by Daniel Kendie,Ph.D.
( Continued from last week )
Structural Adjustment Programme
It appears that the World Bank and the International Monetary Fund have the answer - the survival-of-the-fittest type of system, whose very premise as a model of development should be highly questioned. There is the assumption that the path to economic and political success for these countries was essentially the same path followed by rich, industrialized countries. The rich countries had started down that path earlier, so naturally they were more advanced than newly independent countries. The way for the latecomers to catch up was to emulate the early birds. Indeed, if less developed states would adopt development strategies as similar as possible to those tried-and-true strategies devised by Britain, France, the USA, and the other rich countries, before too long they would progress down the same path blazed earlier by those countries, reach a take-off stage, and enjoy the fruits of modern prosperity.
Unless one accepts that the laws of economics codified in Western textbooks are universal, it does not stand to reason that the application of the laws to the different cultures of Africa, Asia and South America will automatically yield identical economic results to those of the west. All countries do not move in a linear fashion along the same track. Moreover, dependency theorists like Dos Santos contend that such a view understates the extent to which economic progress in the rich Northern countries was based on exploitation of the currently underdeveloped regions, and that if the latter were to follow the pattern of development of the North, they would have to look for colonies to exploit.
The World Bank and the International Monetary Fund have now designed a package of economic and social reforms broadly described as "Structural Adjustment" - a term coined by the then World Bank President Robert Macnamara in 1979, aimed at integrating "developing" countries into the world trading system in order to help accelerate their growth and development efforts, but which has resulted in making the rich richer, and the poor, poorer. Structural adjustment embodies the goals of neoclassical theory. It places the market at centre stage, assigns the state a secondary role in development, and puts its faith in the potential of unfettered individual initiative, creativity, and ingenuity. It comes at the cost of lost capacity of the state to make important long-term investments, and has become a means of redistributing economic and political power. Needless to say that the World Bank and the International Monetary Fund take a market oriented approach to economic management, which rests on the assumption that economic "rationality" is constant across all societies, which applied regardless of the level of development reached by any particular economy, and that by controlling budget deficit and money supply, one should liberalize the foreign exchange regime, which in turn would ensure that the market was given free rein to allocate resources within the economy, and rectify the distortions created by undue and inefficient state intervention in economic management.
In this regard, some of the World Bank/IMF prescriptions include the following: Pruning of government bureaucracies, deregulation of the economy, removing government involvement from economic activities, cut-backs in government expenditures, especially in social spending and subsidies introducing user fees in education and health care, raising food prices, cutbacks in or containment of wages, privatizing of state owned enterprises, devaluation of the currency, elimination of or reduction of protection for the domestic market, less restrictions on the operations of foreign investors, and so on.
One should question the representation of what has occurred. It raises doubts about the validity of the analytical model, which is implicit in the policy prescriptions. It appears that further conceptual and empirical analysis is required before providing the prescription.
There is also the drive to privatization, which has been stimulated by the budget maximization thesis. In reality, it is designed to advance the interest of central and policy-level officials at the expense of job losses. It worsens the conditions of rank and file state workers and produces a qualitative and quantitative reduction of services to recipients, especially the poor and the working class. Even if it were assumed that privatization would result in improved efficiency of resources, this cannot be settled in the abstract and divorced from the values of society. It would be inappropriate to judge the performance of an enterprise by the simple test of the market, because society’s needs are too complex to be reduced to that criterion. Public enterprises and services have their public duties more than just profit-making which is the only motive of private capital. It is commonly accepted that private firms are more efficient than public firms are. The truth is that when a firm is privatized, the managers of the new privatized firm are, literally, the same people as those who managed the old public firm the day before. It is only competition between the private and the state sector that determines efficiency.
Thirty-six countries in Sub-Saharan Africa have been subjected to the Structural Adjustment Programme. Faced with the threat of a cut off of external funds needed to service the mounting debts, these countries have no choice but to implement the painful measures. But at the end of the day, the prescriptions have brought neither growth nor debt relief, but increased massive poverty and misery. In fact, the total external debt of the African continent is now 110% of its gross national product.
If we look at other regions, an empirical study in the case of Latin America has shown that Latin American countries stand to gain less from free trade agreements say with the USA than the USA stands to gain from free trade agreements with them.
Why inequality and social injustice have become essential prerequisites for growth and development, the formulators of the prescription cannot explain. No doubt, conventional economic thinking emphasizes out-puts at the expense of distribution. In fact, it is argued that wealth has to be created before it is distributed, and that, in the early stages of "development", economic growth results in inequality of incomes and that this inequality is necessary and essential for generating the savings needed for investment. Whether such thinking is a result of the manner in which economic theory was conceived to encourage the formulation of ideas in a way that evaded the equity issue is a matter that should not preoccupy us here. Suffice to say that the interests of the few need not necessarily coincide with those of the whole, and that even if there is an increase in output, there would be no effective demand to absorb the output without income distribution. Lack of income and low purchasing power among a large segment of the population are, after all, a major constraint on development and growth. Because these countries cannot pay for their debts, there will be a rescheduling of the debts, accompanied with the provision of further loans, so that the insolvent debtor will be able to service current debt obligations. This is invariably accompanied with a drastic devaluation of the national currency and the "stifling" of internal inflation by cuts of budget deficits. The macro-economic logic of these cures cannot be disputed in principle. But who foots the bill? Devaluation makes sense if the objective is to reduce balance-of-payments deficits. Exports can be promoted because they become cheaper for foreign buyers. But this will happen if export demand reacts flexibly to lower prices. Even if there is devaluation of the currency, one cannot be absolutely certain that adequate quantities can be sold. In the process, imports can become more expensive through devaluation, which, in turn, leads to the reduction of imports.
There was a debate between the World Bank and the United Nations Economic Commission for Africa regarding the policy of structural adjustment and its relevance to Africa. Using the same data, as well as different statistical methods, and different measures of economic performance including welfare, both have arrived at contrary conclusions. The bank argued that reforming states performed significantly better than weak-reforming and non-reforming ones.
The ECA, on the other hand, using the same data base, argued that there was little evidence of recovery and that in growth rates in non-reforming countries actually did better overall between 1980 and 1987 than strong adjusters, and that Structural Adjustment has led to worsened economic performance and social welfare.
The aggregate evidence shows that during the 1980s, the decade of structural adjustment in much of the continent, growth slowed and agricultural output failed to keep pace with population growth, leading in turn to increased food imports. Manufacturing did not increase its share of total output, investment dropped, consumption plummeted, per capita incomes declined, and unemployment rose.
Furthermore, cuts in government spending are hindering human-capital formation, the development of the pool of skilled labour, managerial talent, and engineering capacity. The policy puts countries back in the syndrome they tried to break out of long ago when structuralists first identified the problem of declining terms of trade.
With regard to privatization, we should also note that it seems to offer little to African countries. Public-sector reform, coupled with policies to encourage new private investment, would have been the best policy.
In March 1998, the U.S. House of Representatives also passed the African Growth and Opportunity Act. The plan, among other things, would expand African access to U.S. markets by extending, for a ten-year period, import tariff concessions under the Generalized System of Preferences and by eliminating U.S. import quotas on textiles and apparel manufactured in Sub-Saharan Africa.
The new U.S. initiative reinforces an unbalanced emphasis on market liberalization and global economic integration rather than sustainable and equitable development. Indeed, it contains provisions that would obstruct equitable development by requiring countries to adopt market-oriented policy changes similar to those imposed by the World Bank and the IMF. What is surprising is that First World governments can go to great lengths to shelter their own industries, and will impose quotas on Third World exports if they undercut those of their own products.
Most African countries are unlikely to realize substantial benefits from programmes that do not emphasize social investment in education and health care, poverty reduction, food production, debt eradication initiatives, and broad-based economic growth, and fair employment opportunities. But to its credit, the bill also lists poverty reduction, social investment and human rights as factors to be considered in assessing eligibility.
Market liberalization alone, does not necessarily ensure long-term growth of the economy. Structural constraints like the lack of infrastructure and poor education are also key elements of long-term growth. Likewise, market liberalization does not necessarily reduce poverty, or promote development of local industries, or stop capital flight. Many African nations do not have the capacity to exploit new markets. They do not have the required international connections, expertise, and financial resources to fully exploit these new opportunities. In fact, African economies do not yet have developed industries that can take advantage of the opportunities. Besides, the arrival of cheap imported goods may discourage local entrepreneurs from moving into industry.
If the countries of Sub-Saharan Africa are to grow and to develop, the notion of laissez faire-that is, a system under which the intervention of the state in economic matters, whether as regulator or operator should be confined to the barest practical minimum, should not be taken seriously. In fact, the less developed a country is, the greater appears to be its need for state intervention.
The weakness of the indigenous entrepreneurial classes, the lack of capital, the difficulty of creating and maintaining effective economic organizations beyond the level of the small family, does not only need a state, but even a strong state, which will have to plan the economy, to actively participate in order to enhance stability of prices, to mobilize resources for investment in education, public health, and the general infrastructure, and to promote growth. Indeed, as planning is a deliberate activity, someone must initiate and undertake it. And since it operates by affecting the behaviour of economic agents, authority must back its measures. Besides, to achieve stable level of prices, to promote specific industries, to resort to an industrial policy which includes the selective use of instruments including taxes, protection, and subsidies, to establish quality standards, and to set minimum wages, to create the conditions for full employment, and to sustain growth and to maintain balance of payments without deficit, it is only the state which can, among other things, use monetary and fiscal policy and to influence the level of spending.
To be sure, one should be concerned with the question whether a country's development is best promoted by opening its economy to global market forces or by combining it with neighbouring economies in such a way, so as to follow the domestic economic and social policies of its own choice. In the case of Sub-Saharan Africa, it appears that the state should follow an interventionist policy that entails regulation of domestic and foreign investment in accordance with government priorities; allocation of investments between regions and provinces in the interest of equity; and generally a comprehensive and integrative approach to development.
Some Lessons from the Past
If history were a guide, in the USA of the 18th and 19th century, the north specialized in industry, and the south in agriculture. And by resorting to a highly protectionist trade policy, the country speeded up its industrialization programme, in which the government was the engine of growth. Alexander Hamilton, John Adams, and others were all strong believers in economic nationalism and opposed the policy of free trade. Mass education and the transport system were government subsidized. So was industry and agriculture, to the extent that a considerable volume of new capital formation was done in the public sector. Moreover, it was not the private sector and private capital which pulled America out of the depression in the 1930s and 1940s. Private business either speculated or invested overseas. It was the government of President Franklin Roosevelt, which under the New Deal (1932-1940), among other things, created jobs for more than nine million Americans, including 50,000 teachers and 3,000 artists and writers, established the public university system, the federally supported agricultural research and extension services, the National Banking Act and the Federal Reserve System, the inter-state highway and railroads system, built 75,000 bridges, 2,500 hospitals, 13,000 play grounds, 8,000 parks, 125,000 public buildings, 40,000 schools, 1,000 airports, 650,000 miles of roads, and the Tennessee Valley Authority (TVA).
If, in the case of the US, the depression was merely an eight-year phenomenon, as far as the Africans are concerned, the depression is a daily occurrence for much of their lives. To tell Africans to go for free trade would therefore be to behave like someone who immigrates to a prosperous land, and then turns around and calls for a halt to immigration.
In countries like France, Italy, Britain and others, the national government had to participate in the productive sector by means of nationalized enterprises. As late as 1957, in France for instance, public enterprises generated 10% of the national income, employed 7% of the labour force, and accounted for 25% of all gross investment in the country. In Italy, public enterprises mined all the iron-ore and extracted nearly all the natural gas, generated nearly all the electric power, accomplished most of the ship building, and produced 50% of the steel.
Indeed, between 1950 and 1960, 20.8% of the national income was saved in Italy for domestic investment, largely through measures taken by the government. In the case of Sweden, it was 21.3%; in West Germany, 24%; in Canada, 24.8%; and in Norway, 26.4%.
In a country like Japan, government set in motion all the major industrial projects of the first break-through. To be sure, during the Meiji period (1868-1912), the government carried out a land reform programme, created a central bank, established the basis for a sound fiscal system, laid down the foundations for the recruitment of state officials based on merit, made education compulsory, sent students abroad, imported technicians, and established and operated factories for silk, brick, glass, cement, textiles, shipyards, and so on.
The Meiji government invested heavily in telegraphs, postal services, water supply, coastal shipping, ports, harbours, bridges, lighthouses, railways, electricity, gas and technical research.
With regard to the newly emerging Asian countries, the World Bank itself has admitted that state intervention was crucial to East Asian development.
All of the East Asian countries - the Asian Tigers, use protection to develop infant industries, even after the shift to an export-oriented strategy, that the regime of South Korea achieved spectacular growth rates by practicing command economies, that government incentives, subsidies, and coercion fueled the drive for heavy industry in such areas as iron and steel that market forces would have rendered uncompetitive in the early stages, that scholars analyzing the success of the Asian Tigers have often emphasized the pattern of extensive state intervention in the market,that most Anglo-American development economists have a mistaken understanding of Korea and Taiwan as low-interventionist countries, especially with reference to trade, and that they rely on this mistaken understanding to validate a low-intervention prescription elsewhere.
In Korea, the government invested in education, infrastructure and industry with nearly 25% of domestic investment between 1963 and 1979 arising from public sector allocation in infrastructural and social overhead capital.
Contrary to the myth, which portrays Singapore as a free port, the state is in fact heavily interventionist. It owns, controls, and regulates land, labour and capital resources and their allocation. Additionally, the state not only vastly expanded traditional infrastructure but also provided low cost fully serviced factories available for the rapid establishment of new industrial ventures.
In Hong Kong, the government through leasing arrangements made land available for industrial estates at a fraction of their market value. The government has also been active in other areas of infrastructure with a mix of ownership, subsidization and close regulation when infrastructure has been privately controlled.
In Malaysia, government intervened heavily to promote the industrial sector.
Japan, Taiwan and Korea emphasized local capital accumulation between 1868 and 1891, and resisted large-scale foreign investment. In the most extreme case, Meiji Japan virtually banned foreign investment in 1891.
Structural Adjustment in contrast, encourages an open door policy and the institution of new legal guarantees that protect against nationalization and ensure the repatriation of profits.
In Taiwan, during the crucial phase of early industrialization, government spending for education increased in 1952 from 7.8% of the total budget to 17.6% in 1972.
Yet, in Africa, between 1980 and 1987, spending per student had fallen from $32 to a mere $15. This, combined with the introduction of user fees, has led to a steady erosion in primary enrollment rates which fell from 79% in 1980 to 67% in 1990.
Between 1972 and 1980, real per capita state spending on health care for example, in Singapore, rose by 90%. In contrast, the austerity of structural adjustment programms in Sub-Saharan Africa was taking its toll on social spending. Real per capita government spending on health care in the region fell by 42% between 1980 and 1987.
The developmental successes of these Asian countries are historically and regionally specific, and therefore provide no readily adaptable models for others who may be interested in emulating them.
( to be continnued next week)