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close this book The Courier N°137 January-February 1993 Dossier: Development and Cooperation - Country Reports Mauritania
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View the document Development and cooperation
View the document Three decades of development
View the document Toward an ethic for development
View the document An interview with DAC Chairman Alexander Love
View the document Development as a pledge of financing
View the document Can development be measured?
View the document Development and poverty: the case of Latin America
View the document Can development be left to the economists?
View the document The informal sector: development at the grassroots
View the document An interview with Michel Relecom, Chairman of UNIBRA
View the document Trade reform: impacts for the North and the South
View the document AASM then ACP... what next?
View the document Aid and development- where the twain shall meet
View the document Is development aid harmful to development ?
View the document Development aid in the 1990s

Development as a pledge of financing

by Elsa ASSIDON

The basic problem in economic theory is to comprehend the process whereby a community which once saved and invested at least 4-5% of its revenue turns into an economy in which voluntary saving is of the order of 12-lS% or more of revenue (Arthur Lewis, 1954).

Ragnar Nurkse's idea that 'e country is poor because it is poor' (1953) reflects the common view that development is a question of money. There is not enough saving because earnings are low and earnings are low because production cannot expand because the market is flawed, capital is short and there is no inœntive to invest. The problem is to break out of this vicious circle, trigger development and finance transition until such time as domestic saving reaches an adequate level and growth is self-sustaining. External financing is required in the meantime. Europe itself, after all, had Marshall Plan aid to help it rebuild and grow again after the war. And we hear many of the same ideas now about the countries of Eastern Europe and sub-Saharan Africa.

With the injection of foreign capital, revenue improves as production expands and development becomes a pledge of financing. New resources are channelled into investment and, with the diversification of production, the economy sheds its dependence on the outside world because national currency, whether from saving or credit, can be exchanged for a wider range of goods.

This, in outline, is how the economists described transition before the debt crisis, when money was more likely to create development than happiness. An observation of past trends suggests it would be a good idea to take a somewhat less mechanical look at the matter of financing.

 

External financing and national savings

At the end of the 1960s, studies underlined a negative correlation between injections of external capital and domestic saving in the developing nations." Statistical tests revealed such a correlation in cases of official development assistance in particular, although cause and effect were not clearly established. The results of injections of private capital (direct investment and other contributions) were less detrimental.

There were apparently many factors preventing domestic savings from expanding - a finding which financial development theorists used as an argument against Keynesian traditions of financial repression, particularly the idea of low interest rates as a means of encouraging investment and growth but suspected of discouraging saving.

Later studies showed a strong increase in exports and domestic saving in countries which grew sturdily in the 1970s. The export/growth/saving hypothesis is a legitimate one in extrovert economies, for exports really are the driving force of growth. But what about savings?

Let us compare two types of extrovert economies - those of the new industrial countries and the primary exporting countries of sub-Saharan Africa (where the rate of saving fluctuates widely from one year to the next). In the former countries, the level of saving seems to be maintained, but, in the latter, it is like a perpetual lottery, varying in particular with the price and volume of exports, with the accountancy theory of saving as residue in full operation.

Nonetheless, in the new industrial countries, rates of saving develop differently in the long term. The rate went from 21% to 27% of GDP in South Korea, for example, and from 24% to 17% in Brazil between 1965-1973 and 1980-1985 - i.e. between a period of strong growth and the period in which the debt crisis broke out.

 

Foreign exchange constraint and the debt crisis

As the crisis in the 1980s showed, the way foreign currency constraint eased varied widely from one country to another following the growth processes observed over the two preceding decades.

The majority of countries which continued to specialise in primary products (notably oil producers and virtually all the economies of sub-Saharan Africa) were unable to honour their external debt repayments in full when export revenue slumped.

Economies which had undergone significant industrialisation proved to be vulnerable to the recession of the 1980s to very varying degrees. The one or two newly industrialised countries of Asia which kept their external trade momentum going continued to grow without any lasting setbacks and were thus able to cope with their external debt. It was a different story for the large countries in Latin America, which had to cut back on their imports - and hence investment and growth - for several years in a row. In this part of the world, the absurdity of the negative financial transfer between North and South became extremely clear.

Persistent crises led the creditors to look for solutions specially tailored to fit each case. Rescheduling and adjustment financing from the IMF and the World Bank and balance of payments support from the other funders merely bought time. By the end of the last decade, the rule was to treat a debt as a series of bad debts or irrecoverable borrowings (reserves in banks and proposals to write off debts), even if the creditors went on receiving interest and failing to translate all the implications of this realisation into practical terms.

We know that there is no real debt crisis any longer. We also know to just what extent delaying tactics can worsen recession. In its time, the debt money brought prosperity to the people who sold capital goods to the developing nations. With the reversal of the world economic situation, it put states in a position to take account of the shortage of foreign exchange and forced them to implement policies to rationalise their finances. In short, it became the 'dirty' money of promises unfulfilled on all sides.

 

Export earnings, saving and investment

What have we learnt from situations in which development honoured the pledge of financing? There is obviously a combination of things to take into account here. Some of the conditions which are always necessary, but are never sufficient when taken singly, are set out below.

1. Given the poor initial financial autonomy of economies geared to selling primary products abroad, stable export earnings are essential during the period of transition at least. For example, there is no doubt that the EEC's sugar protocol has sheltered Mauritian sugar producers from fluctuation and drops in prices on the world market since 1975, thereby providing conditions conducive to transforming sugar revenue into industrial investment. It can always be argued that Mauritius would never have had either this change or industrial growth without a dynamic private sector - but the first condition does not rule out the second The first, however, seems a sine qua non of any economic action in the medium or the long term.

2. Development was long seen as the expansion of a capitalist nucleus, so there was a vision of saving as something which would finance development as a reality centralised in the economic sphere. The idea was either to nationalise the main areas of production (so the State could focus a surplus) and/or make for an increase in the proportion of national revenue accounted for by profits (and encourage a concentration of savings in the hands of capitalist businessmen or the State), or push up interest rates and encourage the development of the financial system (so that saving could be centralised in this sphere), or make informal saving formal by encouraging savers to take it to the banks.

Each of these policies was carried out without producing any lasting improvements in the extent to which the economies could finance themselves. When that capacity increases, the question, ultimately, is to know how the sort of savings behaviour which is useful to development comes about at the decentralised level of the operators themselves (i.e. at micro-economic level). Experience suggests that this trend has more to do with income - and as much with level as distribution. On the one hand, saving from profit may be high when profits are high (or as long as wages are low) and it may go up when saving as a percentage of national income is on the increase (or the rate of profit is going up). On the other hand, saving by ordinary people may expand if wages are not too low and, especially, if several people in the same household (unit of consumption and saving) work and receive money income. On the one hand, there is the logic of productive accumulation in which saving and investment go together and, on the other, the process of monetarisation and increasing wage-earning and wealth of the household (the rate of pay may stay the same) encouraging the development of the sort of popular saving which can be drawn off by banks and savings banks. Overall, nonetheless, the barrier represented by the initial foreign exchange constraint on growth will have been surmounted, and surmounting it is a necessary first stage in small economies with ill-diversified resources.

3. These, then, are some of the trends to be observed when development has kept its promise of financing. But economists only talk about what they are familiar with. Their tools of analysis are tools which are suitable for monetarised economies (and typified by wages, if not trade), whether or not with heavy foreign exchange constraints. This is the framework in which growth and development and saving and investment are defined. Development, by definition, is of course a matter of money. Is it not seen, when any attempt is made to measure it, as a sum of goods and services being bought and sold, or as a flow of money income?

E.A.