STABILIZATION AND STRUCTURAL ADJUSTMENT The past decade has been disastrous for Africa. Different solutions have been proposed for this crisis, but the stabilization and structural adjustment packages of the World Bank and the IMF have had much the greatest influence. Characteristically these packages are designed to diminish the role of the state and enhance that of the market, but a whole range of strategies have been pursued to achieve these ends. Given that much of the literature in this area is descriptive, and orientated around case studies, it is difficult to disentangle the key features of the debate. Stabilization and Structural Adjustment offers clarification by looking beyond individual programmes to assess the relevance of the macroeconomic theory and models that underlie them. It begins by examining the peculiar weaknesses of the African economies and the issues of macroeconomic management they create, before proceeding to outline the different frameworks within which stabilization and structural adjustment packages can be analysed. Whilst particular attention is paid to IMF and World Bank models, because of their unique influence, alternative perspectives are also considered. The result is the clearest overview to date of the economic theory underlying this key area of development economics. Finn Tarp is Associate Professor of Development Economics at the Institute of Economics of the University of Copenhagen. Formerly with the Food and Agricultural Organization of the United Nations, he worked as an economist for a decade in southern Africa from 1978 to 1988. He has previously published on agricultural price policy, agrarian transformation and income distribution and growth. STABILIZATION AND STRUCTURAL ADJUSTMENT Macroeconomic frameworks for analysing the crisis in sub-Saharan Africa Finn Tarp London and New York First published 1993 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 This edition published in the Taylor & Francis e-Library, 2001. New in paperback 1994 © 1993 Finn Tarp All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue reference for this book is available from the British Library ISBN 0–415–08179–3 (Print Edition) 0–415–08180–7 (Pbk) Library of Congress Cataloging in Publication Data Tarp, Finn, 1951– Stabilization and structural adjustment: macroeconomic frameworks for analysing the crisis in sub-Saharan Africa / by Finn Tarp. p. cm. Includes bibliographical references and index. ISBN 0–415–08179–3 (Print Edition) 0–415–08180–7 (Pbk) 1. Economic stabilization—Africa, Sub-Saharan. 2. Structural adjustment (Economic policy)—Africa, Sub-Saharan. I. Title. HC800.T37 1993 399.5'0967—dc20 92–7431 CIP ISBN 0-203-01864-8 Master e-book ISBN ISBN 0-203-15225-5 (Glassbook Format) CONTENTS List of tables vii Preface ix Acknowledgements xiii List of Abbreviations xv INTRODUCTION 1 1 MACROECONOMICS OF AFRICA 7 Nature of the African economy 7 Economic performance 11 Sources of the crisis 14 Getting the issues right 25 2 MACROECONOMIC CONSISTENCY AND ADJUSTMENT POLICIES 29 Sector and budget constraints 30 National balance, absorption and economic policy 33 Savings and investment 43 Government and fiscal policy 45 Monetary balance and policy 50 Summing up 54 3 FINANCIAL PROGRAMMING AND STABILIZATION 56 The ‘empty’ framework 59 The Polak model 60 The monetary approach 64 Financial programming in theory 68 Financial programming in practice 73 Discussion 75 4 GROWTH PROGRAMMING AND ADJUSTMENT 79 Accounting framework 81 CONTENTS Growth and resource gap models 82 Revised minimum standard model 86 Growth programming in practice 90 Discussion 93 5 GROWTH-ORIENTED ADJUSTMENT – AN IMF/WORLD BANK SYNTHESIS? 99 A conceptual framework 100 Policy analysis 104 An empirical analysis 108 Issues and problems 110 Conclusion 116 6 ALTERNATIVE APPROACHES AND PERSPECTIVES 120 Adjustment with a human face 121 Structuralist-inspired views and models 126 Radical perspectives 138 African alternative framework 143 Final remarks 146 7 CONCLUSIONS 150 Notes 167 Bibliography 194 Index 205 vi TABLES 1.1 Comparative structural data on sub-Saharan Africa, other developing regions and OECD economies 8 1.2 Gross domestic product, aggregate demand and other economic indicators, 1965–89 12 1.3 Aggregate demand, external resource balance and external debt, 1965–89 13 1.4 Domestic macroeconomic variables and policies, 1980–9 16 1.5 Balance of payments – current account, 1980–9 20 1.6 Balance of payments – capital account, 1980–9 20 1.7 Terms of trade, net financial transfers and external debt, 1980–9 21 1.8 External economic shocks – interest rate and terms of trade, 1980–7 22 5.1 Impact effects of changes in policy instruments, behavioural parameters and exogenous variables 106 vii PREFACE I was introduced to the field of development economics during the Second United Nations Development Decade, and was immediately intrigued by the coexistence of a variety of competing theoretical and practical approaches to development problems in the Third World. I took note of the fact that the orthodox, neo- classically-inspired school of thought was largely on the defensive. Planned development with a focus on distributional goals became, in my understanding, a realistic goal to strive at for an economically-active, interventionistic state, committed to development. From 1978 I spent a decade as an employee of the Food and Agriculture Organization of the United Nations (FAO) in various field assignments in southern Africa. In this way, I was effectively exposed to the extremely difficult socio- economic and political conditions of sub-Saharan Africa. I was introduced to widely-different political and economic systems with dissimilar approaches to development, and became gradually more realistic about ‘the possibilities of development planning’, and the fact that governments may not be representative of the aspirations of their people.1 Deficiencies in the formulation of plans and their implementation, insufficient and unreliable data, unanticipated external and internal economic disturbances, institutional and managerial weaknesses, and so on, are obstacles which by now have a very real meaning to me. I came, in other words, to perceive the crisis in planning in sub-Saharan Africa (SSA) and accepted that there is a need to rethink and reformulate government strategies and policies and that market relations have a role to play even in the development of planned Third World countries.2 From 1981 onwards I devoted a substantial part of my efforts towards participating in the process of redirecting the Mozambican agricultural policies and planning systems. I was, however, taken by surprise by the strength of what ix