Disasters caused by economic mismanagement

Background

Many African countries - for example, Benin, Madagascar, Mali, Mauritania, Niger and Togo - have been characterized since their independence by an overvalued currency, which has led to cheap imports and difficulty in exporting agricultural commodities, excessive government expenditure, and too much parastatal control over producer prices and commodity marketing. This has led to a cumulative economic “disaster” and over 30-40 years of increasing rural and urban poverty, characterized by less and less incentive for farmers to produce for the urban market. This, in turn, has led to urban shortages, where commodities are only available at excessively high prices, partly as a result of private sector and parastatal seasonal hoarding. It is now evident that a similar situation has been evolving in the Central European States (CESs) since 1945. In both Africa and Europe, economic mismanagement has been compounded by serious environmental mismanagement.

Food distribution in Niger.

UNDRO NEWS July/ August 1984; CWS/Jon Otto

The principal solution to this type of ongoing disaster is some form of structural adjustment which focuses on:

· promoting a market-oriented economy
· rehabilitating growth potential in key sectors
· removing infrastructural bottlenecks
· strengthening management of the national economy
· raising government revenues and controlling government expenditures
· implementing a comprehensive social policy to assist vulnerable rural and urban households, especially those whose vulnerability was increased by structural adjustment reforms

A schematic representation of some of the key points highlighted in structural adjustment is summarized in Figure 2.

Alternatives

Government will need to consider alternative policy and investment initiatives, and their trade-offs, during the process of designing a structural adjustment package that is supported by the World Bank and the International Monetary Fund. Structural adjustment requires that specific targets be set. The following discussion identifies some of these targets.

1. A flexible and realistic monetary exchange rate has to be maintained. This raises questions regarding what level the rate should be and how long it should be controlled. Where the exchange rate is controlled this might require:

- Holding the differential between official and parallel market rates of exchange to less than a given percentage. This raises questions about which percentage and which parallel market rate should apply.

- Ensuring unrestricted access of the private sector to foreign exchange through weekly currency auctions with the attendant questions of who should organize the auctions and under which conditions.

2. Interest rates must be high enough to reduce non-productive and non-essential borrowing, bring inflation under control and mobilize domestic financial resources. But, how high must the rates be and how will the rates be raised?

3. Taxes on imports and domestic production have to be adjusted to eliminate any bias in favor of imports. But, what should those levels be?

4. Export taxes have to be simplified and reduced, as well as eliminated where they affect significantly the demand for exports. Acknowledging this, the analyst must still decide on which export commodities to focus, what the tax level should be, and in what order and over what time period the adjustments should be made.

5. Measures to encourage efficient export of goods and services, including tourism have to be provided. This could take the form of government or private sector overseas export trade/tourism centers.

6. Does the price of all commercial and food aid imports include the full cost of transportation, margins, insurance, losses and import duty? As the cost of imported food increases, is domestic agriculture able to compete with food imports? Is government going to implement a strategy of self-reliance i.e. ability to pay for necessary imports with export earnings, or self-sufficiency i.e. accepting inefficient domestic production as the price to pay for achieving domestic security over supplies of selected food and other commodities?

7. At what level should public utility charges be set to insure that short term operating, maintenance, and replacement costs do not require substantial public sector funding? Can public utility delivery be transferred to the private sector? Under which conditions would this be possible? Would any existing activities need to be liquidated?

8. What size core civil service is required to deliver required services in an efficient manner? Can positions be eliminated and government expenditures cut? What salary increases must be offered to those civil servants that retain their positions?

9. To what level should major excise tax rates e.g. on petroleum, tobacco and alcohol be raised? What type of institutional strengthening is required to improve levels of tax collection?

10. Which projects should be included in a newly designed public investment program? Are these projects consistent with government's objectives, as well as its sectoral strategies, macroeconomic projections, debt scheduling commitments and overall policy initiatives?

11. Which public enterprises and parastatals can be liquidated? Which can be privatized and restructured? Which can be sold to foreign and national investors? Under which terms can this occur?

12. What type of social policy, including employment-generating programs, targeted feeding programs, and income transfer schemes will be most cost effective in protecting poor rural and urban vulnerable groups seriously affected during the transition phase of structural adjustment?

13. What program of legislative and democratic reform is required to complement the economic initiatives undertaken during structural adjustment?

Q. Consider a country which has experienced long-term economic mis-management with which you are familiar. Identify a policy intervention that government might be forced to make to rectify the situation. Identify both the positive and negative consequences of that decision, and describe an intervention that might lessen the impact on the affected people in the country.

A.____________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________
______________________________________________________________ ______________________________________________________________ ______________________________________________________________