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Christine Lagarde IMF CEO.

Sankofa:The IMF and the World Bank in Africa: A ‘Disastrous’ Record

(August 23, 2004) This year marks the 60th anniversary of the International Monetary Fund and the World Bank. Through their propaganda machines, both institutions will attempt to highlight their “assistance” to Africa. But in reality, since the 1970s, these institutions have gradually become the chief architects of policies, known as “the Washington  Consensus,” which are responsible for the worst inequalities and the  explosion of poverty in the world, especially in Africa.

Yet, when they began to intervene on that continent in the late 1970s and early 1980s, their stated goal was to “accelerate development,” according to a World Bank document, familiarly known as the “Berg Report,” published in 1981. But as the following editorial will show, the actual record is just disastrous.

The main pretext for their intervention was to “help solve” the debt crisis that hit African countries in the late 1970s, following the combination of internal and external shocks, notably sharp fluctuations in commodity prices and skyrocketing interest rates. The remedy they proposed, known as stabilization and structural adjustment programs (SAPs), achieved the opposite, and contributed to worsening the external debt and exacerbating the overall economic and social crisis.

In 1980, at the onset of their intervention, the ratios of debt to gross domestic product (GDP) and exports of goods and services were 23.4 percent and 65.2 percent, respectively. Ten years later, in 1990, they had deteriorated to 63 percent and 210 percent, respectively. In 2000, the debt to GDP ratio stood at 71 percent while the ratio of debt to exports of goods and services had “improved” somewhat, at 80.2 percent, according to the World Bank’s Global Development Finance.

The deterioration in debt ratios is reflected in the inability of many African countries to service their external debt. As a result, accumulated arrears on principals and interest have become a growing share of outstanding debt. In 1999, those arrears accounted for 30 percent of the continent’s debt, compared with 15 percent in the 1990s and 5 percent for all developing countries. To compound the crisis, African countries are getting very little, in terms of new loans, except to pay back old debts. As a result, since 1988, the part of accumulated arrears in “new” debt is estimated at more than 65 percent.

Between 1980 and 2000, Sub-Saharan African countries (SSA) had paid more than  $240 billion as debt service, that is, about four times the amount of their debt in 1980. Yet, despite this financial hemorrhage, SSA still owes almost four times what it was owed more than 20 years ago! One of the most striking illustrations of this apparent paradox is the case of the Nigerian debt. In 1978, the country had borrowed $5 billion. By  2000, it had reimbursed $16 billion, but still owed $31 billion, according to President Obasanjo.

The Nigerian case is a good example of the structural nature of  Africa’s debt crisis and of the power imbalance that characterizes world economic and financial relationships. It is this general context that allowed the IMF and World Bank to increase their influence in African countries. One good illustration of this has been the rapid rise in the share of the World Bank and its affiliate, the International Development Association (IDA), in SSA’s debt. The combined share of both, which was barely 5.1 percent of SSA’s total debt in 1980, had jumped to 25.0 percent in 1990 and to more than 37 percent in 2000, according to the World Bank. In other words, the World Bank group has become the principal “creditor” of many Sub-Saharan countries, which explains the enormous sway it holds over these countries’ policies.

One way they exercise this influence is through the imposition of stiff  conditionalities on African countries in exchange for loans and credits. Financial liberalization, aimed at attracting more foreign investments to compensate for shortfalls in export revenues, instead fostered more instability, due to the volatility of exchange rates resulting from speculative short-term capital flows. This, combined with higher interest rates, “crowded” out both public and private  investments. For instance, investments as a percentage of gross domestic production (GDP) fell from an annual average of 23 percent between 1975 and 1979 to an average of 18 percent between 1980 and 1984, and 16 percent  between 1985 and 1989. They recovered somewhat in the 1990s, but  averaged only 18.2 percent between 1990 and 1997, according to UNCTAD. These statistics are consistent with those given by the World Bank, which show that the annual investment ratio averaged 18.6 percent and 17.2 percent in 1981-1990 and 1991-2000, respectively.

These low investment ratios resulted in a contraction of output. Real GDP growth, which averaged 3.5 percent in the 1970s, fell to 1.7 percent, between 1981 and 1990, according to the World Bank. However, this masks the sharp declines recorded in the 1980s, dubbed “the lost decade” for Africa. This is better illustrated by the negative growth rates of both GDP and consumption per capita. They fell respectively by 1.2 percent and 0.9 percent a year between 1981 and 1990. It is estimated that in 1981-1989, the  cumulative loss of per capita income for the continent as a whole was equivalent to more than 21 percent of real GDP.

In a report released in September 2001, the United Nations Conference on Trade and Development (UNCTAD) indicated that the average income per capita in SSA was 10 percent lower in 2000 than its 1980 level. In monetary terms, average income per capita fell from $522 in 1981 to $323 in 1997, a loss of nearly $200. The same report said that rural areas experienced an even greater decline in income. These statistics were confirmed by the World Bank, which says that income per  capita in Sub Saharan Africa contracted by a cumulative 13 percent between 1981 and 2001.

The 2004 edition of the World Development Indicators says that SSA is the only region in the world where poverty has continued to rise since the early 1980s, that is, at the onset of IFIs’ intervention. According to that document, in 1981, an estimated 160 million people lived on less than $1 a day. In 2001, the number had risen to 314 million, almost double its 1981 level. This means that approximately 50 percent of Africa’s population lives in poverty. When the threshold is $2 a day, the numbers rise from 288 million to 518 million, during the same period.

The Costs of Trade Liberalization

According to the IMF and World Bank, one of the sources of Africa’s crisis is its inward-looking trade system, characterized by the protection of domestic markets, subsidies, overvalued exchange rates and other “market distortions” that made African exports less “competitive” in world markets. In place of this system, they propose an open and liberal trading system in which tariff and non-tariff  barriers are kept to a minimum or even eliminated. Such a system, combined with an export-led growth strategy, would put Africa on a solid path to economic recovery, according to both institutions.

The costs associated with trade liberalization have largely offset any potential “benefits” African countries were supposed to derive from that liberalization. First of all, trade liberalization has translated into substantial fiscal losses, since many countries depend on import taxation as their main source of fiscal revenues. Therefore, the  elimination of, or reduction in, import tariffs has led to lower government revenues.

But one of the most negative impacts of trade liberalization has been the collapse of many domestic industries, unable to sustain competition from powerful and subsidized competitors from industrialized countries.  In fact, Africa’s industrial sector has been among the biggest victims of structural adjustment.

From Senegal to Zambia, from Mali to Tanzania, from Cote d’Ivoire to Uganda, entire sectors of the domestic industry have been wiped out, with devastating consequences. Not only has the industrial sector contribution to domestic product continued to fall, but also the industrial workforce has continued to shrink dramatically. In Senegal, more than one-third of industrial workers lost their jobs in the 1980s. The trend was accentuated in the 1990s, following sweeping trade liberalization policies and privatization imposed by the IMF and the World Bank, especially after the 50 percent devaluation of the CFA Franc, in 1994. In Ghana, the industrial workforce declined from 78,700 in 1987 to 28,000 in 1993. In Zambia, in the textile sector alone, more than 75 percent of workers lost their jobs in less than a decade, as a result of  the complete dismantling of that sector by the Chiluba presidency. In other countries, such as Cote d’Ivoire, Burkina Faso, Mali, Togo,  Zambia, Tanzania, etc. similar trends can be observed.

In several annual and special reports, the International Labor Organization (ILO) has documented the devastating impact of SAPs on employment and wages. The African Union seems to have come to grips with that devastation. It organized a special Summit on Employment and Poverty, in the capital of Burkina Faso, September 9 and 10, 2004. It was revealed during that Summit that only 25 percent of the African workforce is employed in the formal sector. The rest, 75 percent, is either in the subsistence agriculture or in the informal sector. In light of this reality, the Summit issued a Plan of Action aimed at exploring strategies to foster job creation. But such a Plan will only be credible if African countries are ready to move away from IMF and World Bank recipes, which were harshly criticized during the Summit.

UNCTAD has reported that more than 70 percent of Africa’s exports are still composed of primary products, more than 62 percent of which are non- processed products. This helps justify the need for more liberalization and deregulation to make African exports more “competitive.” The second objective is to help justify the need for more liberalization and deregulation to make African economies more “competitive” and  “attractive” to foreign direct investments. This also explains the push for more privatization.

In the name of “comparative advantage,” the export-led growth strategy forces African countries to compete fiercely for market shares, leading them to flood the same markets with more of their commodities. As a result, trade liberalization has accentuated the volatility of African commodities, whose prices experienced twice the volatility of East Asian commodity prices and nearly four times the volatility that  industrial countries experienced in the 1970s, 1980s, and 1990s. This has contributed to worsening Africa’s terms of trade.

According to UNCTAD, if Africa’s terms of trade had remained at their 1980 level:

– Africa’s share in world trade would have been twice its current level,

– the investment ratio would have been raised by 6 percent per annum in non-oil exporting countries,

– it would have added to annual growth of 1.4 percent per annum, and

– it would have raised GDP per capita by at least 50 percent to $478 in 1997  compared with the actual figure of $323 during that year.

The Costs of Financial Liberalization

One of the main objectives of financial liberalization is to make African countries “attractive” to foreign direct investments. But as the experience of development shows, foreign direct investments follow development, not the other way around. In addition, despite all “the right financial policies,” foreign investments continue to elude Africa, with less than 2 percent of flows to developing countries, despite having among the highest rates of return on investments in the world. And these flows are concentrated in a few oil-producing and mineral-rich countries, according to UNCTAD and the World Bank.

In reality, financial liberalization has yielded little gains. For most African countries, it has been associated with huge costs. First, it entails higher levels of foreign exchange reserves to protect domestic currencies against attacks resulting from speculative short-term capital outflows. Second, financial liberalization has increased the  likelihood of capital flight, in part as a result of a greater volatility of domestic currencies. The high costs of trade and financial liberalization further weakened African economies and opened the way to the privatization of the continent.

The Privatization of Africa

Privatization, like financial liberalization, is seen by the IMF and World Bank as an instrument to promote private sector development, which has been elevated to the status of “engine of growth.” The privatization of State-owned enterprises (SOEs), including water and power utilities, has been one of the core conditionalities imposed by the two institutions, even in the context of “poverty reduction.”

Most of the foreign direct investments registered by African countries in the 1990s came as a response to privatization of SOEs. No sector was spared, even those considered as “strategic” in the 1980s, such as telecommunications, energy, water and the extractive industries. In 1994, the World Bank published a report assessing the process of privatization in SSA. After complaining about the slow pace of privatization throughout the region, it issued a warning to African governments to accelerate the dismantling of their public sector, accused of being “at the heart of Africa’s economic crisis.” The process of privatization peaked in the late 1990s and ever since has leveled off, despite more deregulation, liberalization and all kinds of incentives offered to would be investors.

To date, it is estimated that more than 40,000 SOEs have been sold off in Africa. However, the “gains” from privatization, projected by the World Bank and the IMF, have been elusive. In fact, many privatization schemes have failed and contributed to worsening economic and social conditions. Almost everywhere, privatization has been associated with massive job losses and higher prices of goods and services that put  them out of reach of most citizens.

Building a Neoliberal State

The concept of “good governance” was promoted by the IMF and World Bank to explain the failure of SAPs. It tends to convey the idea that SAPs have failed, in large part, because African States are “corrupt,” “wasteful,” and “rent-seeking,” and because of the “poor implementation” of policies. In other words, SAPs were basically “sound.” It is the combination of “rampant corruption” and lack of qualified personnel that led to the failure of these policies. Thus, “good governance” means nothing else than the need to build a neoliberal State, subservient to the IFIs, able to effectively implement “sound policies” and to protect the interests of foreign investors.

Indeed, one of the main goals of the IMF and World Bank has been to discredit State-led development strategies in favor of market-led strategies. This is why one of the main targets of these institutions has been the role of the African State in economic and social development. To discredit that role, a two-track strategy was adopted. The first track was to attack the credibility of the African State as an agent of development. To achieve that goal, an abundant literature has been published by the two institutions, highlighting the “corrupt,” “predatory,” “wasteful,” and “rent-seeking” nature of the African State.  To justify these epithets, the IFIs pointed to the “mismanagement” of  the public sector, accused of being an obstacle to economic growth and  development. These attacks helped make the case for the sweeping restructure of the public sector, which, in many cases, led to its dismantling in favor of the private sector.

The second track in weakening the role of the State in development was to deprive it of financial resources. Trade and financial liberalization achieved, in part, that goal. As already indicated, trade liberalization not only led to a greater loss of fiscal revenues,  following lower tariff barriers, but it also led to huge trade losses. This was compounded by financial liberalization which entailed further fiscal losses resulting from tax holidays and low income tax rates. To make up for these losses, the African State had to resort to more and  more multilateral and bilateral loans and credits, which further alienated its sovereignty.

As a result, many African States have been stripped of all but a  handful of their economic and social functions. Cuts in spending mostly fell on social sectors. State retrenchment primarily aimed at eliminating subsidies for the poor, removing social protection, and abandoning its role in fighting for social justice through income redistribution and other social transfers to the most disadvantaged  segments of society. This explains, among other things, the degradation of many basic social services and the explosion of poverty in Africa, since 1981, as the World Bank itself has acknowledged.

While dismantling or weakening the economic and social roles of the State, the IMF and World Bank have sought to build or strengthen the functions most useful to the implementation of neoliberal policies and the promotion of private sector development. This explains the insistence on “capacity building” or on “institution building,” heard  over the last few years. However, the institutions that the IMF and  World Bank talk about are not for development, but for markets. In other words, they propose building institutions supportive of neoliberal policies and in the service of the private sector, especially foreign investors.

Thus, the “institution building” agenda promoted by the IMF and the World Bank has nothing to do with promoting democracy and protecting human rights. In fact, the neoliberal conception of governance undermines both since it deprives representative institutions of their role in formulating public policies following open and democratic debates. They are reduced to implementing what the IMF and World Bank and their G- 8 masters decide for African countries and their people.

From Structural Adjustment to Poverty “Reduction”

After producing poverty and deprivation on a massive scale in Africa and elsewhere, the IFIs’ focus on “poverty reduction” since 1999 could not be more suspect. But to make this shift a bit more credible, the IMF’s Enhanced Structural Adjustment Facility (ESAF) was renamed “Poverty Reduction and Growth Facility” (PRGF) and the World Bank has set up a “Poverty Reduction Support Credit” (PRSC).

There is no doubt that the shift in the rhetoric of the IFIs amounts to an admission of failure of past policies, which put too much emphasis on correcting macroeconomic imbalances and “market distortions” at the expense of economic growth and social progress. The disastrous record of SAPs and the continued deterioration in the economic and social situation of countries subjected to IMF and World Bank programs put into question the credibility and even the legitimacy of these institutions. Their crisis of legitimacy was exacerbated by stepped up attacks by the Global Justice Movement and growing criticism from mainstream economists, especially from Joseph E. Stiglitz, former World Bank Chief Economist.

The Nature of Poverty Reduction Strategy Papers (PRSPs)

The Poverty Reduction Strategy Papers (PRSPs) are supposed to provide more freedom to developing countries in formulating their policies. This is what the Bank and the Fund call “national ownership.” Representatives from the government, the private sector, civil society organizations– and even the poor– are supposed to “participate” in drafting the PRSP of each country to decide on how to use the proceeds released by “debt relief” to achieve “poverty  reduction.”

In reality, the macroeconomic framework that underpins the PRSPs is the same as that which underpinned the now discredited SAPs. That framework is non-negotiable and includes fiscal austerity, trade and financial liberalization, privatization, deregulation and State retrenchment, etc. In essence, despite the disastrous outcome of their past policies, the IMF and the World Bank still believe that those policies are in the “interests of the poor.” In particular, they think that trade  liberalization and openness are the best– if not the only– road to growth, which they see as a “prerequisite” for poverty reduction. Hence the export-led growth strategy advocated by the two institutions, but which has been a big failure in African and in other developing countries.

A survey of 27 African PRSPs by UNCTAD in 2002 has demonstrated that all of them, without exception, contain the policies outlined above. Policies which are at odds with both the wishes and the interests of the poor, observes the document. It is this straight jacket that ties up developing countries’ hands and prevents them from achieving any substantial gain in poverty “reduction.” Most of the time, countries have failed to implement these conditions, leading to the suspension of their programs.

In fact, the IFIs’ conception of poverty views it as an isolated aspect of overall economic and social development that should be dealt with by short-term measures. Hence, the emphasis in the PRSPs on more spending for primary education and health, among others. Thus, PRSPs contain some short-term measures aimed at mitigating the negative impact of macroeconomic policies and structural reforms on the most vulnerable groups, notably the poor. However, the tools the World Bank and the IMF have proposed to achieve this goal are the same as those already tested in the past and that have aggravated poverty and deprivation in much of Africa.

In reality, PRSPs are SAPs with more conditionalities and less resources. As already indicated, a new “generation” of conditionalities has been added to old conditionalities, with the concept of “good governance,” analyzed above. UNCTAD (2002) has revealed that between 1999 and 2000, 13 African countries had signed programs containing an average of 114 conditionalities, 75 percent of which are governance-related conditionalities. One can imagine the enormous human and financial resources needed to deal with such a number of conditionalities. For this reason, the degree of compliance with IMF and World Bank-sponsored programs has significantly declined since the mid-1990s. For instance, the rate of compliance was estimated at about 28 percent of the 41 agreements signed between 1993 and 1997, according to UNCTAD.

With the PRSPs, the IMF and the World Bank pursue three objectives. First, mislead world public opinion, especially in Northern countries, in making believe that they are really serious about “reducing poverty.” And the World Bank alone counts on a huge and sophisticated propaganda machine to achieve this. With the more than 300 staff of its External Relations Department– Propaganda Department, one should say–  the Bank has all the means it needs to “explain” effectively its policies. It has achieved some success, since some big Northern NGOs, once very critical of SAPs, see the PRSPs as a “positive shift” in the IFIs’ policies.

The second objective of the PRSPs is to enlist a broad support within each country to help rehabilitate discredited and failed policies. This is what “national ownership” and “participation” of civil society  organizations are supposed to achieve. While insisting on the “participation” of civil society organizations, their most vocal critics, the IMF and World Bank tend to sideline representative institutions, like National Assemblies. This is another illustration of these institutions’ contempt for the democratic process in Africa. Finally, with PRSPs, the IMF and the World Bank seek to shift the blame  to African countries and citizens for the inevitable failure of these “new” policies.

Conclusion

The IMF and World Bank have utterly failed in “reducing poverty” and “promoting development.” In fact, they are instruments of domination and control in the hands of powerful states whose long-standing objective is to perpetuate the plunder of the resources of the Global South, especially Africa. In other words, the fundamental role of the Bank and Fund in Africa and in the rest of the developing world is to  promote and protect the interests of global capitalism.

This is why they have never been interested in “reducing” poverty, much less in fostering “development.” As institutions, their ultimate objective is to make themselves “indispensable” in order to strengthen and expand their power and influence. They will never relinquish easily that power and influence. This explains why they have perfected the art of duplicity, deception and manipulation. In the face of accumulated failures and erosion of their credibility and legitimacy, they have often changed their rhetoric, but never their fundamental goals and policies.

This is why they cannot be trusted to bring about “development” in  Africa. If the experience of the last quarter of a century has taught Africa one fundamental lesson, it is that the road to genuine recovery and development begins with a total break with the failed and discredited policies imposed by the IMF and the World Bank.

In fairness to both institutions, we must recognize, however, the complicity of African leaders in the disastrous outcome of neoliberal policies. Many governments and senior civil servants have bought into the agenda promoted by the IMF and World Bank. Therefore, they bear a great responsibility in the current state of the continent. Thus, to put an end to the influence of these institutions, African social movements and progressive forces must explore strategies aimed at promoting a new kind of leadership able and willing to challenge these institutions in favor of genuine alternative development policies.

Demba Moussa Dembele is Director of the Forum for African Alternatives in Dakar, Senegal. This article first appeared in Pambazuka News http://www.pambazuka.org/ .

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