III THE CHALLENGE OF ACHIEVING MACROECONOMIC STABILITY IN AFRICA
- Michel Dessart, and Roland Ubogu
- Published Date:
- October 2001
Goodall E. Gondwe
Director, African Department, IMF
As the Chairman of this session, I have a confession to make. I actually don’t know what each member of the panel is going to say, but what I do know, however, is that we couldn’t have found better people to address this very important subject at this critical time.
The subject “The Challenge of Achieving Macroeconomic Stability in Africa” is a timely one because, as you heard from Mr. Camdessus, there is going to be a shift on both the World Bank’s part and the IMF’s part to issues of poverty reduction. Poverty, as a subject, is going to be the focus of our occupation. Previously, our emphasis was on growth issues - macroeconomic stability first - and we think that to a large extent the IMF has achieved remarkably its aims in that respect.
From my point of view, one of the most important things to note is that, whereas in the 1980s we were concerned with convincing governments that macroeconomic stability mattered, the situation is now completely changed. I was with the President of Tanzania one week ago during President Nyerere’ funeral, and with us was the Governor of the Central Bank of Tanzania. The issue that was of much concern to the President was that the exchange rate had not depreciated enough, and he needed an explanation from his Governor as to why this was so. This was quite the reverse of the situation in the 1980s, when in fact one mission chief to Tanzania was nearly deported because he was asking for a devaluation of the currency. Thus a complete change in Africa has resulted. The question now is, where and what importance do we attach to macroeconomic stability issues now that we are going to focus more on poverty issues?
This question is being raised at this critical time when the Fund as well as the World Bank and everybody, including the African Development Bank, is asking the same question. Focus on poverty, yes, but what will happen to macroeconomic stability, which is an extremely important instrument for tackling poverty?
Director, African Center of the Harvard Institute for International Development
I would like to thank the ADB, the World Bank and the IMF for inviting me to participate in this inaugural seminar of the Joint Africa Institute. The Institute is destined to play an important role in strengthening the technical foundations for economic policy-making and analysis directly in the region. I am sure that the location of the Institute, here in Abidjan, will enable it to respond more appropriately to the specific and peculiar issues of economic management in Africa. It should also help to strengthen the ADB’s role in fostering macroeconomic stability in the region by improving the interaction of the Bank’s operational staff with key personnel involved in shaping and managing monetary and fiscal policies in its borrower countries.
Much has been written about the significantly improved macroeconomic situation in the sub-Saharan region resulting in improved economic performance as measured by average real GDP growth, annual inflation, and current account and fiscal deficits. There are indications that the continuing fall in Africa’s share of world trade is being arrested, meaning that African exports are becoming more competitive. While the slowdown in overall growth in 1998 may not herald a reversal of the recovery that began in the mid-1990s—indeed many countries, including Côte d’Ivoire, posted fairly robust growth in 1998 in spite of the fall in commodity prices—it points to the fragility of the recovery itself.
Overall, the picture of Africa’s social and economic situation is sobering, with about 40% of Sub-Saharan Africa (SSA)’s 600 million people below the poverty line, with a poverty gap arguably the widest in the world, leaving 43% of the population with no access to safe drinking water.
The causes of the region’s slow growth are, as recent literature has begun to acknowledge, many and complex. Nevertheless, episodic, even if infrequent, bursts of relatively buoyant growth, including the recovery of the mid-1990s, suggest that a change in fortunes is possible. Indeed, other regions of the world have been able to achieve progress from levels of income and poverty not much better than Africa’s today. What is required is an agenda of policies and actions designed to systematically influence the region’s long-term prospects for development, and the stability of the macroeconomic environment is a fundamental, although not a sufficient, condition of success. On the other hand, the stability of the macroeconomic environment depends on appropriate policies, and their efficient and sustained implementation.
At least three areas are identified in the literature as requiring concerted policy reform. They cover macroeconomic as well as structural issues and include:
- High transaction costs stemming, among other things, from cumbersome administrative and regulatory systems as well as high telecommunication and transport costs. The ratio of CIF to FOB import prices, which is a convenient measure of transport costs on imports, is higher in Africa than in any other region of the world. Power is often an added problem. Some recent surveys suggest that in some countries such as Uganda, investments in generators represent more than a third of the total capital formation of firms. Constraints on physical infrastructure and on skills adversely affect the productivity of private capital and overall competitiveness in many countries.
- Low levels of domestic savings, compounded by undue aid dependence and a near complete marginalization from the growing universe of private capital flows.
- Fiscal deficits have come down markedly, but the general picture may be misleading, as it may not fully reflect the extent of state guaranteed loans and other contingent liabilities. Moreover, in many cases fiscal balance has been achieved at great cost to vital social spending and the profitability of enterprises.
The long agenda of unfinished business has implications for changes in the external environment, including the framework for development cooperation. But more importantly, and from the point of view of the focus of this seminar, it also has implications for capacity building and retention. It also underscores the importance of national ownership of the policy making and economic management function in African countries. Let me offer some thoughts on these matters and also make a plea.
Africa is poised to enter the 21st century with even greater challenges than it faced at the beginning of the 20th. If these challenges are to be overcome - and I believe they can be overcome - Africa’s intellectuals and scientists and policy makers will need to truly get engaged and assume leadership of the economic policy making and management process. The most worrying reality that we face today is the loss of control over the setting of the policy agenda and the management of the development process. We have lost control not to the International Monetary Fund so much, but to the international community of donors and the institutions they control. Even the recent emphasis on poverty alleviation is in some ways a manifestation of that loss of control. The international community by and large decided on a target for poverty reduction by the year 2015, and has further decided, in effect, that the savings from enhanced debt relief under the Cologne Initiative must be used in education and health, regardless of the real priorities dictated by national circumstances.
The result is that the undeniably important emphasis on poverty alleviation is in danger of becoming a pretext for the setting of mechanical targets for social expenditure, and, even more worrying, of diverting the course of development thinking away from growth strategies designed to achieve employment-generating growth. Aid dependence, the burden of external and in some cases domestic debt, make most of our economies extremely vulnerable. The pressures on local capacity from donor reporting and accounting requirements and uncertainties in the pattern of aid disbursements can, as every Finance Minister knows, be deeply destabilizing. Above all, these pressures tend to focus the attention and time of policy makers and supporting technical staff on short-term management concerns, leaving precious little time and opportunity for strategic thinking.
Most analysts now appreciate that structural transformation is going to have much greater urgency in this phase of Africa’s development given the challenges of rapid urbanization, and the high rates of population growth. In these circumstances, we need to strengthen capacity for macroeconomic management and management of external shocks and for devising creative development strategies. Let me now turn briefly to a number of related issues.
There are a number of institutions already engaged in the business of training personnel in economic and financial management. They include the West African Institute for Financial and Economic Management (WAIFEM), the Macroeconomic and Financial Management Institute (MEFMI), the IMF Institute and the World Bank Institute. All these institutions are serving the region well. But they cannot be the answer to the capacity needs of the 48 countries of the sub-Saharan region. In the final analysis, the answer to the problem of training economic managers must lie in the capacity of the countries themselves to continuously reproduce these skills through their universities and institutions of higher learning. In this regard, it is important that the ongoing crisis in African universities, which has led in some cases to a backlog of over five years of fresh intakes of students, be quickly recognized and addressed. The World Bank’s first generation of education reforms, and donor strictures on the use of aid funds to finance recurrent expenditures or any aspect of higher education, have contributed to this crisis by posing a false antithesis between basic education and higher education. This is obviously not the place to go into these matters in the required detail. But it is important in my view to make the point that the capacity problems of Africa, in general, and in economic management in particular, cannot be solved without a resolution of this crisis and the effect it has had on economics and management faculties. The JAI can help in this regard by networking with African universities, by providing opportunities to lecturers in economic faculties to upgrade their skills and knowledge, and by generally collaborating with local training institutions. Distance learning programs should in my view be given high priority in this regard, for the lack of access and marginalization from the information and communication technology revolution is often the problem.
This is a difficult problem given the well-known constraints on resources in African countries. The problem is compounded by globalization and the easier marketability of trained personnel that it offers. The solution does not lie in giving our people sub-optimal training, as some have suggested. Rather, it lies in continuously reproducing the needed skills in our training institutions mainly, and in creating an environment that helps to retain these skills. Such an environment must obviously address the issue of financial incentives. But it must also address other equally important issues, such as the attractiveness of the working environment, including computerization and access to worldwide information and knowledge. Finally, a political environment devoid of spite and victimization, and in which excellence is rewarded, must prevail.
The reform of traditional technical assistance
Improving and retaining capacity for economic and financial analysis is obviously going to require increased resources. While the primary responsibility rests with the countries themselves, the donor community must help by urgently reforming traditional technical assistance programs that often end up recycling money and saddling African countries with high-cost consultants. Donors, according to World Bank figures, spend about $4 billion annually on about 100,000 consultants in Africa alone. This is obviously not the most efficient way of addressing Africa’s capacity needs.
My plea: if the JAI is going to compete with the IMF Institute and the World Bank Institute and the many regional bodies also engaged in the business of training of personnel for economic and financial management, it is important that its relationship with these bodies be rationalized. It would be particularly important to ensure that it becomes a full and capable African institution, responding to African problems more effectively by reason of its greater understanding of the specificity of the African situation, and not a feeble caricature forever treading timidly in the footsteps of the IMF and World Bank Institutes.
My conclusion: the issues of structural transformation are going to become ever more important for the achievement of macroeconomic stability in Africa in the years to come. Africa’s training institutions in economic analysis and management must be the primary institutions through which the necessary skills are produced and reproduced to respond to this challenge. The JAI has an important contribution to make in this regard. It will make a more effective contribution if it helps in the end to upgrade Africa’s capacity to train its own.
Former Minister of Finance, Senegal and Former Director, African Department, International Monetary Fund
For over two decades, most African countries have been engaged in the era of stabilization policy and structural adjustment programmes. Even if a certain number of these countries have struggled through these programmes at one time or another, even with relapses, the fact remains that many others would still, with greater and greater success, enter the third millennium with these programmes.
Macro-economic stability, which is a sine qua non for sustainable economic and social development, penetrates the culture of African societies and gives their leaders much hope for the advent of the silent revolution, which will upgrade many of these countries to the much-envied rank of emerging countries. To reach this stage and possibly cross it, there are still efforts to be made and obstacles to overcome in a fast and deeply changing unified world that has no pity for the weak and the underprivileged. But whether big or small, strong or weak, stability in its broad sense is an indispensable factor of success and, in the area that interests us, macro-economic stability in particular, cannot be achieved and maintained without peace and security in the countries.
In the presentation that follows, we shall first state the importance and utility of establishing and maintaining macro-economic stability, and then the strategies and instruments of this policy. We shall then examine some collateral effects, especially of the stabilization phase and the ways and means of addressing them. Before concluding, we shall state the conditions of the internal and external environment as well as the structural reforms, which go hand in hand with the macro-economic measures to ensure their success.
Importance and Utility of Achieving and Maintaining Macro-economic Stability
A stable macro-economic framework for the promotion of a sustained and harmonious economic growth with price and social stability and full employment, is in the first place a strong invitation to national and foreign investors who can then make long-term projections and draw up investment plans. Public finance and currency stability indisputably favour private and public savings formation and strengthen the confidence of economic agents.
The importance of macro-economic stability is moreover borne out by the numerous examples of economies destabilized by the irresistible price inflation, unbearable current account payment deficits, the drying up of currency reserves and the plummeting of exchange rates, leading finally to social disorders and political collapse.
So stated, macro-economic stability is not a requirement essential to only developing countries; it is as much and may even be more of a requirement for industrialized countries. Neither is it a datum limited to the recovery or stabilization period, but a requirement of permanent vigilance to monitor the economic and social trend of the countries and take steps to prevent imbalances the symptoms of which can be easily detected from the vital statistics most modern economies have.
If the principle and the role of macro-economic stability is universally accepted, the instruments, or more precisely their combination under the strategies devised by the authorities, may show variations which take into account features peculiar to the systems and economic structures concerned, as well as factors that caused the imbalance of the major aggregates.
Strategies and Instruments for Macro-economic Stability in Africa
African economies are in their majority still dependent on the external phenomena which the authorities do not master, namely, climatic conditions and sudden variations in the terms of trade and in the prices of the raw materials exported by these countries. Certainly, the long-term responsibility of these factors is not completely ruled out, especially in the aggressive behaviour to nature or in the lack or failure of diversification policies. The fact remains, however, that in the short or medium terms, these are external causes on which the authorities have no influence, even if it is their responsibility to take corrective, if not preventive, measures.
Besides, there are bottlenecks, institutional weaknesses and socio-cultural differences in the fluidity of the internal economic and financial flows, their relay and transmission points, and in the social organization in comparison with the developed countries.
What is the impact of macro-economic stability on the strategy and instruments? What, in this context, are the roles of the fiscal and monetary policies? Confronted with an acute crisis, which occurred suddenly or in the wake of cumulative imbalances that lasted long without corrective measures, or which were not properly addressed, governments have been tempted - and many succumbed—to resort to the repressive arsenal of administrative measures and other state constraints that often worsen the malfunctioning of the economic and social machinery.
It appears to me that in the event of a serious crisis, triggered by a chain of interdependent and mutually reinforced causes, the first concern should be to stop the destructive spiral; in other words, it is a shock treatment that should be administered, at least in the stabilization phase if this has to be short and effective. A gradual approach at this stage could worsen the situation, considering the interconnection of the phenomena by which a crisis generally comes to a head: high budget deficits, explosion of the domestic credit and the amount of currency in circulation, unbearable external current account and balance of payments deficits, and destabilization of the exchange rate. It is important that a decisive stop should be put to this spiral, based on a duly adjusted exchange rate, along with other global demand management instruments.
In Africa, it is mainly the budgetary policy that is required to bear the brunt of adjustment even if the monetary policy plays an increasingly important role as progress is made in structural reforms. In simple terms, it entails not spending more than what is earned. We should therefore start by stabilizing public sector finances through the elimination of deficits. It is not hard to imagine that there are two components in this respect, namely, income and expenditure. The latter should be reduced and the former increased in a proportion that reflects the specific situation of each country and the actual genesis of the crisis that affects it.
But how can this be done? It should be borne in mind that with regard to public finance, budgetary balance does not mean absolute equality, or even accounting identity, between income and expenditure, but rather a deficit that can be financed by non-inflationary resources and that does not, by the way, occasion an unbearable debt. Having made this point, it can be said that the qualitative and quantitative control of expenditure appears to be the Achilles heel of macro-economic stability.
Current budget expenditures, which already account for roughly 20 to 25 % of GDP, are absorbed in large part by the salary and wages item. Looking at it closely, one often observes that the problem is more of overstaffing than real salaries. Therefore, the obvious logic in the effort to reduce the payroll lies in a realistic reduction of the staff of the public and parapublic sectors. Absence of this logic will spell the erosion of real salaries, with its economic and social consequences.
Surveys carried out in a number of countries to verify the validity of the salaries paid have revealed the existence, in sometimes large proportion, of fictitious salaries, or salaries paid to workers who have definitively left their jobs for several years, or who are simply dead. However, even after removal of all the anomalies, there will still be reductions to be made. The categories of unproductive expenditures, or those that lead to economic distortions, should be targeted first because, even without adjustment, they are not justified. In many countries, military expenditures should be considerably adjusted. Particular attention should be paid to the reduction and/or cancellation of transfer expenditures, notably consumer subsidies, as some of these expenditures are not intended for the most vulnerable classes of the population.
Finally, with the increase in countries’ external debt, the interest payment item of the current account expenses assumes an important proportion in spite of the many debt reschedulings. Here, in my opinion, a significant debt reduction or even cancellation is necessary in a number of cases.
As for the income component, it should be noted that, in many countries, the ratio of revenue to GDP is below the average of the developing countries, and could therefore be revised upward. Improvement of the tax revenues to an acceptable proportion of the GDP, through different combined actions in the various sectors, could give the authorities greater room for manoeuvre in the implementation of their economic policy aimed at restoring and maintaining macro-economic stability.
The existence of two sectors, one official and the other informal, which do not contribute in the same proportions to budgetary earnings, is an area that, if properly studied and examined, could lead to a broadening of the tax base. This mainly involves urging the informal sector, with every caution, to be more transparent in its relations with the tax department. The enhancement of the management capacity of the administrations in charge of tax revenue recovery is another area of action, but that could take time. Meanwhile, cooperation with the informal sector, if well targeted, would be most useful and effective to increase tax revenues.
The existence in Africa of many generalized exemptions within the framework of policies the objective of which is apparently to attract investments, and of other still more specific exemptions that are usually granted arbitrarily, considerably limits the scope of application of duties and taxes. The dismantling or streamlining of these systems and practices would be a source of income growth for the state.
The Parallel Effects of Accompanying Measures
Earlier on, it was a question, perhaps a little naive, of simply not spending more than what is earned. This simplicity happens to be more in concept than in practice, because the authorities responsible for adjustment policies do not have only numerical figures and statistical reports that could be worked on, but also and more basically, economic agents, households, enterprises and various socio-professional categories: in a nutshell, a structured society the improvement of whose conditions of existence is the final objective of socio-economic activities. That is why, even in a shock therapy made necessary by circumstances during the stabilization phase, global demand management instruments should be handled with precaution.
The preservation of the quality of expenditures requires the protection of budgetary allocations intended for sectors that contribute to long-term growth like health, education and basic infrastructure. In drawing up the timetable of actions to be undertaken to restore the balance of the major aggregates, it is quite clear that, without specific accompanying measures, the risk of seriously compressing living standards, especially of the poorest categories of the population, is great. For, after all, the aim is to reduce the global surplus demand to a level compatible with the real productive capacities and the normal external financing possibilities, and at the same time to combat inflation in order to pave the way for the return to real sustainable growth.
Staff reduction, cutback on the payroll, removal of subsidies, consequent increase in prices mainly of foodstuffs and staples, and credit restriction produce almost immediate effects of reduction in real incomes. The redistribution process depends, in large measure, on the sectors targeted to bear the reductions. In any case, the integration of the social safety nets into the strategies can contribute to a more equitable distribution of the adjustment burden. It therefore appears that, though necessary, macro-economic stability alone is far from being enough to restore sustainable growth in an economy. And it is here, in my opinion, that structural adjustment and the strategy of a gradual approach have to be called upon, with all their rights and pre-eminence. They will make the domestic environment of the country more flexible, more conducive, more sensitive to the incentives created by such tools as interest rates, reserve requirements, sales or purchases of treasury bills and bonds, and other economic policy instruments used to enhance efficiency, improve resource allocation, and increase the production capacity of the whole economy.
As a matter of fact, several reforms have been undertaken. Among them is the rehabilitation of the banking sector, which has been initiated in several countries.
This reorganization facilitates the control of the monetary policy to achieve the fixed objectives, as well as the development of financial intermediation. Public enterprises should at the same time be rehabilitated through reorganization or most often, when they are in the trade sector, through privatization.
Neither are domestic reforms alone adequate if the international environment itself is not stabilized. To be sustainable and restored as promptly as possible after its disruption, macro-economic stability, which is dependent on the domestic environment, as has been succinctly outlined, also depends on the external environment, especially in the case of developing countries and African countries in particular. In effect, the pursuit by the great powers of healthy macro-economic policies, price and exchange rate stability, and public finance adjustment constitute an important factor of stability of the developing countries. The great powers should adopt an economic policy capable of ensuring an appropriate and sustainable growth of the world economy. In particular, they should practice what they preach, i.e., allow the free and unrestricted entry of products from Africa into their territory.
It is up to the international finance institutions, and in particular the International Monetary Fund in its supervision duty, to monitor the economic policies of their members, especially the most indebted of them.
In summary, we can say, that the whole matter is generally a question of stabilizing and deregulating, i.e., removing the system of administered prices and other obstacles to market forces. Some economists are of the opinion that an order of priority should be observed in the application of this strategy. For example, first contain the budget deficit, then reform the labour market, finally liberalize the domestic market of goods and services, as well as the payment and transfer accounts on international transactions. If in any case, the reduction of the budget deficit is unavoidable, the succession of the other stages and the simultaneity of some of them depend on the respective conditions of the countries, and will probably necessitate a certain gradual approach in their application.
We have just seen the importance of macro-economic stability as a necessary condition for sustained growth, and the need to effect structural and constitutional reforms made still more necessary by the globalization phenomenon. It is not difficult to understand that in structural adjustment, which closely affects the welfare of the populations in terms of stabilized bases and structures, everybody is required to make important sacrifices. But to be effective and credible, the example should come from above, especially through a reduction in the lifestyle of the state and an increase in the transparency of its policy.
Instead of raising a “barrage of complaints and bitter remonstrations about the past”, and a “chorus of pious wishes for the future”, African countries should rather take control of their destiny and design their programmes, which once formulated, will be naturally theirs. Thereafter, it will be inevitable to enter into negotiations with external partners and institutions which will continue, in large part, to provide financing and external credibility.
The popularized theme of this end of the decade, poverty alleviation, along with its related themes of corruption control and rule of law, is a challenge to us all especially at this time when, failing to see the end of history or the appearance of the last man, we are celebrating, not without some kind of arrogance, the indisputable triumph of democracy and liberal society. Africa should not stand aloof and denounce the injustices of globalization, as if the grapes of it were too sour. Its curses and complaints would be of no use in changing the course of events. Africa should remember the popular saying:
- God grant me the serenity
- To accept the things
- I cannot change
- The courage to change
- The things I can
- And the wisdom
- To know the difference
Comments from the Floor
- In the past half decade, a significant measure of macroeconomic stability has been achieved in the African economies, although concurrently with stagnation or negative growth in the real sector. Thus, a radical reformulation of the present policies is called for, which will accord priority to measures that will bring about structural transformation and alleviation of constraints on production.
- To promote development and poverty alleviation in the new decade, macroeconomic reforms should continue to be deepened, but with maximum emphasis on employment generation and small enterprise stimulation.
- The JAI programme for 2000 looks like replications of those of the World Bank, IMF and ADB. The JAI should resist the temptation of being an appendage of its founding institutions. It should rather create its own identity as a unique and distinctive multilateral institution in Africa and claim ownership of its courses, formulating innovative strategies for building up and sustaining capacity on the continent.
- Future programme of the JAI should emphasise more microeconomic subjects and projects in the real sector, because it is there that Africa at present has the more serious capacity problems. In this regard, a well-planned and implemented networking with existing relevant institutions on the continent is to be recommended.
- Considering Africa’s needs for training, the figure of about 400 trainees at the JAI in the year 2000 is inadequate. The figure should be increased, with the JAI collaborating with national and subregional institutes that are active in macroeconomic management training. Consequently, the JAI’s future programmes should be structured to complement those of existing organisations involved in capacity building. In this way, the total number of JAI trainees will be more in line with the needs.
- Owing to the existing huge wage differentials between Africa and the developed countries, loss of African professionals is difficult to stop. A strategy to help the situation is to increase the number of trainees in Africa so as to reduce the impact of the brain drain. Furthermore, the current increase in brain drain in various institutes in Africa can be arrested to some degree with changes in the organisational and management structure of these institutions. The JAI can play a useful role in this regard by mounting appropriate consultative meetings with the top executives of the institutions.