The average performance of the economies of SSA has worsened over the last two decades, and by the turn of the 1980s decade economic conditions in the continent assumed crisis proportions. Real GDP growth rate declined from an annual average of 3.7% in 1970-81 to only 1.4% for 1982-85. With the high and steady rate of population growth in Africa, this translated into substantial declines in the standard of living with per capita income declining at an average rate of 0.9% in 1970-81 and 2.5% in the following period 1982-85. Other concomitant aspects of Africa's economic crisis are reflected in the sharp declines in foreign sector indicators. Thus, between the above two sub-periods the average rate of growth of exports declined from 2.6% to 1.1% per annum.
The worsening export performance is closely related to the declining share of agriculture in the domestic economies of SSA and the expansion of the non-traded service sector between the two periods (Table 1.1). Similarly, the average ratio of external debt service to exports increased sharply from an average of 9.6% in 1973-81 to average 16.7% for the 1982-85 period (Table 1.2), the stock of external debt to GDP ratio also rose from 39% in 1980 to 69% in 1987. In short the story of economic performance in Africa is summed up by Oyejide (1990), "there is very little debate regarding Africa's poor economic performance and the long-term nature of the decline in living standards, particularly during the 1980s. But controversy continues to surround the issue of which factors are responsible for the crisis".
One important interpretation of the causes behind the diminished economic fortunes of SSA as described above, emphasizes the role of domestic economic policies, especially real appreciation and real overvaluation1. The evidence from SSA points to episodes of dramatic real appreciation over the seventies and the first half of the eighties. The real appreciation is clearly related to the high rate of fiscal expansion and the increased domestic absorption (negative of the resource balance) where both indicators respectively rose by 2.1 and 1.4 percentage points of GDP between the first two periods (Table 1.2). On the face of these expansive macroeconomic policies, SSA experienced a severe negative external shock, where the value of this aggregate shock - as a percentage of GDP - turned from a small but positive average of 0.2 in 1973-81 to negative ratio at -5.3 in 1982-85. The terms of trade component of this shock also reflect the same effect, with the TOT index declining from 106.3 in 1973-81 to 91.6 in 1982-85. Also external finance available to SSA dropped by more than 50% over the two periods. Therefore, as the real exchange rate (RER) is appreciated, the major fundamentals call for an equilibrium depreciation of the RER. Another evidence in support of this view is the tremendous expansion of parallel markets in SSA and the rising black market exchange rate premium which is directly related to real overvaluation and economic distortions in general (Table 1.2).
Table 1.1 Economic Structure and Performance in Sub-Saharan Africa
1970-81 |
1982-85 |
1986-89 | |
Real growth rates GDP Exports |
3.7 3.6 |
1.4 1.1 |
2.0 3.3 |
Share in GDP Agriculture Manufacturing Services |
39.3 20.1 37.9 |
36.7 22.0 41.3 |
36.3 21.7 41.2 |
Share in labor force Agriculture Manufacturing Service |
78.5 7.8 13.7 |
-- -- -- |
-- -- -- |
|
Rural population (% of total population) |
79.6 |
74.4 |
71.2 |
Source: World Bank Data Bank (BESD)
Another possible explanation of Africa's economic performance emphasizes the exogeneity of the determinants of economic growth in Africa, especially the effect due to the observed sustained worsening TOT for SSA and the declining external finance available to it. Regardless of the extent of domestic policy accommodation to external shocks, "the results of these unfavorable TOT have been increased indebtedness which, in its turn, has given birth to crippling debt repayments that are starving all sectors of the economy of essential imported inputs. Faced with limited resources, African governments have reduced investments in infrastructure and in most cases even existing infrastructure is in disrepair for lack of necessary inputs for maintenance. This further contributes to the structural rigidities that blunt supply responsiveness of African agriculture" (Mkandawire 1989). Also Ndulu (1991) found strong evidence in support of the exogeneity of growth thesis in the context of SSA2.
In 1979 the World Bank introduced the concept of Structural Adjustment Lending (SAL) and the closely related Sectoral Adjustment Lending (SECAL) in order to help countries experiencing difficulties in adapting to external shocks, to phase out the initial cost of the stabilization part of adjustment while implementing appropriate policy and institutional reforms aimed at making the economy more flexible and strengthening its capacity for adjusting relatively more efficiently and easily to future shocks (World Bank 1985). Given the declining economic fortunes of SSA, by the turn of the 1980s decade many African countries undertook economic reforms, almost exclusively assisted by multilateral and bilateral donors, including the Bank structural adjustment programs (SAPs)3. The SALs and SECALs policy prescriptions strongly emphasize the adoption of outward-oriented development strategy, especially export expansion as the primary channel for eliminating the balance of payments and debt problems. Considerable and recurrent nominal devaluations, macroeconomic retrenchment, and foreign trade and institutional reforms were the main vehicles for eliminating real overvaluation and creating a structure of incentives consistent with this strategy.
The controversy regarding the relative influences of the domestic policies in the economic crisis of SSA, has been mirrored in the debate regarding the effectiveness of the Bank-supported structural adjustment reforms. In section 2 of this paper we will analyze in some details the initial conditions - in terms of economic performance and policy stance - that prevailed in the period 1970-80. This is the period that preceded the onset of the economic crisis in the first half of the 1980s. This second period has been the decision period concerning Bank-assisted structural adjustment programs by many of the SSA member countries of the Bank. The main objective of the analysis of these two periods will be to address the issues regarding the causes of the crisis, as well as the determinants of the decision to participate in the reform program.
In section 3 we will compare economic performance before and after the implementation of the program, where the following five indicators are considere rate of growth of GDP, ratio of saving to GDP, ratio of investment to GDP, ratio of export to GDP, and domestic inflation. Following Corbo and Rojas (1991), we compare the value of the performance indicator in 1985-894 - a period after adjustment was initiated - with performance in 1981-84 - the decision period, for three groups of countries: Early Intensive Adjustment Lending (EIAL), countries that have received two or more SALs or three or more adjustment loans (SALs or SECALs), starting in 1985 or before; other adjustment lending (OAL) countries that started a program after 1985 or received fewer than two SALs or fewer than three adjustment loans in 1985 or before; and no adjustment lending (NAL), countries that have received non-adjustment loans.5 In this paper we also introduce a further disaggregation where we compare performance between the above comparators within SSA and for the entire of the low-income countries (LICs).6
It is important to emphasize that, while the before and after analysis of economic performance should be useful in helping us understand what actually happened after implementation of the reform; it is not suitable, however, for addressing the ultimate question of whether or not the Bank-assisted reform programs have had significant effect on economic performance7. Section 4 concludes.
Table 1.2 Selected Macroeconomic Indicators for Sub-Saharan Africa
Indicator |
1973-81 |
1982-85 |
1986-89 |
Investment to GDP ratio Domestic Savings to GDP ratio Resource Balance to GDP ratio Imports to GDP ratio Debt Service to Exports ratio BEER (1980 = 100) 1/ Terms of Trade Index Rate of change of CPI (inflation) Black market exchange rate premium (%) 2/ Fiscal Deficit to GDP ratio External Shock 3/ External Financing (net flows in 1980 US$ mn) Total 4/ Public Private |
21.5 13.0 -8.3 37.2 9.6 95.5 106.3 16.5 128.9 5.3 0.1 7830 (29%) 7136 (28%) 694 (55%) |
18.7 8.8 -9.7 37.0 18.4 113.5 91.6 17.7 221.9 7.4 -5.3 3839 (-28%) 3357 (-30%) 482 (-13%) |
17.1 9.1 -8.0 34.5 26.4 89.4 80.8 20.5 90.9 7.8 -2.2 4635 (25%) 4272 (31%) 363 (.03%) |
Note:
1/ Index of the period average exchange rate of the currency to a weighted geometric average of exchange rates for the currencies of selected partner countries and adjusted for relative price movements in national price of the home country and its partners. An increase in the index reflects an appreciation.
2/ Includes only Ethiopia, Ghana, Kenya, Malawi, Sudan, Tanzania, Zaire and Zambia.
3/ The total effect of external shocks as % of GDP is computed as the sum of the real interest rate effect and the terms of trade effect. The interest rate effect is calculated as - (r-rbase)* (debt.GDP)beg, where r is the real interest rate computed as (i-dp/p)(1+dp/p); rbase is the average real interest rate of base period; it is the ratio of interest payments to total debt; interest payments are calculated by adding public interest payments to private interest payments; private interest payments are proxied by multiplying private debt by L(L equals three-month annualized LIBOR plus one percent); the private debt is estimated by subtracting public and publicly guaranteed debt from total debt; dp/p is "world" inflation (proxied by the percentage change of the GNP deflator of the US), and (debt/GDP)beg is the ratio of debt to GDP of the year preceding the beginning of the end period. Debt data correspond to total disbursed guaranteed and non-guaranteed debt. The effect of terms of trade is computed as [((PX/PXbase)-1)*(X/GDP)beg]-[((PM/PMbase)-1)*(M/GDP)beg], where PX and PM are the average export and import price indices deflated by US GNP deflator, respectively; PXbase and PMbase are the average price indices of the base period; X and M are exports of GNFS and imports of GNFS respectively; and (X/GDP)beg and (M/GDP)beg are ratios of X and M to GDP respectively at the year preceding the beginning of the end period. All the variables are denominated in current US dollars.
4/ The periods used are 1970-1980, 1983-1985 and 1986-1989 respectively. The figures in parentheses refer to average annual growth rates.
Source: World Bank (BESD),OECD 1990 Report, Pick's Currency Yearbooks.
In this section we will provide a preliminary analysis of the possible determinants of the demand for Bank-assisted adjustment. Here we will review initial conditions in terms of policy stance and economic performance during the 1970s for the three groups of comparators (EIAL, OAL, NAL), from SSA countries, where the above three groups were selected according to the criteria explained in the introduction to this paper.8
The main objective of the analysis of this sub-section is to examine whether or not there exits a systematic association (and perhaps causation) between the initial conditions in the 1970s and the response of the economies of the different comparators to the massive adverse exogenous shocks of the late 1970s and early 1980s; and hence between the former and the demand for, and implementation of, Bank-assisted economic reform on the part of the countries with the most unsustainable initial conditions.
Table 2.1 provides a summary of economic conditions in the 1970s for the three groups of comparators. As we stated above, without loss of generality, we will confine ourselves for the remaining of this section to the analysis of comparisons within SSA. It is clear that EIAL and OAL have pursued more expansive macroeconomic policies than their NAL counterparts, with the fiscal deficit to GDP ratio averaging 6.6%, 3.6%, and 2.4%, respectively. Not surprisingly the rate of domestic inflation averaged 14.9% and 14.8% respectively for the first two groups, compared to 10.9% for NAL countries. Also the first two groups have been less conservative compared to the last one in terms of external debt policies. The stock of external debt as a ratio of GDP averaged 33.1% for EIAL, and 26.3% for OAL compared to 23.5% for NAL. The debt service to export ratio on the other hand, averaged 7.7% and 5.5% for the first and second groups and only 3.8% for the NAL countries.
The external debt story is reflected on the comparators' performances in terms of their resource balances. Over the period under consideration, domestic absorption ratio to GDP (the negative of the resource balance ratio) for the three groups averaged 10.6%, 13.6%, and 10.1%, respectively. Also over this initial 1970s period, the above "would be" adjusting two groups of countries did not adopt more export-oriented policies or achieve better export performance compared to the other group. While the real exchange rate index for the three groups ranged between 93 and 98, the export to GDP ratio averaged 30.2% for EIAL and NAL compared to only 21.0% for OAL. These comparisons provide a case against the relatively more expansive external debt policies adopted by the EIAL and OAL in the period prior to reform.
Perhaps the most significant aspect of the initial conditions that set NAL countries from the other two groups is the record of growth and the implied productivity of investment. While the NAL countries managed to achieve an annual average rate of growth of 6.0% over the 1970s decade, the EIAL and OAL grew by only 3.7% and 3.2%, respectively. There is no significant difference among the three groups, however, in terms of aggregate investment expenditure; with investment to GDP ratio averaging 24.7% in EIAL, 20.5% in OAL, and 21.1% in NAL. Clearly the EIAL and OAL were substantially outperformed by NAL countries in terms of real economic growth despite the relatively comparable investment ratios across the three groups. The EIAL and NAL countries were relatively similar regarding aggregate domestic saving, and both of them have been more successful than OAL on this score with the average saving ratio equal to 16.1% and 12.8% for the first two groups compared to only 6.4% for OAL countries.
The above analysis suggests that EIAL and OAL countries could have suffered from rather low investment productivity prior to reform compared to the NAL group of countries. It has been argued that the rather sluggish growth in SSA despite colossal investment, may be attributed to low level of capacity utilization as opposed to capacity growth, driven by investment. Given the imperfect substitutability between imported intermediate goods and domestically produced goods in most of the economies of SSA, the level of imports could be a reasonable approximate measure for capacity utilization in SSA (Ndulu 1991). According to Table 2.2 this justification may be a valid explanation for the case of OAL with an average import to GDP ratio at 34.7% during the 1970s, but it cannot explain the low growth performance in the EIAL countries compared to its NAL counterparts with the average import ratio at 40.8% for the first group and sufficiently close to 40.3% for the second.
The above analysis shows that the group of SSA countries that undertook the Bank-assisted adjustment have in fact entered the 1980s decade with relatively weaker economies. These countries did not fare well compared to the NAL countries in terms of: (i) actual growth performance as well as the potential for higher growth in the future; (ii) sustainability of external finance and external debt strategy; and (iii) the ability to control excess aggregate demand and achieve internal balance. In light of these findings, it is natural that the massive exogenous shocks that dominated the late 1970s and the first half of the 1980s, have had a much more devastating impact on the economies of the EIAL and OAL countries of SSA than those of the NAL countries.
Table 2.3 shows the magnitudes of the terms of trade, foreign interest rate, and total external shocks in: 1981-84 compared to 1970-80, 1985-89 compared to 1970-80, and 1985-89 compared to 1981-84. Focusing our attention on the first comparison for the purpose of this discussion, we note that EIAL and NAL receive similar and much bigger negative external shocks compared to the OAL group. The magnitude of the aggregate shock relative to GDP was -15.4% and -16.4% for first two groups, respectively; this is almost twice the total negative shock sustained by the OAL countries. For all of the three groups the collapse of the terms of trade for SSA has been the factor with the most devastating effect; it accounted for 88% of the total shock for the case of EIAL countries, 83% for OAL, and 93% for the NAL group.
Economic performance for all of the three groups is provided in Table 2.4. The EIAL countries of SSA experienced a dramatic decline in real GDP in 1981-84 where it grew by only 0.1% per year compared to an average of 3.7% achieved for the previous period. OAL basically maintained its previous period growth level of 3.2% per annum. The rate of growth in the NAL countries, on the other hand, declined to 4.5% per year over the first half of the 1980s; this is lower than the previous period average but still high compared to the other two groups. Both of EIAL and NAL experienced reductions in the second period by 26% and 14%, respectively, in their investment ratio; and by 39% and 17% in their saving ratio. The OAL countries of SSA, however, managed to achieve a slight increase in their investment ratio by about 5% in the same period, while their saving ratio declined by only 8%.
Furthermore, the NAL countries had a clear edge over the other two comparators over the second period in terms of domestic inflation and export performance. The rate of domestic inflation declined for NAL from an annual average of 10.9% in the first period to a single digit average at 8.3%, while the export ratio increased from 30.2% to 32.9%. The reverse happened for the EIAL and OAL countries. Between the two periods, inflation increased from an annual average of 14.9% to 21.0% for EIAL and from 14.8% to 24.5% for OAL. Also exports as a ratio to GDP, declined from 30.2% to 27.7% for the first group; and from 21.0% to 19.6% for the second.
Despite the similarity in terms of the external shocks experienced by EIAL and NAL countries of SSA, economic performance in the last group has been uniformly superior compared to the first. Also despite receiving twice as much negative external shock compared to OAL countries, the NAL group has fared better especially in terms of domestic inflation and export performance. An interesting question to consider is whether this happened in spite of important reform-oriented policies on the part of EIAL and OAL countries or whether the policy stance taken by these countries in fact was not significantly changed from those of the 1970s? Table 2.2 provides a summary of the evaluation of policy stance by the three groups of countries over the 1970-89 period.
According to the above table, EIAL countries of SSA have actually appreciated quite considerably over 1981-82 and 1983-84, where the real exchange rate index increased from 93.8 in 1970-80 to 120.3 and 126.3, respectively. This leaves EIAL to be more appreciated than NAL countries which experienced a rise in the real exchange rate from 98.0 in 1970-80 to 106.7 and 117.2 in the two following periods. Given the much weaker initial conditions (in 1970-80) for the EIAL countries, and the change in the fundamentals as reflected by the sizable adverse exogenous shocks that impacted these countries, it is clear that these EIAL countries might have experienced considerable overvaluation over the 1981-84 period. Therefore, the observed decline in exports from EIAL countries over this period is consistent with the real exchange rate policy adopted by these countries over the period. This analysis also applies to the decline of OAL exports even though real appreciation is much smaller in this group, where the real exchange rate appreciated by only 16% between 1970-80 and 1983-84.
In terms of fiscal policy 1981-82 has been a period of continued expansive macroeconomic policy on the part of all groups. Compared to 1970-80, the fiscal deficit to GDP ratio increased by 62% in EIAL, 89% in OAL, and more than 200% in NAL. The fiscal expansion continues over the following period for OAL and NAL; where between 1981-82 and 1983-84, the deficit ratio increased by 10% for OAL and 48% for NAL. The EIAL countries on the other hand managed to reduce their fiscal deficit by an average of 32% between the two periods; this is still, however, higher than the 6.6% ratio registered for 1970-80.
Even though deficits in all of the three groups of countries might not have been sufficiently brought under control over the 1981-84 period, it appears that aggregate demand has been steadily retrenching in EIAL and NAL. The domestic absorption ratio for EIAL countries decreased from 10.6% in 1970-80 to 8.4% in 1981-82, and to 3.5% in 1983-84. For the NAL the ratio decreased from 10.1% in 1970-80 to 8.6, and it turned negative if very small at -0.2% in 1983-84. Aggregate demand policy in the OAL countries, however, has been quite expansive over the 1981-84 period where the absorption ratio deteriorated from 13.6% in 1970-80 to an average of 18.0% for 1981-84 period. The reduction of aggregate demand in both of EIAL and NAL countries has been partly achieved by import compression, where between 1970-80 and 1981-84, the import ratio declined by 16% for the first group and by 8% for the second. The import ratio in OAL on the other hand increased by 8% over the two periods, reflecting the continued expansion in aggregate demand in these countries.
We emerge from the above discussion with the following broad conclusions:
(i) The adverse exogenous shocks that impacted most of LDCs, and especially those of SSA, over the first half of 1980s, have certainly been the trigger that pushed the economies of EIAL and OAL countries of SSA to the brink of crisis and to the subsequent adoption of Bank-assisted type reforms.
(ii) The exogenous shocks by themselves, however, do not explain either of the above two developments. The interaction between the shocks and the initial conditions that prevailed in the 1970s is key to understanding why these countries embraced reform.
(iii) Except for a belated effort by EIAL countries at controlling fiscal expansion, others continued to produce large fiscal deficits during this first stage of adjustment. After 1983, however, as external finance became increasingly difficult,9 both of EIAL and NAL countries made considerable efforts at reducing aggregate demand, mainly though import compression.
(iv) Over this period the adjusting countries of SSA (EIAL and OAL) could not distinguish themselves form the NAL countries in terms of real depreciation, while the EIAL and OAL suffered from a dramatic rise in inflation, NAL managed to reduce its inflation to single digits.
Table 2.1: Initial Conditions (period averages, 1970-1980)
|
External debt as % of GDP |
Debt service as % of exports |
Real effective exch. rate |
Fiscal deficit as % GDP |
Resource balances as % of GDP |
Annual avg. rate of inflation |
Real GDP growth |
Domestic saving as % of GDP |
Invest- ment as % of GDP |
Export as % of GDP |
EIAL LIC SSA |
46.5 33.1 |
8.7 7.7 |
97.9 93.8 |
9.0 6.6 |
-5.9 -10.6 |
13.5 14.9 |
4.0 3.7 |
16.9 16.1 |
22.8 24.7 |
29.1 30.2 |
OAL LIC SSA |
39.7 26.3 |
6.2 5.5 |
98.7 93.1 |
9.1 3.6 |
-10.2 -13.6 |
13.7 14.8 |
3.2 3.2 |
8.1 6.4 |
18.3 20.5 |
18.0 21.0 |
NAL LIC SSA |
23.8 23.5 |
6.7 3.8 |
97.5 98.0 |
4.6 2.4 |
-7.8 -10.1 |
10.5 10.9 |
4.1 6.0 |
9.7 12.8 |
17.5 21.1 |
19.0 30.2 |
Table 2.2: Selected Indicators of Policy Stance
|
Real effective exchange rate |
Ratio of fiscal deficit to GDP | |||||||
1970-80 |
1981-82 |
1983-84 |
1985-86 |
1970-80 |
1981-82 |
1983-84 |
1985-89 | |
EIAL LIC SSA |
97.9 93.8 |
116.5 120.3 |
111.5 126.3 |
83.5 88.5 |
9.0 6.6 |
9.8 10.7 |
7.4 7.3 |
5.7 5.8 |
OAL LIC SSA |
98.7 9.31 |
104.3 106.8 |
111.7 108.8 |
81.2 94.4 |
9.1 3.6 |
8.8 6.8 |
9.8 7.5 |
8.2 9.0 |
NAL LIC SSA |
97.5 98.0 |
105.6 106.7 |
114.5 117.2 |
106.4 123.7 |
4.6 2.4 |
7.7 7.5 |
8.5 11.1 |
7.7 8.2 |
Table 2.3: External Shocks
1981-84 compared to 1970-80 |
1985-89 compared to 1970-80 |
1985-89 compared to 1981-84 | |||||||
Terms of Trade |
Real Int. Rate |
Total Shock |
Terms of Trade |
Real Int. Rate |
Total Shock |
Terms of Trade |
Real Int. Rate |
Total Shock | |
EIAL LIC SSA |
-10.6 -13.6 |
-2.0 -1.8 |
-12.6 -15.4 |
-14.0 -13.4 |
-3.2 -3.4 |
-17.2 -16.8 |
1.6 1.7 |
-0.5 -0.6 |
1.1 1.1 |
OAL LIC SSA |
-8.6 -6.9 |
-1.6 -1.4 |
-10.2 -8.3 |
-9.7 -9.8 |
-3.6 -3.2 |
-13.3 -13.0 |
-1.7 -2.5 |
-0.8 -0.8 |
-2.5 -3.3 |
NAL LIC SSA |
-18.7 -15.3 |
-0.9 -1.1 |
-19.6 -16.4 |
-9.5 -8.5 |
-2.0 -2.3 |
-11.5 -10.8 |
3.1 6.7 |
-0.6 -0.7 |
2.5 6.0 |
Notes: The total effect of external shocks as % of GDP is computed as the sum of real interest rate effect and the terms of trade effect. The interest rate effect is calculated as - (r-rbase)* (debt/GDP)beg, where r is the real interest rate computed as (i-dp/p)/(1+dp/p); rbase is the average real interest rate of the base period; it is the ratio of interest payments to total debt; interest payments are calculated by adding public interest payments to private interest payments; private interest payments are proxied by multiplying private debt by L (L equals three-months annualized LIBOR plus one percent); the private debt is estimated by subtracting public and publicly guaranteed debt from total debt; dp/p is "world" inflation (proxied by the percentage change of the GNP deflator of the US), and (debt/GDP)beg is the ratio of debt to GDP of the year preceding the beginning of the end period. Debt data correspond to total disbursed guaranteed and non-guaranteed debt. The effect of terms of trade is computed as (PX/Pxbase)-1)*(X/GDP)beg and (M/GDP)beg are the ratios of X and M to GDP respectively of the year preceding the beginning of the end period. All the variables are denominated in current US dollars.
Table 2.4: Country Performances
Real GDP Growth |
Investment to GDP |
Domestic Saving to GDP | |||||||||
1970-80 |
1981-84 |
1985-89 |
1970-80 |
1981-84 |
1985-89 |
1970-80 |
1981-84 |
1985-89 | |||
EIAL
LIC SSA |
4.0 3.7 |
0.1 0.1 |
3.7 3.7 |
22.8 24.7 |
18.4 18.4 |
16.2 16.9 |
16.9 16.1 |
11.8 9.9 |
10.2 11.0 | ||
OAL LIC SSA |
3.2 3.2 |
2.1 3.1 |
3.2 3.0 |
18.3 20.5 |
19.3 21.5 |
19.7 18.7 |
8.1 6.4 |
3.3 5.9 |
7.7 5.3 | ||
NAL LIC SSA |
4.1 6.0 |
3.1 4.5 |
2.2 2.3 |
17.5 21.1 |
19.1 18.2 |
17.7 17.3 |
9.7 12.8 |
6.0 10.6 |
10.2 15.0 | ||
Export to GDP |
Export Shares |
Inflation | |||||||||
1970-80 |
1981-84 |
1985-89 |
1970-80 |
1981-84 |
1985-89 |
1970-80 |
1981-84 |
1985-89 | |||
EIAL LIC SSA |
29.1 30.2 |
27.3 27.7 |
28.2 29.6 |
3.4 3.5 |
3.2 4.0 |
" " |
13.5 14.9 |
51.6 21.0 |
170.4 15.0 | ||
OAL LIC SSA |
18.0 21.0 |
19.4 19.6 |
19.2 18.5 |
0.8 0.8 |
2.3 0.7 |
" " |
13.7 14.8 |
22.6 24.5 |
23.5 24.6 | ||
NAL LIC SSA |
19.0 30.2 |
18.1 32.9 |
23.0 30.3 |
2.2 0.9 |
2.4 0.7 |
" " |
10.5 10.9 |
7.7 8.3 |
6.7 5.0 | ||
In this section we conduct a simple before and after comparisons of economic performances for each of the three groups of countries. As we stated in the introduction to this paper, the before and after approach gives a picture of what has actually happened after the implementation of the program; it does not however, answer the question regarding the effectiveness of programs. The main drawback of this approach is that it implicitly makes the implausible assumption of "other things equal". This is a nontrivial point because, for example, it is not clear whether the change in output growth after implementing the program can be attributed to the program or to the terms of trade or interest rate shocks. Therefore, as the title of this paper suggests, the analysis of this section should be considered as merely indicative.
To compare the performance of EIAL, OAL and NAL countries before and after implementation of reforms, I analyzed five indicators of economic performance - real GDP growth, domestic investment to GDP ratio, saving GDP ratio, export to GDP ratio, and domestic inflation - in the three periods, 1970-80(first), 1981-84 (second), and 1985-89 (third).
Table 2.4 shows that real GDP growth rose significantly for EIAL countries from an annual average of 0.1% in the second to 3.7% in the third, which re-established the average set for the first period. OAL countries virtually maintained their pre-program performance, where real GDP growth declined by 0.1% in the third compared to the second and by 0.2% compared to the first. The NAL countries on the other hand, experienced continued economic decline where average annual real GDP growth came down from a high of 6% in the first period to 4.5% in the second and only 2.3% in the third.
The investment ratio declined steadily for all countries where between period one and three it came down by 32% for EIAL, by 9% for OAL, and by 18% for NAL countries. The saving ratio also declined by 32% and 17% for EIAL and OAL respectively, between the two periods; the NAL countries on the other hand, increased their saving ratio by 17% between the same periods.
Compared to period two, EIAL countries managed to improve their export performance by almost 2 percentage points of GDP and came close to the 1970-80 average ratio of 30.2%. For the other two groups, the deterioration in export performance, however, could not be arrested; between the last two periods, the export ratio declined by 1.1 and 2.6 percentage points of GDP for OAL and NAL, respectively.
Finally, with respect to domestic inflation, NAL countries significantly outperform both of the EIAL and OAL countries in periods two and three; the EIAL countries, however, reduced their price inflation in the third period to levels comparable to the first period, while OAL countries' inflation did not improve between the last two periods.
In the previous analysis we discussed the magnitudes of the external shocks for each of the three groups between periods one and two. Compared to period one, all three groups received negative shocks in period three, albeit to a lesser extent than the shock of the early 1980s for EIAL and NAL countries. This implies that external conditions have been conductive to improved economic performance over the third period in these two groups of countries. Between the last two period terms of trade improved by 1.7 and staggering 6.7 percentage points of GDP in EIAL and NAL countries, respectively. These terms of trade improvements were more than enough to account for the still rising cost of external borrowing which increased by 0.6 and 0.7 percentage points of GDP, respectively, for the above two groups. The terms of trade for OAL countries on the other hand, worsened by 2.5 percentage points of GDP to add to a 0.8 percentage point foreign interest cost for these countries.
In the third period the EIAL countries clearly distinguished themselves from others in SSA in terms of fiscal policy and real depreciation. In comparison to period two, the average annual real exchange rate in period three is 30% depreciated in EIAL countries, compared to only 13% for OAL countries and a 5% appreciation for NAL countries. NAL countries also cut down on their fiscal deficit ratio in period three by 3.2 and 0.8 percentage points of GDP relative to periods two and one respectively; compared to an increase of 1.8 and 5.4 percentage points for OAL. The fiscal deficit ratio in NAL countries was still almost 6 percentage points of GDP higher in period three compared to the first, even though it came down by about 1.2 percentage points of GDP between the last two periods.
To recapitulate, the following broad conclusions can be state
(i) The story so far is consistent with the argument that the early phase of the reform program (period two) which tends to be dominated by stabilization, is not likely to restore growth for EIAL and OAL countries of SSA. Economic growth, however, has been restored in EIAL countries after enough time has elapsed (period three), and after the reforming economies have adjusted to the costs of the initial stabilization phase. As we explained above the present analysis does not answer the question regarding whether or not this can be attributed to the program effect.
(ii) In addition to their relative success at resuming growth, EIAL countries also improved their export performance while exports from OAL and NAL countries experienced positive exogenous shocks of about the same magnitudes.
(iv) The steady decline in investment as a ratio to GDP in all countries is explained by the less than proportionate rise in private investment, as public investment declined as part of the cut down in public expenditure necessitated by reduced external finance for NAL and to some extent OAL countries, or by program conditionality for the case of EIAL countries.
(v) The failure of private investment to be forthcoming could be attributed to at least two reasons. It may be because on aggregate, public investment in SSA actually crowded in rather than crowded out private investment, or because of credibility problems due to doubts on the part of the private sector regarding the adequacy and sustainability of reform (EIAL and OAL) or the prevailing policies (NAL).
(vi) The increase in the import ratio in EIAL in the third period and the decline in the other two groups, is consistent with a relatively less binding external constraint for EIAL as reflected by the resource balance indicators.
(vii) The improved growth performance in EIAL countries despite the decline in aggregate investment, could be explained by the enhanced capacity utilization (via increased imports) and investment efficiency achieved by these countries. The reduction of investment in this case could have a more significant effect in terms of allowing for higher private consumption, which should enhance the chances for sustainability of the reform.
(viii) Even though our analysis supports the concern regarding the rising inflation in the adjusting countries of SSA (Chhibber 1991), it nevertheless shows that countries that undertook deep reforms and stayed with it (EIAL), were able to reduce their inflation to the pre-shock levels after the steep rise associated with the initial cost of the stabilization part of the reform.10
(ix) Finally and as expected, the indicators of political stability and political pluralism of Table 3.1 show the EIAL countries to be more politically stable on average compared to OAL countries both in SSA and in LICs in general. This finding supports the view that reforms are successful, when the programs are owned, actively explained and campaigned for by governments that are politically stable (eg. Corbo and Fisher 1991).11
Table 3.1: Index of Political Pluralism
1971-80 |
1981-84 |
1985-86 | |
EIAL LIC SSA |
5.1 5.2 |
5.1 5.0 |
5.1 5.4 |
OAL LIC SSA |
5.7 6.0 |
5.7 5.9 |
6.0 6.2 |
NAL LIC SSA |
5.1 5.4 |
5.4 5.6 |
5.3 5.6 |
Notes: The index is a simple average of two indices on political rights and civil liberties as reported in Gastil (1987). The political rights index measures the extent of a fully competitive electoral process. The civil liberties index measures the extent of freedom of expression of rational political opinion. In each scale a rating of (1) is the most free and (7) the least free.
The main conclusion of the preliminary analysis of this paper regarding the causes of the economic crisis that swept sub-Saharan Africa over the 1980s, is that the adverse exogenous shocks that impacted the continent - and other developing countries - over the first half of the 1980s, have certainly been the trigger that pushed these economies to the brink of crisis and to the subsequent adoption of the Bank-assisted type reforms; the exogenous shocks, however, do not by themselves, explain either the economic decline or the adoption of reform in sub-Saharan Africa. Our analysis shows that the group of sub-Saharan African countries that undertook the Bank-supported adjustment have in fact entered the 1980s decade with relatively weaker economies; hence, it is natural, therefore, that the exogenous shocks have had a much more devastating impact on the economies of the EIAL and OAL countries of SSA than their NAL counterparts. The interaction between the external shocks and the initial conditions that prevailed in the 1970s is key to understanding why both of the two developments happened for certain countries and not others.
A related question that was not addressed in this paper is the effectiveness of Bank-supported reform programs in improving economic performance in the adjusting countries of sub-Saharan Africa relative to the others. While the before and after approach of this paper gives a picture of what has actually happened after the implementation of the program, it does not, however, answer the question regarding the effectiveness of programs. To address this question satisfactorily, the marginal contribution of the program must be estimated for given initial conditions, exogenous shocks, and the counterfactual policy stance that would have prevailed in the absence of the program. This requires a methodology that allows for endogenizing the participation decision itself (see Elbadawi 1992).
1. A frequently cited analysis of the economic crisis of SSA representing this tradition is the World Bank's Berg Report (World Bank, 1981).
2. The official African view at the time also emphasized the role of external factors such as world recession, falling commodity price, rising interest rates and debt burden, as well as drought, as the major factors responsible for Africa's economic crisis (Lagos Plan of Action, 1980, OAU).
3. By FY 1988, the share of SALs and the broadly similar Sectoral Adjustment Loans (SECALs) in Bank lending was almost 25%. Between 1979 and 1987, some 25 SSA countries received World Bank adjustment loans almost half of total SAL and SECAL lending (Oyejide, 1990, Table 2 and Nooter and Stacy, 1990). Also Deng (1988), among others, contains a review of adjustment experiences in Africa in the 1980s.
4. 1985-89 or 1986-89 is argued to be the appropriate period to assess the effect of structural adjustment programs on economic performance. Examination of performance indicators one or two years after the initiation of an adjustment effort reveals little about the effectiveness of an adjustment program, since the first phase of reform will be dominated by the stabilization effort needed for establishing a credible macroeconomic environment, before structural reforms to improve resource allocation and restore growth can be started (see Corbo and Rojas 1991).
5. At the outset we hasten to point out that while this classification process is based on rather objective criteria and therefore avoids subjective judgment, it does not, however, account for actual implementation of the programs. Strictly speaking, therefore, the above classification allows for testing the effectiveness of Bank-assisted adjustment lending rather than testing the effectiveness of the program themselves,. To be able to do this the current classification should be augmented with a somewhat 'subjective' but informed criterion specifying the degree of program implementation. While this should be an important future extension to this research (Jones 1992), in this study, however, we will assume that the present 'objective' classification criteria are adequate for 'approximately' assessing the effectiveness of the adjustment programs.
6. LICs are normally defined to be the group eligible for the World Bank IDA lending. In addition to these countries, we include six SSA middle income countries: Botswana, Cameroon, Congo, Cote d'Ivoire, Mauritius and Zimbabwe to the LICs group for the purpose of the analysis of this paper.
7. Evaluating performance in adjusting countries requires measuring the marginal contribution of adjustment programs while controlling for other factors that affect performance; as well as explicitly taking account of the potential endogeneity of the decision to participate in an adjustment program, since the same non-program factors that influence performance in the pre-program period are likely to influence the participation decision (see Elbadawi 1992).
8. The tables actually contain the same comparison for the low income countries (LIC) as well. To make the comparisons more focused, we confine the analysis to the within SSA comparisons; but all the conclusions carry over to the case of LICs.
9. See Table 2.2 of the previous section.
10. The fact that OAL countries of SSA received a large negative external shock in the third period compared to a positive shock for the EIAL group, may account for this difference.
11. Actually the evidence of Table 3.1 has not been discussed above; however, this conclusion is fairly straightforward to obtain from the table.
12. Internal Shock was constructed by regressing cereal yield on a time trend and multiplying the excess of actual over predicted yield by the share of agriculture in GDP.
13. The index is a simple average of two indices of political rights and civil liberties as reported in Gastil (1987). The political rights index measures the extent of a fully competitive electoral process. The civil liberties index measures the extent of freedom of expression of rational political opinion. In each scale a rating of (1) is the most free and (7) the least free.
Chhibber, Ajay (1991). Africa's Rising Inflation: Causes, Consequences, and Cures. PRE Working Papers WPS 577. The World Bank.
Corbo, Vittorio and Rojas, Patricio (1991). Country Performance and Effectiveness of World Bank-supported Adjustment Programs. PRE Working Paper Series No. 623, The World Bank, March.
Corbo, Vittorio and Stanley Fischer (1991). Adjustment Programs and Bank Support: Rationale and Main Results. PRE Working Papers Series No. 582, The World Bank, January.
Deng, Lual A. (1988). Economic Recovery Programs: An Overview of the Adjustment Experiences in Africa in the 1980s. Memo, African Development Bank, Abidjan.
Elbadawi, I. (1992). World Bank Adjustment Lending and Economic Performance in sub-Saharan Africa in the 1980s: Comparisons of Early Adjusters, Late Adjusters, and Non-Adjusters. Policy Research Working Paper No. 1001, The World Bank.
Gastil (1987). Freedom in the Worl Political and Civil Liberities. Greenwood Press, New York.
Jones, C. (1992). African Adjustment Study: The Issues Paper. Unpublished mimeo. The World Bank, May.
Mkandawire, Thandika (1989). Structural Adjustment and Agrarian Crisis in Africa: A Research Agenda. CODESRIA Working Paper 2/89, Dakar, Senegal.
Ndulu, Benno J. (1991). Growth and Adjustment in sub-Saharan Africa. In A. Chhibber and S. Fischer (eds.), Economic Reform in sub-Saharan Africa, World Bank Symposium.
Nooter, Robert and Roy Stacy (1990). Progress on Adjustment in sub-Saharan Africa: Implications for Future Lending Strategies. The World Bank, memo.
Oyejide, T. Ademola, (1990). Supply Response in the Context of Structural Adjustment in Sub-Saharan Africa, AERC, special paper 1, Nairobi.
World Bank (1981). Accelerated Development in Sub-Saharan Africa: An Agenda for Action. Washington, D.C., World Bank.
World Bank (1985). Annual Report, Washington, D.C., World Bank.
World Bank 1990. Adjustment Lending Policies for Sustainable Growth, Washington, D.C., World Bank.
All the data used in the analysis are taken from the World Bank's ANDREX data base except the real effective exchange rate, which is from IMF statistics. The sample consists of 45 low income countries, listed in Table A.1. The sample period is 1970-89.
The variables are defined for three periods: 1970-80 (first), 1981-84 (second), 1985-89 (third). The number following the variable is the period, i.e. GDP2 is the rate of GDP growth in period 2. Variables with a number 21 mean period 2 relative to period 1 and with number 32, period 3 relative to period 2. Following is a description of the variables.
Five indicators
GDP = Rate of GDP growth
GDI = Gross investment to GDP ratio
GDS = Gross domestic saving to GDP ratio
X = Export to GDP ratio
INFL = CPI inflation
Others
INT = Internal shock12
EXT = External shock (positive)
CAB = Current account balance to GDP ratio
DEBT = Total debt to GDP ratio
REER = Real effective exchange rate
TOT = Terms of trade index
POL = Index of political pluralism13
Dummy variables
AFR = 1 if a country is African, 0 otherwise
LAC = 1 if a country is Latin American, 0 otherwise
ASIA = 1 if a country is Asian, 0 otherwise
MIC = 1 if a country is middle-income, 0 otherwise
PROG = 1 for EIAL (program countries), 0 otherwise
The data used in the analysis is taken from the World Bank's ANDREX data base, except the real effective exchange rate which comes from IMF calculations. The sample contains observations from 45 low income countries during the sample period 1970-89; the period for which data are available for all relevant macroeconomic variables. Only constant price series were used. Most EIAL countries carried out a real depreciation in 1985-89, thus, the relative price of investment goods and exports rose relative to the early 1980s. Therefore, to measure the contribution of growth in the supply response of exports, it is better to work with GDP and export to GDP ratios in constant prices. For completeness and to satisfy the adding up condition, savings ratios at constant prices were also used. In the analysis, two categories of countries were define EIAL, program countries and a "control" group, the non-program countries, consisting of OAL and NAL. The OAL are considered non-program countries because they received too few adjustment loans during the period analyzed.
The sample period was divided into three periods: 1970-80 (first), l1981-84 (second) and 1985-89 (third), with the latter corresponding to the adjustment period. A comparison was made of the program countries' performance in the third period with respect to some counterfactual scenario of what would have happened in the absence of an adjustment program. Simple period averages of the following five indicators were use rate of GDP growth, inflation and the ratios of gross domestic savings, gross investment and exports to GDP. Thus, for each country j, there is an observation for variable i in periods one, two and three. (A complete list of the variables used in the analysis is presented in Appendix A).
Table A.1: Country Classification
|
I. EIAL (Early Intensive-Adjustment-Lending Countries) (14) | ||
Bolivia Cote D'Ivoire Ghana Kenya Madagascar Malawi Mauritania |
Mauritius Nigeria Pakistan Senegal Tanzania Togo Zambia | |
|
II. OAL (Other Adjustment-Lending Countries) 16 | ||
Bangladesh Burkina Faso Burundi Central African Republic China, People's Republic of Congo, People's Republic of Guinea Guinea-Bissau |
Guyana Mali Niger Sierra Leone Somalia Sudan Zaire Zimbabwe | |
|
III. NAL (Non-Adjustment-Lending Countries) (11) | ||
Benin Botswana Cameroon Ethiopia Haiti India |
Liberia Myanmar Rwanda Sri Lanka Yemen Arab Rep. | |
Notes: EIAL are countries that have received 2 SALs or 3 adjustment operation or more,
with the first adjustment operation in 1985 or before.
OAL are other countries receiving adjustment lending.
NAL are countries that did not receive AL in the period 1980 to 1988.
The sample include sub-Saharan African countries and other low income countries.
The control group in the Modified-Control-Group methods includes EIAL countries.
Table A.2: Indicators of Performance: EIAL Countries
GDP1 |
GDP2 |
GDP3 |
GDI1 |
GDI2 |
GDI3 |
GDS1 |
GDS2 |
GDS3 |
X1 |
X2 |
X3 |
INFL1 |
INFL2 |
INFL3 | |
Bolivia |
0.042 |
-0.026 |
0.009 |
0.219 |
0.096 |
0.056 |
0.206 |
0.124 |
0.016 |
0.291 |
0.209 |
0.263 |
0.233 |
4.255 |
24.141 |
Cote D'Ivoire |
0.060 |
-0.002 |
0.009 |
0.200 |
0.164 |
0.096 |
0.217 |
0.161 |
0.145 |
0.350 |
0.356 |
0.312 |
0.122 |
0.066 |
0.035 |
Ghana |
0.005 |
-0.016 |
0.055 |
0.072 |
0.048 |
0.065 |
0.071 |
0.042 |
0.058 |
0.132 |
0.073 |
0.084 |
0.435 |
0.753 |
0.263 |
Kenya |
0.082 |
0.021 |
0.056 |
0.303 |
0.209 |
0.197 |
0.258 |
0.189 |
0.176 |
0.368 |
0.256 |
0.255 |
0.121 |
0.135 |
0.081 |
Madagascar |
0.011 |
-0.022 |
0.026 |
0.126 |
0.101 |
0.108 |
0.008 |
0.000 |
0.012 |
0.130 |
0.099 |
0.100 |
0.094 |
0.229 |
0.152 |
Mauritania |
0.016 |
0.004 |
0.038 |
0.282 |
0.375 |
0.256 |
0.078 |
-0.012 |
0.152 |
0.372 |
0.469 |
0.526 |
0.096 |
0.099 |
0.126 |
Mauritius |
0.056 |
0.040 |
0.077 |
0.297 |
0.208 |
0.321 |
0.295 |
0.197 |
0.375 |
0.527 |
0.470 |
0.590 |
0.150 |
0.097 |
0.061 |
Malawi |
0.062 |
0.016 |
0.028 |
0.321 |
0.193 |
0.137 |
0.168 |
0.148 |
0.081 |
0.230 |
0.208 |
0.227 |
0.095 |
0.138 |
0.192 |
Nigeria |
0.044 |
-0.047 |
0.032 |
0.194 |
0.159 |
0.083 |
0.207 |
0.119 |
0.090 |
0.223 |
0.112 |
0.125 |
0.153 |
0.228 |
0.200 |
Pakistan |
0.047 |
0.066 |
0.064 |
0.190 |
0.190 |
0.185 |
0.096 |
0.147 |
0.184 |
0.129 |
0.132 |
0.144 |
0.124 |
0.076 |
0.061 |
Senegal |
0.019 |
0.032 |
0.032 |
0.181 |
0.150 |
0.154 |
-0.286 |
-0.082 |
-0.169 |
0.293 |
0.328 |
0.353 |
0.104 |
0.117 |
0.027 |
Togo |
0.044 |
-0.017 |
0.033 |
0.340 |
0.248 |
0.227 |
0.328 |
0.201 |
0.121 |
0.413 |
0.453 |
0.475 |
0.103 |
0.092 |
0.003 |
Tanzania |
0.034 |
0.006 |
0.038 |
0.241 |
0.208 |
0.211 |
0.146 |
0.110 |
0.085 |
0.122 |
0.131 |
0.101 |
0.142 |
0.292 |
0.319 |
Zambia |
0.015 |
0.002 |
0.023 |
0.411 |
0.149 |
0.145 |
0.447 |
0.113 |
0.136 |
0.466 |
0.367 |
0.356 |
0.112 |
0.165 |
0.469 |
Notes: GDP = rate of growth of GDP
GDI = gross domestic investment to GDP ratio
GDS = gross domestic saving to GDP ratio
X = total exports to GDP ratio
INFL = inflation
The numbers after the variable mean period 1, period 2 and period 3.