In Adjustment in Africa: Reform, Results, and the Road Ahead, published in March, researchers from the World Bank's Policy Research Department try to answer three questions: How much did adjusting African countries change their policies? Did their policy reforms restore growth? And what is the road ahead for adjustment?
In answering these questions, the report advances the debate on adjustment by providing the most comprehensive data so far on policy changes in Sub-Saharan Africa. It takes a careful look at whether reforms are paying off, and it identifies areas where the adjustment strategy needs redirecting. The report shows that African countries have made great strides in improving policies and restoring growth, but that they still have a long way to go in adopting the policies needed to move onto a faster growth path and reduce poverty.
Twenty-nine African countries drew up adjustment programs in the 1980s---programs intended to improve the poor policies that were the primary cause of the 15 percent fall in Africa's GDP per capita between 1977 and 1985. The outcomes? Macroeconomic reforms have spurred external competitiveness while keeping inflation low. Trade reforms have increased access to the imports needed for growth. And the reduced taxation of agriculture has helped the poor while encouraging production and exports.
For public enterprises and financial enterprises, however, there have been few policy changes.
There has been much talk about the costs of adjustment, less about the substantial benefits. Most countries that improved their policies have returned to positive rates of GDP per capita growth. This turnaround shows that adjustment policies work when implemented properly. And although GDP per capita growth rates remain low, it is unreasonable to expect that African countries would quickly match the rapid rise of the best performers in Asia and elsewhere. Even before the macroeconomic crisis of the early 1980s, Sub-Saharan Africa was growing more slowly than other regions.
Despite the efforts to improve the macroeconomic environment, open up markets, and strengthen the public and financial sectors, most African countries still lack policies that are sound by international standards. Even Africa's best performers have worse macro- economic policies than the newly industrializing economies in Asia. Few besides Ghana come close to having adequate monetary, fiscal, and exchange rate policies. And Ghana lags behind other adjusting countries elsewhere---Chile and Mexico, for example---in trade and public enterprise reform.
In trade, many African countries have, by eliminating extensive import controls, returned to the regimes they had before the crisis---helped in many cases by successful exchange rate depreciations that restored competitiveness. Other countries that never experienced a severe macroeconomic crisis, such as Kenya and Zimbabwe, have moved slowly toward import liberalization. The current policy stance in countries with flexible exchange rates is free of the heavy administrative controls that characterized the period before adjustment, but most African countries still have some nontariff barriers and high and dispersed tariffs.
The policy stance for agricultural pricing and other price controls is more difficult to quantify. Most countries have eliminated price controls and restrictions on the marketing and pricing of food staples, and many have eliminated costly subsidies for fertilizer (with no apparent reduction of fertilizer use) and liberalized its distribution. But governments continue to intervene heavily in the marketing of export crops.
The scarce evidence on public enterprise reform suggests that there has been no significant reduction in financial flows to public enterprises or in the volume of assets held by the government. Nor has there been a sustainable improvement in the efficiency of enterprises remaining public. The paucity of data partly reflects institutional weaknesses, but it probably also reflects the lack of government commitment to results.
Financial reform lags behind as well. The financial position of the banking sector is weak because of poor macroeconomic management, which induces the monetization of fiscal deficits through the banks. It is also weak because of the slow pace of reform in the public enterprise sector. And it reflects continuing government interference in the management of the financial sector. A large share of bank lending still goes to the public enterprise sector, making it more difficult for the private sector to borrow.
Although public spending on health and education did not decline in the adjustment period---an achievement given the fiscal problems of African countries---there is little evidence of an increase in that spending. Nor is there much evidence that public spending within those sectors is being reallocated away from costly tertiary programs and toward the basic services most likely to reach the poor.
What about the payoffs to good policies? Countries that maintained or ended up with fair or adequate macroeconomic policies during 1987-91 did better than countries with poor or very poor policies. The median rate of GDP per capita growth in countries with the better macroeconomic policy stance was 0.4 percent a year between 1987 and 1991---low but at least positive, and a turnaround from annual declines of about 1 percent a year in the early 1980s. By contrast, in countries with poor or very poor macroeconomic policies, the median GDP per capita growth rate was -2.1 percent a year on average. The extent of government intervention in markets also made a difference in growth. Countries that limited their intervention in markets had median GDP per capita growth of almost 2 percent during 1987-91, compared with declines of more than 1 percent for the countries that intervened more extensively.
Adjustment is the necessary first step on the road to sustainable, poverty-reducing growth. But adjustment programs in Sub-Saharan Africa have been burdened with unrealistically high hopes, driven in part by awareness of the real poverty that economic growth can help alleviate. Some proponents of adjustment thought that it could quickly put African countries on a much higher growth path than before. Too often there has been little effort to determine whether Africa's disappointing economic performance in the aggregate represents a failure to adjust or a failure of adjustment.
Drawing on successful experiences elsewhere and taking Sub-Saharan Africa's circumstances into account, three principles can guide African governments undertaking reform programs.
Getting macroeconomic policies right. Countries should continue with the current strategy: avoiding overvalued exchange rates and keeping inflation and budget deficits low. Good macroeconomic policies have paid off in East Asia, and they will pay off in Africa, too---indeed, they are already starting to do so.
Most countries in the region still need to cut budget deficits and indirect fiscal losses (those covered by the banking system) to lessen the need for inflationary financing or additional external financing. There is little scope for cutting overall public spending in many countries, although the composition of spending can and should be improved. Increasing tax revenues is thus the best avenue for reducing deficits, but the increases should come by levying broadly based taxes that do not unduly penalize businesses and by granting fewer exemptions that favor the politically well connected.
Domestic savings, which are low in Africa relative to other developing regions, must increase to finance investment. Eliminating large negative real interest rates is a crucial first step. But given the complexity of devising additional policies to encourage private savings, raising public savings is the best option in the short run. The surest way to increase savings in the long term is to boost growth, because growth and savings reinforce each other in a virtuous circle, with high growth leading to high saving and to higher growth.
Taxing agriculture less. In agriculture, the main task is to continue reducing the taxation of farmers by liberalizing pricing and marketing and by reducing the protection of industry. Progress has been made, but countries need to do more to help farmers, and eliminating agricultural marketing parastatals, particularly for export crops, must be high on the agenda. Liberalizing markets so that private agents can compete with parastatals and linking producer prices to world market prices may be useful transitional mechanisms in the near term. These reforms can help farmers reap the full benefit of the exchange rate depreciations, which might otherwise merely shore up the financial profitability of parastatals.
Care must be taken not to undermine market liberalization efforts with restrictive licensing procedures and other interventions that give marketing parastatals an undue competitive advantage. Traders often face a thicket of regulations for licensing, transportation, the movement of goods, trading hours and locations, and weights and measures. Eliminating these burdensome obstacles is essential for increasing profitability and production in agriculture. Simultaneous progress in the development agenda is also important. Improving the quality of public spending for transport networks, rural infrastructure, and agricultural research and extension will enhance the payoffs to improving agricultural policies.
Putting exporters first. Because exports are so beneficial for growth, countries should consider the needs of exporters carefully and apply an "exporters first" rule. One easy way for government to help exporters is to remove unnecessary policy impediments---by providing automatic access to foreign exchange, eliminating export monopolies, and facilitating access to intermediate inputs and capital goods. Governments also need to welcome foreign participation, because foreign firms can bring the contacts and production knowledge needed for penetrating global markets. But governments and international agencies should abandon the practice of trying to pick "winners"---that is, pushing particular exports---because they have consistently made poor choices in the past. Export processing zones have seldom been more effective than simple free-trade zones and bonded production areas, so it is important to find other mechanisms to help exporters avoid administrative, regulatory, and tariff impediments. A high priority is developing workable schemes to provide exporters access to duty-free inputs.
The potential for export growth is great because African countries are starting from a very low base. Even modest success in increasing their share of world markets will translate into tremendous growth. The future is in nontraditional exports, but traditional exports still need to be part of an outward-oriented strategy. Gaining just a very small foothold in the world market for such traditional, labor-intensive goods as clothing and footwear would substantially increase the region's exports. But this does not mean that Africa should neglect its traditional export of primary commodities, even those that face limited world demand. Although the region already has a large market share in a handful of agricultural commodities, notably cocoa, it is possible to expand that share further. Good policies and investments in infrastructure and research and extension activities can help to raise the productivity of African producers and displace higher-cost producers elsewhere (as Indonesia and Malaysia have demonstrated).
Rationalizing import barriers. There has been progress in liberalizing imports, but most countries have gone only halfway. African countries should continue to eliminate nontariff barriers (NTBs) to rationalize the trade regime and increase transparency. The focus should be not on fine-tuning tariff levels but on establishing a credible schedule for substituting tariffs for NTBs. Even very high tariffs, if imposed only for a clearly limited period, can support the objectives of adjustment. The next steps on the agenda are to simplify the tariff structure, reduce the highest rates to more moderate levels, and institute a minimum tax---so long as effective systems are in place to provide exporters duty-free access to imports. These reforms can often generate enough revenue to offset a fairly substantial overall lowering of tariffs, while leading to a more competitive environment and productivity gains. Beyond that, further progress toward a low and completely uniform tariff structure should not sacrifice fiscal revenues.
Privatizing public enterprises. The efforts to privatize state corporations and to improve their performance have yielded meager results so far. African governments have resisted privatization, especially of the most important public enterprises. But the alternatives---imposing hard budget constraints, granting the enterprises greater autonomy, and putting them on a commercial footing---seldom work.
Countries elsewhere are getting around the obstacles to privatiza- tion, and their experience might be useful in Africa. Some of these countries have fostered broadly based ownership by giving private citizens vouchers for shares in public enterprises, or reserving shares for employees. Others are using various types of private investment and holding companies to improve corporate management. Nonasset divestiture---through leasing, concessions, and incentive-based performance contracts---can increase private sector management of the public utilities and other natural monopolies and improve their productivity.
Prudent financial reform. The overall approach to financial development is on target, but reforms have suffered from too much faith in quick fixes. African countries need to continue with a three-part strategy of reducing financial repression, restoring bank solvency, and improving the financial infrastructure. But adjustment programs have been overly hasty in cleaning balance sheets and recapitalizing banks in an environment where institutional capacity is weak and the main borrowers (the government and public enterprises) are financially distressed. Many programs were based on the assumption that banks could improve their performance simply by removing the bad loans from their balance sheets, replacing managers, and injecting new capital to bring assets up to international standards. This usually was insufficient for several reasons: reforms were not accompanied by needed macroeconomic and structural changes, bank managers continued to be exposed to political interference, and regulatory and supervisory capacities were inadequate and could be developed only over time.
A more prudent strategy to restore bank solvency involves downsizing publicly owned banks, privatizing them where possible, and encouraging new entrants. Because most African countries lack the capacity to regulate and supervise, the challenge is to devise a financial system that offers extra cushions against risk---by setting higher-than-normal capital-adequacy ratios, relying more on foreign banks, and limiting entry to reputable banks with a solid capital base. Countries must strike a balance between the need to increase competition and the need to ensure the solvency of financial institutions.
Improving public sector management remains a major challenge for the road ahead---but one that probably extends beyond what adjustment-related policy reforms alone can accomplish. Perhaps the biggest challenge is to build a more effective civil service to provide the elements necessary for a well-functioning market economy, including a sound macroeconomic and legal framework and a system for providing basic social services consistent with the development objective of growth with equity. There is increasing recognition that adjustment programs, with their focus on containing civil service costs, have had limited success in tackling the more fundamental problems of the public sector, such as the lack of accountability and transparency, civil service employment and pay practices that are unrelated to technical competence and productivity, regressive patterns of resource mobilization, expenditures that conflict with development priorities, and the limited capacity for policy analysis. Broader approaches that address the difficult tasks of strengthening the administrative structure and creating the conditions for improved governance are thus called for.
Moreover, there is considerable concern that the reforms undertaken to date are fragile and that they are merely returning Africa to the slow-growth path of the 1960s and 1970s. At the same time, there is hope that Africa, like East Asia 30 years ago, will move onto a faster development track. That will require more progress in macro- economic reform---to provide a stable environment in which economic activity can flourish. Much more progress in trade, agricultural, and regulatory reform will also be needed---to create a favorable climate for business so that Africa can join the world economy. And growth with equity will call for strong political resolve to tackle money-losing public enterprises and bloated bureaucracies---to free up the resources needed to improve basic health and education services for the poor.
Drawn from Adjustment in Africa: Reforms, Results, and the Road Ahead, A World Bank Policy Research Report (New York: Oxford University Press, 1994). Also see Development Briefs 33 and 34 in this issue.