Stabilization and Structural Adjustment

Macroeconomic Frameworks for Analysing the Crisis in Sub-Saharan Africa

Finn Tarp

• Publisher: Routledge
• Year: 2002
• eBook ISBN: 9781134891979
• Topic: Business
• Subtopic: Business General
• Index: Business

This book reveals and examines the relevance of the macroeconomic theory and models behind recommendations for stabilization and structual adjustment. Alternaive analytical approaches are discusses. This is done on the basis of an up-to-date review of developments in sub-saharan Africa during the 1980's and within a common analytical framework.

1

MACROECONOMICS OF
AFRICA

The main body of macroeconomic theory and policy analysis is concerned with developed market economies. An attempt will therefore be made here to provide a brief sketch of the particular characteristics of the economies of sub-Saharan Africa (excluding the Republic of South Africa) and the dimensions and causes of the present crisis. An initial disclaimer is necessary. African economies are diverse; economic contexts, structures and policies differ, and available statistics are notoriously unreliable and vary widely from one source to the other. Methodological problems with exchange rates and deflators as well as the unknown size of the unrecorded economy are just a few important reasons for this.

Furthermore, average data are heavily affected by the performance of the Nigerian economy, which accounts for close to 25 per cent of population as well as gross national product (GNP). Also the significant differences between oil-exporting and oil-importing countries are concealed, and the same accounts for a range of other inter- and intra-regional variations. These differences are not in focus here. The generality of the economic crisis is widely confirmed by country studies across sub-Saharan Africa, and while the overall picture to be drawn up does not necessarily fit particular countries, the overall trend seems, nevertheless, to reflect quite well the situation of a majority of African countries. In addition, a frame of reference is required as background to the analytical approaches reviewed in subsequent chapters.

NATURE OF THE AFRICAN ECONOMY

The countries of sub-Saharan Africa are small, poor and open economies. With a rapidly growing population of some 480 million, SSA had a total GNP of only US $163 billion in 1989. This is not even double the GNP of Denmark with only five million people. A major share of the African population live and work in the rural sector. Production, which is severely affected by an array of human, physical, infrastructural and technological constraints, including the vagaries of weather conditions,¹ is therefore largely in the primary sector.

Table 1.1 Comparative structural data on sub-Saharan Africa, other developing regions and OECD economies

Commercial activities are crucially dependent on imported factor inputs, and exports are based on only a few, mainly primary, export commodities. Savings are limited, and a continuous inflow of external financial resources is required to maintain domestic absorption, including a low rate of capital formation. Poverty in all its dimensions is widespread, and living conditions are extremely difficult. This is clearly demonstrated in Table 1.1, which shows a number of indicators of economic development from sub-Saharan Africa, other developing regions and the Organization for Economic Co-operation and Development (OECD) area. The data reveal, in a self-explanatory manner, the predicament of the economies of sub-Saharan Africa. Only in South Asia can similar conditions be observed at national and regional levels.

It can be added to the above characteristics that the African economies are seriously fragmented as well as inflexible and dualistic in nature. The production base is narrow both in terms of size and the range of goods produced.² A modernized sector of monetized enclaves has been super-imposed over a large low-productivity subsistence sector, which has seen little technological development, and which continues to use traditional tools and techniques of production. Linkages with the modern sector are few and may have weakened during the 1980s. Furthermore, intra-regional trade remains insignificant.

Despite considerable progress since independence, human resources are critically underdeveloped. The acute scarcity of trained manpower at many levels has constrained efficiency and the capacity to govern effectively, and the consequent reliance on expatriate advisers, willingly supplied through a rapidly-growing international system of technical assistance, has had at best mixed results.³ The lack of institutional capability is also rampant in SSA. The apparatus of modern states including the provision of public services are either not in place or work very inefficiently,⁴ and the size of the private entrepreneurial sector is limited.

Social organization and the political system, as well as the cultural milieu, interact with the institutional set-up and the management of the economy to determine the dynamism and relative viability of the development process.⁵ In perceiving the basic characteristics of the economies of sub-Saharan Africa reference to the socio-political structure is therefore important, and it is beyond doubt that political instability and civil strife have had an important negative impact on the economic performance of SSA during the 1980s. These aspects of the development process of sub-Saharan Africa will not, however, be discussed further here, and the same accounts for the physical development potentials which do, of course, influence and constrain the feasibility of alternative courses of action in the field of economic management.

ECONOMIC PERFORMANCE

The 1980s have been disastrous for most of sub-Saharan Africa. Nevertheless, the economic performance, since political independence was achieved, is not consistently bleak. A few countries have managed well, and for the continent as a whole, the 1960s witnessed, in fact, considerable progress in most economic indicators. The 1970s show an uneven record and there were uncomfortable signs of future problems on the horizon, but it can be argued that by and large sub-Saharan countries ‘rode through’ the 1974–6 external shocks successfully, and that from 1976 to 1979 Africa performed as well as anyone.⁶

There is reason, as noted above, to be very cautious in the use of data and averages in the African context,⁷ but some overall trends make sense, as they are confirmed by observation of a more qualitative character, and by common sense. Tables 1.2 and 1.3 are an attempt to capture some of the more important quantitative aspects of the macroeconomic developments from 1965 to 1989 on which there are relevant data available.

The average annual rate of growth in GDP, which reached a respectable 5 per cent from 1965 to 1973, decreased during the latter part of the 1970s to only 3.2 per cent, and from 1980 dropped further to 2.1 per cent. Taking account of a rapidly-increasing population, real GDP per capita actually fell by 1.1 per cent during the 1980s. It can, furthermore, be noted that real GNP per capita in 1980 prices, which grew at 1.7 per cent from 1965 to 1973, dropped by 1.2 per cent annually from 1980. The overall average annual rate of growth of GNP per capita almost stagnated at 0.3 per cent from 1965 to 1989.

Production in the industrial sector, which had shown much progress in the earlier two decades, grew little from 1980, and agricultural output could not keep pace with population growth. Food production per capita had by 1987–9 fallen to 95 per cent of the level in 1980. The daily per capita calorie supply in 1988 was at around 2,000 calories, equivalent to the level of 1965, which is far below minimum nutritional requirements.⁸ Consequently, hunger and malnutrition became widespread. The combined share of agriculture and industry remained constant at around 60 per cent of GDP from 1965 to 1989, but agriculture increased its share from 28 to 32 per cent, while industry fell from 32 to 27 per cent from 1980 to 1989. A process of de-industrialization therefore took place in SSA during the 1980s.

Table 1.2 Gross domestic product, aggregate demand and other economic indicators, 1965–89 (average annual change in per cent)

However, manufactured exports, which accounted for only 5 per cent of merchandise exports in 1980, increased to 11 per cent in 1989. This illustrates the importance of relatively better export prices, but also that total merchandise exports contracted considerably in volume terms. Data on trade vary in coverage and are not directly comparable,⁹ but taking account of the rate of population growth of 3.2 per cent per annum, per capita merchandise exports dropped by 29 per cent between 1980 and 1989. Per capita merchandise imports began falling at an average rate of 9.1 per cent per year from 1980, and by 1989 had dropped by 57.6 per cent in volume terms. The overall terms of trade also developed very unfavourably after the positive trend during the 1970s, although it should be noted that terms of trade also fell during the 1970s for the poorer oil-importing African countries. Finally, net inflows of foreign resources started to dwindle rather than increase.

Table 1.3 Aggregate demand, external resource balance and external debt, 1965–89

External long-term debt continued to increase in nominal terms during the 1980s, but at a reduced pace as compared to the 1960s and 1970s. In fact, real increases in external debt were modest from 1980, and commercial bank lending collapsed.¹⁰ However, from 1973 an increasing share of total long-term debt was contracted at variable interest rates, and debt service payments actually reached 5.9 and 22.2 per cent of, respectively, GNP and total exports in 1989.

As a consequence of the above developments, significant resource gaps developed, inflation reached unprecedented levels averaging over 19 per cent annually from 1980, and past investment and consumption levels became unsustainable.¹¹ Government and private consumption and gross domestic investment fell in real terms by 17, 20 and 48 per cent respectively per capita, from 1980 to 1989. However, the share of total absorption (that is, consumption and investment) as a share of GDP showed an upward trend during the 1965–89 period. Gross domestic savings therefore fell from a level of 21 per cent of GDP in 1980 to only 13 per cent in 1989, which is lower than the savings rate in 1965. It should be noted though, that if Nigeria is excluded, gross domestic savings fell by only two percentage points from 13 per cent of GDP in 1980 to 11 per cent in 1989. ¹²

In other words, it is obvious that much of the economic and social progress realized during the 1960s was lost during the 1980s. Important economic and social infrastructure has deteriorated, human suffering has increased and utilization rates as low as 30 per cent of industrial capacity have been reported in some countries.¹³ The quality of health care and education is declining almost everywhere, the supply of expendables (drugs for health services, books for pupils, and so on) is grossly insufficient and maintenance budgets are inadequate. Progress in reducing child death-rates has slowed down and in some cases even reversed, and at the same time population growth continues to soar.

SOURCES OF THE CRISIS

Many of the structural and other features of the economies of sub-Saharan Africa reflect closely the historical legacy of hundreds of years of colonialism. This sets the background against which the development failure of sub-Saharan Africa during the 1980s must be seen. Viewed in this broader perspective, the three decades of post-independence history do indeed appear as a very brief span of time. Nevertheless, there are many mutually-reinforcing sources of the crisis, and while legacies may be historical facts of overwhelming importance, they must be taken as given in economic policy-making. The topic to be reviewed here is, therefore, the more immediate sources of the crisis.

Most of the countries in sub-Saharan Africa became independent in the 1960s, at a time when the state was assigned a leading role in economic development. It appeared self-evident that an active state, pursuing interventionistic economic policies in accordance with a central development plan, and adequately supported by an inflow of foreign aid, could master the art of breaking the vicious circle of poverty and underdevelopment within a relatively short period. With hindsight, this was over-optimistic, and in the early 1980s it became, in addition, politically opportune to perceive state interventionism and ill-conceived domestic economic policies as the primary source of the impending crisis in sub-Saharan Africa.¹⁴

The ‘Berg Report’ was a major contribution along this line of thought, and it is, as Ravenhill (1988:179) points out, difficult to overemphasize the extent to which this publication changed the nature of the debate on Africa’s development problems.¹⁵ It is now widely accepted that domestic policy matters, and that includes overall development strategies as well as the investment, price, trade and exchange rate policies pursued by many African countries – often at the advice of foreign advisers and institutions – have not yielded the desired results.

As suggested by the World Bank (1989b), there is little dispute that the origins of the problems in the industrial sector in SSA can be traced to high levels of protection and to the erroneous perception that development is equivalent to industrial growth. Governments have consequently relied too much on import-substituting policies, allowing vested interests, including many foreign investors, to exploit their position to the detriment of the overall economic performance.¹⁶

Even ECA (1989), which is highly critical of the orthodox approach to adjustment put forward by the IMF and the World Bank, refers to the neglected informal sector, to ‘lopsided development’ (that is, urban-biased) and to policies that have been biased against traditional agriculture. These were, indeed, some of the major points made in the ‘Berg Report’. In ...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• TABLES
• PREFACE
• ACKNOWLEDGEMENTS
• ABBREVIATIONS
• INTRODUCTION
• 1. MACROECONOMICS OF AFRICA
• 2. MACROECONOMIC CONSISTENCY AND ADJUSTMENT POLICIES
• 3. FINANCIAL PROGRAMMING AND STABILIZATION
• 4. GROWTH PROGRAMMING AND ADJUSTMENT
• 5. GROWTH-ORIENTED ADJUSTMENT – AN IMF/WORLD BANK SYNTHESIS?
• 6. ALTERNATIVE APPROACHES AND PERSPECTIVES
• 7. CONCLUSIONS
• NOTES
• BIBLIOGRAPHY