Reforms after reforms: Do they have feet of clay?
By the beginning of the 1980s, macroeconomic performance in sub-Saharan African countries had witnessed a serious decline as evidenced by both domestic and external imbalances.
This was the consequence of chronic economic and structural weaknesses as well as severe external shocks. In most sub-Saharan African (SSA) countries, distortions and imbalances such as overvalued exchange rate, high protection across sectors, highly controlled financial system, over concentration on few exports and importation of consumer and producer goods, were prevalent. The chronic imbalances led to massive deterioration in economic conditions in the sub-region.
Balance of payments deficits, low or negative per capita real income growth, inflation, and worsening foreign exchange reserves position pervaded most SSA economies (Akinlo 1992, 1993a,b).
In order to address the problems induced by these distortions and move the continent towards the path of growth and development, one or other forms of reform programmes with the assistance of the World Bank and or International Monetary Fund were introduced.
Macroeconomic theories of reforms
At the root of the reforms, which started in mid 1980’s in SSA was market liberalization. Liberalization means reliance on market mechanisms as a means of resources allocation in the economy as against administrative control. This, of course, constitutes the issue of contention between the classical (monetarists) on one hand and Keynesian-structuralists on the other. The classical-monetarists basic insight is that price signals in an open market, will bring about the necessary adjustments in an economy.
This vision is derived from a world of near perfect competition, smooth convexities, significant price elasticities, and frictionless price and wage self-adjustment.
The driving force in classical economics is the quantity of money equation, which is an identity equating the nominal value of output to the money in circulation in the economy. This is formally stated as: MV = PT, where M is defined as money supply, V is the velocity of circulation, P is the price level and T is aggregate real output.
A number of assumptions are made on this identity for the purpose of reinterpreting it as a theory. One, money is a measurable entity with a stable composition over time. Two, aggregate money demand is also a stable measurable function of income, and of the expectation of the price level. Lastly, income velocity of circulation is constant or suffers minor variations over a long period of time. It is assumed that the exchange rate under the classical-monetarists’ model is determined by the demand for, and supply of foreign exchange, which in turn is derived exclusively from merchandise trade. Depreciation in the value of domestic currency vis-a-vis other currencies makes domestic goods cheaper in foreign markets and foreign goods dearer in domestic markets. The reverse is the case for appreciation. It is presumed that this mechanism adjusts the exchange of exports and imports in order to maintain equilibrium in the balance of payments.
Based on these assumptions, inflation becomes a purely monetary phenomenon, and can be curbed by simple elimination of budget deficits. Likewise, since both current and capital balance of payments are highly price sensitive, exchange rates and domestic interest rates should be allowed to float with a view to maintaining purchasing power parity (PPP). Finally, output remains insensitive to demand shock, especially in the long run.
The basic inference from the classical-monetarist postulate is that excessive government intervention in the economy constitutes the main origin of various imbalances, distortions and bottlenecks in less developed countries (LDCs). Excessive government control of the economy is seen as leading to high government deficits, high inflation rate and freezing of prices which will culminate in balance of payments problems, low domestic savings and productivity loss. These distortions, imbalances and bottlenecks, which are often not easily amenable to government control, will in turn, precipitate capital flight as a normal response of a rational individual in the face of looming crisis (Ize and Salas 1985, Akinlo 1995).
The policy implications arising from the classical-monetarists’ vision are the conditions of laissez-faire economics and limiting any government effort to the role of ensuring stable growth in the supply of money. Moreover, government efforts by way of public investments, employment programmes, exchange rate and price controls, and the likes, are superfluous since the self-regulatory character of the economy would stimulate both economic efficiency and economic growth. In view of the above, it may be argued that to a large extent, the problems of imbalances and distortions are an aberration in the classical sense; market forces will work to eliminate these imbalances and distortions with little or no government effort (Akinlo 1995, 1996a).
In contrast to the classical-monetarists’ vision, is the Keynesian-structuralist’s conception derived from the negation of the basic tenets of the classical-monetarist model. The Keynesian-structuralist’s see output as being demand determined, while inflation and its dynamics become mainly a function of input costs since rigid income levels often precipitate inflationary spirals, which are then passively accommodated on the monetary side. Contrary to the postulate of the classical-monetarist theory, demand for goods, money and balance of payments, as well as capital, are insensitive to price changes. It is therefore, argued that the problems of most of the less developed countries (LDCs) derived from the excessive degree of openness of the economy, which has led to current account disequilibrium in real terms, and thus precipitated inflation in nominal terms.
In view of this, the Keynesian-structuralists posit that there is a need for government intervention in the economy through fiscal actions. Fiscal actions are viewed as exerting powerful influences on economic activity. Increases in the level of government expenditure are direct addition to aggregate demand, while a reduction in tax rates has the effect of increasing disposable income, and working through the multiplier effect, resulting in a general increase in income. Likewise, higher protection, strict exchange controls, vis-à-vis a lower interest rate and mandatory price controls, will aid investment and output, and prevent capital flight.
Worthy of note in the Keynesian and Structuralists remedial policy which necessitated higher protection, controls and further government intervention in the economy, is its tendency to worsen a depression or inflation, due to the existence of lags in the economy. A lot of time is taken between gathering data to formulate a counter-cyclical policy towards a developing or anticipated position and when the policy is executed. Thus by the time a particular policy is applied, the economy would have shifted to another phase of the cycle in which the policy will produce results that are opposed to the intended.
Moreover, besides the observation noted above, the practicability of Keynesian and Structuralist policies in correcting domestic imbalances and distortions, is also doubtful in a modern dynamic environment, as they were formulated for recovery in a static framework. As pointed out by Toyo (1987), competition, profits, prices and growth are not taken into consideration. In the same way, the question Harrod (1948) and Domar (1946) addressed has not been answered. If investment creates not only demand but also capacity, how do we then avoid excess capacity, the fall in the rate of profits arising from it and the panic that causes the downturn? Equally, contentious is the argument that the multiplier is at best a tool for recovery analysis when the economy is depressed. This therefore raises the fundamental question of how to prevent the economy from being depressed. As a matter of fact, the main objection of the classical economists that the structural parameters such as ‘multiplier’ and ‘accelerator’ are unreliable given the fact that prices are free to vary in the course of competition, has not been addressed. Attempts to resolve this as indicated in the Staffer’s neo-Ricardian analysis, Kalechi and even in Marx have not produced any lasting impact in the literature (Eichener, 1979).
The third theory (New classical theory) is considered antithetical to the Keynesian-structuralist theory of stabilisation and reforms. The new classical theory is highly akin to the classical macro model except for the new assumption that aggregate supply depends on relative prices as against quantities as postulated by the Keynesians, which nonetheless, is consistent with the results of Walrasian general-equilibrium models. Essentially, the failure of the Keynesian concept of stability through state regulation in the face of stagflation led to the resurgence of the new classical economists focusing on supply side economics. The policy options suggested here are designed to force real wages down, lower production costs, increase real profits, and induce investors to invest. They equally advocated tax reduction, a cut in budget deficits and privatisation (Ballet 1987, Akinlo 1995).
The policy package comprises measures that can be categorized into six: namely, reduction of government expenditure and subsidy, tax reforms, trade liberalization, currency adjustment (devaluation), more disciplined management of foreign exchange and privatization. These, in fact, constitute the so-called IMF conditionality (Guitan, 1981). Essentially, the neo-classical structural adjustment programme preaches all out ‘outward orientation’ and ‘market orientation’ as the secret of successful development.
The last model, the Marxist theory is firmly rooted in three component parts of Marxism; namely political economy, dialectical materialism and class struggles (Onimode 1985). The Marxist view is derived from the basic proposition that class societies have in-built tendency to generate contradictions and crises. This contradiction is rooted in the material production of use values in which labour produces value beyond its subsistence, with the surplus going to the owners of capital. In fact, to the Marxist, the appropriation of the surplus value that results from socialisation of production by the owners of capital constitutes the primary contradiction, which often manifests in class struggles of both reformist and revolutionary types.
In the Marxian view, it is this general fundamental contradiction in capitalism that informs the other types of crisis (which can be periodically resolved) that are rooted in the economy, some of which owe their origin to simple commodity production. Marxist theory identifies three of such sources of crisis leading to inflation, unemployment, balance of payment deficit, and slow or negative growth rate.
The first source of such contradiction is the one between social production and consumption. This is a typical contradiction in all economic systems based on commodity production. This includes pre-capitalist formations but excludes subsistence communal formations. The establishment of commodity production and the existence of market intermediaries create tensions between production and consumption since the former is meant for exchange and profits rather than for the satisfaction of the basic needs. This situation eventually creates conditions for over or under production. The contradiction between production and consumption in simple commodity production becomes more intense under capitalism because of its superior and more complex market relations and multiple divisions of labour.
The second source of crisis in the Marxist theory is the falling tendency of the rate of profit. This emanates principally from the proportionate displacement of workers by machine. As surplus cannot be derived from exploitation of capital, profit is bound to fall with very serious effect on the performance of the economy. The third source of crisis is the contradiction between national and international accumulation, which has become more pronounced in the period of international finance capital.
Basically, to the Marxists, crisis and imbalances cannot be permanently eliminated from a capitalist economy; so also is capitalism incapable of reconciling the fundamental contradiction between social production and private appropriation of surplus. Hence, to the Marxists, crisis and imbalances cannot be eliminated by market liberalization or the structuralist-Keynesian prescriptions of high government control and regulations through fiscal policies.
Reform package and its policy intents
The reforms implemented in most African countries since mid 80s were tailored along the IMF and World Bank standard adjustment programme rooted in the Neo-classical school of thought. These reforms were designed to effectively alter and restructure the consumption, production, exchange and income distribution pattern of the countries. They were equally intended to eliminate price distortions and heavy dependence on exports of minerals and import of consumer and producer goods. Figure 1 summarises the major policies in reform package implemented in most Sub-Saharan African countries in mid 1980s. These measures could be classified into two broad categories, namely; liberalization/efficiency and stabilization measures. While the IMF focused on stabilization policies, the World Bank’s focus was on market liberalization or structural adjustment policies.
Structural adjustment policy
Figure 1: Policies in the adjustment package
The liberalisation or efficiency measures were meant to dismantle government controls on prices, exchange rate, interest rate, international trade and capital flows. Domestic prices and commodity markets were indirectly deregulated in many African countries through the abolition of the commodity boards and the privatization and commercialization of some companies previously owned by government. Tariff and non-tariff barriers to trade were either abolished or reduced in most countries of SSA. In the same way, subsidies of some products were either abolished or slashed.
The rapid deregulation of the financial market was an important feature of the reform programmes because of many years of non-price allocation of credits and high negative real interest rate. The domestic capital markets were substantially deregulated. For one, interest rate ceilings in most countries of SSA were eliminated aimed at stimulating savings and encouraging inflow of foreign capital. Also, restrictions on movement of private capital were eliminated. Individuals were allowed to open foreign currency denominated accounts in banks. The foreign exchange market was deregulated by adopting floating exchange rate system in which the price mechanisms allocated foreign exchange amongst competing uses. Pricing reform for public enterprises was implemented within the context of privatization and commercialization policy. In some sub-Saharan African countries, most government owned parastatals were either completely privatised or commercialized. As an illustration, in the case of Nigeria, non-statutory transfer to all economic and quasi-economic parastatals were fixed at not more than half of their 1985 levels, and transfers to completely commercially oriented parastatals were required to embark on cost recovery measures; they were thus given more leeway in fixing prices for their services (Akinlo 1992, 1996a).
The financial policy objective, under the economic reforms in Sub-Saharan Africa, is fivefold: moderation of inflationary pressure, stimulation of rapid financial development and efficient resource allocation, encouragement of foreign capital inflow and services, increase in exports from non-oil sources, and ensuring an improvement in the balance of payments (Akinlo 1992). Some of the policies undertaken included reduction in the growth of money supply to achieve internal or external balance, interest rate liberalization to motivate savings and reflect the opportunity cost of capital. Anti-inflationary fiscal programmes included control or elimination of government budget deficits, reduced spending, increase in taxes and withdrawal of subsidy (for example on education, health, petrol and agriculture).
However, the implementation of the IMF and World Bank inspired reforms in mid 1980s and their effects attracted a lot of criticisms in the sub-region. Consequently, an alternative reform programme was formulated by the Economic Commission for Africa for implementation in SSA. This reform package was tagged African Alternative Framework to Structural Adjustment Programmes for Socio-economic Recovery and Transformation (AAF-SAP).
The African alternative framework (AAF-SAP)
The African alternative framework to structural adjustment programmes for socio-economic recovery and transformation (AAF-SAP) was launched in 1989. This reform package was designed to address the structural weaknesses that led to the perpetual emergence of crisis situation in African countries. The package aimed at simultaneously strengthening the process of the generation, distribution and expenditure of national income. With respect to the income generation process, the critical focus was that of human-centred process in which productive forces were given a prominent role, with resources being used to bring about the transformation of the African economy from a primarily exchange economy to a production economy. The main focus of the income distribution framework was to ensure greater and more effective involvement of socio-economic institutional groups in the process of adjustment and transformation. The critical needs relate primarily to the production and accessibility of essential commodities and services, the production of essential factors inputs and the maintenance of increased investments levels.
Basic features of the AAF-SAP
The AAF-SAP is anchored on three sets of macro-entities. These are operative forces, available resources and needs to be met. The operative forces include political, economic, scientific and technological, environmental, cultural and sociological factors. The available resources encompass human resources (quality and skills), natural resources (land, water and forests), domestic savings and external financial resources (ECA 1989; Tomori and Tomori 2004). The third entity needs to be met, places emphasis on vital goods and services and the ability to acquire them.
The AAF-SAP is broken into three modules. The first module brings out clearly the interrelationships among some specified forces with the level and pattern of resource allocation to determine the type and quantity of different categories of output. In this module, different sets of relationships in the process of producing goods and services and generating factor incomes were defined. The second module isolates those forces that explain the distribution of output and determine the level and pattern of allocation of resources.
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