debt falling due for renewal was estimated at $14 billion. No such deal was arranged, nor was the trip successful in persuading commercial bankers to renew credit lines. The flight only served to emphasise the isolation of the South African government if it did not seriously reform apartheid, or, at least, the difficulties that its allies in the US and UK had in supporting it. But the authorities sought to hide this by claiming subsequently that the journey’s purpose was only to explain to the UK and US what steps the government and Reserve Bank themselves intended taking. These emergency steps were announced on 1 September and consisted of a debt moratorium or temporary freeze and a two-tier exchange rate supported by foreign exchange controls.

Debt freeze and exchange controls The emergency measures attempted to stem the flight of the two main types of international capital in South Africa — bank loans and money invested in the stock exchange. Bank loans were to be subject to a moratorium or debt freeze. An exodus of investment funds was to be discouraged by establishing a two-tier exchange rate supported by exchange controls.^ The debt freeze halted all repayments of capital on foreign loans for four months (until the end of 1985) but interest payments would continue to be made. The Minister of Finance said that the relevant interest payments amounted to no more than 6 per cent of the country’s annual export earnings and could be met easily. The debt freeze applied to loans through banks, suspending repajTnent of $14 billion of short-term bank debt. It extended as far as preventing repayments of loans by foreign branches and subsidiaries of South African banks. This was especially significant because some South African banks, in particular Nedbank, the third largest, had been actively operating in New York and other foreign centres. It is noticeable that the debt freeze was focused on bank loans while repayment of other types of loans was unrestricted. These included repayments on maturity of South African public sector bonds quoted on foreign stock exchanges or privately placed notes; debts to international financial agencies; debts guaranteed by foreign governments and their export credit agencies; and the foreign debts of the Reserve Bank including those arising from gold swaps.

South Africa’s External Debt Crisis

177

The exchange rate and exchange controls distinguished between current account and capital account foreign exchange transactions. Current account imports and exports of goods and services would occur at a ‘commercial rand’ exchange rate which the Reserve Bank itself would manage. Sellers of shares and other assets, on the other hand, would only be able to convert the rand proceeds into foreign currencies at the financial and exchange rate. That rate would be determined by free market forces or, in other words, the outflow of money from the stock market seeking safety abroad (net of any inflow) without the authorities attempting to manage the rate. Controls would be administered to ensure that foreign exchange required for capital export was not acquired at the commercial rate. The plan was that in the circumstances of 1985 the financial rand would be lower than the commercial rate; the current account surplus combined with Reserve Bank purchases of rands to support their price would make the exchange rate of the conunercial rand relatively high while the flight of capital would depress the price of the financial rand. The low financial rand would discourage the flight of capital for it would lower the foreign exchange value of each rand obtained by selling shares. Some believed that by the same token making shares ‘cheap in terms of foreign currencies, the measures should encourage a new inflow of capital eventually’ (Daily Telegraph, 29.8.85). These foreign exchange measures were a return toward a system of controls and restrictions that had been relaxed only two and a half years earlier. In February 1983, South Africa had abolished exchange controls on transactions by non-residents and ended the distinction between the commercial and financial rand. In previous years, the financial rand had fluctuated at a discount of between 2 per cent and 40 per cent below the commercial rand. They were unified partly as a general move, supported by business and bankers, toward greater ‘normalisation’ of South Africa’s position in the world economy and partly as a result of pressure toward increased market freedom from the IMF which had agreed stand-by credit and other credit up to SDR 1 billion in 1982. The unified rand began at 88 US cents in February 1983 with the Reserve Bank managing the rate, and it was allowed to float in September 1983, falling to well below half of its initial value by the time the new restrictions were imposed.

Debt negotiations and attempted stabilisation When the foreign exchange market reopened on 2 September the new measures appeared to have halted the panic which had pushed the rand down to around 35 US cents. The exchange rate rose sharply in ‘euphoric’ trading. But, after having climbed to over 41 US cents, it crashed back to 37 US cents on 5 September. The violent ending of a major strike at Gold Fields of South Africa had undermined the precarious confidence of the markets.^ This was a graphic illustration that, of the three types of measure

178

Case Studies

that had been under discussion in financial circles since the July State of Emergency (controls on capital outflow including debt moratorium; two-tier exchange rate; and political reform), political stabilisation was the fundamental prerequisite for financial stabilisation. It was unlikely that political reforms could bring political stability but Botha’s Rubicon speech had not even promised a serious attempt at reform. The problem of South Africa’s foreign debt was even more strongly dominated by political considerations than was the stability of the foreign exchange market. The overseas banks whose assets had been frozen by the debt moratorium were not willing to be seen to negotiate directly with South Africa over repayment of existing debt. Political pressures in the United States, such as the decision of several bodies to withdraw funds from banks that lend to South Africa, had precipitated the decision of Chase Manhattan and others not to renew loans falling due at the end of August, and the same pressures prevented them from negotiating a solution with South Africa. Following the discussions Mr de Kock held with the Bank of England, Federal Reserve, and commercial banks at the end of August, South Africa’s debt freeze package included a measure designed to surmount this difficulty. Instead of direct negotiations or the alternative of simply stating its terms to the bankers on a ‘take it or leave it’ basis. South Africa would appoint an ‘independent mediator’ to devise a plan for eventually repaying the debt. The person named to this post was Dr Fritz Leutwiler who in June 1985 had become head of the Swiss industrial multinational. Brown Boveri. His strong credentials for the task stemmed from his record as the former President of Switzerland’s central bank and chairman of the Basle-based Bank for International Settlements, an international body which in many respects acts as the central bank to central bankers. Most important was the experience he had gained in Third World debt negotiations. The people with whom Dr Leutwiler had to deal were, on one side. Dr Chris Stals (Director-General of South Africa’s Reserve Bank) who chaired South Africa’s Standstill Co-ordinating Committee and, on the other, tlie representatives of 30 major international banks with loans outstanding. In addition, another 230 banks Were smaller creditors and any proposals had to take them into account. The mediator’s round of discussions (calling them negotiations was abjured) did not produce results within the four-month period of the freeze. The South Africans wanted the banks to accept a long repayment period for outstanding short-term loans, effectively transforming them into mediumterm credit. Several leading banks wanted immediate repayment of outstanding debt and no commitment to future loans. Above all, the banks wanted a commitment to political reforms and, although these were not specified, a lifting of the State of Emergency and the release of Nelson Mandela were believed to be critical measures of that commitment. Lack of progress became apparent relatively early. Although it was clear that the lack of new credit facilities from banks as a result of the freeze was causing a severe liquidity squeeze on industry (with importers, unable to

South Africa’s External Debt Crisis

179

obtain their usual 90 day credit, having to pay cash with their orders),'* on 15 November South Africa let it be known that it expected to extend the debt freeze (Financial Times, 16.11.85). The Governor of the Reserve Bank, Dr de Kock, admitted that tangible evidence of political reform was a precondition for debt rescheduling. He ‘hinted that this message had finally reached the Government after direct warnings from Dr Fritz Leutwiler’ and predicted there would be ‘political and constitutional reforms that would go far enough to win the support of moderate opinion, black and white’ in South Africa and some African states (Financial Times, 27.11.85). Whatever reforms were envisaged, their preparation required time and on 10 December South Africa formally extended the debt freeze until the end of March 1986. The extension to the freeze was due not only to the time needed to prepare a political package, for the two sides seemed to remain a long way apart over the technical, financial details. At that stage South Africa had put forward proposals for converting the $14 billion short-term debt due the previous August into medium-term debt. No repayments would begin on it until phased instalments started in 1990 and the repa5mient date on other debt (which had not yet fallen due) would also be put back several years. As part of its moves to strengthen control over foreign exchange, it transferred the frozen loans from the commercial banks to special accounts in the Reserve Bank and it paid interest of only */, per cent above the international rate (LIBOR) on them.^ While many of the foreign banks said they wanted immediate repayment, they also wanted a higher interest rate as long as their funds were blocked, and with more general objections too they rejected these proposals (Financial Times, 11.12.85).

Rubicon II and partial agreement on debt During the extended debt freeze the President, opening parliament in January 1986, made a major speech in an attempt to meet the requirement for political reforms and it was followed in February by a meeting that appeared to yield some agreement on technical financial terms. But neither of these developments proved to be enough to settle the debt crisis. Botha’s speech contained promises of future reforms which, since they were presented as moves toward the dismantling of apartheid, led to it being called Rubicon II, the second attempt at a step that was balked in August 1985. In fact, the promised reforms were seen as too qualified to be meaningful. Blacks were to be offered an advisory role in legislation through a new ‘national statutory council’, a proposal unacceptable to the African National Congress, the United Democratic Front and other anti-apartheid organisations, and irrelevant to the demands of the black population. The ‘pass laws’ or ‘influx control’ mechanism, a cornerstone of apartheid, were to be repealed, but replaced with new legislation to police people’s movements through identity cards. The speech promised to release

180

Case Studies

Nelson Mandela, but only on condition that the USSR released Scharansky (which it did soon after, apparently as a result of quite separate negotiations already in progress) and Angola released a South African soldier. The promises of Rubicon II had been relayed in advance to leading bankers and enabled them to say that they could negotiate a temporary ‘informal’ rescheduling of the $14 billion debt frozen the previous August. However, they were insufficient to allow them ‘to drop their opposition to a full scale rescheduling of the country’s foreign debt’ (^Financial Times, 1.2.86). In other words, they could not be seen to renegotiate the rest of the outstanding debt or to arrange significant new credits. But the sign of some progress toward regularising the $14 billion frozen debt was enough to satisfy the markets. Whereas August’s Rubicon I was followed by panic on the foreign exchanges, after this speech the rand closed unchanged at 43.8 US cents and within a few days had risen to 45 US cents and it maintained its strength in the following month. The ability of Rubicon II to provide bankers with a strong enough prospect of reform was, however, soon jeopardised by events. After a few days for analysis. Western commentators assessed that the promised reforms were not fundamental.^ Their weakness was underlined by the rapidity with which Botha criticised his Foreign Minister for saying that apartheid was being dismantled and a black President was foreseeable. It was demonstrated most effectively by the continuing violence, rebellion and repression that marked the country under the State of Emergency. And the political impasse was heightened by the call the ANC and Bishop Tutu made on bankers to refuse to bail out the government. Despite this, the banks and the South African government became sufficiently close in their attitudes toward the debt freeze to enable the mediator to put new proposals to a London meeting of the leading banks in February 1986. These talks established a ‘broad consensus’ between South Africa and those banks (which themselves had advanced some 70 per cent of the country’s international bank credit). The plan agreed in broad principle had three key features. First, there would be a further year’s extension before repayment of some $10 billion of frozen short-term debt was required. Thus, the repayment of that amount of debt, originally due in August 1985, would be delayed by at least 19 months, and higher interest rates would be paid on it. Second, South Africa would make a down-payment of $0.5 million starting in April 1986 in respect of the credit it owed. Third, the plan was to be seen as a ‘short-term interim solution’; there would be a review of South Africa’s economy in Summer 1986 and full-scale discussions in February 1987 with a view to a full restructuring of South Africa’s debt. The Leutwiler plan was agreed in broad principle and a technical committee of twelve banks was established to work out the details.^ By March, however, it was clear there was disagreement on the details and would be difficulties in achieving a full agreement by the end of March

South Africa’s External Debt Crisis

181

deadline. Some leading banks wanted a greater immediate repayment than the $0.5 billion proposed. Even before the London meeting they had argued that the recent fall in the price of oil and rise in the gold price would double South Africa’s surplus on current account in 1986 from the $1.5 bilUon Pretoria estimated to almost $3 bilhon and this would permit a larger down-payment. Others wanted the Leutwiler plan to be agreed for longer than one year, presumably to delay the necessity of a review and contentious negotiations. Most problematic of all was the fact that unlike most countries’ rescheduling agreements, the Leutwiler plan was to be implemented through each bank making an agreement with each debtor on a bilateral basis. This raised the possibiUty that one creditor might arrange a more advantageous deal than its competitors. Even if the 30 leading banks could agree a detailed plan overcoming these problems, there was little time available to persuade the other 230 smaller creditor banks to accept the terms before Pretoria’s unilateral debt freeze expired at the end of March. Whether or not an agreement was in place by the end of March it was not any sort of end to the problem; even for the most optimistic bankers it was an interim step. Under white minority rule. South Africa’s debt crisis would reappear time and again in future months, for it had been forced into the open by two continuing but opposing forces, international bankers’ difficulty in supplying new credit while under pressure from shareholders and depositors, and South Africa’s need for foreign credit because of its modem economic integration with the international economy. The debt crisis has become a key and recurring element in the poUtical and diplomatic manoeuvring around a weakened apartheid. In order to judge its future significance, it is necessary to consider its present character. The most important questions concerning the crisis that unfolded from Summer 1985 are, first, whether the crisis was wholly political rather than also reflecting underlying economic factors, and, second, to what extent were the banks’ actions determined by political pressure rather than financial considerations. My view is that, although political factors were important in each respect, more traditional economic and financial considerations had a strong effect. Those commentaries that presented the problem in political terms alone are misleading.

Economic determinants of the crisis The rand and stock exchange crash initiated the crisis in July 1985 and it turned into a debt crisis when banks refused to renew the credit expiring in August. These were both cases of investors dramatically attempting to switch funds out of South Africa and much emphasis has been placed on their character as responses to political events. The imposition of a State of Emergency, the impact on sentiment of the French government’s restric¬ tions, the political pressure on US banks and UK banks arising from

182

Case Studies

shareholders and from depositors such as New York State withdrawing funds from pension funds and banks with South African business have all played important roles, which, in turn, derived from the fact that the liberation struggle inside the country had reached a new stage. But South Africa’s economic problems were growing and, although the country in 1985 was not ftmning balance of payments deficits which made debt servicing impossible (as were Latin American borrowers), the imbalances in the economy predisposed it toward the financial crisis that occurred and, at one level, caused it. South Africa’s economy is dominated by gold mining and manufacturing. Although other sectors, particularly agriculture, are very large and account for a high percentage of employment, gold and manufacturing are the key sources of profit and the most sensitive links between South Africa and the world economy. Moreover, their fortunes relate directly to 'urban conditions and organised black labour. In the first half of the 1980s, the earlier strength of both these sectors collapsed. The world price of gold dropped from its record of $850 per ounce to below $300 at one point in early 1985. The index of the manufacturing sector’s output collapsed from 135 at the start of 1982 to 117 during that year (recovering slightly in 1983) as South Africa’s exports, despite the low prices achieved through using cheap black labour, were slowed by the world recession. As a consequence of falling gold prices, world recession, and, in the early 1980s, high oil prices, the balance of payments was severely in deficit in 1981, 1982 and 1984. In 1985 the balance of payments current account moved into a substantial surplus following austerity measures taken in August 1984 when the authorities increased bank interest rates from 22 to 25 per cent and imposed controls on hire-purchase and other credit. The severity of the squeeze was indicated by the high cost of credit in real terms, for inflation was then at 12 per cent. The austerity measures helped the balance of payments but further depressed manufacturing output and increased unemployment. It was estimated that in 1985 black unemployment was approximately three million. From the point of view of stock exchange investors holding shares in manufacturing, or foreign creditors having lent to those firms, confidence was shaken by the effect of the squeeze on company profits and liquidity. This was one of the factors causing an accelerated outflow of capital in the first half of 1985 and it was pushing foreign banks towards refusing to renew their short-term loans even before the political situation worsened. A related economic factor was that South Africa’s international debt had become highly unbalanced and difficult to sustain even under the most neutral financial criteria. Since the beginning of the 1960s the proportion of loans to equity investments had increased sharply and of these loans a high and increasing proportion were short-term bank loans. Thus, whereas the ratio of interest payments to dividend payments abroad was 17 per cent in 1965—69, it had risen to 81 per cent in 1980—83 and, at the end of 1984, 40 per cent of the interest-bearing foreign debt was short-term. A

South Africa’s External Debt Crisis

183

high proportion of the debt was accounted for by bank debt and, at the end of June 1984, 66 per cent of these liabilities to banks were short-term (compared with an estimated ratio of 44 per cent for ‘comparable developed countries’). The most telling statistic was the Reserve Bank’s estimate that at the end of 1984 short-term debt (with an original maturity of less than one year) was $14 billion while longer-term loans outstanding were $10.3 billion. Many Third World countries also borrowed considerable amounts from banks in the late 1970s and early 1980s but their predominant form of credit was medium- rather than short-term and South Africa was particularly unusual in that its bank borrowings were not contracted by the state (or state guaranteed). The high proportion of short-term debt was mainly incurred in the 1980s by South African banks borrowing dollars on the essentially short-term international inter-bank market, converting them to rand and lending them to local companies. At the end of 1984, private borrowers accounted for about 60 per cent of the foreign debt.* For Western banks ‘lending to South Africa through the inter-bank market provided near perfect disguise’ (Daily Telegraph, 7.9.85), for transactions on the inter-bank credit markets are never published. But it also meant that South Africa’s debt structure was highly unstable and increasingly so; the short-term/long-term ratio of 14/10.3 at the end of 1984 was worse than the 1983 ratio of 12.9/11.1. This debt instability combined with the Reserve Bank’s policy toward the foreign exchange market to increase the volatility of the exchange rate. Since 1983, when the rand had been allowed to float, the Reserve Bank had operated a spot-swap technique for buying and selling dollars on the forward market. The fall in the rand (by 47 per cent) in 1984 made this policy expensive, and it also made the Reserve Bank seek a new policy in order to support the rand. Thus, in January 1985 it changed the operation of the forward market by also carrying out outright purchases and sales at different rates from the spot-swap rates. This new system, however, created many problems, one of which was that it could increase the instability of the spot rate by increasing the Reserve Bank’s spot purchases of dollars at crucial times to meet its forward obligations.® \^en the foreign exchange panic broke in mid-1985, this was an additional source of instability; from a longer-term point of view the unsatisfactory nature of the techniques adopted under a system of floating exchange rates comprised a strong economic pressure toward adopting a two-tier exchange rate with a managed commercial rate.

Bank prudence and financial criteria Although the economic developments I have outlined have interacted with political events, it is commonplace to see the debt crisis as essentially political. This broad judgement is open to several interpretations. One is

184

Case Studies

that the international banks, subject to political pressure from depositors and shareholders, and, perhaps, wanting to establish their good standing with a future ANC government, have taken an essentially poUtical stance. On this view, the baiis have cut their loans in order to speed apartheid’s end, and statements by bankers themselves have supported this interpretation. In announcing Barclays’ results for 1985, the group’s chairman said the bank wanted to see “changes which confirm an end to the bankrupt policy of institutionalised racial discrimination” . . . [and] added that one of the requirements it would consider a sign of good faith from the repubhc would be the release of the imprisoned black leader. Nelson Mandela’ (Guardian, 7.3.86).

In an earlier report, London’s Guardian (29.8.85) had quoted ‘a consider¬ able consensus’ among British bankers and business leaders typified by the statement that ‘Political rights for Africans are now on the agenda. Jn the past you could have talked about social rights or human rights alone. That is no longer enough.’ In fact, this view is misleading. The banks’ behaviour has been consistent with the pursuit of their normal financial criteria rather than political objectives. Banks as institutions have not seen it as their business to push for poUtical reforms for reform’s own sake. In following financial criteria, bankers have had two immediate objectives: first, to protect their own assets; second, to safeguard the delicate mechanisms of the international financial system. In order to do this, the banks have co-operated with Pretoria, and South Africa has co-operated with them, while maintaining their different perspectives on political reform. This has led to a view that the banks’ statements on reform are empty. At the time of the February 1986 meeting. Bishop Huddleston, President of Britain’s Anti-Apartheid Movement, said agreement showed that ‘the banks have decided to come to South Africa’s rescue . . . [in] a political act.... Dr Leutwiler is little more than a mouthpiece for Botha’, and Neil Kinnock, Leader of the Opposition, argued that a ‘decision to allow South Africa to postpone repayments would be of great assistance and encouragement to President Botha’ (Guardian, 21.2.86). The first financial criterion, of protecting their own assets, was easily executed by the banks and other financial institutions. The deterioration in the economy, the distorted debt structure and increased political instability led them to reassess the riskiness of their investments according to the criteria, well established since the early 1970s, of political risk analysis. When the State of Emergency was declared, it was reported that ‘Frost Sullivan, the New York political risk consultancy, has dropped South Africa from ranking as one of the safest of the world economies’ to ‘a par with some of the higher risk Third World countries’ (Sunday Times, 28.7.85). Following normal criteria, banks and investors responded by withdrawing funds and refusing to renew credits. At a more general level, their concern for reform was an attempt to protect assets by achieving stabilisation of South African society, but I shall argue below that such hopes were misplaced. The second financial criterion, protecting the delicate mechanisms of the

South Africa’s External Debt Crisis

185

international financial system, was particularly relevant for Dr Leutwiler, the Bank of England, US Federal Reserve and other central banks, but it also affected the creditor banks themselves. At its heart was the problem of ensuring that the inter-bank credit market was not permanently damaged. More widely its aim was to ensure that, despite the debt crisis. South Africa’s large economy with its control over gold production was not cut off from the Western world’s financial system. The inter-bank market for credit is both crucial for the international financial system and usually regarded as delicate and easily disrupted. It links all major banks across the world enabling them to lend funds which are temporarily in surplus to other banks at a profit. It is informal and enables banks to borrow very large sums from other banks for short periods varying from overnight loans up to one year loans. Its survival depends on all borrowers borrowing their huge debts and upon lenders not panicking and withdrawing their liquid loans, South Africa’s short-term bank debt consisted to a large extent of such inter-bank credits and they were a threat to the whole system because, instead of being made on the usual rotating basis to balance the surpluses and deficits different banks have in their liquid resources, these were contracted as an indirect means of providing core finance to companies. Ultimately they became a real problem for the inter-bank market because South Africa froze repayments, and this was a unique shock. In 1982 it became apparent that Brazil and other Latin American countries had also used the inter-bank market to obtain core finance; in those cases to provide the state, through the banks, with finance to cover the balance of payments deficit. When Mexico virtually defaulted on its other debts in 1982, the inter-bank market suffered a severe shock as bankers themselves withdrew their money from the vast loans to banks such as Brazil’s. In South Africa in 1985 the bankers did not actually withdraw funds but the shock to the market came from the state freezing repayments. Neither Dr Leutwiler nor the banks knew whether this new type of disruption would critically damage the inter-bank market; their task was to minimise such damage. Although many countries had agreed debt reschedulings with their bankers in recent years, inter-bank credits were generally excluded from these arrangements. When South Africa’s leading bank creditors agreed in principle to the Leutwiler package, bank technicians saw this as the first major rescheduling of inter-bank debt and it appeared that the negotiations had succeeded in ensuring that the world’s inter-bank market could continue to function smoothly. To avoid totally disrupting the inter-bank market, it was necessary for re-scheduling to be achieved in a manner which ‘normalised’ the positions of both borrowers and lenders. Each needed to reach a solution which offered a realistic prospect of predictable repayments of capital and payments of interest. For the banks an additional requirement was that the liquidity of their outstanding debt should be restored as far as possible (for the inter-bank market’s value has been the liquidity that it offers lenders).

186

Case Studies

That problem was not solved at the February meeting although the possibility of converting the outstanding debt into certificates which could be bought and sold between banks was discussed and viewed favourably in that context. But both Pretoria and the banks had a mutual interest in achieving a realistic agreement on a predictable payments schedule. An illustrationrof the common interest of central bankers in South Africa and other countries in ensuring that the debt issue did not put the international financial system at risk was the restraints placed on Nedbank’s New York operations. This bank had taken the lead in establishing its own business abroad, borrowing actively through its New York office. There were concerns about this activity in any case, but after the debt freeze they became acute. The American authorities were concerned about the bank’s ability to meet its commitments and possible repercussions on the stability of the money markets. Sharing this concern for the system, the South African authorities acted to secure Nedbank’s US business and management changes followed. Pretoria and leading bankers also shared a desire to ensure that South Africa was not cut off from all sources of new credit. Mr du Plessis’ announcement of the debt freeze in 1985 was careful to leave several areas of international finance where ‘business as normal’ would be the order of the day. By excluding from the moratorium state debt and finance obtained under export guarantee schemes, Pretoria left a window through which foreign credit could be obtained in future. The leaders of the international financial system share that interest in maintaining normal provision of credit and avoiding the isolation of the country, for cutting off all its sources of finance would disrupt all the economic relations it has with the UK, US and Europe. It is not yet possible to assess the extent to which new lending continued after the debt freeze. There were net repayments of these credits according to the Reserve Bank, but they were not large and the inflows within the total are not known. As well as reports that some firms have had difficulty in arranging trade finance, newspapers have reported that new credits have been arranged both for industry and for bodies such as the Urban Foundation which are presented as politically liberal institutions.

Assessment and prospects Although South Africa’s debt crisis is often seen in wholly political terms, it actually arose from the interplay of political and economic developments. Its future course, too, will depend on the same factors although the more acute South Africa’s political crisis becomes the more politics affects financial matters. The other side of the coin is that the debt crisis heis had a significant effect on South Africa’s politics, hastening the break-up of the ruling block’s consensus, heightening the conflicts of interest within white society, and injecting a new destabilising factor into South Africa’s diplomatic relations with the Western powers.

South Africa’s External Debt Crisis

187

To reach an assessment of the debt issue we have to judge the way in which economics and politics affect it and are affected by it. Doing so leads to the conclusion that the regime’s debt problems will have a continuing importance and be a recurring flashpoint. It would be a mistake to see negotiations such as those under Dr Leutwiler as being aimed at achieving a settlement’. There is no sense in which a rescheduling or restructuring can be achieved which would put the apartheid economy’s external debt onto a new and sustainable footing. Instead, any agreement can only be seen as a temporary and fragile intermission; although finance is a mundanely materialist issue, bankers’ agreements on it are best seen as stations of the cross for apartheid. The unattainable character of a long-term solution results from several factors. First, instead of the main directly involved actors, the South African regime and the banks, having well defined strategies and positions which can be the subject of negotiations, each has a strategy and interests with many contradictions and divergent interests within it. Second, the underlying political and economic factors which generated the crisis are likely to intensify. Third, and most significant, the growth of the people’s rebellion and the strategic strength of the African National Congress and its military wing, Umkhonto we Sizwe, which have been instrumental in heightening the conflicts of interest and the political and economic crisis, will continue to determine the conditions within which debt is located. Below I discuss the insoluble contradictions in the positions of the banks and the government and consider the relation between debt and the fight against apartheid. As background, I assume that the recession experienced by the South African economy in the first half of the 1980s is a mark of structural economic problems which will continue with high unemployment and reduced profitability. This may be ameliorated temporarily, as it has been in the first quarter of 1986 by international markets’ reductions in the price of oil or increases in gold prices, but the structural problems remain and are intensified by the political instability. The banks lack a clear strategy because at one level they want to regularise relations with South Africa and at another to pull out. In the long term, even if less profitable than previously, the South African economy is such a key element of the West’s international economy that banks have a strong interest in regularising its financial position. This finds expression particularly in the central banks of the US, UK and continental Europe, and among the strategically minded policy makers of the major international banks. This tendency produced the bankers’ agreement to the broad principles of the Leutwiler plan, justifying the anti-apartheid movement’s criticism that the bankers were supporting Botha, but it is caught up in a number of contradictory forces. Bank shareholders and the supervisory agencies do not favour exposure to an economy which is now judged to be a high credit risk; this affects all banks but is especially important for the 230 or so medium and small banks who are creditors. Some banks are subject to considerable pressure from shareholders and

188

Case Studies

depositors with anti-apartheid concerns. Because of such pressure, lending in the 1980s has been disproportionately at the private sector rather than the South African state level, with an exceptionally high proportion being short-term credit through the inter-bank market; for technical reasons this cannot easily be rescheduled on a long-term basis. The inter-bank market’s essential characteristics are its informality, liquidity and its short-term loans but a rescheduling agreement, by its nature, goes against them. It could only exist either as a temporary patching up for want of anything better (an approach that appears to have predominated in February 1986) or, as a longer-term basis, if there were substantial and unlikely financial innovations such as the creation of a secondary market in South African short-term debt. Financial markets’ judgements on any economy are based on simple indicators; at any one time indicators such as the money supply, the current account balance, the public sector deficit are treated as key. In this case ‘political reforms’ have been identified as a crucial measure of creditworthiness. Banks have seen progress on reforms as the one thing that would enable some reconciliation of their desire to regularise South Africa’s international finance and their need to reduce the risk of lending to the country. But, in fact, that path toward solving financial problems is not very promising for the banks. One difficulty is that the banks themselves cannot specify a list of political reforms by which they can measure progress. It is indicative that before the February 1986 London meeting there was speculation that the banks would consider a document with a political preamble on desirable reforms, but they refused. Similarly, Barclays’ chairman, in announcing his group’s results and their intention to pull out from South African business, refused to detail desired political reforms apart from the release of Nelson Mandela (Guardian, 7.3.86). Although that demand is a remarkable advance in itself, it has become for many bankers (and politicians) a symbolic demand which substitutes for the detailed political reforms they rightly feel they could not specify. Another difficulty, the main difficulty, with the banks looking for political reforms is that reforms in themselves cannot guarantee the type of political and economic stability sought by the financial community. Indeed, substantial political and social reforms are as likely to open the way to an intensification of the popular struggle against apartheid. On that perspective, social and economic instability is inescapable until majority rule is achieved and reconstruction under an ANC government is under way, so that political reforms themselves could not solve the debt crisis. If the banks lack a clear strategy, the South African government’s own position on the debt is even more problematic. For them the debt issue is one aspect of their attempt to maintain apartheid in one form or another. Thus, ‘what to do about the debt’ is inseparable from the questions of what to do on the diplomatic front abroad and political, social and economic reform at home, and the Nationalist government is no longer able to have a clear, unified strategy on those questions.

South Africa’s External Debt Crisis

189

In the face of each side’s complexities and constraints, the manner in which the 1985 debt crisis was handled was the most favourable possible for the South African regime, and it offered great advantages to the banks. Although the package was not completely tied up at the February 1986 meeting, the agreement on broad principles effectively meant that the major banks had agreed to reschedule South Africa’s short-term debt for at least one year (or more than one year after their due date). Since inter-bank debt is not usually rescheduled this was a considerable achievement for South Africa, giving the regime considerable support. At the same time, the banks gained much to satisfy that element that sought to normalise South Africa’s financial relations. Because South Africa appeared to declare the debt freeze unilaterally, the banks were able to achieve this while presenting themselves to depositors and shareholders as wishing to pull out of South Africa and being forced into rescheduling against their will. This was reinforced by the Reserve Bank’s deliberately unreeilistic December 1985 proposals for a four to five year rescheduling and the banks’ inevitable rejection of it in favour of more modest arrangements. And, as with any rescheduling, the banks gained increased interest rates. That was not the only way in which the foreign banks could have reacted to the debt freeze. Another direction which the conflicting tendencies in their strategies could have taken would be to veer toward recovering their assets by pulling out rather than staying in. This did happen to some extent after the debt freeze. The Reserve Bank’s Quarterly Bulletin for December 1985 (p.l2) reported that ‘After the introduction of the [September] standstill arrangement, large repayments were made on loans exempted from the “standstill” ’. But since the country’s gold and foreign exchange reserves fell by only R1.5 billion in the third quarter of 1985 and much of this was accounted for by leads and lags on the current account, the net withdrawal of credit cannot have been on a large scale. In any case, net repayment of ‘exempted’ loans was not the heart of the matter, the strongest action to recover the debt would have been to react to the debt freeze by freezing the assets of South Africa abroad. This strategy was proposed by Bishop Tutu, Dr Naude, and Dr Boesak. They wrote to Dr Leutwiler in February 1986 proposing ‘that the banks should immediately freeze all South African bank balances in their books and refuse to effect any transfer instructions over these accounts’ and suggesting ‘that the banks should obtain court attachment of aircraft, ships and other SA assets and apply the proceeds against South African indebtedness.’ It was reported that by the February meeting they had not received a reply (Daily Despatch, 20.2.86). Such asset freezes have been applied elsewhere by foreign governments (most notably by the US against Iran, and by the UK against Argentina). And they could have covered the debt since South Africa’s total foreign assets (not including the ships and aircraft mentioned by the clerics) were some $12.4 billion at the end of 1984. The fact that such actions appear not to have been considered is a measure of how far the contradictions in the banks’ position were weighted in favour of

190

Case Studies

maintaining relations with the regime. Nevertheless, in the months following the debt freeze, South Africa made policy pronouncements to give an appearance of reform. The question is whether, or to what extent, foreign creditors’ opinion was responsible for promoting an apparent change of heart and that requires an examination of how significant any changes have been and what their background is. The most publicised policy statements were President Botha’s address on opening the new session of parliament in January 1986, and the announce¬ ment in March 1986 that the State of Emergency was being hfted. The address promised an end to the pass laws and minor constitutional reforms; but the first is a promise of cosmetic changes since the pass laws were to be replaced by other forms of control, and the second proposal a new body which could only be rejected by the ANC. In effect, those items could not be treated as promises of reform. It also announced proposed changes in the education system. These did suggest some movement, building on the 1981 De Lange Report and the 1983 White Paper and going further than the reforms introduced in an Act of 1984. Their announcement was clearly aimed at influencing foreign creditors, but it would be mistaken to conclude that the proposed reforms were basically due to the pressure over debt; in essence they were a response to the school pupils’ rebelUon.” Similarly, the lifting of the State of Emergency in March was a response to several political forces so that the debt crisis can only be seen as a small element within the whole. It was lifted because the riots and military actions had shown that it was ineffective in repressing the movement, because the ‘normal’ security laws gave the State enormous powers, and because it alienated a range of potential allies in the business establishment and abroad (of which the bankers were only one element). By March 1986 the economic, political and social system of South Africa was in such turmoil and the diplomatic structure of support for apartheid so undermined that even Chester Crocker, the architect of the system of ‘constructive engagement’ under which the US had supported South Africa, called the insurgents ‘freedom fighters’. In the context of such shifts, bankers’ opinions have had only a secondary role. Nevertheless, the debt problem will resurface. The short-term debt due in August 1985 is being rescheduled for one year with a full review before further arrangements are agreed. South Africa’s medium-term foreign debt, estimated at $10 billion in 1985, will fall due for renewal; between March 1986 and March 1987 $1.5 billion of it is due for repayment plus the $500 million down-payment on the frozen short-term debt. And even if new arrangements are made on old debts, a flexible profitable economy requires new credits especially if the restructuring set in train by the recession and social changes is to move ahead. When debt is on the agenda, it is clear that further pressure from anti-apartheid forces and solidarity movements will attempt to ensure that the South African regime is effectively isolated financially and that financial difficulties become effective financial sanctions.

South Africa’s External Debt Crisis

191

Notes This article is based on the author’s work carried out at the Open University within the Financial Studies Research Group and the Development Policy and Practice Researeh Group. 1. Although commentators emphasise the political factors and note that in 1985 South Africa had a surplus on current account enabling it to serviee its debt, ‘normal’ economic factors were also signifieant. The current account had been in deficit over several years and, as outlined below, other economic problems were serious. 2. Speech by Mr B. du Plessis, full text in Business Day, 2.9.85. 3. The separation of the financial rand and commercial rand meant that pure capital flight could not cause the latter to erash, but, as in all such arrangements, current account and capital account transactions are not completely separable. ‘Leads and lags’ are the main way in which current aceount transactions can disguise short-term capital movements. If, for example, importers expect a fall in the rand (rise in the dollar) they will buy dollars earlier than otherwise while exporters will give longer cr^it. Such leads and lags were instrumental in the rand’s fall at the beginning of September. 4. Financial Mail, 25.10.85; South African Reserve Bank, Quarterly Bulletin, December 1985, pp.l2—13. 5. Other measures ineluded greater control over current aecount transaetions in order to regulate leads and lags. 6. A. Robinson, ‘Botha aims to modernise apartheid, not kill it’. Financial Times, 6.2.86. 7. The technical committee included the following banks: Barclays, National Westminster, Standard Chartered, Credit Suisse Union Bank of Switzerland, Swiss Bank Corporation, Commerzbank, Deutschesbank, Dresdner Bank, Citibank, Manufacturers Hanover and Morgan Guaranty. 8. Data from Economic Monitor, Old Mutual, July 1985 and South Afriean Reserve Bank, Quarterly Bulletin, December 1985, p.66. 9. R.M. Gidlow, ‘Forward exchange policy in South Africa’, South African Journal of Economics, vol. 53, no. 3, Sept. 1985. It was reported that with the falling rand, the spot-swap system had cost the Reserve Bank R2 billion losses in the year to March 1985, Star, 22.8.85. 10. J. Coakley and L. Harris, The City of Capital, Oxford, Basil Blackwell, 1983, pp.66—7. 11. E. Unterhalter, ‘Seeking social stability: political responses to the De Lange Commission Report’, unpublished paper, 1986.

14. A Future Independent Namibia and the IMF—World Bank: Policy Alternatives Wilfred Asombang The fatal flaw in the IMF operations at the moment is that despite its formal mandate for surveillance, it is in no position to place any conditionality on the surplus countries and as such is obliged to place the entire burden of adjustment on the borrowing developing countries. IMF Summary Proceedings, 1982. The creditworthiness of developing countries is judged not only in terms of their economic potential and ability to service their debts, but also in terms of their overall social structure and their domestic and foreign policy orientation. Economists have tried in vain to predict debt crises or to estabUsh scientifically based critical threshold values for indebtedness: yet the fact remains that acute debt crises have arisen only when banks declare a country uncreditworthy and withhold their funds. Peter Komer et al. (1986), The IMF and the Debt Crisis, London: Zed Books, 1986.

Namibia’s experience of the ruthlessness of colonial occupation, exploitation, plunder and repression stretches back to 1884—1915 when the territory was under German occupation and known as the German Protectorate of South West Africa. At the Treaty of Versailles, signed on 28 June 1919, Germany renounced all her colonial rights. Namibia was subsequently placed in category ‘C’ under the League of Nations Mandate System; the King of Great Britain accepted the Mandate but delegated it to the government of the Union of South Africa to exercise it in the interest of the Namibian people, and under the supervision of the League of Nations. The United Nations succeeded the League of Nations and South Africa ruled Namibia under the Mandate from 1920 to 1966 when the United Nations General Assembly (vide Resolution 2145 (XXI) of 1966) formally terminated it and assumed direct legal responsibility for Namibia, to be exercised (vide UN General Assemby Resolution 2248 (S-V), 1967) through the United Nations Council for Namibia. Thus but for the intransigence of South Africa and its allies in Western Europe, North America and Japan, the people of Namibia would have long won their independence to use their resources to determine their own destiny. In essence, therefore, the economic activities of South Africa and its allies in occupied Namibia, in defiance of the formal revocation of the Mandate in 1966, are not only illegal and immoral, but also constitute grand larceny and reflect the insensitivity of foreign economic interests to the agony of the Namibian people. Namibia, as possibly the last colony to become independent on the continent, will inevitably have to grapple with multitudinous social and economic problems associated with reconstruction and the development of an economy which has been devastated by more than 100 years of colonial occupation and ruthless exploitation of the territory’s natural and human

Future Independent Namibia and the IMF—World Bank

193

resources. The government of independent Namibia will also be confronted with the imperatives of providing the hitherto repressed population with at least a minimum basic human needs (BHN) package. The colonial economy used to be bountifully rich in minerals, cattle, karakul and fish, but has been systematically militarised and grossly mismanaged under the apartheid umbrella. The present economic structure and production relations are the products of apartheid and colonialism: it is the classic case of a colonised territory that produces what it does not consume and consumes what it does not produce. The economy is, therefore, vulnerable to external shocks and crises which would warrant cautious and efficient management, with or without borrowed external financial resources.

The economy of occupation and the imperatives of reconstruction and development after independence Given the entrenchment of the apartheid system in occupied Namibia, the ruthless exploitation of natural resources and the repression of the indigenous people who constitute about 96 per cent of the population of 1.6 million, it can be anticipated that on the attainment of genuine independence the government will be saddled with problems which will include: (i) abject poverty among the indigenous population in contrast with the affluent colonisers; (ii) widespread unemployment resulting from colonial policies which guaranteed cheap captive labour for the whiteowned enterprises; (iii) glaring malnourishment among blacks; (iv) high illiteracy rates maintained to keep the indigenous people unaware of the exploitation and the extemalisation of the country’s wealth; (v) the landless uprooted from their ancestral homes and deprived of the right to own land under apartheid’s laws; (vi) rehabilitating invalids, the infirm, and the homeless; (vii) a mineral-led economy which South Africa and its allies have turned into an export enclave vulnerable to international political-economic forces, especially from the capitalist world economy. These problems will be the colonial legacy which South Africa will bequeath to the future independent government of Namibia. They could well be the seeds of debt management crises involving not only the IMF/IBRD but other financiers whose conditionality could be even more damaging than that of the IMF. Knowledge of Namibia’s present production structure, resource base, and fiscal and monetary system should give us some indication of the likely pace, pattern, direction and resource mobilisation requirements of future economic and social development in the independent state. The present economic structure The analysis of Namibia’s GDP and GNP has been widely documented and articulated in several studies' and only the contextual highlights will be mentioned in this paper. The preponderance of the mining sector and the

194

Case Studies

disarticulation of the economy are apparent from Table 14.1. The trans¬ national-dominated mining companies of Namibia do not engage in downstream operations and, given the high concentration of incomes in the hands of the minority whites, there is a high propensity to import rather than invest in production for the domestic market. The creation of employment in mming, ranching and fishing is also insignificant because of the highly capital-intensive nature of these operations. The gap between GDP and GNP indicates the extent to which Namibia’s wealth is remitted for the creation of employment in South Africa and other foreign countries, at the expense of the economic and social development of the territory. The increase in the GDP—GNP gap from R90 million in 1969 to R425 million (372.2 per cent increase) in 1977 and to R680 million in 1983 indicates the massive gains which foreign firms as surrogates of the South African state and its allies have extracted from Namibia in the last few years.^ The economy has deteriorated sharply due, among other things, to negative changes in the international economy, prolonged drought and war, wasteful fishing and gross fiscal mismanagement. This reckless all¬ round economic mismanagement has exacerbated the highly disarticulated production structure, worsened the already inegaUtarian income distribution and exposed the economy to a diverse range of exogenous shocks. The increases in GDP and per capita output tend to conceal the underlying weaknesses of the present economy, and the extreme income inequalities which make the life of the black population deplorable and intolerable. For instance, the 1977 GDP, at current prices, rose from Rl,135 million to about R2,000 million in 1983, and the output per capita in current prices rose from R930 in 1977 to Rl,350 in 1983. However, at constant 1977 prices, output per capita actually fell over 20 per cent from around R930 to about R690. The worsening terms of trade during 1977—83 were partly responsible for the greater fall in real income: the prices of the country’s commodity exports rose less rapidly than those of imports. The worsening of the terms of trade was significant given that about 90 per cent of the country’s production of goods, and a substantial portion of services relating to exportables, are exported and about 85 per cent of the goods used locally are imported. In all types of economic activities whites, as a rule, earn substantially more than blacks. In 1975, for instance, the Gini index for occupied Namibia was estimated at 0.67, which reflects extreme income inequality, far in excess of what can be justified on the basis of skill differentials in other societies. Resource base and balance of payments The analysis of Namibia’s resource base indicates that the country is well endowed with natural resources which have been exploited to levels yielding $1,250—$1,500 per capita in territorial output. This indicates that the abject poverty in the territory is the result of colonial policy and apartheid distribution, not of any absolute lack of resources or their

Future Independent Namibia and the IMF—World Bank

195

Table 14.1

Gross Domestic Product (GDP) and Gross National Product (GNP) of occupied Namibia 1977—83 (million rands) Year

Total GDP

GNP

Agri. Mining Mann- Cons- Public Trans¬ Trade General Other and fact. tniction utilities port & govt. services fishing comm. 1977 1135.0 710.0 210.0 365.0 85.0 60.0 15.0 60.0 135.0 70.0 135.0 1978 1129.0 621.0 104.4 523.0 45.9 41.4 17.4 62.0 123.7 91.7 104.2 1979 1254.3 664.0 110.8 567.8 50.5 44.1 21.3 71.8 155.9 103.2 112.4 1980 1400.5 715.0 128.1 621.9 56.0 47.9 26.3 76.7 177.5 133.4 114.1 1981 1432.1 702.0 146.5 443.0 66.1 62.9 36.4 99.5 216.0 310.6 130.0 1983 2000.01320.0 202.0 483.0 125.0 102.0 71.0 130.0 270.0 352.0 265.0 Note: (i) GNP shown in aggregate only: the gap (author’s estimates for 1978—81) between the GDP and GNP reflects the extent of remittances from Namibia through ‘European Wages and Salaries’, large and small enterprise surpluses and net state revenue, (ii) Externalisation through malpractices such as transfer pricing could be quite substantial given the overwhelming preponderance of foreign firms but has not been taken into account in the remittances, (iii) The Statistical/Economic Review data are basically 12 per cent—15 per cent lower than the actual due to secondary data used and other RSA distortions of data classifications and quantities on the territory. Sources: GDP and GNP data compiled from several sources including R.H. Green, K. Kiljnen and M. Kiljnen (eds), Namibia: The Last Colony, London: Longman, 1981, p.51; Namibia: Perspectives for Nation^ Reconstruction and Development, Lusaka: UNIN, 1985, p.64; for 1978—81, SWA/Namibia Information Service, Statistical/Economic Review 1983 and 1985, Windhoek: Dept, of Finance.

exploitation.^ The economy is mineral-led and production consists essentially of diamonds (98 per cent of gem quality), uranium (Rossing uranium mine in Namibia is one of the world’s largest uranium oxide, UjOg, complexes with about 5,000 tonnes rated capacity) and an assortment of base metals. Forecast deposits of natural gas, oil and coal are already being proven. Other existing export-oriented products include cattle, karakul pelts, game and fish products. The ownership of production facilities, exploitation of the resources and the marketing of the output are fully in the control of South African and transnational enterprises as well as the local white establishment. The expansion of export-oriented enterprises in Namibia and the resulting siphoning out of the territory’s resources have been facilitated by the development of a relatively sophisticated outward-looking physical and administrative infrastructure, the availability of skilled foreign labour, low-cost unskilled migrant contract labour, and the close interaction of the colonial economy with the South African economy, especially with regard to banking and related financial services. The economy is thus built on selected natural resource exploitation for exports: about 90 per cent of domestic production is for exports, consisting of 100 per cent for minerals, 99 per cent for fish, 100 per cent for karakul pelts, and 90 per cent for cattle.'* Changes in the magnitudes of these exports and the implications for policy have been well documented, especially in UNIN studies.-^ The constraints^ on the development of Namibia’s economy include the possible depletion of the non-renewable mineral resources, or greater

196

Case Studies

difficulty in their utilisation and marketing; uncertainty about South Africa’s attitude to political developments in an independent Namibia; the devastation of the war-torn economy; the emergence of the liberation movement, SWAPO, from a protracted war of liberation and the gigantic tasks to be undertaken to rehabilitate the economy and the population based on the principles of non-capitalist development; and the potentially destabilising effects of the extreme racially based inequalities in income, wealth opportunities and political power, which must be rectified speedily in order to create a conducive atmosphere for development. Notwithstanding the constraints imposed by South Africa, Namibia has excellent prospects for rapid development, if there is transition to genuine independence acceptable to the Namibian people.

The balance of payments scenario The composition of Namibia’s visible exports and imports for selected years from 1975 to 1983 reveals the following scenario: (1) Primary sector commodities, especially minerals, are overwhelmingly significant in Namibia’s export trade, suggesting that the export perform¬ ance of the country would be sensitive to supply, demand and other conditions in world markets; (2) Energy, especially oil products, electricity and chemicals (28 per cent) tend to top the list of the country’s merchandise imports in value, closely followed by imports of motor vehicles, machinery and equipment (21.1 per cent) and food items (18.9 per cent); (3) There is sufficient evidence to suggest that the trend of Namibia’s imports has been dictated more by the requirements of the colonial exploitation of a mineral-led economy, the South African occupation forces, and the consumption habits and lifestyles of the minority settler population, than by any developmental activities in the territory; (4) South Africa has, as a matter of policy, discouraged the growth of Table 14.2

Current account of the balance of payments 1975—83

(R million)

1975

1977

1979

1981

1983

Merchandise exports 372.1 Merchandise imports 418.9 Trade balance -46.8 Net payments for non-factor services -56.1 Net exports for goods and non-factor services -102.9 Net factor payments -63.6 Net transfer receipts 38.2

715.7 540.3 175.4

993.9 616.1 377.8

906.6 1019.6 -113.0

925.3 976.6 -51.3

-94.4

-114.4

-162.4

-185.2

81.0 -132.7 54.4

263.4 -193.6

-275.4

-236.5 -108.9

51.5

-135.0 342.6

Balance on current account -128.3

2.7

121.3

-67.8

538.1

182.7

Source: South West Africa/Namibia, Department of Finance Statistical/Economic SWA/Namibia, 1984, Windhoek: SWA/Namibia Inf. Service, 1984, p.24.

Review ’

Future Independent Namibia and the IMF-World Bank

197

manufacturing activities in Namibia: processing of fish and animal products amounts to less than 5 per cent of GDP, and even then the ordinary Namibian does not benefit from the consumption of these products. The South African distortion of Namibia’s balamce of payments data can be seen from Table 14.2 for the period 1975-83. It should be noted that earnings from Namibia’s exports have tended to rise nominally, but have in fact dechned sharply in import purchasing power terms since 1977. This has been due partly to the worsening terms of trade and the manipulation of trade statistics as part of the South African propaganda intended to hoodwink the outside world as to the realities of the territory’s balance of payments. For instance, there have not been any development-oriented investments in Namibia in recent years. It should, therefore, be difficult for South Africa and its collaborators to justify the excess of merchandise imports over exports for 1975/76, 1981/82, and 1982/83. A plausible explanation could be inferred from the fact that excess imports and South Attcan subventions into occupied Namibia have tended to increase concomitantly with the escalation of South Africa’s war in Namibia and Angola; the RSA’s hawking of subsidies to buy political influence in an attempt to thwart the independence process; the massive corruption, mismanagement, and misappropriation of funds by about 60,000 civil servants under South Africa’s control and influence; and the reckless South African surrogate regime which runs a spendthrift fascist bureaucracy in the territory. The present balance of payments scenario of occupied Namibia suggests that after independence a radically new composition of imports and exports is likely to emerge due to the following factors:”^ (1) The demand by black workers for increased incomes, particularly equal wages for equal work, could be more urgent than in most African countries due to their extreme deprivation and degradation under apartheid; (2) The need to improve food, housing, health, education, rehabilitation and other social welfare services, especially for the underprivileged black population: the pent-up demands of the population will be released and the incomes and social welfare policies of the government should effect changes in imports through such programmes as subsidies on, say, food items; (3) The establishment of new institutions or the rationalisation of existing institutions for the new government and administrative infrastructure may require large amounts of capital and recurrent expenditures; (4) Irrespective of the manner in which independence is achieved, there will certainly be significant levels of disruption of production and foreign trade with adverse implications for the balance of payments; (5) Population movements, including returnees from exile, could result in short-run increases in food imports in the range of 5 to 10 per cent and, perhaps, a shift in the product mix of exported agricultural produce, given that there will be some increases in the local consumption of fish and meat, hitherto exported;

198

Case Studies

(6) Independent Namibia, like other already independent African countries, would be expected to embark on national economic planning and initiate development projects requiring massive infusion of financial resources for the re-orientation of economic and social goals and the reconstruction of the war-tom economy. Post-independence development programmes for reconstruction and development would be pursued against the backdrop of the rationale that existing colonial, commercial and external economic policies were not designed to, and cannot, meet the needs and aspirations of the sovereign people of Namibia. Table 14.3

Indicative estimates of Namibia’s import sources, 1983

(R million)

Total .

RSA

Other -

Fuel Other intermediate goods Other capital and construction

25 25 20 200 275 75 125

60 100

25 30 30 250 275 135 225

Total % of total

745 76

225 24

970 100

Grain Other food Cars Other consumer goods

5 10 50 —

Notes: The South African column includes import content of South African produced goods, which in some cases — e.g., petroleum products — is over 50 per cent. For total imports. Statistical/Economic Review, SWA/Namibia, 1984, gives the figure R976.6 million for 1983 merchandise imports (see Tables 13.9 and 12.11). Sources; Estimated from data in sectoral chapters, fragmentary reports and analogue adaptation from a Zimbabwe study summarised in X. Kadhani and R.H. Green, ‘Parameters as warnings and guide-posts: the case of Zimbabwe’, in R.H. Green (ed.), ‘Sub-Saharan Africa; towards oblivion or reconstruction?’. Journal of Development Planning, no. 15,1985.

Insofar as post-independence trade relations with South Africa are concerned, available evidence suggests that, among other things, apartheid South Africa has no natural monopoly over any of the products exported from, or imported into, Namibia. The indicative estimates of the sourcing and routing of Namibia’s imports and exports are shown in Table 14.3 and 14.4. Other issues which influence sourcing and routing, especially in connection with South African leverage, should be borne in mind. Namibia is not a landlocked country and as such no natural barrier to world sourcing need exist. South Africa has so far been an apparent (not real) low-cost supplier for many goods in occupied Namibia because of protection under the Southern Africa Customs Union (SACU) against other suppliers, the near absence of Namibian importers with any capacity for global sourcing, cheap black labour under the apartheid system in South Africa, and because South Africa’s administrative rules and procedures are used to delay or block third country imports into Namibia. Table 14.4 indicates that Namibia is, in fact, paying a very high price for high import sourcing from, and high import routing of, third country imports through South Africa.® Cost-efficiency

Future Independent Namibia and the IMF—World Bank

199

Table 14.4

Indicative estimates of cost of import and routing, 1983 Category Grain Other food Passenger cars Other consumed food^ Fuel® Other intermediate goods Transport equipment Other capital construction goods Total cost

Excess cost RSA sourcingi — 1 5 42.5 80 5 3 16 152.5

(R million)

RSA excise RSA customs in import in import RSA transit price^ priced charges'* —

3 25 50 _

78

—

1.5 3 13

—

0.5 1 4.5

Total —

10 2.5

5 1

6 9 85 130 20 6.5

17.5 47.5

8 20

41.5 298

—

—

Notes: 1. Gross excludes ctises — e.g. grain, coal, some food and other consumed goods, some mining equipment and construction materials — where RSA cost is lower than alternative sources. 2. Basically wine, beer, spirits, cigarettes, petroleum products. 3. At 20 per cent (rough average RSA effective rate) times GIF. 4. At 10 per cent (transport costs, commercial margins on R200m of non-RSA imports). 5. Estimated at one third pre-excise value. 20—25 per cent basic cost plus 8—10 per cent. RSA distributive margins and general stated tax. 6. Estimated at 40 per cent pre-excise cost petroleum products. Relatively conservative estimate.

considerations thus dictate that the diversification of the trading partners away from apartheid South Africa could improve the balance of payments of independent Namibia.

South African monetary policy and system in Namibia Occupied Namibia has no independent monetary policy. There is no restriction on the flow of currency between Namibia and South Africa. The whites and white-owned businesses of any significance maintain their large accounts in banks outside Namibia, normally in South Africa. South Africa has incorporated Namibia into the South African financial system and strengthened South Africa’s economic stranglehold on the territory through the Rand Monetary Area (RMA) over which South Africa exercises un¬ restricted discretionary powers in the determination of monetary supply, credit guideUnes, foreign exchange and resource allocation policies for the member states. In essence, therefore. South Africa as the pivot of the RMA decides monetary policy matters which affect social and economic develop¬ ment in member states of the area.^ The Reserve Bank of South Africa (SARB) opened a branch in Windhoek in 1961 to exercise tighter control on the monetary and credit transactions in the territory, and to ensure that there are no foreign exchange leakages abroad through the foreign-owned commercial banks and other financial institutions. The absence of an independent financial and monetary system in Namibia and the complete grip of the RSA regime on financial institutions and transactions in the territory have far-reaching implications for the post-colonial reconstruction

200

Case Studies

of the economy. The determination of the status of the foreign exchange reserves of Namibia at independence is a case in point. South African fiscal policy actions in Namibia Besides the grip on and direction of Namibia’s monetary policy, South Africa has persistently violated sound public finance principles and distorted the mobilisation of financial resources in the territory. Under the budgetary processes in Namibia today, budgeted resources available for directly productive economic activities are insignificant. It is well-known that the IMF/IBRD takes a keen interest in matters related to public finance. The latter provides for an uninterrupted execution of various government functions and, as such, the budgetary process is closely related to the functions of the state. In the LDCs, the absence of meaningful social overheads at independence implies that the state must play a more active role in the development of the economy. In fact, in terms of international comparison it could be shown that, on average, the extension of the public sector even in the advanced countries has been in the ascendancy. Public expenditure affects both production and the general level of economic activity and, as such, could be analysed as an indicator of the intentions of the government in the management of an economy. A nationalist government of a sovereign state would normally structure public expenditure in such a way as to bring about the greatest happiness to at least the largest number, and preferably to all in society. This basic canon of public finance has all along been violated in occupied Namibia.Instead, South Africa has saddled the territory with an ‘enormously complicated, bloated, inefficient and hideously expensive system of government devoid of all sanity and effectively led to the semi¬ paralysis of the political and economic development of the territory’ (Windhoek Advertiser, 12.5.82). Statistics reveal that in the fiscal years 1983—86 the largest budgetary allocations went to the surrogates of South Africa in Namibia, such as the South African occupation forces, police and intelligence services. Concomitantly, there has been a phenomenal decrease of about 486 per cent in the allocations for agriculture and nature conservation but significant increases in allocations to the Finance Ministry (129 per cent) and Civic Affairs (117 per cent), along with a 98 per cent increase in the defence budget. However, Economic Affairs and Health and Welfare decreased by 16 per cent and 22 per cent respectively. The bulk of non-military expenditure went to buttress the South African-imposed second-tier ethnic administrations where corruption and mismanagement are rife. Here wages and salaries constitute 60 per cent of recurrent spending. * ‘ In 1983/84 alone, total government wages and salaries amounted to approximately R625 million; that is, about 60 per cent of overall non-capital spending. The thrust of the budget continues to be centred on recurrent expenditure at the expense of capital investment. What minimal capital expenditure there was in the budget went on the provision of social infrastructure — largely for whites. Capital expenditure during 1983/84 was

Future Independent Namibia and the IMF—World Bank

201

18 per cent of the total budget and, as in previous years, the meagre capital expenditure allocations did not benefit the black population. With the escalation of the war in Namibia, the ‘puppet’ government’s expenditure in Windhoek has been on the increase notwithstanding the near stagnation in the level of productive economic activities due to the excessive South African militarisation of the whole territory. Normally, governments derive revenue from a combination of voluntary savings, borrowings, taxation, surpluses from state enterprises, deficit financing, etc. In an ideal situation governments mobilise the resources they require for national economic and social development from internal sources. This has not even been attempted in occupied Namibia, and, given the present destruction or depletion of the economy, after independence it may become necessary to supplement internal resources with external techno¬ logical and financial resources in one form or another. The taxable capacity of Namibia has not been fully explored: there is no domestic propertyowning class except for white settlers, while the huge foreign enterprises enjoy various tax concessions. A large chunk of Namibia’s GDP thus accrues to non-residents. In addition, the tax system contains major inequities, for example, married blacks with, say, two children, pay a much higher income tax rate than whites in similar circumstances. As of the early 1980s, a black earning R350 per month paid R7.20 per month whilst a married white with two children started paying tax only when earnings reached R530 per month, paying only 67 cents per month (The Star, 28.2.81). Quite clearly the present monetary and fiscal policies of occupied Namibia do not serve the development interests of the territory. The future government will need to restructure fiscal, financial and monetary instru¬ ments in order to bring about meaningful reconstruction and development after independence. The indications are that external resources may become necessary to cover balance of payments deficits due to the multitudinous socio-economic tasks of reconstruction which will require the urgent attention of the government of independent Namibia.

Policy alternatives for resource mobilisation in Namibia after independence The Fund and Bank are only two of the international institutions with which an independent Namibia will seek to co-operate in the task of mobilising internal and external resources for national economic and social recon¬ struction and development. The government of independent Namibia will be expected to restructure the fiscal and monetary systems to mobilise the resources necessary for reconstruction and development without plunging the country into a debt crisis. In the initial stages of the country’s economic development, it may well be necessary to supplement the country’s internal resources from external sources. These will take different forms, such as loans, direct foreign investment, grants, or technical assistance. The extent,

202

Case Studies

structure and other modalities for the mobilisation of external resources will, however, depend on a number of political, social and economic factors. External resources will come from foreign governments, private financial institutions and a range of international institutions such as the IMF, World Bank, Special United Nations Fund for Economic Develop¬ ment, the Africafi Development Bank (ADB), the Council for Mutual Economic Assistance (CMEA), and regional economic and intergovern¬ mental organisations.

Alternative policy proposals The following assumptions preface proposals for alternative policies on resource mobilisation for an independent Namibia: (1) While preferring to finance the task of reconstruction and development from its own resources, Namibia will be unable to do so as a result of colonial exploitation. Selective external resources will be required to supplement Namibia’s own resources; (2) External resources per se are not harmful. It is the recklessness of procurement, and their misuse and pernicious conditionality which can render them harmful impediments to development; (3) Cautious and effective management of resources and the dismantling of the colonial and apartheid legacy will produce structures in keeping with the aspirations of the Namibian people; (4) Strategies which produce disastrous indebtedness will be avoided. Factors inimical to rational external resources mobilisation will be avoided. These include loan financing of industrialisation, neglect of the agricultural sector, failure to diversify exports, debt-generating social reforms, ‘white elephant’ projects sometimes encouraged by donors, etc. Given the SWAPO Economic Reconstruction Programme for Namibia,^'* the above assumptions and the fact that the economy is at present mineralled and minerals are non-renewable resources, alternative policy proposals for resource mobilisation and utilisation are presented below: (1) Exploitation of mineral resources will take into account revenue requirements for the provision of social services arid a minimum basic human needs package for the population, as well as future financial requirements for development from the mines. Such a cautious approach to the exploitation of minerals has not been followed in several African countries, and completely abused up to now in Namibia where the activities of South Africa and the TNCs in the plunder of the mineral wealth of the country amount to grand larceny in contravention of the UN Council of Namibia Decree No.l for the protection of the territory’s natural resources; (2) Close integration of the mining sector with the fiscal system will be developed so that mineral rents will accrue to the Namibian people through the budget, rather than to individual TNCs. The government could therefore

Future Independent Namibia and the IMF—World Bank

203

exercise its option to participate in the mining sector through the fiscal and monetary system, rather than in day-to-day operations; it could also acquire representation at Board level and/or acquire a minority or majority shareholding in mining ventures. Care would have to be taken to ensure that TNCs and other investors do not use government’s financial participation to promote mining ventures which could be a fertile ground for dubious external loans that could plunge the country into a debt crisis; (3) The selective establishment of resource-based industries could be built around the domestic processing of mineral-related industries. It is generally true that mining companies are not much interested in establishing down¬ stream manufacturing operations. Therefore the government may have to devise a strategy for implementation. The availability of complementary inputs such as natural gas and hydroelectric power could be decisive considerations in this regard; (4) The use of foreign expertise in the mining industry will be carefully regulated to ensure that these imported skills do not become a burden on the foreign exchange earnings of the country. To avoid this, the government will need to formulate a manpower programme and agenda which would lead to the significant Namibianisation of the mining industry; (5) An incomes policy will be formulated which will take into considera¬ tion the possible distortionary effect of high mining wages in fuelling inflationary pressures in the economy. The perpetuating of colonial salary scales will be avoided; (6) The exchange rate policy will also have to be carefully formulated and the IMF could provide assistance in this area. The exchange rate regime to be chosen should seek to facilitate the diversification of production and exports so as to facilitate the transition to a dynamic post-mineral future. Likewise, the establishment of reserve funds for possible future debt service obligations should be mandatory. The experience of all primary-exporting countries has been that there can be erratic fluctuations in the prices and hence earnings from mineral exports. Therefore it will be essential to establish both a Revenue Stabilisation Fund (RSF) and a Reserve Fund for Debt Service (RFDS), and to build up these funds with revenue surpluses from minerals when the mineral prices are high, and draw upon them when prices fall; (7) The development of the agricultural sector will be a priority in the policy framework of independent Namibia. In this regard, the UN Institute for Namibia and the FAO have prepared studies and recommended strategies for agricultural development. In the early stages of independence, some emergency food aid may be needed but this will not be allowed to become an impediment to seeking food self-sufficiency and food security; (8) The creation of a data bank on all economic variables and indicators of economic performance will need to be given priority in independent Namibia. The rudiments of such a bank already exists at the UN Institute for Namibia in Lusaka and will be upgraded after independence. Likewise, the establishment of a Debt Management Unit (DMU) and formulation of

204

Case Studies

a Debt Management Policy to strengthen the operations of the DMU will be a prudent policy move. (9) South—South co-operation will be an important aspect of the inter¬ national relations of independent Namibia. The pre-independence solidarity which other LDCs have demonstrated in the support of the liberation struggle of the Namibian people will be translated into concrete economic relations.

Conclusion A future independent Namibia has the opportunity to benefit from the lessons of the costly external debt management errors of other independent African states, other LDCs and the industrialised world. Some of 'these errors were the products of the damage which colonialism inflicted on the natural resources and traditional value system, as well as the perpetuation of anachronistic colonial lifestyles. Others were imposed by major inter¬ national banks and investors seeking short-term profits and in the process leading these countries into a debt trap of immense proportions. Still other errors can be attributed to gross misuse of external resources in collusion with unscrupulous external debt brokers from the donor countries. Another disturbing lesson to be learnt is that oil-rich countries like Nigeria, mineral-rich countries like Zaire and Zambia as well as agriculturally rich countries like the Ivory Coast and Cameroon can suddenly find themselves in a debt trap. The creditor and debtor nations must share the blame for this. Loan agencies, investors and donors are not philanthropists, nor are loans and aid synonymous with charity and gifts. Donors and investors have their own interests to defend, and these interests do not normally coincide with those of the recipient countries. For instance, the IMF loan facility to the apartheid regime in South Africa at a time when that regime was escalating its unjust war in occupied Namibia, destabilising other independent countries in the region, and brutalising its own black citizens is a self-evident demonstration of the fact that in any negotiation for loans or aid, the financial and strategic interests of the lenders or donors come first. Independent Namibia must, therefore, aim at the efficient management of its natural resources with very low levels of external borrowing, no matter how attractive the concessional terms and conditions may be. The hidden costs of external loans and aid could be astronomical. Social and economic development based on a country’s own resources is the most desirable strategy and policy alternative to distance a country’s economy from the international debt trap.

Future Independent Namibia and the IMF—World Bank

205

Notes 1. For succinct analyses and articulation of the implieations of Namibia’s GDP see R.H. Green, Maija-Liisa Kiljnen and Kimmo Kiljnen (eds), Namibia: The Last Colony, London: Longman, 1981; and Namibia, Perspectives for National Reconstruction and Development, Lusaka: UN Institute for Namibia, 1986. 2. R.H. Green et al., ibid., pp.50—3. 3. Ibid., p.35. 4. Ibid., p.37. 5. UNIN studies in this regard include W.W. Asombang, Trade and Development: Some Policy Considerations for Independent Namibia, Lusaka: UNIN, 1985; W.W. Asombang and H.S. Aulakh, Economic Development Strategies for Independent Namibia, 1985; and Namibia: Perspectives for National Reconstruction and Development, Lusaka: UNIN, 1986. 6. W.H. Thomas, Economic Development in Namibia: Towards Acceptable Development Strategies for Independent Namibia, Germany: Kaiser-Griimewald, 1978, p.33. 7. W.W. Asombang, ‘Export marketing strategies for economic development in Namibia’, Washington, DC: SADEX, vol.2, Nov./Dec. 1980, pp.4—7. 8. Namibia: Perspectives for National Reconstruction and Development, op.cit., pp.493—95. 9. Lueia Hamutenya, Public Finance, Monetary System and Financial Institutions, New York: Office of the Commissioner for Namibia, June 1985, mimeo, pp.2—4. 10. W.W. Asombang and H.S. Aulakh, Economic Development Strategies for Independent Namibia, Lusaka: UNIN, 1985, p.l43. 11. Africa South of Sahara 1986, London: Europa Publications, 1986, p.699. 12. Details in Faet Paper on Southern Africa No. 10, Apartheid’s Army in Namibia: South Africa’s Illegal Military Occupation, London: International Defence and Aid Fund, 1982. 13. Peter Korner, The IMF and the Debt Crisis, London: Zed Books, 1986, pp.26-39. 14. South West Africa People’s Organisation, Political Programme, Lusaka: SWAPO, 1976, pp. 11-14.

15. Structural Adjustment: The Case of West Africa R.S. Olusegun Wallace The West African sub-region consists of 16 heterogeneous countries whose pattern of economic decline and approaches to national economic recovery are similar. The countries of the sub-region can be classified and re-classified into different groups for the purpose of analysis. Eleven of these countries are among the 27 African countries currently described internationally as ‘least developed’. Two (Ivory Coast (20 per cent) and Nigeria (60 per cent)) which account for over 80 per cent of the external debts of this sub-region, are among the most highly indebted countries of the world. Many of the factors which account for the varying levels of development in the sub-region relate to their differences. For example, it is possible to hypothesise that economic performance in this sub-region is a function of the climatic environment and, as a result, divide the sub-region into two groups: Sahel (Burkina Faso, Cape Verde, The Gambia, Guinea-Bissau, Mali, Mauritania, Niger and Senegal) and non-Sahel (Benin, Ivory Coast, Ghana, Guinea, Liberia, Nigeria, Sierra Leone and Togo) for the purpose of testing the hypothesis. It is also possible to argue that economic performance in the sub-region is a function of colonial antecedent: that the former French colonies outperform the former British colonies or vice versa. Another geographical criterion is whether a country is totally landlocked or has easy access to international waters. Landlocked are Burkino Faso, Mali and Niger; coastal countries are Benin, Ivory Coast, Ghana, The Gambia, Guinea, Guinea-Bissau, Liberia, Nigeria, Sierra Leone and Togo. Cape Verde, of course, is an island cut off from the mainland. Some are small micro-states with less than two million inhabitants (Cape Verde, The Gambia, Guinea-Bissau and Mauritania); four have GDP per capita above US $450 (Cape Verde, Ivory Coast, Liberia and Nigeria) while three are rich in minerals (Nigeria has crude oil, Mauritania and Liberia have iron ore). Despite these differences, significant similarities can be discerned in the national approaches and policy thrusts for economic recovery. These similarities in experience and exposure to economic problems, and in salient characteristics and features of structural adjustment programmes, provide the basis for a composite analysis of the sub-region. The paper does, however, use specific country examples to enhance the understanding of the efforts at structural transformation and to bring out the homogeneity in the sub-region’s quest for economic progress.

The creation of structural imbalances External factors A number of old and new, external and internal factors account for the poor

Structural Adjustment: The Case of West Africa

207

economic performance of the sub-region. The process of structural adjustment can be regarded as an attempt to correct the structural imbalances created during the colonial period. Historically, these structural imbalances were created by Britain and France which extracted raw materials from the colonies to foster their industrial revolutions and their quest to remain the workshops of the world. Industrialisation in West Africa has mainly been a post-independence activity and a pandering to the desire to produce locally the industrial products to which the people of this region had become accustomed during the colonial period. Factories were created to turn out previously imported products, resulting in a policy which substituted imported finished products for imported raw materials jmd for bundled foreign direct investments (FDI) comprising financial capital, embodied technology, management and access to raw materials. This meant that a consumer goods producer in France and Britain, previously supplying about 50 per cent of the entire West African market, had to undertake direct foreign investment in each West African country (in response to the pervasive demand for in-^ dustrialisation) to build smaller-scale replica factories to produce consumer products which could only be produced profitably if advantage was taken of the economies of large-scale production. The small-scale factories were cost ineffective. Locally produced consumer goods were more expensive than similar imported goods. To ensure the economic survival of these import-substituting factories, it was necessary in the 1950s and 1960s to adopt fiscal policies that made imported goods more expensive or more difficult to acquire. The import-substituting strategies used in this period tended to inhibit manufactured exports and to create long-term balance of payments imbalances. ^ The emphasis in the sub-region was not to increase the ratio of industrial output (and exports) to industrial imports. It was to increase the ratio of domestic production of consumer goods to imported consumer goods. A major change in industrial strategy, which will concentrate import substitution in the sub-region on capital inputs rather than final consumer products, was (and still is) needed. Other external factors which accelerated the decline of the sub-region included (1) the collapse of export — commodity and mineral (including crude oil) — prices; (2) adverse terms of trade which were aggravated by the economic slowdown in the OECD region as a whole; (3) stagnation and decline in official development assistance (ODA) in real terms; (4) aggressive soft lending by private transnational banks due to the growth in loanable funds in offshore financial markets during the 1970s and the unprecedented higher global inflation and interest rates since 1982; (5) the heavy burden of external debts and debt-servicing obligations; (6) a shift in the world monetary system to a regime of sharp fluctuations in exchange rates and the reluctance of the countries of the sub-region to move away from the Bretton Woods system of fixed exchange rates; and (7) increased protectionism in advanced industrialised countries of their consumption of raw materials from developing countries per unit of final product.

208

Case Studies

Although the fall in oil prices alleviated the debt-servicing difficulties of the rest of the sub-region, it worsened that of oil-exporting Nigeria. The historical antecedents of West African countries and the simul¬ taneous interplay of these exogenous factors contributed to the structural imbalances and poor economic performance of this sub-region. But these factors were not* the only explanatory factors. Many other developing countries in other parts of Africa and the rest of the world with similar antecedents and exposed to similar international factors have performed better than the countries of West Africa. It is therefore necessary that explanations for the poor economic performance of the sub-region also be sought from within it.^

Internal factors Possible explanatory internal factors include (1) political instability and civil strife, partly due to a poor regard for democratic principles and the replacement of democratic elections by military coups as a means of installing national leaders/rulers; (2) the weakening of the power of certain traditional elites often antagonistic to modernisation and the concomitant consolidation of local power in new economic elites lacking experience, often corrupt or with mistaken ideas about how economies work; (3) high rates of population growth and large migrations from the rural areas aggravating the unemployment situation; (4) poor economic management and inappropriate economic strategies and policies which tended to perpetuate obsolete (colonial) economic systems; (5) the persistence of social values, attitudes and practices not always conducive to development; (6) the development of urban markets for consumer goods, industrial inputs (including technology and the infrastructure required to support the growth of both private and public sectors) and (7) the spread of ‘Western’ patterns of behaviour such as the transplantation of foreign techniques of business organisation and management, styles of negotiation and consumption patterns. Some, if not all, of these factors are reflected in the aggressive, nationalistic rhetoric employed by local elites vis-a-vis their counterparts in industrialised countries; this may also explain the inter¬ ventionist role of the governments of this sub-region and, indeed, may have contributed to the changes in their policies. Another important internal factor has been the frequent changes in the regulation of foreign investments. Although these regulations vary in scope and emphasis, they include the formation of government boards to screen and register foreign investments; the imposition of local-content and export-performance requirements; limitation of profit remittances abroad; the demarcation of sectors or industries where foreign investment was forbidden or restricted; the control of foreign takeovers of local firms and the restriction of foreign equity to minority positions. Many of these policies were inspired by emotive rather than economic reasons in a period marked by considerable political instability, rising nationalism, and some anti-TNC rhetoric arising from the North—South dialogue of the 1970s.

Structural Adjustment: The Case of West Africa

209

These conditions tended to worsen the investment climate of the sub-region for foreign capital and helped to alienate the international business community which was essential for the very economic development which the plethora of government regulations sought to promote.

Vehicles of economic transformation It is essential to identify two other vehicles of economic transformation which must complement structural adjustment — stabilisation and economic growth strategy. Both structural adjustment and stabilisation are aspects of the economic growth strategy. Stabilisation addresses urgent short-term problems: inflation, loss of foreign exchange reserves, capital flight, and large current account deficits. Structural adjustment addresses obstacles to longer-term growth: distortions in the incentives for production (for example, overvalued real exchange rates); controls on prices, interest rates, and credit; burdensome tariffs and import restrictions; and excessive taxes and subsidies. But both must be undertaken together.^ Structural adjustment is not only concerned with the improvement of the productivity of the existing stock of capital, land and labour but also with the adjustment of social and economic institutional arrangements which necessarily affect the performance of the economy. This requires keeping the fiscal deficit to a low fraction of GNP, guarding against rapid monetary expansion, and maintaining a realistic exchange rate. All three elements of this policy mix are necessary for economic growth. Mere reUance on monetary pohcy in the presence of large budget deficits and overvalued exchange rates, for example, will raise interest rates and deter investment. Similarly, reUance on trade and exchange controls will distort prices ( World Development Report, 1987, p.24).

There are two ways of understanding the basis for structural adjustments: in one, a country may believe that its extant economic system is well structured but badly managed and so needs measures which would remove the mismanagement. This is described in this paper as the base case. Ivory Coast and Senegal are countries whose economic orientation before and after structural adjustment has remained unchanged. In the other, described as the policy case, the extant economic system has so many structural imbalances that only a total policy reform would set the country on a path to economic progress. In the policy case, the aim is to reform policies and build new infrastructures. For example, Guinea, Ghana and Mali need drastic measures to alter their long-standing socialist economic orientation. This implies the development of a package of micro- and macro-based policies that aims at stabilising the economy to respond to the current financial crisis while avoiding over-deflation of the economy. At the same time, however, it sets in motion the overdue structural adjustment process by increasing incentives for the commodity-producing sectors, particularly agriculture and industry. Emphasis is on a consistent set of macro-economic policies involving some expenditure reductions, reduced

210

Case Studies

government domestic borrowing, monetary restraints, increased external borrowing, and a reformed foreign-trade regime including a flexible approach to exchange-rate policy. In contrast, the base case implies the adoption of macro-economic policies corresponding to a short-run crisis management approach. This would involve some expenditure reductions, relatively high government domestic borrowing, relatively low external borrowing, and a primary and increased reliance on administrative controls over foreign trade and capital flows, rather than a flexible rate policy. West Africa’s economic development objectives would seem to be better served by a macro-economic package designed along the lines of the policy case rather than one designed along the lines of the base case. The policy approach leads to higher growth, lower inflation, higher imports and higher capital expenditures. This is achieved by a greater recourse to external borrowing, by a modification of incentives towards the directly productive export or import-substituting sectors, and by more prudent macro-economic management. In comparing the two scenarios attention has to be focused not so much on the details, as on the broad differences between the approaches they typify. While the policy case aims at stabilising the economy and using foreign borrowing as an instrument in this effort, the base case largely foregoes foreign borrowing and offsets this by depressing the level of economic activity further than seems warranted. In addition, in contrast to the base case, the poUcy case modifies economic incentives to begin the process of adjusting the structure of the economy in the light of comparative advantage — a step that is an inevitable part of the development strategy of economies that depend on cash crops and oil, and is better undertaken sooner than later. Whatever the approach, the role of the public sector in this process is vital. Governments in this sub-region seem to believe that it is their role to promote economic growth and in this process they tend to spend more money than they can raise from taxes, investment returns and grants. However, stabilisation is another way of saying that a government, like an individual, must learn to live within its means. Public deficits can be financed either by borrowing (internal or external) or by printing money. If a country seeks to finance its deficit by printing more money than is necessary, inflation will follow. Easy access to hard currencies slows the process of adjustment since it enables current spending to be maintained. The oppor¬ tunity cost of complete adjustment is the sacrifice of current spending and living standards whilst the opportunity cost of financing is the sacrifice of future expenditure and living standards (in the form of interest foregone on external reserves spent and interest on loans). There is therefore a trade-off between adjustment and financing.

Structural adjustment experiences Individual country efforts While it is possible to view the economic changes in each country since independence as part of the structural efforts, this section places emphasis

Structural Adjustment: The Case of West Africa

211

on recent attempts at improving the performance of the various economies. Recent structural adjustments introduced at the national levels include: (1) nationally conceived programmes, in the case of Liberia and Nigeria and (2) those undertaken with the support of, agreement and collaboration of the IMF, the World Bank and the international donor community. Because many of the countries have had to seek debt-relief arrangements with their major creditors in order to be able to pursue any recovery programmes at all, they have had very little flexibility or independence in designing and undertaking adjustment programmes on their own, in view of the insistence by many commercial £md even bilateral credit sources on IMF packages as a precondition to a debt rescheduling agreement.'* The structural adjustment programmes adopted in West Africa in the 1980s have generally followed the base approach and focused on demand management through austerity-centred budgetary programmes and reforms, a general strategy of fiscal and monetary stabilisation, and a reluctant exchange rate depreciation. West African countries could only choose the base case because none of them had any meaningful scope for borrowing at the time they commenced their structural adjustment programmes.^ Development indicators show that each country has borrowed more than 25 per cent of its GDP and that many had a debt service ratio of over 20 per cent of export earnings. The range of domestic measures undertaken in conjunction with structural adjustment programmes has been far-reaching and at times drastic, covering: (1) outright currency devaluations or the establishment of foreign exchange auction markets governed by either demand and supply (in the case of Ghana and the Gambia) or a mixture of market and administrative forces (in the case of Nigeria and Sierra Leone); (2) a reduction in price subsidies and price control; (3) reduction in government recurrent and development expenditure; and (4) attempts, in all cases, at the commercialisation and/or privatisation of state-owned enterprises (SOEs). Almost every country needed to curtail its excessive public sector expenditure by constraining increases in wages and salaries and, in some cases, reducing them absolutely and reducing the number of public sector employees. In many cases, the attempt has been to make the average national producer of commodities competitive with his or her international counterpart. The implementation of many of these measures in concert by any country is bound to involve a great social cost because they lower the standard of living of the people which invariably exposes the government of the day to considerable political risks. Riots which followed the announcement of the reduction of the petroleum subsidy in Nigeria exposed the sensitivity of the issues involved and the doggedness with which the government has had to pursue these policies. Two illustrations of structural adjustment efforts (i.e., removal of fiscal deficit and exchange rate adjustment) will highlight the different approaches and problems in the sub-region. On the question of fiscal deficit, one can consider the case of Nigeria and Guinea-Bissau. In Nigeria, the government spent about 10 per cent of GDP more than it earned in

212

Case Studies

revenue: because its fiscal deficit was respectively 7.4 per cent and 9.6 per cent of GDP in 1982 and 1983. The deficit was financed by printing money and so inflation accelerated from 13 per cent in 1981 to 40 per cent in 1983. In Guinea-Bissau, fiscal deficits of higher magnitudes were experienced — 39 per cent and 47 per cent of GDP respectively in 1983 and 1984. Guinea-Bissau, however, received some official development assistance (ODA) and so did not finance its deficit solely by printing money. But the amount of paper money printed was large enough to produce an inflation figure of 45 per cent and 60 per cent in 1984 and 1985 respectively. The lesson to be learned from these is that financing of fiscal deficits by money creation leads to unacceptably high rates of inflation. The alternative is to cut government spending to a more suitable level and/or resort to more borrowing from the non-bank sector. The effect of the rapid inflation in Nigeria remained hidden from the citizens for long time because the government chose to protect the naira by not adjusting its exchange rate. When domestic inflation increased, relative to the international rate of inflation, the cost of producing goods in Nigeria increased relative to that in neighbouring and competitor countries and the effective exchange rate increased. For example, from a base of 100 in 1980, the index of effective exchange rate rose to 188 by 1984; so that Nigeria became less competitive internationally. Foreign exchange was allocated and the official exchange rate was fixed, out of line with the free market rate: the parallel (black) market was exchanging three naira for one dollar whilst the official market was exchanging less than one naira for one dollar. The Nigerian case is an extreme example of what pervades the sub-region. All countries have, to some degree, a high domestic rate of inflation compared to the international rate and so their competitiveness is affected. Because the goods are for final domestic consumption, high tariffs and import bans are imposed to protect local industries; so that these countries harbour many inefficient, high-cost firms whose resources could have been better used in other areas. Exports and potential exportables are also affected. The cost of producing them increased in these countries just as their prices fell in the world market. Government revenue from their exports fell; governments (of Ghana, Guinea, Liberia, Mali, Nigeria and Sierra Leone) were forced to withdraw the subsidy to farmers and the export sector shrank. So it was imperative that these countries move away from a fixed to a floating exchange rate to ensure internal consistency. The World Development Report 1988 used the experiences of Ghana and Sierra Leone to argue that the flotation of exchange rate must be accom¬ panied by fiscal reform. The Nigerian experience Although the Nigerian structural adjustment programme is meant to save the country from imminent external bankruptcy, it is not designed to please any external monetary organisation, but to address the most fundamental problems facing the country since 1981. The two-year programme was

Structural Adjustment: The Case of West Africa

213

launched in July 1986 with the objective of improving resource allocation and public sector efficiency, macroeconomic management and domestic production. The measures adopted in different but gradual phases included: (1) the liberahsation of external trade and payments system — this led to the cancellation of the import licensing system; (2) the introduction of a flexible exchange system — this was brought about by the introduction of a two-tier foreign exchange market;® (3) rescheduling and refinancing of the country’s external debts; (4) creation of a conducive atmosphere for economic growth including (i) the deregulation of the investment strategies of commercial and merchant banks to enable them to invest in the equities and other securities of industrial enterprises and (ii) the conversion of some external debts into equity holdings under debt conversion and swap schemes; (5) the unloading of the government’s burden in respect of state-owned enterprises by privatising or com¬ mercialising them; (6) the introduction of incentives to promote productivity growth and increased production of food and agriculture; and (7) the improvement of public sector efficiency.’ Concerted efforts The coimtries of West Africa have also benefited from both Africa’s Priority (1986—90) Programme for Economic Recovery (APPER) and the United Nations’ (1986—90) Programme of Action for Africa’s Economic Recovery and Development. APPER (adopted by the African Heads of State and Government in Addis Ababa in July 1985) suggested four priorities for African countries in pursuit of their economic recovery programmes. These were, in descending order of priority: (1) the development of food and agriculture and the rehabilitation of the rural sector; (2) promotion of other sectors supportive of agricultural transformation such as the development of agro-allied industries, the development of transport and communication, trade and finance; (3) combating drought and desertification and (4) the development of human resources. All countries in the sub-region have embraced the priorities enunciated in APPER and UN-PAAERD. As a result, the great majority have now devoted 25 per cent or more of their capital budget allocations to food and agriculture. Many have begun to create and maintain national emergency preparedness mechanisms to cope with future food emergencies and some have instituted effective early warning systems. There are, more than ever before, greater incentives for agricultural production. Burkina Faso, Niger and Nigeria have started to develop a national population policy to reduce growth. Mali, Benin and Burkina Faso have started such pilot projects to combat desertification as afforestation and the development of multi¬ purpose integrated-function villages. The attempt to turn the economy of the sub-region around is not solely an individual country’s affair. There have also been collective sub-regional efforts. The Council of Ministers of Economic Community of West African

214

Case Studies

States (ECOWAS) adopted (in November 1986) a short-term Recovery Programme which focused attention on what they considered to be crucial. The objective of this two-phase programme has been to give new and additional meaning and impetus to on-going recovery programmes and reforms in the nipmber states and to reinforce the priorities identified by APPER and UN-PAAERD. Phase one of the ECOWAS programme sought to tackle the acute food situation and declining agricultural production in general, the control of drought and desertification, water resource develop¬ ment and management, the rehabilitation of infrastructural facilities and productive capacity. It also paid attention to policy reforms to improve economic management as a whole and public sector performance in particular, the development of sound fiscal and monetary policies to curb inflation and eliminate domestic price distortions, to correct the over¬ valuation of weak national currencies, to improve the balance of payments position and to curb the increasing indebtedness of the sub-region. In July 1987, phase two of the programme was announced, a mediumterm Recovery Programme to identify projects in many areas of economic and social life for joint promotion by the countries of the sub-region: 136 projects have since been targeted at an estimated cost of US $296 million over the next three years. Forty of these are international co-operative projects like the combating of drought and desertification, and the development of transportation and communication links between member states. The remaining 96 are drawn from national programmes with potential for spill-over benefits to neighbouring states.

Effect of policy reforms and future prospects Indicators for the period 1980—82 (when many African countries started embarking on various strategies of structural adjustment) and 1987 allow a comparison of those countries which have adopted strong programmes and those with weak programmes, or no programme at all. It is then possible to determine whether the adoption of structural programmes has had any effect. In West Africa, the seven countries which have followed more rigorous structural adjustment programmes are Ivory Coast, Ghana, Liberia, Nigeria, Senegal, Sierra Leone and Togo. Using the criteria adopted by the World Bank to analyse the effects of policy reforms in sub-Saharan Africa, six main indicators were constructed. Table 15.1 provides evidence that structural adjustment programmes are conducive to growth. Judging by these indicators. West African countries with strong structural adjustment programmes seem to have performed better than those with weak or no adjustment programmes. With the exception of exchange rate performance, the countries in the sub-region with adjustment programmes seem to-have done better than their counterparts in the rest of sub-Saharan Africa.

Structural Adjustment: The Case of West Africa

215

Table 15.1

Impact of policy reforms in sub-Saharan and West Africa Indicator

Fiscal deficit (percentage of GDP) Real effective exchange rate (1980-82= 100) Inflation (annual percentage) Agricultural incentives: Export crop prices (real 1980-82 = 100) Food crop prices (real 1980-82 = 100) Growth (annual percentage)

Period

1980-82 1987

Countries with strong reform programmes Sub-Saharan West Africa^ Africa 8.2 7.9 5.2 3.6

Countries with weak or no reform programmes Sub-Saharan West Africa Africa® 6.7 7.4 7.2 8.1

1987 1980-82 1987

69 19 15

94 17 14

79 16 38

124 14 42

1986/87

153

172'’

114

124'’

1986/87 1980-82 1987

122 1.0 4.0

98'’ 1.5 2.8

94 1.0 1.2

88'’ 1.5 0.6

Notes: Averages are unweighted. a = Figures from World Development Report 1988, p.28; b = Figures from ECOWAS data for 1987 All other data were computed from World Bank’s Finaneing Adjustment with Growth in Sub-Saharan Aftiea 1986—1990.

Exchange rate adjustment is a common feature in the former British colonies. The experience of francophone West African countries and Liberia is that balance of payments difficulties are not as pronounced as in anglophone countries. This is probably connected with the historical link of the CFA franc with the French franc and the link of the Liberian dollar with the US dollar so that these local currencies are more easily convertible than the local currencies of the Gambia, Ghana, Nigeria and Sierra Leone. Because of the convertibility characteristic, devaluation as an instrument for structural adjustment has not been found relevant in the francophone countries.

Future prospects The national economies of the sub-region continue in the doldrums despite the attempts to reform them. In a few countries, such as Ghana, living standards have begun to show an improvement, but massive unemployment of human resources, extensive under-utilisation of productive capacities or mis-allocation of scarce resources, chronic balance of payments disequilibria, high inflation rates and high debt burdens are still rampant everywhere. For many countries, the experience has been one of spasmodic decline, as a result of their ‘stop and go’ policies — incomplete structural adjustment brings about a brief improvement only to be followed by a more than compensatory prolonged decline. Sustained recovery and significant improvement in economic performance and living standards of the people

216

Case Studies

have remained as elusive as ever. The GDP of West Africa increased marginally in 1987 by 0.6 per cent after a continuous decline since 1980. If the sub-region is disaggregated into Sahel and non-Sahel groups, a more interesting picture emerges. The Sahel had negative growth rates of 5.1 per cent in 1983/84 but achieved remarkable growt]& rates of 7.4 per cent, 4.9 per cent and 4.4 per cent respectively in 1985, 1986 and 1987. The non-Sahel group had negative growth rates in each year since 1981 except in 1984 when it had a positive growth rate of 4.4 per cent. The growth rates in 1986 and 1987 were —3.9 per cent and —0.7 per cent respectively. It is clear that unfavourable weather conditions are factors in the performance of the region. When the drought which almost completely ravaged the Sahel and the upper parts of non-Sahel subsided, growth rates in the Sahel turned positive but remained negative in the non-Sahel. The international economic environment has an important role to play in the economic recovery of developing countries. The coDapse of commodity prices, the debt burden, the reluctance of creditor countries to extend more credit, and the fall, in real terms, in Official Development Assistance (ODA) have made economic recovery difficult, if not impossible. Economic recovery programmes can only be successfully implemented if affected countries are endowed with adequate foreign resources. All the countries of the sub-region have difficulties in obtaining these. Liberia, Mauritania, Niger and Togo have been officially classified by the World Bank as debt-distressed. Many have had to approach the World Bank and credit bank clubs in Paris and Rome several times within a short span (of say one year) for rescheduling. However, the situation, which is desperate and not very different from what obtains in bankruptcy proceedings, is not likely to abate in the immediate future. The flow of FDI, ODA, credit and loanable funds (from the World Bank, development agencies and transnational banks which are now selling their past loans to developing countries at a loss) to West Africa may not increase for some time. This is because two newer markets are emerging on the international scene as they seek to improve their economic performance. The first is China with its huge controlled economy and good creditworthiness. The second is the huge and attractive Soviet Union with its glasnost and perestroika. Yet, West African countries need foreign capital to undertake the growth which is necessary for transforming their economies. It is important that growth-oriented programmes should incorporate structural adjustment and that the settlement of existing debts should be tied to increased output from existing programmes. The decision of the govern¬ ments of industrialised countries to cancel some of the debts of those developing countries with per capita incomes of less than US $500 annually* is a welcome relief. Economic recovery cannot be separated from the requirement of long¬ term development and structural change. For example, one cannot meaningfully organise a recovery programme for existing industries without

Structural Adjustment: The Case of West Africa

217

first deciding whether such industries, as presently structured, are appropriate in the context of long-term development strategies — particularly in terms of comparative advantage, of the raw materials they use, the consumption patterns which they support, and the extent of their dependence on imported factor inputs and services. The implication is clear. It is necessary to situate recovery programmes in the context of perspectives for long-term development and to ensure that the objectives of short- and medium-adjustment programmes are rooted very firmly in, and are made more compatible with, those of long-term growth and development. There is also a need for West African governments to continue to pursue the unfinished agenda of reforms and the process of recovery and development already initiated. It must, however, be ensured that stabilis¬ ation and structural adjustment programmes are consistent with the requirements for economic recovery and growth. This further implies that these governments should continue to recognise the need to minimise the adverse social impact of their structural adjustment measures and to take into account the human dimension of adjustment by ensuring that cuts in budgets do not adversely affect the poorest sections of their populations.

Notes 1. A prominent Nigerian industrialist warned against the ill effects of cutting off one’s nose to spite one’s face. He suggested that one should remember that there is a time for everything. Import substitution commended itself to the sub-region yesterday. Having served its purpose of introducing the sub-region to industrialisation, every effort is being made to discard it for its negative impact on the economy. Again, the people of this sub-region complained about being the exporters of raw materials to service foreign factories. Today, they decry being importers of raw materials for their own factories. Times really do change and the effect can be devastating, particularly when fundamental factors regulating human conduct and the relationships between nations are ignored. (Gamaliel Onosode in an unpublished paper on ‘Sound strategies and programme for economic survival’). 2. The same point was made in World Bank’s 1981 Accelerated Development in Sub-Saharan Africa where it was argued that domestic policy deficiencies (over-valued exchange rates, excessive subsidies and over-extended and inefficient public sectors) were the main causes of stagnation. For criticism of this viewpoint see the papers in John Ravehill (ed.), Africa in Economic Crisis, New York, 1986. 3. For more on the comparative differences and the need to operate the two policies together see World Development Report 1988, pp.59—61. 4. It should not be assumed that the insistence of international financial institutions that a country needs to structurally adjust before additional loans and credit are granted is the only explanation for the recent determination of

218

Case Studies

governments of this sub-region to embark on structural adjustments. The alternative to structural adjustment in the absence of hard currencies is an accelerated disintegration of the official economy and government apparatus. All reasonable governments should have an interest in preventing the complete disintegration of their economies. The old order has to change. West Attcan states are now awhre, more than ever before, of the need to be competitive internationally in terms of GNP and access to hard currencies. Governments of these countries have been taken over by a new breed of military men who are more concerned with making their economies strong and competitive within the sub-region and internationally. 5. Graham Bird argued in his International Monetary System and the Less Developed Countries (Macmillan, 1978) that LDCs have, in fact, often tended to come up against an availability constraint on financing and have therefore been precluded from using that combination of adjustment and financing yvhich they would have chosen had no such constraint existed. When this financing constraint has been effective, LDCs have been forced to make greater use of adjustment and less use of financing than they would have preferred (p.ll9). 6. This was introduced in July 1986 as one of the first steps in the Structural Adjustment Programme. The first tier, based on the official exchange rate, was reserved for approved debt service obligations and international contributions and public sector requirements which do not fall into the second tier; the second tier relates to some public and all private sector expenditure on foreign goods and services. The two tiers were merged in July 1987. In January 1988, an official black market (known as autonomous market) was sanctioned and its naira price to the dollar was settled at N6.50, about 20 kobo more than what obtained in the illegal (black) market. It should be remembered that the Nigerian currency, like that of the other countries of the sub-region, is a non-convertible one and its value depends on the ability of the government to acquire enough hard currency to back up its non-convertible status. In effect, there are now three foreign exchange markets in Nigeria: the official foreign exchange market (FEM), the autonomous market and the black market. FEM sells government’s foreign exchange earnings to banks that should only sell their purchases from this market to customers with documents which are acceptable to the Central Bank of Nigeria. The autonomous market sells foreign exchange earnings of the private sector and purchasers can use their purchases for any purpose. The government is presently thinking of issuing regulatory and supervisory measures for streamlining the three markets. 7. The government of Nigeria recently announced that, although the appointed time for the reforms has elapsed and the major reforms have been completed, the structural adjustment programme would continue because the instituted economic reforms would neither be cancelled nor reversed. In addition, the government is yet to implement its privatisation programme and the com¬ mercialisation of state-owned enterprises. It hopes to reduce further its current budget deficit as well as to implement the scheme for the swapping and conversion of the country’s external debt to domestic debt. 8. This excludes Ivory Coast and Nigeria. However, Nigeria is arguing that it qualifies under this classification because the population figure which the World Bank used to compute its GDP per capita is disputed.

16. Impact of IMF—World Bank Programmes on Nigeria Adebayo Olukoshi The present crisis in Africa’s economies started in the early 1970s as part of the global capitahst depression that accompanied the collapse of the Bretton Woods System. It has continued unabated into the 1980s, with adverse consequences for the basic living and working conditions of the vast majority of Africans. The sheer magnitude of human misery which has been witnessed on the continent since the crisis began has probably not been paralleled anywhere else on earth in the second half of the twentieth century. At its most dramatic, the crisis has been captured by the faces of hundreds of thousands of starving Africans of all ages on television screens across the world. This sense of ruin and decay that pervades many African countries today has been aggravated by the ruthless repressiveness of many regimes on the continent. Much has been written on the causes, dimensions and consequences of the African crisis and many solutions from different and often conflicting political perspectives have been preferred.^ One is contained in the Structural Adjustment Programme (SAP) of the International Monetary Fund (IMF) and the World Bank. The SAP emerged in the early 1970s and reflects the strong influence of the Chicago school of monetarism, an ideological counterpoint to Keynesianism.^ The Fund and Bank strategy gained initial acceptability among African governments and by 1987 it was reckoned that about 28 countries were implementing some form of structural adjustment programme. In Ghana, the strategy is called the Economic Recovery Programme while in the Cameroon it is officially dubbed Le Rigeur. This paper is a contribution to the radical critique of these programmes by focusing on their impact on Nigeria to illustrate their effects on the existential conditions of the African working class. The choice of Nigeria for special focus is justified in part because, as World Bank officials are often at pains to stress, the country is currently implementing the most comprehensive structural adjustment programme of any Third World state.

The nature of the African crisis The crisis in Africa, with all its complexities, has most of the solutions of conventional economists. surround its nature. It is therefore necessary to background that challenges some of the popular fallacies that surround the causes, manifestations African crisis.^ It is my view that:

defied the diagnosis and As a result, many myths begin with a theoretical myths and dismisses the and consequences of the

220

Case Studies

1. The crisis in Africa is an integral part of the present global capitalist crisis dating from the early 1970s. This is because, since their incorporation into the world capitalist system at the close of the nineteenth century, African countries have been part of an increasingly close-knit world system dominated by transnational production, commercial and banking groups. Given that a generalised crisis, encompassing the entire global bourgeois order, only started with the world-wide development of capitalism, especially at its monopoly stage, it follows that African countries would inevitably be affected by the general crisis. Such generalised crises are refracted into African economies that are structurally tied to international capital. The crisis of the 1970s marked the third generalised capitalist crisis, the first being between the 1850s and 1890s, and the second the ‘Great Crash’ of 1929—33; 2. Because of the heavy concentration of transnational corporations (TNCs) in the advanced capitalist countries, with the United States accounting for some 45 per cent of foreign direct investments, while the eight most advanced countries of Western Europe as well as Japan and Canada contribute 52 per cent, it follows that these countries play the biggest role in the development of the international capitalist system. One implication is that only those countries whose corporations dominate the world economy can induce a generalised crisis in the system. The TNCs of the advanced capitaUst states not only dominate the world economy in general, but also account for a substantial proportion of the industrial and agricultural requirements of Africa and other Tliird World states, especially in terms of raw materials, spare parts and machinery. A generalised depression in the core capitalist countries will, therefore, affect the African countries that are structurally tied to them; 3. Although the African crisis is part of a general capitalist crisis, it has a specificity which derives from the fact that African economies are not just simple captives of the global capitalist order, but are active participants in its development. The way in which local and international capital are articulated in each African economy, and the balance of opposing class forces in each African formation, lend a particular character to the manifestations of the generalised crisis in each country; 4. Furthermore, because the activities of TNCs have been woven into the fabric of the domestic activities of indigenous and state capital, the articulation of a generalised crisis in African countries is not solely an external issue. While the activities of foreign, indigenous and state capital in Africa transmit a generalised global crisis, they also provide the basis for the generation of the contradictions and crisis of capitalist development within African economies; 5. In its nature, the current African crisis is structural, periodic and conjunctural. Its structural nature derives from the primary contradiction faced by all capitalist systems, namely, the social nature of production and the private appropriation of surplus value through the exploitation of v/age labour. Arising from the structural contradiction is the periodic aspect of

Impact of IMF—World Bank Programmes on Nigeria

221

the crisis which occurs in fairly regular cycles. It is only when we grasp the periodic nature of the crisis that we will be able to understand its general tendency towards recurrence. As the current world capitalist crisis has been accompanied by a major restructuring of accumulation on a global scale, it has also taken on a conjunctural nature. Hence the African crisis is neither a predominantly short-run nor an ecological (drought) affair; 6. Depending on their degree of integration into the orbit of international finance, the level of development of their productive forces and the balance of power among competing domestic class forces, a generalised crisis affects the constituent parts of the world economy unequally. In general, the advanced capitalist states, because of their position as the centres of international capital, enjoy a greater shock-absorbing capacity than the peripheral Third World countries that are used as buffers to cushion crises in the core capitalist states; 7. Just as the impact of the crisis has been uneven among nations, so also has it been unequal within nations. Within specific African countries, some regions have suffered more than others while, sectorally, certain economic activities have been more badly affected than others — a result of the uneven character of capitalist penetration and development on the conti¬ nent. Nor has the crisis been equal in its impact on the peoples of Africa. Different communities and classes have had to pay different prices as capital accumulation is restructured on a world scale. While, for a tiny minority, even in the worst affected countries, there have been oppor¬ tunities for personal enrichment, for a majority of Africans, workers, peasants, women and children, things have never been so bad. Against this background, the Structural Adjustment Programme is not a neutral strategy for recovery, but one that bears a specific class character, geared to advance the minority interests of local and foreign capital at the expense of the poor majority. Once the Bretton Woods monetary arrangement collapsed in the early 1970s and the crisis took hold in the core capitalist countries, it quickly spread to the rest of the capitalist world. In the case of Africa, the crisis led to the elimination of markets for the continent’s export commodities, dried up sources of foreign exchange and so forced cuts in imports which, in turn, undermined the supply of inputs into manufacturing and agricultural projects, and thus reduced local production levels. These developments made it difficult for African countries to repay international debts, put at over $200 billion.

Origins and dimensions of the Nigerian crisis 1982—87'' Nigeria’s integration into the world capitalist system through the institution of colonial rule helped to subject its economy to the bourgeois system of development and crisis. When the current generalised depression started in the early 1970s, the Nigerian economy, unlike other African economies.

222

Case Studies

was initially insulated from it. This was because, while the OPEC oil price increase of 1973 exacerbated the crisis in most African states, Nigeria benefited as an oil exporter. The country’s oil revenues underwent exponential growth from a few hundred million naira to N4.733 billion in 1975, NIO billion in 1979 and N 15.234 billion in 1980. Such huge earnings guarant&d Nigeria a respectable balance of payments position for most of the 1970s and encouraged an unprecedented expansion of state expenditure. From N8.258 billion in 1975, state expenditure rose dramatically to N13.291 billion in 1979 and N23.695 billion in 1980. Whereas the amount earmarked for capital expenditure under the First National Development Plan (1962—68) stood at about N2.2 billion, that of the Second Plan (1970—74) was N3 billion while for the Third (1975—80) it soared to over N30 billion. The quadrupling of oil prices in 1973 generated a change from the agrarian basis of accumulation in Nigeria to that of crude petroleum. Petroleum exports which accounted for only 10 per cent of the country’s export earnings in 1962 rose to 82.7 per cent in 1973 and, for the second half of the 1970s, peaked at between 90 and 93 per cent. By 1980, the country was producing 2.05 million barrels of oil per day. The massive oil earnings were used to finance the expansion of the country’s industrial sector, commercial enterprises, numerous agricultural projects and the construction of many infrastructural facilities. This massive expenditure was instrumental to the rapid development of the Nigerian petitbourgeoisie, the expansion of the foreign corporate presence in the country and the growth of state capital to an unprecedented level. The increased tempo of economic activities from the oil boom was accompanied by an expansion of corrupt practices such as contract inflation, 10 per cent kick-backs, over-invoicing, and outright stealing of public funds. While the windfall from oil exports led to a considerable expansion of the economy, it did little to increase the country’s self-reliance. If anything, the country’s dependence on external sources for crucial inputs and various commodities increased, as Table 16.1 shows. The structure of the country’s import substitution industries entailed a high import profile for machinery and spare parts. The importation of machinery and transport equipment increased by 121 per cent during 1976—81, while that of capital equipment grew by about 156 per cent in 1974—79 and by 28 per cent in 1979—81. Raw material imports expanded by 110 per cent and 100 per cent respectively. The importation of consumer goods and food items into the country also underwent a rapid growth. Food imports more than doubled in 1976—79, and more than doubted again by 1981 when they exceeded N2 billion per annum. The importation of manufactured goods increased by nearly 50 per cent in 1976—79, and nearly doubled again by 1981 so that within two years it was as much as N2.6 billion. With this pattern of imports, it has been reckoned that, for much of the period between 1973 and 1981, for every one naira spent in the Nigerian economy, 60 kobo found its way out of the country. This was sustainable

Impact of IMF—World Bank Programmes on Nigeria

223

only as long as the state continued to earn sufficient foreign exchange to finance import costs and thereby cover the structural distortions in the economy. These included the high level of dependence on external inputs for industrial activities, low level of local value-added and relatively weak intermediate and capital goods sub-sectors. What this meant was that, once there was a shortfall in foreign exchange earnings, a crisis of immense proportions would occur. It can, therefore, be argued that the country’s import structure provided the framework for the transmission of the generalised capitalist crisis into Nigeria, while the shortage of foreign exchange provided the medium for the articulation of the crisis. The domestic roots of the crisis are traceable to the structural distortions in the economy. Table 16.1

Imports by end use at current (1983) prices (N imUion) 1974 1975 Consumer goods: 1. Non-durable a) Food 166.4 353.7 b) Textiles 31.5 81.3 c) Others 173.6 353.5 2) Durable 65.8 191.3 Sub-total 437.3 979.8 Passenger cars 97.0 220.3 Capital goods: Capital equipment 490.1 1,136.6 Transport equipment 124.9 371.1 Raw material 519.3 903.0 Fuel 55.4 100.2 Sub-total 1,289.7 2,731.2 Grand total 1,727.0 3,711.0

1976

1977

1978

1979

1980

1981

526.7 912.6 1,004.1 1,040.1 1,416.8 2,198.3 65.0 38.9 41.9 73.2 92.4 202.6 476.7 612.1 720.5 705.8 567.4 822.0 282.0 421.7 370.2 380.7 473.7 674.1 1,350.4 1,985.3 2,136.7 2,199.8 2,550.3 3,897.0 261.0 297.4 350.1 169.7 206.1 1,316.9 1,515.0 729.6 1,094.0 175.0 3,774.6 5,125.0

2,129.8 1,012.5 1,543.0 128.6 5,111.3 7,096.6

2,529.8 1,233.8 1,880.1 156.7 6,150.5 8,287.2

1,576.0 988.7 1,115.7 116.4 3,966.5 6,106.3

2,228.0 2,661.3 1,770.2 1,818.7 2,166.9 3,038.5 173.4 187.2 6,545.3 9,022.6 9,095.612,923.6

Source: National Economic Council Expert Committee Report, The State of the Nigerian Economy, 1983.

The first indication of the possibility of crisis in the Nigerian economy came in 1978 when, in the face of a world oil ‘glut’, the Obasanjo administration sought to maintain the country’s revenue by raising the posted price of oil by 2 per cent. This resulted in a boycott of Nigeria’s oil by customers with access to cheaper sources of supply, including the spot oil markets. The effect was a recession during 1977/78, when there was a decline in the country’s oil output from 2.10 million barrels per day in 1977 to 1.57 million by February 1978. In the circumstances, Nigeria’s import bill, which had been accelerating at a rate of 40 per cent annually and stood at a staggering N1 billion a month by May 1978, could no longer be sustained. The country suffered a balance of payments deficit of about N1.3 billion. Also in the 1977/78 period, industrial production increased by only 3.9 per cent as against 19 per cent in 1976. The public debt

224

Case Studies

increased by 66.4 per cent to N5,001.1 million in December 1977. In response to the emerging crisis, the outgoing regime of General Obasanjo introduced some mild deflationary measures to contain the problems. The government sought to cut down drastically on imports by raising tariffs and duties on a range of commodities, while banning the importation of a selected few. An attempt was also made to reduce public expenditure through an increase in the cost of social services. Thus, hospital and school fees were increased. These fiscal measures met with some success, aided, no doubt, by the disruption of Iran’s oil supply at the height of the Iranian revolution and the stock-building of oil supplies by a Western world uncertain as to what the long-term effects of the Shah’s fall would be on the world oil market. By 1979, Nigeria’s foreign exchange account had a reserve of N3 bilUon, rising to N5.6 billion in 1980. It was against this background of an apparent improvement in the economic situation that the civilian government of Shehu Shagari was inaugurated in October 1979. The advent of the Shagari administration coincided with a dramatic, all-time increase in the international price of oil, rising from $14.9 a barrel in 1978 to $33 per barrel in 1979 and $44.4 in 1980. This in turn led to a dramatic increase in government revenue. With this favourable development, the import controls introduced in 1978 were removed by the Shagari administration and foreign corporations, ‘emergency contractors’, local manufacturers, importers of all types of commodities as well as big-time touts had a field day. Nigeria’s import bill rose astronomically from N9.095 billion in 1978 to NI3.I59 billion in 1981, an increase of 45 per cent in twelve months. By 1981, imports averaged NI.2 billion per month and this was largely sustained into the first quarter of 1982. Built into the import system was an elaborate network of fraud perpetuated by local and foreign business interests, which ensured that Nigeria got only about 25 per cent value for her imports. Investment and trade credits, mostly of a short-term nature, obtained from the international capital market, the World Bank and foreign governments also rose dramatically. By the end of 1983, the country’s cumulative external loans commitment was estimated at NI8.5 billion. When the price of oil suddenly collapsed in the world market towards the end of 1981 and in early 1982, a crisis of immense proportions, much more severe than the relatively mild one suffered in 1977/79, hit the Nigerian economy. The price of Nigeria’s oil fell from the 1980 level of $44.4 per barrel to about $28 per barrel in 1985, and to less than $10 per barrel in early 1986. The state’s revenue from oil fell dramatically from its peak of $10 billion in 1979 to about N5.161 billion in 1982. The country’s oil output declined from 2.05 million barrels a day in 1980 to 1.294 million barrels a day in 1982 and 0.8 million barrels a day by 1983/84. As a result of the crisis, the country’s GDP fell by 2 per cent in 1982 and a further 4.4 per cent in 1983 to record an annual growth rate of —3.0 per cent. The current account recorded a deficit of N4.9 billion in 1982 and N2.9 billion in 1983. The budget deficit for 1983 alone was N6.231 billion, representing more

Impact of IMF—World Bank Programmes on Nigeria

225

than 50 per cent of total government expenditure. The crisis quickly spread to all sectors of the economy. Unable to bring in the required levels of raw materials, many Nigerian manufacturing concerns collapsed. It was reckoned that about 50 per cent of Nigeria’s im¬ port-substitution factories folded as a result of the crisis. Also, an acute shortage of consumer goods and food items developed as importers were no longer able to bring in commodities. As a result the rate of inflation rose astronomically. As manufacturers and commercial companies closed down, a large number of workers were laid off, leading to a grave unemployment situation in which, for the first time in Nigeria’s history, many university and high school graduates were unable to find jobs. The crisis also led to a debt problem for the country. In 1983, for example, the repayment of principal and interest on the public debt rose to N 1.3 bilUon, an increase of 72.2 per cent compared with payments in 1982. The debt service ratio jumped from 8.9 per cent in 1982 to 17.4 per cent in 1983. Internal public debts also rose from N4.6 billion in 1979 to N22.2 billion in 1987. The increase in 1983 alone was N7.2 billion. As the crisis escalated, basic social services collapsed, the agricultural sector underwent further decline, the construction boom in the economy ended, while infrastructural facilities deteriorated rapidly. The severity of the crisis compelled an instant response from the state.

The march towards structural adjustment In a bid to contain the escalating crisis, the Shagari administration announced a set of austerity measures through an Economic Stabilisation Act of April 1982. It marked the beginning of the country’s march towards structural adjustment. The thrust of the Act was unmistakably monetarist. It called for a massive imposition of import restrictions, monetary controls and cuts in public expenditure. Compulsory advanced deposits for all importers, ranging from 25 to 50 per cent, were imposed on a wide range of commodities. The basic travelling allowance (BTA) for Nigerians was cut from N800 to N500 and the business travel allowance was reduced from N3,000 to N2,000 in foreign exchange. There was also an increase, by government decree, of 2 per cent in interest rates. Restrictions were placed on external borrowing by state governments. The importation of gaming machines and frozen chicken was prohibited outright. The government also began negotiation with the IMF for a loan of $2.5 billion under the Extended Fund Facility (EFF). Provisions were made for the strengthening of anti-smuggling task forces so as to support the import restriction policy. Monetary and credit guidelines were also established for industries, financial institutions and general commerce.^ However, the National Party of Nigeria (NPN) administration that controlled the federal government lacked the capacity to implement even its own programme. This is because the administration depended on an

226

Case Studies

elaborate and flourishing patronage system to sustain the party. As Bangura noted, this had become more pronounced after the incorporation of the largely ‘opposition areas’ into the party network. The crisis was tied to this patronage system and thus the government was hamstrung in its efforts to implement the provisions of the 1982 Act. For example, the import deposit scheme and the regulation of import licences not only bureaucratised the import system, it also elevated corruption to new heights. Import licences went to party stalwarts who merely collected and sold them at huge profits. Added to this, the government was faced with an escalation of strikes by unions whose members had not been paid their salaries for several months. Indeed, it was only in the face of the threat of a national strike before the 1983 elections that the government decided to extend a loan of about N537 million to the 19 state governments to.pay arrears on wages and salaries of more than six months in some states.^ Thus, in spite of the 1982 Act, the economic crisis worsened with many more companies collapsing. The massive retrenchment of workers increased, the hoarding of scarce commodities emerged and the standard of living of most Nigerians declined further. The tense political atmosphere in the country was not helped by the massive rigging that characterised the 1983 elections. It was against this background that the Shagari administration was toppled on 31 December 1983 in a military coup led by General Buhari. The Buhari regime accepted the broad outlines of the December pre-coup budget of the Shagari administration. In line with the general thrust of curtailing public expenditure, the regime further reduced the 1984 current expenditure by 15 per cent and capital expenditure by 15.6 per cent. The business travel allowance was abolished while the BTA was reduced to the equivalent of NlOO in foreign exchange. Home remittance for expatriates was cut from 50 per cent to 25 per cent.’ At the monetary level, the government raised interest rates for deposits and lending, with only the agricultural sector exempted. The aim was to encourage savings and reduce consumption. A wage freeze was also declared in the public sector. These measures were supplemented by a sudden change in the colour of the currency which resulted in a severe naira squeeze between 25 April and 6 June 1984. Furthermore, all imports placed on open general licence during the early years of the Shagari administration were placed under specific licence by the Buhari regime. TTie government also launched a campaign. War Against Indiscipline (WAI), to foster a disciplined culture among Nigerians. Trials were instituted, exposing the corruption and recklessness of ousted politicians, contractors, foreign corporations, local business groups and civil servants, resulting in the conviction of some of them. This was a necessary sacrifice if the crisis-management package of the regime, which was signally hostile to working people, was to meet with some success. Draconian decrees were passed on all manner of issues, including Decree Number Four that restricted press freedom and public criticism of state officials. There was also a massive purge of the public service, and a plethora

Impact of IMF—World Bank Programmes on Nigeria

221

of levies and special taxes were introduced. Petty commodity traders, roadside mechanics and others were prevented from carrying on their businesses in their traditional places as part of a bid to improve the scenic beauty of the country and to promote environmental sanitation.® The Buhari regime also continued the IMF negotiations started by its predecessor for an EFF loan of $2.5 billion. However, very little headway was made in the bargaining and, in time, a stalemate soon developed as neither the government nor the IMF was ready to budge on the points of disagreement. Yet clearly, the Buhari regime had all the credentials to qualify for an IMF loan — it had agreed to reduce grants, subventions and loans to parastatals, suspended federal loans to state governments, massively reduced public expenditure, controlled wages, retrenched workers and allocated 44 per cent of state revenue to debt repayment in 1984 as the debt crisis escalated. Indeed, the measures taken by the government had reduced the budget deficit from N6.2 billion in 1983 to N3.3 billion by 1984.® However, the regime was unable to agree with the Fund over the latter’s insistence on the devaluation of the naira, removal of the petroleum subsidy, liberalisation of trade and an across-the-board privatisation of public enterprises. As a result, no agreement with the IMF was concluded: Nigeria’s debts could not be rescheduled and blocked lines of credit were not re-opened. In the midst of this, the repressive tendencies of the regime increased, alienating virtually all sections of Nigerian society — workers, students, press, professionals and so on. The attempts by the government to seek a clean bill of health from Western financiers by selling its own home-made austerity package that included the allocation of substantial amounts of the country’s foreign exchange earnings to debt servicing met with little success. An atmosphere conducive to the overthrow of the regime developed and, on 27 August 1985, General Buhari was toppled in a palace coup led by his Army Chief of Staff, General Ibrahim Babangida. The new government was dissatisfied with the stalemate in the negotiations with the IMF and declared its determination to break the deadlock. To do this, the regime needed the broad support of Nigerians since the IMF conditionality would seriously erode their living standards. In an attempt to judge the public mood, the Babangida administration decided on 2 September 1985 to declare a national debate on the IMF loan. In the course of the debate, it was clear that the vast majority of Nigerians were opposed to the IMF loan and its conditionality. But while the debate was still on, the government declared a state of National Economic Emergency on 1 October 1985 which was to last for fifteen months. Under this Emergency, a general pay cut for both civilian and military employees was introduced, ranging from 2 per cent to 20 per cent. Although at the end of the national debate, the government decided to reject the IMF loan, it proceeded through the 1986 budget to articulate and implement a Structural Adjustment Programme (SAP). Central to the regime’s SAP was the devaluation of the Naira through the introduction of

228

Case Studies

the Second-Tier Foreign Exchange Market (SFEM). Although the intention to establish the market was first announced on 27 June 1986, it was not until the end of September that SFEM actually took off. The other components of the SAP included the liberalisation of trade, privatisation of state enterprises, ^rationalisation of the economy’s tariff structure and elimination of price controls. Also, through the 1986 Budget, the government reduced the subsidy on petroleum for domestic consumers by 80 per cent. By September 1987, Nigeria was reported to have secured a ‘jumbo’ loan of $4.28 billion from the World Bank — after turning down a $2.5 billion IMF loan! The adjustment programme would last for two years from July 1986 to June 1988. The programme centred on market forces or the price mechanism as the foundation of its demand-management policies. Since the IMF had been considerably discredited in Nigeria, as evidenced by the passion of opinion against the Fund during the loan debate, it became convenient for the regime to rely on the World Bank for support. The Bank, therefore, came to assume the role of the IMF in the domestic management of the Nigerian crisis. The Fund itself supported the Babangida administration in international financial circles, especially during debt renegotiations, Clearly, between 1982 and 1987, the adjustment measures which had been pursued by Nigeria and which finally culminated in the adoption of a comprehensive Structural Adjustment Programme were such that they provided the basis for the triumph of the IMF and the World Bank in the country.

Impact of structural adjustment on the Nigerian working class More than any other social category in the country, the Nigerian working class has borne the worst consequences of a crisis not of its making. This should not be surprising because of the decisively monetarist thrust of the IMF and World Bank sponsored SAPs in Africa, which see the worker as the main cause of the current economic crisis. The position is held that a pliant and soft state succumbed to workers’ demands through massive social expenditure which fuelled the inflationary spiral and caused other distortions. Regimes in Africa have, therefore, sought to impose the burden of adjustment to the crisis on their workforces and the poor majority through rising prices, falling money wages, massive retrenchment without compensation, and drastic reduction of public expenditure, especially on social services. In the Nigerian case, as soon as the crisis started, employment was dealt a severe blow. During 1980-83, about one million workers were estimated to have been retrenched from the industrial sector. For instance, in 1980—81, 35,000 textile workers lost their jobs. In 1983 alone, 10,000 workers in the metal industry were retrenched with another batch of 15,000 workers. A poll conducted by the Manufacturers Association of Nigeria (MAN) showed that a total of 101 companies had in the twelve

Impact of IMF—World Bank Programmes on Nigeria

229

months to 31 July 1983 dismissed 200,000 workers." Apart from retrenchment, one key feature of the austerity measures promoted by the Shagari administration was the failure of employers, especially in the pubhc sector, to pay workers their wages and allowances for several consecutive months. Among those retrenched were many workers unable to claim their legitimate entitlements. This was in a context in which the standard of living of the working people was drastically reduced as a result of the rampant inflation that accompanied the crisis. The prices of basic commodities like milk, sugar, rice, yams, beans and other food items escalated beyond the reach of workers, and undermined the real income of those among them who were lucky to have survived the spate of retrenchments. The rising cost of basic commodities is clearly reflected in Table 16.2. The message it conveys is not limited to Lagos alone — it was much the same all over Nigeria. Table 16.2

Comparative increase in the prices of some essential commodities between February and October 1983 (Lagos) Item A tin of palm oil A gallon of vegetable oil Average size of yam tuber (staple) A tin of beans (staple) A tin of gari (staple) Medium size Omo (detergent) A tin of Peak milk Medium size Macleans toothpaste Tin of medium size Nescafe coffee

February N45.00 N5.00 N4.00 N56.00 N30.00 N0.55 N0.25 Nl.OO N0.75

August N52.00 N7.00 N7.00 N60.00 N35.00 N0.80 N0.40 N1.40 Nl.OO

October N79.00 N15.00 NIO.OO N78.00 N47.00 N1.50 N0.70 N2.00 N1.70

Source: National Concord, 20 October 1983.

Furthermore, as social services in Nigeria deteriorated and the government sought to reduce the level of public expenditure, workers were forced to take on an increasing part of the social wage through the cost of education, health services, housing, water and transport. Many health centres were closed while the increasing inaccessibility of medical services resulted in a drastic fall in the health standards of most Nigerians, including a rising infant mortality. By the time the Shagari administration was overthrown on 31 December 1987, the average Nigerian worker was faced with a serious crisis of bare survival. Yet, the Buhari administration’s austerity programme did little to uplift the condition of workers. If anything, its approach was even more repressive. One of its very first acts was to declare a unilateral wage freeze for workers in all sectors of the economy. The Niger state government went even further to slash teachers’ wages by 5 per cent — even though economists insist that wages are rigid downwards. The federal government also imposed a system of ‘no work, no pay’ as a means of forestalling

230

Case Studies

industrial actions arising out of the inevitable workers’ discontent about the regime’s crisis management strategy. In the words of General Buhari himself: This administration will not tolerate any irresponsible and recalcitrant behaviour among the country’s workforce. In the face of the downturn in Nigeria’s economy, we cannot afford the loss of productivity arising from indiscipline and disruption caused by strikes.

It was in the context of the anti-Labour orientation of the Buhari administration that it proceeded to carry out one of the biggest waves of dismissals and retirements from the public sector in Nigeria’s history as part of its effort to reduce public expenditure. This can be clearly seen in Table 16.3 even though it is by no means a complete picture of the retrenchments carried out in the public sector in the first nine months of Buhari’s accession to power. Table 16.3

Some of the workers retrenched by the state government agencies between 1 January and 30 September 1984 State/government agency Anambra State Bauchi State National Assembly Kwara State Federal Ministry of Finance Niger State Ogun State Nigeria External Telecommunications Sokoto State Benue State Bendel State Nigeria Airports Authority Federal Ministry of Works Federal Ministry of Agriculture Ondo State Oyo State Federal Ministry of Communications

Number of workers i 4,177 4,133 2,100 7,000 369 2,144 900 184 2,545 6,850 21,000 238 255 220 1,176 3,000 1,029

Source: Compiled from various issues of West Africa, but see especially that of July 1984, p. 1416.

The wave of public sector retrenchments went hand-in-hand with further dismissals from the private sector, as eloquently testified by the dismissal of 1,000 dockworkers in 1984. Because of the efforts made to reduce public expenditure, social services suffered even more setbacks under the Buhari administration. School fees and hospital charges were either introduced or reviewed upwards all over the country. For example, in Rivers State, primary school children were required to pay N30 a session, while secondary schools charged each student N90 for an academic year. In Benue State, primary school fees

Impact of IMF—World Bank Programmes on Nigeria

231

were increased to N31 a session, while for technical colleges, School of Basic Studies at Markurdi, and Advanced Teacher’s Colleges, the amounts charged were N250, N180 and N215 respectively.^^ All manner of obnoxious compulsory levies were also introduced as part of the government’s revenue-generation drive. Apart from the hated poll and cattle taxes, ‘development’ and ‘education’ levies were exacted from the working people. Hospital fees were also increased, a move which was especially unjustifiable, given the deteriorating state of the health-care delivery system. Indeed, it was in reaction to the appalling conditions in the hospitals that the Nigerian Medical Association (NMA) and the National Association of Resident Doctors (NARD) went on national strike in March 1985. That strike was suppressed in a most ruthless manner by the Buhari regime — the doctors’ associations were proscribed, their leaders arrested, their militants humiliated and the hospitals at the centre of the strike declared military zones. The emergence of the Babangida administration and its adoption of a full-blown IMF and World Bank inspired SAP led to an even greater erosion of the living standards of Nigerian workers. The National Economic Emergency introduced a unilateral cut in the wages and salaries of all public and private sector employees of 2—15 per cent of their annual income. The N500 million which the government expected to realise from these cuts was to be paid into a special National Economic Recovery Fund Account in the Central Bank of Nigeria. Apart from this, the government’s decision, announced in the 1986 budget, to reduce the petroleum subsidy by 80 per cent led to further hardships on workers because transporters simply transferred the higher oil prices to them by raising transport charges. In most cases, the fares for a trip in a taxi went up by about 70 per cent. In order to legitimise the additional hardship which the Babangida administration’s measures entailed for the working class, a promise was made to restore free primary education. But even this promise was not fulfilled. Indeed, some of the obnoxious levies imposed on working people during the Buhari administration were reviewed upwards, and several new ones introduced by some state governments. But, perhaps, more than any other component of SAP, it was the Babangida administration’s decision to devalue the naira to the tune of about 300 per cent through the Second-Tier Foreign Exchange Market (SFEM) in September 1986 that hiked the cost of living. At one stroke, the real wages of Nigerian workers were devalued by about 300 per cent to the point where World Bank officials now often stress the availability of a cheap labour force as one of the factors favouring foreign investors in the country. With the introduction of SFEM, the N125 minimum wage concession which Nigerian workers won in 1981 is now (September 1987) worth less than N35 in real terms. Yet, one of the immediate effects of SFEM was the unprecedented increase in the price of all commodities to the tune of 100 per cent on average. Faced with prohibitive prices, many Nigerians were no longer able to acquire basic commodities. Government propagandists were

232

Case Studies

quick to point out that this was reflective of ‘consumer resistance’ and the arrival of a ‘buyers’ market’. In fact, the situation was neither one of ‘resistance’ nor of consumer sovereignty. Quite plainly, the level of immiseration created among Nigerians by the Babangida administration’s SAP made it imppssible for them to acquire the most basic of necessities. The steep decline in the standard of living of Nigerian poor masses which was exacerbated by SAP is confirmed by the Pay Research Unit of the Office of the Head of the Civil Service of the Federation. In a pre-1987 budget review of recent trends in wages and fringe benefits in the public sector, the Unit concluded that there was a ‘general downward trend in the wages/salaries and fringe benefits in the public service.’The pool of the unemployed still continues to grow as many small and medium-scale enterprises collapse under the weight of the government’s SAP. In particular, the devaluation of the naira through SFEM (renamed the Foreign Exchange Market — FEM — in July 1987 following the con¬ vergence of the first and second-tier markets) and the liberalisation of trade have had crushing effects on Nigerian industries. In the midst of this, the regime proceeded in 1987 to enact a decree technically abolishing the Minimum Wage Act of 1981 by making it mandatory for only those companies employing 500 workers or more to pay the N125 minimum wage. Under the 1981 Act, the applicable figure was 50 workers. It took a spirited nationwide effort by the Nigerian Labour Congress (NLC) and other democratic forces to get that decree repealed. Far from being part of a wider effort to generate jobs as the government claimed, the real reason for the attempted repeal of the 1981 Minimum Wage Act lay in the regime’s determination to depress wages further in order to attain one of the key components of its incentive package for foreign and local investors. Although a National Directorate of Employ¬ ment was established in mid-1987 with a budget of N200 million, the unemployment situation still remains alarmingly bad. Nor has the National Open Apprenticeship Scheme for unemployed youths made any significant impact. Indeed, the government’s strategy for combating unemployment has exposed the scope of the human tragedy which has been unleashed on Nigerians by SAP. For instance, when the National Open Apprenticeship Scheme was launched in Oyo State, 15,000 applicants, mostly teenagers, came forward to compete for the 2,000 places being offered. In order to qualify for the first round of the selection process, each of the applicants was made to undergo military drills and a three-kilometre race. Not a few, among them women, fainted. In other states, 90,000 applicants showed up for the 1,000 jobs offered. Such is the humiliation which the job-seeker in Nigeria has to undergo to earn a living.*^ The daily reports carried in Nigerian newspapers contain alt manner of stories on the tragic and harrowing experiences of the unemployed. On 30 May 1987, for example, the Nigerian Herald reported that a ‘Jobless Man Sets Self Ablaze’. He had been out of work for two years and was no longer able to care for his family. Another report in the Sunday New Nigerian

Impact of IMF—World Bank Programmes on Nigeria

233

spoke of the harsh economic conditions in the country as one of the factors responsible for the increasing rate of mental illness,

Conclusion The SAP which the Nigerian state has been implementing with the backing of the IMF and the World Bank has unleashed enormous suffering on Nigeria’s working people. It has had the effect of further polarising Nigerian society by increasing the gap between rich and poor. Yet its market-oriented strategy does not show any signs of putting the country on the path to economic recovery. Nor does it guarantee that Nigeria will not be beset by further crises of accumulation. For working people of Nigeria what is really needed in this period is not a Structural Adjustment Programme, which undermines their living conditions to the advantage of local and foreign exploiters, but a programme of structural transformation in which the working people will become masters of their own destiny. The daily struggles of the workers to retain their jobs and the forms of resistance led by the labour unions, including strikes and go-slows, show that the Nigerian labour movement has developed a tradition which would enable it to make a concerted push for a fundamental change in societal relations. The challenge of the current conjuncture in Nigeria is how the efforts of democratic social forces can be harnessed to struggle for structural transformation and to jettison the IMF—World Bank-sponsored SAP.

Notes 1. See, for example, the proceedings of the 1984 Review of African Political Economy conference on the World Recession and the Crisis in Africa. Some of the papers have been published in Peter Lawrence (ed.). World Recession and the Food Crisis in Africa, London: James Currey, 1986. See also the proceedings of the Council for the Development of Social and Economic Research (CSER), A.B.U. Zaria conference on Economic Crisis, Austerity Measures and Privatisation in Africa held in 1985. 2. See Cheryl Payer, The Debt Trap: The International Monetary Fund and the Third World, New York: Monthly Review Press, 1974. 3. Some of the theoretical positions in this section have also been posited in Yusuf Bangura, ‘Crisis in Sierra-Leone and Nigeria: a comparative study’ (mimeo), 1985; Y. Bangura, ‘The deepening crisis and its political implications’ (mimeo), 1984; Adebayo Olukoshi, ‘Crisis in the Nigerian economy’ (mimeo), 1984, and The Multinational Corporation and Industrialisation in Nigeria: A Case-Study of Kano, Ph.D thesis. University of Leeds, 1986. 4. All figures in this section are drawn from Bangura, op.cit., 1985; Olukoshi, op.cit., 1984 and the Odama Report as reproduced in Africa Development, vol. IX, no. 3,1984, pp.75—115.

234

Case Studies

5. Ibid.; also the Central Bank of Nigeria, Annual Report and Statement of Accounts, 1983. 6. Bangura, op.cit., 1985. 7. CBN, Annual Report and Statement of Accounts, 1985. 8. Bangura, op.ci^^, 1985. 9. Ibid. 10. For greater details on the Babangida administration’s Structural Adjust¬ ment Programme see Y. Bangura, ‘IMF/World Bank conditionality and Nigeria’s Structural Adjustment Programme’, 1987 (mimeo). 11. Olukoshi, op.cit., 1984. 12. General Buhari quoted in West Africa, 7.5.84, p.993 13. Olukoshi, op.cit., 1984. 14. Issa Aremu, ‘SAP and Labour’ (mimeo), 1987. 15. Nigerian Herald report as cited by Issa Aremu, ibid. 16. Ibid.

Index

Note: Volume 2 en tries are in bold type. Abbey, Dr J.L.S., 149 Accra, 35 Addis Ababa, 46 Africa, 1; agriculture, 29, 35, 36, 42, 53, 60, 61, 96, 214, 2; agricultural development projects (ADPs), 26; alternative development model, 7, 24, 42, 59, 62-64, 157-58, 3-4, 27-28,

47-52, 71-2, 192, 193-94, 197-98; balance of payments crises, 27, 31, 194; colonialism, 32; 196; constraints on development, 17, 60; co-operation within, 62, 63, 64; crisis, 219-21, 34, 191; debt, 2, 6, 34, 43, 64,1, 4, 18, 19, 20-21, 22, 26, 192, 193; debt and international finance, 23, 26; decapitalisation, 3, 13; devaluation in, 12, 112; education, 15, 17, 45, 61, 3, 32, 45, 49; health, 15, 17, 46, 60-61, 3, 32, 35-36, 45, 49; IMF-WB effect on, 4, 30, 31, 97, 36, 191-92, 195; import strangulation, 15, 53, 56; import substitution, 30 25; industry, 63, 196, 197; and industrial countries, 18, 55, 59; inflation, 45; and (world) market relations, 18, 28, 195; medium-term adjustment, 15, 52; military expenditure, 3; non-government organisations (NGOs), 61; population growth, 26, 45, 60, 49; primary production, 27, 32, 33, 38, 43, 52, 55, 28, 30n, 40-41, 48; private sector, 15-16; public sector, 15-16, 17, 27, 59; refugees, 28; self-reliance, 52-53; social crisis, 31, 32, 34; structural adjustment, 12, 16, 29, 31, 38, 192, 194, 195; TNCs in, 220; transport, 46, 60; urban-rural balance, 46, 34, 49; war in, 37, 47; working class, 219, 193

African Development Bank (ADB), 64, 151, 202, 87 African National Congress (ANC), 172, 173, 179, 180, 184, 187, 188, 190; Umkhonto we Sizwe, 187 African Priority Programme for Economic Recovery (APPER), 3, 12, 213, 214, 45 aid, 56, 60,129 ALCAN, 17 ALCOA, 17 Amin, Idi, 32, 83 Angola, 180, 47 Annan, Justice D.F., 146 Anti-Apartheid Movement, 184 Arab—Israeli war, 142, 80 Arab Monetary Fund, 127 Argentina, 172, 189,10, 11, 13, 14,

129, 198 Aristotle, 55 Arusha Declaration, 97 Armscor (South Africa), 163 Asia, 8; successful development in, 17, 96; south-east, 41,191 Australia, 174

Babangida, General Ibrahim, 227, 228, 231, 232,160, 163, 179, 181 Bangladesh, 62 Bangwa, 226 banks, commercial, 39, 49, 72, 187, 10,

11, 12, 13, 14, 15, 31, 59; anti-apartheid pressure on, 184; Barclays Bank, 164, 174, 184, 188; Chase Manhattan, 174, 178; Citibank, 10; Citicorp, 15, 87; interbank credit, 185; Nedbank, 176 Bank of England, 176, 178, 185 Bank for International Settlement, 178, 13

236

Index

BBC, 1 Benin, 206, 213 bilateral donors, 14, 77 Boesak, Dr Allan, 189 Bolivia, 10, 15 Boston Consulting Group, 131 Botchwey, Dr Kwesi, 140 Botha, P.W., 174, 175, 180, 184, 187, 190 Botswana, 45, 21, 44, 53 Bradley, Bill, 15 Brazil, 34, 122, 185,10, 11, 12, 13, 14, 15, 17, 70, 72, 198 Bretton Woods system, 2, 18, 19-24, 207, 219, 221,191; and Africa, 59; conference (1944), 4; conditionality, 20; co-operation of institutions, 17, 25-26; Mark I, 2, 20; Mark II, 2, 21; ‘multilateralism’, 21 Britain, 59, 62, 154; and Argentina, 189 ;as coloniser in W. Africa, 207; and crisis in world economy, 149; and South Africa, 174; and Zambia loan, 146; and Zimbabwe, 154 Brown Boveri, 178 Buhari, General Muhammad, 226, 227, 229, 230,159, 160, 164, 178, 179, 181, 183, 188 Burkino Faso, 206; environmental projects, 213; population policy, 213

Camdessus, 14, 23 Cameroon, 41, 45, 204, 21; Le Rigeur, 219 Camp David Accord, 79-80 Canada, and African debts, 14; and crisis in world economy, 149-151; in¬ vestment in, 174; as investor, 220 Cape Verde, 206 capitalism, 2, 20, 24, 31, 85, 89, 220; crisis of, 149-151, 157,153, 159; , effect on developing world, 151, 152, 3, 196 Caribbean, 96 Central America, 1 Chad, 47, 137 Chicago school of monetarism, 219 Chidzero, 156 Chile, 10, 11, 13, 69, 70 children, 14, 32, 45, 2, 3, 35, 36, 57, 65, 122 China, 216, 46

Chirac, Jacques, 137, 138 Colombia, 10, 13 Commonwealth, Summit (Vancouver), 14; US penetration through multilateralism, 21 Council for Mutual Economic Assistance (CMEA), 202 Crocker, Chester, 190,137

Dakar, 35 Dar es Salaam, 46 debt-service ratios, 1, 56, 9, 29n de Kock, Gerhard, 173, 176, 178, 179 depression (early 1980s), 46, 69, 78,150, 162, 7, 56; Great Depression (1930s), 150,10 delocalisation (of raw materials processing), 17, 18 Diouf, Abdou, 125, 133, 134, 135, 136, 137 Diop, Bator, 128 drought, 45, 99, 221, 214 Du Plessis, B., 186 Ecuador, 15 Economic Commission for Africa (ECA), 2, 3, 4, 151, 198 Economic Community of West African States (ECOWAS), 213, 130 EEC, 54,1, 3, 163; common agricultural policy (CAP), 3, 129 EEC-ACP, 130 Egypt, austerity measures in, 79; SAP failure in, 69; war with Israel, 142, 80 Employment Bureau of Africa, 166 environmental degradation, 13, 60, 61, 214, 221, 34, 36, 50, 169, 171 Erena, Mohammed Adams, 186 Equatorial Guinea, 1 Ethiopia, 33; refugees of, 77 Europe, 2, 96, 99, 162, 191; in IMF/Bank, 7, 4; as investor, 220; unemployment in, 151, 56

famine, 45, 62 FDI, 216 Ferrer, Aldo, 13 ‘flight capital’, 3, 1, 13, 195 Food Aid Commission, 130 Food and Agricultural Organisation (FAO), 30, 117, 118, 203, 154, 155

Index ‘fordism’, 89 France, 20, 149, 59; Caisse Centale de Cooperation Economique, 25; as coloniser in West Africa, 217; investment restrictions in South Africa, 173, 174, 181 free enterprise, see market economy Frost Sullivan, 184

Gambia, The, 206, 211, 215, 137 GATT, 18, 59 General Motors, 164 Germany, West, 127, 149, 59, 154, 163, 166; Deutsche Entwicklings Gessellschaft, 166 Ghana, 11, 32, 35, 42, 44,46, 54-55,70, 191; civil service, 143,144,145; cocoa, 38, 66,146-47,151; Cocoa Marketing Board, 46,142,143; Committee for the Defence of the Revolution (CDR), 146; conditionaUty, 30; debt, 149,150, 151; devaluation, 146; economic decline, 6, 209, 37, 38,68; ERP in, 27, 219,140,141,142,144,145,146, 147,148,149,150; farm subsidies withdrawn, 212; foreign exchange auction, 34, 36-37, 38, 39, 42, 211; Ghana Education Service, 143, 144; industrial relations, 145; Interim Management Comittees (IMCs), 145; Joint Consultative Committees (JCCs), 146; liquidity, 149; Manpower Utilisation Committee, 142; National Mobilisation Committee, 141; PNDC government, 140, 141, 143, 144, 145, 147, 148; resource gap, 41; retrenchment, 141-43, 144, 145, 148, 149; SAPs in, 5, 214, 215, 141, 144, 150, 151; wage policy, 144, 145; World Bank programme, 61, 143, 146, 150-51 Gini Index (on Namibia), 194 Glaxo pharmaceutical company (Nigeria), 182, 183, 184 Grant, James, 31 Guinea, 206, 209; bauxite, 17; debt, 17, 18; exports (other), 17; farm subsidies withdrawn, 212; Interim National Recovery Plan (1985—87), 17 Guinea-Bissau, 206; fiscal deficit, 211, 212; official development assistance (ODA), 212

237

Holland, commodity financing facility, 127 Hong Kong, 56 Huddleston, Trevor, 184

IBM, 164 IBRD, see World Bank Idiagbon, 183, 188 IFAD, 103, 104 India, agricultural development successful in, 62; aid to, 50; Research and Information Services, 150 Indonesia, 12, 161 Institute for African Alternatives (IFAA), 4, 7,191, 197 Inter-American Development Bank, 10 International Association of Pharmaceuticals (LAP), 185 International Development Association (IDA), 13, 25, 147,19, 23; special assistance facility from World Bank, 56 International Finance Corporation (IFC), 25 International Labour Office (ILO), 98, 160 International Monetary Fund (IMF), 1, 2, 11,14; and Africa, 4-5, 25, 28-33, 78, 90, 97, 23, 31, 33, 52, 161, 191, sub-Saharan, 12, 14,160; Africa department of, 5; balance of payments, 26-27, 28, 29, 80, 60, 195; Buffer Stock Financing Facility (BFF), 5; and capitalism, 2, 20, 21, 22, 23, 24, 27, 31; and commercial banks, 13; and commercial donors, 75,14, 23; Compensatory Finance Facility (CFF), 5, 54, 55, 71; conditionality, 5, 17, 18, 20, 21, 22, 27, 28, 29, 30, 31, 34, 35, 44, 78, 92, 192, 193, 2, 8, 14, 22, 24, 99, 191; devaluation, 35,195; Enhanced Special Adjustment Facility (ESAF), 5, 4; and Europe, 2; executive board, 125, 197-98; Extended Fund Facility (EFF), 4, 22, 26, 30, 225; 79; history, 25; ideology of, 69, 26, 81, 87, 91, 99-100, 195; ‘integrated rural development’, 31, 33; loans untied, 3; oil facility, 5, 71; policies, 16, 23, 200, 24, 33, 51, policy of domestic contraction, 34-35; Sectoral Adjustment Loans (SECALS), 5, 12, 56, 58; social effects of policies.

238

Index

(IMF cont.), 13, 32,1, 2, 64-5, 68; Special Drawing Rights (SDR), 4; Structural Adjustment Facility (SAF), 5, 12, 14, 15, 18, 19, 50, 57, 58, 69, 61; Structural Adjustment Loans (SALS), 5, 51; Sljaictural Adjustment Programmes (SAPs), 5, 17, 27-28, 29, 31, 42, 89, 96, 116, 219, 221, 42, 47, 78, 114, 125, 144, 163, 177; symposium (Kenya, 1985), 4; tranche policies, 4, 5, 26; World Bank partnership, 17, 26,160;World Economic Outlook (1986), 15 Iran, 189, 224, 82 Iraq, 82 Ireland, 17; famine in, 50 Israel, 80 Italy, 149, 82 Ivory Coast, 35; climate, 206; debts, 1-2, 204, 206, 21; IMF quota, 5, 24; income/debt ratio, 1; as ‘model’ recipient of loans, 24, 191; Multi-Year Rescheduling of Debts (MYRAs), 51; structural adjustment, 209, 214; trade balance, 6; World Bank loans to, 24 JASPA, poverty line definition, 103 Jamaica, 11,17, 66, 68, 72; Export Processing Zones of, 66; ‘higglers’, 69; World Bank SAL, 61 Japan, 59; and crisis in world economy, 149; as foreign investor, 220; a ‘success story’, 16, 89, 150; trade war with US, 57 Jaycox, E.V.K., 31 Jawara, Dauda, 137 Johannesburg Stock Exchange, 174. Jordan, 82

Kaduna Textiles (Nigeria), 180, 182, 183, 184 Kane, Cheik Amidou, 45 Kaunda, President, 37 Kenya, 75, 99, 102; economic decline, 6; growth, 45; IMF quota, 5; World Bank SAL, 61 Keynes, John Maynard, 35 Keynesianism, 219, 3, 195 Khartoum Spinning and Weaving Co., 134 Khayyam, Omar, 55 Kinnock, Neil, 184

Kodak, 164 Korea, South, 12, 15; a ‘success story’, 16, 56 Kuwait, 12

Lagos, 35 Latin America, 1, 91, 185,14, 74, 191; borrowers, 182, 1, 7, 10, 11, 13; income decline per capita, 56 ‘Lawson initiative’, 49, 50, 51 Leutwiler, Dr Fritz, 178, 179, 184, 185, 187, 189 LDCs, 34, 40, 43, 73, 200, 204, 218n, 62, 178 League of Nations Mandate System, 192 Lesotho, credit squeeze, 165; debt, 167; debt service ratio, 21; IMF in, 160, 169; Lesotho Monetary Authority, 164; Lesotho National Development Corporation (LNDC), 168; migrant workers in South Africa, 165; and South Africa, 160, 164-66; taxes, 165; Thaba-Bosiu Rural Development Project, 167, 169; TNCs interest in, 164, 168; World Bank involvement, 160, 166-68, 169 Liberal International, 138 Liberia, 206, 211, 214; debts, 216; farm subsidies withdrawn, 212; SAP, 214 Libya, initiatives in sub-Saharan Africa, 80 Lome Convention, 2 London, Club of, 23, 163, 198 London Metal Exchange Price, 144

Madagascar, 32; loans to, 13, 24; policies, 25 Mahidi, 82 Malawi, IMF quota, 5; World Bank SAL, 61, 68 Mali, 206, 209, 212, 213, 35, 50 Malvinas War, 172 Mandela, Nelson, 178, 180, 184, 188 market economy, 2, 21, 42, 91, 154,18, 62-63; effect of ideology on Third World, 89-90 markets, 53-55; international commodity agreements, 54; marketing boards, 35-36 Marx, Karl, 41 Mauritania, 206, 216; rescheduled debt, 50

Index Mexico, 34, 172, 185,12, 13, 14, 70, 198 Middle East, 1, 8, 80, 81 Mozambique, child mortality, 35; debt, 1, 50; FRELIMO government, 26; quality of life in, 39; restructuring economy, 26; and South Africa, 26, 37, 47; in world market, 24 Morocco, failure of SAP in, 69 multilateral facilities for loans, 52, 23, 26 multinational corporations (MNCs), 2, 3, 21, 27, 31, 41,1, 8, 132 multi-year reschedulings of debt (MYRAs), 51 Mwinyi, President, 82, 84

Nairobi, 35 Namibia, alternative policies, 201-202; apartheid in, 193; balance of payments, 196-97; basic human needs package (BHN), 193; Debt Manage¬ ment Unit (DMU), 203; development plaiming, 198; economy, 193-94; export domination, 195; GDP—GNP gap, 194, 195; German Protectorate of SWA, 192; IMF-World Bank in, 201, 202, 203; independence, 192-93; mis¬ management, 194; Reserve Fund for Debt Service, 203; Revenue Stabilisation Fund, 203; resources, 193, 194-95; social services, 197; South African fiscal policy in, 200; South African occupation, 192, 193, 196, 197, 198, 199, 200, 204; SA Reserve Bank in, 199; transnational mining, 194; wages, 197 NASA, 137 Nassau, Senior, 50 Naude, Dr Beyers, 189 New International Economic Order (NIEO), 1, 24, 96 New York State, 182 Newly Industrialised Countries (NICs), 69 Niger, loans to, 13; population, 213; Sahel, 206 Nigeria, 1, 4, 11, 30, 204, 206, 211, 12, 21; Abisoye Report, 189; Academic Staff Union of Universities (ASUU), 188; adjustment policies/programmes, 6, 214, 215, 218n, 227, 228, 231, 232, 233, 163, 177, 179, 182, 187;

239

(Nigeria cont.), agribusiness corporations, 158, 162, 163, 166, 168, 169, 170, 171; Agricultural Credit Guarantee Scheme (ACGS), 168; Agricultural Development Loans, 157; Ahmadu Bello University, 189; balance of payments deficit, 223, 224; boom, 1973, 222; capital exports, 3; capital imports, 222-23, 224; cotton, 156; coup of 1985, 227; debt, 206, 216, 164-65; desertification, 171; devaluation, 35, 38, 231,160, 162, 163, 164, 171; Directorate of Food, Roads and Rural Infrastructure (DFRRI), 167; economy, rural, 153, 154, 155-58, 160, 162, 163, 166, 167, 168, 169, 170; Economic StabiUsation Act (April 1982), 225,159; education, 68; exchange rate, overvalued, 161; farm subsidies withdrawn, 212; Federal Office of Statistics, 168; food imports, 162-63, 171; foreign exchange auctions, 22, 34, 36-7, 39-40, 42; Foreign Exchange Market (FEM), 232, 178; Funtua Agricultural Development Project (FADP), 157; Green Revolution Strategy, 154, 169; IMF discredited by, 228; IMF loans, 225, 227,159, 163, 166, 178; import licence scheme, 179; import substitution, 225,170; Integrated Rural Development Projects (ADPs), 154, 155-57, 162, 167, 170, 171; Kano River Project, 169; Manufacturers Association of Nigeria (MAN), 228,179, 180; Minimum Wage Act (1981), 232,186; National Association of Nigerian Students (NANS), 188; National Association of Resident Doctors (NARD), 231; National Development Plans, 222; National Directorate of Employment, 232; National Economic Emergency, 227, 231; National Open Apprentice¬ ship Scheme, 232; National Party of Nigeria (NPN), 225; National Transport Owners Association (NTOA), 187, 188; National Union of Banks, Insurance and Financial Employees (NUBIFE), 183; National Union of Chemicals and Non-Metallic Products, 185; National Union of Road Transport Workers (NURTW),

240

Index

(Nigeria cont.), 187, 188; National Union of the Textiles, Garments and Tailoring Workers of Nigeria, 184; Nigerian Agricultural Consultative Advisory Committee, 154; Nigerian Agricultural and So-operative Bank (NACB), 157, 158, 168; Nigerian Labour Congress (NLC), 232, 177, 184, 185, 186-87, 188, 189; Nigerian Medical Association (NMA), 231; Odoma Committee, 159; oil, 208, 222, 224,154, 159, 162, 177, 180-81; parallel markets, 40, 212, 218n; population, 213; privatisation, 163, 166-67; rationalisation, 179, 180, 181, 182; Retrenchment Review Committee, 185; riots, 211; River Basin Development Authorities (RBDAs), 154, 158, 162, 166, 167, 169, 170, 171; School of Basic Studies, Makurdi, 231; Second-Tier Foreign Exchange Market (SFEM), 228, 231, 179, 180; strikes, 226; 164, 166, 182, 184, 186, 187; TNCs in, 161, 162, 164, 165, 166, 174-76; trade unions in, 181-82, 183, 184, 186, 187; Trade Union Act (1973), 188; unemployment, 225, 226, 228-229,153, 158, 164, 169, 171, 179-80, 181, 183, 184, 185; War Against Indiscipline (WAI), 226; World Bank in, 25, 153, 154, 156, 160, 162, 163, 166, 169, 170, 179 Non-Aligned Movement, 73, 150 Nyerere, President, 30, 73, 74, 77, 79, 80, 93, 79

Obasanjo, General, 223, 224, 177 OECD countries, 13, 19 Official Development Assistance (ODA), 56, 60, 216 oil, boom, 35-36; importance, 53; shocks, 46, 52, 142, 198, 208, 222, 223, 7, 11, 12-15, 87, 111 OPEC, 222, 7, 12, 78, 193, 194 Organisation of African Trade Union Unity (OATUU), 7, 33, 65n Organisation for African Unity (OAU), 2, 3, 4, 72, 197, 198; debt conference, 7; Lagos Plan of Action, 4, 7, 96, 4,_ 28, 191; Priority Programme for Economic Recovery (1985), see APPER

Osman, Kalil, 134 Overseas Development Institute (ODl), 23, 70

Paris Club, and African recovery, 11, 81, 82, 31, 163; debt relief, 49, 78, 198; debt rescheduling, 14, 50, 51, 52, 216, 10, 13, 22, 23, 87, 127 Paris Consultative Group, 127, 128, 145, 146 Pearson Commission Report (1969), 11, 13 Persian Gulf, 105 Peru, 173,13, 15 petrodollars, recycling of, 7, 12, 78 Philippines, 27, 28,11 Pliny, 55 Ponzi scheme, 9, 15 Poland, 172 Portugal, 32 ‘Programme of Action’ (Joint IMF-World Bank), 56 protectionism, 89

Quebec, 17

Rand Monetary Area (RMA), 199 Rawlings, Right Lt Jerry, 31, 34, 140, 145 Reagan, President, 62, 80, 81 recycled/substituted materials, impact of, 54, 33 Report of the Intergovernmental Group of 24 (1987), 23 resource gap, 40-41, 42 Ricardo, David, 41 Rome, Club of, 11 rural-urban migration, 36

Saudi Arabia, 105, 113, 125, 127, 12, 78, 81 Say’s Law, 105 Scharansky, 180 Senegal, 206, 209, agriculture, 128-30, 132; ‘bukk;’syndrome, 128; Compagnie Sucriere Senegalais (CSS), 126, 129; Dakar Industrial Free Zone, 130; debt, 127; discontent, 134, 136, 137; economic regression, 125, 131,

Index (Senegal cont.), 135; education, 132; and funding, 13, 2, 35; IMF-World Bank in, 125, 127, 138; imperialism in, 125, 129, 132, 133, 137, 138; incomes, 126; independence (1960), 125; industry, 130-31, 133; Institut Senegalais de Recherche Agricole (ISRA), 132; Islamic movements in, 134; Mimran group, 129; neocolonialism in, 126, 135; ‘New PoUcies’, 128-131, 132, 133, 134, 135; Office National de Co-operation et d’Assistance pour le Developpement (ONCAD), 128; Pacte colonial, 126; privatisation in, 128, 131; SAP, 214, 125, 127, 128, 129, 131, 132, 133, 135, 137; Senegalese Democratic Party (PDS), 138; socialism, 128; Socialist Party, 134, 136; stabilisation plan (1979-85), 127; strike (policemen’s), 136; unemployment, 133; Union Nationale des Groupements Economiques Senegalais (UNICES), 126 Senghor, Leopold, 126, 127, 128, 135 Seung, H. Choi, 140, 146 SIDA, 153 Scandinavia, 77, 79 Scandinavian Institute for African Studies, 4 Scotland, 46 Shagari, Shehu, 224, 225, 226, 229, 177, 178, 179, 181 Shah of Iran, 224 Shultz, George, 62 Sierra Leone, 206, 211; farm subsidies withdrawn, 212; SAP, 214, 215 Singapore, 56, 61 Smith, Adam, 41, 196 socialism, 72, 77, 90, 96, 97; scientific, 96 Somalia, calorie-sufficient level, 101, 103, 104, 107, 118; climate, 99, 115, 118; debt rescheduled, 50; devaluation, 112, 117, 119; economic deterioration, 99, 107, 37, 39; exchange rate, 109, 110, 111, 112, 119; exports/imports, unofficial, 99, 101, 105, 108, 109; exports, livestock, 112, 114, 115; ffanco valuta system, 105, 107, 109, 110; GDP, 100, 101, 102, 107, 108, 109, 114, 115, 118; IMF programme, 112, 114, 115, 116, 119; migrant

241

(Somalia cont.), workers, 99, 100, 101, 104, 105, 111, 116; nomadic pasturalism, 99, 100, 101-02, 103, 104, 108, 120; parallel market. 111, 117; peasant farming, 102, 103, 104, 108, 119; structural adjustment, 6, 100, 109, 114, 119, 120; urban incomes, 105, 106, 107, 109, 118 South Africa (RSA), 137; anti-apartheid pressure, 164, 169, 172, 173, 179, 184, 187, 188, 189, 190; asset freeze proposals, 189; austerity measures, 1985, 182; Chamber of Mines, 166; debt crisis, 162, 172-178, 180, 181, 182-190, 22, 24; debt service ratio, 23; De Kock Commission, 162, 164; De Lange Report, 190; devaluation, 174, 175; disinvestment, 174, 184; economic decline, 160-61, 169, 182; exchange rate, 174, 175, 176, 177, 183; GDP growth rate, 161; gold price, 162, 181; Gold Fields of South Africa, strike at, 177; Handelsinstituut, 175; and IMF, 160, 162, 164, 177, 204, 23; Leutwiler Plan, 180, 181, 185, 187; monetary reforms, 162, 163, 188; monopolies, 163; and Namibia, 192; Reserve Bank, 176, 177, 179; revolt, 1984/85, 172, 190; Rubicon Speech, 175, 178, 180; SA Federated Chambers of Industry, 175; Southern African dependence on, 17, 145, 160; Standstill Co-ordinating Committee, 178; State of Emergency, 172-174, 178, 180, 181, 183, 190; State Security Council, 34; stock exchange crash, 174; unemployment, 163, 182, 187; United Democratic Front (UDF), 173; Urban Foundation, 186; wars, 47 Southern Africa, 1, 145, 99; Southern African Customs Union Agreement (SACU), 160, 198; SADCC, 60 Sri Lanka, 61, 72; Export Processing Zones, 66; food subsidies removed, 68; health, 69 Stabex/Sysmin, 54 Stals, Dr. Chris, 178 Steyr (Nigeria), 182, 183-84 sub-Saharan Africa, 12; agriculture, 160-61; aid, 56; debt, 48, 49, 19, 21, 22, 23; debt-service ratio, 1, 19; definition, 29n; drought, 45; education, 45; economic deterioration.

242

Index

(sub-Saharan Africa cont.), 11, 13, 18-19, 46-47, 52, 55-56, 56; exports, 54-55, 63; GDP, 50; health, 48; IMF ‘extended facility’ arrangements, 23; import strangulation, 48; mortality in, 35; neocolonialism, 23; oil, 53, 111; quality of life in, 37, 38; SAF arrangements, 57, 22; SALs, 5; SECALS, 5; stabilisation/adjustment in, 40, 41, 43; transport infrastructure, 17; US military involvement, 80; war in, 47; World Bank report on, 89, 160 Sudan, agriculture, 123, 130, 137, 138; alternative programme, 92-93; austerity measures, 90; balance of payments, 127, 128; breadbasket strategy, 124, 77, 82; civil war, 77; cotton, 123, 137-38, 77, 78, 79; Cotton Public Corporation, 133; crisis, 6, 30, 79, 123; debt, 77, 80, 81, 82; deficit, 89; devaluation, 123, 124, 126, 127, 129, 130, 131, 138, 139, 88; drought in, 77; economic deterioration, 77, 91; exports, 130, 138, 77; food riots, 80; foreign exchange, 126, 131; GDP, 132, 134; Gezira scheme, 78; IMF, 123, 124, 125, 126, 127, 128, 133, 134, 136-38, 139, 78, 79, 80, 81, 87; irrigation schemes, 130, 133, 137, 138; mismanagement, 135-36, 139; monetarism, 131; parallel market, 126; People’s Assembly, 136; private sector, 88; refugees in, 77; regionalism, 136; rural poor, 35; SAP, 69, 2, 46, 78, 91; Sharia Law (1984), 80; Six Year Development Plan, 79; State Security Organisation, 139; subsidies withdrawn, 135; sugar, 133, 134, 135, 77; strikes, 134; Sudanese Socialist Union, 136, 139; Three Year Public Investment Programme (TYPIP), 79; trade liberalisation, 126, 127, 128,, 129, 133, 139; Umma Party, 124; unemployment, 135, 139; US intervention in, 80-81; wages, 131; World Bank in, 125, 130 77 Sudan Textile Trading Company, 134 SWAPO, 196; Economic Reconstruction Programme, 202; see also Namibia Swaziland, 45 Switzerland, Central Bank, 178 synthetic substitution of raw materials, 142, 154

Taiwan, a ‘success story’, 16, 56 Tanzania, agrarian economy, 70, 81, 82, 91, 93, 94, 95, 83, 86, 90; alternative recovery strategy, 25, 27, 33, 54, 93-94; austerity measures, 78, 79, 68, 90; balance of payments, 70; bilateral donors to, 77; CCM party, 79; coffee boom, 71; co-operatives, 76, 86; debt, 79, 21, 84, 87; deficit, 89; devaluation, 78, 80, 81, 82, 91, 84, 85, 88, 89; education, 92, 26, 42; economic deterioration, 77, 82-83; environmental drawbacks, 71, 84; ERP, 93, 96; exchange rate, 91, 85; Export Credit Guarantee Scheme, 85; Five Year Development Plan, Third, 71, 44; foreign exchange earnings, 83; Foreign Exchange Seed Capital Revolving Fund, 85; GDP, 6, 81; General Agricultural Products Export Corp. (GAPEX), 89; health, 92; and IMF, 77, 78, 81, 82, 84, 87, 89; IMF—World Bank resisted, 30, 69, 73, 77, 27, 87; imports to, 70, 71; loans to, 13, 82; National Bank of Commerce (NBC), 76; National Economic Survival Programme (NESP), 75-76, 83, 93, 95, 84; National Executive CouncU (NEC), 72; parallel market, 75, 81, 84; parastatals, 92, 85, 88, 90; private sector, 88; reconstruction, 80, 24; SAPs, 76, 77, 80, 83, 90, 93, 96, 2, 84, 85, 86-87, 91; socialism, 77, 81; Tanzania Sisal Authority (TSA), 89; trade, 74, 78, 80, 82; Ugandan war, 71, 72, 83; ujamaa model, 82, 83, 95, 97, 86; urban/rural balance, 70 Tham, Carl, 153 Thatcher, Margaret, 62 Third World, 1, 7, 11, 69, 144-45, 7, 12, 13, 154; Bretton Woods system, 20, 21, 23, 24, 31, 32; debt, 7-16; decapitalisation, 3, 8; dependence, 192, 196; exchange controls, 22, 195; and First World, 78, 83, 142,1, 10, 14, 18, 130; loans, 183; market economy ideology, 89-90, 220; primary production, 26, 161; redistribution in, 35; SAPs, 69, 60, 66; south-south co-operation, 204; trade with US, 14-15 Togo, 206, 214, 216

Index Toure, Mamadou, 127 transnational corporations (TNCs), 162, 163, 202, 208, 220,17, 131, 161, 162, 164, 165, 168; see also multinationals Treaty of Versailles (1919), 192 Tunisia, 79 Turabi, Dr, 136 Tutu, Bishop, 180, 189

Uganda, adjustment packages, 104-105, 106, 108, 109; agriculture, 100, 101, 108, 109; Bank of Uganda, 105, 106; Central Btmk, 106; devaluation, 98, 100, 104; employment, 96-99, 107; exports, illegal, 100, 107; food policy, 101; foreign exchange, 99, 104; IMF-World Bank in, 5, 95-96, 98, 99, 101, 102, 103, 106, 107; magendo economy, 95,107; magendo incomes, 99, 102, 107; National Resistance Movement (NRM), 32, 105; price controls, abolished, 106; Produce Marketing Board, 106; Rehabilitation and Development Plan, 106; social services, 101-103; stabilisation, 104; Ten-Point Programme, 108-109; Ugandan Development Corporation (UDC), 106, 108; Ugandan War, 71, 47, 77; World Bank study of, 99, 108 United Nations (UN), 1, 30, 150,154; African Steering Committee, 11; Decree No. 1, 202; UN Council for Namibia, 192; UNCDF, 167; UNCTAD II, 18, 30, 50, 151; UNCTAD VII, 23, 49; UNCTAD, Common Fund Agreement, 54; UN Decade for Women, 56; UNDP, Round Tables, 51; UN Economic Commission for Africa, 155; UNESCO, 155; UN High Commissioner for Refugees, 28; UNICEF, 1, 23, on vulnerable groups, 13, 16, 89, 31, 68, 70, 71, 72, 74, 122; UN Institute for Namibia, 203; Resolution 2145 (1966), 192; Resolution 2248 (1967), 192 United Democratic Front (South Africa), 173 United Nigerian Textiles, 182 USA, 2, 20, 149, 174, 178, 189, 1, 7, 8, 9, 10, 12, 13, 15, 16, 59, 129, 137, 162; aid programmes, 8; Agriculture

243

(USA cont.). Department, 163, 166; ‘Baker Plan’ (1985), 14, 15, 59; ‘Bradley Plan’, 15; Federal Reserve, 176, 178, 185,13; foreign investor, 220; IMF/World Bank, dominated by, 21, 4, 80, 191, 194; protectionism, 54; in sub-Saharan Africa, 80; trade discrimination, 145; trade war with Japan, 57; unemployment, 150 USAID, 167, 62, 79, 80, 125 USSR, arms supplier, 91; commodity agreement ratified, 54; glasnost and perestroika, 216; in Sudan, 80, 82 Uruguay, 10 Uruguay Round (multilateral trade negotiations), 55

Venezuela, 12, 13 Venice Summit, 11, 14, 49 wages, 35, 41, 80, 105, 131, 156, 197, 115, 117, 121, 144, 145, 186 Walker, Lennon, 137 West Africa, 206; agricultural programmes, 213; climate, 206, 213, 216; colonialism, 207; development strategy, 210; economic decline, 207-208; ECOWAS, 213; GDP, 216; import substitution, 207, 217n; industrialisation in, 207; public sector, 210; stabilisation, 209; structural adjustment, 207, 209, 210-12, 216, 218n West African Monetary Union, 126 women, 11, 32, 2, 3, 45, 49, 50, 198; ‘Adjustment with Gender Equity’, 71, 74; farmers, 70, 73; household management, 64-65, 68; labour unpaid, 57-58; in manufacturing, 73; and market, 63; public services, 63, 66; and the state, 62-63; and structural adjustment programmes, 64-69, 70; Women’s Bureaux, 56, 58, 71, 72, 74 World Bank (IBRD), 1, 2, 4, 11, 25; in Africa, 11, 25, 28-33, 52, 90, 96, 19, 22, 23, 31, 52, 161, 191; Berg Report, 3, 29, 33, 28; and capitalism, 2, 21, 22, 23, 24, 31; conditionality, 17, 18, 20, 22, 28, 29, 30, 31, 92, 2, 8, 25, 27, 61, 67, 191; Consultative Groups (CGs), 51; development policy reform, 59; and Europe, 2; exports, programme

244

Index

(World Bank cont.), to rehabilitate, 61; growth programmes, 25, 27, 29, 33, 60, 33; history, 25; ideology of, 90, 26, 97, 99-100, 195; IMF partnership, 26; influence, 23; ‘integrated rural development’, 32f 33; International Development Association, 19, 166, 167; loans untied, 3; and public finance, 200; specied assistance facility, 56; Structural Adjustment Loans (SALs), 5, 12, 13, 15, 17, 18, 22, 27, 51, 56, 58, 69, 73, 76, 89, 96, 214-15, 33, 48, 61, 178; Structural Adjustment Programmes (SAPs), 27-28, 29, 31, 42, 219, 221, 42, 61, 70, 191; Sectoral Adjustment Loans (SECALS), 12, 56, 58; social cost of programmes, 16,1, 2, 64-65, 68; and sub-Saharan Africa, 14, 19; World Development Report (1987), 21 World Commission on Environment and Development, 61 World Employment Programme, 44, 49 World War, Second, 2, 7

;

;

Zaire, crisis, 6, 204, 32 debt, 50, 21 and loans, 13 Zambia, 11, 204, 21 22 32 46 66 68 agriculture, 96,112 114 116 balance of payments deficit, 113, 115; children, 122-23; ‘compulsory financing facility’ (CFF), 113; copper exports, 142, 144, 112 114 116 devaluation, 143, 144, 116 education. 111, 117; food subsidies removed, 68 foreign exchange auctions, 22, 34, 36-37, 39,

, , , , , ; , , ;

, ;

,

;

;

,

(Zambia cont.), 40, 42, 143, 144,115 116 121 Foreign Exchange Management Committee (FEMAC), 147; GDP, 112 household structures/ incomes, 117 19 120 121 123 IMF policies, 5, 144-46, 113 114 IMF—World Bank resisted, 30, 37-38, 69, 142, 147, 197 import-substitution, 142, 143; income—debt ratio, 1; independence, 142; informal economy, 120 Interim National Development Plan, 148; loans, 13, 30, 143, 146; National Commission for Development Planning, 116 parallel market, 123 parastatals, 114 population. 111 Prices and Incomes Commission, 147, 166 riots, 6, 37, 79; SAPs, 114 and South Africa 145; Times of TLambia, 124; University Teaching Hospital (Lusaka), 123 wages, 143,115 117 121 women. 111 117 120 121 123 124 World Bank investment programme, 143, 61 Zimbabwe, 96, 33 44 53 54 agriculture, 155; debts, 154, 21 exports, 154; devaluation, 153; drought programmes, 46 economic measures, 1987, 155-56; foreign currency allocation, 154-5; GDP, 153; health, 36 IMF programme for, 153; independence, 152; industry, 155; Rhodesian Stabilisation Policy (1975-79), 40 Transitional National Development Plan (TNDP), 153; wage freeze, 156; World Bank loan, 153, 156

,

;

; - ,

,

,

,

;

;

;

;

;

;

;

;

;

;

;

; ;

,

,

,

, , - ; ;

;

;

,

;

,

,

,

African ‘per capita income has deciined during the 1980s by over a fifth... export vaiue has faiien by neariy haif... [and] the debt burden has reached crisis proportions’ - World Bank/UNDP Report . - Debt poses the greatest threat to the incomes and general welfare of countless numbers of people in the Third World, as well as to the prospects for development and democracy. To date, most regional analyses have focused on Latin America, with little specific attention paid to Africa. These two volumes redress the balance. They not only confirm the World Bank’s assessment, but show the real situation to be far worse. The essays originate from a conference organized by the Institute for African Alternatives where African scholars and public officials confronted representatives of the IMF and the World Bank with grim evidence of their failed programmes. Volume One examines the economic effects and Volume Two the social and political impact. Together, they represent an African challenge to the assumptions and theories of the international monetary system, upon which IMF and Bank policies are based. Through sectoral and case studies from Anglo- and Francophone Africa, the essays reveal the harsh effects of these policies on the lives not only of Africa’s children, workers, women and peasants, but also of the African middle class. In their place, they present alternative solutions, including a repudiation of foreign debts, the formation of an African Debtors’ Cartel under the OAU, and the democratization of the IMF and the World Bank. Bade Onimode is Professor of Economics at the University of Ibadan. The contributors include the Deputy Secretary-General of the Commonwealth, Chief Emeka Anyaoku, and such prominent academics as Caleb Fundanga, Haroub Othman, Cheryl Payer, Reginald Green, Fantu Cheru, Laurence Harris, Abdoulaye Bathily and Yusuf Bangura.

*

Zed Books Africa/Development/Economics/Politics 0 86232 828 4 Hb 0 86232 829 2 Pb

J11 27 89

06-DJV-688

$17.50