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Adjustment Policy and New Conditions towards Sustainable Development In Africa: A Kenyan Perspective

Patrick Okanga, George Owuor and Jackline Moriasi*

Abstract

For many countries in Africa the Structural Adjustment Programmes (SAPs) have lasted for more than a decade. The International Monetary Fund/World Bank hypothesis in connection with SAPs was that their package of economic restructuring would, after some time, help to create the environment in which market-led and self-sustained economic growth would take place in stagnating economies. The package was also expected to induce the entrepreneurial spirit that thrives in and drives market-led economies. The long-term results were expected to be, among other things, healthier balance of payments, external debts, budget deficits, internal balance, lower rates of inflation, higher real rates of growth, and lower rates of unemployment. These problems were either unknown or existed only as minor ailments at the time of political independence (Khan 1987). This paper reviews the pre- and post- implementation of the SAPs in Africa. It addresses the need for structural adjustment reforms since 1980s, and investigates the components of SAPs, the experience, implementation and results/observation in the process of SAPs.

As Africa approached her fourth decade of independence, there was a growing concern among African scholars and observers that the independence and credibility of the African policy could be seriously endangered due to the protracted socio-economic crisis facing the continent. The continuing crisis of the African states – which has been overwhelmed by socio-economic decline since the late 70s, and as a result, has been unable to meet popular aspirations and expectations, - has been labelled the “African condition” (Adedeji and Shaw 1985), or as Africa’s “lost decade” (Chazan et al. 1992). The gravest development crisis is in sub-Saharan Africa which, after reasonable growth rates in the 1960s and 1970s, experienced considerable economic deterioration during the subsequent years.

The concern with how to address and arrest the low standard of living, poverty, and high levels of indebtedness in sub-Saharan Africa led to two developments. First, alarmed at the worsening socio-economic crisis and the emerging global crisis, the World Bank through its publication of “Accelerated Development in sub-Saharan Africa: An Agenda for Action” (often referred to as the Berg Report) in 1981 suggested appropriate measures to overcome the crisis. The end result was the adoption of the Structural Adjustment Programmes (SAPs) as a policy instrument with which to resuscitate African economies. Secondly, the crisis sparked off a debate on the democratization of the continent. The one-party system, which had been the dominant form of political organization on the continent, was criticized and followed by calls for more democratic policies (Anyang Nyong’o 1988). Former Tanzanian president Julius Nyerere’s (1986) recantation of his earlier advocacy for one-party democracy, which he had deemed central to Africa’s development path, not only reinforced the debate on democratization but also gave new momentum to the forces struggling for democracy in African countries.

Consequently, political reform was held to be a basic condition not only for arresting Africa’s decline but also for stimulating and sustaining development.

Generally, as a precondition for a country to enter into a SAP, agreements must be reached on a set of stabilization measures with the IMF. Similarly, bilateral donors and commercial banks would insist on the borrowing country's reaching an agreement with the IMF and the World Bank as a precondition for rendering economic support.

The primary objectives of the SAPs were to: restore long-term growth; improve balance of payments position; reduce domestic financial imbalances, including government fiscal deficit; promote trade liberalization; increase domestic savings in the private and public sectors; eliminate price distortions in various sectors of the economy and mobilize additional external resources (Tarp 1993).

However, in recent years there has been a shift in emphasis with higher development objectives assuming equal importance as growth oriented adjustments. It is now common to conceptualize and formulate adjustments with “human face”, or to evaluate social dimensions of adjustments. The objectives of SAPs now include, reducing its impact on the poor and other vulnerable groups, avoiding sharp declines in personal consumptions, and providing for delivery of basic social services, which, if neglected, could result in the decay of society.

The stabilization and Structural Adjustment Programmes are well known in Africa and include the following: removal of all subsidies; reduction of public expenditure on social services; devaluation of national currencies, coupled with foreign-exchange auctions; reliance on market forces; privatization of parastatals; liberalization of inputs, and reduction of public sector workforce.

The above conditionalities have been viewed as the safest and fastest routes to Africa’s socio-economic recovery and prosperity. Since the early 1990s Western donor countries have been insisting that international economic assistance should be conditional on political pluralism and economic liberalization. What this has entailed in practice is that foreign aid to individual African countries has been linked to their perceived progress towards political and economic liberalization. As a response to these (and other) pressures, political reform has swept across the African continent. These reforms, which have been dubbed as “Africa’s second coming” or “second liberation” (Onimode 1992), have been predicted on political pluralism and an open market-based economy.

Since Africa’s problems were increasingly perceived to be of a political nature, political reform was elevated to the top of the reform agenda. The World Bank’s (1989) report, which directly linked political liberalization to successful economic rehabilitation, should therefore be seen as the precursor of the new conditionality.

Since then, the Western donors have insisted on political reform as a necessary condition for foreign aid to Africa. Consequently, political conditionality has since become an instrument of foreign policy for most of the Western countries. The centrality of political conditionality was reinforced and highlighted at two very important forums: the Harare Commonwealth Heads of Government Meeting in October 1991, and the European Community (EC) in November 1991. At the latter, the EC signed a charter which linked future aid disbursements to the implementation of democracy in recipient states.

The main problem has been that the expectations of the SAPs were healthier balance of payment (BOP), internal balance, low rates of inflation, higher real growth rate, low rates of unemployment, external debt management, budget deficits, and capacity utilization in industries.

These problems were either unknown or existed only as minor ailments at the time of political independence of most African countries. Though this situation has been blamed on a multitude of factors, including poor Keynesian type of planning from the center, active state participation in business and unsustainable welfare which includes low tax rates, lack of subsidies - on food items, education and health-nepotism and corruption in government. The objectives of this study are to assess the rate of economic growth in Kenya before and after the introduction of the SAPs; analyze the trend of export and import of Kenya and observe the trend of employment and external debt before and after the introduction of SAP in Kenya.

The SAPs' packages seem to subscribe to the position that "the business of government is not business", and so recommend the withdrawal of government from economic activities. Enterprises that are owned by government but could be more profitably run by private companies are recommended for privatization. These may include trading companies, manufacturing industries, and even airlines. Those government-owned enterprises that, by their nature, are essential or strategic, should be commercialized. Thus, eventually, every enterprise would be run as a private enterprise.

SAPs also focus on the government sector itself and urges elimination of budget deficits as a means of dealing with inflation. While increased tax rates and an expanded tax base are recommended, the main focus seems to be on reducing government spending and eliminating subsidies. This means that services provided by government, especially in the education, health, and housing sectors, must be paid for at market price – a virtual end to welfarism. Also directed towards solving the problem of inflation is the requirement that the growth of the money supply should be restricted, and the caution that discretionary monetary and fiscal policies may be destabilizing.

The IMF and the World Bank prescribe these policy recommendations to countries in need of assistance in the hope that their economies would start functioning properly, and the output and incomes would be able to repay their loans from their external earnings.

The economic theory on income determination in the mid-1940s became Keynesian. Keynes argued, contrary to the general neoclassical position, that falling prices will not reduce aggregate supply, increase demand, and restore equilibrium at full employment. Rather, they diminish the revenue of proprietors and incomes of employers and employees, thus reducing aggregate demand which will make aggregate supply fall even more and worsen unemployment. Falling interest rates - when savings exceed investment - do not reduce savings and increase investment until equilibrium is re-established at full employment. During the down-swing when deficient aggregate demand makes the profit position bleak, capitalists do not invest in new plant and equipment no matter how low interest rates fall. Hence, even if interest rates should fall, investment will not rise to the level of savings, and full employment will not automatically be restored. Similarly, falling wage rates in the whole economy will not increase demand for labour and reduce the supply, thus restoring full employment. Instead, falling wage rates reduce aggregate income and spending, and worsen unemployment.

Because of this obvious inability of markets to restore equilibrium at full employment, even when they function properly – and sometimes monopoly powers in product and factor markets do not make them function properly – Keynes recommended the interventionist state to take care of underconsumption and overproduction to ensure full employment. When the Second World War transformed the situation in most western countries from severe unemployment to acute shortage of labour, the Keynesian position was upheld, and even the United States government for the first time acknowledged responsibility for employment (Hunt and Sherman 1990). But the triumph of Keynesian economics did not go unchallenged for long and that challenge took the form of a revival of traditional neoclassical theory.

Because of the connection between money and the general price level, via the quantity theory of money, the Keynesian revolution was also taken as a demolition of neoclassical monetary theory. The essence of the Keynesian revolution was to shift the subject matter of monetary theory from concern with determination of price levels and economic fluctuations to the emphasis on the level of employment (Johnson 1973). Keynesian monetary theory initially showed how, through interest rate, investment and output, the money supply could affect the level of employment.

However, Keynes argued that there are limits to the effectiveness of money in dealing with unemployment and inflation. If banks have extra reserves over and above the maximum required reserve ratio, if corporations use internal funds for further investment instead of borrowing from banks, and if expected profit rates are rising faster than interest rates when the money supply is contracting, then monetary policy will have little success in curbing inflation and unemployment. In fact, if profit expectations are bleak, business people will not increase investment no matter how low interest rates are. For these reasons, when dealing with unemployment, Keynesians in the 1950s and 1960s down played the importance of monetary theory and monetary policy, while putting their faith in government spending and tax cuts (Hunt and Sherman 1990). Also, the Keynesian emphasis on the role of government is more consistent with fiscal policy than with monetary policy.

Meanwhile, economists at the University of Chicago had refused to abandon the quantity theory of money. They continued to teach and develop a more subtle and relevant version, one in which the quantity theory was connected and integrated with general price theory and became a flexible and sensitive tool for interpreting movements in aggregate economic activity and for developing relevant policy prescriptions (Friedman 1973). Milton Friedman, who championed the cause of this new way of looking at things, through a series of articles, developed it into what is now mainstream monetarism, the main aspects of which include that free markets are efficient and will bring about an equitable distribution of goods; will promote growth, and will generally solve their own problems. When serious economic disturbances occur, these could be traced to random shocks and misguided government economic policy (Friedman 1973). One implication of this position is that prices and wages are flexible; the money supply is the principal determinant of the levels of output and employment in the short-run, and of the price level in the long-run. This view is based on the Monetarists' position that the velocity of circulation of money is regular and predictable; there are lags between changes in money supply and their impact upon aggregate demand, and these lags are variable and unknown. So governments that try to use discretionary monetary policy (to correct short-run problems) will tend to either overreact or underreact and thereby create further distortions. So, instead of discretionary monetary policy, Monetarists recommend allowing the money supply to expand at a fixed rate of 3 to 5 per cent per year. This is their monetary rule. Also, discretionary fiscal policy (unless it is accompanied by monetary policy) may not solve the problems of inflation, unemployment or sluggish growth, since the associated changes in government spending may be dependent on changes in taxes or in government debt, which would cancel each other out. The implied crowding out may leave aggregate demand virtually unchanged, and so any impact would be negligible.

The schism between the Keynesians and Monetarists is obvious. Monetarists believe that the economy has a tendency to adjust to full employment and so stabilization is unnecessary. They maintain that discretionary monetary and fiscal policy may be destabilizing. Keynesians, however, argue that equilibrium could occur below or above full employment and so the market economy needs to be stabilized by discretionary monetary and fiscal policy (Modigliani 1977). Not even Samuelson’s grand neoclassical synthesis could fill the gap completely. He had expected a synthesis in which the Keynesian theory would keep the economy at full employment, and the more traditional neoclassical Monetarist thought would support the market in allocating resources within the Keynesian framework. Though the two schools have moved closer over the years with respect to the role of money and monetary policy, the gap with respect to stabilization policy has remained as wide as ever (Edgmand 1983)

Government in the industrialized countries have, therefore, been guided by one theoretical construct or other. For example, from 1946 to the early 1960s, government policy in the United States was based on Keynesian economics. Though there were mild recessions, there was no serious depression during that period, and government, through its spending, tried to keep the economy at full employment. However, during late 1960s and early 1970s, the American economy experienced high unemployment and high inflation rates simultaneously. The Keynesian theory had no answer to simultaneous unemployment and inflation because the government could not both stimulate and reduce demand at the same time (Hunt and Sherman 1990). Policy makers in the United States concluded that the Keynesian economics had failed, and so turned to Monetarism in the late 1970s (Samuelson and Nordhaus 1992).

The attack that was launched against inflation in the United States in the 1970s was called a “monetarist experiment”. The government stopped “smoothing interest rates and instead focused on keeping bank reserves and the money supply on predetermined growth paths” (Samuelson and Nordhaus 1992). Interest rates rose sharply, the economy slowed down, unemployment increased, and the growth of real wages and prices took a down-turn. The real Monetarist experiment had succeeded in holding inflation in check. The Monetarists’ preoccupation with inflation stems from the thinking that inflation affects the balance of payments, the level of unemployment, and the rate of growth. They claim that increases in the money supply result in claims by workers and other income groups for higher wages and salaries. This reduces profits and incentive to invest. Production and growth rates would then fall and unemployment would increase (Kiguel and O’connell 1995).

This relative success of monetarism in the United States may have inspired the IMF and World Bank to conduct the monetarist experiment in TWCs plagued with inflation and other related social and economic problems. This view is supported on the basis that SAPs are basically monetarist and the experiments were initiated in TWCs in the early 1980s after a success story in the USA. Of great theoretical and policy importance was the view that the monetarist experiment also revealed that the money velocity could be quite unstable – it changed more in 1982 than it had in several decades because of the heavy reliance placed upon monetary policy (Samuelson and Nordhaus 1992).

This raises a number of concerns about the likelihood of the success of SAPs in Africa. For example, SAPs advocate reliance on markets – product markets, factor markets, foreign exchange markets and financial markets. Are markets in Africa, for example, developed enough to fit the Monetarists’ view of the world? Historically, markets did not just spring up but developed in response to the need to distribute goods that had been produced. In other words, the focus must be on production structures that improve productivity and output along which markets will develop concomitantly. This is the contention in Say’s law. It was only after the roots of industrial capitalism had been significantly laid down that the invisible hand (implying deregulation) was recognized and emphasized. Also, how could markets be relied on when large concentrations of rural dwellers are subsistence producers who operate virtually outside the market economy? The modern sectors in most African economies have many large monopoly or oligopoly producers and labour unions. These monopoly powers distort the markets in which they operate (Wellisz and Findlay 1988). In this regard resources may not be allocated efficiently and incomes may not be distributed equitably by the unaided market.

The periods before and after SAPs cover the years from 1985 to 1992, and from 1993 to the year 2000 respectively.

Between 1985 and 1992 the Kenyan economy grew at the rate (average) of three per cent (Table 1). However, by 1992 the growth rate fell almost to negative one per cent.

After the introduction of the SAP programmes, the growth rate had increased to an average of two per cent till 1990 when it registered a negative one per cent.

Both exports and imports had shown an overall increasing trend from 1985 to 1992, the period before the introduction of the structural adjustment programmes (Table 2). However, this became rapid after 1992 and continued till 2000. Nonetheless, imports showed a comparative higher increase in value terms than exports after the introduction of SAPs.

Employment Rate

Concerning employment, the country registered a gradual increase in employment rate in the period from 1985 to 2000 (Table 3).

External Debts

In regard to foreign borrowing, Kenya registered a gradual increase in its debts during the period before the SAPs programmes were introduced (Table 4). However, after 1992, foreign debt sharply increased and maintained higher figures until 2000.

Table 2: Comparison of Exports and Imports in Pre- and Post- SAP Programmes

Table 3: Employment Rate

Source: Economic Survey (Republic of Kenya)

The following review of reactions to the implementation of SAPs will focus on three country experiences – Zambia, Uganda and Kenya.

Table 4: External Debts

Source: Economic Survey (Republic of Kenya)

What Zambia has done in the implementation of SAPs includes: currency devaluation, adoption of market determining prices, privatization of state enterprises, staff retrenchment, and abolition of subsidies (Mwase 1995).

In Zambia, 95 per cent of the 160 parastatals (representing 80 per cent GDP and 140,000 jobs) were earmarked for privatization. However, The pressure to bring down fiscal deficit has led to a reduction of government expenditure and the withdrawal of subsidies. Spending on social services fell from 7.4 per cent of GDP in 1991 to 0.4 per cent in 1993; per capita expenditure on education declined from US$25.60 in 1982 to US$8.20 in 1992, and real health expenditure fell by 20 per cent between 1991 and 1992. Even the subsidy on maize flour, the local staple, which had been a thorny issue since 1986, eventually had to go despite protests and strikes.

For Zambians, especially for those in the lower income groups, SAPs meant sharp declines in real wages and salaries; rising costs of food, health services and education, and a general decrease in the standard of living. This was seen as more of a worsening of the crisis than a path to recovery.

The Ugandan Perspective

For Uganda, Oyowe (1993) lists the liberalization of internal and external trade, the liberalization of the foreign exchange market, the relaxation of import and export regimes, the privatization of state enterprises, the reduction of the civil service, among others, and adds that Uganda has rigorously applied the required measures.

In Uganda, a Public Enterprises and Divestiture Statute was enacted in 1993 to confirm the government’s three-tiered approach of liquidation, reform, and divestiture (Sharer et al. 1995).

For Ugandans the SAPs experience over a similar period produced the opposite effect on the population, including people in the lower income groups. In 1986 when the National Resistance Movement government came to power and decided to seriously implement the SAPs, which had not had a chance since 1980 because of the war, Uganda was an economic wasteland with inflation rate of over 200 per cent; the health care infrastructure in ruins; most roads out of function; farm and factory output falling; exports declining, and the treasury nearly empty (Oyowe 1993). In such a situation welfare was a meaningless word, and the important thing was survival. The commitment to SAPs was a requirement for foreign funding needed for reconstruction.

Over the years of SAPs implementation, key factories resumed production; agriculture was revived; inflation dropped from three digits to a single digit; the tax base expanded, and government revenue increased rapidly since 1992 (Ibid). Though earning from export declined despite the increasing export volume, the inflow of foreign aid ensured that there was no shortage of foreign exchange for reconstruction.

In Kenya, the implementation of the SAPs commenced in 1993 with recommendations of restructuring institutions, i.e. introduction of cost sharing in health services, introduction of fees in the universities, and further liberalization of foreign exchange markets and many others. However, these processes were gradual, and were met with strong opposition from the public.

In terms of growth (GDP), export and import trends, employment and external debt trends, little had been achieved as a result of the introduction of SAPs. The rate in the economic growth had registered a sudden rise between 1992 and 1993, then started steadily declining, culminating with a negative growth rate in 1999. Concerning export and import, the period after the introduction of SAPs (1993), both sectors showed sudden increase, with imports rising slightly faster than exports. This is attributed to open and competitive markets which is a component package of the SAP.

Employment has kept a gradual and steady increase throughout the years before and after the introduction of the Structural Adjustment Programmes. It can be argued that the programmes have contributed to the opening up of more employment, with government minimizing and even retrenching part of its employees.

In regard to foreign debt, Kenya's external debt had registered a gradual increase (1985 – 1992), but after the introduction of SAPs in 1993, there was a sudden rise in foreign debt, and it maintained higher figures throughout.

One important fact that stands out pertaining to SAPs in Africa is that not all countries that have adopted SAPs have realized the objectives of low rates of inflation and unemployment, healthier balance of payments, improved capacity utilization in industry, and other socio-economic benefits (Khan 1987). However, some countries, like Uganda, have come close to realizing most of these objectives.

It was also pointed out that, historically, markets developed concomitantly with the development of production structures. The focus of African countries should therefore be on improving the production system in the region by diversifying on the basis of resource endowment, instead of producing and exporting raw materials to industrialized countries. As the production structures improve, so would the markets and regional trade, and then market-oriented policies would have better chances of success. The Southern African Development Community (SADC), for example, provides one institutional framework within which efforts at improving the production structures in the southern Africa region could be coordinated.

Monetarists seem to suggest that workers share the blame with governments for the economic crisis facing least developed countries (LDCs). They argue that the inflation that results from excessive monetary expansion makes workers and other income groups demand higher wages which reduce profit levels and the incentive to invest. Production then drops and employment levels fall. The implication of this argument is that workers become the conduit through which excessive monetary expansion translates into an economic crisis. SAPs have therefore been quite harsh on workers, especially those in the lower income group. The Zambian case brings out this quite clearly.

The massive depreciation of the currencies of countries implementing SAPs has adversely affected fixed incomes, wages, pensions, and so on, and has led to sharp increases in prices of both local and imported commodities and inputs. Monetarist approaches to this problem of inflation created by SAPs have pushed interest rates very high.

No school of thought could exactly predict how the real world is or will be, and the objective reality is not the same throughout the world. For example, the situation in Zambia and Uganda in the 1980s, when both countries started implementing SAPs, was not the same. This implies that the eclectic approach may be more pragmatic in restructuring economies in Africa. This approach is based on the view that different forces move the economy at different periods, and so a wide variety of policies should be employed in influencing aggregate demand (Samuelson and Nordhaus 1992).

The negative impacts of these reforms on the economies of African countries have been highlighted in case studies on Tanzania, Sudan, Somalia, Zambia, and Nigeria where it was shown that SAPs had aggregated the economic crisis (Onimode 1989). Indeed, although World Bank officials point to Ghana as the most successful example, the case studies undertaken reveal the extent of the negative impacts of the reforms in many aspects, including sharp reduction in real incomes, rising external debts, increasing inequalities, and the desperate plight of the poor (Ibid). Similarly, it has been pointed out that the statistical data is neither convincing nor internally consistent (Mosley et al. 1995). Schatz (1994) goes further and highlights that not only its statistical aspect but also the implementation of SAPs “has actually impeded economic growth in Africa.”

Ironically, although the World Bank (1992a) paints a rosy picture and optimistically predicts a general recovery, the Bank has admitted elsewhere that its reform programmes have largely been unsuccessful in sub-Saharan Africa. In view of this, the World Bank’s report should not be taken seriously but be viewed in its proper context - a public relations exercise by the embattled Bank to justify its operations on the African continent.

At the same time, the majority of African observers, scholars, NGOs and even some UN agencies, particularly UNICEF, hold out little hope for any meaningful improvement in Africa’s economic condition, without a radical shift in the direction of economic reforms and the pattern of development assistance. Furthermore, even the World Bank’s projected development range of 2.4 per cent to 3.9 per cent in African economies is below the average annual growth rate of five per cent that was achieved in the period between 1966 – 1973. In addition, Africa’s GNP in 1992 was US$ 450 less than it was in 1972. More recent data to the mid-1990s reveals that the average growth rate in the period between 1990 – 1994 was a meagre 1.2 per cent compared to almost two per cent of the 1985 – 89 period (Mosley et al. 1995). In short Africa is struggling to get back to where it had been in the 1960s and early 1970s.

Africa, as has been pointed out, is the only continent where standard of living has declined continuously. As noted by the OAU Secretary-General, Salim (1992) “The economic crisis threatens to undo entirely the social gains made in the 1960s and 1970s when Africa achievable growth.” Thus, the sad fact is that most African countries are worse off today than they were two decades ago. To conclude, as the UNICEF report (1992), which paints a depressing picture stated, for the first time in the modern era, a sub-continent is sliding back into poverty. The number of families in sub-Saharan Africa who are unable to meet their basic needs has doubled in a decade. Average incomes have fallen by a third.

* Departments of Economics and Business Management, Egerton University, P.O. Box 536, Njoro, KENYA, E-mail: geogwur@yahoo.com, moriasij@yahoo.com

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