G. E. Gondwe
- I. Patel
- Published Date:
- December 1992
The challenges for economic adjustment and growth facing Africa in the 1990s are daunting in their scale and pressing in their social and political implications. Indeed, it is easy to be discouraged by the enormity of the task, particularly in view of the unsatisfactory economic performance of many African countries in the 1980s and the inadequate economic structure against which programs and policies in the 1990s must be fashioned. On the one hand, it is possible to be overly sanguine and complacent about the ability to cope with these challenges; on the other, one can be unduly critical of the structures and mechanisms inherited from the 1980s to deal with the issues involved. A position somewhere in the middle seems to be warranted, one that promises a more balanced approach. With regard to the role of the international financial institutions—including the Fund—in this adjustment process, adaptations have indeed already occurred in response to the experience of the 1980s, but flexibility and imagination are needed to meet the demands of the decade ahead.
Claims have been made that the Fund is (1) focusing too much on the short term and too little on the long run; (2) emphasizing economic concerns without due regard to social issues; (3) dealing too much with internal policy matters, with inadequate attention to the promotion of external funding, and; (4) imposing their own policy packages without regarding the input of the local authorities. It seems to me that such sharp distinctions are not especially helpful and do not properly reflect the evolving role of the institution. Nevertheless, in view of the currency of these views, I shall address each of them briefly and then go on to discuss more broadly some key adjustment and growth challenges for the 1990s.
Some Adjustment and Growth Issues
Short-Term and Long-Term Adjustment
As widely acknowledged, African economic difficulties are reflected in serious macroeconomic imbalances and severe structural weaknesses and distortions. As for the former, major imbalances in the government’s fiscal position are frequently a central concern, usually exacerbated by sizable losses by parastatals, subsidized in full or in part by the state. These imbalances are typically reflected in monetary expansion at a rate well in excess of growth in the country’ s productive resources, promoting not only an inflationary environment but frequently resulting in scarce savings being directed to less efficient forms of economic activity. These, and related, imbalances must be redressed if medium- and long-term growth is to proceed on a firm foundation. Although this point seems self-evident, it can surely be obscured by the repeated stress from critics that the shorter-term objectives are being overemphasized by the Fund. In fact, medium- and long-term adjustment is unlikely to be realized unless based on a sound macroeconomic framework. Monitoring by the Fund of the short-term aspects of macroeconomic programs is not therefore an end in itself but a necessary step in ensuring a background more conducive to longer-term economic growth. To decry this shorter-term aspect of programs is to miss part of their rationale.
This said, it is equally true that short-term adjustment objectives must be constructed in a manner consistent with longer-term economic and social aims. It is perhaps a matter for debate as to whether or not the Fund was as early to recognize and incorporate these longer-term elements into its programs as it might have been, but it is certainly now an important feature of African programs supported by the Fund. Indeed, the structural adjustment facility (SAF) and the enhanced structural adjustment facility (ESAF) strongly emphasize longer-term components; furthermore, while it is true that these facilities support programs with terms limited to periods of up to three years, the design of the programs stresses the need for viability in the subsequent years. Consistent with this increased focus on mutually reinforcing short- and longer-term objectives, Fund negotiating missions endeavor, for example, to formulate fiscal targets with the authorities that give due attention not only to the level but also to the composition of the fiscal aggregates. Thus, on the revenue side, emphasis is placed, where needed, on tax reforms that not only help realize stabilization objectives, but also promote structural efficiencies in the tax collection and administrative process. Equally, on the expenditure side, attention is focused not only on the level and timing of expenditures, but also on the respective composition of recurrent and developmental outlays.
Other examples can be given of this joint concern with stabilization and structural objectives. Take an example from my own country, Malawi. The import liberalization program—now recently completed—was a major structural component of the program supported by the Fund under a three-year ESAF arrangement. An important objective of this program for liberalizing the system of prior exchange approval for imports was to ensure much wider access to supplies, including capital equipment and factor inputs, needed for capital formation and increased productive capacity. Apart from this essentially structural objective, the import liberalization program also played an important role—in conjunction with appropriate financial policies—in facilitating the slowdown in inflation by increasing the availability of supplies and improving competition, and has had important implications when establishing appropriate external reserves targets, including those for the short term. The import liberalization element of the program, therefore, clearly had both structural and stabilization aspects. These examples can be multiplied but support the position, in my view, that short- and medium-term objectives should be formulated in a complementary fashion. Too much emphasis on one or the other can lead to policy distortions and ineffective implementation. The Fund is fully aware of this need for complementarity, which is an essential element in program design, and is somewhat sensitive to the unwarranted criticism that these issues are being discounted or underemphasized.
These considerations have necessarily required a wider degree of coordination between the major international financial agencies. Cooperation between the Fund and the World Bank has been of central importance, particularly in the context of the policy framework paper, which brings together, in conjunction with the national authorities, the macroeconomic and structural issues and policies involved. Apart from program construction, coordination is also being increasingly emphasized in monitoring arrangements. To promote improved cooperation between the Fund and World Bank in constructing and monitoring programs, arrangements are being developed for joint participation in missions and in briefing and debriefing discussions, and coordination in the timing and staffing of missions. More recently, the Fund has been emphasizing improved cooperation with United Nations’ (UN) agencies and is participating in a range of UN working committees, thereby enabling programs to be formulated on the basis of a wider range of data and opinion.
Appropriate attention to the time horizon of adjustment is also important from the perspective of the country’s ability to meet timely debt-service payments; this is a particularly important issue in view of the difficulties experienced by many countries in this area over recent years. A program for restoring a country’s external viability therefore needs to be phased so as to ensure that debt-service payments are made in a timely fashion, thereby enhancing the country’s creditworthiness. The Fund has been giving particular attention to this aspect of program design, not surprisingly in view of its own experience. Self-interest, at the very least, and the need to ensure the revolving nature of Fund resources would surely argue against such a narrow perception of adjustment objectives. More broadly, of course, the Fund sees improved external viability as a central focus of any adjustment and structural reform effort. It is for this reason that export expansion and diversification—and possibly a degree of import substitution in certain cases—are viewed by the Fund as major elements in any policy package. Such an objective will obviously require maintenance of external competitiveness and appropriate and enabling financial policies, but will at the same time also necessitate structural reforms that support a shift in productive resources toward export- and import-competing activities.
Need for Emphasis on Both Economic and Social Concerns
The Fund has at times been criticized for not placing sufficient stress on social concerns and issues—including poverty alleviation, redressing of income inequalities, and environmental concerns—in its programs formulated with member countries. There is no doubt that greater effort to address major social issues is now being made in the context of Fund programs, with strong encouragement from the Fund’s senior management. On this point, it needs to be emphasized that the economic and social problems facing Africa are not the making of Fund-supported programs but are typically deep-seated and long-standing. Furthermore, it must also be acknowledged that while economic policies and reforms involve social costs and sacrifices, the costs of forgoing adjustment are much higher still. It must be clearly understood that the Fund believes that the social implications of economic programs must be adequately recognized and major social priorities duly incorporated into the policy framework, even if macroeconomic objectives need to be modified to some degree. Failure to do this certainly complicates the whole process of policy formulation and acceptance, and mitigates strongly against the chances of effective implementation of the program. At the very least, programs need to protect the most vulnerable population groups from difficulties stemming from adjustment.
Against this background, the Fund has been focusing on means by which these legitimate social concerns can be met. An important emphasis has been on the social composition of government expenditures, ensuring that due emphasis is given to spending in areas of higher social priority. Conversely, restraint in budget expenditures when needed to meet appropriate fiscal objectives needs to be fully focused on areas of lower social priority. In such policy formulation, the Fund staff works closely with national officials to ensure that this general aim is realized. As a further example, revenue-generating measures need to be reviewed with respect to their nature and form, be they regressive or otherwise, to ensure an appropriate recognition of social concerns. Because program policies typically have an important impact on various prices in the national economy—both for goods and services—increasing attention is being given to the impact of price changes on the various population groups, specifically the poor who are obviously most vulnerable to price movements. Of course, the Fund’s emphasis in this area is still evolving, but there can be little doubt that it will assume increasing importance in the period ahead. Effective incorporation of these features—including appropriate steps toward poverty alleviation—in programs supported by the Fund will require inputs from a range of organizations and agencies, as well as the countries themselves. The Fund is paying particular attention to improved collaboration with the World Bank, the UN, and other organizations to ensure that a practical collaborative approach is taken in dealing with these social concerns.
Having stated the Fund’s broad intentions, it is nonetheless important to note policies in the social area that the Fund considers inappropriate for this task. In particular, price controls, budget subsidies, and exchange and trade restrictions are frequently envisaged as a means by which, inter alia, social issues can be addressed. Such policies have clearly been found wanting in the past and have led to inefficient and costly bureaucratic difficulties; the Fund considers such policies ill-suited for the realization of social objectives, despite their frequent appeal for political or bureaucratic reasons. The Fund believes that both efficiency and equity objectives can be better served by more appropriately conceived adjustment policies, including policies that incorporate greater scope for private sector initiative.
Internal Policy Issues, Relative to Promotion of External Financing
It is certainly true that most of the Fund’s financing over the past decade has been conditional, contrasting with experience in the 1970s when certain facilities—notably the oil facility—provided significant funds virtually without conditionality. The question therefore arises as to the appropriate relationship between external financing and conditionality, particularly as a guide for the 1990s. The issue focuses most particularly on the extent to which current difficulties facing African countries, including the problem of payment arrears, has resulted in creditors calling for heightened conditionality to ensure appropriate policy reforms. To press the point, observers have argued that conditions often warrant an increased intrusion into domestic policy management, with greater scope for exacting increased conditionality from countries weakened by their economic difficulties. Such a view is good for polemics but not very useful for policy formulation and implementation. Experience in Africa, as elsewhere, has shown that there must be a workable nexus between creditors and borrowing countries. The Fund believes that such a coordinated approach is the only possible means of achieving successful adjustment and growth. Many instances are at hand to indicate that too ready an access to external finance, without an appropriate macroeconomic policy framework, can result in short-lived economic benefits, with attendant waste, mismanagement, and lost opportunities. Indeed, ensuing external debts can often negate or seriously qualify any immediate economic gains. Conversely, an economic program, no matter how well conceived and desirable its objectives, must remain on the drawing board if the requisite external assistance is not forthcoming. Formulation of internal objectives consistent with available external resources is therefore a prerequisite for an effective economic program.
The Fund plays a major role in this endeavor and doubtless will continue to do so in the 1990s. As for the developing countries, the need for meaningful adjustment is now evident, particularly after a decade of disappointing performance in many cases, and with delays in policy formulation and implementation proving very costly, both in economic and social terms. To assist low-income countries, notably in Africa, the Fund established the SAF, despite opposition from certain constituent member countries. This development was followed by the establishment of the ESAF, which has provided resources on highly concessional terms, including longer repayment periods. Middle-income countries are supported through stand-by and extended Fund facility (EFF) arrangements. Of the 30 programs supported by the use of Fund resources, 20 now involve SAF or ESAF arrangements. The essence of these arrangements—formulated closely in cooperation with the World Bank—is the promotion of growth and adjustment, while acting as a catalyst for financing from other creditors. Indeed, the catalytic role of the Fund’s involvement in country programs has been essential in mobilizing external support, and more could be done in this regard if a larger number of African countries were to embark on strong adjustment programs. The Fund’s approach therefore focuses on a complementary—rather than antagonistic—relationship between internal policy issues and the promotion of external financing. A further concern requires due regard to ensuring appropriate absorptive capacity of the member country to external assistance and financing. While the challenges remain as acute as ever, the benefits and results already emerging from the approach should not be underemphasized.
Input from Local Authorities
This issue has already surfaced in the preceding comments, and can be dealt with fairly briefly. Despite statements to the contrary, local participation in the construction of programs supported by the Fund is not just rhetoric, but the very nature of the negotiating process. Fund-supported programs take into account the particular features of each country, the priorities of the authorities, and their administrative constraints. In designing a program, a balance must be struck between the need for appropriate adjustment and legitimate social and political concerns, without which such a program has little chance of success. This task can only be accomplished by a comprehensive and open dialogue with the authorities on program objectives and policies.
Having commented on some specific issues relating to adjustment and growth in the 1990s that impinge on Fund programs, I would like to make a few broader observations about the role of the Fund in Africa in the period ahead.
While it is true that the difficulties and challenges for economic progress in Africa are indeed formidable, it must be remembered that the international environment is improving in certain respects, including many instances of intensified adjustment and structural efforts in both developing and developed countries. In these circumstances, the prospects for improved economic growth and lowered inflation in the world economy are encouraging. Of course, there are always major uncertainties and downside risks, not least the implications—both in the short and long run—of the situation in the Middle East, that qualify the outlook for economic development and stability, Furthermore, vulnerability to economic downturns in developing countries remains a problem, and progress on world trade liberalization continues to be disappointing. Nonetheless, many aspects of the situation—including a strengthened will in many developed and developing countries to grapple with their economic difficulties—seems more favorable than a decade earlier.
Against this background, the Fund sees itself as playing an important role in Africa in encouraging countries to adopt appropriate macro-economic frameworks and policies on the basis of which sustained economic growth can take place. A major priority is to ensure that strengthened macroeconomic performance will lead to improved creditworthiness, both with respect to official and private sectors. Once these macro-economic frameworks and policies—with needed external support—are in place, scope is provided for meaningful structural reforms. Within this context, the Fund will support credible macroeconomic programs designed to increase domestic savings and investment, raise productivity, and achieve increased export diversification. As regards external financing, while the Fund will continue to help reforming countries to mobilize adequate external resources, it is clear that African countries will need to place greater emphasis than in the past on the generation of domestic savings to meet their financing requirements. A number of African countries have already benefitted from progress in these areas, and it would be unduly pessimistic not to see promise of comparable improvements elsewhere in Africa. All together, Africa needs to fear marginalization only if it chooses to stop or reverse the economic adjustments on which it has embarked.
The Fund has continually adapted its programs to help deal with the particular circumstances of African countries. Criticism that the Fund has imposed ready-made “solutions” on its African member countries does not reflect the facts, as the detailed construction of individual programs clearly shows.
As regards debt issues, vital for many African countries, the Fund continues to support a strategy that is based on international cooperation. It believes that all initiatives to alleviate the debt burden of developing countries without undermining further flows of external financing to these countries deserve support. Recent initiatives have provided significant debt relief to African countries, through, for example, improved debt rescheduling (Toronto). Further efforts, supported by the Fund, are under way to finalize agreements between the creditor banks and some middle-income countries. It needs to be remembered, however, that medium-term solutions to the debt problem remain dependent on other elements, including efficient mobilization of domestic savings, restoration of confidence, ability to attract external private investment, and export diversification.
Finally, it needs to be stated that the Fund has a clear mandate to assist sound adjustment and developmental efforts in Africa, as with other member countries. It obviously needs adequate resources to support these programs of reform, and the recent increase in quotas will be an important help in this direction. The quality of analysis and commitment to program design from its own staff are recognized as critical, and cooperation with other financial institutions—particularly the World Bank—is also central. But the Fund does not shrink from its responsibilities, nor accept claims that it should diminish or even relinquish its role.