the imf, the world bank and africa's adjustment and external debt problems: an unofficial view

World Development, Vol. 20, No. 6, pp. 77%792,1992. 030>750)(/92 $5.00 + 0.00 Printed in Great Britain. 0 1992 Pergamon Press Ltd

The IMF, The Wijrld Bank and Africa’s Adjustment and External Debt Problems: An

Unofficial View

G. K. HELLEINER* University of Toronto

Summary. - Sub-Saharan African development in the 1990s will require significant increases in transfers and debt relief from external official sources. Negotiation of conditions for assistance imposes heavy costs upon recipients. Once gross macroeconomic distortions are overcome, the risk of program failure from uncertainty and underfunding typically exceeds that from absence of further policy reforms, the effects of which are unproven. The relative influence of the International Monetary Fund (IMF) and World Bank in African programs has grown too large. The IMF, transferring resources out of the region, should retreat to a technical advisory role. The World Bank should develop contingency financing and cooperation with other sources of advice and finance

1. BACKGROUND-REQUIREMENTS FOR AFRICAN DEVELOPMENT

Africa’s overall economic performance has been miserable in the 1980s. With only a few exceptions, the prognosis for the African countries in the 1990s offers little prospect of improvement. During the past couple of years, there has nevertheless been a degree of convergence among analysts of African development performance and prospects as to what would be involved in providing a better long-term future for sub- Saharan Africa. The World Bank’s “Longterm Perspective Study” (LTPS) (1989), the Economic Commission for Africa’s “Alternative Frame- work” (1989), and a wide variety of academic and other contributions (including Helleiner, 1990) all point in parallel directions. _ The most important element in the emerging

consensus as to the requirements for economic development for sub-Saharan Africa is the adop- tion by policy makers of a much longer time horizon than is implicit in current structural adjustment programs and many current evaluations. Many of the most important investments and policy changes have very long gestation periods. The costs of pursuing too short-term and therefore, in the absence of alternative possibilities, too demand-oriented an approach to adjustment in Africa have been severe. The forced

adjustment necessitated by short-term, balance- of-payments arithmetic and the concomitant “import strangulation” not only rendered the investment required for recovery impossible but also damaged the limited and painfully accumu- lated existing capital stock. Worse still, it resulted in unnecessary output losses in consequence of underutilization of partially import- dependent productive capacity and, of course, unnecessarily severe and extended human suffer- ing.

If a long time horizon is generally regarded as appropriate, it is not helpful to undertake repeated evaluations of the adjusting countries’ progress according to short-term monetary/ credit targets, balance-of-payments performance, conventional growth measures, or social indicators, still less by one agency after another. Such evaluations can be enormously demanding -

*This paper was originally presented to the symposium on “Structural Adjustment, External Debt and Growth in Africa,” jointly sponsored by the Association of African Central Banks and the International Monetary Fund, Gaborone, Botswana, February 2527, 1991. I am grateful for comments to Roy Culpeper, Mike Faber, Just Faaland, Susan Horton, Philip Ndegwa, Frances Stewart, Rolph van der Hoeven and the participants in the AACB/IMF symposium in Bots- wana, none of whom are to be implicated in the contents of this paper.

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780 WORLD DEVELOPMENT

of local decision makers’ scarce time and skills, disruptive of local planning and operations, and ultimately unproductive.

The Maastricht conference on Africa in mid- 1990, co-chaired by the President of Botswana and Mr. Robert McNamara, attempted to for- malize major elements of the emerging consensus. There was agreement that:

- the development of Africa will require a much longer time horizon than many had previously thought;

- development must be the product of national leaderships and not those of external agencies;

- there must be a clear focus upon the human dimension to development processes and therefore to food security and access to health, education and employment oppor- tunities;

- development cannot succeed unless production growth is restored;

- movement toward regional economic cooperation and integration within Africa, however difficult, is desirable;

- it is desirable to achieve greater accounta- bility, transparency, and popular participa- tion in public and governmental affairs in Africa;

- substantial increases in external financial flows and domestic savings will be required to achieve even minimal developmental targets.

(Concluding statement of the Co-Chairmen presented by Robert S. McNamara, July 4, 1990.)

There is also widespread agreement on the need for restructuring production toward effi- cient exporting and import-substituting activities and on the typical main elements of previous supply-side policy error - on the relative neglect of agriculture, overambitious aspirations for the role of the state in the productive sector, inappropriate or ineffective pricing policies, the neglect of maintenance and recurrent costs relative to the further expansion of capital stock, and inappropriate technology in all sectors. Please accurately noted long ago that the common elements in Economic Commission for Africa (ECA) and World Bank approaches to Africa’s economic future far outweigh their differences (1984, pp. 91-93) and this remains true today.

Particularly worth noting, in light of the prodding of the ECA and UNICEF, is the fact that, by common agreement, the impact of adjustment programs upon poverty is now receiving much more attention in Africa and else- where. The World Bank’s (1990) World Develop- ment Report, focused upon poverty, and empha- sized the need for labor-intensive growth and the

provision of education and health services for the poor in longer-run development. The Bank’s LTPS on Africa made parallel points with refer- ence to adjustment programs. Policies for the relief of absolute poverty seem at last to have been added as an 11th item to the so-called Washington consensus on 10 kinds of appropriate policy reform’ (Williamson, 1990, pp. 9-33). IMF and World Bank practice in this realm still is inadequate, in the eyes of many observers who note that relatively little effort has been made to monitor absolute poverty levels, assess the imple- mentation of anti-poverty policies, or build anti- poverty objectives into ex nnte design of adjustment programs. (Stewart, 1990; see also Mosley, 1990, and Sahn, 1990.) In the World Bank, however, an important start has been made in the “social dimensions of adjustment” data-gathering initiative.

2. EXTERNAL RESOURCE REQUIREMENTS AND DEBT RELIEF

As has been seen, it is generally agreed by those who are knowledgeable that the difficult adjustment programs upon which so many Afri- can countries have now embarked, and which many more have been encouraged to undertake, are unlikely to be sustainable in the absence of adequate external funding. Moreover, governments seeking to initiate necessary adjustment programs face much greater overall difficulty and are likely to encounter much more political resistance at the very outset if the requisite funding, particularly “upfront” funding, cannot be assured. For the longer run (and, as noted above, most now agree that adjustment and development will take much longer than previously assumed) the needs for external finance will, by all accounts, continue.

The overall resource requirements for the achievement of sustained African development in the 1990s as estimated by virtually all sources, imply significant increases in transfers from external official sources. (Indeed the World Bank has consistently understated Africa’s medium-term requirements so as to generate aid targets within what the major industrialized countries would consider a politically acceptable range.) Only in the very much longer run, in the 21st century, can the relative role of official finance be expected to decline.

The highest immediate returns from expanded official flows to import-strangled economies are typically reaped from the provision of increased inputs for the rehabilitation and full utilization of existing capital stock rather than from the crea-

AFRICA’S ADJUSTMENT AND EXTERNAL DEBT 781

tion of new capital. Increased supplies of “free” foreign exchange in situations of foreign exchange constraint can yield extraordinarily high returns. (They could also, of course, in some circumstances, simply finance increased rents for those controlling mismanaged economies and/or increased capital outflow.) At the same time they can render many more potential investments remunerative. Growth-oriented adjustment re- quires investment for the restructuring of production toward tradable goods and services. There are obviously also continuing needs for the expansion of social infrastructure and the directly productive capital stock for steady longer run development. There can be neither private nor public incentives for such investments in the absence of assurances of adequate provision of inputs for their effective operation.

Concern over the “absorptive capacity” of recipient African governments for increased external assistance may in some circumstances, particularly where there is war, civil strife or gross mismanagement in government, be appropriate. In the main, however, in the light of the sharp reduction in African imports (and, even more, imports per capita) below prior levels, the virtually universal phenomenon of import-related underutilization of both social’ and directly productive capital, and continuing increases in population which will expand import needs, such *concerns are inappropriate. Where “absorptive capacity” problems do seem to arise, they are frequently the product of donor administrative and other constraints. It must be a matter of high priority to ease these constraints.

It is often argued, especially in donor circles, that necessary policy reforms will not be undertaken if external resources are too readily available. Some analysts, despite the collapse of Africa’s terms of trade in the 1980s lament world commodity price increases when they occur, because of their purported disincentive effects upon appropriate policy change. But the logic of such arguments is weak. A particular African adjustment and development effort is either worth supporting to the necessary degree or it is not. The details of conditions for support are an obvious matter for continuing debate (see Sec- tion 3). If there is to be external support for an adjustment program (i.e., the conditions are deemed appropriate) the requisite amounts to permit a reasonable prospect of success should be made available. An external decision not to support a particular program is tantamount to saying that the provision of increased resources (or improved terms of trade) will be nearly irrelevant to recovery prospects. In the typical African program today underfunding is of much

greater concern than marginal policy alteration (see Section 3).

The evident need for increased official resource transfers for African development is directly related to the problem of Africa’s external debt, most of which is owed to official creditors. If newly acquired external resources have to be employed for the service of external debt, they obviously cannot contribute to African social or economic development. Official flows and debt problems therefore must be considered in an integrated and consistent fashion. In recent years the problems created by Africa’s external debt have worsened (Mistry, 1988; Humphreys and Underwood, 1989; World Bank, 1990). Efforts to deal with them have been wholly inadequate. The need for, and the potential gains from, official action on Africa’s debt are now both very great.

The overhang of African debt now constitutes a significant extra drag upon the prospects for African development. The constant pressure of debt-related financial negotiations deflects decision makers from the necessary and more socially productive activities of development-oriented economic decision making. It thus both detracts from effective economic governance and reduces absorptive capacity for utilization of further public resources, whether locally or externally mobilized, for development. African govem- ments’ absorptive capacity for further debt negotiations and extensive consultations with external sources of advice is a much greater problem than their absorptive capacity for further resources. No less important, heavy external debt servicing obligations discourage both private investors and government reformers by imposing a major “tax” upon successful adjustment efforts.

Reducing African external debt service obligations, unlike many other current means of transferring resources to Africa, involves no potential “absorptive capacity” problem; on the contrary, it will free existing capacity for more productive pursuits. It also will overcome the major domestic fiscal problem that arises when heavily indeb- ted countries undertake currency devaluations that are necessary for macroeconomic stabilization and the restructuring of production. Reduc- ing the current external cash flow obligations and payments on debt account will thus probably be the most cost-effective form of official external resource transfer to Africa in the 1990s. Debt reduction must constitute a major element in any serious internationally supported effort to restart African development.

Of the $43.5 billion of external finance de- ployed in support of 23 African SPA (Special Program of Assistance) countries during 1988


90, $11.6 billion, or 27%) was already in the form of debt relief (capitalization of scheduled interest payments, postponed scheduled principal payments, and rescheduled arrears). With the anticipated modest potential for further increases in gross Official Development Assistance (ODA) flows to Africa in the 1990s the role of further debt relief in marginal expansion of external support is potentially much larger (as it was in the SPA effort, where it accounted for over 60% of the “new” money) (World Bank, 1991, p. 93).

Since a high proportion of Africa’s debt, particularly high in the case of the lowest income countries, is owed to governments and official institutions rather than private creditors, there is high potential for direct political solutions. This presents creditor governments with both a major challenge and a major opportunity.

There have already been many official initiatives in the sphere of African external debt. So far, however, they have had only minor effects upon the resource transfers to Africa. Debt cancellation associated with official development assistance programs has mattered little since the debt was originally on very soft terms. Noncon- cessional official (Paris Club) debt has been reduced for some low-income, debt-distressed countries under the terms of the Toronto Summit agreement of 1988, but the modalities under this agreement have proven much too restrictive in their benefits.

The so-called Toronto terms for Paris Club debt rescheduling are now widely recognized as far from adequate. Some creditors have consistently availed themselves of the agreed option to extend maturities rather than reduce principal or interest rates (Belgium, the Netherlands, Spain and the United States). The terms of debt reductions, where they occur, are too modest (averaging about 20%) (World Bank, 1990, p. 29), too slow to take effect (because they apply only to servicing obligations during the “consoli- dated period” rather than to the entire stock of debt), and too costly in terms of negotiators’ time. The World Bank estimates that their application in the first 17 African countries (since October 1988) has resulted in cash flow saving of only about $100 million annually, of which Zaire and Mozambique together make up over half. Between 1990 and 2000, the introduction of Toronto terms will save at most 5% of 1989 debt servicing obligations (World Bank, 1991, pp. 100-104).

Debt forgiveness on previously concessional debt (official development assistance) is estimated to have reduced annual debt servicing for Africans by another $100 million in 1990 (World Bank, 1991, p. 93). These gains have been

greatest for those not otherwise benefiting from debt rescheduling, i.e., typically middle-income countries, those who least require them. There is some potential for further gains for debt- distressed African countries as more donors write off their ODA loans; but these possibilities are, by their nature, fairly limited.

Significant improvements over the Toronto terms for Paris Club rescheduling are absolutely necessary if debt-distressed, low-income countries are to have any prospect of increased net transfers of external resources, stimulus to investment, and therefore development over the coming decade.

Among the non-African schemes recently proposed for improving Paris Club treatment of low-income African countries’ debt are: (a) a one-off reduction of the total eligible debt

stock (rather than continuing to reschedule only one year’s maturities each year) by two- thirds, with an initial five-year period of interest capitalization and an extension of the repayment period from 14 to 24 years for the remaining debt.

(b) total forgiveness of bilateral official debt to the poorest of the severely debt-distressed countries (the “least developed” and other low-income countries).

(c) a 310 year moratorium on bilateral official debt servicing with all rescheduling on Inter- national Development Association (IDA) terms (UN, 1990).

All of these are to be conditional on the existence of an agreed adjustment program and additional to current or anticipated resource flow commitments.

Current Toronto terms may be roughly appropriate for some debt-distressed African countries, those not categorized as low-income or least developed.

Low-income, debt-distressed countries’ obligations to multilateral institutions are, by common agreement, best handled by refinancing at highly concessional terms; and most of the World Bank’s and IMF’s credit to these countries has already been treated in this manner (although the IMF prefers not to describe its actions in these terms). The problem of arrears to the international financial institutions (IFIs) however,’ is a much more difficult issue.

Arrears in African countries’ IMF repayment obligations are unlikely to be successfully addressed in existing or newly agreed arrangements for dealing with them, all of which require major “up front” policy change, without the prospect of supportive external resource transfers until much later. Such punitive approaches risk aborting recovery. Where adjustment programs have been

agreed and performance is maintained, the errors of the past should not be permitted further to cloud what is, in any case, a highly precarious economic future. Arrears, or at least the interest on arrears, should be financed via the sale of IMF gold, so as not to “waste” scarce donor resources on maintaining the IMF’s already “super-safe” balance sheet. The recent Fraser Report on African commodity problems (UN, 1990) sen- sibly recommends the sale of 20% of the IMF’s gold holdings over the next few years to deal with the arrears problems of poor countries (and to augment the resources of the Trust Fund for the provision of interest rate relief on new loans to poor countries).

The World Bank should continue and comple- te its program for the conversion of Bank loans to International Development Association (IDA) terms for currently IDA-eligible borrowers. Other “hard” creditors should do likewise.

Although in most sub-Saharan African countries (Nigeria is a major exception) private creditors account for a relatively small proportion of external debt, failure to deal with them - through clearing arrears, rescheduling and write- downs - can be very costly in terms of more expensive or unavailable trade credit and higher priced imports.

As far as commercial debt is concerned, there is no reason, in principle, for African debtors to be treated in any way less favorably or less quickly than those already benefitting from debt reduction initiatives under the Brady initiative, or its successor arrangements. There is every reason to expect case-by-case IMF/World Bank initiatives in support of debt-distressed African countries with significant commercial debt outstanding, as in the case of Morocco. The $100 million fund provided to IDA out of the World Bank’s profits for this purpose is welcome, and its inauguration in support of Niger’s buyback of $108 million of commercial debt at 18% of its original value is promising; but its size is much too small. Under its rules each beneficiary country may receive up to $10 million in grants but there are already 15 countries with upward of $2 billion of commercial debt that have applied for its use.

Developed country governments that are themselves writing down their own African debt should also be expected to insist, or at least to provide inducements to raise significantly the probability, that their private creditors offer no less favorable arrangements to the beneficiary debtors. Thus far they have largely, and inappropriately, stood aside from these negotiations.

In the past Africans have called for an interna-

tional conference on the debt issue. A high-level international conference addressing the African debt problem could prove politically useful if it were still necessary and possible thereby to focus official attention on the issue. The need and the urgency are already widely recognized, however, even at the political level. It may now be possible to move directly to an official debt action program without a major new African debt conference.

Certainly a high-level political agreement is required among creditor governments to significantly ease the current terms of Paris Club rescheduling agreements. This effort must involve reducing a much larger proportion of the debt “at one go,” and reducing payments obligations by much greater proportions. The speed with which the G-7 were recently able to agree to better-than-Toronto terms of debt forgiveness for Egypt and Poland illustrates the possibility of effective early action.

It may be useful at this time, rather than scheduling a conference, to establish a target date by which at least the low-income countries’ debt distress is to be finally “dealt with” in the sense that it no longer seriously inhibits the net transfer of external resource flows, imposes heavy transaction costs (of constant rescheduling) or stands in the way of the resumption of an orderly flow of trade credit. A conservative target date in the case of the low-income countries, for whom the main decisions need to be made by governmental creditors rather than banks, might be mid-1993. Faber (1990) has suggested 1994 for a resolution of Third World debt in general.

3. CONDITIONALITY AND LOCAL “OWNERSHIP”

Governments seeking external financing for their domestic programs have rarely questioned the right of financiers to place conditions on their grants or loans. The nature and degree of IMF, World Bank and others’ conditions for the provision of resources to African (and other Third World) governments have changed sharply, however, in the 1980s.

It is important to recognize that in Africa, the need for conditionality is no longer argued primarily on the basis of the need for ensured repayment. The high degree of concessionality in IMF and World Bank lending means that, in economic terms, most will never be “repaid.” Aid donors, who also do not expect “repayment ,” are as active in the imposition of policy conditions as are any lending institutions. The new emphasis upon broad policy-based conditio-


nality on development assistance evidently stems from the international consensus that domestic adjustment and development policies in the recipient countries have been seriously at fault and that African governments require not only external advice but also heavy pressure before they will adopt appropriate policies. Moreover, this “new conditionality” now moves well beyond the traditional, fairly narrowly focused IMF type by addressing the need for “growth-oriented adjustment.”

The extreme difficulties of so many African countries in the 1980s have left them more desperate for external finance; and have embol- dened financiers to tighten their demands on those to whom they provide resources. Donors and lenders attribute “the new condtionality” to the increased need for policy reform in the developing countries. Those in the developing countries most directly responsible for development-oriented policies in a harsh international economic environment may be forgiven for seeing it as reflective, rather, of (a) an altered international development ideology, which now regards increased external intrusion into domestic policy formation processes as legitimate, and (b) the opportunity created by their own desperate conditions for determined outsiders to extract concessions from those local policy makers who remained unconvinced by technical argument.

Whatever the causes, there were major changes in IMF and World Bank behavior in the 1980s. During the 197Os, particularly after the first oil shock, the IMF provided substantial amounts of low-conditionality financing to developing countries. The bulk of the World Bank’s financing was for development projects, with its conditions typically related only to the effective and remunerative functioning of the projects it financed. In the 1980s virtually all of the IMF’s financing was highly conditional; and much larger proportions of World Bank lending were for “adjustment” purposes, involving a far wider and deeper range of policy conditions than ever before.

The background “Issues Paper” for the 1990 Maastricht Conference on Africa summarized the current consensus aspirations in this sphere as follows:

Major macro-economic imbalances, such as those that occurred in the 198Os, disrupt development programs and must, therefore, be corrected. Howev- er, there is widespread agreement that programs to correct such imbalances should be designed in a way that does not jeopardize the transformation process, upset its priorities or undermine the foundations for future progress. Measures to achieve overall financial balance and improve the allocative function of

prices have to be made consistent with the need to protect expenditures on human resource development and on infrastructure maintenance. They also must take account of the social and political dimensions and respect national development priorities. This implies insuring the endogenous character of policy setting. Ony if programs are understood and supported by the broad mass of the population is it likely that they will prove to be sustainable (Maas- tricht Conference on Africa, 1990, p. 6).

A great deal of energy has been devoted to the assessment, by the IMF and the World Bank, as well as by others, of the effects of their stabilization and adjustment lending activity and, by implication, of the efficacy of their conditions (World Bank, 1988 and 1990; Khan, 1990; Mosley, forthcoming). Granting all the methodo- logical problems, notably the difficulty of estab- lishing appropriate counterfactuals, there is evidence of modest improvement in overall economic performance in countries with IMF/World Bank programs. The IMF’s studies also now indicate that there are initially negative growth experiences associated with typical IMF programs (Khan, 1990). But it remains difficult to disen- tangle the positive results of increased resource flows from those of policy reform; a lot of uncertainty about the effects of particular com- ponents of reforms remains; and the evidence is, in any case, much less persuasive in Africa than anywhere else.

It is important that any generalizations from these studies not be translated into universal policy prescriptions. Not only do different kinds of countries and problems require different solutions but apparently fairly similar circumstances may, in fact, cover widely varying under- lying constraints (Taylor, 1988, especially pp. 69- 74).

One way in which prescription for most Afri- can countries probably should differ from current generalizations is in the sequencing of adjustment policy. The current “conventional wisdom” posits that macroeconomic stabilization, especially in the realm of inflation, should come first; followed by the restructuring of incentives, addressing the most severe distortions first; and only then expanded investment and growth (World Bank, 1990). In today’s Africa, where critical early investments must be undertaken by government (in education, health and infrastructure), where confidence in government has been shattered and where much of the relevant private decision making is done by peasant farmers, the first step has normally been to restore some public investment, generate some early growth, and restore some government credibility.

Most African countries can be described as


different from the developing country norm, if indeed there is such a thing at all, in their very low income, very limited base of human, physical and institutional capital, heavy dependence upon primary production and exports, limited flexibil- ity of production structure, “soft” administrative systems, and small economic size. At the same time most are both extremely susceptible to external shocks, and extremely limited in their capacity rapidly to respond to them via appropriate borrowing and/or adjustment. They are uniquely fragile in economic and, frequently, ecological terms. Policy prescriptions for them must take these special characteristics fully into account. Ultimately, however, there is no substitute for full country-specificity of adjustment programs.

It is particularly difficult to generalize about the development consequences of more micro- level policy reforms. It would be a very brave analyst who could conclude that there have so far been unambiguously positive effects from Afri- can efforts at financial liberalization, import quota and tariff reform, privatization of public enterprises, or tax reforms, to name some of the principal areas of policy pressure. As more experience accumulates, there will undoubtedly be scope for improved policies and results in these spheres.

The principal shortcomings of African stabilization and structural adjustment programs in the 1980s are obviously controversial, but many would find some fault with their:

- continued overreliance upon demand res- traint;

- overoptimism concerning the market prospects for traditional exports and the short- run possibilities for expanding nontraditio- nal ones;

- relative neglect of the provision of crucial public goods, especially agricultural infrastructure;

- relative neglect of the maintenance of human capital, particularly health expenditures, and failure to minimize the impact upon absolute poverty;

- failure to grasp the nature of required changes in the financial system, and overestimation of the efficacy of financial “liberalization” and interest rate increases;

- overestimation of the efficacy of privatization, especially in agricultural marketing and input distribution;

- inadequate appreciation of the fiscal impli- cations of reform packages incorporating sharp devaluations and interest rate increases;

- exaggerated expectations of the role of

foreign direct investment, and the prospect of returning flight capital;

- inadequate consideration of the potential gains from regional and subregional cooperation;

- underfunding, and frequently inappropriate forms of external assistance.

On the other hand, as far as more immediate prospects are concerned, one lesson of recent experience is quite clear. Whereas it has been very difficult to prove unambiguously that there is improved development performance in consequence purely of policy reform, either in Africa or anywhere else, it is beyond dispute in econo- metric investigations, notably those within the World Bank (Faini et al., 1989), that there is a positive and statistically significant correlation in recent years between increased imports and improved growth. (See also Mosley, forthcoming.) Increased external resources can evidently be highly productive in periods of foreign exchange stringency in the short- to medium-term, probably primarily through their effects upon capacity utilization (Faini et al., 1989; Ndulu, 1990).

Among the most important thrusts in development and adjustment thinking in recent years, derived in large part from these same studies, is the increased emphasis now placed upon stability, policy credibility and sustained government effort (World Bank, 1990). More important than achieving policy “perfection” at each point in time, whatever that might mean, is the creation and maintenance of a stable overall policy environment, and the creation and preservation of credibility for and confidence in an announced adjustment and development program. Stable incentives and politics can compensate for quite a lot of policy “imperfection.” Only with the resulting reduction in overall uncertainty will private decision makers and public servants be able to act rationally, consistently and in the longer-run social interest. This new perception of the prime prerequisites of success has created a fresh interest in “critical thresholds” in policy change, below which very little will happen but above which much more is possible. Once this threshold is crossed and, provided that relapse does not occur, there may be considerably lower marginal returns to further “fine-tuning” of policies. Once the most grotesque distortions, particularly, in Africa, those related to the real exchange rate and the fiscal deficit, are repaired, further “improvements” of prices and policies may not be nearly so productive. Adjusting African governments, in fact, have achieved significant real currency devaluation and other major price reforms in the 1980s. Insistence upon


too many further policy reforms, which are often disputed, risks disruption of the stable investment flows on which development depends.

Among the key elements in securing policy credibility are the adequacy of finance and assurance of its continuation. It makes little sense to strain over optimal policies if all can see that adjustment possibilities are so tightly constrained by resources as to throttle the best of reform efforts.

Once gross macroeconomic distortions are overcome, then the risk of program failure as a consequence of underfunding is at least as great, and today, unfortunately, usually greater than that resulting from failure to undertake further (often externally recommended) policy reforms. What, after all, do we ultimately know about optimal policies for growth? We do know - now better than ever, with fresh evidence on the important role of imports in growth - that more resources help. The contrast between under- funded Zambia which, for many years, did almost all it was asked and still failed, and Ghana, which has been receiving gross donor commitments of over US$50 per person per year and remains more or less “on track” is indicative. These financial requisites are much more important to the credibility and sustainability of adjustment effort than the uncertain outcome of such ongoing debates as those about the purported virtues of “shock” reforms as against step-by-step confidence-building efforts.

More debate is required not only on the conditions for external support of low-income countries’ adjustment and development programs but also on the process for monitoring and/ or enforcing them. Current arrangements provide for a very short leash on African governments. Structural Adjustment Facility (SAF) and Enhanced Structural Adjustment Facility (ESAF) arrangements are l-3 years in duration, and performance is assessed every six months. Within the World Bank there is active discussion of the possibility of tightening and shortening the leash on adjustment lending still further. Some suggest that, where reforms take a long time either to implement or to take effect, loan disbursements should be geared to the continuation of appropriate policy or policy change in order to reduce the prospect of “policy slippage” (World Bank, 1990).

While this recommended “short leash” approach may be defended on the basis of the incentives (against policy slippage) that it cre- ates, it makes little sense in terms of broader adjustment objectives. If there are balance-of- payments problems associated with adjustment efforts, increased external financing should be

made available; the amounts to be provided should relate to the objective need for both quick-disbursing and steady program support, not fairly subjective assessments of whether programs of uncertain outcome in the longer run are being adhered to. The stability of incentives and expectations, and the credibility of development programs, both of which are critical to success, are hardly enhanced by “stop-go” approaches to the commitment or provision of external finance. Perhaps recommendations for shorter leashes are intended to reduce the relative importance of adjustment or program lending in World Bank and others’ overall portfolios; that is, in any case, what they will achieve.

Much more persuasive than the calls for shorter-leash financing is the call for improved contingency financing - what used to be called “supplementary finance” - to permit World Bank supported adjustment programs to stay on track in the face of unexpected events such as terms-of-trade deterioration (World Bank, 1990). The new evidence that investment rates vary directly with the stability of overall output (Serven and Solimano, 1990) lends extra support to this advice. It is striking that the existing contingency financing arrangements in the IMF, introduced in 1988 with considerable fanfare, have not been utilized.

Among the most critical issues in the development of appropriate adjustment programs in small low-income countries is the time and energy of the relevant skilled personnel which are available for dealing with foreign sources of finance. The “transaction costs” of endless deal- ings with individual bilateral donors, the World Bank, the IMF, and, in the case of the debt- distressed countries, the Paris Club are enormous when expressed in terms of their domestic opportunity costs. It is inconsistent of external sources of finance simultaneously to demand both that local programs be developed by national governments and be fully “owned” by them, and that these same governments devote the amount of effort required to service the informational and other requirements of the external creditors. Short-term, short-leash finance implies, for these countries, that there will be little time left for the relatively small numbers of key economists and administrators to develop their own programs and policies for development. Although in many African countries indigenous macroeconomic ex- pertise has been increasing significantly in the 1980s the relevant governments are still heavily reliant upon external aid donors, the IFIs, and foreign consultants.

While the rhetoric of the IMF and the World


Bank clearly recognizes the need for local “ownership” of programs and policies, the practice of “leaning” fairly hard on the weaker members, notably those in Africa, has been resistant to change. Perhaps this practice is, to a degree, inevitable when powerful institutions deal with weak ones. Between them, the IMF and World Bank employ over 4,000 professionals; they are among the highest paid in their professions and have access to the best support systems anywhere. It is understandable if teams of these IF1 professionals have high opinions of their own collective views, relative to those they encounter in their periodic forays into African capital cities among understaffed, underfinanced and over- worked ministry officials. It is also understandable that they seek to pressure African governments to adopt their recommendations; not only do they genuinely believe that their medicine is beneficial to the patient but they also know that their success in achieving local acceptance is likely to be used as an important barometer of their own job performance. Senior IF1 officials who send one short-term advisory team after another to already stressed African administra- tions typically act with the highest of motives, trying to make “their” country programs succeed. But the costs of these modes of interaction can be high. There is limited absorptive capacity, either in adminstrative or political terms, for external reformist advice during any given period.

Professional training cannot, in any case, completely substitute for local understanding; and, even if it could, policies and programs will come to naught when those who implement them do not believe in them, or do not regard them as their own. There is also, in non-Washingtonian perceptions, considerable “inbreeding” in the Washington policy community, limiting the variety of sources from which consensus views there are developed and subjecting them to periodic “herd” behavior. Certainly the IMF and the World Bank both have established ways of looking at things - implicit models - and therefore what some (both inside and outside these organizations) call “party lines.” This has led some aid donors and many developing country governments consciously to seek alternative views and, in the case of donors, to make them available to skill-scarce, low-income countries. Greater efforts could be made to obtain independent assessments of alternative policy possibilities as a matter of course, and thus to improve the quality of both donors’ and African governments’ performance (Helleiner, 1986b, p. 84; Ranis, 1985, p. 214).

African governments or donor agencies, of

course, may have their own “party lines.” Other international institutions such as UNICEF, IL0 and ECA may also have implicit models. But their overall influence has been much less significant. African development is likely to be best served when (a) no single foreign source of ideas and finance has disproportionate power, and (b) African indigenous technical capacity is built to the point where genuine policy dialogue, based upon mutual respect, takes place between external donors and African policy makers, and where Africa’s development programs are fully and unambiguously locally constructed.

The IMF has so far made less effort than the World Bank to utilize available indigenous ex- pertise to develop agreed-upon approaches to Africa’s development problems. In the prepara- tion of the World Bank’s long-term perspective study, for instance, considerable time and effort was devoted by the World Bank staff to consultations with experienced and knowledgeable Afri- cans. It is perhaps indicative of the IMF’s more “self-contained” approach that the second symposium of African governers and the IMF should have taken nearly six years to arrange following the last such effort (published as Helleiner, 1986a). On the other hand, the World Bank has never had an African responsible for its Africa programs.

At present, there is fairly general professional, governmental and popular consensus within Afri- ca that the relative influence of the IMF and the World Bank, particularly the latter, has grown too large. There is little consensus as to what should or can be done about it. For example, should African governments seek to strengthen the African Development Bank or the ECA or both? Should they press for more diversified sources of external assistance (while somehow still seeking to minimize transaction costs and improve aid coordination)? Should they improve various forms of South-South exchange and cooperation?

In regard to one longer-term response there is a firm African consensus: that technical capacity building is a matter of very high priority. For obvious reasons there is widespread nervousness in African economists’ circles about too great a Washington influence upon technical and economic capacity building. It will be a challenge to those engaged in the World Bank-financed “Afri- can Capacity-Building Initiative” to steer an appropriate course through such tricky waters. For the present, the World Bank and the IMF will continue to perform their most useful roles when they provide, upon request, specific technical assistance and advice, and contribute to the quality of ongoing, primarily domestic, policy debate.


4. THE ROLES OF THE IMF AND WORLD BANK

Table 1 shows the net international transfers to (and from) sub-Saharan Africa by the IMF, World Bank and others in the 1980s. Most striking are the IMF’s net transfers outward from 1984 onward, totaling over $4 billion during 1984-90. Sub-Saharan Africa use of IMF credit peaked in 1987 and has fallen by about 15% since (World Bank, 1991, p. 130).

Table 2 shows net IMF credit flows at the country level in 1988-90 (exclusive of char es, because the data are not publicly available). 9 In the year ending April 30, 1990, about half of Africa’s countries were, on balance, transferring resources to the IMF. Of the 39 African countries (35 sub-Saharan) that have had IMF programs in recent years, only 21 (19 sub-Saharan) still had them outstanding at end November 1990. The

IMF’s Enhanced Structural Adjustment Facility (ESAF) has not extended nearly as much credit to Africa as originally anticipated. The reasons for this come down to controversy over conditionality. During 1990 the SAFs for Chad, Guinea- Bissau and Tanzania expired. None were im- mediately renewed. Major further tests will arise in 1991 and 1992 as eight and seven, respectively, SAFs and ESAFs formally expire.

Table 1 also shows sharply rising IDA disbursements until 1987 and a negative World Bank transfer beginning in the same year. The total net transfers to sub-Saharan Africa from the Washington IFIs in the late 1980s were positive but small, only about one-third to one-fourth the size of those transfers early in the decade, and far less than the transfers from other official sources. A significant proportion of sub-Saharan Africa’s actual debt service, 32% in 1989, is paid to the IMF and the World Bank (calculated from World

Table 1. The IMF, The World Bank and external transfers to Africa, South of the Sahara, 1980-90 ($US millions)

1980 1983 1984 1985 1986 1987 1988 1989 1990*

IMF Gross disbursementst Repayments and interestt Net transfer

IDA Disbursements Repayments and interest Net transfer

The World Bank Disbursements Repayments and interest Net transfer

IMF/IDA/World Bank Total net transfers

Other net transfers (Long-term debt): Multilateral§ BilateralB Private11

Total long-term debt and related net transfers

Grants7

Direct foreign investment

TOTAL NET TRANSFERS

1,217 1,618 952 738 735 678 1,033 865 733 487 739 993 1,172 1,689 1,541 1,495 1,593 1,265 730 879 -41 -434 -954 -863 -462 -728 -562

424 637 778 881 1,400 1,681 1,697 1,700 - 21 44 56 79 94 111 128 126 -

403 593 722 802 1,306 1,570 1,569 1,574 -

400 708 832 647 898 998 581 835 - 328 438 527 616 865 1,073 1,306 1,226 -

72 270 305 31 33 -75 -725 -391 -

1,205 1,742 986 399 385 632 382 455 -

707 664 442 487 650 709 672 607 - 1,657 2,295 1,925 472 1,210 1,194 630 945 430 2,818 270 - .1,667 -2,648 - -1,132 -213 -434 -428 -1,818

5,657 4,092 1,727 -856 2,067 3,185 1,712 2,307 657

3,057 2,844 3,422 4,514 4,823 5,030 6,567 6,570 -

20 882 494 1,059 460 1,167 687 2,301 -

6,573 7,485 4,419 2,779 5,209 6,763 7,511 8,692 -

Source: Derived from World Bank (1991), pp. 13&133. *Projected tGross disbursements $Repayments and interest PExcluding grants l\Publicly guaranteed and unguaranteed, excluding direct foreign investment (Excluding technical assistance.


Table 2. Net flows of IMF credit to African countries, 1988-91* (years ending April 30) (SDRs millions)

1988 1989 1990 1991

Africa South of the Sahara Angola Benin Burkina Faso Burundi Cameroon Central African Republic Chad Congo C&e d’Ivoire Equatorial Guinea Ethiopia Gabon The Gambia Ghana Guinea Guinea-Bissau Kenya Lesotho Liberia Madagascar Malawi Mali Mauritania Mauritius Mozambique Namibia Niger Rwanda Sao Tome & Principe Senegal Sierra Leone Somalia Sudan Swaziland Tanzania Togo Uganda Zaire Zambia Zimbabwe

Total

North Africa Algeria

Egypt Morocco Tunisia

Total

Africa - total

*Excluding arrears

4.08 6.12

12.81 69.53

1.46 -1.75

-19.25 _

-8.80 20.12

4.73 -21.37

7.28 1.00

-27.35

3.48 -15.15 - 15.20

16.97 -22.80

30.50

-

-125.06 2.43

-6.47 51.16

0.04 -41.37

17.37 -0.94

9.79 3.02

-1.29 -28.04

-0.25 -1.24 -5.14

-32.27 12.20

-0.60 -7.54 -

0.01 11.11

-0.70 -1.63

-

23.32 -0.01 -8.50

-

-4.50 31.88

-3.23 -3.18

-26.50

-90.40 -123.38

-1.10 32.10

-6.88 17.21

-71.98 -

-41.77 -129.16

- 103.50

-28.10 47.00

122.40

-0.98

33.06 6.26 -

8.54 15.45

-8.66 5.68

-2.38 -87.46

-2.31 -18.45

8.22 3.88

23.39 -6.01

1.78 -14.03

4.53 -2.36

-12.26 0.30 7.79 8.66

-31.19 -

-3.32 -

0.80 1.23

-2.42 -1.22

- -

13.93 0.06

-6.13 -98.52

-

-25.11 -178.27

72.05 470.90 -6.25 -

-121.24 -35.94 - -18.71

-55.44 416.25

-184.60 237.98

- -

6.32 - -

1.14 4.37

-0.75 42.86

-1.84 -17.65 -13.31

1.94 40.28

- 10.49

37.82 3.02

-0.23 -7.21

5.14 -9.11

- 10.55 -32.83

24.40 15.89

-2.60 8.76

-38.40 -1.60 -1.89 -1.05

-21.18 6.54

38.36 -95.43 -39.52 -12.24 -81.04

- -43.50

- 105.02 -87.11

-235.63

-316.67

Source: Calculated from IMF Annual Reports (Thanks to Nancy Harbin for assistance).


Bank, 1991, pp. 13&132). The net transfers to the IMF alone have exceeded those to private creditors in 1987, 1988 and 1989.

The International Monetary Fund has long since shifted from its previous proclaimed purity as a (short-term) financial institution, treating all members equally, to a new role in which development assistance is also provided as a matter of course. The subsidized interest rates and longer terms within its Trust Fund, the Structural Adjustment Facility and the Enhanced Structural Adjustment Facility have converted the IMF into an aid agency, at least in part. Having started in this direction, the IMF can no longer easily defend its failure to act more vigorously in the provision of expanded resources to developing countries on the ground that its role is “monetary” rather than “developmental.”

At a bare minimum, the IMF should now be acting so as not to generate a net transfer of resources from countries that are at present in desperate circumstances in consequence of terms-of-trade deterioration, heavy levels of external debt, and other factors. We have come far from the discussions in the mid-1970s of the possibilities of using the IMF as a source of expanded resource flows to the developing countries.

Many members of the IMF are reluctant to discuss the use of the IMF’s substantial holdings of gold for any purpose but psychological “back- ing,” however socially constructive alternative uses may be. Even some of the executive directors representing developing countries have proven reluctant to draw down the IMF’s gold stock. Surely, however, the time has come for a reconsideration of the usefulness of holding roughly 103 million ounces of gold with a market value on the order of $40 billion in the coffers of the IMF. The low-income developing countries have an unprecedented need for increased financial assistance, some of it directly associated with payments obligations to the IMF that were inappropriately offered and incurred. Can it be realistically argued that anything significant in respect of the IMF’s potentially important international operations would be altered if, for example, 30 million ounces of gold were sold over the course of the next few years in the interest of providing expanded resources to the IMF’s debt-distressed, low-income members? The resulting profits could be utilized by the IMF in such a way as to improve its own balance sheet and increase the prospects of some of its most distressed members returning to “normal” rela- tions with the Fund.

In the words of the recent Fraser Report to the United Nations.

The gold is not essential to IMF operations and serves no socially useful function at present. By selling a relatively small portion of the gold, the IMF could raise enough profits to rectify the arrears of poor countries with the IMF through new low- interest loans, and to contribute additional resources to the IMF Trust Fund for subsidising interest rates on other advances to poor countries (UN, 1990, p. 90).

It is no longer realistic, at least under current IMF arrangements, to consider the use of Special Drawing Rights (SDRs) to achieve a “link” with aid requirements. When the link proposals were originally formulated, SDRs carried a highly concessional interest rate and therefore consti- tuted a potentially valuable source of external finance for low-income countries. As subse- quently developed, however, the SDRs carry a market rate of interest. That increased credit to low-income countries at market interest rates is not considered appropriate under present circumstances is evident in the highly concessional terms of SAF, ESAF and IDA lending.

It would be possible, however, to provide interest rate relief on SDR issues to low-income countries either by special Trust Fund contributions (perhaps financed by gold sales, among other sources) or by willing suspension by creditor nations of the interest earnings on SDR accumulations to which they would otherwise be entitled. Article V, Section 12 (f) (ii) of the Articles of Agreement of the IMF specifies that proceeds of gold sales, held in a Special Dis- bursement Account, may be used for “balance of payments assistance . . on special terms to developing countries in difficult circumstances, and for this purpose the Fund shall take into account the level of per capita income.” Another possibility arises in Article V, Section 7 (g) which specifies that repurchase obligations may be postponed if “the Fund determines, by a 70% majority of the total voting power, that a longer period for repurchase . is justified because discharge on the due date would result in exceptional hardship for the member.” Can there be doubt as to the immediate relevance of these articles? In short, the IMF still has considerable underutilized capacity to perform an important further role as a source of development finance if it chooses to employ it.

Given that African countries’ development problems are now seen as long term in nature, their financial difficulties are not best addressed through mechanisms designed for short-term or “emergency” circumstances. It is surely anoma- lous that so much in the realm of the financing of development still rests upon the shoulders of the IMF which is both ill-equipped and hesitant to


prescribe upon developmental matters, and which, for its own good reasons, has been taking resources (exclusive of increasing arrears) out of sub-Saharan Africa for each of the past seven years.

In any case, as has been seen, the IMF no longer acts as a supplier of conventional liquidity to the low-income countries. Rather, it collabo- rates with the World Bank (and other official suppliers of longer-term finance) in the development of short- to medium-term (three-year) overall economic policy frameworks and, where possible, supplies modest amounts of supportive and highly concessional medium-term finance. Not only has it been unable, despite contrary statements of intent, to prevent net aggregate repayments from sub-Saharan Africa for the past half decade, but its contingency financing facility has failed to play any role in the stabilization of those low-income countries’ adjustment or development programs which it has supported.

It may be, at last, time to reconsider seriously the appropriate means for the provision of international finance to very low-income countries. The IMF’s traditional role as a supplier of short-term finance is not now being performed, and apparently cannot easily be performed under existing institutional arrangements. The over- whelming need in these countries is for grants and long-term finance in support of long-term development programs. Might it not be prefer- able, in the case of very low-income (or “least developed”) countries, to build new (and work- able) contingency financing arrangements into the longer-term financing programs put together by the World Bank and other aid donors in the World Bank consortia, UNDP Roundtables, and the like; and allow the IMF to retreat to a relatively smaller role as a source of technical advice on monetary matters?

The IMF would thereby be relieved of an “aid” role with which it is not totally comfortable (see, for instance, Polak, 1989, pp. 4%52), the “bad press” associated with its steady negative net

transfer out of Africa and its inappropriate role as “gatekeeper” for access to debt relief and external finance. The IMF’s existing claims on very low-income countries could either be frozen at existing levels or eliminated by using the proceeds from limited sales of IMF gold. The World Bank group would then formally take over as the international financial institution with primary, though certainly not exclusive, respon- sibility for assessing these countries’ needs for external finance, and the formulation and monitoring of country-specific conditions for its provision. To perform this role effectively it would be required both to encourage efforts to expand the role of independent advisors and further develop its cooperation with other national and international development agencies, including those of the UN and, in Africa’s case, the African Development Bank and the ECA. “Graduation” from very low-income or least-developed status would thereafter involve a return to “normal” JMF membership.

Such an institutional “reform” may not be of enormous immediate economic consequence for the relevant lowest income African countries; but if their debt is at last to be satisfactorily dealt with, and serious efforts made both to strengthen their economic decision-making capacity and to reduce unnecessary transaction costs, it would be a useful and appropriately timed concomitant of these other, more important, measures.

To some degree the international financial system has already been edging in that direction. Perhaps the time has come to shift in a more direct and visible manner. In any new dispensa- tion it will be important, above all, to avoid the creation of any one overpowering arbiter of Africa’s development requirements. The object must be, rather, to assist Africans to reach their own development decisions through the provision of multifaceted and sustained external assistance - in the context of genuine policy dialogue, and consistent and sustained domestic effort.

NOTES

1. The others, originally derived from approaches to Latin America, are fiscal discipline, public expendi- 2. E.g., dispensaries without medicine, schools ture priorities, tax reform, financial liberalization, without textbooks or paper, etc. appropriate exchange rates, trade liberalization, welco- 3. Even these data are difficult to extract from the me for foreign direct investment, privatization, dereg- ulation, and securing property rights.

obscure presentations in the IMF’s Annual Reports.

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the imf, the world bank and africa's adjustment and external debt problems: an unofficial view

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