Adjustment and development: the experience of the ACP States

by Patrick Guillaumont and Sylviane Guillaumont-Jeanneney

Do 15 years of adjustment mean a return to development? That is the vital question posed by the authors of this article who have coordinated a survey (to be published in book form), at *e request of *e European Community, on 'Adjustment and development: the experience of ACP countries'

The book reviews the present state of structural adjustment in all the ACP States, Four features stand out: it is a European survey; it is based on a comparative method which is innovative in several respects; it provides an overall interpretation of developments without complacency or disparagement; and it concludes with several economic policy recommendations.

A European survey

The study is a European survey in several respects. Firstly, the book is based on research carried out at the request of the European Commission and in close cooperation with it, especially with the Support for Structural Adjustment and Planning Division, Directorate-General for Development.

Secondly, the research was conducted by a European team based at CERDI, University of the Auvergne, and work with Oxford and Brescia Universities. This team is at the heart of a European network of economic research into development.

The survey is also primarily European in spirit. It steers clear of inappropriate simplifications and the assessment is finely tuned. Confidence in market forces does not stop the authors looking at the most appropriate means of government intervention. Recognition of the need for flexibility, which is at the heart of structural adjustment, is paralleled by an interest in a degree of stability, including that of relative prices.

And the survey is European in the sense of the geographical area it covers, that of the ACP States which have signed the Lomonventions with the European Community.

A relative method

There are many assessments of adjustment policies, like this one, covering a wide sample of developing countries. Apart from the territory it covers, the ACP States, this assessment has several characteristics which, in combination, give it its specific nature.

It is, firstly, a 'comparative' assessment, not only because it considers the countries in relation to one another, which is the distinctive feature of a cross-sector analysis, but also primarily because the attempt is constantly made to assess the policies against the environment in which they have been implemented, i.e. the conditions at the outset and the impact of exogenous, external or internal factors.

Next, it is an assessment of policies rather than of the programmes adopted in agreement with the IMF or the World Bank. The effect of these programmes in fact merges into that of the accompanying external resources and in the end it is the nature of the economic policies implemented which is important.

Thirdly, the assessment is set out in stages in the sense that the following are analysed in turn:

- the economic policy instruments used;

- the impact of the use of these instruments on 'intermediate variables' of economic policy in the main areas of adjustment, i.e. the control of aggregate demand, the correction of relative price distortions and the allocation of resources;

- the effects of shifts in these variables in terms of achieving the major objectives of adjustment, in other words narrowing the external trade gap and recovery in growth;

- the implications of the previous trends for poverty and political stability.

Fourthly, the authors have tried to give a 'transparent' assessment. Not only, of course, are the sources of the information used indicated and where appropriate discussed, but the statistical methods and econometric models are systematically set out: the significance of the differences between sub-sets is tested, the theories underlying the models are discussed, and so on. In short, although the assessment is at times technical, it is never, it is hoped, technocratic.

Lastly, the assessment as presented has a permanency about it. By establishing a base of economic policy indicators and their effects in the ACP States, it is in fact self-perpetuating. CERDI is currently updating this base and expects to produce a first supplementary report before the end of 1994. The name given to it is a piece of invented Latin or an English acronym which expresses its dynamic nature: PRODEM, Policy Reform for Development: European Monitoring.

A comprehensive interpretation

At the start of the 1980s, economic conditions on average were less favourable in the ACP States than in the other developing countries. Growth was significantly slower and their current account deficit higher, while their competitiveness in relation to the outside world was adversely affected by the appreciation in the real value of their currencies. As a result, the adjustment policy reform was essential for the majority of ACP States.

The results achieved by the ACP States from 1980 to 1989 seem disappointing when set against the targets set for adjustment policies, i.e. restoring the macroeconomic balances, creating a recovery in growth and relieving poverty. Growth remained slow, sometimes negative, the reduction in imbalances was temporary and poverty persisted. But for all that, if, we look at the economic policy indicators - the intermediate variables mentioned above - it can be seen that the ACP States have in fact put the adjustment policies into practice - to more or less the same extent as many other developing countries.

At the start of the decade, the need for adjustment and, still more, recourse to a strategy based on market mechanisms and openness to the rest of the world, met with a certain hostility in many ACP States. This hostility gradually diminished, but this did not end the debate on adjustment: it shifted from the objectif (making the economies more competitive) to the instruments and their effectiveness.

It is true, of course that the history and macroeconomic development of each country merit a proper explanation. Accumulating of case studies was not the purpose of the research undertaken. But on the basis of the cross-sector or comparative statistical analysis and the various authors' in some cases long and in-depth experience of the economic policy reforms in a certain number of ACP States, it was possible to put forward an overall interpretation of the reasons why adjustment has been a disappointing experience in the ACP States.

This interpretation is an attempt to answer four questions. The first question is whether the apparently mediocre results accurately reflect what happened. It is maintained that growth was partly underestimated, on account of the growing proportion of economic activity carried out by the informal sector in many ACP States and the insufficient account taken of this: on the whole, the adjustment was partly informal.

Although, however, the results are still mediocre, which is acknowledged, the question arises as to whether this is due to the environment or to economic policy. Analysis shows that the adverse effect of the environment, especially the terms of trade and the start-up conditions, is a vital factor in the explanation. In short, adjustment was 'thwarted'.

Nevertheless, it is not argued that economic policy was in no way to blame for the mediocre results. The question is whether the policy was badly deigned. The book shows that the use the ACP States made of the various economic policy instruments gave too high a priority firstly to macroeconomic stabilisation as opposed to correcting price distortions (especially in the use made of fiscal policy and devaluation), then to the correction of price distortions at the expense of the quest for productivity increases - in a nutshell, to the short term over the long term. The consequences of this choice are especially serious in low-income countries, which the vast majority of ACP States are. In a word, the adjustment was shortsighted.

Adjustment policy should therefore, in future, assign greater importance to long-term objectives. Endeavours should be made to balance the budget by reforming the role of the public sector, reducing it to its essential functions. This usually means cutting down the civil service workforce, rather than cutting the pay of increasingly demotivated civil servants.

This would allow one to avoid imposing taxes or similar levies at the expense of activities which generate growth and to increase public expenditure on human resources and public investment in infrastructure.

But the policy has not always been badly designed. Where it was well deigned, the question is how far it was actually applied. The survey examines the possible reasons for hesitation on the part of officials with regard to 'good policies' and the way in which 'false pretences' developed in relations between lenders and the officials responsible for economic policy in the ACP States: countries would pretend to agree to the proposed reforms with no intention of carrying them out, as they had not 'internalised' them; lenders pretended to believe that they had in fact been carried out, in the teeth of the evidence, simply so that they could claim that their own action had had some effect. In short, the practice of granting aid to reform economic policies on certain conditions meant that adjustment became 'borrowed adjustment' in several respects.

Having thus diagnosed adjustment as non-formal, thwarted, shortsighted and borrowed, the authors go on to set out a number of recommendations for reforming adjustment aid, leaving aside those which relate to programme guidelines.

Towards a reform of conditionality

The crisis in conditionality lies largely in a mutual loss of confidence between the developing countries and the donors and lenders, and this is why it is difficult to overcome. Suggestions for reforming it set out to avoid false pretences and ensure that adjustment programmes really are the concern of the countries themselves.

The conditions attached to adjustment aid should be less rigid and more demanding than at present. They should no longer be based on specific measures, such as devaluation, raising the prices of certain goods, or changes in particular categories of tax revenue or public expenditure. Adjustment aid should go hand in hand with an economic policy programme defined by the country. The amount given should be reviewed each year depending on the policy actually followed and the aggregate results achieved as assessed ex post by the donors and lenders.

Attaching conditions to a programme in this way would mean that adjustment aid (or counterpart funds) would no longer be allocated to any particular item of expenditure. Allocating aid in this way, which at the moment is clearly just a stopgap, for want of any better approach to conditionality, is a sign of distrust in the ability of the states to carry out the fiscal policy they have defined and it creates rigidity in the expenditure structure, which makes it difficult to adapt it to developments in the economic situation.

This new pattern of conditionality would obviate abrupt breaks between the ACP Stat" and the international community (or the policy of all or nothing) which in past years were a source of macroeconomic instability in the ACP countries. It would be consistent with the desire of the international community to see the ACP States becoming more democratic. It is in fact extraordinary that in countries which are busy equipping themselves with democratic institutions, almost every aspect of economic policy is decided through negotiations with the representatives of international institutions and bilateral donors and lenders. The democratisation of these countries only enhances the need to internalise their adjustment policies.

P.G. and S. G.-J.