1

To be cited as: New York: The Phelps-Stokes Fund, 1997

AFRICAN DEBT AND SUSTAINABLE DEVELOPMENT:

Policies for Partnership with Africa

February 1997

Revised, March 1997

Haider A Khan

Graduate School of International Studies

University of Denver, Denver , CO 80208

e- mail: hkhan@du.edu

I would like to thank Lori Hartman and Go Ito for valuable research assistance.

I would also like to thank the participants of the seminar at the Phelps

- Stokes

Fund in

New York

City and

those who

sent their comments by e

- mail for their valuable

suggestions. All remaining errors are my own.

2

I

“The Washington Consensus” Travels to Africa

The Washington Consensus 5

The Washington Consensus and the Structural Adjustment

Policies in Africa 7

II

African Debt and Bleak Prospects for Sustainable Development

The Marginalization of Africa 7

Economic Conditions in Africa 8

Human Conditions in Africa and Sustainability 14

III

The Way Forward: Sustainable Development with Equity in Africa

African Capabilities 20

Assessment of SAPs from a Capability Perspective 21

An Alternative Structural Adjustment Program (ASAP)

for Capability-enhancement in Africa 25

Social Expenditure Conditionality for Africa

30

IV

Rethinking U.S. Economic Policy Toward Africa

A New Vision. 32

Need for Specificity 34

Some Specific Recommendations: A New

Economic Partnership with Africa 35

Appendix.

IMF and World Bank Adjustment Approaches:

Stylized Descriptions

39

3

Introduction

Economic Justice and Africa

The continent of Africa, especially Sub-Saharan Africa, faces a dire economic struggle.

1

Over the last decade in particular the living conditions for the great majority of the people there

have deteriorated. Economic growth is stagnant or even negative in many cases. The environment

has also deteriorated. Inequality and poverty among the population have increased. All these are

well-known facts -- acknowledged by both bilateral and multilateral donors of aid to Africa. Yet

there seems to be a lack of vision from which arises a lack of determination in helping the poor,

indebted African nations in their struggle against underdevelopment. What has brought about this

paralysis of policy.

In the following section I discuss the so-called “Washington Consensus” which seems to

be dictating much of the current policy gestures towards Africa and other poor indebted countries

in the third world. The indebted African countries are forced to swallow the bitter medicine of

structural adjustment regardless of their economic and human conditions.

2

The direct and indirect

costs of these policies on the vulnerable groups are already evident. We must ask if there is an

alternative to the current combination of structural adjustment prescribed by the multilateral

organizations on the one hand and the neo-isolationist retreat on the economic front by the U.S. on

the other.

According to the recent advances in the theory of human development the goal of

development is to enhance the scope of real freedom of individuals. Economists and philosophers

such as Amartya Sen and Martha Nussbaum have proposed that the enhancement of the

capabilities of the people -- their freedom to be and to do, to live their lives fully -- must be the

4

ultimate goal of development.

3

UNDP has published several volumes of Human Development

Reports to alert the international community about the achievements and shortfalls in all the

countries in this regard. Once again, measured by these indicators, the plight of African countries

would appear to call for urgent international action.

It can not be overemphasized that this is fundamentally an issue of global justice. Ignoring

the serious conditions of economic deprivation in Africa and elsewhere in the world only declares

our own complicity in an international regime of injustice. The call for an economic partnership

with Africa, therefore, is at the bottom a call for economic justice.

But even if we all can agree about the ethics of the situation, what kind of alternative

economic policies towards Africa are necessary. And, the skeptics might say, is it realistic to

advocate an alternative set of policies.

The burden of this monograph is to show clearly that what is morally and economically

necessary to do in this case can also be defended for its realism. To allow African economies to

sink into a morass of dependent stagnation is not ultimately good for the World Economy. It is also

not in the best interests of the U.S. to allow this to happen.

The argument is carried on in several stages. In the first section the received view

(called ’the Washington Consensus’) regarding the African adjustment (as well as elsewhere) is

critically reviewed. Next, the debt and human condition in sub-Saharan Africa are reviewed. Not

surprisingly, this reveals the glaring inconsistencies between present domestic and international

policy regimes and the real needs of the African people. In light of these discrepancies an

alternative structural adjustment program more in keeping with the human development goals of

Africa is outlined. The alternative program has deep economic and moral basis in enhancing the

5

capabilities and real freedom of the African citizens.

4

The final part of this monograph explores policy options for the U.S. with respect to Africa

in the sphere of international economic relations. It turns out that ignoring Africa or following a

policy of ’selective isolationism’ is not a viable option for the U.S. in the next century.

Realistically, the U.S. must forge a new partnership with Africa based on trust, mutual respect and

responsible economic behavior. A set of specific recommendations consistent with the principle

of enhancing the economic freedom and social capabilities of the African people concludes the

monograph with a note of cautious optimism for the future.

I

The “Washington Consensus” Travels to Africa

The “Washington Consensus”

“Washington Consensus” is the name given to the complex array of policy reforms

underway in the developing countries. John Williamson

5

can be credited with coining this aptly descriptive

term. Although, as Williamson

6

tells us he "...should have christened this list the 'universal convergence' rather

than the 'Washington consensus,' on the grounds that there is no complete consensus, while the very real

convergence extends far beyond Washington...." The impact of this so-called "Washington consensus" on the

world economy is already considerable. But what is this consensus about which not everyone agrees. In the

appendix to his excellent 1994 paper Williamson provides us with a list that without being exhaustive covers a

great deal of the policy terrain. In my view, this list is as good a place to begin the discussion on structural

adjustment as any other. I have reorganized the list to reflect (roughly) the priorities that African economies have

6

been asked to accord to the various components of the consensus. However, the ordering is definitely not

lexicographical and does not apply completely to any particular country.

(1) Privatization: Ways and means must be found for state enterprises to be privatized. A soft version

advocates caution and gradual privatization. A hard core neoliberal version advocates "shock treatment"

in the form of rapid and wholesale privatization.

(2) Deregulation: In keeping with the tenets of (an almost) perfectly competitive market structure,

governments should abolish regulations that get in the way of new firms entering the market. All

regulations that restrict competition in any way should be abolished.

(3) Property rights: Through a set of legal and institutional reforms private property rights must be secured by

law.

(4) Financial liberalization: The ultimate goal of deregulation and privatization of the financial sector is to

achieve free market interest rates. Williamson adds judiciously, "...experience has shown that, under

conditions of a chronic lack of confidence, market-determined rates can be so high as to threaten the

financial solvency of productive enterprises and government. Under that circumstance a sensible interim

objective is the abolition of preferential interest rates for privileged borrowers and achievement of a

moderately positive real interest rate."

7

(5) Trade liberalization: Here the GATT philosophy and procedures are advocated. As Williamson puts it,

"Quantitative trade restrictions should be rapidly replaced by tariffs, and these should be progressively

reduced until a uniform low tariff in the range of 10 per cent (or at most 20 per cent) is achieved. There is,

however, some disagreement about the speed with which tariffs should be reduced (with

recommendations falling in a band between 3 and 10 years), and about whether it is advisable to slow

down the process of liberalization when macroeconomic conditions are adverse (recession and payments

deficit).

8

(6) Foreign direct investment: Barriers to entry by the foreign firms should be removed. This is intended to

increase the capital in-flow to the African economies.

(7) Fiscal discipline: This is often seen as the heart of reforming the government sector.

9

According to

Williamson, "Budget deficits, properly measured to include those of provincial governments, state

enterprises, and the central bank, should be small enough to be financed without recourse to the inflation

tax. This typically implies a primary surplus (i.e., before adding debt service to expenditure) of several per

cent of GDP, and an operational deficit (i.e., disregarding that part of the interest bill that simply

compensates for inflation) of no more than about 2 per cent of GDP."

10

(8) Public expenditure priorities: Hand in hand with the fiscal discipline of the governments goes the task of

setting priorities in expenditure. The guideline is to use economic rather than political criteria for

allocating expenditures.

7

The Washington Consensus and the Structural Adjustment Policies in Africa

Many of these prescriptions also form the core of the structural adjustment policies (SAPs) recommended

by the IMF. The reader is referred to Appendix 1 for a description of SAPs and a mathematical formalization of

the IMF financial programming model.

Although neither the Washington consensus nor the IMF model is used as a complete blueprint for actual

policy formulation, more often than not they represent the philosophical and theoretical foundations of the analysis

underlying most policies for African economies. Given the complexities of the actual African economies and the

often confusing nature of the policy statements by the government officials in these countries the

Washington-consensus and the IMF approach both have at least the virtues of clarity and consistency. However,

the most significant question to ask is how appropriate are these policy approaches to the real problems of

stagnation, poverty and environmental decay in Africa. In order to answer this question fully we need to know

something about the problems faced by the African economies. In particular, in this monograph I wish to focus on

the problems of low-income African economies where the problems of indebtedness and sustainable development

are the most acute. I now turn to a critical discussion of the trends and conditions in Africa.

II

African Debt and Bleak Prospects for Sustainable Development

The Marginalization of Africa

8

Recently (5-8 August, 1996) twenty five African NGO networks met in Harare to discuss

the African development situation. These groups represent a wide-ranging spectrum of

development philosophies. Most of them also have grass-roots connections. Their conclusions

regarding the prospects for African development under the currently prevailing conditions, if

accurate, are truly alarming. According to the NGO groups:

The African continent continues to be marginalized in the new world order. It remains

characterized on the international scene as a basket case stricken with unresolvable poverty,

conflict and debt. At the same time, the shaping of development policy, practice and pace

is driven by the interests of Trans-National Corporations and dominated by new

instruments of global governance such as the World Trade Organization and International

Financial Institutions. These are dominated by the North at the expense of Africa’s voice.

The international community lacks the moral and political will to constructively assist

Africa with its dilemmas. It is therefore a matter of grave concern that, in spite of their best

efforts, African institutions have not adequately played their role in defining an agenda for

African development, in articulating African interests and in harnessing resources and

capacities for action.

At the national level, African governments have excluded people in the policy and

decision making processes. In particular, women, who are the socio-economic mainstay of

the continent, have been totally marginalized. The exclusion of the population has blocked

the emergence of endogenous initiatives. This is aggravated by the failure of education and

information systems to nurture positive and creative thought to address African problems

and mobilize local initiative.

11

The charges above are serious enough to merit a thorough investigation in the African

context. It is also necessary to understand the deeper reasons for the African decline and the

consequent “Afro-pessimism” that is in vogue nowadays.

12

Economic Conditions in Africa

Table 1 presents the growth record of the African countries during the decade of the 80's.

It is clear that the growth performance of all the countries has been quite weak. What is indeed

9

alarming is that the weakest economies that were called upon to adjust most strongly by the IMF

and the World Bank are precisely the ones registering a negative growth rate during the decade.

Table 1

Growth of GDP in Africa, 198O-1987 (constant 198O U.S. dollars, market prices, in percent)

Period

Country

1980- 1981- 1982- 1983- 1984- 1985- 1986- 1980

Groups

81 82 83 84 85 86 87 1987

Aver.

Strong

adjusting - 3.01 0.33 - 3.85 - 4.31 6.33 2.82 - 1.97 - 0.53

Weak

adjusting 5.44 3.46 0.66 - 1.29 0.13 4.01 1.88 2.00

Non- .

adjusting 3.92 3.35 3.53 3.68 6.40 3.62 - 2.51 3.50

Sub-Saharan

Africa - 1.05 1.01 - 2.37 - 2.94 5.44 3.09 - 1.48 0.24

North

I Africa - 2.27 3.12 3.63 2.78 1.90 0.19 1.29 1.50

Africa

Total - 1.52 1.81 - 0.06 - 0.66 3.98 1.92 - 0.38 0.73

Source: World Bank data files; country coverage and classification of strong adjusting, weak

adjusting and non

-adjusting countries according to World Bank; Average annual growth rates were

calculated as arith metic averages.

Table 2 shows other summary performance indicators over the same decade. Again, the

growth in export performance has been negative as has been the growth in real domestic

10

investment. The saving rate, by world standards, is quite low. At the same time the growth in

personal consumption has been negative. Therefore, it is not the profligacy of the ordinary people

in Africa that can account for the low saving rate (although the affluent minority certainly has

more than a few profligate members). The more likely explanation is the constraint of falling

income and the burden of indebtedness.

Table 2

Summary of Economic Performance Indicators (average annual percentage change unless

indicated otherwise)

Countries not

All Countries affected by strong

shocks

Period With strong With weak With strong

With weak

reform or no reform reform

or no reform

programs programs programs

prog rams

Growth of GDP

1980-84 1.4 1.5 1.2 0.7

(constant 1980 1985-37 2.8 2.7 3.8 1.5

prices)

Agricultural

1980-84 1.1 1.3 1.4 1.8

production 1985-87 2.6 1.5 3.4 2.6

Growth of

1980-84 - 1.3(-11.0) - 3.1(-0.9) - 0.7(-4.7) - 5.7(-2.1)

export volume

1985-87 4.2 ( -2.0) 0 2( -2.5) 4.9( 3.5)

- 3.3(-6.0)

Growth of imp.

1985-87 1.7 ( -7.7) - 2.7(-3.0) 6.1(7.4) - 4.o(-2· 2)

volume excluding oil

4.8 (6.8)

exporters

Growth of real

1980-84 - 8.1 - 3 7 - 3.5 - 7.0

domestic 1985-87 - 0.9 - 7 0 1.9 - 4.8

investment

11

Turning now to African indebtedness the situation in Sub-Saharan Africa in particular

appears to be grave. Table 3 shows the debt records of this region. Over the last decade the

absolute amount of debt service has shown mainly an upward trend. After 1986 there was some

decline, but recent tendency is for the debt service burden to grow once again. The debt service

ratio (ratio of debts to exports) stood at 278.4 for these very poor countries in 1990. Debt to GDP

ratio for the same year was 107.7. It is impossible to envisage sustainable development with equity

under such intolerable debt burden.

Table 3 Sub - Saharan African Debt

Debt Service (DS) DS to Debt To Debt

Years (USS Billions) Exports Exports to GDP

1978

3.5 10.0 102.3 24.3

1979

4.4 10.2 96.1 24.5

1980

6.2 10.8 85.0 23.5

1981

6.6 14.2 123.0 29.2

1982

6.8 17.8 177.2 34.4

1983

8.1 22.9 214.5 40.4

1984

10.2 26.9 207.7 41.9

1985

13.0 34.7 217.6 43.4

12

To make an already bad situation even worse the terms of trade have also declined for the

African countries in the last decade. Table 4 displays the statistics for a number of African

economies. If we assume a value of 100 for terms of trade in 1980 by 1988 all countries in the table

show a decline to various degrees. Terms of trade is defined by the international economists as the

ratio of export prices to prices of importables. Accordingly by the late 1980s some of the African

countries on the table had to increase exports by more than 25% to import the same amount as in

1980. If we add to this the debt service burden discussed above it is not surprising that investment

and growth have declined for most of these countries steadily.

Table 4 Terms of Trade Estimates for Selected African Countries

(1980 = 100)

Country 1981 1982 1983 1984 1985 1986 1987 1988

Ghana

73 64 63 71 59 66 64 65

Kenya

93 92 88 92 91 91 73 72

Madagascar

84 82 88 102 103 110 83 81

Mozambique

103 89 85 101 94 90 83 87

Rwanda

68 67 63 68 71 70 52 53

SierraLeonc 90 90 93 98 97 99 89 90

Sudan 102 86 84 92 93 81 76 94

Cote d'Ivoire 90 71 83 80 78 73 74 82

13

Table 5 shows the human development indexes (HDI) for selected African countries. This

is intended to be a summary indicator of overall development performance. It takes into account

not just growth (increased income) but also the effects of growth on the other human development

aspects such as health and education. By this widely accepted measure most African countries are

behind even poor developing economies such as Ecuador or Philippines. According to the 1996

Human Development Report Ghana (rated by the World Bank as a recent

Table 5: Human Development in Africa

Real

Real GDP

GDP

per

per capita

HDI HDI

capita minus

value rank rank HDI

rank

Zimbabwe

0.534 124 120 -3

Congo

0.517 125 101 -23

Kenya

0.473 128 136 9

Ghana

0.467 129 124 -4

Lesotho 0.464 130 150 21

Equatorial Guinea

0.461 131 126 -4

Zambia

0.411 136 144 9

Nigeria 0.401 137 134 -2

Zaire 0.371 141 174 33

Tanzania,

0.364 144 170 26

Sudan

0.359 146 138 -7

Cote d'lvoire 0.357 147 131 -15

14

success in Africa) scored 0.467 with an overall rank of 129 among 174 countries. The country to

occupy the last rank was also an African country -- Niger with a value of 0.204 for its HDI index.

The silver lining in this otherwise completely dark cloud is that over the last three decades

Sub-Saharan African countries have slowly improved their human development record. However,

this improvement while worthy of acknowledgment especially in the light of disastrous growth in

the 80's has been at a snail’s pace. From 1980 to 1993 in particular the index increased from 0.312

to 0.379 -- not a record of phenomenal upward trend. It should also be noted that countries, with

only medium human development according to the UNDP had an average HDI of 0.647 for 1993

-- more than twice that recorded for Sub-Saharan Africa.

The decade of 1980's seems to have been really a lost decade for Sub-Saharan Africa in so

15

far as economic development is concerned. Over the entire decade GNP per capita fell by nearly

10 percent. World prices for major exports -- tea, cocoa, coffee and cotton fell by an enormous 50

percent. Real investment dropped by more than 50% in per capita terms. About 170 million people

-- nearly a third of the region’s population -- do not receive an adequate amount of food. About 23

million children are malnourished and 16% of the babies are underweight. The region also records

the world’s highest maternal mortality rate -- 929 per 100,000 live births (compared with 33 for the

OECD countries).

Human Conditions in Africa and Sustainability

Table 6 shows the bleak trends in health and nutrition indicators in Africa. Under these

circumstances the rhetoric of sustainable development may seem like a cruel joke and indeed

under the current circumstances this assessment is not far from the truth. However, as Khan and

Sonko

13

have shown improvement of the environment can under some circumstances go hand in

hand with an increase in equality and improvement of the standard of living of the poor people.

Table 6: Trends in Some Health and Nutrition Indicators

Infant mortality rate Daily calorie supply

(per thousand live births) (per capita)

Country

.

!965 1989 Annual

1965 1986 Annual

change (%)

change (%)

1. Burundi

142 70 -2.9 2 311 2 253 -0.2

2. CH 157 100 -1.9 2 016 1 980 -0.1

3. Cote d'lvoire 119 92 -2.0 2 334 2 365 0.1

4. Ghana

120 86 -1 1 1 912 2 209 0.6

5. Kenya 112 68 -2.1 2 169 1 973 0.4

6. Madagascar

201 117 -2.2 2 375 2 101 -0.5

7. Malawi

200 It7 -1.3 2 196 2 009 -0.4

8. Mali 207 167 -0.9 1 113 2 111 0.7

9. Mauritania 171 123 1.5 1 796 2 528 1.5

16

Currently, Africa faces multiple ecological challenges. The most significant and

threatening ones are: drought, deforestation, desertification and pollution. To this list one could

add hazardous waste dumping and possibly global warming.

Drought is a typical feature of the Sahelian countries. In the late sixties the Sahel suffered

one of the worst droughts in recorded history. Most affected were Ethiopia, Somalia, Mozambique

and the Sudan. The more recent droughts have forced mass starvation. In 1985 it was estimated

17

that more than 30 million people were in danger of starvation. More than 10 million people were

forced to abandon their homes and lands because of the adverse conditions caused by the drought.

Deforestation is also an imminent threat to the economic security in Africa. In 1991 the

U.N. report on Africa’s environment warned that deforestation was proceeding at the rate of 3.8

million hectares per year. In Sub-Saharan Africa, more than 30% of the original rainforest has been

degraded. In Nigeria, it is reported that more than 90% of its moist forests are already gone. Cote

d’Ivoire has already destroyed two thirds of its forest even as it continues logging for exporting

timber.

Poverty and deforestation are also linked by a vicious circle in Africa. The poor are forced

to degrade the environment by cutting down trees for agriculture, livestock raising and in many

cases for fire to cook their daily food. However, this in turn leads to lower opportunities for the

poor and a long-term decline of their income earning potential.

14

Closely related to deforestation is the threat of desertification. Aforementioned practices

such as logging, overgrazing and the destruction of trees for firewood contribute to desertification.

In the long run, this will make agriculture totally unsustainable.

The primary cause of desertification, however, is the overcultivation of cash crops such as

cotton, groundnuts and tobacco. Burkina Faso, for example, loses an area of 85,000 hectares each

year due to its cultivation of groundnuts and other cash crops. Senegal loses about 50,000 hectares

in the same way and Guinea Bissau degrades 20,000-35,000 hectares per year. A recent United

Nations Environment Program and FAO study on soil erosion points out that about 23% of African

land has been degraded. With the continuation of current trends in soil erosion African agricultural

output could decline by 25% by the year of 2000. This is sobering news for a continent faced with

18

many other human catastrophes already.

15

To these severe ecological challenges one can add the threat to the health and well-being

of people from the worsening of air and water quality and the increase in the dumping of hazardous

wastes by some non-African countries on poor African lands.

Table 7 and 8 present the projections of the United Nations Environment Program (UNEP)

regarding the carbon emission for the African countries. These tables, in a way, summarize the

most serious danger due to deforestation and pollution in Africa. If one adds up all the various

environmental threats outlined above the entire continent would seem to be advancing steadily

towards ecological disaster.

19

Table 7: Low Base Case Carbon Emission Projections for Deforestation of

All Tropical Forests for 1980-2050 (in billion tunes of carbon per year)

Countries

1980

2000

2025

2060

AFRICA

Algeria

Angola

3.9

4.4

5.0

5.8

Burundi

Cameroon

11.0

12.6

14.1

15.8

Cen. Afr. Rep. 2.5

2.9

3.3

3.8

Chad

3.0

3.4

3.8

4.2

Congo

2.4

2.7

3.1

3.4

Equ. Guinea

0.2

0.2

0.3

0.3

Benin

1.7

1.9

2.2

2.4

Mali

1.6

1.7

1.9

2.1

Tanzania

3.5

3.9

4.4

4.9

Burkina Faso 3.0

3.4

3.8

4.2

Mozambique 5.0

5.8

6.3

7.1

Niger

1.1

1.3

1.6

1.6

Nigeria

23.4

28.6

29.9

33.3

Guinea

1.8

2.1

2.4

2.6

Rwanda

0.2

0.2

0.3

0.3

Uganda

1.6

1.8

2.0

2.2

Zambia

3.0

3.4

3.8

4.2

Botswana

0.5

0.6

0.6

0.7

Liberia

2.9

3.3

3.7

4.1

Namibia

0.7

0.8

0.8

1.0

Ethiopia

5.6

6.3

7.1

7.9

Gambia

0.1

0.2

0.2

0.2

Ghana

3.8

4.3

4.8

5.4

Guinea

3.9

4.4

5.0

5.6

Kenya

1.2

1.4

1.5

1.7

Malawi

11.1

12.6

14.2

15.9

Sierra

0.4

0.4

0.5

0.5

Ivory Coast

41.4

46.9

53.0

59.1

Madagascar

8.7

9.9

11.1

12.4

Togo

0.4

0.4

0.5

0.6

Senegal

2.1

2.3

2.6

2.9

Somalia

0.8

0.9

1.0

1.1

Zimbabwe

3.0

3.4

3.8

4.2

Gabon

1.6

1.8

2.0

2.2

Sudan

18.8

21.3

24.1

26.9

Zaire

24.8

28.1

31.7

36.4

TROPICAL

AFRICA

200.3

227.0

256.4

285.8

20

Table 8: High Base Case: Net Flux from Population-based Rates of Forest Conversion

and High Forest Biomass Estimates

Countries

1980

2000

2025

2060

AFRICA

Algeria

Angola

8.4

9.6

13.8

15.5

Burundi

Cameroon

23.7

27.4

39.2

46.9

Cen. Afr. Rep. 5.6

6.3

9.0

10.8

Chad

6.4

7.4

10.6

12.6

Congo

5.2

6.0

8.5

10.2

Equ. Guinea

0.5

0.6

0.8

0.9

Benin

3.8

4.4

6.3

7.6

Mali

3.2

3.7

5.3

6.3

Tanzania

47.7

8.6

12.3

14.7

Burkina Faso 6.4

7.4

10.6

12.6

Mozambique 10.6

12.3

17.6

21.1

Niger

2.4

2.8

4.0

4.8

Nigeria

90.4

104.4

149.6

179.0

Guinea

4.6

5.3

7.6

9.0

Rwanda

0.6

0.6

0.8

0.9

Uganda

3.3

3.9

5.5

6.6

Zambia

6.4

7.4

10.6

12.6

Botswana

1.1

1.2

1.8

2.1

Liberia

11.8

13.7

19.6

23.6

Namibia

1.6

1.8

2.6

3.0

Ethiopia

11.8

13.7

19.6

23.6

Gambia

0.3

0.4

0.5

0.6

Ghana

11.7

13.6

19.4

23.2

Guinea

13.4

16.4

22.1

28.6

Kenya

2.6

3.0

4.3

5.1

Malawi

23.8

27.6

39.6

47.2

Sierra

1.6

1.8

2.6

3.0

Ivory Coast

162.7

176.3

252.6

302.3

Madagascar

36.2

40.7

58.3

69.8

Togo

1.1

1.2

1.8

2.1

Senegal

4.4

5.1

7.3

8.7

Somalia

1.5

1.8

2.6

3.0

Zimbabwe

6.4

7.4

10.6

12.6

Gabon

3.3

3.9

5.6

6.6

Sudan

40.4

46.7

66.9

80.0

Zaire

53.2

61.4

88.0

105.3

TROPICAL

AFRICA

558.3

653.9

937.1

1121.3

21

III

The Way Forward: Sustainable Development with Equity in Africa

African Capabilities

Faced with the disheartening trends outlined in the last section, one reaction in the policy

circles internationally has been to write Africa off as a lost cause. A somewhat different response

by the multilateral development agencies has been to advocate structural adjustment according to

“the Washington Consensus.” Here I would like to advance a third way of dealing with the

African crisis. This alternative is based on an ecologically sound and equitable growth-oriented

program for the African economies in the future.

The philosophical starting point in this approach to African development is the idea of

human development as an increase in the capabilities of people. The question one has to pose at this

point is simply this: What kind of adjustment is an equitable adjustment. Traditionally, economists have been

reluctant to answer this question except in very weak normative terms. The ordinal approach only considers Pareto

improving allocations where at least one individual is better off and no one else is worse off than before as a

superior outcome. The stronger normative approach is to take a utilitarian cardinal social welfare function and use

some proxy for distributive justice as an argument in this function. For example, the distribution of income can be

such a proxy variable. Many of the indexes of income inequality (e.g. Gini index, Atkinson index, Theil index,

etc.) and poverty can be derived from such considerations. The Human Development Index (HDI) is computed

according to a methodology which uses an income adjusting method in the spirit of Atkinson. The attraction of

this method is considerable and I see nothing wrong with using it imaginatively as the HDI approach tries to do.

16

22

At the same time, the theoretical criticisms by Sen

17

; Nussbaum

18

and others that this approach reduces all

qualities into quanta of utilities is a serious one. Nussbaum

19

gives a graphic example of this by quoting the

exchange between Mr. Gradgrind, economist and grief-stricken father, and his pupil Bitzer. Bitzer outdoes his

mentor by adhering to a strict code of utilitarian rationality that cannot comprehend a father's grief. I have pursued

a similar line of criticism in a number of recent papers.

20

In discussing equity, therefore, I wish to take a version of the social capabilities approach. Structural

Adjustments in order to be defensible, must be proven to be capability enhancing, or at least not to be

capability-reducing. The first type of SAPs I will characterize as "strongly equitable" SAPs (SESAPs). The

second type will be called weakly equitable SAPS (WESAPs). But first we need to ask: what is meant by

capabilities.

Capabilities can be construed as general powers of human body and mind that can be acquired,

maintained, nurtured and developed. They can also (under circumstances such as malnutrition or severe

confinement) be diminished and even completely lost. I have emphasized elsewhere the irreducibly social (not

merely biological) character of these human capabilities.

21

Sen himself emphasizes "a certain sort of possibility or

opportunity for functioning."

22

Assessment of SAPs from a Capability Perspective

In order to assess SAPs from a capabilities perspective we need to go further and try to describe more

concretely what some of the basic capabilities may be. David Crocker has given an admirable summary of both

Nussbaum's and Sen's approach to capabilities in a recent essay. Mainly relying on Nussbaum,

23

but also on other

23

sources (shown below), he has compiled a list that is worth reproducing here:

Basic Human Functional Capabilities (N and S stand for "Nussbaum" and "Sen", respectively; the quoted

items come from Nussbaum

24

unless otherwise noted).

1. Capabilities in Relation to Mortality

1.1. N and S: "Being able to live to the end of a complete human life, so far as is possible"

25

1.2. N: Being able to be courageous

26

2. Bodily Capabilities

2.1. N and S: "Being able to have good health."

27

2.2. N and S: "Being able to be adequately nourished."

28

2.3. N and S: "Being able to have adequate shelter"

29

2.4. N: "Being able to have opportunities for sexual satisfaction"

2.5. N and S: "Being able to move about from place to place"

30

3. Pleasure

3.1. N and S: "Being able to avoid unnecessary and non-useful pain and to have pleasurable

experiences

31

4. Cognitive Virtues

4.1. N: "Being able to use the five senses"

4.2. N: "Being able to imagine"

4.3. N: "Being able to think and reason"

4.4. N and S: "Being acceptably well-informed"

32

5. Affiliation I (Compassion)

5.1. N: "Being able to have attachments to things and persons outside ourselves"

5.2. N: "Being able to love, grieve, to feel longing and gratitude"

6. Virtue of Practical Reason (Agency)

6.1. N: "Being able to form a conception of the good"

33

S: "Capability to choose"

34

; "ability to form goals, commitments, values"

35

6.2. N and S: "Being able to engage in critical reflection about the planning of one's own life"

36

7. Affiliation II (Friendship and Justice)

7.1. N: "Being able to live for and to others, to recognize and show concern for other human beings,

to engage in various forms of familial and social interaction"

7.1.1. N: Being capable of friendship

37

S: Being able to visit and entertain friends

38

24

7.1.2. S: Being able to participate in the community

39

7.1.3. N: Being able to participate politically

40

and being capable of justice

41

8. Ecological Virtue

8.1. N: "Being able to live with concern for and in relation to animals, plants and the world of nature"

9. Leisure

9.1. N: "Being able to laugh, to play, to enjoy recreational activities"

10. Separateness

10.1. N: "Being able to live one's own life and nobody else's

10.2. N: "Being able to live in one's very own surroundings and context"

11. Self-respect

11.1. S: "Capability to have self-respect"

42

11.2. S: "Capability of appearing in public without shame"

43

12. Human Flourishing

12.1. N: "Capability to live a rich and fully human life, up to the limit permitted by natural

possibilities"

44

12.2. S: "Ability to achieve valuable functionings"

45

To facilitate this ordering, it might be better for practical rationality and affiliation to "infuse" but not

"organize" the other virtues. Crocker contrasts Nussbaum's approach with Sen's. Sen's and Nussbaum's

lists differ at a few points. For Sen, the bodily capabilities and functionings (2) are intrinsically good and

not, as they are in some dualistic theories of the good life, merely instrumental means to other (higher)

goods. In interpreting Aristotle, Nussbaum distinguishes between bodily functionings that are chosen

and intentional, for instance, "chosen self-nutritive and reproductive activities that form part of a

reason-guided life" and those that are non-intentional, such as digestion and other "functioning of the

bodily system in sleep." She may want to say that intentional bodily actions that lead to being

well-nourished and healthy are intrinsically good, but that being healthy or having good digestion are not

functionings (because not intentional) and are valuable only because of what they enable us to do.

Another option open to her would be to adopt Sen's view that bodily states and processes, whether

intentional or not, both as intrinsically and instrumentally good but as less valuable than other inherently

good capabilities/functionings.

Furthermore, Nussbaum has included items 5 and 8-10, for which Sen has no counterparts. These

items are welcome features. Item 8, which I have called "ecological virtue", is an especially important

recent addition to Nussbaum's outlook. In a period when many are exploring ways of effecting a

convergence between environmental ethics and development ethics, it is important that an essentially

anthropocentric ethic "make room" for respect for other species and for ecological systems. Worth

considering is whether Nussbaum's "ecological virtue" is strong enough. Perhaps it should be

formulated to read: "Being able to live with concern for and in relation to animals, plants, and nature as

intrinsically valuable." Item 9 injects some appealing playfulness in a list otherwise marked by the

25

"spirit of seriousness." What explains the presence of these items on Nussbaum's list, their absence on

Sen's list, and, more generally, the more concrete texture often displayed in Nussbaum's descriptions.

One hypothesis is that the differences are due to Nussbaum's greater attention, in her Level 1, to the

limits, vulnerabilities, and needs of human existence. Further, it may be that Nussbaum's richer

conception of human beings derives from making use of the story-telling imagination far more than the

scientific intellect."

46

On the other hand, Sen helpfully includes the good of self-respect, a virtue that

enables him to find common ground with Rawls and to establish links with the Kantian ethical tradition,

in which moral agents have the obligation to respect all persons, including themselves, as

ends-in-themselves.

47

Both Sen and Nussbaum agree, however, that these capabilities are distinct and of central importance.

One cannot easily trade off one dimension of capability against another. At most, one can do so in a very limited

way. They cannot be reduced to a common measure such as utility.

As Crocker points out, "capability ethic" has implications for freedom, rights and justice going far beyond

simple distribution of income considerations. If one accepts the capability approach as a serious foundation for

human development,

48

then it follows that going beyond distributive justice is necessary for a complete evaluation

of the impact of economic policies.

In evaluating SAPs from this perspective not only do we wish to pose the question of efficiency but also

the whole set of questions regarding human freedom. In particular, the positive human freedom to be or to do

certain things. Thus, creation of markets and efficient production by itself would mean very little if it led to a

lopsided distribution of benefits. Worse yet, if SAPs led to phenomena such as reduced life expectancy, increased

unemployment, reduced consumption levels for many and deprivation for certain groups such as women and

minorities then they will not even be WESAPs. On the contrary, they will be strongly inequitable from the

capability perspective.

26

This abstract discussion actually has direct relevance for the African situation. Unless an alternative is

found, the future capability enhancement of Africans cannot be assured. This assessment follows in a transparent

way from the evidence presented in the previous section.

An Alternative Structural Adjustment Program (ASAP) for Capability-enhancement in Africa

Let us go back to the beginning and reconsider the Washington consensus outlined in section I. In light of

what I have said so far it must be apparent that I do not consider this approach to be so much wrong as incomplete

and to some extent inconsistent with the goals of human development. I have given critical and technical analysis

of these programs elsewhere.

49

At the risk of distortion by leaving out some details and nuances I will attempt a

quick summary here.

Basically, the conventional SAPs focus on short to medium run results regarding inflation and

balance-of-payments equilibrium.

50

In the case of many African economies, as discussed in section I, privatization

itself may have become a goal for structural reform. Likewise, market-making can also become a goal in itself.

Not enough recognition has been accorded to the economic side effects such as unemployment or (at least a

temporary) lowering of output. Social dimensions of adjustment came to be recognized even later. The status of

vulnerable groups such as women, children, or the poor do not often figure explicitly in these programs. In order to

design a capability-enhancing alternative SAP (ASAP) for Africa the following elements must figure prominently:

(1) A clear recognition of the status of the different socio-economic groups in African countries in terms of

their economic and overall level of well-being.

.

(2) A list of priorities in terms of economic and social goals must be prepared. In the case of incompatibilities

of some of these goals, the question of trade-offs must be raised and resolved explicitly rather than

implicitly through the logic of the market.

27

(3) In particular, issues of fair inter-regional allocation of resources or opportunities must be addressed

explicitly.

(4) Human development indicators based on the capability framework must become an integral part of

ASAP.

(5) As table 9 shows, the record of Africa in the wake of SAPs with regards to gender disparities is not

flattering. Therefore, gender-justice must become a central part of ASAP for Africa -- not a peripheral

issue to be ignored or to be resolved later after enough growth has taken place.

(6) As alluded to in the discussion of African environment, sustainable development, with ecological effects

of adjustment included, must become the conceptual center of thinking about SAPs in these economies.

(7) It follows then that ecological and distributional issues need to be explicitly addressed in any such

program. This implies that there will be a need for careful inter-disciplinary studies on probable impacts

of a policy package before its implementation. It also implies the need for follow-up studies in order to

assess the after-effects of a SAP.

51

It should be clear by now that no African economy has been provided with an opportunity to design a

SAP with the above provisos in mind. However, that does not mean that it is impossible or unrealistic to try to do

so. For example, the struggle of Ghana to manage its economy while keeping the goals of creating social

capabilities may offer some lessons -- positive and negative -- in this respect.

28

Table 9: Critical Gender Disparities in Developing Countries

gap in literacy

rate, 1992

material

mortality rate

(per 100,000

births) 1988

gap in labor force

participation

1990-92

administrators

and managers (%

female), 1980-89

parliament (% of

seats by women),

1992

Swaziland

400

52

Lesotho

350

79

Zimbabwe

330

15

12

Congo

63

900

64

Cameroon 64

550

43

6

12

Kenya

400

67

3

Namibia

400

32

7

Madagascar 83

600

67

Ghana

73

700

67

9

8

Zambia

80

600

67

33

3

Nigeria

65

750

49

2

Zaire

73

700

56

5

Senegal

48

750

35

12

Liberia

58

600

45

6

Tanzania

600

92

11

Equa. Guinea

800

56

Sudan

28

700

41

5

Burundi

66

800

113

10

Rwanda

58

700

117

17

Uganda

56

700

69

13

Benin

50

800

32

6

Malawi

500

104

12

Mozambique 47

800

92

16

Cen. Aft. Rep. 48

650

89

4

Ethiopia

900

69

Djibouti

740

0

Guinea-Bissau 48

1000

72

13

Somalia

39

900

64

Gambia

41

1000

69

15

8

Mali

59

850

19

2

Chad

43

800

20

Niger

85

850

89

6

Leone

35

1000

43

Burkina Faso 32

750

96

3

Guinea

37

1000

43

Judged by the evidence presented in the previous section, it would appear that SAPs in

29

Africa over the past decade led not to even a weak equity for the great majority of the population.

The conditions of the vulnerable groups, in particular of women and children, have worsened in

many areas. Inequality and poverty have also increased. On the strength of the empirical evidence,

the current international economic policy towards Africa must be declared strongly inequitable.

If the current conditions in Africa send a strong message that existing adjustment efforts

are not appropriate. What then are appropriate policies consistent with the new approach outlined

above.

In the light of the above criteria for ASAP alternative policies for Africa must address

initially debt rescheduling, canceling and refinancing. Specifically, the creation of a multilateral

debt facility for the highly indebted poor and some highly indebted middle income countries

would be a step in the right direction. The World Bank, the IMF and the group of creditor

countries known as the Paris Club, recently approved a plan to relieve the massive debt load of

some of the world’s heavily indebted poor countries (HIPCs). The countries to be assisted under

this program are those that have undertaken economic reforms but still have extremely high levels

of external debt relative to their export earnings.

Officials of the World Bank and the IMF have said that eight countries would probably

benefit in the first round of debt relief, and perhaps twelve others might qualify in the future. The

first beneficiary is likely to be an African country--probably Uganda. In Table 10 of the eight

HIPCs listed six are African countries.

30

Table 10: External Debt of Selected HIPCs in 1994

Country Annual Per Capita

GNP (in US dollars)

Debt as Percentage of

GNP

Debt as Percentage of

Exports

Debt Service as

Percentage of

Exports

Bolivia

770

89.4

390.1

28.2

Ethiopia

100

109.8

630.0

11.5

Mali

250

151.8

589.2

27.5

Mozambique

90

450.4

1,388.7

23.0

Nicaragua

340

800.6

2,286.1

38.0

Tanzania

140

229.5

877.5

20.5

Uganda

190

88.1

1,042.7

45.6

Zambia

350

204.3

560.1

31.5

All Low-&

Middle-Income

Countries

1,090

37.6

162.8

16.6

Source: World Bank, World Development Report 1996

While a step in the right direction, this scheme is far from adequate. HIPCs have

debt-to-export ratio of over 500 percent as a group. For some African countries such as

Mozambique, it is over 1000 percent. However, there are more than half a dozen other African

countries with debt-to-export ratios of over 200 percent. From an economic point of view, a ratio

of over 100 percent means that export earnings by themselves can not cover the debt during the

relevant economic period—usually the fiscal year. Given the argument developed here, debt relief

needs to be extended to most if not all of these African countries. The proposed relief for HIPCs

is estimated to cost between $5.6 billion and $7.7 billion. The Paris Club countries can offer up to

80 percent reduction of eligible bilateral debt; the World Bank, African Development Bank and

other multilateral development banks and individual countries (most notably U.S., UK, and

France) could contribute to the trust fund to purchase the additional outstanding debt. Finally, the

IMF could contribute to the proposed expanded initiative by allocating more funds to its existing

subsidized loan facilities. However, in the case of IMF not realizing the stringent conditionalities

31

will mean that most African countries, as in the recent past, will be unable to use its SAF or ESAF

facilities. Additionally, the IMF could also allocate special new SDR’s to the severely indebted

African countries.

In this context, a new contract more generous than the Naples Terms for bilateral debt

relief is clearly called for. Partly because of the stringent conditions of Naples Terms, for instance,

Uganda’s debt service was reduced by only 2 percent. Countries like Zambia now spend thirty

times more in debt repayments than on education. In the spirit of Naples Terms, a new bilateral

debt relief scheme needs to be set up without conditionalities to provide up to 75 percent reduction

in the stock of bilateral debt of African countries.

From the perspective of the African countries, a debtors cartel might have been a strong

response earlier. But the time for such radical responses may have passed. Therefore, incremental

proposals like the ones above need to be pursued vigorously.

Social Expenditure Conditionality for Africa

The best conditionality that the bilateral and multilateral lenders can impose on the African

counties is a social expenditure conditionality. This could be a specific African version of the

global 20:20 proposal as presented in the Human Development Report 1994 and further refined in

the interagency consultations within the UN system. According to the 20:20 proposal, the

developing countries should earmark at least 20% of their national budgets and donor nations 20%

of their aid budgets for human development expenditures. These are defined to include primary

health care, basic education, rural and peri-urban water supply, essential family planning service

and nutrition programs for the most deprived groups in society.

32

If implemented in African countries between $5 and $10 billion may become available

annually for such human development priority expenditures. It can be expected that in two

decades (the goal for the world as a whole is to do this in one decade) the now heavily indebted

African countries could ensure that:

1. Everyone will gain access to basic education.

2. Everyone will gain access to primary health care facilities and to safe drinking water.

3. All children will be immunized, and most childhood diseases eliminated.

4. Maternal mortality rates will be halved

5. All willing couples will have access to family planning services, and the groundwork will be

laid for stabilizing the world’s population by 2015.

6. severe malnutrition will be eliminated, and moderate malnutrition reduced by half.

7. The worst forms of human deprivation will be eliminated through the provision of certain basic

social services. Although the proposal does not deal with many aspects of global

poverty—particularly with employment and income generation—it does contain certain

attractive features. For example, it would;

-Help slow population growth by focusing on universal female education, primary health care and

other elements of an essential human development program needed to create the underlying

conditions for declining fertility.

-Improve the prospects for global human security downstream by eliminating upstream the global

spread of many dangerous diseases. For example, AIDS cost $240 billion during the 1980s;

preventive health care would have cost only a fraction of that.

-Improve the global environment by addressing some of the worst aspects of the pollution and

poverty—polluted water, unknown diseases, galloping population growth.

-Enhance human capital and its competitiveness. Consequently poor people will be better able to

use market opportunities. This will ultimately lead to a greater demand for goods through the

multiplier effect. Growth will be affected favorably as well.

In view of the serious nature of the economic and social crisis in Africa, the compact may

have to be more than 20:20 if faster progress is to be made. A 30:30 compact will destroy the neat

ocular analogy with perfect vision, but will enable the African nations to achieve the human

development goals outlined above in half the time. Because of large initial fixed costs of the

programs and the presence of economies of scale and complementarities an extra dollar after a

certain initial amount is actually more productive than before. Therefore, increasing outlays by

33

only 50% beyond the 20:20 compact will have almost twice the effect. This is encouraging and

should prompt some serious thinking about increasing human development related expenditures

among African and international policy circles.

Finally, an Environmental Defense Fund for Africa (EDFA) needs to be set up. This could

be facilitated both by the multilateral aid agencies and the developed country donors. Local

campaigns to stop environmental deterioration can be supported through this facility as can be the

NGOs with programs for sustainable development, given the circumstances described earlier in

Chapter II.

Ultimately, the African nations themselves have the primary responsibility in meeting the

challenges described. But without coordinated efforts and aid from the advanced industrial

nations, no policy for sustainable human development can succeed in Africa.

IV

Rethinking U.S. Economic Policy Toward Africa

A New Vision.

In spite of the prevailing gloom regardin

g Africa among some circles in

Washington there are some hopeful signs. In 1994, John F. Hicks, the Assistant

Administrator of the Bureau for Africa of AID outlined in general the Clinton

administration ’s policy priorities for Africa in following terms:

52

1. to help Africans build stable, honest and democratic governments, including

stimulating popular participation and full respect for basic human rights;

34

“small ” initial disturbances resulting in large and

prolonged systemic instability.

53 In an uncertain world, it is better to insure

against the possibility of such as global catastrophe by sending timely and

35

—but it is safe to assume

that they will not be pleasant for the developed economies either.

Perhaps, the greatest threat to the world from a possible catastrophe in

Africa is to e cology of the planet as a whole. Although precise estimates are

hard to come by, ultimately deforestation and other environmental disasters in

Africa will definitely constitute to global warming, global atmospheric conditions,

and other global ecological

problems.

Helping Africa is, therefore, not merely a humanitarian concern. It is

dictated

by

a

deep

realism

in

international

economic

relations

based

on

enlightened,

long - term national interests of developed nations such as the U.S..

Need for Specificit y

36

37

’s needs

to be made an integral part of the U.S. aid policy for Africa. The recent

proposal advanced by NGO groups such as the Development Gap and Friends of

the Earth - U.S., among others, calls for an independent

agency to be created.

Furthermore, according to this proposal, this

“Agency for International

Cooperation ” will have room for a Development Assistance Board. The structure

and governance of this board should be such that NGOs based among the people

can get funding for development without political or bureaucratic interference

from above. Special emphasis must be given the role of these indigenous NGO

’s.

Cooperation among domestic and foreign NGO ’s for specific and appropriate

projects in Africa could c

onsiderably brighten the prospects for genuine

development there. A related policy issue here is the possibility of bypassing

the existing rigid hierarchy of both aid operatives and domestic bureaucracy.

To the extent indigenous traditional sectors will

maintain viable

organizational capacities NGO ’s can encourage and foster local self

- reliant

development

by

working

with

the

people

(particularly

in

the

rural

area)

directly.

38

39

40

“Rather than retreat from Africa, the United States should form an international partnership

with African states in their determined struggle against underdevelopment and to enhance

the dignity of all peoples on this troubled continent. African advancement assures our own.

By helping them to strengthen their human rights conditions we reaffirm our commitment

to these values at home.”55

The eight concrete policy initiatives outlines above are some of the most

important and immediately feasible steps that the U.S. can take. The list is

not meant to be exhaustive. It is my hope that by focusing on the most urgent

tasks, it will be possible to persuade the U.S. policymakers to move quickly in

the desired directi on. At the same time, this monograph can serve as a basis

for

further

discussion

and

refinements

of

specific

policies.

The

economic

problems

of Africa are not just African problems. They are global in their origin and

scope. They also will require glob

al cooperation for their solution. This is

the basic message of this monograph.

41

Appendix. IMF and World Bank Adjustment Approaches: Stylized Descriptions

Since both the IMF and the World Bank have been so influential in designing many aspects of the

structural adjustments in both LDCs and transitional economies, it is useful to present in a stylized way the formal

structures of their approaches. Needless to say the equations described below cannot capture all or even most of

the details of SAPs. What they can do is to bring out the formal logic of the conventional thinking which is often

implicit in the arguments and the policy advice given by these international bodies. The hope here is to generate a

rigorous discussion about the issues by clarifying the basic logical structure of the standard SAPs.

The Theoretical Basis of Adjustment Programs

Why the IMF does what it does

The theoretic basis of IMF adjustment programs rests on financial programming, the analytical

foundations of which are drawn from Polak

56

and Robichek.

57

The modeling process is referred to as financial

programming, an integration of monetary and credit elements in BOP analysis, which derives a linkage between

the domestic part of the money stock (credit) and international reserve changes. This approach begins from the

simple accounting identity showing change in the money stock as the result of changes in its domestic and

international components.

In the approach the BOP is shown as the difference between the change in money supply and that in

domestic credit. The absorption approach is adopted to include income and expenditure relationships as well as the

impact of capital movements in an open economy. In this approach the current account (CA) deficit is equal to the

difference between income (Y) and absorption (A). The current account is matched by changes in the net foreign

assets of domestic banks (

.

R) and in the net foreign indebtedness of nonbank residents (

.

FI). Hence:

CA =

.

R -

.

FI (1)

Combining the current account identity with equation (1) yields

CA +

.

FI =

.

M -

.

D (2)

where

.

M is the change in the money supply and

.

D is the change in net domestic assets of banks (credit).

This equation can be written in terms of the difference between nominal income and absorption, as

Y - A +

.

FI =

.

M -

.

D (3)

Assuming that the change in nominal money balances are independent of

.

D, the conclusion is that a ceiling for

.

D will determine the balance of payments (

.

R).

To specify where the improvements in the balance of payments will take place, the BOP is decomposed

42

into its different parts and the demand for imports added as a second behavioral relationship. The simplified

framework shows imports as a constant function of only real income.

The BOP identity is

.

R = X - IM +

.

FI (4)

where X and IM are exports and imports, respectively, in domestic currency. Based on projections of the values

for exports and capital flows, the targeted value of imports is derived as a residual of the preceding equation

IM

*

=

.

R

*

- ( X +

.

F I) (5)

where IM

*

is the targeted value of imports,

.

R

*

the targeted BOP in the program period, X and

.

FI are the

projected values of exports and capital flows, respectively.

To include elements of fiscal policy, three ex-post identities are specified. Initially, the change in net

foreign indebtedness of a country is taken as the sum of changes in the public sector (

.

FI

g

) and private sector

(

.

FI

p

) net foreign debt position:

.

FI =

.

FI

p

+

.

FI

g

(6)

Next the public and private sector credit changes are decomposed as

.

D =

.

D

g

+

.

D

p

(7)

where

.

D

g

and

.

D

p

are changes in credit to the public and private sectors, respectively.

Third, the government budget constraint is shown through deficit financing by either net borrowing from

abroad or net borrowing from domestic banks:

G - T =

.

D

g

+

.

FI

g

(8)

where G is total government expenditure and T is total revenue, with the difference representing the government

deficit.

The three equations provide the rationale for restricting government spending, specifically through

ceilings on domestic and foreign borrowing. This policy is directed toward two consequences of government

spending: fiscal deficits and crowding out.

In the financial programming framework, the exchange rate plays a role through the effects on money

demand. Depreciation of a fixed exchange rate results in a decline in real absorption by creating excess demand

for real cash balances. At the same time, by affecting the incentives to domestic supplier of exports and import

substitutes and spending on exportables and imports, it affects the composition of domestic expenditure on

43

domestic and foreign goods.

The World Bank’s Model

Unlike the Fund's concern with temporary BOP imbalances, the World Bank focuses on the real

economy and growth in the medium term. Through the Revised Minimum Standard Model (RMSM), it

emphasizes savings, capital inflows, and investment. According to Khan,

58

the RMSM posits four additional

relationships to those in the IMF model.

Assuming that an incremental capital-output ratio (ICOR) is given historically or technologically, output is

specified as a function of the level of investment:

.

y

*

=

r

-1

.

k (9)

where

.

y

*

is the output target,

r

is ICOR, and

.

k is total domestic investment.

In the model, exports are exogenously determined, although this is later relaxed, and there is a stable

relationship between GDP and imports. The savings rate is also stable and historically given, yielding a

consumption function such as

C

p

= (1 - s) (y

*

- $

T ) (10)

where C

p

is private sector consumption, s is the ratio of private savings to disposable income, and $

T is taxes.

For output determination the national income identity is written as

.

K = s(y - $

T - C

p

) + ( $

T - $

C

G

) + (Z - X) (11)

where C

G

is public sector consumption, Z is foreign sector revenues in the form of imports by the domestic

economy, and X is foreign sector spending on domestic exports. More importantly, the national income identity

may be formulated as

.

K = s(y

*

- $

T ) + ( $

T - $

C

G

) + (ay

*

- X ) (12)

which establishes a positive relationship between income and investment through the aggregate demand curve. A

rise in output increases both domestic savings according to given rate, s, and the inflow of foreign saving according

to the marginal propensity to import, a. Investment increases in respect to saving on a one-for-one basis.

The positive relationship between investment and output can also be obtained by rewriting equation (9) as

.

K = y

*

- y

-1

, (13)

44

where y

-1

is last period's real GDP. In this model, output and BOP targets can be reconciled either through control

over net capital inflows or though perfect elasticity of foreign capital. In this way change in net foreign assets

(

.

F), as a policy variable, can be chose as

.

$

F = X - ay

*

-

.

R

*

, (14)

where

.

R

*

is a BOP target. The values of

.

y

*

and

.

R

*

can be attained through C

G

, $

T , and

.

$

F , given an

exogenously derived export projection.

The World Bank model provides for exchange rate adjustment too. Including the effects of the exchange

rate on imports and exports, equation (14) can now be written as

.

$

F = -ay

*

+ (b + c) ê -

.

R

*

, (15)

where b is a parameter that measures the responsiveness of the volume of imports to the relative price of

importables, c is the coefficient of responsiveness of exports to relative prices, and e (with the assumption of

constant prices) is the real exchange rate. With three independent exogenous variables and eqations to solve three

endogenous variables, the model is fully determined now, even with a foreign exchange constraint.

Critical Voices Against Adjustment Models

The criticisms against the IMF and World Bank approaches are numerous and come from several

directions, from different strands of economists and political scientists. Therefore, we can attempt only a summary

here by concentrating on the economic and political economy components of the debate. However, even these are

impossible to present in their entirety. The structuralist challenge is particularly interesting. Structuralists draw

attention to institutional and technological factors that affect changes in the economy at any particular time. The

neo-structuralists argue that developing countries may respond to standard economic policies unexpectedly.

Therefore, a devaluation may cause output contraction, tight money may cause price rises due to higher interest

costs, inflation may become "inertial," and public investment may crowd in, instead of out, private investment. In

the long run, they observe that income distribution may condition growth and market liberalization, and unfettered

foreign capital flows may not be beneficial.

In Taylor's

59

theoretical analysis, the trade-liberalizing aspects of the IMF and World Bank models are

questioned. It is shown that export subsidies unambiguously increase capacity utilization, and with appropriate

multiplier values and intermediate import content of output, the trade balance improves as well, without unpleasant

side effects on interest rates and inflation. In the short run, liberalization can be self-defeating by liquidating wealth

and inducing recession. The long-run consequences can be counterproductive too. His general conclusion is that

"at least in the short to medium run, directed policy makes sense. Maneuvers such as quotas and subsidies (or

multiple exchange rates) and price controls, instead of changes in the exchange rate, monetary and fiscal policy,

avoid unfavourable economy-wide side-effects."

On the Left the attack is launched by Onimode.

60

His criticism evolves around the theme that the IMF

and World Bank address what he refers to as "at best subsidiary or auxiliary structures" (prices, trade, money, and

45

foreign exchange). The relevant "fundamental structures" that demand adjustment are those of the capitalist

international division of labour, of production, consumption, accumulation, technology, and dependency in the

poor countries. Hence IMF and World Bank programs operate to aggravate, rather than ameliorate, the

crisis-generating structures in Africa and other poor countries. In sum, he argues that BOP disequilibria are

inevitable in low-income countries because of the combined effects of devaluation, liberalized imports, and the

withdrawal of exchange controls.

Several aspects of programs have become controversial even by centrist standards. The most often

discussed aspect relates to the social impact of adjustment on the poor and vulnerable. This concern has pushed its

way to the forefront of the debate, since the publication by the United Nations Children's Fund of the (UNICEF)

twin volumes, Adjustment with a Human Face.

61

The volumes draw attention to the disproportionate share of the

poor and vulnerable, particularly women and children, in the adjustment burden. Since then a strong "pro-poor"

theme has developed in the literature. Publications such as Susan George's A Fate Worse than Debt have

strengthened this theme. According to the United Nations Economic Commission for Africa (ECA) the standard

models "not only ignore the human dimension, but also tend to worsen the well-being of large categories of the

population, especially the poor and vulnerable." The major cause of this is public sector budget retrenchment,

which has also strained governments' institutional capacity to the limit.

Similarly, the models have been criticized for ignoring the impact of reduced real wages on productivity

and living standards. In fact, in many low-income countries the centrality given to the BOP is itself wrong, since

the most important problem is that of falling or inadequate real incomes. Therefore, if poverty is perceived as the

main problem, cutting wages of ordinary, low-paid employees to achieve profitability and economic growth is

unacceptable.

Critics have also pointed out a problem of economic logic and deflationary bias. The logical issue has its

origins in John Stuart Mill's concept of reciprocal demand, elaborated in his Principles of Political Economy. The

idea is that the exports of one country are the imports of another; hence the deficits and debts of one are the

surpluses and credits of another country. Failure to recognize this is what creates the deflationary bias of the

standard adjustment modes. This has also clear Keynesian implications of global deflation under conditions of

reciprocal lowering of demand.

Finally, a note on devaluation, which apart from distributional issues has received the heaviest barrage of

criticism: There is a long tradition in the literature on the contractionary effects of devaluation and its failure to

improve the BOP. The rationale for devaluation is that there are excessive imports and inadequate exports. The

two shortcomings of this approach are that it may ignore the share of debt-service payments in the BOP deficit and

does not distinguish between essential imports and luxury imports. Inflation may be caused directly by higher

import costs and/or a nominal rise in food prices, unleashing demands for higher wages in the industrial sector,

which, if granted, would lead to higher industrial prices and the need for another devaluation. Even if the

inflationary pressures can be controlled, the implicit assumption that the demand and supply of tradables is elastic

has been widely questioned.

All this is not to deny the need for adjustment in the countries that need it. The real question has to do with

the type and purpose of the necessary adjustment. The criteria for ASAP discussed in the main body of the

monograph tried to address precisely these questions.

46

1

See for example, UNDP, Human Development Report, New York: Oxford University Press, 1996. For a discussion

of the African situation from the perspective of global justice, see Karamo Sonko and George W. Shepherd, Jr. (eds.),

Economic Justice in Africa: Adjustment and Sustainable Development, Westport, CT: Greenwood Press, 1994.

2

Of course, it is not being claimed that structural adjustments are not necessary. Later, in Chapter III, an alternative

structural adjustment program suitable for the particular economic and human conditions in Africa is presented. See

also, H.A. Khan, “Economic Modelling of Structural Adjustment Programs: Impact on Human Conditions,” Africa

Today, 37, No.4 (4

th

Quarter, 1990), 29-38.

3

See for example, A.K. Sen, Inequality Reexamined, Cambridge, MA: Harvard University Press, 1992, 1992; Martha

Nussbaum and A.K. Sen (eds.), The Quality of Life, Osford: Clarendon Press, 1992.

4

See Martha Nussbaum and Jonathan Glover (eds.), Women, Culture and Development, Oxford: Clarendon Press,

1995. See also, H.A. Khan, “Resources, Capability and Regional Development,” in A. Kumssa and H.A. Khan (eds.),

Transitional Economies and Regional Economic Development Strategies, Nagoya: United Nations Centre for

Regional Development, 1996. And UNECA, African Alternative Framework to Structural Adjustment: Programmes

for Socio-Economic Recovery and Transfomation, Addis Ababa: Africa House, 1989.

5

John Williamson, ed., Latin American Adjustment: How Much Has Happened. (Washington, DC: IIE, 1990).

6

John Williamson ed., The Political Economy of Policy Reform (Washington, DC: Institute for International Economics, 1994), p. 17.

7

ibid., p. 27. The debate on financial liberalization has been quite extensive. For an extensive survey see Maxwell

Fry, Money, Interest and Banking in Economic Development (Baltimore, MA; London: The Johns Hopkins

University Press, 1988), chapter 1-8. Karamo Sonko, Debt, Development and Equity in Africa (Lanham

University Press of America, 1994) and; Haider A. Khan, and Karamo Sonko, “A Multidimensional Approach to

Designing Effective Adjustment Programmes” in George Shepherd and Karamo Sonko, eds., Economic Justice in

Africa (Westport, CN: Greenwood Press, 1994); Khan and Sonko, “A Further Extension of Adjustment Models:

The Environment and Equity” in George Shepherd and Karamo Sonko, eds., Economic Justice in Africa

(Westport, CN: Greenwood Press, 1994) discuss the issues relevant to structural adjustment programs.

8

Williamson, ed., The Political Economy of Policy Reform, p. 27.

9

In Khan, “Economic Modeling of Structural Adjustment Programmes: Impact on Human Conditions,” Africa Today 37 (4: 1990): 29-38 , I

have explored the effects of a budgetary retrenchment on a developing economy. See also Erik Thorbecke et. al., Adjustment and Equity in

Indonesia (Paris: OECD, 1992), for an analysis of the impact of fiscal retrenchment.

10

Williamson, ed., The Political Economy of Policy Reform, p. 26.

11

From Africa: UN-NADAF NGO Statement, circulated online electoronically, apic@igc.apc.org., 21 September,

1996.

12

This apt term has been coined by Rene Lemarchand. See R. Lemarchand, “African Transitions to Democracy: An

Interim (and Mostly Pessimistic) Assessment,” Africa Insight, 22, NO.3 (1992), pp.178-85.

13

H.A. Khan and K. Sonko, “A Further Extension of Adjustment Models: The Environment and Equality,” in Sonko

and Shepherd, op.cit., pp.189-201.

14

Ibid., pp.197-99. See also A.S. Bhalla, Environment, Employment and Development, Geneva: International Labour

Office, 1992. Also, World Bank, Sub-Saharan Africa: From Crisis to Sustainable Growth, Washington DC, 1989.

15

Sylvain Bayalama, “Environmental Degradation, World Bank Projects, and the Right to a Clean Environment,” in

Sonko and Shepherd, op.cit., pp.63-78.

16

For a survey of the technical issues that arise in the construction of social and economic index numbers see S. Chakravarty, Ethical Social

Index Numbers (Berlin: Springer-Verlay, 1990). Various Human Development Reports including the most recent one (1995) discuss the use

of the Atkinson and other approaches to adjusting income. These reports also address other issues such as how to correct for gender bias.

17

Amartya Sen, Population Policy: Authoritarianism vs. Cooperation (London: London School of Economics, 1995); Sen, Inequality

Reexamined (Cambridge: Harvard University Press, 1992); Sen, “Welfare, Preference and Freedom” mimeographed, Harvard University

(1991); Sen, “On Indexing Primary Goods” mimeographed, Harvard University (1991); Sen, Commodities and Capabilities (Amsterdam:

North-Holland, 1985); and Sen, “The Moral Standing of Markets.” Social Philosophy and Policy 2 (1985): 1-19.

47

18

Martha Nussbaum, “Human Capabilities, Female Human Beings” in M. C. Nussbaum and J. Glover, eds., Women, Culture, and

Development (Oxford: Clarendon Press, 1995); Nussbaum, “Aristotelian Social Democracy” in R. B. Douglass, G. R. Mara and H. S.

Richardson, eds., Liberalism and the Good (New York and London: Routledge, 1990), Nussbaum, Love's Knowledge: Essays on P hilosophy

and Literature (New York and Oxford: Oxford University Press, 1990), Nussbaum, “Nature, Function, and Capability: Aristotle on Political

Distribution,” Oxford Studies in Ancient Philosophy suppl. volume (1988): 145-84; Nussbaum, “Non-Relative Virtues: An Aristotelian

Approach,” Midwest Studies in Philosophy 13(1988): 32-53.

19

Nussbaum, “Human Capabilities, Female Human Beings,” p. 361.

20

Khan, “Economic Justice in the Age of Postmodernism” (Unpublished manuscript, GSIS, University of Denver, March 1995); Khan,

““Economic Justice and Democracy” (Unpublished manuscript, GSIS, University of Denver, March 1994); and Khan, “Markets, Structural

Adjustment and Democracy,” Relatciones Internationales 45 (1993).

21

That the capabilities are social does not mean that they are arbitrary. They are to be socially determined in a manner that will allow the

individual maximum amount of autonomy. In any existing social arrangement the capability of the individual may fall short, not because of

individual decisions but because the social arrangements do not allow the maximum to be achieved. This normative dimension of objective

thought about freedom in society is, in a sense, Hegelian. See for example Hegel’s Philosophy of Right, G.W.F. Hegel (Oxford: Clarendon

Press, 1942). See also, David Levine, Needs, Rights and the Market (Boulder, CO: Lynne Rienner, 1988); and Levine Wealth and Freedom:

An Introduction to Political Economy (New York: Cambridge University Press, 1995).

22

David Crocker, “Functioning and Capability: The Foundations of Sen's and Nussbaum's Development Ethic” in Martha Nussbaum and

Jonathon Glover, eds., Women, Culture and Development (New York: Oxford University Press, 1995), p. 162.

23

Nussbaum, “Aristotelian Social Democracy,” p. 225.

24

Ibid.

25

See Sen, “The Concept of Development” in H. Chenery and T. N. Srinivasan, eds., Handbook of Development

Economics vol I (Amsterdam: North-Holland, 1988), p. 13.

26

See Nussbaum, Love's Knowledge: Essays on Philosophy and Literature, pp. 374, 378.

27

See Sen, “The Moral Standing of Markets,” p. 197.

28

Ibid.

29

See Sen, “Equality of What.” in S. M. McMurrin, ed., Tanner Lectures on Human Values i (Salt Lake City: University of Utah Press,

1980), p. 218.

30

See Sen, “Equality of What.,” p. 218; Sen, and Bernard Williams, Utilitarianism and Beyond (New York: Cambridge University Press,

1982), p. 20; Sen, “Rights and Agency,” Philosophy and Public Affairs 11 (1982): 200; Sen, “The Moral Standing of Markets,” p. 119; and

Sen, On Ethics and Economics (Oxford: Basil Blackwell, 1987), p. 64.

31

See Sen, “The Moral Standing of Markets,” p. 195-6; and Sen, On Ethics and Economics, p. 64.

32

Sen, “The Moral Standing of Markets,” p. 199; see Nussbaum, “Human Capabilities, Female Human Beings,”

p. 24.

33

See Sen and Williams, Utilitarianism and Beyond, p. 13.

34

Ibid.

35

Sen, “The Moral Standing of Markets,” p. 218; and Sen, “The Moral Standing of Markets,” p. 41.

36

See Sen, “The Moral Standing of Markets,” p. 218.

37

Nussbaum, “Human Capabilities, Female Human Beings,” p. 24.

38

Sen, “The Moral Standing of Markets,” p. 199.

39

Ibid.

40

Nussbaum, “Aristotelian Social Democracy,” p. 233.

41

Nussbaum, “Nature, Function, and Capability: Aristotle on Political Distribution,” p. 161.

42

Sen and Williams, Utilitarianism and Beyond, p. 20.

43

Sen, “The Moral Standing of Markets,” p. 199.

44

Nussbaum, “Aristotelian Social Democracy,” p. 217.

45

Sen, “The Moral Standing of Markets,” p. 200.

46

Nussbaum, “Aristotelian Social Democracy,” p. 217; see Nussbaum, The Fragility of Goodness: Luck and Ethics in Greek Tragedy and

48

Philosophy (Cambridge: Cambridge University Press, 1986), p. 69; and Nassbaum, Love's Knowledge: Essays on Philosophy and Literature.

47

Crocker, “Functioning and Capability: The Foundations of Sen's and Nussbaum's Development Ethic,” pp. 176-77.

48

See Sen, Inequality Reexamined; “Economic Justice and Democracy” (Paper presented at the Conference on

Democracy, GSIS, Denver, April 1995); Khan, “Economic Justice in the Age of Postmodernism”

49

Khan, “Economic Modeling of Structural Adjustment Programs: Impact on Human Conditions,”; Khan,

“Democracy, Markets and the New Social Movements” (Paper presented at the Conference on Democracy, GSIS,

Denver, April 1993); Khan, “Markets, Structural Adjustment and Democracy,”; Khan and Sonko, “A

Multidimensional Approach to Designing Effective Adjustment Programs”; Khan and Sonko, “A Further

Extension of Adjustment Models: The Environment and Equity”; and Khan, Haider A. and Hitoshi Sogabe,

“Macroeconomic Effects of IMF Adjustment Policies” in George Shepherd and Karamo Sonko, eds., Economic

Justice in Africa (Westport, CN: Greenwood Press, 1994).

50

In Khan and Sogabe, “Macroeconomic Effects of IMF Adjustment Policies” we have attempted a statistical

evaluation of the impacts of the IMF programs for a large number of LDCs.

51

Thus one of the recommendations for future monographs in this series could be the carrying out of such studies and

publishing the reports as monographs in this series. Alternatively, a new series focusing particularly on the effects of

SAPs could be started. Some relevant existing studies are: “Africa: Multilateral Debt,” Washington DC: Bread for the

World, Feb. 5, 1996; Sigun I. Skoly, “Structural Adjustment and Development: Human Rights—An Agenda for

Change,” Human Rights Quarterly, No.4, 1993; The Brundland Report, World Commission on Environment and

Development: Our Common Future, Oxford: Oxford University Press. For debt reduction for Africa, “Multilateral

Debt Reduction: A Proposed Framework,” a position paper of the Canadian Inter-Church Coalition for Africa, January

1996 is an important recent contribution. On debt and aid, see, Christina Katsouris and Nil K. Bentsi-Enchill, “Africa

under Pressure from Falling Aid, Rising Debt,” African Recovery, United Nations, Vol.9, No.1, June 1995. Finally,

groups such as the Development Gap and American Committee on Africa are also producing reports that are timely

and relevant.

52

George W. Shepherd, Partnership with Africa: A New American Policy, Phelps-Stokes Fund

Africa Papers, July 1996, p.20.

53

See for instance, Brian Arthur, Increasing Returns and Path Dependence in the Economy, Ann Arbor: The

University of Michigan Press, 1994. Also, H.A. Khan, The Limits of National Innovation Systems: Technology,

Development and Democracy in the Postmodern World, Aldershot, U.K.: Edward Elgar, forthcoming.

54

George W. Shepherd, op.cit., p.1. In the area of U.S.-Africa trade in particular, Robert Browne has also emphasized

the idea of a partnership. See Robert Browne, The U.S. and Africa’s Trade: Prospects for Partnership, Amsterdam:

The Trans Africa Policy Institute, 1995

55 Ibid ., p.1.

56 J. Polak, "Monetary Analysis of Income Formation and Payments Problems," IMF Staff Papers (Washington, DC, November 1957).

57

W. Robichek, “Financial Programming Exercises of the International Monetary Fund in Latin America” (Address to a Seminar of Brazilian

Professors of Economics in Rio de Janeiro, September 1967).

58

H. A. Khan, “Economic Modeling of Structural Adjustment Programmes: Impact on Human Conditions,” Af rica Today 37 (4: 1990):

29-38.

59

L. Taylor, Stabilization and Growth in Developing Countries (U.K.: Harwood Academic Publishers, 1989).

60

B. Onimode, A Political Economy of the African Crisis (London: Zed Books, 1988).

61

UNICEF (G. A. Cornia, R. Jolly and F. Stewart, eds.), Adjustment with a Human Face: Protecting the Vulnerable and Promoting Growth

(Oxford: Clarendon Press, 1987).