Abstract
In many ways, the decade of the 1980s in Sub-Saharan Africa was lost in social and economic terms. Between 1980 and 1990 per capita income fell in the region by an astounding 1.1 per cent per annum (World Bank, 1992a, p. 196). This was, by far, the worst decade in the post-independence era.
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Notes
The initial dates of the programs were divided fairly evenly between early adjusters (1980–84) and later adjusters (1985–87). Early countries in chronological order were Kenya, Sudan, Côte d’Ivoire, Malawi, Senegal, Mauritius, Nigeria, Togo, Ghana, Zimbabwe, Guinea-Bissau, Zambia and Sierra Leone. The later adjusters included Burkina Faso, Madagascar, Burundi, Central African Republic, Gambia, Guinea, Somalia, Zaire, Congo, Niger, Sao Tome, Tanzania and Uganda. The content and duration of the programs varied. For a good summary of the details see Mosley and Weeks (1993: Appendix A and footnote 15).
There is now an extensive literature (I list just a few examples) critical of structural adjustment in Africa covering a variety of topics including agriculture (Commander, 1989b; Lele, 1990), industry (Stein, 1992; Lall, 1992, Riddell, 1993), debt (Parfitt and Riley, 1989; Nafziger, 1993), basic needs (Cornia et al., 1987; Stein and Nafziger, 1991; Stewart, 1991), trade (Godfrey, 1985; Helleiner, 1990) and investment levels (Mosley et al., 1991). In contrast, the latest World Bank (1994) study, released just as the manuscript of this book was about to be forwarded to the publisher, is a strong statement aimed at reaffirming the positive effect of adjustment on Africa. The position is somewhat surprising given some of the evidence in tables in the study (Appendix B. 3). Twenty-six Sub-Saharan countries are divided into three categories based on the degree of change in macro-economic policies. A quick glance at the data shows that countries with a ‘large improvement’ in policies actually did worse in median change in agricultural growth than the ‘small improvement’ and ‘deterioration’ categories and lower growth of gross domestic investment than the ‘small improvement’ category. The ‘large improvement’ group also did more poorly after netting out the oil exporters in the area of public investment compared to the other two categories (Appendix A, Table 23). GDP per capita in the large versus the small improvement category is very similar (1.8 vs. 1.5 per cent) and probably not statistically significantly different. In the text, the Bank very conveniently redefines the categories when the data are negative (e.g. in agriculture the new category is countries that have increased the real prices to exporters) and maintains the categories when they are positive. As with earlier studies its not entirely certain what is being compared here. First, there is no explanation of the reason for the choice of the dates of 1981–1986 vs. 1987–1991. Choosing other dates could lead to different results (the Bank tries a few others which hardly captures the range of permutations). Second, some countries in the categories began programs well before 1986 while others were after (see footnote one). If early adjusters abandoned adjustments due to negative economic consequences and if one assumes any lag time between policies and their effects then some of the poor results in the latter time period may be due to adjustment not due to a lack of adjustment. A similar line of argument could be used on the ‘large improvement’ category. Third, to determine the classification of countries, the Bank assigned the number minus three through plus three to ranges of changes in six sub-categories of macropolicies (like fiscal balances) equally weighted. The numbers used to determine the extent of change in macroeconomic policies are arbitrary to say the least as is the choice of equal weighting. Why should a decrease of inflation of 2.5 per cent only receive a plus one and an increase of 5 per cent a minus one (a variation of 7.5 per cent) when an increase of 31 per cent leads to the assignment of a minus three (a variation of 26 per cent for the same point reduction). A few changes in the definition of the ranges can easily push five of the six countries from the ‘large improvement’ into the ‘small improvement’ category or the majority of the ‘deterioration’ group into the ‘small improvement’ category. Similar shifts would also occur using different weighting schemes. In essence, the results of the whole exercise could have been dramatically different by simply redefining the ranges or the weighting.
To quote the Bank study: ‘ ...getting the fundamentals right was essential. Without high levels of domestic savings, broadly based human capital, good macroeconomic management and limited price distortion, there would have been no basis for growth and no means by which the gains of rapid productivity change could have been realized’ (World Bank, 1993, p. 23).
The book does not provide detailed studies of South Asia, Thailand, the Philippines or Indonesia. The focus is on the most successful cases which we believe also set the pattern that other Asian countries are attempting to emulate. Even the Malaysia chapter is written in the context of ‘looking East’.
The two best examples of this are World Bank (1993) and Lindauer and Roemer (1993). The Bank’s ‘Asian Miracle’ sums up this position very effectively:
This is unequivocally stated in the Bank’s Asian miracle study. ‘Our assessment ... is that promotion of specific industries generally did not work and therefore holds little promise for other developing economies’(World Bank, 1993, p. 24). This position also places the study squarely in the neo-classical paradigm and is contrary to the case studies in this book.
The Bank in the Asian miracle study recognizes how important public funding was to the expansion of primary enrolment and vocational training and in turn how central these were to the development of a suitable labor force for industry (World Bank, 1993, pp. 192–203). The recognition of this point is not new to the Bank and was emphasized in its 1989 report on Sub-Saharan Africa (World Bank, 1989a, pp. 77–84). However, the Bank seems to ignore the conflict between demand managed stabilization aimed at meeting fiscal and monetary targets in Africa and the need for supply inducing government expenditures such as increasing investment in education. So far, the emphasis has been on austerity and stabilization with consequences discussed below. Despite the Bank’s comment that ‘public spending on health and education did not decline in the adjustment period’ (World Bank, 1994, p. 9) the data provided in tables in its new study seems to indicate otherwise. The median expenditures of education as a percentage of GDP fell in all categories between 1981–86 and 1987–90. Overall, in fourteen countries in which data was provided the median decline in the change in real educational expenditures was 4.6 per cent from 1980–83 to 1987–89 with decreases of 70.3 per cent in Nigeria and 64 per cent in the Gambia (two countries in the Bank’s ‘large improvement’ category) (World Bank, 1994, pp. 171, 172).
In a rather extreme example, capital spending by the Malawi government (an early adjuster) plunged by 58 per cent between 1980 and 1989 in real terms. Malawi was one country that very heavily emphasized government austerity.(Mosley and Weeks, 1993: Appendices A and B). From a broader perspective, 17 out of 26 countries had a decrease in the percentage of GDP allocated to public investment between 1981–86 and 1987–91 (World Bank, 1994, p. 251).
The figures were respectively 4.0 per cent vs. 1.8 per cent; 3.2 per cent vs.–0.6 per cent; and 4.6 per cent vs. –0.2 per cent. The differences between the sample means of investment and export growth were significant at a 1 per cent level and in the case of GDP growth at the 5 per cent level (Mosley and Weeks, 1993, Table 6).
Tanzania, which was one of the staunchest critics of adjustment, signed a standby agreement with the International Monetary Fund in 1986. In the same year it initiated the first structural adjustment program. In actuality, a number of liberalizing measures were undertaken prior to 1986, partly in preparation for the accord. For a detailed discussion of the period see Campbell and Stein, 1992.
The importance of these variables are supported by empirical studies. For example, Chhibber (1989), examining data from India from 1954/55 to 1977/78, finds that the long run elasticity of supply with respect to non-price variables is three times as high as the price elasticity.
In Tanzania the real minimum wage fell by 33 per cent from mid-1986 to the end of 1988. In May 1988, the minimum wage would only purchase 1.3 kilograms of maize meal per day or around 40 per cent of the calories necessary for a family (using this highly unbalanced diet as a nutritional source). In household surveys the amount spent on food on average for a family of four was six to eight times the minimum wage. As a result formal sector employment was primarily being used as a conduit for informal activities (miradi) rather than as an end in itself with negative implications to productivity. For a more detailed discussion of this see Stein and Nafziger, 1991, pp. 182–5.
In the new ‘Asian Miracle’ study, the Bank moves slightly away from its earlier view that there was a neutrality of incentives to the recognition that Asian states actively promoted exports. However, the effect was the same since they counterbalanced the protection of imports. To quote the study: Thus while incentives were largely equal between exports and imports this was the result of countervailing subsidies rather than trade neutrality; the promotion of exports coexisted with the protection of the domestic market. (World Bank, 1993, p. 22) The Bank does not provide any evidence to support this assertion by systematically evaluating the level of subsidies vs. protection. The only information directly on this question is provided in Table 3.6., from a 1977 study of Korea by Larry Westphal. The table provides the ratio of the effective export exchange rate relative to the effective import exchange rate taking protectionism and subsidies into account. In every year from 1958 to 1975, the ratio exceeded one sometimes by very significant percentages. It would seem that this would indicate a bias in favor of exports which would contradict their assertion. One can only venture the hypothesis that in view of the vast evidence that indicates that the state intervened on the import and export side, the Bank wants to argue that somehow the ‘distortions’ were offsetting so it was as if they did not intervene at all. In effect, it can still promote the standard neo-classical based reform package of encouraging neutrality in the trade regime.
According to Mosley and Weeks (1993), seventeen of 23 African countries surveyed undertook adjustments of this nature.
The ‘Asian Miracle’ study argues that despite the obvious level of protectionism in countries other than Hong Kong and Singapore, there is little evidence of distortion compared to other regions. In 1985, overall tariffs plus paratariffs in three countries (Korea, Malaysia and Taiwan) are less than almost any other developing country region. There are obvious problems here. As we argued above there has been considerable reductions in nominal levels in recent years in places like Korea. A more interesting comparison would be to examine protectionist levels used during the earlier period of industrialization particularly in Korea and Taiwan. Obviously what is important from an African perspective is how they got where they are not what the tariffs are after they have already arrived (World Bank, 1993, pp. 298–301).
The World Bank (1993) provides data on the real interest rates over various periods mostly between 1970 and 1991 except for Japan which is dated from 1953. Only Japan at –1.12 for 1953 to 1991 and Hong Kong for 1973 to 1991 show negative average rates. Of course, focusing on other periods such as the pre-1965 years in Korea would also reveal negative rates (p. 206).
M2 is a broader definition of money supply and usually includes narrow money such as currency in circulation and demand deposits as well as quasi-money which is generally comprised of savings and time deposits.
There was also wide variation on the level of deficits with countries like Malaysia running significant deficits into the 1980s although countries like Singapore and Taiwan after the early 1970s were very conservative. The question that needs to be answered is not what is the level of the deficit but what is being supported by the deficits and could there be a better use for the credit.
In 1982, for example, Singapore had a gross savings rate of 41 per cent while Korea’s was only 24 per cent (World Bank, 1984, p. 227). Dornbusch and Reynoso (1993), drawing on the literature, find no evidence that positive real interest rates raise the level of savings.
In 1965, just prior to the big surge in industry, Singapore’s and Korea’s gross domestic savings rates were significantly below those in Sub-Saharan Africa. The numbers were 10, 8 and 13 per cent, respectively. By 1990 the figures were 45, 37 and 16 per cent (World Bank, 1992a, p. 235).
The Bank in the study uses a Granger causality test for the growth rate of real GDP per capita and the gross savings rate. For details of the results and the method used see appendix 5.1 of the ‘Asian Miracle’ study (World Bank, 1993, pp. 242–5).
In Tanzania, credit constraints imposed after the 1986 agreement with the IMF were even affecting manufacturing exports. In 1987 Texco (National Textile Company) could only meet Shs 280.7 million of a total export order of Shs 380 million due to overdraft constraints caused by the IMF credit ceilings (Campbell and Stein, 1992, p. 77). There are many examples of the impact of credit constraints on manufacturing in Africa, including attempts by small industry to finance production for exports. In a very interesting case in Ghana, reported by the Wall Street Journal, small and medium sized Ghanian textile producers were having difficulty meeting the orders of import companies like Pier One due to the tightness of credit and the lack of financial institutions to accommodate their needs. Even the normal pro-Bank Journal was lamenting how little progress had been made in Ghana, the Bank’s showcase country, after a decade of adjustment (Wall Street Journal, January 26, 1994, p. A5).
There are some interesting cases of the private sector prospering in industry without the state’s support of even basic public goods. Deborah Brautigam (1993) provides a fascinating case study of the development of mostly auto part manufacturing in the Nnewi Township in Eastern Nigeria during the 1980s. The industrial entrepreneurs substituted their own private goods such as water and power for the public goods the Nigerian state failed to provide. In the absence of financial intermediaries, they financed their operations from well-developed trading operations. Along Hong Kong Chinese lines, they reduced agency problems by incorporating family members into the management of the companies. International connections, developed over a long period in trading with mostly Taiwanese companies, reduced the effects of ‘adverse selection’ in the import of equipment. Clustering reduced information costs and provided a demonstration effect which encouraged further investment in manufacturing. Long term business relations increased the trust and cooperation between different groups in the cluster. The result was manufacturing which was not just competitive domestically, but regionally which allowed some exporting. However, given the macroeconomic instability after 1988 brought on partially by structural adjustment (e.g. devaluing naira made it difficult to plan a large investment based on imported capital goods, inflation was eroding savings, credit constraints made it difficult to obtain working capital from other sources, etc.) the surge of new industries was leveling off. Overall, given the peculiarities of the case and the threat to its sustainability, this is unlikely to be the route to industrialization. There is no substitute for the state capacity to reduce transaction costs and foster entrepreneurship.
Even in Taiwan where there was a greater reliance on small scale industrial production, the state played a number of key supporting roles like requiring multinational capital to use local sources as inputs into production. For a good discussion of this, see Brautigam (1994, p. 148).
Lindauer and Roemer (1993) in a study on Asia and Africa sponsored by the US Agency for International Development point to the Southeast Asian countries of Thailand, Malaysia and Indonesia, not East Asian nations, as examples to be emulated. Their reasoning is fairly neo-classical, relying on a combination of standard static comparative advantages and public choice arguments. First, they share similar factor endowments including unskilled labor, land and natural resources. In contrast, East Asia has poorer endowments particularly in land and natural resources. Second, the states of Southeast Asia, (unlike East Asia) have been subject to clientalism and rent-seeking which is very similar to Africa. They have not attempted interventionist strategies which would be thwarted by these features.
The World Bank (1993) defines the rewards, rules and referees: Preferential access to credit and foreign exchange have been extremely attractive rewards. Rules have centered on economic performance, primarily a well-understood imperative to export. Referees, the government officials who have designed and supervised the contests, have been generally competent and fair. (p. 94)
I thank Chris Edwards for pointing this out in his comments on a draft of this chapter.
Lindauer and Roemer emphatically concur: ‘For Sub-Saharan Africa as a whole, intervention has been tried and failed’ (1993, p. 13).
To once again quote Sanjaya Lall: There cannot be any ‘quick fixes’ for the problems of African industrialization. Some of the incentive-based approaches have given the impression that just getting prices right will launch Africa on the path to NIC-dom ... it is the right combination of incentives capabilities and institutions ... that will call forth a proper response ... A great deal of responsibility ... rests on the aid donors as well as African governments. Donors have to ensure that funds aimed at industry are used in a policy framework which provides the right incentives (which may not, it should be reiterated, necessarily mean laissez faire or low, uniform rates of protection) and stimulates the right capabilities. The pace of industrialization should not exceed, in a general sense, the pace of capability development ... It would also mean that action is needed on the capability front in policy formulation and implementation as well as in industry. (1992, p. 131)
Roger Riddell lists four areas of intervention needed to support the development of industry in Africa. They include measures aimed at improving the viability of currently operating industry; assistance in setting up new competitive enterprises which would be aimed at current domestic (to save foreign exchange, raise value added levels etc.) and external markets (particularly sub-regional); support for new enterprises which will not be competitive in the short or medium term but are useful for long-term development; and establishing a facility to monitor and assess the current viability and potential competitiveness of various industries as well as evaluating the benefit vs. cost of the other types of intervention (Riddell, 1993, pp. 240–1). In addition, one should also add the broad forms of intervention in support of industry discussed in this chapter including upgrading technical education, expanding and upgrading infrastructure, aggressive international and regional promotion of domestic manufactures etc.
The new Bank study of Africa argues that adjustment policies have had a positive effect on industry. Except for some rather anecdotal evidence, the main support for this position is the higher median increase in the average annual growth rate of the ‘large improvement’ group from 1981 to 1986 to 1987 to 1991. The argument, however, is not very cogent. First, if we ignore the classification problems discussed above and accept the categories as given, the Bank’s data actually indicates that the ‘small improvement’ category’s average annual performance in industry and manufacturing was appreciably better than the ‘large improvement’ group between 1987 and 1991 (mean of 5.5 per- cent vs. 4.3 per cent and 8 per cent vs. 4.6 per cent in industry and manufacturing, respectively). Second, the Bank argues that the critics of adjustment policy’s impact on industry must tie any declines in industrial output to Bank policies. The argument can be inverted. The Bank needs to show that if there is any improvement in industry it is due to adjustment policies. This is not done. In fact, evidence from Riddell (1993, p. 232) indicates that some of the countries in the ‘large improvement’ category (like Zimbabwe) improved their manufacturing by increasing the incentives to export non-traditional categories of manufactures. In contrast, Cote d’Ivoire with its reduction in tariffs undertaken in response to international agency pressure partially explains the decline in the growth of industry in the country (–2.2 per cent between 1987 and 1991) (World Bank, 1994, pp. 149–52, 247–8). In any case both the Bank and its critics would probably agree that there is little or no evidence of robust growth in industry in the last decade. The focus of the argument is on how that can be changed.
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© 1995 Howard Stein
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Stein, H. (1995). Policy Alternatives to Structural Adjustment in Africa: An Introduction. In: Stein, H. (eds) Asian Industrialization and Africa. International Political Economy Series. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-24473-7_1
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