In DepthSoapboxInterview: Shanta Devarajan, World Bank chief economist for Africa


Posted on Friday, 08 October 2010 12:52

Interview: Shanta Devarajan, World Bank chief economist for Africa

By Patrick Smith and Nicholas Norbrook

In this edited transcript of a wide-ranging interview with The Africa Report, World Bank chief economist for Africa Shanta Devarajan talks about the legacy of structural adjustment programmes and conditionality, liability for when programmes go wrong and the latest from the ongoing review of the Bank's Africa policy.

As the World Bank's annual meetings begin in Washington DC, find out if the Bank passed the test in our policy report card. On our Typerighter blog Taimour Lay explains how our probe into the Bank's record on racial diversity caused it to change its website. And read the Bank's responses to our extra questions on agricultural policy.

The Africa Report: If the Bank were able to go back in time, what would it have done differently with regard to structural adjustment programmes (SAPs)? What do you think it would have done the same way?

Shanta Devarajan: I think the actual policies, for the most part, we would have proposed the same way. But I think what we would have done differently is actually help ensure that those policies and the actual tailoring of those policies to the national circumstances emerged from a domestic political consensus rather than as conditionality from Washington.

I’ll be a little bit more precise on some specific policies which we might have done differently. Let's take trade liberalisation. I think trade liberalisation was both necessary and actually a welcome move in Africa, and it’s showing results for sure. But the one thing that I feel like we didn’t take sufficient consideration of was that trade taxes in many low-income African countries represented a major part of government revenue. So when trade was liberalised, you took away a major chunk of government revenue and they didn’t have in place a plan to shore up revenue from other sources, as they should have. That was the appropriate way to do it.

Now, today, most African countries now have fairly well-functioning value-added taxes, which is the way to replace trade taxes with domestic taxes. It’s always easy to have hindsight, but I think in hindsight, we would have tried to put in place value-added taxes.

So, that’s on the technical policy side. Let me add one other thing that we would have done differently in response to the criticisms of structural adjustment programmes. If you recall, the big criticism that came in the 1980s was that these SAPs were cutting health and education expenditure. And in response to that, both the Bank and the [International Monetary] Fund put in place a mechanism by which even if a country had a terms of trade shock and had to adjust, they would protect health and education expenditures. Now, I think that actually created more of a distortion than it helped, for at least two reasons.

You can think of a country, say Zambia, with a negative terms of trade shock – copper prices fell. Zambia actually has to adjust. The entire government budget was suffering and still they had to protect health and education expenditure, which meant everything else had to be cut even more. In particular they were cutting infrastructure expenditure, maintenance of infrastructure.

This had quite serious effects. One, obviously cutting infrastructure meant there was a shortfall in future growth. But more importantly, it actually didn’t even protect health and education outcomes because you actually need roads for kids to get to school, for people to be able to go to the clinic or for medicines to get to the clinic. So you were protecting the wages of the people working in the clinics and the schools, but kids couldn’t go there or you couldn’t get the medication. And finally, as we know, not all health and education expenditure is all that productive, you’ve got absentee rates of teachers in public schools of about 20-25%, so this was an illusory protecting of expenditure under the guise of trying to protect health and education outcomes.

It seems the Bank gave African governments the choice to either reduce salaries by half or just halve the amount of people working in the civil service. Allowing governments to do the first option – cutting wages in half across the board – then led to huge intellectual flight, the brain drain. In hindsight, would it have been better to have helped governments to take the political decision of lowering the number of civil servants?

I think you use the right word, which is we should be helping governments take the economically efficient decision. But we have to recognise that these are all politically difficult decisions. I think what would be wrong would be for us to insist that there’s only one way in which to cut the budget. It’s the governments that have to face the music in terms of the political fallout. These are sovereign governments and they’re elected officials. They are the ones that should make that decisions as to what mix of cutting wages and reducing staff that they want to choose. That is a deeply political decision.

Would you consider advising governments in Africa to protect an industry for 10 years – say chickens in Ghana or Nigeria?

I would do so but very cautiously. I mean I think we have to be realistic. If there was another way in which governments could provide some of these public goods without necessarily protecting a particular industry, like providing transport facilities and so on, I’d feel more comfortable with that. The art is to try to design government interventions that are least prone to capture. Things that are much more across the board are easier to design that way.

To give you an example, Mali is now a major exporter of mangoes, to Europe in fact. Mali is a land-locked country in the Sahel, but it turns out that the agro-climactic conditions are good for mangoes, but they couldn’t transport them. So what the government provided was storage facilities, which is a collective good, and transport facilities for exporting mangoes. It didn’t necessarily pick mangoes, it actually picked storage facilities and transport. Then it turned out that the farmers found it most productive to ship mangoes.

So you would perhaps advise countries along that line and improve agro-industry and infrastructure?

Absolutely! Or improve transport and it doesn’t necessarily have to be agro-industry – it could be just pure industry as well. To give you just one example of road transport. Everyone talks about road transport costs being very high in Africa and that this is one of the reasons why they’re not competitive, and that’s true. But we did a study of the four major road transport corridors in Africa that cut across borders and ship good to the ports. It turns out that in all four of these major transport corridors, the pure vehicle operating costs along these major corridors are no higher than in France, which is really quite remarkable.

But transport prices, the price you have to pay to put the goods on the ships, are the highest in the world in Africa. Now, the difference between transport prices and vehicle operating costs is the profit margin accruing to the trucking companies, and some of these profit margins are like 100%. And then you say why is that? Well it turns out that there are regulations on the books in almost all of these countries that prohibit entry to the trucking industry.

This regulation was concocted 40 years ago when they started the economies of scale or whatever, and you wanted to have just one trucking company. No longer is that the case. You can do a lot having competition in the trucking industry and you could lower costs. Just to give you an example, Rwanda did it. Rwanda deregulated the trucking industry and transport prices fell 75%.

A question on the design of Bank programmes – especially Bank programmes which kind of go wrong and then fall in the lap of the taxpayers of that particular country. The classic example is the paper mill in Tanzania. Is there any thinking at the Bank that the Bank should extend more of its own liability towards programmes that it designs and it implements which then go wrong and end up being a burden?

I mean you can call it a Bank programme, but it was an attempt to ‘pick a winner’, which was paper production, that failed. By the way, for every Bank programme, I bet there are half a dozen government-owned programs that have also gone wrong that we don’t talk about or you didn’t mention. The Tanzanian taxpayer is paying for that as well as for the Bank programmes.

Let me say, that it could be that we actually did provide a system of liability, sharing the liability – it was called debt relief. Think about it. For about 20-30 years the Bank was giving very low interest loans – 0.25% interest loans – to low-income countries. Yet the growth rate and productivity of these loans were such that these countries were in a debt trap and they couldn’t pay it back. I would say quite appropriately, the international community decided that we have to forgive some, if not all, of that debt in order to help these countries resume growth, which they did, and they have resumed growth.

Do you think ideas about accountability have changed since then? One thing that has obviously happened in Africa in the past 15-20 years is more representative governance. Do you think that is being passed on to the Bank in any way?

I would characterise it differently. I would say that our discussions with government are about not just what is the optimal thing to do but what is the politically feasible thing to do that still improves the welfare of their country. That is the nature of our discussions.

Now that’s not governments trying to hold us accountable, but us actually trying to help governments remain accountable to their public, which I think is the appropriate one. I think we are a little bit more aware of this and that’s the evolution of conditionality, is that these recent developments and governments being accountable to their people is still quite nascent. It’s somewhat fragile in many countries, so we have to be very careful not to destroy it or not to make it even weaker by our own actions.

When you say that, do you mean by recommending policies that could prove really unpopular?

That’s the wrong kind of conditionality. Instead of a government being accountable to its people, if its accountable to the World Bank, that then weakens their accountability to the people. But I think we’ve learned that we have to help strengthen that accountability to the people rather than weaken it.

But there’s an incident with the former president of Tanzania, Benjamin Mkapa, when there were some NGOs in Tanzania that were raising questions about the education programme in Tanzania. They had done some surveys and were questioning whether students were actually learning anything and whether the programme was worth the money. The president actually made a statement in public saying, 'I don’t understand why these NGOs are complaining, the donors are very happy with it,' which spoke volumes to me about this accountability.

In the 1970s you couldn’t even get onto a structural adjustment program unless you signed up to quite a comprehensive raft of conditions, those conditions have certainly been eased. Do you see this as a continuing process?

It’s a continuing process, but also I think that you’re oversimplifying the situation in the old days. You’re right that you were required to agree to do certain things in order to get a structural adjustment loan. The fact of the matter is that many governments, having agreed to do so, didn’t do that.

And then the loans were suspended?

No! The loans continued! In Kenya in the 1980s, there were three structural adjustment loans in a row for the same agricultural price reform, with the same conditions. I think people recognised that this idea of conditionality – of that sort of traditional type, which is you promise to do something and then we’ll give you the money – doesn’t seem to work for lots of different reasons, and so that’s the evolution.

I think the biggest key change was the evolution to the poverty reduction strategy paper (PRSP), which came around the time of the HIPC [Heavily Indebted Poor Country] initiative, because that was the first time when this PRSP was being articulated by the government alone. Before that, we had the policy framework paper, which was supposedly a tripartite document, joint between the Bank and the Fund and the country. But let's be honest, it was effectively written on either side of 19th Street [in Washington DC] and the government signed off on it.

And that’s why, to avoid that, we said: “From now on, you have to present a PRSP, and by the way, we’re not going to help you write it.” It was tying our own hands because the temptation was for us still to go ahead and design it.

Why don’t institutions like the Bank have a bigger footprint on the continent? Not for tomorrow, but over the next decade, do you think its feasible to find out that the Bank in Washington is about 1,000 people and the Bank in Africa, Asia and Latin and Central America would be 8,000 people?

I wouldn’t want to put any numbers on it, but I think that’s certainly one of the options we are considering. Currently in the Africa region, 60% of our staff are in Africa. So over half. From my position as chief economist, all my lead economists are in the field. So basically, the people that are closest to me are actually in Kampala and so on. In a sense, already that centre of gravity has shifted.

When I write a paper or when I do any analytical work, I am always doing it with somebody in one of my country offices. The only reason that I’m not there is that frankly, I can't find a particular place in one city in Africa where it is convenient for me to be in order for me to get connected with all the other cities in Africa that I have to be in.

As Africa hopefully comes out of the downturn and gets back onto that growth path of an average of 5%-plus growth, do you think we’re going to see a clutch of African countries graduating to middle-income status by 2020?

Oh yeah, I think there’s a very good chance. Just look at the countries in the $700-900 GDP per capita level. I would add places like Zambia and possibly even Senegal. They are all in that $700-900 range and let’s take a reasonable growth rate of 5-6%. In 20 years you would expect – well less than that, say in 15 years – you would expect some of them to graduate to middle-income countries just by the arithmetic.

I sometimes say that they are already psychologically thinking of themselves as middle-income countries. It’s a psychological graduation that’s happening. And I have to say, I have just come back from a tour of four countries, but we were linked up or we had invitees from 35 African countries on a consultation about Africa’s future and the World Bank’s strategy in Africa, which was fascinating (its on our website – you can watch the video and read the comments) . I was impressed by an almost universal acknowledgement from people in the private sector, public sector, academics, engineering and so on, that is the future of Africa … how they can tap into private sector funding and almost no mention of aid, which is really quite surprising.

Can you give us an indication of the sort of trends coming up in the World Bank’s Africa review?

One of the big trends or thrusts was, first of all, a big emphasis on governance. And then this one is a new development, an acknowledgement that the world is going to be more volatile in the future, and as a result of that Africa needs to develop greater resilience.

It seems that there’s a lot of transparency at the Bank, with reports from its Independent Evaluation Group (IEG) – very tough reports sometimes for example on the health sector – but there is actually very little accountability. Is that a fair assessment?

No, I think the problem is IEG reports tend to look back 5-10 years, sometimes. What has happened is that we have already recognised some of these problems and have already made the changes. So the IEG is picking up what was already a trend that Bank management is already responding to, so sometimes the changes have already been made. On health, I can tell you for sure that’s the case because we had already sat and put in place a whole program on health systems reform, which is precisely what the IEG reports said we should emphasise. Now obviously it’s hard to make changes in a large bureaucracy, so these changes sometimes come only incrementally.

A version of this interview was published in the October-November edition of The Africa Report.

Last Updated on Friday, 08 October 2010 13:26


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