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Structural Adjustment is the Wrong Policy
he incorrect perception of a problem can lead to the development of poor theories to solve it. This explains why, a decade after implementing Structural Adjustment Programs (SAP) advanced by the World Bank and the International Monetary Fund (IMF), many African countries have still not made measurable progress.
Africa is much worse off today than it was a decade ago because African economists and the world bodies have a poor perception of the African economic problem and so designed SAP—a program which cannot stimulate growth. Why do Structural Adjustment Programs lack growth elements, and what should be done to stimulate rapid development?
Introduction
Most African nations are implementing SAP, an economic `panacea' inspired by the World Bank and the IMF. The objectives of a Structural Adjustment Program are largely the same for most African nations, because the world bodies presume that African economies are at the same level of development and are experiencing similar problems.
The stated objectives of the Nigerian SAP are to:
• restructure and diversify the productive base of the economy
• achieve fiscal stability and positive balance of payments
• set the basis for a sustained non-inflationary or minimal inflationary growth, and
• reduce the dominance of unproductive investments in the public sector.1
The corresponding program instruments include the strengthening of demand management policies, adoption of a realistic exchange rate policy through the establishment of Foreign Exchange Markets (FEM), rationalization and privatization of public sector enterprises, and the adoption of appropriate pricing policies for public enterprises.
Nigeria has implemented SAP for almost a decade now, but none of the objectives has been achieved, and there is no indication that any of them can be achieved using the chosen program instruments. Indeed, all that is still conspicuously present in Nigeria is the foreign exchange market and the ceremonies associated with it. The situation is not different in Ghana, Zambia, and other African nations implementing SAP.
Analysis of SAP
Financial institutions and Nigerian economists campaigning to establish SAP continue to insist that there is no alternative to SAP. They point out that Nigeria had become indebted and seemed unable to repay because it had been involved in indiscriminate importation and had also neglected non-oil export as potential foreign exchange earners. To these economists, the solution to the problem lay in a mechanistic manipulation of the import-export equation, which dictates that a country must export (or earn) more than it imports (spends) to generate a positive balance of trade.
Foreign exchange markets, as part of structural adjustment programs, served to increase the cost of imports and hence reduce import spending. The indirect impact of this instrument affects all sectors of any economy in which it operates. The implications of FEM in African countries are especially harsh.
The effect of mandatory foreign exchange markets has been to erode the value of the local currency over time. Most countries undergoing adjustment have seen their currency values plummet in relation to international currencies.
Earnings from primary commodities, the mainstay of African economies, have been decreasing for over a decade. The United Nations publication "Africa Recovery," reported recently that the prices of most export commodities, already at record low levels in the 1980s, have continued to fall every year in the 1990s.2 Recent efforts by SAPs to increasing primary exports have only led to reduced earnings from commodities.
Multinationals have taken advantage of the situation, even reverting to over-invoicing in certain instances. Economist C. V. Vaitos examined the basis of profit among multinational corporations in Columbia's pharmaceutical industry and found that multinationals defined effective returns to the parent company as the sum of reported profits of the subsidiary, royalty payments and intermediate products overpricing.3 The reported profit of a sample of the industry constituted 3.4% of declared profits, royalties 14.0%, and overpricing 82.6%. In 1990, the World Bank also reported deliberate overpricing deals in steel imported by African nations from Europe over a 26-year period, leading to capital flight estimated to be over 12 billion naira.4 The easy money must be changed into dollar or pound sterling to be repatriated to Europe or America. This is an important false devaluation pressure in African FEMs, unduly reducing the purchasing power of local African currencies.
SAP by its nature is inflationary because it increases the amount of the local currency used in buying a unit quantity of local goods and imports. SAP is also inflationary because it is based on the fallacy that capital is the primary basis of economic growth, which by extension implies that the mere establishment of banks in an artisan economy automatically transforms it into a monetized and advanced economy.
All the African nations implementing SAP have seen a rapid increase in the number of new banks. At the end of 1983, Nigeria had 32 approved commercial banks of which 25 were functioning with a national network of 11,001 branches, there were 10 merchant banks and 22 development banks, including savings banks.5 By 1992, about six years after Nigeria has started implementing SAP, commercial and merchant banks had increased to 120, there were 500 finance houses, over 200 stock-brokers and brokerage houses, about 156 community banks, a people's bank with over 210 branches, and 85 savings banks. Similar increases in the number of financial institutions were experienced in Ghana, Zambia and Tanzania.
Monetizing African economies by the mere establishment of banks only increases speculation and discourages production and development. The effect of increased speculation is to increase the value of the inflation index and reduce the purchasing power of the local currency. It comes as no surprise that African nations implementing SAP have been experiencing hyper-inflation, high interest rates due to speculators' high demand for money, low productivity and increasing general economic distress.
Endless devaluation
All the African nations implementing SAP are today experiencing increasing indebtedness and budget deficits because they are not growing; a growing economy realizes budget surpluses and pays its debts. All the African nations implementing SAP are also experiencing mass unemployment in all categories.6 This trend has been experienced by the currencies of all nations that have been implementing SAP for about a decade.
Today, one dollar exchanges for 22 naira; this official rate was fixed again in Nigeria following the government's frustration with the naira's uncontrolled loss of purchasing power. Outside the official circles, the dollar exchanges for about 80 naira, reflecting artificial demand due in part to speculative and fraudulent activities The fraud factor is so large that true demand—that which brings goods to Nigeria—may not be more than 10 percent of the apparent demand today. While this artificial demand is estimated at over 2 billion dollars every two weeks, it is doubtful if goods worth more than 200 million dollars return to Nigeria.
Before SAP began in 1986, one dollar exchanged for 77 kobo (1 naira = 100 kobo). When SAP began later that year the dollar exchanged for 1.756 naira and the main complaint among corporate executives was that there was insufficient foreign currency (e.g., dollars) to exchange for the volume of naira available. As the dollar exchanged for more naira, companies became cash-strapped; they could not get enough naira to exchange for dollars. The dollar exchanged for 4.016 naira in 1987, 5.35 naira in 1988, 9.93 naira in 1991 and 22 naira in 1993.7 Interestingly, there has been an increasing gap between demand and supply. In 1988, $2,910 million was offered against $3,260 million demanded. In 1991, $262 million was offered on a monthly basis against the $788 million demanded. In July 1993, $290 million was offered against $3,439 million demanded, and in August, $230 million was offered against $3,930 million demanded.8
The effect of a mandatory devaluation of a country's currency through FEM is difficult to imagine: it has to be experienced. Early in 1986, a new Ph.D. graduate appointed as a University Lecturer in Nigeria earned 7,550 naira a year. A family size loaf of bread at the time sold for 2.50 naira and national newspapers sold at 50 kobo. In 1994, eight years later, a fresh Ph.D. graduate appointed to teach in the University earns only 17,731 naira per annum, but a national daily newspaper sells for 20.00 naira per copy, a family size loaf of bread sells for 50.00 naira, and a liter of petrol (gas), which sold for 39 kobo in 1986, now sells for 11.00 naira.
Before Ghana began to implement SAP, the nation's national currency, the cedi, exchanged 2.5 to one United States dollar. Today, one dollar exchanges for over a thousand cedis. Some goods on Ghanaian shelves are even marked in United States dollar prices. The situations in Tanzania and Zambia are the same. Are Africans losing their independence?
The growing gap between supply and demand of foreign currency largely measures the increasing economic stress which an economy and the people are subjected to when a nation is subjected to mandatory devaluation programs like the African SAP.
The reasons are complex
Why do African nations accept SAP? There are two main reasons: dishonesty on the part of leadership, and ignorance on the part of a large proportion of the population. Some unscrupulous African leaders accept SAP so that they can embezzle the external loans that come with the program.9 They probably know that the program could ruin their economies and increase the chances of chaos, but it appears they choose to destroy their national economies for personal gain.
Many Africans have not cared to examine existing development models to ascertain their suitability for African economies. One consequence of this is that an unfortunately large proportion of `learned' Africans believe strongly in the fallacy that capital is the primary basis of economic growth.
The suitability of a program for a nation can be explored through an examination of historical data and an examination of the logic.10 It has been argued so far that SAP is logically not a development program. Let us now examine historical parallels.
After the First World War, Allied powers subjected the Germans to mandatory SAP to enable them pay war reparations. One dollar exchanged for 4.2 marks in 1914 before the War. In 1920, one year into Germany's SAP, one dollar exchanged for 63 marks. The exchange rate fell with time, reducing the purchasing power of the German mark. One dollar exchanged for 2,000 marks in 1922. The mark was virtually eliminated in 1923; one dollar exchanged for 4.2 trillion mark.11 Every German was impoverished and disgraced. The impact of mandatory devaluation on Germany's economy should be viewed against the backdrop of Germany as a world power even at that time. What do we expect from the artisan-economies of Africa, subjected to the same type of program?
Stimulating Growth in Africa
African nations are experiencing unfavorable balance of trade. Proponents of structural adjustment see this problem as one of excess demand, and designed SAP based on a demand-management philosophy. However, the African problem is predominantly one of supply-management. While demand-management philosophy emphasizes the management of consumption, supply-management philosophy emphasizes the management of production. These different perceptions of the problem lead to the design of different programs.
Examination of Nigeria's import profile during the period 1980-85 revealed that the import category of "machinery and equipment" accounted for approximately 40% of imports every year during the period. The introduction of SAP did nothing to change the situation: In 1990, $2,755 million (89.8%) of the $3,067 million of Nigeria's foreign exchange earnings was allocated to machinery, spare parts and raw materials. In 1991 this figure increased to $3,344 million (93.3%) of the $3,584.1 million total. This reveals that Nigeria is trying to achieve industrialization through a very slow approach—passive technology transfer. The mere erection of structures like roads and telecommunication networks, estates, banks, and industrial plants does not stimulate rapid technological development. The structures merely age and demand spare parts perpetually, decreasing in value over time.
Technological development is achieved by learning and acquiring new knowledge, skills, and capabilities. Traditional economics has encouraged the erection of structures over human development (in fact, the population is typically regarded as a burden on itself). While structures decrease in value with age and usage, man increases in value with learning.
While African nations have relatively few people in educational institutions, they have even fewer people with the necessary knowledge and skills in the productive sector. Due to the mismatch between education and productive training, Nigeria, Ghana, and other African nations are experiencing mass unemployment in all categories of university graduates. This situation has worsened with the introduction of structural adjustment programs. To the economists, Africa has an "over-supply" of university graduates, implying that their numbers should be cut back to save resources. African economic planning is based on traditional economists' theories, limited in scope by supply-demand analysis and short-term profit consideration. Rapid industrialization, on the other hand, requires a transformational analysis.
Link Education and Production
To take advantage of the high-intensity learning in educational institutions and facilitate rapid industrial transformations, African nations must move away from traditional economists' supply-demand analysis. University science and engineering graduates need opportunities for acquiring complementary practical skills to relieve Africa of her economic distress. African nations should therefore introduce their university graduates to their economies through learning channels.
Nigeria, for example, now produces about 35,000 university graduates every year, and half of this number complete science-based programs. All those who complete science-based courses, except medical doctors, could be introduced every year into the economy through a public program in which they are to learn and acquire fundamental practical skills in artisan workshops and factory floor work settings, one year for each year of study in the university. This means that engineers who complete their university programs in five years should spend five years in the linkage program.
Scientists and engineers should be engaged in the following activities: workshops for cutting, welding, tooling, foundry operations (iron, aluminum, copper); study the design and fabrication of prime movers (electric motors, pumps, compressors, fans, capacitors, valves, fuses); presses (hydraulic and pneumatic); internal combustion engines; maintenance of transportation systems (automobiles, railways, ferry/water boats, airplanes); maintenance of refrigerating and air-conditioning systems; and water treatment and distribution systems. The graduates should also study the maintenance, design, and fabrication of health care machinery/equipment like x-rays, ultra-sound and other diagnostic and monitoring devices and structures. The graduates who complete this linkage program would become the vanguard of African industrialization.
Education Helps Economy
The positive impact of the suggested linkage program would immediately be reflected in the following ways:
i Prolonged service-life for machinery and equipment would immediately be experienced, because scientists and engineers would be able to combine their theoretical and practical skills to maintain, design, and fabricate spare parts.
ii The linkage program would immediately improve the bargaining power of African nations when they have to purchase necessary goods. Too often, Africans have been buying machinery and equipment like black boxes, not knowing what ought to be in them.
iii The linkage program and the industrialization vanguard that it will produce will increase employment quickly. The vanguard would sustain built-up structures by reducing break-down times and providing spare parts. The vanguards would also build new machinery and equipment and industrial plants, employing more people within a short time.
iv Improved knowledge of the products being imported would reduce fraud at the international level, and locally through the establishment of credible certification programs. Before a part could be imported, African engineers would have to certify that it was not available locally and could not immediately be designed and fabricated. This will reduce importation pressure and the demand for foreign currencies.
v Rapid industrial transformation will be achieved by African economies which adopt the suggested linkage program. This is because the program would readily increase the size of scientific and technological manpower in African economics and this determines the rate of industrialization and productivity.
The foregoing benefits demonstrate that the linkage program would sustain itself once initiated. Africans should know this and help education, so that education can help them.
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* F. E. Ogbimi is at the Technology Planning and Development Unit (TPDU), Faculty of Technology, Obafemi Awolowo University, Ile-Ife, Nigeria.
References
1 Bellow, U. K. "Fiscal Policy Implications of Structural Adjustment Program." A paper presented at the First National Biennial Conference of the Faculty of Business Administration, University of Lagos, Lagos, Nigeria, Oct. 26-28, 1987. Alhaji Bellow was the Permanent Secretary in the Federal Ministry of Finance in Nigeria at the time the program was introduced in 1986.
2 The United Nations. African Recovery. A United Nations Publication, New York., 1993. This report was cited in The Guardian, Nigerian edition, Vol. 9, No. 5676, March 19, p.13.
3 Vaitos, C.V. "Bargaining and Distortions of Returns in Purchase of Technology by Developing Countries," in Under-development and Development, H. Bernstein, editor, Penguin Books, Harmonsworth, 1973, pp.315-322.
4 The World Bank. This study conducted by the bank's international economics department and reported by the Chief Economist, Mr. Alexander Veatx, was reported in The Guardian, Nigerian edition, August 27, 1990, front page.
5 Falegan, S. B. "Nigeria's Mortgage Industry: A Critical Overview." In The Guardian, Nigeria, Monday June 22, 1992, p.17.
6 Lewis, W. A. Theory of Economic Growth, Tenth Printing, Unwin University Books, London, 1972.
7 Central Bank of Nigeria. Annual Reports and Statements of Accounts, Lagos, Nigeria, 1986 to 1993.
8 Central Bank of Nigeria, 1986-93.
9 The corruption of African Leaders is a public knowledge; Dr. Orji in ref. (7) above cited the remark by a Citibank Vice-Chairman before a large audience during a meeting of the African Development Bank (ADB), that six individuals in Anglophone African Countries own about $30 billion in deposits in European and American banks.
10 Ogbimi, F. E. "Transforming Foreign Technology into indigenous Capabilities in Nigeria," African Technology Forum, Vol. 6, No. 3, 1992. pp.30-32.
11 Stolper, G., K. Hauser, and K. Borchardt. Germany 1870 -1940, translated by Toni Stolper, Weidefeld and Nicolsa, London, 1967.
12 See West Africa, published weekly since 1917, 16-22 May, 1994, p.859. Rocard made these remarks in Dakar, Senegal.