Reforms after reforms: Do they have feet of clay? (3)

By Anthony Enisan Akinlo   |   07 September 2015   |   11:16 pm  


In the same way, most of the sampled industries signalled that liberalisation had negative effects on employment level, production costs and unit prices of their products.

On how manufacturing firms perceived and adjusted to the shocks from the reform; our study, in Akinlo (1993b), found that managers viewed the reforms with considerable scepticism.

The responses of manufacturing industries showed that they did not respond to the reforms instantly. However, despite cautious attitude of the industries, our study showed that there were some important adjustments by firms.

Some major adjustments made by firms included increase in the quality of the products, changes in the inventory decisions, changes in marketing strategies and greater caution in financial management.

Others were increases in unit prices of industries’ products and reduction in labour force. Finally, firms identified credit sales, advertising, changes in product quality and competitive prices as the main factors behind their continuing participation in the market during the period of the reforms (Akinlo, 1993b).

Our study on how the characteristics of industries affected their perceptions and adjustments to the reforms showed that small-sized industries were not significantly negatively affected by the shocks from the reforms (Akinlo, Olusi and Akutson, 1999).

The results equally showed that industries established after the reforms were more positively affected by the reforms in terms of output, profitability and production costs than the previous ones.

Those industries established after the reforms utilized more local materials and did not employ labour reduction as strategy for adjusting to the reforms.

From the standpoint of investment, only those industries established after the reforms indicated to have increased their investment levels during the reforms (Akinlo et al. 1999).

This clearly means that in order to ensure a better performance of the manufacturing industries, emphasis should be placed on the establishment of small sized export-oriented industries.

Also, industries should be encouraged to source their raw materials locally. This will not only help to reduce the increasing cost effect of imported inputs, but also enhance increase in employment, particularly among medium and large scale industries in both conglomerate and exporting categories (Akinlo, et al. 1999).

Summary of the evidence The aggregate evidence seems to show that the various reforms initiated since 1980s in Sub-Saharan African countries have not had significant positive impact on those economies.

Economic growth has not increased significantly, agricultural output has failed to keep pace with the population, leading to increase in food imports and manufacturing share of the total output has remained very low.

Savings and investment equally remain very low, per capita income and consumption have also declined, while unemployment has risen phenomenally. This raises the issue of whether or not these reforms have feet of clay.

The missing links Some of the foundations on which the theory is built are questionable, particularly the macroeconomic principles. A case in point is the assumption that humans are rational, self- interested, profit-optimizing creatures, which forms the root of some of the reforms.

However, there is growing evidence that individuals in the developing world may be more likely to ‘satisfice’ than maximise (Rapley, 2007).

This, by implication, means that they satisfy some minimum requirements, thereafter turn their time and resources to other pursuit. Under this situation, anchoring policies on the assumptions of profit maximization may produce contrary outcomes.

As an illustration, government attempts to free up the market to maximise may not attract new entrants. This is because free market might bring about not only high returns but also high risks.

Hence, potential entrants who are highly risk averse may decide to stay away for fear that their basic goals might not be achieved. In this case, it might be plausible for government to step in to minimize risks.

Moreover, most of the policies in the reforms implemented in SSA often fail to take into consideration the differences between the developed and developing economies like SSA.

Undoubtedly, developing economies like SSA are full of market imperfections and characterised by dualistic economic structure. Highly modern economy coexists with backward rural areas where the same economic rules do not apply.

There is so much market fragmentation, which makes market integration rather difficult. The combined effects of market fragmentation and dualism tend to impede the operations of the labour markets in SSA.

In a well functioning economy, wages should equilibrate the demand for and supply for labour. However, in many developing countries, where the level of education is low, few people have the requisite training to perform difficult manufacturing jobs.

Therefore, increasing the supply of labour does not affect wages and one finds the peculiar third-world phenomenon of what has been called ‘cities of peasants’: large numbers of people leaving the countryside and flooding into cities, searching for jobs that do not exist, while a small number of skilled workers continue to earn relatively high wages (Roberts, 1978).

Such situations, no doubt, require government’s intervention to integrate markets, build up human capital and encourage the development of labour-absorbing production technologies.

Also very important, is the fact that in sub-Saharan African countries, capitalist firms do not constitute the principal economic agents. While firms do respond to price incentives, other agents tend to behave differently.

As an illustration, third world households respond to price incentives, but they filter these incentives through traditional or structural arrangements.

In many parts of Sub-Saharan Africa, women cultivate farms for food production but men decide how the farm’s revenue will be spent.

Under this situation, increasing producer prices might not cause women farmers to increase their output, since they will not see the fruits of their labours, and could better devote their energies to other tasks (Harriss and Crow, 1992).

Essentially, most of the assumptions in the various reforms instituted in sub-Saharan African Countries about individual behaviour tend to overlook the laws and customs that restrict the control of women in SSA on money, property and their own employment (Sparr, 1994).

Moreover, the reforms in SSA fail to consider the real structure of these economies. Sub-Saharan Africa domestic structure is basically exchange oriented, narrow and weak in production base, extremely open and highly dependent, thereby making it susceptible to external shocks (Akinlo 1991, 1992).

These basic features have serious implications for reforms in SSA. They, indeed, constitute the main areas of problems that need to be addressed and not only the financial imbalances on which the reforms in SSA are based.

As a matter of fact, since the financial imbalances are derivatives of the structural imbalances, even if they are eliminated, the structural imbalances will still remain which will eventually regenerate the previously eliminated financial imbalances.

Added to this, is the fact that, even if we assume that the structural imbalances do not regenerate the financial imbalances after their elimination by the reforms, the situation will be transient, as the financial imbalances would be generated by the external forces especially the economic conditions in the advanced countries.

Sub-Saharan African economies are highly integrated into the international system; hence, the crises in the advanced countries are often transmitted usually in more severe forms to these economies.

Asides, the particular mix of fiscal and monetary policies often adopted by the industrial countries in dealing with inflation, and unilateral increase in the rate of interest will definitely regenerate the financial imbalances in SSA economies.

Moreover, liberalisation, which constitutes the main policy of the reforms in SSA is argued would enhance efficiency. However, certain conditions such as perfect competition and free flow of information are required for efficiency to be achieved.

Unfortunately, many of these conditions are not obtainable in SSA. Even if we assume that these conditions are obtainable and free market equilibrium leads to maximisation of efficiency in the Pareto optimum sense, there are other problems to contend with.

For example, economic efficiency in Pareto optimum sense by reflecting static efficiency alone, that is, neglecting both dynamic and distributional aspects, makes it conceivable for a Pareto optimum to correspond to an inefficient distribution of income.

As a matter of fact, considering the peculiarities of the continent, emphasis should be on dynamic and distributional efficiency rather than static efficiency.

The use of exchange rate adjustment and other outward looking policies as means of encouraging export supply and for reducing aggregate demand for imports in SSA, particularly in the face of increased protectionism in the advanced countries, has been criticized.

Exchange rate devaluation and trade liberalisation, set simultaneously together, in the face of inelastic demand for finished goods particularly when one considers the sub-region’s preference for imported goods, would worsen the economic situation in SSA.

Moreover, as the sub-region tends to rely on imported raw materials for production, exchange rate devaluation/depreciation will likely lead to increased input costs.

Asides, since imports of the region have inelastic demand; devaluation when the trade balance is already in deficit, will lead a loss in aggregate real income. This is because expenditure on imported goods is likely to offset the possible increased profits to the exporters.

Thus, income would be leaked through imports thereby causing the economies to contract. Other policy measures in the reform packages are government expenditure reduction, domestic credit restraints, tight monetary and fiscal policies, reduction on physical and human investment expenditures.

The basic assumption for incorporating these policies is that one can temporarily deflate, arrest growth, reduce government expenditure, while at the same time gathering strength for a new and hopeful sustained period of growth and development.

However this presumption as noted by Singer (1989), seems to disregard the possibility that each cutback may make it more difficult to resume growth from such a weakened position or even lead to further deterioration in growth rate.

In other words, a reduction in growth, expenditure and saving today may lead to lower growth and development tomorrow. This is particularly possible when one considers the structure of the African economies including weak and narrow production base, high openness and poor infrastructural development.

Leaving aside the issue of structures, expenditure reduction and tight monetary policies could adversely affect investment. There are two main price channels through which restrictive monetary and credit policies might affect investment.

The first is the increase in the real cost of bank credit and the second is the increase in the opportunity cost of retained earnings. Both effects lead to an explicit reduction in the market value of existing capital relative to its replacement cost, thereby precipitating a decline in investment (Akinlo, 1992).

The investment reduction impact of expenditure reduction policies is likely to be aggravated by the deregulation of the interest rate. In addition, devaluation of the currency may affect the profitability of investment through its impact on the relative price of capital in the economy.

This is particularly critical for SSA with a high demand for capital goods, raw materials and intermediate goods. Since the continent’s capital and consumer goods have high import content, the net effect of devaluation is to raise the supply or reposition price of these goods in terms of home goods thereby ultimately depressing investment in the home goods sector (Akinlo 1991, 1992).

It is equally contended that devaluation and restrictive monetary and fiscal policies can lead to stagflation. Tight monetary policies will lead to expensive credit, which in turn, leads to an increase in a component of input costs, and thus more inflation and less output.

Moreover, as stock of raw materials and intermediate imports are financed through credit, by mark-up pricing rules, high interest rates emanating from deregulation and contractionary monetary policies will lead immediately to higher prices (Wijnbergen 1981, 1986).

Given the highlighted flawed assumptions in the reforms implemented in SSAs, the various problems in the way neo-classical theorists put together their critique of statism and the basic structure of the African economies, one can conclude that economic reforms in SSA countries do have feet of clay.

Economic reforms that will address the problems (distortions) in SSA must be internally consistent, based on sound theories, realistic in terms of their underlying assumptions and more importantly provide the basis for delinking the Sub-Saharan African economies from the capitalist economy.

A return to good housekeeping in SSA Since the problems facing SSA are rooted in structural weaknesses of these economies, there is the need for an alternative development framework.

The alternative framework must comprise set of policies that have capacity to deal effectively with the structural problems, promote popular participation in economic and social process, and enhance universal welfare (Akinlo and Akinbobola, 2003).

Basically, these housekeeping policies are grouped into three broad sets. The first is shift from crises manipulation to reduce imbalance to managing imbalances – and averting their burgeoning out of control in order to provide a stable basis for strategic political and socio-economic goal setting and implementation.

The second is change in the harnessing of domestic resources (human and materials) for development. The third entails adjustment of production, distribution and consumption patterns.

Transformation of production and consumption patterns African adjustment must focus on the development of a coherent and plausible food policy.

The import of the policy is better appreciated when one notes that food accounts for almost 60% of the consumer price index in most African countries.

To accomplish this, the smallholder peasant segment should be transformed. This transformation will involve integration of the peasant segment to the modern sector.

There should be improved access to land, improved allocation of scarce foreign resources to the agricultural sector, removal of restrictions on the movement of crops between regions subject to the requirement of national security.

Moreover, there is the need to promote industrial production, not only to enhance capacity utilization level but also to raise the level of value-added.

This industrialisation strategy should focus on agro-based industry that utilises local raw materials. Existing industries in SSA should be encouraged to source their raw materials locally through incentives (Akinlo, 1996), and where found expedient, a time table should be drawn for industries within which they should reduce their import content.

Secondly, there is an urgent need to diversify exports into products whose global demand are projected to grow globally. These products will include horticultural products, semi-processed primary products including plywood, cocoa paste wood pulp and paper among others.

Already, few African countries are moving in this direction. As pointed out in Akinlo and Akinbobola (2003), a wider effort that incorporates improved physical infrastructure, human resources and training, as well as adequate research on production among others is needed to ensure better results.

Thirdly, governments need to be effectively involved in poverty alleviation. Poverty constrains saving, investment, capacity utilization and productivity.

The need to focus on poverty alleviation programme is rooted not only on the humanistic and altruistic aspects of development, but also on the rational proposition that development has to be engineered and sustained by the people themselves through full and active participation.

Essentially, poverty reduction strategies and indeed other planning strategies should shift focus away from top down planning to down top approach.

Such an approach will make development inclusive and effective. Development should be the organic outcome of a society’s value systems, perceptions and endeavours (ECA, 1989).

Harnessing of domestic resources Harnessing of physical and human resources is critical to development in Africa. Many African countries are endowed with material and human resources.

Hence, governments in Africa must formulate appropriate policies to enhance capital and to ensure that human potentials are tapped to the fullest.

Appropriate enabling environment should be provided for the private sector to thrive. This entails establishment of a set of rules and regulations that are clear and stable, provision of law and order, national security, appropriate tax policy and incentives.

Moreover, governments need to be accountable, transparent, predictable and open in their transactions. This is better attained where democracy and governance are appropriately instituted.

Harnessing domestic resources equally entails utilising African experts, technicians and higher institutions in terms of policy advice. This means that there is the need for capacity building and increased technical education in the continent.

This is very important because of the positive linkages between capacity building and economic growth. Shifting from crises management to managing imbalances The third component of housekeeping involves shifting from crises manipulation to reduce imbalance to managing imbalances.

Policies that need to be implemented here will include budget management, expenditure restructuring, revenue raising, monetary and exchange rate policy, external resources management and environmental management.

AKINLOBudget management involves a clear and a certain frame of goals-resources-limits and ongoing monitoring to ensure results approximate projections and in particular, that massive, macro-destabilizing imbalances do not arise (Green, 1995).

The main thrust is designing and enforcements of cash flow budgeting system to keep limits on government cash-overdraft-Treasury bill balances and ensuring efficient resource use.

This is critical because large government budget deficits absorb domestic saving and foreign funds that could otherwise be channelled to the private sector.

Expenditure restructuring involves relocation of spending from defence, debt service, and surplus public servants among others to areas of critical needs. In particular, expenditure should focus on provision of basic infrastructure such as roads, electricity, education and such other amenities that will make the environment conducive for private sector to flourish.

Governments in sub-Saharan Africa need to plug all leakages in their economies. Wastages in the areas of abandoned projects, poorly executed projects, and contract inflation should be totally eliminated. Also, waste in hidden expenditure in form of security spending should be reduced.

In addition to expenditure restructuring and reduction, governments in Africa should focus on revenue rehabilitation. Tax systems need to be restructured.

The suggestion is that with a bearable tax burden, and a well-designed system, a typical African state should be able to collect 20 per cent to 25 per cent of total Gross Domestic Product and 30 to 35 per cent of monetised products. For most states in Africa today, the ratios are far less than 20 per cent.

To enhance the level of tax revenue, governments in Africa should ensure that corruption is reduced to the barest minimum, if not totally removed.

Moreover, attention should be focused on key taxes and main payers and on provision of appropriate incentives for tax workers. In SSA, the whole framework for the management of public money should be overhauled through an appropriate public financial management process to deal with political and financial accountability.

In order to achieve growth and development, there is the need to formulate sound macroeconomic policies that take into consideration the fundamental structures of the African economies.

There is the need for realistic and stable real and nominal interest rates as well as exchange rate. In order to achieve realistic and stable interest and exchange rates, governments must exercise discipline in their spendings. Moreover, there is the need to ensure a higher level of productivity in the domestic economy.

Governments in Africa must ensure that recurrent revenue and expenditure are balanced except in cases of externally induced emergencies. The challenges facing African states are enormous and structural in nature.

This is why reforms in SSA should be made to stand on hinds’ feet with which the economies of the sub-region can propel forward.

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