Structural Adjustment in Africa. An Evaluation of Western Aid and Development Interventions in Africa after 1980.

Table of Contents

Introduction

The African Economic Crisis

Structural Adjustment Plans

Criticisms of the Structural Adjustment Plan

Conclusions

References.

Introduction

“Africa’s economic crisis is severe, in general, and worsening. It has many dimensions. It is, first of all, a crisis of stagnant or declining production. National output - Growth Domestic Product - has been stagnant or in decline in much of the continent since the late 1960s”

( Berg, E)

The causes for the stagnation of production and the consequent poor economic performance have been much debated about in recent times. Some scholars like Anne Phillips and Mahmood Mamdani believe that the root of this lies in colonialism, others prescribe it to other reseons. But despite the causes for the poor economic performance, the fact remains, that a severe economic crisis did remain in Black Africa for a long period since the early 1980’s. The international community became aware of the worsening condition as some larger debtors, like Mexico, announced that they will not be able to service their accumulated loans, which were worth more than 100 Billion USD. As a response, the IMF and the World Bank established the Structural Adjustment Plan (SAP).

In the following paragraphs, I will briefly outline the contributing factors to the crisis. I will then go on to explain the strategy of the structural adjustment plans. Further, I will give some criticisms followed by my conclusions, which is the last part of this paper.

The explanations offered to explain the of poor performance of the African economy include complex issues like the impact of colonialism or cultural reasons, which I mentioned earlier. Due to the extreme complex nature of these factors, and given the time constraints under which this paper is being written, I will not be able to go into those debates. Other factors, which I have to disregard as well are: foreign policies and interests of other countries, financial speculation, wars, etc..

The African Economic Crisis

Berg coined the phrase the “African Economic Crises”, to denote the early 1980s, in the following manner, “… since 1979 the crisis has worsened. It is also a crisis in international and external economic balance. Budgets are tightly squeezed everywhere, with non-salary expenditures cut to the bone. The performance of routine government functions has been severely impaired because of more and more intense scarcities of funds for operation and maintenance of public facilities and services. In the external accounts, growing current account deficits, higher debt-service obligations and shrinking reserves are the rule”.

Why are some of the developing states in such a fiscal crisis? Since I have a background in Economics and having studied at the Wharton Business School, USA, I will take a ‘fiscal approach’ to this issue. The income of most developing countries in Africa is based on the exports of agricultural products as Malima has outlined. In this assumption I will disregard the exploitation of natural resources, since this is more like an island economy^[1].

Often developing countries rely only on one or two cash crops, for instance, in Côte d’Ivoire coco is the main export crop. As prices collapsed on world markets, the incomes of many developing countries shrank drastically. Their imports remained the same, which consequently resulted in a large trade imbalance and higher deficits or credits.

Malima noticed this to be the same case in Tanzania, which according to him, “… like all other primary product-exporting countries, is forced to sell cheap and buy dear. In other words, while the prices of her exports have either been stagnant or falling, those of her imports have been rising. Consequently, such an international environment, aggravated in practice by drought, has given rise to a very acute foreign exchange crisis with ramifications in practically every economic sector. Agriculture accounts for over 75 per cent of the output of the productive sector, 80 per cent of the export earnings, and provides 85 per cent of all employment.”.

Since even agricultural spare parts and machinery had to be imported, the absolute output shrank and unemployment increased. The production capacities were under utilized. The revenue base for the government, taxation of corporations and collected tariffs on imports, were eroded. The household budgets were getting tighter and without adjustments the states accumulated more debt.

This downslide is noted by Malima, who expressed, “These external and budgetary imbalances have also starved the domestic transportation services, the educational system, and the health services, as well as rural water supply services, of critical spare parts, replacement equipment and other essential materials, hence adversely affecting our most cherished basic needs program.”.

As a direct consequence of the shortages, black markets emerged and started flourishing. The government lost even more fiscal control by this development. Another important issue which strongly drained developing countries of fiscal flexibility was the over valuation of their currencies. Berg stated:

“… the problem of over-valued exchange rates is not, primarily, that it gives the wrong industrial signals - too much encouragement to domestic markets, not enough to export markets…. Over-valued exchange rates make food imports cheap. Producers of domestically grown substitutes are discouraged. Moreover, consumer tastes are shifted in favor of rice and wheat and away from tubers, root crops, millet and maize. Moreover, over-evaluation makes it harder for exporters to pay farmers higher prices. … People who get access to import licenses can get rich overnight, and that this inevitably gives rise to abuses. But the likelihood of these abuses is greater in most african countries, because the administrative ability to prevent corrupt practices is especially weak, and the political cohesion needed to punish wrong-doers is often thin.”

Not only are exports at a disadvantage over imports as seen above, the imports are also competing with local crops on the local market. The fiscal effect of this strategy was that the national bank had to buy constantly back the local currency in order to maintain the over valued exchange rate. With this the country was even more drained of much needed financial resources, which could have been used to service the loans for example and reduce the annual interest payments.

As mentioned before, the creditors were backing out of ‘emerging markets’ in the early 1980s due to the shock which was caused by Mexico’s announcement that it would not be able to service the debts. The developing countries had no other means to re-finance their deficit. They found themselves locked in a debt crisis. Moreover, they were facing the consequences of careless fiscal policies. Susan George (2002) summarized the devastating effects of debt in an interview, in the following manner,

“… so the borrowers borrowed, and they borrowed heartily. They borrowed for mega projects, some of them vastly detrimental to the environment. They borrowed to finance current consumption, which simply means living beyond your means. They borrowed to finance capital flight-in other words, the money didn’t even stay in the country; it went straight back to banks in the North. The countries that didn’t produce oil borrowed to finance imported oil. And they borrowed for the military. About twenty per cent of the debt went into arguments or into increasing the armed forces. So that’s the side of the borrower, and these were the major reasons that they got very deeply into debt.”

There are many more factors which lead to the African economic crisis such as: “…food dependency, which has been growing at around 9 % per year; what is unsettling is the rapid growth of wheat and rice consumption in countries where these crops cannot be economically produced with existing technologies” (Berg, E ).

The factors which contributes to the crisis are too many to be listed at this point, however, I would like to point out that most of the developing states have failed to develop any secondary or tertiary industry; this argument will reappear in the conclusion.

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^[1] This refers to the Angola oil industry. In Angola, 90% of its GDP, derives from oil production, since only roughly 10,000 people are employed in the oil industry, the economy of oil is isolated like an island. In addition, the revenues the Angola government collects from its oil production are mainly invested into arms and weapons.