AFRICAN DEVELOPMENT BANK

AFRICAN DEVELOPMENT FUND

ADB/ADF/OPEV/99/02

MARCH 1999

ORIGINAL: ENGLISH

DISTRIBUTION: LIMITED

REVIEW OF BANK EXPERIENCE

IN TRADE ADJUSTMENT PROGRAMMES

Table of Contents

Preface

I. Introduction

II. Background to Programmes

III. Issues in Trade Adjustment Programmes

IV. Lessons for the Bank

Preface

As part of its contribution to the negotiation process of ADF-VIII, OPEV prepared a

paper on Bank Group experience in policy-based lending since 1986. That paper raised series

of issues mostly in the areas of design, implementation and outcomes of those programmes.

While the paper was in the main critical, it concluded that although the Bank Group entered

policy-based lending operations with relatively little experience, it has since acquired

considerable experience with this lending instrument, partly because of its collaboration with

the World Bank, which had been responsible for initiating many of these programmes.

This present report is a continuation of that earlier OPEV effort. Its purpose is to

review Bank Group experience with a subset of policy-based lending – sectoral adjustment

programmes. Sectoral adjustment programmes (SECALs) are aimed at addressing adjustment

issues in a specific sector of the economy. In other words, the aim is to deepen and fine-tune

the adjustment process in a given sector. As an increasing number of African countries

undergo the initial phase of the adjustment process, the need to fine-tune and deepen that

process would become more obvious. Hence SECALs would probably and gradually replace

the conventional economy-wide adjustment programmes as tools of economic reform. This

report reviews Bank Group experience in trade and/or industry adjustment programmes. The

aim is to draw relevant lessons for the Bank that could be useful in future operations.

One of the major findings of this report is that while SECAL is quite desirable,

particularly as an instrument for deepening the reform process, it does not perform well in an

unstable macroeconomic environment. A major recommendation that flows from this finding

is that the Bank should ensure that the macroeconomy is stable before it introduces a sectoral

adjustment programme.

The choice of countries for this review has been dictated by considerations of size and

variations in development experience of the chosen countries. Two of the countries —Nigeria

and Tunisia—are representative of the large economies in Africa, while Malawi and

Mauritius are representative of the small economies. Ghana appears to be representative of the

medium-sized economies. It is hoped that the lessons drawn from this variegated experiences

can be easily generalised to the rest of Africa.

REVIEW OF BANK EXPERIENCE IN TRADE ADJUSTMENT PROGRAMMES1

I. Introduction

1.1 Policy-based lending operations in the form of structural adjustment programmes

(SAP) and sectoral adjustment programmes (SECAL) entered Bank Group array of lending

instruments in response to the economic crisis which engulfed most African countries since

the late 1970s. Subsequently, policy-based lending has become an important lending

instrument not only in terms of resources committed to it, but also in terms of policy leverage

it has conferred on the Bank. In terms of resources, the Bank Group has committed a total of

UA 3452.7 million to PBLs. Of this amount, ADB commitment was UA 2449 million, while

that of the ADF was UA 1003.7 million.

1.2 While in general, policy-based lending has focussed on economy-wide policy reforms

as embodied in SAP, the recognition that some key sectors of the economy (for example, the

trade sector), might require more specific adjustment measures has prompted the Bank to

finance sectoral adjustment programmes in some African countries. The objective was, in the

main, to deepen reforms in carefully selected sectors and to concentrate efforts on specific

issues in such sectors. Following economic crisis of the 1970s, studies were conducted aimed

at establishing the underlying causes of the crisis. One of the conclusions of the studies was

that the loss by Africa, of competitiveness in international trade, was partially responsible for

the crisis. The loss of competitiveness arose from the pursuit of inappropriate economic

policies (e.g. over-valued exchange rates, restrictive trade regimes) and the absence of

institutional frameworks for trade promotion. It was thought, that the reform of the trade

regime would restore or enhance competiveness. While there were variations in the content of

the programmes, they all had the major objective of eliminating the anti-export bias inherent

in the policy stance of the concerned countries. This was to be done primarily through

exchange rate liberalisation, tariff reform, elimination of domestic distortions, and the

establishment of institutional framework for trade promotion.

1 This Review was prepared by O.OJO, OPEV. Questions on it should be addressed to him on ext. 4262 or to

Mr. G.M.B. Karrisa, Director, OPEV, on ext. 4052

2

1.3 The rest of the Review2 is divided into three sections. Section II discusses the

background to the implementation of trade adjustment programmes in the reviewed countries,

while section III deals with critical issues in trade adjustment programmes. The lessons for

the Bank are summarised in the last section.

II Background to Programmes

2.1 Virtually all the countries herein reviewed relied heavily on one or a few primary

commodities for fiscal revenue and foreign exchange earnings. Most experienced one kind of

commodity boom or the other, as a result of which public expenditures expanded rapidly.

Most also failed to take corrective measures when the boom subsided or when oil prices

escalated significantly, with consequent manifestation of domestic and external payments

difficulties. They all exhibited, in varying degrees, overvaluation of national currencies and

other forms of economic distortions which, tended to tax exports. The combined effect of all

these was a gradual loss of competitiveness in international trade. Trade adjustment became

necessary in order to expand exports and diversify the production base of the economy.

(i) Malawi

2.2 During the second half of the 70s, the economy of Malawi, which had made

impressive progress after independence, began to slow down as a result of the combined

effects of adverse terms of trade and weak economic policies. The government reacted to the

crisis by implementing a series of stabilisation and adjustment measures during 1981-86.

Although the economy responded favourably to these measures, it began to weaken again as a

result of the re-emergence of the factors (e.g. the deterioration of the terms of trade), which

had initially caused the crisis. Government response took the form of formulating a

2This Review draws on the following programmes for the analyses that are herein contained.

Malawi: Industrial and Trade Policy Adjustment Programme (ITPAP)

Ghana: Industrial Sector Adjustment Programme (ISAP)

Nigeria: Export Stimulation Programme (ESP)

Mauritius: Industrial Sector Adjustment Programme (ISAP)

Tunisia: Industrial Sector Adjustment Programme (ISAP)

The evaluation reports on Mauritius and Tunisia have, sometime in the past been circulated for Board

discussions, but are herein included along with the new evaluation reports in order to broaden and generalise the

experience with trade adjustment programmes. This review should be read alongside the evaluation reports.

3

development strategy for the period 1988-91, the aim of which was to deepen the adjustment

process by addressing those impediments, which continued to hamper the resumption of

growth.

2.3 Such impediments so identified were to be found in the continuing weakness of the

industrial, trade and financial sectors. In industry, activities were concentrated on a few

commodities and there was little linkage between the sector and the rest of the economy. In

the area of trade, exports were correspondingly concentrated on a few agricultural products.

Export performance was further constrained by an overvalued exchange rate. In the financial

sector, performance was limited by the oligopolistic nature of the sector, with two banks

controlling over 80 per cent of the market.

2.4 It was against this background of general poor economic performance and structural

weaknesses in the industrial and trade sectors that the Industry and Trade Policy Adjustment

Programme (ITPAP) was formulated. The programme followed a series of World Bank-

supported adjustment programmes which were implemented during 1981-86. ITPAP was a

policy-based, sector-oriented programme, whose objective was to stimulate growth in the

industry and trade sectors through trade, price and exchange liberalisation, fiscal discipline,

tax reform, export promotion, the promotion of small-scale enterprises and the reform of the

financial system.

(ii) Ghana

2.5 Between 1970 and 1980, Ghana’s real GDP declined steadily by about 3.7% per

annum, partly as a result of oil price hikes, the collapse of commodity prices and earlier

economic mismanagement. Indeed, the GDP declined by 5.6% and 6.5% in 1981 and 1982

respectively. In response to this crisis, the PNDC government launched in April 1983, the

Economic Recovery Programme (ERP), which was designed to reverse the declines in the

economy. The Programme was in two phases – Phase I (1984-86), and Phase II (1986-88).

2.6 As a result of the implementation of Phase I of the Programme, economic performance

improved relatively. But by 1988, when Phase II was completed, it became obvious that in

spite of its achievements (e.g. the balance of payments position had turned from negative to a

surplus while the rate of inflation had declined from 123% in 1983 to 39.8% in 1987), output

4

growth in the productive sectors, such as the industrial sector, still remained below its

potential. In order to consolidate the gains of the earlier recovery programme, the Government

shifted its emphasis to the reform of specific sectors of the economy, which continued to

exhibit weaknesses. The industrial sector was one of such sectors. Following a series of

sectoral studies by the World Bank, ISAP was put in place to provide policy-based, quick-

disbursing assistance to the Government to help raise industrial output, and non-traditional

exports. The Industrial Sector Adjustment Programme (ISAP) had two main strategic themes.

First, output expansion was to be achieved in the short-run through the efficient utilisation of

existing capacity, rather than through capacity creation. This objective was to be met by the

rehabilitation of existing plants and by the removal of production bottlenecks. In the long-run

however, measures would be implemented to improve incentives in favour of exports, create

conditions for market mechanism to play a bigger role in resource allocation, and thereby

create additional capacity. In order to achieve these objectives, policy reforms were to be

implemented to liberalise the exchange and trade regimes, promote non-traditional exports,

remove price and distribution controls, reform state-owned industrial enterprises and

liberalise the financial sector.

(iii) Nigeria

2.7 Until the 1970s, the Nigerian economy grew rapidly, thanks to the expansion of oil

revenue. While this development was to benefit import substituting manufacturing industries,

it led to the virtual neglect and almost total collapse of traditional agricultural production and

non-oil export expansion. The bias against agriculture worsened by other inappropriate

policies, notably the over-evaluation of the national currency, the Naira. In the early 1980s

however, oil prices started to decline. Export earnings fell from US$ 23 billion in 1979 to

about US$ 6.5 billion in 1986. The corresponding fall in external reserves led to the

accumulation of large trade arrears, and build-up of external debt.

2.8 By 1983, the economic crisis had reached crisis proportions and it had also become

apparent to the Government that the decline in oil revenue was not a transitory phenomenon.

A need was therefore felt for a permanent solution to the over-dependence on oil earnings. It

was against this background that the Government initiated discussions with the International

Monetary Fund (IMF) on possible ways of restructuring the Nigerian economy. These

discussions had reached a fairly advanced stage when in a national debate, the public rejected

5

the idea of an IMF-imposed programme even though the need was felt for policy reforms. The

Government interpreted the outcome of the debate to imply that Nigerians wanted a

restructuring of the economy as long as the restructuring was not imposed externally. The

Government then proceeded to design a home-grown economic reform programme, which

was first embodied in the 1986 Government budget. The reforms contained in the budget

were similar to, and in several respects (e.g. the goals which the government set for itself)

more stringent than the proposed IMF programme. But by rejecting the IMF loan while

implementing a home-grown structural adjustment programme, the government broke the

complimentarity between adjustment and financing, and unwittingly, made the adjustment

process more painful in terms of lost output and declines in living standards.

2.9 The aims of the reforms were to restructure and diversify the productive base of the

economy in order to reduce the dependence on oil and to achieve fiscal and balance of

payments viability over the medium and long term. The budget also contained specific policy

measures designed to bring about the needed adjustment. These included the elimination of

petroleum subsidies, the introduction of a 30% surcharge and the imposition of an income tax

levy. The export sector was to be assisted by the introduction of a package of export

incentives, like the retention of export earnings, the rebates of import duty, the introduction of

Export Credit Guarantees and Insurance Schemes and the rediscounting of short term export

bills. These measures were not fully implemented partly because of the lack of political will

and the collapse of oil prices in 1986.

2.10 The collapse in the oil prices severely affected both the implementation of the reforms

in the 1986 budget as well as the national economy. This prompted the Government to

respond with the formulation of a Structural Adjustment Programme (SAP) covering the

period July 1986 to June 1988. The Programme (which was formulated with the assistance of

the World Bank and the IMF) built on earlier initiatives, but this time, it was broadened to

include exchange rate and trade policy reforms with overall macroeconomic restraint. It also

emphasised the reduction in the size of the public sector and improvements in its efficiency.

2.11 Central to this programme was the imperative of reducing the dependence of the

economy on the oil sector. Thus the support which the World Bank gave was geared towards

the reform of policies in order to permit non-oil production as a step towards the reduction of

6

the economy on oil exports3. In the same vein, the Government approached the Bank Group

for a loan to finance the Export Stimulation Programme. Although there were no cofinancing

arrangements between the two institutions, the two loans were indeed complementary as the

Structural Adjustment Programme provided a common framework under which the two

institutions operated.

(iv) Mauritius

2.12 By the mid 70s, the Mauritian economy has weakened considerably following the

collapse of sugar prices. But the Government took no immediate steps to reverse the trend in

its expenditures, which the boom in sugar prices had generated. The resulting budget deficits

were financed by an increasing recourse to non-concessionary foreign borrowing. Thus

Mauritius found itself in a crisis situation, which was further compounded by other exogenous

factors, including the second oil price increase of 1979 and adverse terms of trade.

2.13 Amidst excessive budget deficits, strong domestic demand and rising inflation, the

current account of the balance of payments registered a huge deficit. The erosion of foreign

exchange reserves coupled with the heavy recourse to external borrowing on non-

concessional terms led to a substantial increase in the country’s external debt obligations, with

the debt service ratio increasing from 1% in 1976 to 10% in 1979.

2.14 In order to address these macroeconomic imbalances and restore economic growth, the

Government of Mauritius, assisted by the World Bank and the International Monetary Fund

embarked on a series of stabilisation and structural adjustment operations between 1980 and

1986. In all, five successive stand-by arrangements and two structural adjustment

programmes were successfully implemented. Under the programmes, substantial policy

reforms were carried out. In agriculture, the main focus of the reforms was rehabilitation of

the sugar sub-sector and enhancing its productivity through land reform, altering the structure

of the export duty and abolishing all restrictions on mill closures. In industry, an outward-

looking strategy was adopted which included eliminating quantitative restrictions on imports,

initiating a programme of tariff reform and encouraging foreign private investment in the

3 In addition to a US $ 452 million Trade Development and Export Promotion Loan, the World Bank also

approved a medium-term lending programme whereby it would lend Us $ 1000 million in support of Nigeria’s

structural adjustment progrmme for a period of three years.

7

export-processing zone (EPZ). In tourism, measures were undertaken to promote Mauritius in

selected markets and a programme was designed to address issues relating to air access

policy, hotel capacity and marketing strategy. The stabilisation component effectively

addressed domestic and external resource imbalances through demand management policies

and export incentives.

2.15 The resulting export-driven economic expansion contributed to the reduction of

unemployment from 11% in 1980 to 5% in 1986. Fiscal restraint, combined with a significant

export supply response, ensued in a dramatic improvement in the country’s balance of

payment position, with the current account improving substantially from a deficit of 15% of

GDP to a surplus of 5% over this period. The fiscal deficit decreased from over 9% of GDP to

3%, contributing to deceleration of the annual inflation rate from 30% to 2%. There was a

marked recovery in domestic resource mobilisation as a result of an increase in the real rates

of interest, with gross domestic savings increasing from 20% to 29% of GDP. The resulting

decline in the need for external borrowing contributed to a decline in the debt-service ratio

from 20% to 18% during the period.

2.16 From the foregoing, it could be seen that the successful implementation of the

stabilisation and adjustment programmes between 1980-86 created a very favourable

environment for sustained export-led growth and development in Mauritius. The steps taken

in liberalising the trade and exchange regimes improved resource mobilisation, restrained

public expenditure, restricted credit expansion and strengthened institutional capacity all

contributed to providing a solid foundation for Mauritius to build upon and take full

advantage of favourable developments in the international economy.

2.17 The underlying objective of the Industrial Sector Adjustment Programme (ISAP,

1987-89) was to build on the earlier efforts at expanding the country’s export-oriented

manufacturing sector in order to generate adequate foreign exchange earnings, diversify the

export base and create additional productive job opportunities. The thrust of policy under

ISAP was to render the manufacturing sector and indeed the economy as a whole, more

responsive to market forces by phasing out the regulatory system and the incentives then in

existence under the Development Certificates. The policy measures under ISAP included: i)

the adoption of a programme for the simplification of the tariffs schedule; ii) reduction of

maximum tariffs on imports from preferential sources; iii) discontinuation of the incentive

8

scheme through Development Certificates for import substituting enterprises; iv)

improvement in the design and functioning of the duty drawback system for exporters; and v)

further reduction of the number of products under price controls.

(v) Tunisia

2.18 The Sixth Economic and Social Development Plan (1982/1986) identified two

economic constraints, which the Tunisian economy would face in the years ahead:

(a) Growing unemployment;

(b) pressure on the balance of payments as a result of the fall in the level of

hydrocarbons produced;

2.19 To respond to these constraints, the plan set for itself three objectives:

(a) redirecting investments towards labour-intensive projects;

(b) reducing internal demand and strengthening the savings capacity;

(c) promoting manufactured exports as a way of compensating for the decrease in

hydrocarbon exports and reversing the decline in the terms of trade.

2.20 Under the Sixth Plan, an Economic Adjustment and Recovery Programme was

implemented. The programme which was supported by the World Bank, was aimed at

implementing policy reforms which would open up the economy to external trade and make

the industrial sector more competitive. The measures which were implemented included the

devaluation of the Dinar by about 28% during 1985-86 and the elimination of obstacles to

export expansion. As a result of the implementation of this programme, the manufacturing

sector expanded rapidly to about 14% of the GDP. Apart from phosphates and textile

subsectors, the manufacturing sector was producing basically for domestic consumption. The

9

limits to import substitution were being reached as internal demand was shrinking because of

the fall in oil production and oil prices.

2.21 In order to compensate for the decline in oil revenue and break the constraints

imposed by a shrinking domestic demand, it became imperative to revitalise the

manufacturing sector. Such a revitalization programmme was contained in the Seventh

Development Plan (1987-91). The Plan contained within it, an Industrial Sector Adjustment

Programme, which had three main objectives. These are the stimulation of the manufacturing

industry; the stimulation of exports of finished goods other than fertilisers and petroleum

products; and the creation of additional jobs in the manufacturing industry. These objectives

were to be achieved through the implementation of trade and price liberalisation measures.

The combined effects of these policies were expected to stimulate growth in the

manufacturing sector and enhance the growth of non-traditional exports.

III Issues in Trade Adjustment Programmes

i) Timing and Sequencing

3.1 One of the pertinent issues in sectoral adjustment programme is that of timing and

sequencing. Is the programme appropriately situated in the context of national economic

policies? Are the policies within it internally consistent with each other? Consider, for

example, the first question. A major requirement for the success of a trade liberalisation

programme is the prior stabilisation of the national economy. If the economy had not been

previously stabilised, liberalisation may lead to the expansion of imports with consequent

adverse effects on the balance of payments. This is more likely to happen under conditions of

inflation and over-valuation of the national currency. In Ghana, an earlier reform programme,

the Economic Recovery Programme (ERP), has considerably stabilised the economy, hence,

the balance of payments account improved both during and after the trade reform. In Malawi,

the trade reform programme was being implemented simultaneously with an economy-wide

reform programme. In other words, the economy had not been previously stabilised. Partly as

a result, the balance of payments worsened during and after the trade reform programme. In

Nigeria, the economy was experiencing tremendous external and internal shocks when the

Export Stimulation Programme (ESP), and a parallel World Bank-supported adjustment

10

programme were introduced. The absence of prior stabilisation of the economy led to a

considerable worsening of the balance of payments situation.

3.2 In Mauritius, previous stabilisation and adjustment efforts had created a conducive

atmosphere for the introduction of a SECAL. Budgetary deficits and external account deficits

had been reduced, while inflation had been brought under control. It was into this

environment that the Industrial Sector Adjustment Programme (ISAP) was introduced in

1987. As a result of these previous efforts, ISAP reinforced and strengthened the balance of

payments account. Indeed, the current account balance turned from negative in the period

before the programme to positive during and after the programme. In Tunisia, prior

adjustment efforts under the Sixth Plan had created a conducive environment for the

implementation of ISAP. Consequently, industrial exports (in particular, textiles exports

expanded rapidly, thus contributing to the improvements in the balance of payments.

3.3 The second question is the extent to which the policies within a SECAL are consistent

with overall economic policies. If they are not consistent, there could be conflicts among

policies. Consider, for example, trade liberalisation and the requirements of revenue

mobilisation. Trade liberalisation may make the attainment of fiscal balance difficult

particularly where a large share of government revenue is derived from import duties. This

raises the question of whether or not tax reform should precede trade reform. In Malawi,

fiscal deficit was high prior to the implementation of the programme. But the Industry and

Trade Adjustment Programme (ITPAP), as an economy-wide programme with sectoral (trade)

focus, had some tax reform measures built into it. The outcome was however not

encouraging. The tax reforms did not significantly alter the reliance of the government on

import duties, presumably because the tax reforms took place alongside trade reforms rather

than before. Thus, international trade taxes continued to average about 20% of total taxes,

both during and after the programme. Revenue concerns might have played a role in the

inability of the government to liberalise the tariff component of the trade reform. In Ghana on

the other hand, the tax system had been reformed under the ERP. This partly explains the

success of the government in liberalising tariffs. In Nigeria where the government has

traditionally relied on the oil sector both for revenue and foreign exchange earnings, the

potential conflict between the requirements of revenue mobilisation and trade reform did not

really materialise because of this peculiar nature of the economy (i.e. its reliance on the oil

sector). This made it relatively easy for the government to carry out the policy measures

11

contained in its industrial policy document. Under this policy, the government was able to

abolish the remaining trade prohibitions and licensing requirements.

3.4 Currency devaluation and the reform of the trade regime are usually key policies

under trade policy adjustment programmes. The former policy represents an attempt to make

the economy competitive again by eliminating currency overvaluation, while the latter is

aimed at opening up the economy to international trade by rationalizing tariffs in order to

remove undue discrimination and non-tariff barriers. While each policy is desirable in its own

right, their combination in trade reform programmes could be counter-productive if the

sequencing is not right. Currency devaluation is supposed to make exports cheaper and

imports more expensive in local currency terms. But if a programme of trade regime

liberalisation accompanies currency devaluation, the result could be unrestricted flow of

imports relative to exports. This in turn could undermine the process of industrialisation of a

country, in particular the growth prospects of the so-called infant industries. Although there is

not much evidence to support the much-talked about ―de-industrialisation‖ of developing

countries, such de-industrialisation could be the ultimate outcome of a policy conflict between

currency devaluation and the liberalisation of the trade regime.

3.5 The conclusions which can be drawn from these pieces of evidence are that

appropriate timing and sequencing of SECAL is crucial to its success. By nature and design,

structural adjustment programmes are difficult to implement because they contain too many

policy measures, and they tend to task the energy of young and sometimes fragile

bureaucracies that are typically found in Africa. But sectoral adjustment programmes on the

other hand, are relatively easier to implement largely because they have fewer policy

measures, and they impose less administrative burden on bureaucracies. It is therefore

tempting, because of this relative ease, to argue that countries and lending institutions should

concentrate on SECAL. The evidence above shows that in spite of the relative ease of

implementing them, SECAL cannot succeed where the macro-economy had not been

previously stabilised. The choice, therefore, is not between one and the other. Rather, the

policy problem is one of appropriate timing and sequencing of sectoral adjustment

programmes in the overall reform process.

12

ii) Programme Content, Design and Relevance

3.6 Two of the programmes (Malawi’s ITPAP and Tunisia’s ISAP) were economy-wide

reform programmes but with industrial focus. The thrust of ITPAP was trade liberalisation,

which was complemented by flexible exchange rate management, reduction in fiscal deficit

and reform of the tax system. The reform of the foreign exchange system was accompanied

by the elimination of quantitative restrictions on competing imports and the rationalisation of

the tariff structure. Administrative and procedural impediments to industrial development

were removed, and export processing zones established for the purpose of promoting

industrial exports.

3.7 The reforms in the trade sector took place alongside the general policy reforms in the

economy. While this might have an advantage (for example, it slightly side-tracked the timing

and sequencing problem referred to above), it had the disadvantage of having too many policy

measures to be implemented. For a young and fragile bureaucracy like that of Malawi, the

burden of implementing several measures was too great. This explains why some measures –

those relating mostly to institutional development – remained unimplemented at the end of the

programme.

3.8 The programme was however relevant to the problem at hand as industrial

performance was poor prior to the implementation of the programme. Although IASP was an

economy-wide programme, its industrial focus made it very relevant to the declared objective

of the government.

3.9 Like ITPAP, Tunisia’s ISAP was a reaction to the economic difficulties, which faced

the country as oil prices collapsed in the 1980s. It was also an attempt to liberalise the trade

regime and enhance capacity utilisation particularly in the industrial sector. In addition to

those policies relating to general reform measures, the programme had components dealing

with the reduction of quantitative restrictions, tariff reforms, and administrative measures to

encourage exports. Until the programme was introduced, Tunisia had experienced severe

economic difficulties, which stemmed from the decline in oil prices. The programme, which

was an attempt to correct these shortcomings, is particularly relevant in the light of those

shortcomings.

13

3.10 The other three programmes started out as sector-specific programmes. Following the

implementation of its Economic Recovery Programme, the Government of Ghana, assisted by

the World Bank, undertook a study of the country’s industrial potential. This study formed the

basis of the industrial sector adjustment programme. The programme was supposed to build

on an earlier reform programme by focussing exclusively on enhancing industrial output and

exports. This was to be achieved through the liberalisation of exchange and trade regimes,

export promotion and removal of price and distribution controls. As the programme was

aimed at expanding industrial output, which continued to be low in spite of previous

adjustment efforts, it can be judged as relevant both to the sector and to the economy at large.

3.11 Nigeria’s Export Stimulation Programme had, as its major objective, the reduction of

the economy on oil exports. This was to be achieved through the expansion of exports

financed by loans to prospective industrial exporters. The Programme was supposed to benefit

from the favourable response of the economy, to an on-going World Bank-supported

adjustment programme. The main features of the adjustment programme included measures to

stimulate domestic production, removal of administrative regulations, control of budgetary

deficits and encouragement of the private sector. Central to this programme, however, was the

deregulation of the foreign exchange market and the trade regime. The ESP was then

supposed to take advantage of the conducive environment, which the adjustment programme

would create. But in reality, there was no-one-one correspondence between the World Bank’s

programme and the Bank’s ESP. It was simply hoped that the World Bank’s programme

would create the enabling environment for the successful implementation of the ESP. Further-

more, in both design and implementation, the ESP looked more like a line of credit, without

the responsibility that goes with a line a credit for project selection. Partly because the

economy had not been stabilised (a SAP was being implemented simultaneously with the

ESP), policy conflicts arose in the process of implementation. For example, the devaluation of

the national currrency (the naira) increased the domestic currency value of the loans to the

beneficiary companies. Similarly, the deregualation of interest rates increased the domesstic

currency cost of the loans. The appraisal report did not factor these possibilities into the

design of the ESP, hence there was no mechanism for mitigating their adverse effects. Their

combination however with the absence of adequate prudential regulatory framework in the

Central Bank was to produce the subsequent distress in the finacial system. It is thus obvious

14

that the ESP was plagued by faulty design right from the design stage, and this fault was to be

carried over into its implementation and eventual outcome.

3.12 Prior to the implementation of the ESP, the government had relied to the tune of over

90% on the oil sector for its fiscal revenue and foreign exchange earnings. Non-traditional

export performance was also constrained by currency overvaluation and other distortions. The

ESP, whose objectives were the reduction of the economy’s dependence on oil for its revenue

and the expansion of non-traditional exports, was thus relevant to the problems facing the

economy.

3.13 Having previously undertaken adjustment measures, the Government of Mauritius

sought to reduce its dependence on sugar exports by diversifying the economy’s production

base. Government action in this regard was heavily influenced by economic and sector studies

carried out or financed for it by UNIDO, the World Bank and the IMF. The underlying

philosophy of the programme which resulted from these studies, was to facilitate the further

expansion of the country’s export-oriented manufacturing sector in order to generate adequate

foreign exchange earnings, diversify the economy and create additional productive job

opportunities. The policy measures under the ISAP included the adoption of a programme for

the simplification of the tariff schedule, reduction of maximum tariffs on imports from

preferential sources, discontinuation of the incentive scheme through the Development

Certificate for the import substituting enterprises, improvement in the design and functioning

of the duty drawbacks system for exports and further reduction of the number of products

under price controls.

3.14 In all the five cases, there were compelling cases for the programmes. Although they

might differ in terms of policy package and orientation, they all had goal of expanding

industrial output and exports. While some had this goal subsumed in a larger programme

(Malawi and Tunisia), others were stand-alone programmes. But the objective was the same.

The programmes as well as the policies therein contained are thus relevant when evaluated

from the standpoint of the problems, which gave rise to them. In terms of outcome, all the

programmes, except Nigeria’s Export Stimulation Programme, were successful. But there

were variations in that success.

15

iii) Complementary Supply-Side Policies

3.15 Trade reform policies by themselves would not increase export production. They have

to be assisted by other complementary supply-side policies. Such policies include growth-

oriented policies which redirect the economy towards production, and policies, which create

and support institutions for trade expansion. In Ghana, previous reform efforts had addressed

these supply-side policies. Domestic distortions were eliminated, thus paving the way for the

restoration of an enabling environment for the resumption of growth. The government also

launched the Accelerated Divestiture Programme whereby several public enterprises were to

be privatised. An Investment Promotion Act was also passed to encourage private investment.

The government also started a programme to address the inadequacies in infrastructure –

water supply, electricity, communication, etc. All these policies were aimed at enhancing the

effectiveness of the trade reform programme.

3.16 In Malawi, previous reform efforts have gone a long way in eliminating or reducing

domestic distortions. In addition, administrative impediments to industrial expansion were

removed through the Industrial Promotion Act. Export Processing Zones were created, while

an Investment Promotion Agency was set up to assist private sector investors. The financial

sector was also reformed and greater participation encouraged within it.

3.17 In Nigeria, the enabling environment had not been created prior to the commencement

of the ESP. But a World Bank-supported programme was being implemented simultaneously

with the ESP. Although the exchange rate was being gradually devalued, domestic distortions

were still prevalent. In the course of implementing ESP however, the institutional framework

for export promotion was created. The Nigerian Export Promotion Council was established

and trade officers were attached to Nigerian overseas missions. The Council as well as the

trade officers were to gather and disseminate information on Nigeria’s export potentials and

identify areas for market penetration by Nigerian exporters. The Nigerian Import-Export Bank

was also established to provide financial support to exporters. The government launched in

1989, the policy framework paper (Industrial Policy in Nigeria: Policies, Incentives,

Guidelines and Institutional Framework). This policy framework paper set out the policies

and incentives for industrial expansion. To further boost non-oil export expansion, the

16

financial system was deregulated to permit free entry and market-determination of interest

rates. All these policies were aimed at creating a growth-oriented environment, thereby

providing a catalytic boost to the working of the trade reform measures. If the outcome of the

ESP fell below expectations, this should be attributed to other factors other than the absence

of complementary supply-side policies.

3.18 In Mauritius, a series of adjustment programmes, which were financed by the IMF and

the World Bank between 1981-1986, has created a conducive environment for a sector

adjustment programme. Quantitative restrictions on imports were reduced, while the incentive

system under the Development Certificates were eliminated. In the area of institutional

support, the export-processing zone was created to attract foreign investment. In Tunisia, the

failure of the Sixth Economic and Social Development Plan brought to the fore, the need to

create a more appropriate environment for the resumption of growth. This enabled the

Government to embark on the implementation of a structural adjustment programme in 1986.

The industrial adjustment programme was part of the larger structural adjustment programme,

which had as its aim, the stabilisation of the economy. From 1987 onwards, the trade regime

was gradually liberalised. Within the overall structural adjustment programme, reform

measures were aimed at liberalising investment codes, regulating banking activities and

encouraging export production. The structural adjustment programme thus contained those

supply-side policies, which were to enhance non-oil export production and exports.

iv) Programme Ownership

3.19 In all cases, lending institutions (IMF, World Bank, and to some extent, the ADB)

took the lead in the identification of the programmes. In some (Ghana and Mauritius), there

were prior economic and sector studies by one or two of these institutions, the purpose of

which was to deepen knowledge of the sector before programme formulation. While the

programmes appear to be driven by donors, the respective governments embraced them once

they (the programmes) were formulated. To this extent therefore, it can be said that they

demonstrated some degree of ownership of the programmes. But beyond this, there was little

or no evidence of a consultative process that tried to share this ownership with the general

public. This was particularly true in Ghana and Malawi as the evaluation missions to those

countries found out. In Nigeria, the reverse was the case. There, the government embarked on

17

the adjustment process after a nation-wide debate among all major economic operators about

its desirability. The feedback, which one received during the evaluation mission to that

country, was that the private sector was fully aware of the ESP and eagerly wanted to

participate in it. But factors other than ownership issues (e.g. poor implementation and

supervision) were to adversely affect the outcome of the ESP, whereas, in Malawi and Ghana,

the success, which the respective programmes achieved, could have been greater if there were

greater national consensus for the programmes. In Tunisia, ISAP was an integral part of the

development policy, which the government initiated on its own for the period 1986-91. The

government was later to play an active role in the preparation of the programme. Even before

the implementation started, it took some steps (e.g. abolition of export licensing, improvement

of export tax system, and the creation of institutional structure capable of promoting export

growth) in order to pave the way for the successful implementation of the programme. During

the implementation, the government went to great lengths to present it to private sector

operators. This way the need for sacrifice (which the reforms entailed) was well understood

by all. In Mauritius, the government played a critical role in the industrial sector adjustment

programme. Although UNIDO and the World Bank conducted the studies which gave rise to

the programme, once it was formulated, the government demonstrated its strong commitment

to it through out the period of implementation.

3.20 It bears re-emphasising that development can proceed best whenever a government

seeks a participatory approach. Such an approach creates understanding of the issues at stake

and the necessity for making sacrifices. Without such an approach, the ensuing ignorance of

the benefits of adjustment could create discontent and thereby undermine the adjustment

process.

v) Programme Implementation

3.21 There were no implementation problems in both Ghana and Malawi. In both countries,

Bank supervision was adequate and the executing agencies performed satisfactorily. In

Nigeria, the situation was different. The implementation of the ESP was marred by several

factors including poor project selection. The executing agency, the Nigerian Import-Export

Bank, delegated the responsibility for project selection to the participating banks, many of

which did not have the requisite capability for the exercise. Consequently, wrong project

choices were made. This problem was further compounded by the fact that neither the

18

executing agency nor the consulting firm appointed for the programme, supervised the choice

of projects. There was therefore no means of stopping the funding of badly appraised projects.

Furthermore, many of the projects did not have working capital, as the responsibility for this

was not made clear from the outset. These and other implementation problems could have

been resolved if the Bank fulfilled its responsibility towards the programme. The appraisal

report called for a supervision mission at the end of each of the three tranches. But throughout

the life of this programme (1989-94), there was only one supervision mission by the Bank. By

this performance, the Bank did not avail itself of the opportunity to correct growing flaws in

the implementation of the programme. The combination of poor performance (on the part of

the Bank and the executing agency), the unstable economic environment and the

shortcomings in the appraisal report (e.g. the lack of clear delineation of responsibility for

project selection and the provision of working capital) predisposed the ESP to failure.

3.22 In Tunisia, there were no serious implementation problems. While the government

was able to persuade private sector operators on the need for the pursuit of adjustment

measures, it failed to submit regular progress reports on the implementation of the programme

as required by the loan contract. This was to limit the exchange of views between the Bank

and the borrower. Bank supervision too was inadequate. For example, only one supervision

mission was carried out in June 1989, nearly two years after the signing of the loan

agreement. The implementation performance in Mauritius was satisfactory. Except for the

initial differences of opinion between the borrower and the government, there were no serious

implementation problems. Co-ordination between the Bank and the World Bank, a co-

financier of the programme, was also adequate.

vi) Programme Outcome and Sustainability

3.23 As an economy-wide programme, the outcome of ITPAP was satisfactory. As a result

of the effects of the programme, the performance of the GDP was impressive. As a trade-

focussed programme, ITPAP was also relatively successful. The trade regime was liberalised

as well as the exchange rate. Administrative bottlenecks, which stood in the way of industrial

and private sector development were removed, while institutions for the promotion of exports

(e.g. export processing zones) were established. The consequence of all these were that

industrial production increased. The index of industrial production (1984=100) fluctuated

between 100.8 in 1987 and 138.6 in 1991. All sectors in industry benefited from this

19

performance with food, beverages and tobacco, clothing, textiles and footwear’s sub-sectors

as the best performers. The performance of manufacturing exports was along similar lines.

Non-traditional exports increased in value terms from US$ 27.2 million in 1992 to US$ 58.6

in 1996. But the supply response could have been much better were it not for the human and

institutional capacity constraint facing the economy. Indeed, it was this observed capacity

constraint which led to the implementation of the successor programme—the

Entrepreneurship and Capital Market Adjustment Programme. The aim of this programme

was to address, in part, some of the human and institutional capacity constraints which had

precluded a better supply response in the economy.

3.24 The reform process in Malawi is fairly sustainable. There is evidence of continuing

government commitment. But this alone would not be enough. The government would need

to go beyond its own commitment and seek political consensus for the reform efforts through

the involvement of the organised private sector. Sustainability would also require donor

support in the areas of debt relief, financial flows including direct foreign investment, and

capacity building for export promotion. The government would also need to investigate

further those areas where the country has comparative advantage for the promotion of non-

traditional exports.

3.25 In Ghana, the response of the economy to ISAP was fairly impressive. In the short to

medium term, the aim of IASP was to facilitate the utilization of installed capacity which had

been run down by past economic mismanagement, through the rehabilitation of existing

plants. Thus the quick-disbursing loans of ISAP were used for this purpose and the response

of the economy was immediate. At the aggregate level, the GDP recorded positive growth

rates. This situation was similarly true of other indicators. The reforms in the trade sector also

yielded positive results. The depreciation of the exchange rate paved the way for export

expansion. Cocoa exports, in particular, increased significantly. Of significant interest is the

performance of non-traditional exports. Non-traditional exports, which accounted for 9.2%

and 12.7% of total exports in 1996 and 1997 respectively, increased to 15% in 1998. The

number of non-traditional exporters increased from 1,729 in 1990 to 3,278 in 1997, while the

value (of non-traditional exports) increased from US$ 62.3 million in 1990 to US$ 329

million in 1997. Processed agricultural products, textiles and crafts dominate the non-

traditional export category.

20

3.26 In the long run, the aim of ISAP was to increase capacity utilisation in the industrial

sector. Although the estimated target of 52% set at appraisal was not achieved, significant

progress was achieved in increasing capacity utilisation from its low levels of 18% and 25%

in 1984 and 1985 respectively. Sub-sectors like tobacco, beverages, food processing and

wood processing actually exceeded 52% in their rate of capacity utilisation. The success of

the programme is attributable to the prior stabilisation of the economy, the economic studies

that preceded it, and government commitment to the programme.

3.27 In Ghana, the evaluation mission found that ISAP was not particularly well known. It

was, in the words of one private sector operator, a government programme. The sustainability

of the reform process would therefore require not just government commitment, but its ability

to reach out to the populace to seek nation-wide consensus for its policies. The government

would also need to deepen the reform process as a step towards the industrialisation of the

economy.

3.28 In Nigeria, the ESP was a dismal failure when measured against its objectives. At the

aggregate level, the GDP recorded positive growth rates, but this performance had nothing to

do with the ESP – it was attributed mostly to the developments in the oil sector. While some

institutional measures for export promotion (e.g. the establishment of the National Export

Promotion Council, and the Nigerian Import-Export Bank) were put in place, the ESP was a

failure in terms of its declared objectives. Industrial output actually declined during the ESP

and post-ESP periods. Capacity utilisation in the industrial sector, which was estimated at

78.7% in 1977, had declined to a low rate of 29% in 1995. Non-oil exports did not increase as

expected, as oil exports continued to dominate the export scene. Before the ESP, the share of

oil, which averaged 95% annually, remained unchanged during and after the ESP. While a

few beneficiary companies recorded some success in expanding exports and in increasing

capacity utilisation, the overall outcome is that at the aggregate level, the ESP did not achieve

the objectives of increasing industrial output, increasing capacity utilisation, and reducing the

dependence of the government budget on revenue from the oil sector which were at the

appraisal. The poor response of the industrial sector to the ESP can be traced to faulty design,

poor implementation, unstable macroeconomic environment and absence of adequate

prudential regulation and control of the financial system. It was certainly not due to lack of

financial and human resources.

21

3.29 The gains of the ESP, though not sustainable, were further undermined by the failure

of the revolving fund scheme to generate the necessary funds to be recycled into new projects,

and by the cancellation of a follow-up programme (the Industrial Export Support Loan) by the

government. But all these need not undermine ESP as a development strategy. Both the

government and donors would need to rededicate themselves to the goal of reducing Nigeria’s

dependence on the oil sector.

3.30 The programme in Tunisia was a success in that it was able to stabilise the economy

and pave the way for the resumption of growth. The trade regime and domestic prices were

liberalised. Value added in the manufacturing sector increased by more than 60% during the

period. This performance is attributable, largely, to the export industries, notably the textile

and agro-allied industries. In the case of Tunisia, the most important factor in the outcome of

the programme was the prior stabilisation of the economy.

3.31 In Mauritius, the manufacturing sector recorded a rate of growth of 8% during the

ISAP period and a rate of 6.5% during 1990-1993. Industries within the EPZ also recorded

impressive performance. As a result of all these, GDP growth rate was also impressive and

has remained consistently so. The ISAP reinforced the reform process in Mauritius and made

a significant contribution to the effort to diversify the economy. This success is traceable to

the combined effects of prior stabilisation of the economy, the reform of the tariff system, the

financial and human resources made available by Hong Kong investors who wanted to take

advantage of the opportunities provided by the EPZ.

3.32 The programmes in both Tunisia and Mauritius are both sustainable. The

macroeconomic environment in both countries is now reasonably stable such that they can

absorb future sector adjustment programmes without difficulty. Both have also showed that

with appropriate policies, Africa can compete in the export market for industrial goods.

IV Lessons for the Bank

4.1 Perhaps the single most important lesson that can be derived from these programmes

is that a sectoral adjustment programme performs best in an economy which had been

previously stabilised, as available evidence shows that distortions and macroeconomic

imbalances undermine the success of sectoral adjustment programmes. In a country’s lending

22

programme, the policy problem confronting the Bank is not whether to choose SECAL or a

SAP in the adjustment process, but rather how to appropriately time either of these

instruments for maximum impact. It should not matter which of the lending institutions

(World Bank or ADB) had previously financed the stabilisation programme for the economy.

What should be important to the Bank is that before it embarks on sectoral adjustment

lending for a country, it must satisfy itself that the economy is stable as judged by the relevant

indicators and that major structural issues have been addressed. Beyond timing, there is also

the question of sequencing of policies within an adjustment programme. This sequencing

becomes important in order to eliminate policy conflicts – conflicts which could undermine

the success of the programmes.

4.2 Another lesson is that prior economic and sector work is important to reform

programmes. In the case of trade adjustment programmes, one needs to know in advance, the

structure of the tariffs, the incentive structure and the likely response of the various industrial

sub-sectors to any reform package. Such knowledge, which can be acquired either through

prior in-house economic and sector work, or through information gathered from the economic

and sector work activities of other donors, would go a long way in enhancing the quality-at-

entry of sectoral adjustment programmes.

4.3 A trade reform programme should ideally be anchored on a system of adequate

information about export opportunities. Thus trade reform would not alone be sufficient, there

ought to be institutions for trade promotion and the dissemination of information on export

opportunities. There should also be a conducive environment (policies and institutions) for

investment in export-producing industries. This is what would make the trade reform

programme a worthwhile effort. Furthermore, a trade liberalisation programme for a country

should not be formulated without regard to its impact on its neighbours. In other words, such

a programme should take into account the regional or sub-regional consequences of such a

trade reform. Failure to take these into account could undermine the domestic outcome of the

programme and it could also impact, negatively, on a country’s neighbours.

4.4 In most of the programmes, there was no explicit indication of performance variables

with which to access their outcomes. Where there are indications, these are usually vague.

The use of the MPDE approach to programme planning would be helpful in identifying, at

appraisal stage, the benchmarks to be used for future evaluations..

23

4.5 Bank supervision is crucial to the outcome of any project or programme. This

becomes even more critical in adjustment programmes, which are of very short duration. In

one of the programmes (Nigeria’s ESP), Bank performance was particularly unsatisfactory as

there was only one supervision mission throughout the life of the programme. This is in spite

of the fact that the appraisal report provided for a mission after the release of each of the three

tranches. Many of the implementation problems, which these programmes (particularly ESP)

faced, could have been avoided if Bank supervision was adequate.

4.6 Finally, it needs to be recalled that development is about people. As such people ought

to have a sense of ownership of the development process. This can be largely achieved if they

are involved in that process. A participatory approach would make obvious the gains to be

expected from the sacrifices which people are called upon to make during the process of

adjustment. Without such an approach, social tensions (borne mostly out of ignorance of the

necessity of adjustment) could undermine the adjustment process.