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A way out of the tunnel

Posted on Monday, 25 May 2009 11:46

The debate over how to steer poor countries out of the crisis is now centre stage. As the economic downturn was the result of the Western financial crisis, the World Bank and the International Monetary Fund have a hard time imposing harsh conditions on African governments who had been faithfully following the advice of the international financial institutions.

British Premier Gordon Brown may have signalled the end of the ‘Washington consensus’ – the bundle of neoliberal policy prescriptions pushed by the Bank and IMF for the past two decades – but so far the changes have been of rhetoric, not of policy fundamentals. In fact, the IMF emerges from the crisis with more funds and more authority.

Although several African officials at the spring meetings of the Bank and Fund expressed concern about tightening state finances, deteriorating terms of trade and falling investment flows, no one was publicly arguing for a return to dirigiste policicies of state-controlled foreign exchange regimes, high budget deficits and a return to high tariff barriers to lock out cheap imports.

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Mistakes of the past?

Countries such as Tanzania and Uganda are running budget deficits at less than a fifth of the 10% deficits in rich economies such as the UK and US, which have in recent months effectively nationalised their biggest banks. By contrast, policy in Africa looks determinedly market-oriented.

Learning from the bad blood during the structural adjustment era in the 1980s, the IMF and the Bank have been quick to emphasise the human costs of the crisis and to insist that they will not push poor countries to cut social spending just to maintain unrealistic fiscal targets. The message was stark. “The global financial crisis is rapidly turning into a human and development emergency,” said World Bank president Robert Zoellick.

On policy, the IMF’s Africa director Antoinette Sayeh warned that after a decade of impressive growth, “the risk is that a lot of what has been achieved in Africa is lost in the months ahead. It would certainly be a very, very bad outcome… if Africa sees a reversion to bad policies in response to social and populist pressures.”?

Zoellick was far too diplomatic to refer to the sweeping criticism that the IMF attracted from countries such as Indonesia, where it pushed contractionary policies with disastrous results in the 1997-8 Asian financial crisis. This time, the IMF desperately wants to avoid a repeat performance. The Fund’s managing director Dominique Strauss-Kahn has been sounding increasingly dire warnings about the social and political costs of the financial crisis, quoting the Fund and the Bank’s figures that another 53m people will be trapped in extreme poverty at incomes of less than $2 a day. More chilling is the Bank’s forecast for infant mortality – with between 1.4m- 2.8m children dying by 2015 if the crisis persists.

The Group of 20 countries meeting in London in early April appointed the IMF the lead agency to steer the global financial system out of the crisis. African ministers have been more enthusiastic about the Fund’s new role, partly because they expect their countries to be able to borrow a substantial amount of the extra $85bn the Fund is making available to middle- and low-income countries. Africa will also benefit from the restructuring of IMF shareholding and the allocation of special drawing rights, which was recommended by the G20.

The IMF’s Sayeh says the Fund has been adapting policy and prescription to address the new conditions, saying that five African states have already secured IMF financing to compensate for lower export earnings.

Fewer micro-conditions?

Core conditions will remain and countries will still need to show effective economic management and financial transparency, but the performance measures will be less rigid. “We’re looking at a review-based system which will look at a country’s performance in the round,” a senior IMF official said, “not an inspector standing around ticking off a checklist of micro-conditions.”?

Most importantly, Africa’s policy-makers are developing their own responses to the crisis. Ali Mansour, Mauritius’s secretary of finance, has launched a $300m stimulus package to boost local demand and create jobs. Mansour told a seminar at the spring meetings in Washington that African states should invest more in infrastructure to prepare for the “inevitable upturn” in export commodity prices.

Uganda’s central bank governor, Emmanuel Tumusiime-Mutebile, said policy flexibility was the key. “We are allowing the shilling to depreciate in the current financial climate,” he said. This could help Uganda boost competitiveness in its processed and manufactured exports, while the alternative of trying to maintain value through a state-administered exchange rate would likely be worse.

South Africa’s then finance minister, Trevor Manuel has cut tax rates for middle- and low-income earners by R13.6bn ($1.35bn) and President Ellen Johnson-Sirleaf’s government in Liberia is proposing a 10% reduction in corporate and income tax rates to boost local business.

Faced with drops in export revenue of $250bn this year, African Development Bank president Donald Kaberuka asked at the Bank’s annual meeting on 13 May for a 200% increase in capital to meet the fast-growing demand from governments.

Opinions on Africa and the Crisis

Nkosana Moyo, Vice-President and chief Operations Officer, African Development BankAntoinette Sayeh, Director of the IMF’s Africa DepartmentMeles Zenawi, Prime Minister of EthiopiaValentine Rugwabiza, Deputy Director-General, World Trade Organization

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