Friday, February 1, 2008

HOW IMF, WORLD BANK FAILED AFRICA

New African
January 1, 2007
Anonymous

The IMF has received heavy criticism for its handling of various financial
crises in middle-income countries: Mexico (1965), Russia (1998), Brazil
(1998), Turkey (1998) and Argentina (2001). But perhaps the most famous is
the Asian financial crisis of the late 1990s, occurring during Michel
Camdessus' tenure as head of the IMF (more recently he has sat on Tony Blair
s Commission for Africa).

The problem with the World Bank and IMF's focus on "export-led growth" or
export-led development" is the way that it has been pursued. Most
industrialised or newly-industrialise d countries have moved away from
exports that are focused on agriculture, and into trading manufactured goods

As the Norwegian economist, Erik Reinert, points out: "No nation has ever
taken the step from being poor to being wealthy exporting raw materials in
the absence or a domestic manufacturing sector."

Although history suggests nobody gets rich by exporting low value
agricultural commodities, the World Bank and IMF seem to he encouraging or
forcing poor countries, especially in Africa, to pursue just such a strategy
with disastrous results.

Take the international coffee trade as a case in point. In coffee producing
countries, the World Bank and IMF have been advising or requiring
governments to liberalise. This has involved measures such as eradicating
controls on supply and prices, disbanding state trading boards and actively
encouraging increased production and exports.

For example, in 1998, under the Highly indebted Poor Country (HIPC)
initiative, C�te d'Ivoires eligibility for debt relief was made conditional
cm the full liberalisation of its coffee sector by the 1998/99 crop year.
This was also backed up with a second national agricultural services support
project, funded by the World Bank, which sought to increase productivity for
all crops, including coffee, as well as stressing the requirement to fully
liberalise the cottee sector. Perhaps the greatest "success" has been in
Vietnam where the World Bank has helped promote a massive expansion of
coffee growing. In 1993, for example, the World Bank funded an agricultural
rehabilitation project with an aim of diversitying export income through the
expansion of coffee and rubber exports. As a result, since the late 1980s,
Vietnam has risen from a marginal coffee producer, producing less than 50
000 metric tons, to one of the world's largest producer. By the late 1990s,
it was producing some 400,000 tons of coffee.

During the same period, the World Bank and IMF were requiring other coffee
producing nations - such as Uganda, Ethiopia and Kenya - to liberalise their
agricultural sectors and encouraging increased coffee exports.

For example, a study of Uganda by the World Bank in 1993 advised the Ugandan
government to plan for a greater share of the world coffee market. The study
argued that Uganda "could double its coffee exports to perhaps five million
bags, without significantly affecting medium-term international prices of
Robusta coffee".

Unfortunately, the study did not seem to take into account the implications
of increased production and exports being encouraged by the IMF and World
Bank in other parts of the world. The result of the oversupply has been a
price collapse and a crisis in coffee producing countries.

According to a World Bank study in 2002, "coffee prices have declined
sharply in recent years because of large increases in coffee production and
exports from traditional exporters such as Brazil and new entrants such as
Vietnam, Between July 1998 and June 2001, coffee export prices declined by
almost 50%.

Ironically, the kind of policies that now help coffee producing countries
qualify for debt relief under HIPC (ie, reducing state intervention in
coffee markets), have contributed to increased coffee production causing
oversupply in the market, a price crash, a commodity crisis, and making the
debt problems of producer countries even worse.

Of course, any standard economic textbook will tell you that an increase in
supply, without an increase in demand, will lower prices. Yet it looks like
the IMF and World Bank economic experts forgot, or chose to ignore, the
basics as they encouraged increased production and exports and reduced state
intervention across the globe.

The other side of the trade equation to increasing exports is liberalising
imports, which the World and IMF have pushed with almost theological zeal.
Trade liberalisation has been a key feature of Bank and hind conditionality
throughout the 1980s and 1990s.

Yet the United Nations Conference on Trade and Development (UNCTAD) has
found that the rapid and extensive trade liberalisation undertaken by
developing countries during the 1990s tailed to benefit the poor. An UNCTAD
report concludes: "The more recent evidence from liberalisation episodes in
sub-Saharan Africa as well as Latin America suggest that they have often
been accompanied by an increase in unemployment. According to calculations
done by Christian Aid, trade liberalisation has cost sub-Saharan Africa
$272bn over the past 20 years.

In 2003, the Ghanaian Parliament passed a budget to increase the import duty
on poultry products to protect Ghanaian farmers who were being priced out of
the domestic market by subsidised European poultry. However, after a phone
call from the IMF, the legislated increase was removed by the Ghanaian
government after just two weeks.

So even though Ghana had managed to mention reviewing trade liberalisation
in its Poverty Reduction Strategy Paper (PRSP) and then subsequently
implemented an "alternative policy", it was pressured by the IMF to revert
to trade liberalisation. (A PRSP is an economic plan whose content is
heavily influenced by the World Bank and IMH and is used as the basis for
defining Bank and Fund policy conditionality) .

Starting in the 1980s, user fees for health and primary education were
pushed as conditions of World Bank programmes. In a 1998 internal review or
the Bank's Health, Nutrition and Population (HNP) lending, the Operations
Evaluation Department reported that 40% of HNP projects, and specifically
75% of HNP projects in sub-Suharan Africa, included the establishment of
expansion of user fees.

Studies have consistently shown that fees have reduced the poor's access to
essential services. For example, with the implementation of fees for health
services in Ghana in the late 1980s, a visit to a specialist cost 10 times
the daily wage. Unsurprisingly, there were "substantial declines in the
utilisation of health care services. The decline was greater and more
sustained in rural than in urban areas.

As for Zambia, the World Bank reported in 1994 that with the introduction of
user fees in health provision, "vulnerable groups seem to have been denied
access to health services". However, this was followed by a new World Bank
health project to increase the use of user fees.

UNCTAD has criticised the use of user fees as "undue emphasis is placed on
market mechanisms" and has called tor their removal from anti-poverty
polices. The former president of the World Bank, James Wolfensohn, stated
that the Bank no longer promoted user tees tor basic health and education.
However, Bank programmes which make countries delegate responsibility for
delivering a service to local communities often include a requirement for
user fees, as a community has no other way of raising finance internally.

In contrast, where user fees have been abolished, improvements have been
seen. For example, when Malawi eliminated a small school fee in 1994,
primary enrolment increased by 50% from 1.9 to 2.9 million pupils.

Ignore the Bank and Fund

As the economics professor, Charles Wyplosz of the Institute of
International Studies in Geneva, says: "There is growing recognition that
the IMF should not be interfering too deeply in sovereign affairs ... When
firemen come to your house to put out a blaze, you would not expect them to
meddle in your marriage."

A damning indictment of the failure of the tree market model pushed by the
World Bank and IMF in Africa and elsewhere is the fact that those countries
that have developed most successfully have often been those that have
ignored the Bank and Fund and pursued their own path to development.

For example, on the issue of trade liberalisation - even looking at
countries using the Bank and Fund's own standard of economic growth - we can
see that between 1996 and 2000, four of the top five fastest growing
developing countries were those deemed to have "trade restrictive" policies
(China, Mozambique, Equatorial Guinea, and the Dominican Republic).

Although no data was available on the fifth, Maldives, and Equatorial Guinea
s growth can be ascribed to its oil wealth, the other three countries at the
very least call into question the "liberalisation leads to growth" dogma.

Similarly, although during the 1990s the IMF ranked Mauritius as one of the
most protected economies in the world, between 1975 and 1999, Mauritius
achieved an average annual per capita growth rate of 4.2% and a reduction in
income inequality.

The polity choices and the success demonstrated by Mauritius are perhaps no
surprise, given that since 1988, the country has not owed the IMF any money
under its structural adjustment programmes, so it has not been subject to
IMF conditionality.

A similar story exists in terms of investment liberalisation. The more
successful countries in East Asia, not to mention industrialised countries
such as the US and various European countries, used a variery of controls on
foreign direct investment (FDI) to ensure that when FDI was allowed it
produced benefits for local people.

And the same trend can be seen when it comes to financial crises. The
countries that ignore the standard prescriptions of the IMF tend to do
better. Perhaps the most cited example is that of Malaysia. Commenting on
the Asian financial crisis, Joseph Stiglitz, the former chief economist of
the World Bank, said: "I think it is no accident that the only major East
Asian country, China, to avert the crisis took a course directly opposite
that advocated by the IMF, and that the country with the shortest downturn,
Malaysia, also explicitly rejected an IMF strategy."

In an ironic twist, in 2003, the Malaysian president, Mahathir Mohamad, was
the opening speaker at the World Economic Forum in Davos; a place where
deregulation, including financial deregulation, and unfettered markets had
been the rallying cry tor over two decades. As one author writes: "Mahathir
excoriated global and economic policies, rightly boasted of Malaysia's
success following a national regulated model and received a rapturous
standing ovation."

This is not to say that more successful countries have nor liberalised at
all. They have simply done so at times and in sectors that are deemed
appropriate in achieving development progress. But critically, these
countries have still maintained various degrees or control over trade policy
foreign investment and foreign capital, so that if a policy approach is not
working they have the ability to change course.

Of course, African governments are well aware of this evidence. In a paper
submitted to the Doha Round WTO negotiations, Ghana, Kenya, Nigeria,
Tanzania, Uganda, Zambia and Zimbabwe have pointed out that, subsequent to
IMF and World Bank structural adjustment, including unilateral trade
liberalisation, "the broad-based development that was expected to ensue has
remained elusive ... Indeed, empirical studies show that industrial growth
has fallen behind GDP growth in sub-Saharan Africa since the 1980s with
de-industrialisatio n in a number of African countries being associated with
trade liberalisation. "

Trade liberalisation has also created problems for sustainable government
income. Research has shown that cutting import tariffs has reduced tax
revenue resulting in a fiscal squeeze, exacerbating the debt problem and
causing cutbacks in infrastructure investment. Although the theory is that
governments can replace tariffs with other taxes, this is easier said than
done in the real world.

It is, therefore, perplexing that the World Bank, a body whose remit to
promote development requires countries to reduce their debts and become less
reliant on aid, should be requiring recipients of its financial assistance
to implement policies that will reduce their tax base - a predictable source
of income - exacerbating their debt problems and nuking them increasingly
reliant on unpredictable, not to mention conditional, bilateral and
multilateral aid.

Sadly, for almost 20 years, going back to the latter days of the Cold War,
poor countries have had little choice but to seek development finance from
Western powers, with the most obvious manifestation of this being the World
Bank. Accepting this finance has meant accepting the policies promoted by
Western governments: free markets and deregulation.

However, this period may be coming to an end with the increasing involvement
of China in poor countries particularly those in Africa. For the first time
in two decades, some poor countries are getting a choice. While this may not
be the most appetising range of options, there is now a distinction between
finance from China that comes with no broader economic policy strings, but
in all likelihood with some political and foreign polity strings, and
finance from the World Bank with all its associated conditionality.

It is hard to find any official World Bank reaction to Chinas activities,
but it is likely that this new development will have rattled the World Bank
hierarchy as much if not more than any civil society campaign.

"After 20 years of implementing structural adjustment programmes, our
economy has remained weak and vulnerable and not sufficiently transformed to
sustain accelerated growth and development. Poverty has become widespread,
unemployment very high, manufacturing and agriculture in decline, and our
external and domestic debts much too heavy a burden to bear" - Kwamena
Bartels, Ghana's minister for works and housing, May 2001 (he is now
minister for information) .

Welcome to how the IMF and World Bank run the show in Africa and, thus, lead
our countries down the garden path. This report was put together by the
London-based World Development Movement (WDM) as its contribution to the
ongoing debate on what kind of global institutions would improve everyone's
quality of life in a highly interconnected world.

The powers behind the throne. Africans have no muscle to influence decisions
at the World Bank and IMF.

Where user fees have been abolished, improvements have been seen. For
example, when Malawi eliminated a small school fee in 1994, primary
enrolment increased by 50%.

While the IMF and World Bank impose conditionalities, the Africans suffer,
IMF managing director, Rodrigo Rato, visits a medical centre in Chad. User
fees keep the sick at home

Those countries that have developed most successfully have often been those
that have ignored the Bank and Fund and pursued their own path to
development.

A hawk at the centre: Paul Wolfowitz, the current president of the World
Bank

Copyright International Communications Jan 2007.

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