Chapter

CHAPTER 3 The Setting for Adjustment and Reform

Author(s):
Susan Schadler, and Hugh Bredenkamp
Published Date:
June 1999
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Author(s)
Sharmini Coorey

The countries under review were among the world’s poorest, with annual per capita GNP averaging about US$400 in the early 1980s (compared with over $1,800 for other developing countries). This gap in income had widened steadily over a 15-year period from 1970 to 1985, most notably in the final decade (Figure 3.1).

Figure 3.1Trends in National Income

Sources: World Bank, Social Indicators of Development database; and World Tables database.

1For nontransition SAF/ESAF countries, excludes Mozambique.

Initial Conditions

Like many other developing countries during the 1960s and 1970s, ESAF users had followed a protectionist, inward-oriented, dirigiste development strategy based on a major role for the public-sector. The resulting legacy of distortionary policies and institutional rigidities had not only left them unusually vulnerable to adverse economic-shocks, but it had also contributed to a low-investment, low-growth equilibrium and a fragile external position. The productive base of these economies was typically narrow, and exports were concentrated in a few primary commodities; manufacturing activity was hampered by inadequate infrastructure, underdeveloped financial markets, and a poor human resource base. In addition, pervasive state intervention and a dominant public sector had distorted market incentives and weakened the supply response. Although burgeoning demand pressures were partially held in check through an elaborate system of controls, they spilled over to large current account deficits, high debt ratios, and rising inflationary pressures.

ESAF users typically did not begin adjustment in crisis conditions stemming from sudden or extreme macroeconomic instability. To some extent, financial imbalances had been mitigated through previous IMF-supported programs. Of the 36 countries reviewed, 25 had initiated stabilization under IMF Stand-By Arrangements in the three years preceding their first SAF/ESAF arrangement. More generally, the relative absence of crisis conditions appears to reflect two other factors. First, external financing was highly concentrated on official, largely concessional, inflows that were not subject to market-based volatility;1 moreover, if debt-servicing difficulties arose, most of these debts could be rescheduled in an orderly manner. Second, many countries resorted to extensive controls and thus managed to suppress sudden or sharp market-clearing increases in prices, particularly of foreign exchange. Nevertheless, by the start of their first SAF/ESAF-supported program, long-standing economic problems had, in most countries, culminated in an unsustainable external debt position. Poor growth and export performance and continuous recourse to external borrowing—even if mainly on concessional terms—had given rise to high debt-service ratios and debt-servicing difficulties, including accumulation of arrears. Many sought IMF support to pave the way for debt rescheduling from the Paris Club or as a result of pressure from donor countries. Others sought increased concessional financing for their adjustment efforts, both directly through the SAF/ESAF and indirectly through bilateral commitments in the context of an IMF-supported program.

Most ESAF countries were caught in a cycle of low saving, low investment, and low growth. In the three years preceding the first SAF/ESAF arrangement, per capita real GDP declined by almost 1 percent a year on average in nontransition ESAF countries, in contrast to an increase of over 1 percent a year in other developing countries (Figure 3.2). Investment and saving ratios were also much lower in ESAF countries; gross national saving averaged only 7 percent of GDP, less than half the average in other developing countries. There was, however, considerable regional variation in growth and saving, but less so in investment (Figure 3.3).2 Per capita growth rates tended to be more closely correlated with saving than with investment ratios across all regions. Only the Asian countries—which also had the highest saving and investment rates—experienced positive per capita growth. Leaving aside the steep output decline in some transition economies (see Box 3.1), Western Hemisphere countries, followed by the countries of CFA Africa, had the lowest growth and saving rates. The greater uniformity of investment ratios across regions suggests that regional differences in growth reflect mainly differences in total factor productivity.

Figure 3.2Key Macroeconomic Indicators: ESAF and Other Developing Countries

(Average in the three years preceding SAF/ESAF arrangement)

Sources: IMF, World Economic Outlook; and IMF staff estimates.

1Average of 1984 to 1986, which corresponds approximately to the pre-ESAF period for most countries.

2Excludes Guyana.

3Including grants.

Figure 3.3Key Macroeconomic Indicators, by Region

(Average in the three years preceding SAF/ESAF arrangement)

Source: IMF staff estimates.

1Excludes Guyana.

2National saving when available, domestic saving otherwise.

3Excluding grants.

What factors underlay this generally weak record of growth, investment, and saving? In all ESAF countries, institutional rigidities and structural distortions had rendered the supply side of the economy inefficient and unresponsive to market signals. Public enterprises played a substantial role in production and employment—particularly in mining, manufacturing, and utilities—whereas publicly owned marketing boards and trading monopolies intervened heavily in agriculture and international trade. Sketchy data suggest that most public enterprises were highly inefficient, operated with significant losses, or earned low rates of return on investment (see Schadler and others, 1993). Official control over prices—often through state monopolies and marketing boards—was common, although the extent varied widely across countries. These controls stemmed from a variety of motives—to subsidize production or consumption, to shield domestic producers and consumers from international price fluctuations, or to raise revenue for the budget—and were often highly distortionary. In many countries, particularly in Africa, these policies had the effect of lowering producer prices below world market levels in agriculture—the dominant sector of the economy—with detrimental effects on output and exports. Labor markets were highly distorted and segmented, particularly between formal and informal sectors, in all countries. Rigidities were perpetuated in the formal sector by public sector dominance in employment and wage setting; by extensive regulations limiting private sector flexibility in wages, hiring, and retrenchment; and, in some cases, by de facto wage indexation.

Box 3.1Initial Conditions in Transition Economies

At the start of their transition to a market economy, the six formerly centrally planned economies—Albania, Cambodia, Kyrgyz Republic, Lao P.D.R., Mongolia, and Vietnam—faced common problems: very high inflation, major fiscal imbalances, widespread state ownership (particularly in industry), nonmarket pricing, and direct distribution of consumer goods. They also suffered a severe external shock when the disintegration of the Soviet Union and the collapse of the Council for Mutual Economic Assistance (CMEA) in 1991 wiped out various forms of transfers from the Soviet Union and substantially reduced their terms of trade. Compared with other ESAF users, all had modest inflows of foreign aid and relatively low external debt burdens. However, by the start of their first SAF/ESAF arrangements—in 1993 and 1994—Cambodia and Vietnam had achieved relative macroeconomic stability, including low or moderate inflation and positive real growth. These countries, particularly Vietnam, had also made substantial progress in reducing fiscal imbalances and in restructuring their economies, so that both structurally and in terms of their macroeconomic indicators they were not significantly different from other SAF/ESAF users. Laos, which had started its first three-year SAF arrangement in 1989 at the beginning of its transition, had also achieved similar conditions by the start of its ESAF arrangement in 1993.

The three Indochinese countries were, in fact, structurally different from other transition economies, which may explain why they did not suffer an initial output collapse. They were dominated by private, family-based agriculture; the state-owned industrial sector was relatively small; and central planning was, in practice, not fully entrenched, so that informal private markets prevailed even before reform. In addition, they were less integrated with the Soviet bloc in terms of both trade and aid and, hence, suffered a less severe (albeit still substantial) external shock at the outset. They also benefited from their proximity to rapidly growing Asian economies that were willing to invest in neighboring low-wage countries. Nevertheless, these countries were emerging from extended periods of war and isolation and, like many other ESAF countries, were faced with extreme poverty, rudimentary infrastructure, and weak administrative capacity.

By contrast, Albania, the Kyrgyz Republic, and Mongolia were still experiencing very high inflation (the Kyrgyz Republic at an annual rate in excess of 1,000 percent), sharply declining output, and large fiscal deficits at the start of their first ESAF arrangements in 1993 and 1994. They had also made relatively modest progress in privatization and restructuring. The Kyrgyz Republic and Mongolia had been closely integrated with the Soviet Union, so they not only experienced a cutoff of important supply links and markets but were also relatively unaccustomed to the functioning of private markets. In addition, these two countries were geographically more isolated and less able to benefit from foreign direct investment from neighboring countries.

Exchange and financial markets were distorted and inefficient. Many countries maintained overvalued currencies supported by restrictive exchange and trade regimes, although the extent of these controls varied widely across countries. Given the excess demand for foreign exchange at the official exchange rate, imports were often heavily restricted—through quantitative controls, state trade monopolies, or steep tariffs—giving rise to high effective rates of protection. Foreign exchange was subject to surrender requirements, and several countries had state monopolies in exports. These restrictions substantially biased incentives against exports. They also frequently spawned active black markets and substantial black market exchange rate premiums. In almost all cases financial markets were highly repressed, with tight controls on interest rates and the allocation of credit. Real interest rates were often negative, and credit allocation favored public enterprises, with the result that nonperforming loans and bank insolvency were common.

Institutional weaknesses contributed to problems of governance in many ESAF countries. Bureaucracies were often inefficient, judicial systems weak, and judicial processes time consuming; a coherent legal framework governing commercial activities was sometimes lacking. Extensive public sector involvement and regulation in the economy also offered wide scope for corruption. Not only was government frequently engaged in unproductive activities, but it also often failed to perform functions—such as the protection of property rights and enforcement of contracts—necessary for fostering a strong private sector. Uncertainty and insecurity resulting from poor governance had a debilitating effect on private sector investment and activity in many countries.

Growth and productivity in ESAF countries were also hampered by a lack of investment hi human capital and adverse demographics. Populations were often growing faster than elsewhere, and high dependency ratios contributed to depress private saving (Figure 3.4). These growing populations typically had poor access to health and education services, particularly in many parts of Africa and south Asia. Life expectancy was lower, and infant mortality was substantially higher, than in other developing countries. Illiteracy was higher and secondary school enrollment lower—most notably in Africa—reflecting not only more limited accessibility but also the pressure, because of widespread poverty, for school-age children to participate in the labor force. Human resource indicators were markedly better in the Western Hemisphere and in some transition economies. But for most ESAF countries, they signaled a pressing need for improving human resource endowments through greater investment in health and education and through the alleviation of poverty.

Figure 3.4Social Indicators of Development, 1981–85

(Group average)

Source: World Bank, Social Indicators of Development database.

1Ratio of the population under 15 and above 65 years of age to the active population (aged 15 to 65).

The ability to meet such spending needs was hampered by the poor condition of public finances in most countries.3 Although several countries had made some progress in reducing fiscal deficits relative to GDP in the three years preceding the first SAF/ESAF arrangement, deficits (excluding external grants) remained large—in excess of 10 percent of GDP, on average. Large deficits kept domestic absorption high and national saving low, particularly in Western Hemisphere and transition economies (see Figures 3.2 and 3.3). Tax systems were nearly always narrowly based and heavily dependent on a few revenue sources—often international trade—with many exemptions. Both tax administration and expenditure control were weak, usually reflecting poor administrative capacity, inadequate monitoring, and institutional weaknesses. Transfers to public enterprises, generalized consumer subsidies, large government wage bills (mainly from excessive employment), and ill-conceived capital projects were a major drain on the budget. In some countries, military expenditures—often related to civil wars (see the last section of the chapter)—were also a substantial burden.

Given the weak productive base, rising demand pressures from the public sector and the growing population spilled over to sizable external current account deficits that required large inflows of foreign grants and loans. Current account deficits averaged about 12 percent of GDP excluding grants (about 7 percent of GDP including grants) in the three years preceding the first SAF/ESAF arrangement, and external debt reached high levels in relation to GDP (Figures 3.5 and 3.6).4 Many ESAF countries had borrowed excessively on the strength of a sharp increase in commodity prices in the late 1970s and early 1980s, but by the mid–1980s they were faced with a decline in their terms of trade. Export performance was poor in all regions other than Asia. Moreover, the undiversified export base exacerbated the negative impact of the terms of trade decline, and imports were compressed sharply.5 Official reserve levels were often inadequate in light of the volatility of foreign exchange earnings.6 Among non-CFA African countries, reserve levels were frequently maintained artificially through reliance on restrictions in the absence of fundamental policy adjustments.

Figure 3.5ESAF Countries: Balance of Payments Indicators

(In the three years preceding SAF/ESAF arrangement unless otherwise noted)

Source: IMF staff estimates.

1Excluding official transfers.

2ExcIudes Guyana.

3At the end of the year preceding the first SAF/ESAF arrangement.

4Data not available for the transition economies group.

Figure 3.6External Debt Indicators

(In the year preceding the first SAF/ESAF arrangement unless otherwise noted)

Source: IMF staff estimates.

1Public and publicly guaranteed debt at the end of the year preceding the first SAF/ESAF arrangement.

2Excludes Guyana.

Deep-seated weaknesses in the external position gave rise to difficulties in meeting external debt obligations in many countries. ESAF users were generally highly dependent on official aid inflows. In 1985 concessional debt amounted to just under half of total debt, compared with 16 percent for all developing countries.7 Despite the highly concessional nature of borrowing, weak export performance resulted in high debt-service ratios (see Figure 3.6). Median scheduled debt-service ratios reached 35–40 percent in Africa in the three years preceding the first SAF/ESAF arrangement, and even higher in the Western Hemisphere, reflecting both markedly higher debt levels and greater nonconcessional borrowing. Since the mid–1980s, 25 countries—other than Vietnam, all in Africa and the Western Hemisphere—were unable to meet their debt-service obligations in full and resorted to external arrears or to reschedulings with the Paris Club. Of these, 15 also restructured their commercial bank debt. By marked contrast, none of the four nontransition Asian countries accumulated arrears or underwent debt rescheduling, reflecting their lower debt levels, stronger export growth, and higher domestic saving.

Domestic demand pressures were also reflected in rising inflation rates. Median inflation rates edged up from about 11 percent to over 15 percent in the three years preceding the first SAF/ESAF arrangement (Figure 3.7). Excluding the CFA African countries, median inflation rose sharply from 15 percent to 30 percent during the same period. Although there were a few cases of very high (in excess of 100 percent) inflation—mainly among Western Hemisphere and transition economies—almost half of non-CEA African ESAF countries experienced chronic and volatile inflation in the 10–40 percent range. Given the scarcity of inflation hedges, these levels and changes in inflation helped create an uncertain economic environment, with adverse consequences for saving, investment, and (ultimately) growth (see Chapters 5 and 6).

Figure 3.7Inflation and Parallel Market Exchange Rates

(Median; in the three years preceding first SAF/ESAF arrangement)

Source: IMF staff estimates.

1End-period inflation when available, period average otherwise.

2Excludes seven countries that had an inflation rate higher than 100 percent, on average, in the three years preceding the first SAF/ESAF arrangement.

Exchange rate arrangements varied across ESAF countries. Only the CFA African countries maintained a formal nominal exchange rate anchor with little or no restrictions on current payments. Two small landlocked countries—Nepal and Lesotho—pegged their exchange rate to a large neighboring developing country, while Nicaragua and Zimbabwe also had explicit targets for the nominal exchange rate before their first ESAF arrangements. Most others maintained a more flexible approach, typically with controls on domestic credit and periodic adjustments of the official exchange rate according to a (mostly undefined) balancing of inflation and external objectives—as indicated by competitiveness or international reserves. Official nominal exchange rates were supported by exchange and trade controls of varying intensity. The generally high but wide-ranging parallel market exchange rate premiums suggest that official rates were overvalued in most countries at the start of their first SAF/ESAF arrangement (see Figure 3.7). Of the 25 non-CFA African countries for which data are available, 16 had premiums in excess of 20 percent in at least two of the three years preceding their first ESAF arrangement, and 11 had premiums in excess of 40 percent in the year immediately before; of the latter, 9 were in non-CFA Africa. Only in the Western Hemisphere did the median parallel market premium show a declining trend during the three years preceding the first arrangement, albeit from very high levels.

There were striking differences in initial conditions before subsequent ESAF arrangements (19 cases in all), compared with those prevailing before the first SAF/ESAF arrangement in the 36 countries.8 Per capita real GDP growth was, on average, positive, and domestic investment was significantly higher (Figure 3.8). Inflation was lower; median inflation in non-CFA African repeat arrangements was 9 percent compared with 30 percent for first-time arrangements. The real exchange rate was markedly more depreciated, and median gross reserves were higher at 23 months of imports. External debt was also higher, but the composition had shifted substantially toward concessional sources, which accounted for two-thirds of total debt. There were, however, some areas where initial conditions did not show clear improvement. Programs supported by the first SAF/ESAF arrangements had not delivered a lasting improvement in national saving rates, and fiscal deficits were only marginally lower. Consistent with this, current account deficits were somewhat higher (before official transfers), notwithstanding lower scheduled debt-service ratios.

Figure 3.8Selected Economic Indicators: Repeat ESAF Arrangements

(In the three years preceding SAF/ESAF arrangement)

Sources: IMF, Information Notice System; and IMF staff estimates.

1End-period inflation when available, period average otherwise.

2Excludes Guyana.

3National saving when available, domestic saving otherwise.

4Excluding grants.

Adjustment Strategy

By the mid–1980s, economic conditions in ESAF countries pointed to the need for a more fundamental reorientation of the adjustment strategy to address deep-seated structural problems. Although previous Stand-By Arrangements had helped to mitigate the more immediate macroeconomic problems in many countries, these arrangements were not suited, nor originally intended, for this task. Adjustment programs emphasizing structural reform and supported by longer-term IMF resources were introduced under the SAF, and subsequently the ESAF, with the aim of achieving sustained higher growth and external viability. Although individual programs were tailored to the circumstances of particular countries, given the common problems they faced, reform strategies under SAF/ESAF arrangements shared the following core elements.

  • Raise saving rates. Fiscal adjustment was a central element of almost all ESAF programs both because public dissaving contributed to the very low national saving rates and because increasing public saving was the most reliable means to improve national saving—even allowing for some offset in private saving. Financial sector reform and a shift to positive real interest rates were important for the mobilization and more efficient intermediation of private saving. The basic aim was to shift the macroeconomic balances underlying current account deficits in favor of greater investment.
  • Secure financial stability. Programs under the ESAF usually aimed to lower inflation to single-digit levels, mainly through a tightening of domestic credit. Since public sector deficits were frequently a chronic source of credit expansion, programs sought to reduce budget deficits and strengthen public finances through revenue and expenditure reform. The chronic and volatile inflation experienced by many ESAF countries was perceived to be damaging because it created uncertainties over wage demands, fiscal (especially tax) policy, and exchange rate policy and hindered economic decision making, particularly with regard to private investment. Low inflation was also considered an important factor in improving conditions for the poorest sectors of the population, who suffered most from the inflation tax.
  • Liberalize and open up economies to foreign trade. Systemic antiexport bias was to be eliminated through nominal exchange rate unification, liberalization of exchange and trade regimes (particularly removal of quantitative restrictions) as well as of export price and marketing regimes, and public enterprise reform. Many programs also aimed at real devaluation of the domestic currency secured by fiscal adjustment.
  • Reduce government intervention and promote well-functioning markets. Structural reforms under ESAF programs typically were intended to reduce the role of the state in controlling prices, intervening in exchange and product markets, and engaging in production and distribution. The development of the financial sector would be encouraged through greater liberalization, privatization, and improved regulation and supervision. Thus, deregulation of pricing and marketing, public enterprise and banking system reform, and privatization were important elements of ESAF-supported programs.
  • Reorient government spending and restructure revenues. Although the share of government expenditure in GDP was not unusually large in ESAF countries, an excessive portion was devoted to inefficient and unproductive uses. Savings were needed in these areas to provide more resources for investment in human capital—health and education—and basic infrastructure. Structural reforms under ESAF programs often included expenditure reform, privatization, civil service reform, and similar measures to redirect and rationalize public expenditure. Similarly, the public revenue system needed to be made more efficient and less distortionary through the simplification of tax structures, the adoption of modern tax systems such as the value-added tax (VAT), and more effective tax and customs administration.
  • Mobilize external resources. A key part of the strategy under the ESAF was to support adjustment and reform by temporarily easing the external financing constraint and to move countries towards external viability, in part through reducing reliance on debt-creating inflows and, in some cases, through reduction of debt burdens. Policies to this end included clearance of external arrears, agreements on official debt rescheduling and debt relief, a shift to more concessional financing, and rebuilding official reserves.

Trends in the External and Domestic Environments

The Global Setting

The external environment that accompanied adjustment under SAF/ESAF-supported programs was a mixture of positive and negative elements. On the positive side, since most ESAF countries had limited access to commercial borrowing, they were somewhat shielded from the sharp reduction in private lending that severely affected many middle-income developing countries in the middle to late 1980s. In addition, growth of demand in trading partners—as measured by the increase in their total real imports—picked up during the first three program years for all regions other than Western Hemisphere, reflecting the recovery of industrial countries from recession in the early 1980s (Figure 3.9).9 The strong demand faced by transition economies reflected increased trade of the Indochinese countries with fast-growing economies in the region. However, demand growth subsequently slackened in Asia and Africa during the industrial country recession of 1991–93.

Figure 3.9Partner-Country Real Imports of Goods and Services

(Average annual percent change)

Source: IMF staff estimates.

1Because most first-time arrangements started after 1991 for countries in these regions, the period t + 3 to t + 5 is not shown.

Net resource transfers increased markedly during the first three years under ESAF arrangements across all regions other than the Western Hemisphere (Figure 3.10). These transfers reflected increases in grants secured in part through consultative or support groups and bilateral contacts, new undertakings (such as the Special Program of Assistance for Sub-Saharan Africa), increased concessionality in debt reschedulings with the Paris Club,10 and debt cancellations outside the Paris Club context. During subsequent years, net resource transfers remained well above pre-ESAF levels in Asia and non-CFA Africa, but declined for CFA African countries, in part reflecting a hiatus in external support pending the CFA franc devaluation in 1994. Average concessional inflows to ESAF users picked up sharply in the mid–1980s and exceeded comparable inflows to other developing countries for almost the entire ESAF period until 1994 (the last year for which data are available). After 1991, there was a perceptible shift in resources in favor of ESAF countries as aid budgets in industrial countries were squeezed.

Figure 3.10Net Resource Transfers and Concessional Inflows

Sources: World Bank, World Debt Tables database; and IMF staff estimates.

1Calculated as net official transfers plus official borrowing from multilateral and bilateral lenders plus medium- and long-term public commercial borrowing, plus other net inflows (including errors and omissions), minus scheduled interest payments, minus scheduled principal payments. Excludes Guyana.

2Since most first-time arrangements started after 1991 for countries in these regions, the period t + 3 to t + 5 is not shown.

3Official borrowing with original grant element of at least 25 percent; excludes official transfers.

In contrast, and notwithstanding periodic and sizable swings, ESAF countries suffered a secular decline in their terms of trade since the late 1970s; by 1995 their terms of trade were substantially lower than levels prevailing in the early 1970s before the first oil shock (Figure 3.11). To some extent, the economic problems faced by many countries reflected delays in undertaking the difficult, but needed, adjustment to this long-term deterioration. There was considerable regional variation in terms of trade developments during the ESAF period (regional averages themselves mask substantial differences among individual countries). Reflecting movements in beverage prices (coffee, tea, cocoa), the terms of trade of Asian, non-CFA African, and Western Hemisphere ESAF countries declined during the late 1980s, reaching- a trough in 1992–93. The CFA African countries were less reliant on beverage exports and benefited through most of the 1980s from declining oil prices. But their terms of trade suffered also during the late 1980s and early 1990s as oil prices recovered and nonfuel commodity prices turned down. In 1994–95, however, a broadly based strengthening of world prices for nonfuel commodities, coupled with relatively subdued oil prices, generated a substantial improvement in ESAF countries’ terms of trade across all regions.

Figure 3.11World Commodity Prices and Terms of Trade

Source: IMF staff estimates.

Box 3.2Major Episodes of Domestic Conflict in ESAF Countries

In the decade before the first SAF/ESAF arrangement
Cambodia(1978–91)Civil war—Khmer Rouge versus the government
Nicaragua(1981–88)Civil war—Contras versus the Sandinistas
Uganda(1981–86)Civil war
During the ESAF period: 1986–95
Burundi(1988–95)Ethnic violence
Kenya(1991–95)Ethnic violence
Madagascar(1991–93)Political unrest
Mali(1991–93)Coup, civil unrest
Mozambique(1981–92)Civil war
Pakistan(1994–95)Political unrest
Sierra Leone(1991–95)Civil war
Sri Lanka(1984–95)Civil war—Tamil separatists versus the government; insurgency
Togo(1991–93)Political unrest

Many ESAF countries suffered restricted access to industrial country markets for key export products—particularly agriculture, textiles, and clothing, where General Agreement on Tariffs and Trade (GATT) rules were relatively weak.11 Although some, particularly African, countries benefited from preferential access for agricultural products through the Lomé Convention, these agreements tended to discourage export diversification by artificially segmenting markets and to foster dependence on nonmarket solutions. Similarly, the Multi-Fiber Arrangement—under which developing country exports of textiles and garments were subject to quantitative restrictions—restricted opportunities for export growth in some countries (Bangladesh, Pakistan, and Sri Lanka). ESAF users—like most other developing countries—benefited from duty-free access to industrial country markets through the Generalized System of Preferences (GSP). However, these preferences were mainly beneficial for products where the principal trade restriction was in the form of tariffs, and the GSP sometimes was not applied to products of particular export interest to ESAF countries.

During the period under review, industrial countries increased the complexities of their protective regimes in certain “sensitive sectors” (particularly agriculture and textiles). A number of regional trading arrangements were also concluded—the European Union (EU) single market, Europe Agreements, and the North American Free Trade Agreement (NAFTA)—which may have had trade-diverting effects. At the same time, some elements of various preferential trading schemes were broadened, with liberalizing effects. In sum, the net effect of these various trade restrictions and preferences depends on the composition of exports and potential exports and is difficult to estimate for ESAF users as a group. However, barriers to global free trade in agriculture and labor-intensive manufactured products, including the lack of transparency, are likely to have hampered the diversification and development of exports in many ESAF countries.

Wars, Civil Strife, and Natural Disasters

Many ESAF countries suffered adverse domestic shocks to which their fragile economic and social structures had left them particularly vulnerable. Of the 36 countries under review, 5 had suffered prolonged periods of armed conflict in the decade preceding their first ESAF arrangement, leaving their economies substantially weakened and adversely affecting the political environment during the adjustment period (Box 3.2, preceding page). Nine others experienced protracted and severe episodes of civil war and ethnic violence during their SAF/ESAF arrangements. These episodes were not only highly disruptive to economic activity, but they also constrained the economic response to policies and paralyzed or severely circumscribed the flexibility of policymakers. Many other countries experienced shorter outbreaks of political and social instability that, although less disruptive, nevertheless influenced the political climate in which adjustment took place. In addition, some countries experienced major natural disasters (such as repeated cyclones and floods in Bangladesh and Nepal; devastating floods in Pakistan in 1992; and recurrent, severe drought in sub-Saharan Africa).

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1In 1985 bilateral and multilateral sources accounted for 80 percent, and private creditors for 20 percent, of public and publicly guaranteed external debt in ESAF countries, compared with about 30 percent and 60 percent, respectively, for all developing countries (World Bank, World Debt Tables database).
2For most variables, regional means are broadly representative of conditions in the constituent countries. When dispersion is high, however, medians are used in place of means.
3For a fuller discussion of fiscal sector issues in ESAF countries, see Schadler and others (1993) and Abed and others (1998). As indicated in the former, fiscal deficits are difficult to compare across regions because of significant differences in coverage (Western Hemisphere countries are on a consolidated public sector basis, while many others cover only central government finances). The lack of data on financial flows among various levels of the public sector obscures the origin of fiscal imbalances and hinders analysis and comparison of fiscal developments.
4Because of the high concessional element, external debt ratios are difficult to interpret. Debt data are not available on a net-present-value basis before 1991.
5In 1985, among the 30 nontransition economies reviewed, the top three exports accounted for more than half of merchandise exports in 26 countries and for more than three-fourths of exports in 13 countries.
6Gross reserves are less meaningful for CFA African countries because of monetary arrangements with France supporting the common currency area. However, because of the dispersion of the data for this group, the median for ESAF countries in Figure 3.5 is not affected by their exclusion.
7The data source (the World Bank’s World Debt Tables database) defines concessional debt as loans with an original grant element of at least 25 percent. For the purpose of setting external debt limits in IMF-supported programs, a concessional loan is currently defined as having a grant element of at least 35 percent.
8Subsequent ESAFs are defined as arrangements preceded by at least two annual SAF/ESAF arrangements, except in cases where the follow-on arrangement was simply a conversion of a SAF to an ESAF arrangement. All other cases are excluded because a single SAF/ESAF year may not constitute a sufficiently long adjustment period to be meaningful (the program may have gone offtrack early).
9With the exception of Bolivia, SAF/ESAF arrangements in the Western Hemisphere began in the early 1990s. Most initial SAF/ESAF arrangements in Africa and Asia started in 1986–88.
10The “Toronto terms” introduced in late 1988 included partial cancellation, extensions of maturities, and concessions on interest rates, while the enhanced concessions introduced in December 1991 included reductions of debt-service payments on debt not related to official development assistance, and effective debt reduction on concessional loans. Additional concessions were introduced through the “Naples terms” in December 1994.
11GATT rules with respect to agriculture were not clearly defined, and, in practice, normal GATT rules did not apply to most products. Special rules applied to garments and textiles, which represented a substantial relaxation of GATT norms.

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