STY 87 E

UNITED NATIONS EDUCATIONAL, SCIENTIFIC AND CULTURAL ORGANIZATION

ECONOMIC THEORIES, DEBT AND A POLICY OF ADJUSTMENT AND STABILIZATION

IN AFRICA

by

Mustapha Kasse

The author is responsible for the choice and the presentation of facts contained in this document and for the opinions expressed therein, which are not necessarily those of Unesco.

DEV-88/WS/14

- 3 -

GENERAL INTRODUCTION

In the current world economic disorder, debt is a subject of controversy, confusion and alarm, as much for theorists and economic experts as for the debtors and major creditors of the Third World, professional economists, financiers and development experts have established extremely grim assessments and diagnoses for underdeveloped societies, and express pessimism about the future of an international monetary system that is already collapsing.

All sectors of opinion take the view that the debts of the Third World will probably speed up and aggravate the international financial crisis, and very seriously undermine the few pockets of stability left in the world economic system. Some writers have even gone so far as to suggest that the insolvencies of the developing countries will jam the entire functioning of the world's economic mechanisms and may trigger a catastrophe on a par with that of 1930.

The size of the debt in certain countries seems narrowly to have missed bringing the international financial system crashing down in 1982-1983 and was sufficiently serious to warrant a package of bail-out plans on the part of the International Monetary Fund. Over the first ten months of 1983, 22 developing countries requested the rescheduling of their official and bank debts, compared with a yearly average of only four countries from 1975 to 1980. Over the same period, the total of rescheduled debts jumped from an annual average of US $1.5 billion to $60 billion.

Taking the analysis a step further, it is possible to see an explosion, or rather an exponential development, of the public debt contracted by the countries of the Third World.

According to statistics released by the World Bank, the total debt - both public and private - currently owed by the developing countries rose from $109.3 billion in 1973 to $300 billion in 1978, and to $519.4 billion in 1982. During this same period, total debt servicing grew from $10.2 billion in 1973 to $34.4 billion in 1978, and to $63.8 billion in 1982, representing for 1982 over 22 per cent of export earnings. These statistics do not include the* short-term debt, which, coming on top of the rest, adds to the burden of external indebtedness.

For 1983, the debt of the non-oil-producing countries of the Third World stood at around $664.3 billion, 53 per cent of which was owed to commercial banks. From 1984 to 1985, however, the figure climbed from $812 billion to $848 billion.

According to the most representative aggregates, debt grew at an annual rate of 20 per cent between 1970 and 1984, even though the overall economic growth rate was somewhere between 4 and 8 per cent. It therefore follows that the massive growth of public debt was not due to an acceleration in economic and social development but was caused and sustained by other factors.

- 4 -

It should also be noted that loans made by international funding agencies and government authorities have fallen considerably, from 61 per cent of the total to less than 50 per cent. This means that private banks have taken over the financing of countries which have enormous needs, thus creating a situation where, in 1983, the total debt of the 25 main borrowing countries stood at .$609.9 billion, of which $344.5 billion (56.8 per cent) was lent by commercial banks.

This factor accounts for the extreme vulnerability of the international financial system, one manifestation of which is the fact that banks were able to magic into Third World countries loans for which the banks did not even possess the funds. Thus we find that the world's 100 leading banks, whose reserves amounted to some $100 billion, were nevertheless able to grant to Latin America loans totalling more than $200 billion. The banks either took unfair advantage of money creation or converted short-term deposits into long-term loans.

Taken as a whole, the external debt of the Third World has a number of features, three of which deserve to be singled out for special attention:

(1) Its annual growth rate is very high, far exceeding that of the economies of the countries it affects. Thus from 1973 to 1982, the total amount paid in debt servicing went up by almost five times, while the Gross National Product merely trebled.

This means that the ratio of total debt servicing to GNP rose from 14.3 per cent in 1973 to 23.5 per cent in 1982.

(2) It is constituted more and more by private loans, and less and less by public financing. Thus the share of total medium- and long-term debt made up of bank loans was 49.6 per cent in 1982, compared with less than 25 per cent in 1973. In the case of the major exporting countries, regarded by commercial banks as better potential debtors, the percentage was considerably higher than the average indicated here.

From this point of view, the ratio of bank loans to export-earnings is a significant indicator of the importance attached to favourable export performance when financial backing is obtained from banks. According to UNCTAD calculations for 1981, the ratio of long-term bank loans to export earnings was about 100 per cent for exporters of manufactured goods, about 40 per cent for other countries with a per capita income of more than $500, and only 20 per cent for the small, poorer nations.

(3) It is both wide-ranging, because it affects all developing countries to different degrees, and highly concentrated, because a major share of the debt is owed by a tiny number of developing countries with large revenues. Thus in 1982, nearly two thirds of the Third World debt was owed by only 13 of the 102 countries covered by World Bank statistics, a proportion which amounted to just under 80 per cent in the case of the 20 countries heading the list of most indebted nations. Five of these - Argentina, Brazil, Chile, Mexico and Venezuela - alone owed $163 billion, representing nearly one third of the total debt-servicing of the developing countries.

The rapid deterioration of the external debt situation of the Third World countries - and more particularly of the major debtors - has led to an increase in requests for debt rescheduling and has fuelled intellectual debate. The latter has largely focused on such questions as:

- 5 -

the conjunctural or structural nature of debt problems;

the origins and components of the debt;

the impact on the international financial system and on Third World countries;

the solutions recommended by international funding agencies (IMF, WB) and major creditor countries;

alternative policies to the debt-based economy.

An examination of the underlying reasons for the fact that debt has in these past few years become a theoretical and a practical problem reveals that beyond the technical factors pertaining to the rapid growth of debt, there is a fear within the international banking system that a mass default on payments could occur, thus feeding the obsession with debt.

Immediately obvious is the fact that the desire of commercial banks to reduce their risks on developing countries, by refusing to grant new loans and lowing the credit lines of some borrowers, has exacerbated the liquidity crisis faced by developing countries at a time when their low level of economic activity and exports caused by protectionism and the world recession, dictates that credit be increased, in other words, the major commercial banks have acted so as to encourage the spiral, even though the situation requires that they discourage it, and are thereby imperilling the stability of the international financial system.

We can therefore claim that the problem arises not so much on account of the debt itself but rather because of the way that bankers and international specialists perceive the ability of debtor countries to honour the debt. This is precisely what entitles us to say that Africa has a debt problem.

In fact, with a global external debt of $50.78 billion in 1982, each of the 41 countries of sub-Saharan Africa covered by World Bank statistics had an average debt of only $1.24 billion, compared with $9.36 billion per country in Latin America and the Caribbean, $6.61 billion in the Far East and the Pacific, $5.38 billion in Southern Asia and $4.94 billion in North Africa and the Middle East.

While the ratio of debt servicing to total exports of goods and services attained 8.8 per cent in 1973 and 7.9 per cent in 1980 for the countries of sub-Saharan Africa, it reached 22 per cent in 1981 for the countries of Latin America and the Caribbean, 18.3 per cent for North Africa and the Middle East and 6.9 per cent for the Far East and the Pacific.

For the West African countries belonging to the West African Monetary Union (WAMU), which constitute one of our points of reference, out of a total of 270.4 billion CFA francs in 1973, the public debt gradually increased to 3,796.5 billion in 1983. This means that in the space of ten years, the amount was multiplied by 14.

The growth curve of the debt indicates a moderate rise from 1973 to 1977, followed by a sharp peak over two years and a levelling off in 1980. The years 1981 and 1982 indicate a veritable explosion of debt, which almost doubled between 1980 and 1982. In 1983, a certain slowing down is clearly visible, caused by difficulties in obtaining financing from banks.

- 6 -

This trend in the debt was determined by changes in the external environment, developments in the countries' domestic economies and the state of their balance of payments. During the early phases, from 1973 to 1976, the adjustments made by the WAMU countries to the impact on the Sahel of the first oil crisis led to moderate external borrowing carried out on favourable terms. In 1977, the price of raw materials (especially coffee, cocoa and phosphate) rose sharply causing several States to step up their public investment programmes, financing them with expensive loans contracted from international.1

banks eager to recycle excess liquidities deriving from the investments made by oil-producing nations.

The policy was pursued from 1978 to 1980, but already, in 1978, the second oil crisis caused a sharp deterioration in the current account situation. To bolster the latter, inroads were made into exchange reserves accumulated in 1977. From 1978 to 1982, the deficit in the current account balance worsened. By 1979, the exchange reserves had been used up and the current account was financed by the operation account loans advanced by the French Treasury, by the International Monetary Fund and by outside borrowings. At the same time, the world economic recession deepened, causing a slowdown in international trade, a slump in the price of raw materials, a sharp rise in interest rates and disorder within the international monetary system. These developments created an even greater imbalance in payments among the WAMU countries, which in 1978 reached an estimated level of 365.6 billion CFA francs, rising to 465.7 billion in 1979 and settling at around 600 billion for the following three years. The scale of these funding requirements explains the debt explosion of 1981-1982, which occurred despite an accompanying reduction in the volume of public investment. If it had not been for the operation account, it is likely that the external public debt of the WAMU countries would have risen even higher from 1979 to 1983.

It is clear from these initial estimates that the external debt situation of sub-Saharan Africa is not as acute or, relatively speaking, as important as that of other parts of the developing world. It is nevertheless a source of growing concern both to African leaders and to international creditors. There appear to be two main reasons for this.

The first is the rapid pace at which the external debt of sub-Saharan Africa is growing. It rose from $9.94 billion (or a per-country average of $0.24 billion) in 1973 to $50.78 billion in 1982 ($1.24 billion per country), multiplying by 5.1 in nine years, as compared with 4.1 for the developing countries as a whole. In relation to GNP, sub-Saharan debt servicing rose by 14.8 per cent in 1973, by 24.7 per cent for Latin America and the Caribbean by 16.4 per cent and 21.5 per cent for the Far East and the Pacific, by 16.9 per cent and 17.1 per cent for Southern Asia and by 22.5 per cent and 38.7 per cent for North America and the Middle East.

The second reason relates to the fact that export earnings in sub-Saharan Africa are derived chiefly from primary commodities whose prices are subject to wide fluctuations and temporary depressions causing a drop in commodity revenues. This being so, international financiers now regard Africa as being less reliable than countries exporting manufactured goods, whose export revenues are more stable and predictable.

Taken as a whole, these statistics indicate the size of the contemporary debt problem as well as its many-sided effects and repercussions. Unquestionably, the problem will shape the course of history for developing economies on an economic, political, social and even cultural level, and will probably lead to radical changes in choices and options for development.

- 7 -

How has economic theory reacted to what is in every sense a strategic problem? Hits it proceeded scientifically, on the one hand providing the indispensable tools for measuring indebtedness and explaining the mechanisms leading to its creation and propagation, and, on the other, offering resources and solutions for solving the problem once and for all? Maybe. But if the generally accepted economic theory which provides the standards used by experts and decision-makers should turn out to be totally incapable of providing an explanation and a blueprint for action, then it can in no sense claim to be scientific. The most it can hope to be is an ideological discourse offering reassurance and comfort about the preservation of the social order.

The aim of the present study is to put forward a series of statistics and opinions on the debt problem as a means of assessing the degree of validity and universality of certain economic theories currently held in West Africa and elsewhere. With reference to Wes„t Africa, we shall examine the following points:

the problem of economic debt as seen through the case-study of West Africa;

the mechanisms governing the aggravation and spreading of the external debt;

policies of recovery and adjustment, and their social and economic impact on countries.

- 9 -

PART ONE

THE DEBT PROBLEM IN WEST AFRICA

At a first estimate, the rising debt in the Third World in general and in West Africa in particular should not cause any wonder or apprehension. The development models established there are based on the precepts embodied in neo-classical and Keynesian economics, which placed faith in the virtues of growth imposed from outside. If one therefore supposes that these countries are lagging behind in development and must achieve rapid growth, at the fastest pace possible taking into account the low capital accumulation base, then the attainment of this objective necessarily means tapping foreign financial resources to offset negative domestic savings. Debt is therefore inherent in the very process of development. In, this respect, there is some comfort to be found in the writings of Professor Charles P. Kindleberger, which establish a clear correlation between rapid growth and the level of indebtedness.

It is strange to note here the doubts and apprehensions which assail the apologists and theoretists of growth policies based on an open economy. What is it that really worries them in the rapid growth of the Third World debt? Has the time come for them to harbour certain misgivings about the theories? Or are they now certain that we are inevitably heading for a general crisis of insolvency which will lead to a spectacular economic crisis similar to that of the 1930s?

At this point in our study, we' propose to take objective stock of the growth of debt in the countries of West Africa, and thereafter to identify the mechanisms accounting for the situation.

The statistics released by the States concerned and by international institutions (World Bank, International Monetary Fund, OECD) indicate the existence of three stages in the growth of the Third World debt. The first stretches from 1970 to 1979 and includes the first oil crisis. According to the World Bank, the debt rose from $114 billion in 1970 to $369 billion, while for OECD it grew from $119 billion to $388 billion. Even though the two aggregates do not coincide numerically, they both indicate an annual growth rate of 20 per cent. The second is a phase of acceleration of the debt, which reaches $450 billion, and above all a worsening of debt servicing, which attains $87 billion in 1980 and $100 billion the following year. Many loans are henceforth earmarked for repayment of debts. During this period, loans from governments and international organizations decline from approximately 61 per cent to 51 per cent and are replaced with loans offered by private banking institutions. These introduce weaknesses: short-term deposits are converted into long-term loans and financial commitments overstep reserves. The final stage covers the massing of an even greater debt at a time when the world economy is in depression. This trend is exacerbated by rising interest rates and an overvalued dollar. The prospect of bankruptcy looms closer, especially for the major debtors in the Third World, while defaults on payment and requests for renegotiation become legion.

- 10 -

The situation gives rise to a wide spectrum of estimates, disingenuous balance sheets are established and opinions harden. Some claim that the Third World debt will bring the world's economic and financial edifice tumbling down. They accuse the international financial institutions of excessively lenient financing policies denoting suicidal folly. For others, this alarmist attitude is wholly without serious theoretical or practical foundation, for, in the end, all the rich countries are living on borrowed money and sitting on top of a mountain of debts. This is particularly true of the United States, where the debts owed by municipal authorities alone amount to six times the entire combined debt of the Third World and the socialist countries of Europe.

It is important, therefore, to examine the specific evolution of debt in the States of West Africa, in order thereafter to identify the causes and mechanisms which sustain and expand it.

I. THE ORIGINS OF DEBT IN WEST AFRICA AND IN THE WAMU

Even though West African debt dates back to before the independence of the various States, there is general agreement that debt first began actually to soar after the first oil crisis in 1973.

Thus the combined global debt of the 13 countries of West Africa rose from $1.5 billion in 1975 to $6.8 billion in 1978, and to nearly $11 billion in 1982. However significant these statistics may appear to be, they nevertheless conceal the major imbalance created by the weight of debts contracted by Nigeria. If this oil-exporting country is eliminated, then a more regular upward trend is seen in the balance of payments deficit of the other 12 countries studied here.

Current account 1975 1976 1977 1978 1979 1980 1981 1982 deficit in $bln

1.56 1.46 1.66 3.07 3.64 4.58 4.47 3.30

In terms of the percentage of GNP, the deficit translates into an average of 10.2 per cent during the period 1975-1982.

This deterioration in the balance of payments was due primarily to the growing deficit in the balance of trade, which was in turn a result of the drop in the value and volume of exports. It also stemmed from a rise in the cost of imports. Thus, over the period 1970-1982, the terms of trade for the entire region were unfavourable, with the significant exceptions of Nigeria and Togo.

To offset the balance of payments deficit, States increasingly resorted to commercial loans and dipped ever more deeply into foreign exchange reserves, as shown in the following table:

- 11 -

THE CURRENT ACCOUNT DEFICIT AND ITS FINANCING

Unit = US $1 billion

1978 1979 1980 1981 1982

Current account deficit (1) 3.07 3.64 4.58 4.47 3.30

Financed by:

1. Net capital flow

State transfers Direct investment Commercial loans Miscellaneous

2. Reserve variations and short-term borrowing (2) 0.27 0.87 1.25 1.03 0.48

0.90' 0.26 1.65 0.01

0.99 0.45 1.60

- 0.27

1.07 0.25 2.15

- 0.14

1.06 0.25 2.36

- 0.23

1.08 0.15 1.17

- 0.12

(1) Except Nigeria. (2) Plus sign indicates diminution in reserves.

Source: calculations based on statistics manuals of UNCTAD, IFS and IMF.

Official development assistance, which rose slightly during the period, was insufficient to make any significant impact on the growth of the balance of payments deficit.

As a percentage of the global GNP, official assistance" disbursements rose from 5.1 per cent in 1978 to 5.2 per cent in 1980, and sank to 3.6 per cent by 1982. The balance of payments deficit rose from 10.7 per cent of GNP in 1978 to 12.3 per cent in 1980, then fell to 6.7 per cent by 1982.

The low level of favourable capital transfers caused the States of the region to turn ever more frequently to external debt simply in order to avoid financial asphyxia.

1. The size of the debt

According to the 1983-1984 edition of the WORLD DEBT TABLES published by the World Bank, the outstanding publicly guaranteed debt for the 15 countries of West Africa rose from $2.3 billion in 1970 to $19.6 billion in 1982.

These figures cover medium- and long-term external debts contracted by the public sector or by State organizations, as well as medium- and long-term private sector debts underwritten by State bodies. Thus they do not include debts of less than one year's duration, drawings on the International Monetary Fund (except loans from the Trust Fund), debts repayable in local currencies or direct investments. According to World Bank calculations for 1980-1982, these omissions may account for up to 50 per cent of the external debt recorded by the debtor reporting system.

- 12 -

To illustrate the point, we need only mention the fact that the region of West Africa drew in 1980, 1981 and 1982 respectively $294 million, $786 million and $1,002 million in IMF loans, none of which was included in the statistics published by the World Bank.

The conclusion to be drawn from these statistics is that the known figures for West Africa provide only a partial account of the external debts owed by the States of the region, thus rendering the figures even more disturbing.

Taken as a whole, the external debt for the region grew at a steady annual rate of 19.8 per cent throughout the entire period from 1970 to 1982, and at a swifter pace after 1977. Compared with the overall GNP of West Africa, the total outstanding debt expanded as follows:

Debt/GNP 1977 1978 1979 1980 1981 1982 in % 9.3 12.5 13.4 12.7 14.0 16.0

These figures indicate a growing deterioration in the region's external debt situation, leaving none of the 15 States in the survey untouched. In absolute terms, Nigeria and Cote d'Ivoire were by far the most heavily indebted States of the region, since the two of them on their own accounted for 54 per cent and 53 per cent of debts for 1981 and 1982 respectively. They are followed by Senegal, Guinea, Conakry, Ghana and Mauritania, which together owed 24 per cent of the debt overhang in 1982 and 23 per cent in 1981.

As we know, however, it is not so much the absolute value of the external debt which counts, but rather its value in terms of reimbursement capacity. Seen in this light, the statistics are almost reversed; for example, Nigeria's debt, the heaviest in the region, represented only 9 per cent, 6 per cent and 5 per cent of GNP in 1982, 1981 and 1980 respectively.

Starting at 270.4 billion CFA francs in 1973, the global public debt of the WAMU countries grew steadily larger, reaching 3,796.5 billion in 1983. In the space of ten years, therefore, its volume increased 14 times. The debt curve showed a phase of moderate increase from 1973 to 1977, followed by two years of acceleration and a pause in 1980. In 1981 and 1982 the debt soared, its volume almost doubling, while from 1980 to 1982 the pace slackened considerably, owing to the difficulty of obtaining loans from banks.

The outstanding public debt of the WAMU gradually rose from 156.3 billion CFA francs in 1973 to 3,030.5 billion in 1983, reflecting the growth rate of the global debt. The ratio of debts to exports of goods and services varied erratically, although it invariably remained somewhere between 40 per cent and 45 per cent from 1970 to 1977. During this period, the ratio was considerably lower than the average ratios noted elsewhere in Africa and for the non-oil-producing developing countries as a whole (cf. Table 1). Starting in 1978, however, the ratio suddenly shot up, so that by 1981 the debt ratio of the WAMU States attained levels above those seen for the rest of Africa and the non-oil-producing developing countries as a whole. The gap widened each year, and by 1983 had reached about 33 points in comparison with the developing countries and 29 points in relation to Africa as a whole.

This trend was partly due to a levelling off of export earnings, which was more pronounced in the WAMU countries than elsewhere in Africa or the developing world. Indeed, after 1978, the difficulty of selling coffee, cocoa, phosphate and uranium, combined with a consistent depression in the price of raw materials and wide fluctuations in the volume of exportable groundnut crops due to rainfall variations, considerably eroded the export earnings of WAMU States, at least 70 per cent of whose export revenue came from sales of these products.

- 13 -

The trend in the outstanding public debts contracted by the WAMU States compared with that of certain indicative aggregates continues to cause concern. From 1973 to 1983, the debt indicators showed a considerable worsening of the situation. In 1983, for example, the debt overhang represented 57.5 per cent of GDP, 177.3 per cent of exported goods and services, and 147 per cent of imported goods and services. In 1982, the latest year for which figures are available on the volume of budgetary revenues, the outstanding debt was triple the size of earnings. A comparison with the average situation of countries elsewhere in Africa and in other developing countries confirms the worsening financial position of the WAMU States. From 1973 to 1979, the ratio between the debts owed by the WAMU States and their GDPs had gradually narrowed the gap separating the WAMU States from the other two groups of countries, a gap which had virtually closed by 1979. From 1980 onwards, however, the WAMU's ratio was above that of the other groups of countries. The ratio grew larger every year, so that by 1983 it had increased by over 12 percentage points. The same was true of the ratio between the debt and exports of goods and services, although in this case the gap closed in 1981 and grew wider again in 1983, to attain the size mentioned above.

During this period, the structure of the WAMU debt underwent a profound change, with the percentage owed to governmental and international institutions decreasing from 63 per cent in 1973 to 49 per cent by 1983. This led to the predominance of external financing under market conditions, a trend which ran counter to the main tendency in Africa, where the relative position of State creditors shifted from 47.8 per cent to 52.8 per cent during the same period. This trend is responsible for the current difficulties of the WAMU States, taking into consideration the high cost and shorter duration of loans granted by private lenders (a high proportion of which are loans from banks and supplier credits).

Another source of debt problems for WAMU is the small number of loans taken out in French francs. Many of those in favour of the franc zone frequently maintained that fluctuations in the French franc against the other main foreign currencies had little effect on the external debts of African countries belonging to the franc zone, bearing in mind their special financial ties to France. This assertion, which implies that most of the loans obtained by these countries were in French francs, is not borne out by the experience of WAMU. As may be seen from the breakdown of outstanding WAMU debt according to currency, the share of loans granted in French francs varied constantly between 1973 and 1983, from a maximum of 35.4 per cent to a minimum of 22.5 per cent. Even more important is the fact that the structure of the WAMU debt reveals, from 1976 onwards, a marked predominance of debts contracted in US dollars, with the exception of the years 1980 and 1981. Most international bank loans were in fact made in dollars, the main reserve currency of the international monetary system. It follows that the sharp depreciation in the franc against the dollar in the past three years has worsened the debt problem facing WAMU countries.

As regards debt servicing, this has in absolute terms been multiplied by 16 between 1973 and 1983, although for the other developing countries it has gone up only five times during the same period. It follows that WAMU's percentage of total debt servicing paid by developing countries increased from 0.6 per cent in 1973 to 1.7 per cent in 1983. A more detailed examination would mean taking into account not only payment arrears but also rescheduled debts. For example, the drop in debt servicing by developing countries observed in 1983 results from the postponement of certain payments due that year, notably by Argentina, Brazil and Mexico. The same is true of WAMU, some of whose Member States have benefited in recent years from debt reschedulings.

- 14 -

From year to year, debt servicing swallows a growing share of the resources of the WAMU countries: 58.6 per cent of fiscal revenue in 1982, and then 11.3 per cent of GDP and 35 per cent of exported goods and services for 1983. For the same year, debt service payments even exceeded the current account deficit by 13.1 per cent and represented 29 per cent of imported goods and services. The increase in WAMU's debt servicing led, from 1982 onwards, to a reversal in the flow of net resource transfers. Until 1981, the balance for these had remained positive, but it subsequently turned negative, with a deficit of 91.7 billion-' CFA francs for 1982 and 296.1 billion for 1983, indicating considerable transfers abroad of foreign currency reserves for purposes of debt payment. These transfers reduced by the same amount the resources available for financing development within the WAMU Member States. They signify that the new borrowings were earmarked totally for debt servicing, which also absorbs part of the countries' domestic resources.

Compared with the rest of Africa and the developing countries in general, the situation of the WAMU States has considerably worsened as far as debt servicing is concerned. In terms of the ratio of exported goods and services to debt service payments, from 1973 to 1978 the ratio was lower than that recorded for the rest of Africa. From 1979, however, the ratio grew ever higher, reaching a gap of 16.6 points in 1983. Until 1981, however, the ratio remained below the average for developing countries as a whole. From 1982, the relative position of the WAMU countries deteriorated, with the gap widening from about 7 points to 16 in 1983. This broadening of the gap was caused both by the acceleration, after 1977, of the WAMU States' reliance on bank loans at variable interest rates and, compared with the other groups of developing countries, a slower growth rate for exports of goods and services.

The rise in interest and amortization payments in the WAMU States is particularly important to the understanding of their present in debt servicing difficulties. From 1973 to 1983, interest payments were multiplied by 30, from 8.5 billion CFA francs to 233.2 billion, representing a sum strikingly similar to the amount earmarked for public investment programmes (262.2 billion) for that year. Over the same period, repayments climbed from 17.3 billion to 344.8 billion, accounting for 32.7 per cent of total fiscal revenue in 1982. It stands to reason, therefore, that the economies of the WAMU countries cannot in the long run sustain the excessively high costs of the annual interest and capital payments. To do so would be to jeopardize the growth of those economies and create a deflationary cycle that would reduce their already inadequate capacities for financial repayments. That is why most of the WAMU States have rescheduled their debts or are engaged in negotiations to that end.

2. The main characteristics of the debt

One of the major features of West Africa's external debt is the preponderance of loans obtained from sources in the private sector in the region's total borrowings. The private sector accounted for 25.9 per cent of the overall debt in 1970, rising to 50.6 per cent in 1982.

This turn of events is particularly remarkable in that it does by no means correspond to the general trend recorded for the sub-Saharan countries of Africa, as indicated in the following table:

- 15 -

STRUCTURE OF THE EXTERNAL DEBT (percentages shown)

YEAR 1970 YEAR 1982

Public Private Public Private sector sector sector sector

West Africa 74.1 25.9 49.4 50.6

Sub-Saharan Africa as a whole " 65.4 34.6 60.7 39.3

Sub-Saharan Africa minus W. Africa 59.2 40.8 68.5 31.5

As may be seen, West Africa in 1970 received the largest volume of loans from the public sector (74 per cent compared with 59 per cent for the rest of sub-Saharan Africa) , whereas in 1982 it received by far the least (49 per cent as against 68 per cent for the rest of Africa).

Given this situation, the pace of borrowing from the private sector began rapidly to increase (averaging 26.6 per cent a year), thereby outstripping the rest of Africa (averaging 17.5 per cent a year). The accelerated pace of borrowings considerably boosted the debt-service payments incurred by West Africa, which in 1970 rose from 41 per cent of total African debt servicing to nearly 54 per cent in 1982 (see Table A.6).

Another important characteristic of the West African debt is that it does not contribute in any significant way to increasing either national production, or by extension, State exports.

Indeed, at the very time that the external debt was rising at an annual rate of nearly 20 per cent, from 1970 to 1982, the average growth rate of GNP in the States of the region remained at a fairly low level, while in many instances exports showed negative growth rates for the period.

The situation arose because, in many cases, external borrowings were not used to finance productive investments but spent on the upkeep of infra­structures or lavished on prestige undertakings that were unproductive by definition.

A last important feature of West Africa's external debt is poor management, which has in part helped to create the difficulties in debt servicing experienced in 1982-1983. That poor management was attributable to several factors:

the multitude of public bodies empowered to contract debts in the name of the State;

the almost total ignorance surrounding non-guaranteed loans contracted by the private sector and repayable in foreign currency;

- 16 -

the lack of proper debt-management structures with the necessary capacity and authority to gather and centralize data in order to ensure efficient monitoring and control of the growth of the debt.

Poor management of this kind can lead to defaults on foreign currency payments and requests for debt reschedulings.

II. EXPLANATIONS FOR THE MASSIVE GROWTH OF DEBTS IN WEST AFRICA

The 1960s were a particularly favourable decade for world finance, with economic expansion in the industrialized countries arid a strong upswing in international trade. These factors produced a positive effect on a fairly large part of the Third World, especially those countries with a high level of revenue and major natural resources constituting a development potential. During this period, the countries in question experienced growth levels of between 4 per cent and 8 per cent. The latter were due, firstly, to the favourable world financial situation, which fostered external demand; secondly, to the relative stability of the prices of raw materials and, above all, of capital equipment and manufactured goods; lastly, to the impressive scale of public financing. In each region, there emerged a handful of semi-developed countries which pushed back the geographical frontiers of capitalism; by their real and potential economic performance, these countries gained credibility in the eyes of the world system, and succeeded in launching and maintaining an internal growth process. These were the countries which were subsequently to negotiate at least 90 per cent of the major loans made to the Third World.

However, the 1970s ushered in a reversal of the trend, with a four-fold increase in the cost of oil products, a rise in the price of capital equipment and manufactured goods, a depression in the price of raw materials and an increase in the cost of food. This situation created a deficit both in the balance of payments and in the treasury, affecting most severely the underdeveloped countries with the strongest links to the international capitalist division of labour.

The increasing emergence of imbalances was further exacerbated by other contradictions within the world system, such as the upsetting of economic balances, the crumbling of the international monetary edifice, and a redistribution of financial surpluses tilted in favour of the Gulf States. The countries of the Third World initiated financial adjustment policies geared to debt. The considerable financial needs of the Third World created commercial opportunities for the private sector of the world financial system. Private banking institutions arranged financial packages that were both flexible and costly to the user.

It was clear that the growth of debt results from several phenomena and cannot therefore be attributed to one single cause. A study of the process in West Africa highlights the following factors leading to debt:

firstly the extremely precarious situation created by the accumulation and development models put forward by the States themselves, which were based on revenue from mining and agriculture as a means to industrialization;

secondly, reliance on the international financial system to redress physical and financial imbalances;

- 17 -

lastly, the role of private financial institutions, not subject to any strict rules and beyond the control of the central banks.

1. The precariousness of accumulation and development models in West Africa based on revenue from mining and agriculture

Economists are unanimous in acknowledging the importance of the accumulation of capital in economic and social development. The expansion of labour and other factors of production, the tapping of basic resources and the modernization and enlargement of production processes are impossible unless a considerable surplus is accumulated and stands ready for use. This is not what happened in Africa, however, where the initial accumulation was discontinued as a result of a breakdown in the basic precepts of capital management, so that part of the surplus was syphoned off by tightly knit social groups with very little hierarchical structure, and channels were created to ensure that profits flowed back to the former colonial powers. Consequently, on achieving independence, most States had no economic surplus for financing development, and some even inherited crisis-ridden public finances as a' result of the practices peculiar to colonial economics. These current account deficits absorbed the meagre resources generated by the system of production.

On gaining independence, the States instituted models for accumulation and development that were based essentially on earnings from the mining and agricultural sectors. Mineral resources were to be systematically exploited and the raw materials exported. These in turn were expected to bring in the foreign currency needed to pay for imports and to finance operations in other sectors of the domestic economy. The aim of agriculture was, firstly, to boost export revenues and build up foreign exchange reserves; secondly, to provide cash income for producers, thereby enlarging the objective domestic market base; lastly to free part of the work-force for employment in other sectors of activity. By this means these policies expanded export activities and linked domestic production systems to the world economy. The results were, everywhere, disastrous.

The model for accumulation and development adopted by all countries, whatever their choice of system, paved the way for the following four situations:

an aggravation of the balance of trade deficit, owing to the contradiction between the appreciation in value of imports (resulting from persistent inflation and the unquenchable thirst for imported goods shown by a wealthy minority) and the downturn in exports, linked to the oligopolistic markets for raw materials and the lack of elasticity of demand;

a worsening of the fiscal deficit, owing to customs and tax concessions aimed at encouraging the influx of private capital from abroad; the depreciation in value of public capital through subsidies to public or semi-public sectors contributing to the profitability of private capital; and massive tax evasion on the part of those with large incomes, i.e. capital investors and persons of independent means;

a food deficit, due to a major crisis in the food-farming sector, taking the form of a drop in per capita crop production and the occurrence of increasingly severe food shortages as a result of the low production levels of local farming systems; the high demand for food products linked to the urban explosion; and the universal adoption of the urban consumption model, based on imported goods;

the many transfers carried out by foreign companies.

- 18 -

This combination of factors, in many cases compounded by the impact of external events (trends in the overall financial situation leading- to a deterioration in terms of trade; higher interest rates; overvaluing, and even undervaluing, of hard currencies), produced a twofold deficit in foreign payments and public finances which obliged States to rely on outside funding.

In other words, debt was a result of the model, but became the only means of achieving adjustment and balance.

2. Reliance on the international financial system to redress physical and financial imbalances

During the 1960s, the international financial system had very little room for manoeuvre as far as redressing the financial imbalances of countries was concerned. Financing was possible only through independent capital movement (direct investment, loans, bilateral or multilateral State subsidies) or through compensatory credits from the IMF, granted under extremely stringent conditions. This meant that the external imbalances of the States were subject to strict rules. In addition, the system had set up financial machinery designed to regulate operations and ensure a return to balance. In other words, the monetary rules enshrined in the Bretton Woods Agreement were more or less respected and financial transfers were subjected to the rigorous control of the central banks.

In the 1970s, however, these institutions evolved very quickly and the international financial system cracked under the combined strain of the enormous growth in liquidities and the manipulation of the latter by private commercial banks operating on an international scale, while remaining completely beyond the control of the central banks.

The countries of the Third World, faced with enormous borrowing requirements as a result of a depreciation in the value of their exports and an upswing in imports, fell back on the liquidities available from the financial market, where a glut of petrodollars was waiting for low-cost investment opportunities.

In view of the favourable economic climate, the countries of the Third World embarked on industrial projects aimed at replacing the exports consumed by social elites (cars, household electrical appliances, consumer electronics, etc.) and at the same time they initiated vast and costly investment programmes aimed at improving social infrastructures. In short, these countries learned to live with major imbalances, while knowing for certain that they would be able to redress the imbalances by borrowing money. Thus they became the credit-worthy customers of industries located in the advanced capitalist countries.

Clearly, therefore, Third World debt can produce twofold benefits for the economies of advanced capitalist countries. On the one hand, it sustains the economic revival and export performance of rich countries; on the other, it fosters a strategy of capital redeployment based on the establishment of regional labour divisions that make for the derealization of industry and the redistribution of other production activities.

Finally, indebtedness helps to create and consolidate relatively independent geopolitical blocs around the world's five main focal points: the United States, Europe, Japan, the USSR and China. Within each bloc there is a division of labour which can open the way to the semi-industrialization of certain Third World countries, at the price of massive indebtedness. The latter include Brazil, Mexico, Israel, Egypt, Nigeria and Cote d'Ivoire.

As we have repeatedly stressed, private banks played an extremely active part in the build up of debt.

- 19 -

3. The role of private banks in accelerating Indebtedness

Commercial banks have been particularly active in contributing to the expansion of the debt contracted by the Third World.

In view of the fact that the Third World was mainly a borrowers' market, and that liquidities had declined as a result of the industrialized nations' adoption of more restrictive monetary policies aimed at slowing down inflationary expectations, the private banks offered financial facilities that were both flexible and costly to beneficiaries. First, the banks organized a system for creating financial liquidities through the expansion of inter-bank operations; in other words for creating loan capital.

The banking system took enormous risks in order to take advantage of commercial interest rates. The rush to court the most advanced, most stable and most reliable of the 'peripheral' countries caused banks to obligate resources which were too far in excess of their own reserves. This is clear from the ratio of loans to reserves indicated in the following table:

Bank Loan/reserve ratio

City Corp. 174.5%

Bank of America 158.2%

Chase Manhattan Bank 154.0%

Morgan Guaranty Trust 140.7%

Manufacturers Hanover Trust 262.8%

Chemical Bank 169.7%

Continental Illinois 107.5%

Bankers Trust 141.2%

First Chicago 134.2%

Wells Fargo 126.6%

This method of flexible financing and easy mobilization of funds was widely used by countries pursuing growth strategies and programmes for the development of certain resources.

However, the financial euphoria was somewhat artificial, rendering the international monetary system, or rather what was left of it, extremely vulnerable.

Indeed, as time went by, it became increasingly clear that the expansion of the debt was leading to a situation where the very survival of private financial institutions was dependent on the solvency of their clients. Having underestimated the risks involved, private banks were obliged to accept the accumulation of arrears in payments by debtors in difficulties and to postpone settlement dates, since bankruptcy was hardly an appropriate procedure in the case of a country.

- 20 -

The prospect of bankruptcy loomed from time to time, causing concern both to creditors and to their economic advisers, for a default on payments would have had extremely serious economic, financial and social repercussions. It would undoubtedly have brought the largest private banks crashing down, upset the entire international financial system and caused the bankruptcy of national and multinational corporations involved in financial capital markets. Nevertheless, all parties were well aware of the implications of the debt and were worried about the nature of the debt crisis.

A crisis of solvency or of liquidity? This is the question which the Third World's creditors and their financial advisers are currently asking themselves, and which is deflecting them from their original view that creating debt is an indispensable means of financing development.

In fact, the growing reliance of West African countries on the rescheduling of their external debts, involving ever larger sums, indicates an acute and lasting debt crisis. It is therefore wholly legitimate to ask whether the problem is simply one of liquidity or whether it goes further and borders on incipient insolvency.

The debt problem currently facing most West African States stems either from insufficient exchange reserves or from inadequate repayment capacity. If the former, the debt poses a problem of liquidity; if the latter, it raises the more serious question of solvency.

The extremely important problem of the medium- and long-term effects of the debt on economic and social development policies needs to be described and analysed in detail. This is the subject of the second part of the present study, which will discuss the 'Factors and mechanisms aggravating and propagating debt'.

- 21 -

PART TWO

FACTORS AND MECHANISMS AGGRAVATING AND PROPAGATING DEBT

Statistics unanimously show that debt has become a massive problem. They also indicate, however, the existence of major quantitative differences, largely due to discrepancies in accounting concepts and methods, which vary from one source to another. To take the example of the volume of Third World debt for 1979, the World Bank evaluates this at $369 billion, while the Development Assistance Committee of OECD estimates the volume at $388 billion. The difference is hardly a negligible sum to be simply written off as a margin of error. There is therefore a genuine problem as regards accounting methods, and this cannot merely be brushed aside. As noted by Marie-France L'Heriteau (Revue Tiers-Monde No. 91, July 1982), the problem of debt appears in an entirely different light as soon as nominal figures are replaced by real amounts. Likewise, the volume of the debt differs according to the macro-economic variables to which one refers. Seen in this context, the debtrGNP ratio reaches alarming proportions. When viewed in terms of the debt:exports ratio, however, the result is different, owing to the considerable increase in the volume of exports over the past few years. The picture changes once again if the focus is shifted from the volume of capital to the volume of repayments due annually and the interest on these.

In other words, each observer uses the figures which best support his or her argument. Depending on whether one is a creditor, a debtor or merely an analyst, the ratio calculated will be either alarming or reassuring. In short, the figures, balance sheets and various methods of accounting are never free from ulterior motives when it comes to the question of indebtedness.

Despite the fact that the instruments of assessment lack precision, the point established in the previous chapter is that the volume of the debt is growing at increasing speed. What are the underlying causes of this, and what repercussions will they have on economic and social development?

If the factors and mechanisms aggravating the debt are not carefully pinpointed, it will be totally impossible to define the nature of the debt crisis, predict its development or recognize all the factors at stake. We may readily suspect that indebtedness is wielded as a formidible financial weapon in the hands of creditors who wish to control and influence the economic and political policies of their debtors - especially when the latter are insolvent. This explains the importance of examining the factors leading to the massive growth of debt.

As noted earlier, debt does not appear to have a single cause. This means that the acceleration and aggravation of debt are also due to a combination of factors, which can be divided into internal and external categories.

I. INTERNAL FACTORS AGGRAVATING DEBT

Although it is not easy to distinguish between external and internal factors, the internal category may be defined as a series of variables of internal origin which contribute to the growth of debt and are directly

- 22 -

controllable by States. If we take the example of the unfavourable geo-climatic environment which prevails in most of the region, we can say that it is an external factor. But, in saying this, we fail to take account of the fact that the governments concerned have not adopted and implemented the measures needed to reduce to a minimum the negative effects of the climate. The same may be said of the food-crop shortfall and the food imports that it necessitates, or "poor debt management.

We may therefore identify the following as internal factors leading to the acceleration of debt in West Africa:

the development models adopted almost unanimously by the States of West Africa;

inefficient debt-management policies and allocations of resources;

the flight of capital;

natural phenomena.

1. Development models

Observers have established that almost all the countries of West Africa, on achieving independence, adopted strategies based on neo-classical and Keynesian theory, thereby founding their development on options which generated indebtedness. These were as follows:

giving priority to the development of exports in the mining and agricultural sectors, where revenue and internal economic surpluses were mainly dictated by trends on foreign markets;

adopting a model of consumption based on that of the industrialized countries, aimed at catering for the needs of a wealthy minority and an urban élite. This model accelerated imports of luxury goods, modernized the basic infrastructure and promoted a dependent system of industrialization designed to substitute imports for home-produced goods. This model of consumption led to a flood of imports which could be financed only by exports or loans. J.C. Sanchez Arnau cites by way of example the introduction of the manufacture or assembly of cars, which in turn created the need to build roads and organize supplies of capital equipment and technology. A series of operations took place at this time which created indebtedness as a result of credit accompanying foreign capital, plus a second wave of debts linked to imports. In spite of this deepening of the debt, the introduction of the automobile catered for the needs of the élite and the middle class only, and did nothing to alleviate transport or export problems;

creating a food deficit as a further consequence of developing cash crops as opposed to food crops, and universally adopting the model of urban consumption based on imported food products. The towns which sprang up as a result of the absolute impoverishment of the countryside served to worsen the food deficit. In this instance, a large part of foreign exchange reserves was used to pay an ever larger food bill. In cases where there were no available reserves, countries relied on debt or food aid;

2 1 J -

opting for major imbalances in favour of the service industries. Of these, the weapons industry is becoming an increasingly important part, involving material that is costly to buy and costly to maintain. It has been the source of heavy debts, the exact figures for which remain a closely-guarded secret.

Development models such as these were bound to lead to debt.

2. Inefficient debt management and resource allocation policies

It cannot be denied that inadequate management of debt is characteristic of the developing countries. In the States under consideration, debt management was until recently in many cases ,entrusted to a department of the ministry responsible for finance or the budget. Most governments subsequently decided to establish a separate structure, known (in Benin, Cote d'Ivoire and Senegal) as an Autonomous Amortization Fund (Caisse Autonome d'Amortissement) or (in Togo) as a National Investment Company. In many instances, however, these structures have not possessed the authority or the wherewithal to ensure genuine management of the debt.

On the subject of authority, the sheer numbers of decision-making bodies empowered to arrange loans on behalf of the State make it difficult to co-ordinate operations or centralize information. As a result, the problems involved in assessing and calculating the debt remain a continuing source of worry. Nevertheless, a thorough knowledge of the debt is a vital prerequisite for proper management. Thus it is impossible, given these conditions, to plan for the debt by drawing up an advance timetable of drawings, interest payments and amortization payments. By the same token, there is little scope for arbitrage in sources of financing and loan currencies, given the present system of organization.

With regard to implementation capacity, the human and material resources at the disposal of the bodies entrusted with debt management are often limited. Generally speaking, little attention is paid to the training #of personnel in modern methods and techniques of debt management. Material resources are so rudimentary that the debt is not even processed automatically, let alone by computer. It is quite obvious that the importance of fast, reliable and well-organized debt management has not yet been fully realized.

Failure to allocate loan resources in the most beneficial way constitutes another internal factor accounting for the difficulty of debt servicing in West Africa. A considerable percentage of external borrowings, especially from 1977 to 1979, was allocated by certain Member States to the funding of prestige investments or to projects of dubious profitability. In-depth studies and surveys were not carried out, and as a result mistakes were made in the siting of dams and in the building of factories, while construction costs were billed at exorbitant rates by foreign companies which in some cases supplied obsolete materials. This led to a situation where large numbers of investments financed by external borrowings not only failed to generate the resources needed to cover the servicing of those borrowings, but also swallowed State subsidies.

The size of infrastructure projects and other schemes of public utility, contributing considerably to development, also raises problems: such undertakings do not directly generate resources for servicing the debt contracted to finance these schemes, and, in addition, they entail high

- 24 -

operating costs. In theory, the State should be able to increase its income and produce sufficient budgetary savings to cover these costs. What in fact has happened is that most States have, since 1980, had to cope with cash-flow problems caused by an unfavourable economic and financial climate.

• 3. The flight of capital

The flight of capital exacerbates the problems of liquidity faced by the-1

countries of West Africa. Large amounts of capital have indeed been invested abroad, on stable and safe financial markets. The investments have been made by both private and State-owned companies, and also by individual investors. Unilateral transfers of this kind represented, according to estimates published by OECD, between $50 and $60 billion in 1982 for the non-oil-producing countries of the Third World.

In the case of Africa, the flight has mainly been carried out by multinational corporations, which transfer funds lawfully, in the form of interest, dividends and profits, and unlawfully, through the twin method of overcharging for goods and services sold to subsidiaries and undercharging for local purchases.

With regard to countries such as the WAMU Member States, these transfers are accompanied by the issuing of banknotes which has attained an annual scale of $150 billion, a sum out of all proportion to the commercial needs and travel expenses of the resident population.

It should be said, however, that the size of the capital flight depends on the development model, the extent to which the country is open to foreign influences, and its links with the world economy. In certain cases, major sums of money are misappropriated from State financial channels, thus worsening the liquidity and savings deficits and leading to a reliance on debt.

4. Other internal factors aggravating debt

In this category, two factors warrant special attention: natural phenomena, and economic and financial policy errors combined with repeated reschedulings.

The intensification and spread of drought in recent years have contributed to a worsening of domestic conditions of production, sometimes exacerbated by unforeseen accidents, such as the bush fires which in 1983 ravaged Benin, Cote d'Ivoire and Togo. These have reduced commercial food crops, cut the amount of agricultural produce available for export, and slashed government revenues. Here again, debt has been relied on as a prop for these imbalances.

Misguided economic and financial policies also lie at the root of the debt problem. For example, according to the Lagos Plan of Action, some 30 to 40 per cent of food crops are wasted in Africa as a result of poor standards of processing, marketing, transport and warehousing. This situation has led to an increase in imported foods, in turn draining budgetary resources and exchange reserves which could otherwise have been used for debt servicing. In addition, loan negotiations are acknowledged to be a notorious breeding ground for corruption (commissions, kickbacks and bribes), going as far as the embezzlement of funds, thus indicating laxist financial policies on the part of the various States concerned.

The final internal factor is rescheduling. Functioning as both cause and consequence, it has now become almost common practice in the States of West

- 25 -

Africa. Indeed, some countries have already broken all records in their repeated and ever more frequent recourse to financing from banking consortia in Paris (Club de Paris) and London. By halting regular amortization of capital, rescheduling increases the overall volume of debt.

In the past few years, reschedulings have become essential for certain debtor countries wishing to avoid an official declaration of bankrupcy. They are, however, bought at what often turns out to be a very high price in terms of commissions, interest rates and financial credibility.

Indeed, countries which renegotiate their debt are required to pay commissions which are added to the debt. On top of this, they are still required to pay interest on the total amount of the debt, including the part that has been renegotiated. It follows that the interest payable is higher than it would have been had the country in question been able to pay off the principal. In some instances, the country is charged a higher interest rate on the part of the debt that has been rescheduled than on earlier loans, in view of the greater risk involved in new borrowings.

Lastly, the loss of financial credibility caused by rescheduled debts exacts its price in the form of tougher conditions (higher interest rates, shorter repayment periods) on further borrowing from capital markets.

II. EXTERNAL FACTORS AGGRAVATING DEBT

External factors may be defined as the constraints which contribute to the erosion of domestic resources and which, when lifted, encourage indebtedness. The most important external factors are as follows:

the international economic environment;

restrictive monetary policies which cause interest rates to rise;

international trade and the deterioration in export earnings.

1. The international economic environment

With the exception of 1977, the orientation of the international economic environment has been unfavourable to the non-oil-exporting developing countries, encompassing the 1973 and 1978 oil crises, the stagnation in international trade, the depressed price of raw materials until early 1983, soaring interest rates, wide fluctuations in exchange rates, cuts in official development assistance, recent restrictions on access to international bank loans, etc. The combination of these factors has led to a profound deterioration in the situation of the West African countries and to a tenfold increase in their financing needs, in turn causing them to sink deeper into debt. These difficulties are aggravated even further, in the case of countries such as the WAMU States, by the presence of multinational or foreign firms. Taking advantage of the rules governing the free exchange and transfer of funds, these firms are draining away major domestic resources to foreign destinations.

According to a study produced by W.R. Cline (International debt and the stability of the world economy), the impact of external events accounts for a

- 26 -

$401 billion increase in the global debt of the developing countries, estimated at $482 billion between 1973 and 1982. That impact can be broken down as follows:

$260 billion for the two oil-price rises;

$41 billion for the raising of interest rates above the average calculated for 1961-1980;

$79 billion for the deterioration in the terms of trade in 1981 and 1982 alone;

$21 billion for the decline in the volume of exports, due to the world economic recession of 1981 and 1982.

Taking account of these facts and of tentative forecasts about the scale of international economic relations, Cline simulates the probable trend in the debts incurred by the 19 most indebted developing countries. For 1986 alone, Cline describes the vulnerability of these countries to the impact of external events in the following terms:

an aggravation of the deficit in the balance of payments amounting to some $53.5 billion, supposing that the average growth level of the industrialized countries as from 1984 is 1.5 per cent instead of 3 per cent;

an improvement in the balance of payments, estimated at $7.8 billion, if the price of oil declines from $31 to $25 a barrel;

a decline in interest payments of approximately $29 billion, if the median level of nominal interest rates is lowered from 13.8 per cent to 10 per cent per annum;

a current account deterioration, estimated at $3.5 billion, plus an $11.9 billion aggravation of the debt situation, should the average depreciation of the dollar attain 10 per cent, instead of 5 per cent, against the other main currencies.

These figures are sufficiently eloquent to establish the fact that, contrary to neo-classical theory, economic and financial relations do not hold out the same development opportunities to all partners alike.

This erosion of the resources of developing countries owing to the impact of external events has been worsened by inflation affecting the debt. The fourfold rise in the nominal value of the debt, which occurred from 1972 to 1979, corresponds even at constant prices to a rise of 56 per cent. Otherwise, over the same period, the debt grew at a real median rate of 6.6 per cent, higher than that of GNP (5.2 per cent) but lower than that of exports (7.3 per cent). Consequently, the growth of the debt appears to be compatible with the increase in real aggregates, contrary to widely held opinion.

The effect of inflation has been to increase the burden of debt servicing and accelerate, in constant terms, the amortization of loans, while at the same time revealing a downward trend in the usual indicators and a weakening of the financial situation of debtor countries.

- 27 -

Thus the initial debt service on a 20-year loan was doubled when the inflation rate, which had started at zero, reached 15 per cent. At the same time, the developing countries were unable to cash in on the transfer of real resources, generally passing from creditor to debtor through inflation, because the effects of this were wiped out by the adoption of variable interest rates indexed to the rise in prices. The deflationary medicine administered since 1980 in the industrialized countries has made the situation of the developing countries still worse. The inflexible lowering of interest rates has raised their real positive level, thus favouring a real transfer of resources from debtors to creditors.

2. Restrictive monetary policies, rising interest rates and an overvalued dollar

Since 1978, payment situations have been reversed, owing to the growth of imbalances in the industrialized countries. In the United States, for example, companies, families and the administration are all living on credit. The debts of corporations jumped from $900 billion in 1974 to $2,589 billion in 1984, those of families from $671 billion in 1974 to $1,832 billion in 1984, and those of the State from $543 billion in 1974 to $1,573 billion in 1984. As in the Third World, a twin deficit has formed and deepened, affecting both the balance of trade arid the budget. The trade deficit rose from $2.3 billion in 1971 to approximately $100 billion in 1984, while the budget deficit climbed from $127 billion in 1979 to $220 billion in 1984.

The United States is undeniably living on top of a mountain of debts and is finding it necessary to finance its deficits. Two monetary measures have helped it achieve this: the overvaluing of the dollar, made possible by the United States' abandonment of the gold standard on 15 April 1979, and the raising of interest rates, owing to the abandonment in October 1979 of interest-rate controls for controls on the money supply.

These two monetary measures led, first, to a deregulation of the banking system and the promotion of financial capital, then to the liberation of banking and credit, which have subsequently become instrumental in mobilizing resources and regulating the money supply. Finally, they caused the United States systemically to syphon to its own advantage all available sources of liquidity. Thanks to the overvalued dollar and the interest rates, the United States has been able to mobilize the capital and savings of foreign countries in order to bolster its economy, which offers guarantees of stability and credibility, plus an economic revival that has increasingly become a reality. The United States has been living well beyond its means and has been able to do so only through maximum exploitation of the key position held by the dollar in the world economic system.

What effects has this monetary performance produced on the countries of the Third World?

On international money markets, nominal interest rates tripled between 1976 and 1981. It is fair to say that the escalation of the external debt as from 1973 was mainly a phenomenon created by debtors and creditors themselves at a time of euphoria in the world economic climate and when holders of surplus petrodollars were looking for low-risk, low-cost investment opportunities to offset generally negative real interest rates. The monetary policies applied today in the Centre countries are quite a different matter, for these have given rise to high interest rates.

- 28 -

Recent studies carried out by the International Monetary Fund have underscored the impact of interest rates on the debt situation of the developing countries. From 1977 to 1982, the average cost of the debt at a fixed rate rose from 5 per cent to 7.9 per cent per annum, while that of the debt at a variable rate climbed from 7.8 per cent to 17.5 per cent. The weighted average cost of the external debts owed by the developing countries thus rose from 5 per cent to 10 per cent a year. Over the same period, the share of the debt at a floating rate grew until it became the predominant part, in accordance with the shift in-' the structure of the debt in favour of a predominance of bank loans whose cost was indexed on the LIBOR (London Inter Bank Offered Rate). According to econometric tests carried out by the IMF, however, a variation of 1 per cent in the LIBOR caused a corresponding variation with regard to the payment of interest on the debts of the developing countries, making a variation estimated at $2 billion a year and representing a modification of 0.5 per cent of the ratio of interest payments to exports of goods and services. This variation produced an inverse modification with regard to the GNP of the developing countries, the volume of which changed by approximately 0.1 per cent.

OECD has shown that the weighted average cost of loan resources of the developing countries exceeds the world inflation rate by at least four points. The reduction of this cost within the proportions described above would have improved by two points the ratio of interest payments to exports of goods and services, and would have raised the growth rate of the developing countries by 0.4 points. This observation underlines the fact that the excessively positive level of real interest rates has not only increased the cost of indebtedness for developing countries, but has also slowed the capacity of debtor countries to honour their debts.

According to statistics published by the World Bank, the average interest rate applied to the debt contracted in the private sector by the countries of sub-Saharan Africa practically doubled in the space of only four years, from 7.8 per cent in 1977 to 14.5 per cent in 1981, before reverting to 12.7 per cent in 1982. This resulted in a considerable increase in interest payments during that period.

Thus from $345.7 million in 1978, interest payments for the region rose to $949.4 million in 1980 and to $1.4 billion in 1982. The steepest rises affected the two countries with the largest volume of debts at variable interest rates, Nigeria and Cote d'Ivoire, whose respective interest payments were $49.5 million and $172.2 million in 1975, rising to $721.5 and $450.7 million in 1982.

It goes without saying that the rise in interest payments significantly increased the burden of debt servicing. By 1982, it had come to represent half (49.5 per cent) of total debt servicing, whereas in 1975, it had accounted for barely 27.5 per cent.

All of these figures indicate the perverse effects of monetary policies and rising interest rates on the deterioration of the financial situation, and hence the indebtedness, of West African countries. Real positive interest rates resulted in transfers of resources in real terms to the benefit of the creditors. Indeed, the World Bank (1984 report) estimated that real interest rates (i.e. nominal rates deflated by the export prices of developing countries as measured in terms of the ratio of interest payments to export earnings) rose from less than 10 per cent in 1980 to 19.4 per cent in 1982, as a result of the combined effects of three factors: an increase in nominal rates, a fall in export prices and a stronger dollar.

- 29 -

-5.1 +2.2 -1.0 -1.2 -4.6 -6.7 -6.9 -2.3

-4.6 +1.7 +1.8 +3.0 -4.0 -3.2 -4.2 +3.6

3. International trade and the decline in export earnings

By and large, foreign trade in the region of West Africa has shown a downturn over the past few years, caused by a steady increase in imports, which the sluggish and fluctuating growth of exports has not been able to offset.

Exports from West Africa still consist chiefly of primary products or semi-finished goods. In recent years, both the price and the volume of these exports has seriously declined. From 1970 to 1982, the average rate of increase or decline in the volume and price of most primary products, exported from the States of West Africa was as follows:

Volume Price

Ferrous minerals Phosphate Coffee Cocoa Ground nut oil Palm oil Maize Wood Cotton -4.0 -1.9

Source: World Bank

The average positive growth rates of prices for certain primary products may perhaps create the impression that the terms of trade improved over the period as a whole. This is not at all true, however, for the rise in the price of raw materials generally coincided with an increase in the price of oil. The global price index for non-petroleum raw materials jumped 28 per cent in 1974 and rose by 12 per cent in 1979-1980, corresponding to the two oil crises of the 1970s. From 1980 to 1982, the price of non-petroleum raw materials declined by 27 per cent in constant dollars. During the same period, the decline in earnings resulting from the deterioration in the terms of trade reached 1.2 per cent of the GNP of sub-Saharan Africa.

Variations in interest rates, exchange rates and international liquidities have played a crucial role in shaping the situation since 1977.

We find, in fact, that any variation in interest rates directly affects the volume of transactions, inventoried stock and speculative demand. The volume of transactions for one category of products depends on their use as raw materials or for direct consumption. An increase in manufacturing costs, due for example to a rise in real interest rates, increases the production costs for finished products and decreases output. This in turn can lead to a falling off in demand from manufacturers and hence a drop in orders for raw materials. High interest rates also reduce the volume of stocks and depress speculative demands for primary products, because opportunity cost rises in consequence.

Another effect of high interest rates, especially in the United States, is to slow demand for primary products billed in dollars.

The instability of the international financial system has contributed to a drop in the price of the raw materials - and hence in export earnings - for the countries of West Africa, leading to a negative effect on their terms of trade. It might also be added that the effects of the protectionism practised by the major capitalist countries have much to answer for in the poor export performance of the States in the West African region.

- 30 -

The scenario is entirely different as far as imports are concerned. These have regularly shown substantial increases, due in particular to the rise-in the cost of oil and the boom in purchases of food products.

In the case of oil prices, it is unnecessary to dwell on the effects that these increases have produced on the non-oil-producing countries of West Africa. Suffice it to say that in many of these countries, the oil bill increased tenfold, and in some instances represented as much as 6 per cent of GNP in 1982,.1

compared with barely 1.3 per cent in 1970.

The second factor triggering a rise in imports is the considerable upturn in purchases of food products. This was the consequence of the significant drop in per capita cereal production and of the droughts endemic to most of the States of West Africa. Between 1969-1971 and 1980-1982, production of cereals (maize, millet, rice, sorghum and wheat) in sub-Saharan Africa rose at an average rate of 1.5 per cent a year, while the total population increased at an annual rate of 3.3 per cent. Given these conditions, the bill for imported cereals climbed from an average of $225 million between 1969 and 1971 to an average of $2.3 billion between 1980 and 1982.

On top of the major factors causing a rise in imports there is the depreciation of West African currencies. This has been a consequence of volatile exchange rates against the major international currencies and of the economic exogeny of the countries of the region. This additional factor has caused growth, consumption and industrialization to become heavily dependent on exports and imports.

Of the 15 countries studied, seven have currencies linked by fixed parity to the French franc (the WAMU countries); three have currencies geared to the dollar (Liberia and Sierra Leone) or to sterling (Gambia); the currencies of Guinea and Mauritania are linked to the SDRs and to a basket of currencies respectively; the currencies of Ghana, Guinea-Bissau and Nigeria are free-floating.

Between 1980 and 1983, however, the real effective exchange rate (i.e. the exchange rate average, weighted by the volume of trade) of the French franc depreciated by more than 25 per cent and that of sterling by nearly 14 per cent, while that of the dollar appreciated by nearly 33 per cent. These variations produced undeniable repercussions on the performance of West African currencies, all other conditions being equal.

The combined series of factors described above either helped to drain the foreign exchange reserves or reduced the foreign exchange earnings (exports) of West African economies, forcing the latter to resort to debt in order to cope with financial imbalances and obligations.

From this assessment it emerges that several factors have contributed to the growth of the debt problem in West Africa. The upheavals in a totally deregulated world economy, combined with the extreme vulnerability of the international financial system, have encouraged the amassing of debts a process which has constituted the sole solution to the imbalances characteristic of developing countries geared to the international division of labour. Furthermore, the absence of any coherent policies aimed at correcting the likely aggravation of the debt raises the question of ways out of the debt crisis.

- 31 -

Are the States of West Africa faced with a simple problem of liquidity, or are they in the throes of a crisis of solvency? An answer must be found to this question if the prospects of a solution are to become clearer.

III. THE NATURE OF THE DEBT CRISIS

A problem of liquidity or a crisis of solvency?

The difficulties created by the debt in West Africa are growing daily more complicated and are causing considerable concern. They lead back to the very nature of the debt crisis itself. The question is therefore to determine whether the debt crisis is one of liquidity, i.e. closely linked to a depressed world economy, or one of solvency, i.e. a problem of structure. There are no easy answers.

Looking at the factors linked to the general world economy, such as the fall in the price of raw materials, high interest rates, the strong dollar and the cuts in unconditional financial subsidies, one might suppose that an improvement in these factors would bring about the total or partial disappearance of the' debt. If this could be proved, then the debt crisis would be a problem of liquidity.

There are three arguments to support this view, each demonstrating that the difficulties caused by the debt are more a result of insufficient foreign exchange reserves than of inadequate repayment structures. We shall now consider how these arguments apply to the concrete case of the WAMU countries.

The first argument is that the continuing decline in the price of raw materials until 1982 and the difficulty of marketing the coffee and cocoa harvests undeniably depressed by at least 30-40 per cent the export earnings of the WAMU countries, according to certain IMF and World Bank calculations. On the strength of these figures, we can put at about $450 billion CFA francs the corresponding loss of resources for 1982 alone. It follows that if the recovery of raw material prices, which began in 1983 as a result of the upturn in the world economy, were to be confirmed in the coming years, the Mnancial capacity for debt repayment of the WAMU countries would markedly improve.

The second argument is based on the fact that the excessively high level of interest rates has considerably added to the burden of interest payable by developing countries. On the other hand, the level of the interest rates also hampers investment in the industrialized countries and is a potential source of renewed inflationary pressures. A lowering of interest is likely soon, as a result of the internal and external pressures increasingly brought to bear on the governments of capitalist countries.

The third argument supporting the idea of a liquidity problem is furnished by the wide fluctuations in exchange rates, especially in the case of the US dollar. The sharp and sustained appreciation of the dollar against the franc since 1981 has not only increased the average debt service payments of the WAMU countries by about 20 per cent a year, but has also entailed a deterioration in their balance of payments, thereby increasing their borrowing requirements. Any move to revaluate the dollar and bring it more into line with the purchasing power parity of the various currencies concerned would considerably ease the burden of debt servicing for the WAMU States.

Assertions such as these must nevertheless be more carefully qualified, for the variations in the world economy involved in the debt problem determine only the national policy and capital investment requirements of the major industrial powers.

- 32 -

In view of this, it would be rash to rely on a solution to the debt problem presupposing the reversal of a trend that could well prove to be much longer lasting than generally assumed. At the very most, we can hope for an easing of pressure on interest and exchange rates, which would lessen the liquidity problem and increase the resources available for the development of productive • strength.

Turning to the question of structural causes, we must acknowledge the fact/ that, in the medium term, West Africa faces a solvency crisis, and that the solution to this involves a substantial overhaul of economic structures.

The countries concerned will indeed have to cope in the coming years with the servicing of a large debt, within a world economy characterized by a slowdown in the flow of foreign capital from private and State coffers. The projections made by the World Bank regarding debt servicing read as follows (in millions of dollars) :

1985 1986 1987 1988 1989 1990

Public creditors Principal

810.4 1,030.3 1,013.2 1,016.2 949.6 320.2

Source: World :

Interest

498.8 499.3 473.2 433.8 389.9 345.2

Bank, World

Private ere Principal

2,121.3 3,060.8 2,657.7 2,040.5 1,554.1 826.6

¡ditors Interest

1,140.8 978.6 712.0 465.4 269.3 128.7

Debt Tables (1983/1984 edition).

Total Principal

2,931.7 4,091.1 3,670.9 3,056.7 2,503.7 1,146.8

Interest

1,639.6 1,477.9 1,185.2 899.2 659.2 473.9

In view of these major financial obligations, the economic prospects for the rest of the decade remain fairly grim. Taking present trends as a basis, the World Bank projects only a slight growth in GNP (2.4 per cent yearly average) for the oil-importing countries of Africa, provided that the net official development assistance payments increase from $4.7 billion in 1980 to $7.5 billion in 1985, and to $11.5 billion by 1990.

This means that the difficulties will build up and become more serious, taking into account the fact that loans are harder to obtain and in view of the following factors:

a large and growing proportion of external debt servicing, corresponding to the multilateral debt, cannot be rescheduled;

reschedulings cannot be indefinitely extended and renewed;

certain rescheduled debts begin to fall due in 1986, although the situation has not in any way changed for the better.

To conclude the present study, it appears that the size of the debt burden casts a shadow over any prospect of development in West Africa. The crisis that is gaining hold may well be a long one, owing to the presence of a large number of factors that extend and aggravate it. In particular, the possibilities for expansion and growth are reduced, and even totally annihilated, by the excessively high outstanding debt. The situation is further complicated by a

- 33 -

reduction in external sources, the holders of which in any case appear to be increasingly reluctant to mobilize the capital essential to the development of the States of West Africa.

Meanwhile, the food-farming crisis making West Africa a zone of nutritional insecurity and vulnerability is growing wider and deeper, owing to a combination of three factors:

the low growth rate (1.3 per cent) of agricultural production coupled with a surge (2.7 per cent) in population, causing a drop in per capita agricultural output;

the replacement of food-crop production by cash-crop farming is accentuating the food deficit: whereas in 1950 West Africa exported 2 million tonnes of cereals, today it imports approximately 2 million;

the urban explosion and the swift but random growth of cities is boosting the demand for basic social infrastructure and increasing the non-productive expenses of the State.

In addition, the following factors are aggravating the situation: the rise in oil costs, the growth in State financial burdens owing to the existence of a huge public and semi-public sector that is heavily in deficit and is maintained by subsidies, the dwindling of donations and other unilateral transfers, and the depreciation of export earnings.

All of these circumstances and factors have thus merged to aggravate the twofold crisis of public finances and the balance of payments. This internal financial deterioration is not only incompatible with targets for growth and development, but is also a cause for concern among the investors and all the creditors of the West African countries. It renders necessary the search for those solutions which international financial institutions claim to have found in policies aimed at stabilization and economic recovery.

- 35 -

PART THREE

POLICIES OF ADJUSTMENT OR A CHANGE OF DEVELOPMENT MODEL

Surveys of every kind have shown that theorists, experts and specialists in development have unanimously arrived at the same conclusion regarding indebtedness: the rapid amassing of debts entails intolerable burdens for national economies. Paying one debt invariably means contracting another, thus creating a vicious circle with no end except in economic and financial deterioration which hampers any growth. There is also a consensus as to the factors aggravating and expanding indebtedness. Any disagreement is very minor, and tends to concern the relative importance of one factor over another in accounting for the acceleration of Africa's external debt.

The consequences of indebtedness have also been perceived by experts, irrespective of their ideological or theoretical persuasion. Thus neo-classicists, Keynesians and Marxists all'share the following views:

(1) Economically, the debt crisis reduces or even rules out any possibilities of growth and development in the States of West Africa. An increasingly large share of domestic resources is spent on debt servicing, instead of being used to finance development. The resulting drop in domestic demand compromises any possibility of expansion.

(2) Finally, the steady rise in the volume of indebtedness reduces public investment and, when cleared, produces a deflationary effect on the economy as a whole. In order to cope with its overheads and increase budget savings, the State is obliged to raise domestic taxation, cut various subsidies to consumption, raise public tariffs and interest rates, and curtail public spending. In short, the policy of income distribution is deflected to the advantage of other countries.

(3) As regards foreign policy, debt servicing further worsens the existing structural deficit in the balance of payments.

All of these consequences, and their scale are acknowledged alike by investors, debtors, theorists and the various experts.

As far as the diagnosis is concerned, it can therefore be claimed that never in the history of economics has there been such a broad consensus among such widely differing schools of thought, however incompatible their approaches and methods may be. There is every reason to suppose that theory has been overtaken by reality.

Needless to say, in their analysis of the workings of indebtedness, the old rivalries emerge and certain economic theories reveal their shortcomings. The debt problem lies at the heart of international economic relations and occupies a central place in questions of trade and development. Seen in the light of neo-classical theory, whereby free trade fosters efficient world production and offers the various partners opportunities for development, the debt problem would appear to invalidate precisely this optimistic vision of international economic and financial relations. Decades of specialization and unrestricted trading have produced the debt-based economy whose ultimate consequence is in fact to prevent economic and social development.

- 36 -

What this means, then, is that the machinery of debt exposes all the weaknesses of neo-classical economic theory.

What possible cures are there? Have the experts proposed identical policies for remedying the economic, financial and social deterioration of debtor • countries and helping them out of the crisis?

The many and complex issues at stake in the debt crisis have over the past1

few years prompted much searching for solutions to the problem of debt.

Foremost among the answers are undoubtedly the stabilization policies imposed by international financial institutions, in particular the IMF, whose intervention in West Africa has been increasingly heavy. The aggravation of the financial crisis has caused countries to turn to the IMF when rescheduling their debts. From 1979 to 1983, reschedulings increased in West Africa as follows:

COUNTRY DATE OF RESCHEDULING

PREVIOUS AGREEMENT

DURATION AMOUNT IN MILLIONS OF AGREEMENT OF SDRs

Cote d'Ivoire

Ghana

Liberia

Mali

Mauritania

Niger

Nigeria

Senegal

Sierra Leone

Togo

1981

1966, 1970,

1978

1983

1983

1983

1981,

1981, 1983

1977, 1982

1979, 1981,

1968, 1974

1982

1982,

1980,

1980, 1982

Feb. 1981

Aug. 1983

Sept. 1983

Dec. 1983

Oct. 1983

Sept. 1983

Feb. 1984

March 1984

36

12

12

18

483.5

238.5

55.0

40.5

15

12

12

12

18.0

95.0

31.2

19.0

Rescheduling and obtaining new loans from the IMF and even from other financial institutions is becoming increasingly subject to the organization of adjustment and stabilization programmes. These give rise to sharp doctrinal controversy and disagreement, resulting from the tensions which they create and which pose a threat to fragile social edifices, especially in West Africa.

The search for solutions to the process of indebtedness throws all the factors involved into relief. What solutions do the various creditors propose to countries with a debt burden so heavy that they are showing signs of bankruptcy and ruin? Do the solutions proposed have any positive effect on the pursuit of growth and development, or is their main purpose the restoration of solvency in debtor countries? How much room for manoeuvre do the solutions allow debtor

- 37 -

countries, and is it true to say that there is an increasing transfer of political and economic sovereignty to creditors, thus making the Third World Debt a financial lever perpetuating dependence and inequitable economic relations?

These vital questions give an indication of the hidden issues that may be at stake in what appear to be technocratic and neutral solutions. They also show the need to examine policies of adjustment and stabilization, assess the economic, political and social impact of these, and seek alternative strategies which provide a genuine solution for these countries and enable them to embark on development programmes geared to meeting their basic needs, as recommended in the Lagos Plan.

To do so, we shall examine two areas:

adjustment and stabilization policies, and the impact of these on the development model based on exogeny and dependence;

alternative solutions.

I. THE ADJUSTMENT AND STABILIZATION POLICIES RECOMMENDED BY INTERNATIONAL FINANCIAL INSTITUTIONS

The statistics quoted in the preceding sections have amply demonstrated the scale of the debt crisis, which has prompted increasingly heavy intervention by international financial institutions, especially the IMF. Indeed, since 1976, IMF interventions have grown to the point where they now represent about 17.5 per cent of its total operations.

In spite of this, analysis of the future outlook and of certain trends within the debt itself shows that the volume of indebtedness will continue to grow and that the context of the world economy is likely to remain unfavourable. This being so, the IMF will emerge as the banker of the African States and the institution that will dictate and co-ordinate the attitude adopted by public and private investors and creditors. In fact, the IMF finds itself taking on an excessively powerful role as the manager and regulator of indebted economies. This places it in a central position in negotiations on debt reschedulings, the organization of agreements and the establishment of new financing facilities framed to fit programmes which amount to policies of adjustment and stabilization.

We must therefore scrutinize these policies and their underlying theoretical and doctrinal assumptions, and assess their radius of action at both practical and theoretical levels.

1. The adjustment and stabilization policies prescribed by the IMF

Adjustment is a phenomenon not altogether foreign to economic analysis. It is often seen as a policy involving the reallocation of factors and resources in order to restore equilibrium and revitalize growth and expansion. Reallocation is carried out by means of co-ordinated and simultaneous variations in relative prices, revenue and exchange rates.

Adjustment policies must make it possible to correct economic and financial imbalances, and open the way for a return to healthy and sustainable growth.

- 38 -

In cases where the imbalances are transitory and can correct themselves within a reasonable period of time, appropriate temporary financing - often provided by the IMF, since this is its purpose - will be sufficient to solve the problem. Financing of this kind will be accompanied, where needed, by compensatory corrective mechanisms designed to modify the flow of goods and capital.

If this is not the case, however, then other measures must be adopted, facilitating the return to a viable balance of payments within a reasonable period of time. In other words, the measures must adjust the economy to a new situation deemed acceptable.

Given the persistent deterioration of the balance of payments and public finances, adjustment has for the IMF become an absolute imperative. The 1981 IMF report emphasizes the fact that the Fund has an important role to play in helping countries to design suitable adjustment programmes and in working out the correct amounts of adjustment and financing required.

IMF adjustment programmes are based on the ingredients of neo-classical theory and liberal doctrine: the quantity theory of money, the theory of purchasing power parity and the theory of comparative costs.

The quantity theory of money is used to explain and prove that any inflationary process is ruinous and leads to multiple anomalies which will produce a negative impact both on the balance of payments and on the allocation of resources for growth. However, the excessive demand for money is the main source of inflation and payment difficulties. This being so, IMF experts try to assess this crucial monetary aggregate, the level of which depends simul­taneously on the volume of internal credit, of external debt and of budget deficit. These three factors make up the macro-economic variables on which action must be taken in order to eliminate or reduce inflation. Credit restriction should therefore affect decisions in both the public and the private sectors. Thus the public sector will reduce its imbalances. Meanwhile, the restriction imposed on indebtedness entails a tighter rein on credits and monitoring of the impact of this on internal accumulation, for there is indeed a need to ensure that an excessively large debt does not jeopardize productive investments. The budget deficit constitutes the final factor creating an excessive demand for money. In the eyes of the IMF, this imbalance is caused by a top-heavy public administration and, above all, by subsidies to the public and semi-public sectors.

These three macro-economic variables must be strictly surveyed and maintained at relatively low levels in order to prevent a swelling of the money supply, which would trigger inflation.

As regards purchasing power parity, this theory stipulates that changes in the exchange rate must reflect the inflation differential that exists between two countries. The theory is therefore used as an explanatory criterion in the emergence of the two major variables pertaining to adjustment policies, viz, the exchange rate and the interest rate. According to the IMF, these rates are often maintained at lower levels in the developing countries. The result is the erosion of domestic savings and their unsatisfactory use.

Last, we come to the theory of comparative costs. This is invoked as a justification of the need for untrammelled trade, based on the specialization of each country in areas where that country is best endowed with natural resources, it being assumed that foreign trade raises the profit made on these resources. Since such trade is to the advantage of all partners, countries should be open

- 39 -

to international economic relations. The next step is to try to show that the opening up of frontiers gives the partners equal opportunities for development. The IMF invokes the theory of comparative costs in order to plead the case for promoting international trade as a means of achieving worldwide prosperity.

Against the background of what appears to be a highly coherent doctrine, the IMF has devised a general adjustment programme that is valid for all developing countries. The universal nature of this solution lies in the fact that, for the IMF, all the countries of the Third World can be diagnosed as suffering from the same illness: balance of payments difficulties. Within this context, the adjustment programme should, within a reasonable lapse of time, create a viable external payments situation.

The adjustment programme is often divided into five interacting and mutually reinforcing parts. These are intended to restore major internal and external balances and to improve solvency.

The first part concerns economic growth. In the view of the IMF, developing countries must enforce a policy of rapid growth. Its pace must be the fastest permitted by the country's internal and external human and material resources. In addition, growth must be continuous, steady and free of excessively sharp downward or upward fluctuations. Theoretically, at least, the pace of growth should depend on the rate of accumulation of capital or on the rate of investment.

The fact remains that the higher the productive investment, the faster the rate of growth. It follows, therefore, that all available savings must be mobilized in order to achieve productive investments. At the same time, however, a solution must be found to the imbalances which interfere with the reallocation of resources to productive sectors. This would apply to relative prices and overvalued exchange rates which discourage the production of goods for export and as substitutes for imports.

A policy of this kind is production oriented and tends to stimulate productive projects at the expense of social investments. The latter generally concern health, education and other social subsectors which, according to IMF economic logic, are labelled unprofitable.

The second part of the adjustment policies concerns money and credit, which must be manipulated in order to sustain domestic demand at a level compatible with equilibrium, and the reduction of inflationary pressures.

As established earlier, the IMF emphasizes the need for strict control of the financial aggregates linked to demand, such as domestic credit, the volume of the debt and the budget deficit. An uncontrolled increase of any one of these aggregates could result in the creation of an excessive demand for money that would generate inflation and in turn introduce a negative imbalance in the allocation of resources.

Measures to reduce demand are of three kinds :

Firstly, control of the credit granted to the Treasury by the Central Bank. This ensures that the budget is contained within narrow limits, and ultimately forces the State to restrain the growth of its expenditure and above all to switch the allocation of public funds to sectors linked to economic growth. An adjustment of the budget will therefore prove necessary, in view of the restriction placed on credit to the Treasury and will be organized in two

- 40 -

parts. The first is the mobilization of additional resources by taxation and borrowing from the non-banking sector. The second is the restriction of total expenditure and the modification of the objects of expenditure.

Secondly, reduction of the volume of bank loans to productive sectors with a view to reducing, where possible, the overall growth in loans.

Lastly, the raising of interest rates, in particular to encourage domestic savings. The IMF considers that, in the developing countries in general, interest rates and other prices are maintained at levels which bear no relation to economic realities, and that this invariably leads to an increase in consumer demand and an erosion of national savings. According to the IMF, these two phenomena explain the stagnation and decline in production.

The third part of adjustment policy concerns real prices and salaries. Pricing policy is of crucial importance because, according to neo-classical theory, prices are an indicator of scarcity and an irreplaceable instrument in the allocation of resources. It is important therefore to combat a range of imbalances which occur in relative price-fixing mechanisms. Such imbalances, however, are largely the result of administrative prices fixed at an arbitrarily low level, and of various subsidies which do not correspond to any economic logic and which unproductively drain public finances.

Free pricing mechanisms must therefore be introduced which ensure that the prices set are a reflection of relative scarcity and make for a fair remuneration of the factors involved. The same is true of salaries, which may be regarded as the price paid for labour. For this economic category, the level will be determined not only according to the parameters of the labour market but also by the fact that workers will be unable to receive remuneration that is out of keeping with their productivity.

The fourth part of the programme concerns budgetary policy. This is organized on the following lines:

generation of new revenue by an improvement of fiscal and customs procedures, and by the development of borrowing, particularly within the non-banking sector;

measures aimed at achieving budgetary savings, entailing cuts in State expenditure and life-style;

a reduction of operating costs by bringing down what are regarded as high levels of overstaffing within the civil service, thereby permitting a more stringent management of staff budgets;

abolition of all subsidies to the public and semi-public sectors.

State operations of all kinds are consolidated within the adjustment programme. This drastically reduces the State's scope for economic and social action and explains why, within the adjustment process, the spontaneous and unplanned mechanisms of economic liberalism must predominate over all forms of State intervention, the latter being regarded by the IMF as costly, inefficient and paralysing.

The fifth part, by far the most important to the IMF concerns devaluation. By and large, this measure tends to produce a negative impact on the balance of payments. This fact is acknowledged by the IMF, which writes in one of its documents that a depreciation of the exchange rate often, in the short term, translates into a deterioration in the balance of trade, because in most

- 41 -

countries the price of imports, tends to vary more quickly when expressed in local currencies than the price of exports, while the volume of exports and imports tends to react fairly slowly. The IMF also acknowledges that the developing countries can exercise only a limited influence on import and export prices expressed in foreign currencies.

In spite of these observations, however, the IMF admits that devaluation can to a certain extent be an effective tool, and places it among the leading measures in the adjustment programme. It does so on the grounds that devaluation triggers a reallocation of income favourable to those working in the export sector. The latter will in the end find that they control the largest portion of the country's revenue. In the long run, therefore, production and investment by the export sector will help to establish equilibrium in the balance of payments.

These, then, are the five p.arts of the adjustment programme put forward by the IMF to countries availing themselves of its resources. On close scrutiny, however, they prove to constitute a series of measures which irreversibly affect the tendencies and structures of any'given country. They in fact entail the implementation, often down to the finest details of economic policies, of a model for development that is based on the ideology and practice of free enterprise, and is very closely linked to the international capitalist division. It is the espousal of this economic philosophy and its theoretical precepts which explains the very marked coherence of adjustment policies. The causal processes highlight, to quote Marie-France L'Heriteau, have resulted in 'the kind of certainty that combines the teachings of the quantity theory of money with those of the parity of purchasing power', which may be presented as follows:

Credit policies Debt

Budget deficit Money Price Balance of payments and/or creation rises deficit

Currency devaluation

These policies, designed and imposed by international financial institutions and investors, have stirred up much controversy. The results of the policies must therefore be examined from both a theoretical and a practical point of view.

2. The practical limits of adjustment policies

Although economic and financial adjustment is undoubtedly a policy which countries could adopt in order to correct the imbalances created by economic activity as and when these appear, experience shows that today's economies often cope with these imbalances by relying on foreign loans. It is only when the burden of debt thus contracted becomes too heavy or the possibilities for new borrowings become too limited that such countries turn to the IMF.

The tapping of IMF resources is, however, subject to implementation of the adjustment programme outlined above. This explains why adjustment is almost always associated with IMF intervention. Thus the success or failure of an adjustment programme is primarily the success or failure of the IMF, which is the main architect of the programme.

The problem of evaluating the effectiveness of financial programmes is at the heart of a debate which has for several years set the IMF at loggerheads with certain experts and researchers. A recent study published by the Overseas

- 42 -

Development Institute of London concludes with the view expressed by Tony Killick, Head of the Institute, that the programmes supported by the IMF•in the developing countries have only limited effectiveness (Finance and Development, Sept. 1984).

The study based on internal IMF documents, summarizes as follows the observed effects of programmes financed by the Fund: while these are aimed at strengthening the balance of payments, the results are statistically' insignificant and often fall well short of set targets; in only a few instances have the programmes of the Fund created a sharp rise in capital inflow from other sources, and no systemic connection has been found between the programmes and the lasting liberalization of trade and payments; generally, the deflationary effects of the programmes have been slight.

Besides, in terms of cost-benefit, the question arises what economic and social costs have to be shouldered in order to solve the imbalance and revitalize growth, and whether these costs have in fact enabled the adjustment policies to achieve their goals.

(a) The economic and social costs of adjustment policies

The measures described earlier should result in a coherent programme aimed at reducing overall demand, liberalizing foreign trade, redistributing income and lowering the purchasing power of the labour force. We must therefore assess the various social consequences of these different measures.

The reduction of demand, which plays a leading role in economic and financial adjustment, is achieved by a series of measures designed to lower the level of spending in order to bring it into line with production. These measures are: cuts in public expenditure, abolition of subsidies, tax increases, slower expansion of the money supply, higher interest rates and higher prices, even administered prices.

These measures have relatively serious social repercusions, especially among the working population: growth of unemployment, loss of earnings and purchasing power, and lower real wages as a consequence of higher prices. They are aggravated by the higher taxation of wage earners, industrial producers and urban consumers.

As regards the credit squeeze', this particularly affects small and medium-sized firms, whose business is ruined by lack of loan facilities.

Theorists and experts are unanimous in their condemnation of devaluation as a tool for improving the trade balance. It has quite the opposite effect: in the African countries, devaluation raises the cost of imports while doing nothing to encourage exports, these being mainly composed of raw materials whose final use is completely beyond these countries' control.

Thus the changes introduced by adjustment programmes principally affect the least wealthy segments of the population, modifying to their detriment the internal distribution of income. This is particularly true of inflation, which affects this segment of the population even more severely since its savings are usually held in the form of cash.

The immediate price paid by a country taking the path of adjustment is therefore extremely high, especially with regard to its least privileged social categories. Helpless to take any preventive action, they are the ones who in the end bear the brunt of adjustment policies.

- 43 -

These are the facts behind the claim that the programmes proposed by the IMF to the States concerned are recipes for civil war. And indeed, the application of adjustment prescriptions invariably has entailed broad social movements which may lead either to administrative instability or to social upheavals that are extremely harmful to the political system.

Before arriving at an overall assessment of adjustment policies, however, we must first examine what has been achieved, notably in West Africa.

(b) The economic results of adjustment policies

In most cases, adjustment programmes in West Africa focus on three main objectives:

fostering economic growth; .

reducing inflation to approximately 15 per cent a year;

improving the balance of payments.

To these priority objectives are added lesser goals, such as:

reducing the ratio of public sector deficit to GNP;

improving the allocation of domestic resources, a measure aimed at encouraging domestic savings and investment;

monitoring the debt and keeping it at a level that matches the country's debt-servicing capacity.

For all these objectives, it is possible to establish comparisons between the values fixed by the programmes and those actually attained, or between programme values and those attained in the year preceding the implementation of the programmes.

The Head of the African department at the IMF and h±s assistant have carried out this exercise in an article which appeared in Finance and Development under the title 'Adjustment programmes in Africa'. The article examines 21 African countries with programmes under way between 1980 and 1981 for which the IMF had committed 4.3 billion DTS in late 1981 (versus 455 million DTS in late 1979). The authors note that:

the economic growth objectives were attained in about 20 per cent of cases;

the inflation objectives were attained in nearly 50 per cent of cases;

the objectives relative to the external situation were attained in approximately 40 per cent of cases.

- 44 -

The two authors also note that the ratios corresponding to public expenditure were, in almost every case, higher than the figures originally projected. The budget deficit as a percentage of GNP was greater than predicted in the case of two out of five countries. As a result, the growth rate of net credit in the public sector did not match the objectives. Since the public-sector credit level itself often exceeded predictions, the objectives for the expansion of net domestic credit were surpassed in nearly half the cases.

Given this state of affairs, the least one can say is that adjustment policies, in spite of their excessively high social costs, have not been effective. They have not corrected imbalances, nor have they helped countries out of the crisis. At best, adjustment policies have postponed payment dates, but they have done nothing to rectify incompatibilities. Nowhere has growth improved, nor have external imbalances been redressed from within. Quite the contrary: indebtedness has worsened and inflation has in all cases been maintained.

The reason why these policies have produced such poor results is that they rely on theories which are completely irrelevant or false.

3. The theoretical limits of adjustment policies

All the facts and results examined here have amply demonstrated that adjustment policies have failed in West Africa in all three of their objectives, i.e. to establish equilibrium in the balance of payments, reduce indebtedness and at the same time restore solvency and revitalize growth and economic development. This very poor performance, leading to a serious and profound deterioration in the social situation, is in part due to the totally irrelevant theories underlying the adjustment models and policies.

The neo-classical theory of money and international economic relations, which is the guiding light of IMF economists, has proved incapable of furnishing a coherent and acceptable explanation of such phenomena as inflation and its effect of eroding weak economies, or inequitable trade and its influence on productive accumulation in underdeveloped countries. Inflation is examined solely in terms of its immediate consequences: raising prices means that the effect is mistaken for the cause. Anti-inflationary strategies based on the doctrine of a monetary policy that restricts financial aggregates, a cautious budgetary policy and a policy of reducing domestic demand have done nothing to eliminate inflation. On the contrary they have produced a restriction in overall supply and created shortages that have led to higher prices.

Devaluation has also turned out to be an unsuitable measure, for it has in every case led to a worsening in the balance of trade: IMF economists themselves acknowledge that, in terms of local currencies, import prices fluctuate more quickly than export prices. For a devaluation to produce an improvement in the balance of trade, at least two conditions must be met: first, the exchange rate must genuinely influence import and export prices, and second, there must be flexibility in the volume of foreign trade in relation to prices. It is impossible for these two conditions to prevail simultaneously in a developing country, for the latter has no way of controlling the process of fixing domestic and foreign prices.

The neo-classical theory of international economic and financial relations is also strongly criticized for its premises as well as its results. According to the theory, specialization based on natural resources and assuming exogenous

- 45 -

economic policies permits an improved remuneration of internal production factors. In fact, however, the theory is founded on inaccurate assumptions, such as the unchanging nature of factors that are totally incompatible with blatant exogeny and the unvarying quantity of factors of production. It is impossible, therefore, for a framework of tenuous and untested assumptions to result in an accurate policy. In addition, even if the neo-classical theory stating that unrestricted trade is mutually beneficial to both partners were correct in its abstract formulation, in its practical reality it is wholly incorrect. Indeed, the increase in protectionism, especially in the industrialized countries, indicates a certain unwillingness to abide by the rules of specialization and exogeny.

Lastly, we come to the final weakness of neo-classical theory, governing prices and the processes determining these. The theory states that if all the conditions of a competitive economy are met, then market prices emerge as instruments for the allocation" of resources and the signals on the basis of which individual economists can make and co-ordinate their decisions. In other words, it involves a system of constantly adjusted prices which ensures the co-ordination of individual decisions. This is based on a whole series of assumptions concerning pure and perfect competition, the rational behaviour of economists and the existence of perfect markets. In reality, however, such a set of hypothetical conditions can never be fulfilled.

It appears, therefore, that the arguments of the IMF are based on extremely flimsy theories, both as regards their assumptions and in the matter of methodology and practice.

Other loopholes are apparent in the application of neo-classical theory: it is incapable of taking into account the specific structural characteristics of each developing country. On an abstract level, if we regard the theory as a one of market relations, as suggested by the writings of Walras, it becomes clear that the categories applied are irrelevant to predominantly non-capitalist countries. In such countries, most trade is not market-based, the economic arena is diversified by partitions and barriers which make the market altogether imperfect, growth cannot be self-supporting, owing to the existence of multiple imbalances, and, lastly, the prevailing authoritarian regimes rule out democratic debate and thus veto the generation of collective choices by the interaction of individual choices.

On the other hand, if we take the neo-classical theory in a systemic sense, as a theory of the stable equilibrium of a complex system, then the categories usually applied no longer have either the same meaning or the same analytical usefulness.

It follows that the proposed theory is wholly out of touch with the reality that it is supposed to serve and transform. Proposals for adjustment policies -such as the reduction of overall demand, growth achieved through the allocation of resources to production sectors, realistic pricing, the absence of State intervention and the fostering of private enterprise - clash with various kinds of structural inertia. Proposals such as these produce perverse effects that are unacceptably divergent from expected results.

This theoretical and practical survey indicates that the model for extraverted development which has so far predominated in West Africa has failed. It has proved totally incapable of:

raising the level of human and material resources for production, and making growth an irreversible process;

- 46 -

constructing multi-purpose production systems capable of autonomy in relation to the international division of labour;

improving the cultural level and the living standards of the working population.

This model for development has been ruinous both economically and socially, and indebtedness is only a surface manifestation of the damage it has caused.

In a context such as this, the policies of adjustment and stabilization imposed by international institutions and investors must serve two purposes: first, to bring the production systems in the developing countries more into line with the needs of the international division of labour, and second, to try to restore solvency by re-establishing major economic and financial balances. By this means the policies will reassure the international financial community, so that the latter may continue to mobilize some of the resources vital to the debtor economies.

Whatever the assessments made, adjustment policies have produced certain effects, three of which deserve to be underscored:

The emergence of wider social differences due to the formation and consolidation of a middle class linked to the export sector. Owing to its area of movement and activity, this class will be congenitally dependent on foreign capital and will enjoy only narrow leeway for taking over and revolutionizing production and labour.

The emergence of cultural patterns and of models for exogenous performance which cater for elites. Inspired by technocratic pretensions, these patterns are often openly scornful of cultural identities, the latter being equated with archaic systems of values which stand in opposition to the philosophy of progress and technology. Powerful élites such as these, versed in the manipulation of esoteric ideas, will remain indifferent to the quest for an alternative identity that should result in new institutions and models leading to the establishment of new forms of government or agricultural and industrial management.

The propagation of the imported consumption model. The redistribution of income enacted through adjustment policies favours the wealthy social classes and elites, whose imported model of consumption tends to spread because it is flaunted and imitated, and also because of rapid urbanization. Urban areas containing social classes enjoying unearned income and often unaffected by austerity measures propagate forms of consumption which require large amounts of foreign currency.

All three of these effects take place against a background of economic and social stagnation, and even regression. Cases of effective growth remain the exception and are invariably exogenous, being maintained from the outside by financial institutions and investors.

These points all prove that the IMF and its economists do not possess the remedies needed to correct structural bias and break the development deadlock. The application of adjustment policies has often prompted an increase in indebtedness and in some cases a tendency to reduce States to least-developed countries. The stage is therefore set for countries to enter into the vicious circle of paying off one debt by borrowing that plunges them even further into debt. Like the legendary wild-ass's skin, the scope for economic freedom and selectivity shrinks with each successive round, and development is carried out under the supervision and within the narrow limits set by public and private creditors.

- 47 -

Given these conditions, it is necessary to shift ground and seek alternative solutions of a global and co-ordinated nature that will lead the way out of a debt-based economy and initiate a different form of development.

II. THE MAIN FEATURES OF AN ALTERNATIVE DEVELOPMENT STRATEGY

The Lagos Plan, having noted the economic and financial deterioration of West Africa and observed the deadlock reached by the development models, put forward the theory of endogenous and autocentric development aimed at meeting basic needs. The question was considered from two points of view:

internally, with regard to the new theoretical and practical approaches to economic and social development;

externally, with regard to proposals for solving problems of indebtedness.

1. The internal solution: changing the model for development and accumulation

New approaches to economic and social development are required, both in theory and in practice. The necessary starting-point for this is a gradual breaking away from the economic and social theories on which development policies have been based and which have led to the ruin of countries that now survive only thanks to international generosity and goodwill.

The framing of the model for endogenous develoment calls, first, for the definition of the premises on which the model is to be founded, and second, for the setting of new policies for each sector.

(a) The premises on which endogenous and self-directed development should be founded

The failure of the exogenous model for development has gradually induced the developing countries to consider and inquire into alternative strategies to stagnation. These would be designed to permit, on the one hand, the full utilization of all their natural potential and their factors of production, and on the other, a reduction of their vulnerability and dependence on the exterior. To achieve this, a system of production has to be organized and developed that is based on internal social and economic forces.

Wherever policies of economic growth have succeeded in boosting the power of material forces of production, they have always been accompanied by social bias, such as the accentuation of inequalities, destruction of the physical and sometimes the human environment, and the misappropriation of production potential by minorities, with the result that basic needs remain unmet. This has happened because the ultimate aims of growth, while often obscure, do not include bringing about a reduction of famine and poverty. In theory, moreover, the process is encouraged by the volume of conspicuous consumption on the part of wealthy minorities.

In this context, the criterion by which the performance of an economic system may be judged is to be found in the components of the consumption model of minorities whose wealth is derived from revenue mechanisms that are inegalitarian. The entire structure operates as if the enrichment of the ruling classes counted for more in the assessment of a society than the poverty thereby created. The acceleration of mass poverty and the extension of the area that it covers are an excessively high price to pay, avoidable by reorienting the system of production.

- 48 -

A development approach based on needs is thus suggested as an alternative to ill-defined growth policies entailing serious social consequences.' If we accept that the true meaning of development is the gradual satisfaction of human needs and the equal sharing of the fruits of labour, then the production of goods and services, the technology and research pertaining to the various sectors, and the use of material and financial resources must all be geared to a central objective, namely, the fulfilment of needs. Those needs will thus acquire major importance in both the theoretical strategies and the practical'' mechanisms of economic and social development.

First, on the level of strategy, the new approach to development must organize the internal production process, the consumption model and the arrangements for the distribution and management of resources with the aim of satisfying needs with maximum efficiency.

Second, the development approach based on needs implies a rethinking of economic mechanisms and levers. Forms of internal regulation, fiscal policies and budgetary and monetary policies, as well as external relations, must be structured in accordance with the new orientations.

Economic policies will henceforth be directed towards target objectives, and their effectiveness will depend on the attainment of those goals. This calls for the organization of a different economic rationale and different standards of management and measurement of performance.

Economic analysis and theory are beginning to show a keen interest in this approach, which is focused on basic needs and offers three advantages:

first, it allows the establishment of an order of priorities and of target objectives which are of interest to the population, so that the attention of the production system is directed towards the lower levels;

second, it affords a means of transcending the tendency towards compartmentalization;

third, it establishes a clear programme for future development.

Thus development is equated with human development and the battle against poverty, and favours an alternative means of using and distributing the resources produced by the efforts of society as a whole.

The manifold controversies recently appearing in print have attempted to define the content and the component parts of the concept of need. As regards content, the concept naturally encompasses food, shelter, health and education -in other words the elements essential to human welfare. Obviously, a particular society may give higher priority to one element than to another, on account of its shortages, its productive potential, or even the state of its factors of production. For example, since the great drought of 1973, the countries of the Sahel have given priority to food, self-sufficiency, because the catastrophe revealed that the food crisis was not due to the years of drought alone, but is a permanent and general crisis affecting most rural populations. In spite of the scale of the crisis, however, the means of finding solutions exist. The far-reaching consequences of the drought encouraged in-depth research into the whole series of mechanisms leading to poverty and famine. The survey uncovered the following facts:

the production system was on the wrong track, with all material, human and financial resources being used to increase the economic growth rate;

- 49 -

the unequal distribution of wealth deprived populations of the means of supplying their own needs or purchasing food, even though the conspicuous consumption of wealthy local minorities was amply provided for.

This was a case of resources being misappropriated and channelled towards objectives other than the satisfaction of the needs of the labouring majority. In order to redirect resources towards these latter objectives, it was necessary to:

specify the central goal of food self-sufficiency;

assess every possible economic implication, especially the changes to be made in the agricultural sector;

assess the changes needed in the social, economic and political structure for the target objective to be attained.

There is no denying that this approach' has limitations and pitfalls. Some experts have drawn attention to several problems caused by the 'basic needs' approach to development. They argue that this approach:

runs the risk of reviving individualism, which is ultimately the philosophy behind this approach;

has overtones of positivism and rationalism, and will therefore serve as a vehicle for certain negative values;

is likely to impose a Western life-style.

These problems are undoubtedly far-reaching and must be regarded as possible obstacles by development experts. In framing policies, the latter must therefore ensure that such problems are overcome. The preservation of community-based forms of production and social life could well prevent the advent of individualism, if such a phenomenon is harmful. The same is true of the European life-style, which should not be merely rejected en bloc, especially since in the Sahel underdeveloped countries which are not Westernized, and which have no ambition to become so, are in the majority.

Other experts draw attention to the fact that the need-oriented approach to development is in danger of masking the mechanisms that cause poverty and of issuing a list of prescriptions to palliate the effects of poverty. Taking again the case of the Sahel countries, the mechanisms of mass poverty have been clearly defined, both in theory and in practice. Contrary to the views expressed by J.K. Galbraith, poverty is the natural counterpart of the prosperity of the rich. Likewise, the elimination of poverty cannot be reduced to prescriptions aimed at alleviating the hardship inherent in the social circumstances of the poor. It must be carried out through policies; in other words, through a restructuring of the internal economic order in all its various sectors.

On the strength of this, we may state that this approach constitutes an effective policy of liberation: on the one hand, it facilitates ways and means of ensuring that direct producers have a decent standard of living, and on the other, it affords producers an opportunity for genuine participation in the distribution of the fruits of collective effort.

- 50 -

This strategy would justify:

the use of a country's own resources and know-how;

confidence in endogenous development capacity;

matching the type of action to the environment and to local resources;

the exercise of power within internal boundaries.

A strategy such as this should foster not only the achievement of optimum economic and social development but also broad grass-roots participation, for the individual will feel directly involved and concerned by the results of the policies applied. Development of this kind could be the concern of peoples, not just of bureaucrats, technocrats and managers. The contribution of the latter groups would be mainly technical, consisting in the search for ways to achieve the ideal definition and quantification of needs and a perfect match between needs and production.

Endogenous development must be organized in the light of the fundamental needs for food, shelter, health and education. For these factors, it is not really the scarcity of resources, however inadequate these may be, which explains poverty in the Third World, but rather their uneven distribution. The traditional mechanisms of inequality have been aggravated by the thoughtless imitation of models from industrialized societies. Thus development will be seen as a single entity with several social, cultural, ecological, institutional and administrative facets. The economy will harmonize these by drawing heavily on all these internal sources of strength.

The development model thus defined will then rest on the following basic premises:

(1) a gradual and modulated change in relations with the international division of labour and a redirecting of the internal production process towards the satisfaction of basic needs: food, health, education and shelter;

(2) a systematic effort to diversify agricultural production, thereby smashing speculative monoproduction catering for the world market;

(3) the construction of a multi-purpose economic system that is truly integrated, based on the priority development of a profoundly different agricultural system;

(4) the choice of appropriate, functional technology, geared to internal economic structures;

(5) due consideration of the environment and of the setting in which the individual and society as a whole live their lives;

(6) modulated State intervention aimed at co-ordinating all the various forces and factors of development, compensating for all relative inferiority, making timely structural modifications and mobilizing all those involved in development work.

An endogenous development strategy such as this is bound to have popular appeal, for, as Samir Amin has observed, exogenous development in all evolutionary phases of the imperialist system works in fact to benefit the privileged ruling classes, which forge alliances with monopolies. By an

- 51 -

inverse and complementary process, therefore, grass-roots development cannot be anything other than national and autocentric.

"All aspects of economic policies must be based on these precepts and lines of emphasis, which provide a theoretical infrastructure. Thus, economic growth is no longer an end in itself but a means, attainable through:

rational distribution of financial and material resources, in keeping with the objectives assigned to the various sectors;

the appropriate management of foreign exchange resources and of other scarce factors of production;

giving absolute priority to agriculture, so as to generate regular supplies of food crops and satisfactory coverage of urban needs for food.

(b) The reorganziation of sectoral policies

This is basically a matter of framing alternative sectoral policies to match the newly adopted objectives of economic and social development.

1: In agriculture

The agricultural development strategy must have three objectives:

food self-sufficiency and the satisfaction of food needs which which are expanding fast as a result of population growth and rapid urbanization;

creation of surpluses in order to feed the productive accumulation reserves earmarked for financing development;

boosting of labour productivity, which should free part of the work-force for assignments in other sectors.

To achieve these objectives, it is indispensable to frame a new agricultural policy, on the follow principles:

A new, two-tier policy for agriculture: production and structures

Agricultural policy must give priority to developing food crops in order to cover the needs of the people at large. It must subsequently re-examine production structures, working conditions and even the status of those who work on the land. The priority given to cash crops and export activities is in fact the main cause of the food farming crisis. The smallest of its consequences has undoubtedly been the food deficit, which swallows a large part of foreign exchange reserves.

The organization of agricultural co-operation on clear, non-bureaucratic lines

The main goal will be to iron out the various contradictions and imbalances which may result from social relations' in rural areas. The principles on which such co-operation should be organized are as follows:

creating the necessary conditions for the democratic management of co-operatives;

- 52 -

permanent guarantee of free access to membership;

specification of clear and comprehensible arrangements for sharing the profits on production.

The programmed assembly of the basic infrastructure required for the expansion and diversification of agricultural production

In the case of countries where dry farming predominates and production is dependent on uncertain climatic conditions, such dependence must be eliminated as quickly as possible through a hydraulic policy presupposing irrigation schemes. Precise estimates must be made of the costs and benefits attaching to large- and small-scale schemes respectively. On the basis of such estimates, a coherent and planned policy must be instituted, aimed at controlling the water supply in order to reduce the impact of natural disasters.

Planned improvement of agricultural techniques and general use of modern agricultural production factors

This fundamental principle concerns :

the modernization of cultivation procedures and the continual renovation of equipment ;

scientific experiment and the dissemination of new techniques in forms accessible to the population at large;

training of highly qualified supervisors of design and execution, and, at the same time, on-the-job training and retraining of model land-workers.

It should be noted that the peasants themselves will be the main artisans of the technological revolution in agriculture, and not the weighty, paternalistic bureaucracies which inefficiently and expensively without preparation, impose structural and technological changes from the outside.

An appropriate policy for agricultural loans

This is urgently needed in order to facilitate the funding of productive operations in the sector and to provide the financial means of its recovery.

It can scarcely be cause for regret that nowhere has there been a return to banking structures based on exploitative trading economies and the reinforcement of the structural bias characteristic of underdevelopment.

A pricing policy which offers sufficient incentives to leading agricultural products

The reluctance of farmers to produce certain items is to be explained by the absence of a coherent marketing policy. For example, the fact that the producer's price for certain cereal crops is maintained at rates of increase below those of current inflation has caused production to stagnate. It is perfectly logical that farmers should produce only enough to provide for their own and their families' survival. A policy must therefore be enforced which provides incentives for farmers to increase their volume of production.

This policy must be systematically accompanied, on the one hand, by the development of warehousing facilities in which stocks of food can be kept to regulate flow and for use in an emergency, and, on the other, the reorganization of distribution and sales networks, currently monopolized in many cases by money-lenders and speculators of all kinds.

- 53 -

2. In industry

It is important to adopt a different approach and set up a coherent industrial structure in which factories no longer appear as islands detached from or barely linked to the rest of the economy, but form part of an integrated system of activities. Agriculture will be the basis of the system on which three categories of industrial activity can develop:

dam construction and other irrigation infrastructures;

upstream activities aimed at the production of agricultural inputs and equipment ;

downstream activities devoted to reaping maximum advantage from agricultural output.

The entities thus created should facilitate the swift development of agriculture and the creation of authentic conditions for a 'green revolution', based on grain selection, pesticides, crop hygiene and a scientifically designed irrigation network, aimed at making agriculture a highly efficient social and economic sector. Within the system, industry will be subordinated to agriculture. This will not be without problems, however, linked in particular to the following:

the fact that the systematic use of modern production techniques and equipment may not be suitable for certain crops and types of farming, which will remain on the sidelines of the modernization process;

the low level or unequal distribution of peasant income may be a major stumbling-block for the universalization of inputs; modernization may also accentuate class barriers and foster the emergence of a wealthy class of Kulak-style peasants;

the fact that external demand may continue to exercise a strong pull. Agribusinesses do indeed run the risk of being obstructed by the small size of domestic markets, and therefore need to find expanding foreign markets in order to ensure growth.

In conclusion, this combined and integrated development strategy for agriculture and industry is the only one capable of leading to economic independence and food self-sufficiency. Economic independence is sought in order to attain:

greater control over the system of production, as regards technical and production-oriented decision-making;

full understanding and monitoring of consumer models and behaviour;

monitoring of accumulated surpluses and a domestic use of these that is more in keeping with the needs of the greater part of the population. With regard to self-sufficiency this will concern mainly food products, although it will also extend to manufactured consumer goods and equipment. In the struggle against underdevelopment, the twin goals of economic independence and self-sufficiency do not mean the creation of a closed economy or an abrupt divorce from the international division of labour, nor do they imply total and indiscriminate rejection of any and every theory of comparative advantages. Maximum use should, indeed, be made of the latter, as regards both availability of foreign currency and technology transfer.

- 54 -

This strategy is quite a faithful reflection of the real desire to promote endogenous and self-directed development founded on a dynamic agricultural- sector and an industrial structure working to satisfy basic human needs and meet the demand for intermediate consumer goods from other sectors of the economy. The strategy calls for efficiency management on the part of the State, which must "beware of setting up a weighty, expensive, inefficient and paternalistic bureaucracy, the official version of which tends to be structured like a pretentious technocracy which scorns the very social class that it is supposed •' to serve.

Management by the State must also avoid granting public authorities exaggeratedly great powers over the economy, the exercise of which could result in an enormous waste of scarce resources. Unfortunately, many countries have adopted this approach by instituting 'companies for the promotion of the rural world', whose goals and purpose are vague and ill-defined, making them elusive and impossible to regulate.

The State's duty is to co-ordinate, encourage and intervene but only in key areas where it is in no danger of hindering the initiative of national economic decision-makers. Wherever State intervention is necessary, it must serve as a model directed towards specific objectives. With regard to agricultural development, for example, the State could set up model farms to be used for political and economic decision-making, as well as for monitoring productive forces in the agricultural sector. Any experiments in agricultural technology could be carried out on such farms and thereafter brought into general use.

3. In international economic relations

The question of international economic relations has been approached from several different angles, and each time the conclusion has been that, in their present form, these relations contribute to the ruin of underdeveloped countries (29) through mechanisms such as inegalitarian trading, whose effects can be gauged in the deterioration of the terms of trade.

The benefits promised by neo-classical theories have yet to be seen in the Sahel countries most strongly linked to the world market through sectors exporting products derived from the predominant cash-crop monocultures. International economic relations have not offset the relative lack of inputs, despite extreme specialization and untrammelled trade. In addition, opportunities for development are unequal and are distributed according to the economic influence of the partners.

The importance and volume of export activities, and likewise the ever-increasing volume of imports, call for an external relations strategy, to be worked out with the twofold goal of economic independence and the establishment of balanced foreign trade.

The first of these goals is paramount, and presupposes that the Sahel countries adopt as their objective the achievement of economic independence, which will entail:

systematic monitoring of national resources and means of production. This makes it possible both to control the system of production, and in particular the surpluses it creates, and to gear the system to the satisfaction of domestic needs;

the achievement of self-sufficiency in food, equipment and technology. This objective must be attained within a fairly definite time-span, and the means and the deadlines must be specified.

- 55 -

The second goal of economic independence is more immediate, and amounts to the reorganization of external relations to ensure that exports cover imports. This implies:

first, determining the volume and composition of non-reducible imports essential to the functioning of the internal system of productive forces;

second, identifying and expanding export sectors likely to earn the foreign exchange required for financing imports. In fact, as stated by I. Sachs, the goal of external relations is to maximize a country's import capacity through the promotion of exports, or to reduce its dependence on imports; the chosen solution will be whichever of the two makes better use of the given investment.

In each and every case, cpuntr.ies aiming for endogenous development must redefine the role of international economic relations and the action required to derive maximum benefit from these.

4. In the service industries

The following must be reorganized:

commercial and distribution networks;

transport and telecommunications;

the banking and loan system;

tourism.

The strategy for such reorganization requires planning to be at once participatory, associative and decentralized. In other words, it calls for an institutional structure for the management of development. The structure must be based on genuine decentralization affording the effective exercise of power inside the country's borders. This development model will represent both the national executive and the rank and file, and will rely on the'following points:

first, the use of resources and know-how indigenous to the country itself;

second, trust in the capacity for organization and development of the population as a whole and more particularly of the elite;

third, ensuring that objectives and inputs are suited to the environment as well as to available national resources.

In order to implement this strategy, a transitional phase must be accepted, during which the international community and its various financial institutions will have to take steps to enable countries to reduce to a minimum the economic and social side-effects of adjustment and to clear away the encumbrances of the past. A positive contribution of this kind would then be totally devoid of any paternalistic overtones or hint or neo-colonialism.

2. Proposals for international action

Two kinds of action could be planned, which public authorities would have to help carry into effect.

- 56 -

(a) At the International level

The political leaders of the Third World must agree on a set of demands, which would approximate to the following:

cancellation of State debts;

consolidation of private debts or introduction of facilities for' rescheduling either arrears or future payments;

organization of reschedulings to suit the economic and financial situation of each country;

introduction of new machinery for the mobilization of new financial resources.

Many recommendations have been made regarding debts, but they are in fact variations on the proposals put forward by the Pearson Commission of 1970, which were as follows:

to define the conditions for easing debt, while avoiding repeated and frequent rescheduling;

to assess possible needs for foreign aid on favour conditions, as a backup to export credits;

to consider the easing of debt as a legitimate form of aid;

to introduce appropriate conditions governing official development assistance. In particular, interest rates should not exceed 2 per cent a year, while the duration of loans could stretch from 25 to 40 years and include a 7- to 10-year grace period;

to include temporary waiver clauses in loan agreements, allowing, under certain conditions, relief measures by prior agreement (deferral of payments on amortizations and interest, and in exceptional circumstances, writing off of such payments);

to extend debt-easing facilities not only to crisis situations but also to certain clearly defined cases, in order to maintain debtor countries' savings or import capacities and per capita consumption levels, and to offset a drop in exports or insufficient returns on investments, in return for the adoption of corrective policies by the beneficiaries;

to institute a suitable multilateral framework for the renegotiation of the debt and the mobilization of new injections of capital, in order to guarantee a net transfer of resources to debtor countries, this being the only arrangement likely to secure a stable and harmonious adjustment of these countries' economies;

to set up institutional debt-rescheduling machinery, operating in accordance with clearly-defined norms and procedures, and aimed at preventing discriminatory treatment of debtor countries;

to encourage debtor countries to change their policies in the very short term and to adopt methods of payment that are more in keeping with the financial situation of these countries and their real repayment capacities.

- 57 -

Had these various recommendations been implemented, the international community could clearly have averted the debt crisis of the developing countries. However, the selfishness of individual nations has taken precedence over"international stability and the spirit of worldwide co-operation. It took the 1979 crisis for the virtues of the Pearson Commission to be rediscovered.

The Africans have not, in fact, been inactive in the search for the solution to the debt problem.

The Lagos Plan contains three fundamental proposals concerning debt. The first concerns the establishment of an African Monetary Fund (paragraph 254(b)), one of whose roles would be to help member countries mobilize and guarantee loans on international capital markets. The second concerns the institution of an African mutual guarantee and solidarity fund, whose task would be to act as an intermediary on international capital markets (paragraph 254(c)). The third proposal urges the international community to increase its financial and technical assistance to the least developed countries, according to more satisfactory procedures and standards, while at the same time cancelling these countries' debts (paragraph 275(a)).

Many other recommendations of the Lagos Plan, though aimed at improving the financing of African countries, incidentally reduce the latter's need to contract debts. The recommendations in particular concern the establishment of a subregional system of clearing and payment, later to be amalgamated into an African Payments Union, the setting up of subregional development finance institutions, the establishment of financial markets at the national subregional and regional levels, and the institution of a Bank of Foreign Trade and Investments for the countries of Africa, the Caribbean and the Pacific (paragraph 253). The Plan also recommends strengthening the resources managed by the African Development Bank (paragraph 254(a)), a fundamental reform of the international monetary system, the establishment of an appropriate international financial framework to sustain the development efforts of African countries, and increased financial assistance and aid to Africa (paragraph 255) . In the energy sector, the Plan recommends preferential tariffs for African countries, the establishment of a compensation fund (paragraph 289) and the institution of an African Energy Development Fund (paragraph 294). For the- least developed countries, the Plan recommends the creation of international mechanisms to finance these countries' oil requirements, guarantee a reduction in their corresponding balance of payments burden and ensure regular supplies (para­graph 275(b)).

(b) At the regional level: action should concentrate on consensus-building for the establishment of a regional division of labour

Integration must be regarded as a means of achieving collective autonomy and of establishing a regional division of labour conducive to the exploitation of natural resources as factors of production and permitting the institution of a monetary and credit system geared to financing development. Only integrationary measures of this kind can loosen the stranglehold imposed by limited space and the low level of capital and technological advancement, and lead to coherent economic policies.

- 58 -

All of these points will be added to the list of Third World claims, which include:

development funding through the organized transfer of financial resources in the revised framework of a better co-ordinated and more equitable international monetary system;

profitable prices for manufactured products and the establishment of stabilization mechanisms that work;

a new allocation of SDRs;

an end to protectionism.

- 59 -

CONCLUSION

The present study clearly shows that debt in West Africa, as in the rest of the developing countries, is the inevitable consequence of a model for development and the exploitation of resources that is exclusively based on exogeny. In this context, accumulation is expected to result from earnings made in the agricultural and mining sectors, whose sphere of activity is the world market. Economic policies therefore focus on cash crops, to the detriment of food crops. In so doing, they ensure that the formation of surpluses is geared to the fluctuation of world prices over which these States have no control whatsoever. The ever more extensive deterioration of terms of trade has dashed any hopes of gaining substantial foreign revenue.

Given this situation, serious imbalances are created by the slightest external shock, such as higher oil prices, more costly food bills, rising interest rates, the overvaluing of hard currencies, and ecological or climatic disasters.

In addition, industry is better geared to a form of conspicuous consumption than to the exploitation of resources and labour. Industry contributes little or nothing to more diversified production, because it is totally dependent on foreign sources for both the capital required for intermediary consumer goods and for technology.

In such circumstances, imbalances'become inevitable, especially with regard to the balance of payments and public finances. In each and every case, the answer will be debt.

In other words, the lack of an international financial system means that the debtor countries of the Third World will find themselves in grave circumstances of default on payments. This will undeniably lead, on the one hand, to a recession in certain sectors of production, since Third World countries without loans will be insolvent, and, on the other, to the creation of an equally dangerous excess of liquidity.

Debt has therefore prevented the world capitalist system from suffering from a more serious financial crisis and a crisis of over-production. There is, however, another fundamentally political aspect to the problem that is only occasionally stressed, namely, that indebtedness lies at the heart of relations of dependence. When it attains a certain size, debt can bring about a transfer of economic, financial and political sovereignty to creditors. Caught in the stranglehold of nutritional and financial pressures, the countries of the Third World have drifted into development based on dependence. As a result of this, they are now firmly enmeshed in the geopolicial system of world capitalism.

It emerges, therefore, that debt is only a surface symptom of the failure of exogenous development models. Economic theorists of every persuasion now agree with development experts and technicians in diagnosing the failure of West African economies and their grim prospects. The experts do not lack arguments, pointing to the steady process of impoverishment and the tendency of some countries to be reduced to LDCs, the rapid growth of debt and the formation of a spiral in which the attempt to pay off one debt leads to even heavier borrowing and the deterioration of the terms of trade is aggravated by the protectionism of the rich countries.

- 60 -

All these facts and the situations that they produce have revealed the flaws in the economic theories. This is especially true of neo-classical precepts, which have heen unable to explain, still less predict, the serious crises currently afflicting developing countries. It is a failure which casts doubt on the ability of the theories to yield appropriate, just and effective strategies.

The meagre results and performance of adjustment policies are proof of the.' limitations of liberal and conservative economic theories. The rhetoric of international institutions - which is based on the plea for the liberalization of economies, the return to faith in pricing and blind market forces, and relentless criticism of State intervention in the economy and of State-owned companies - has proved irrelevant to explanations and action. This being the case, the main advantage of liberal ideas is that they reassure certain strata of society about the social order.

Care must be taken to avoid magic formulae that are based on dubious economic idolatory and which, in addition, entail enormous social and political costs, for it is possible to find alternatives to adjustment programmes that are often blueprints for civil war. All that need be done is to establish the main principles of a different model, one that stands in opposition to the model for exogenous development, poverty, profitless inequalities and cultural alienation.

The proposals contained in the Lagos Plan and those currently being debated by the intelligentsia of West Africa in preparation for the next Economic Summit of the OAU bring the focus of discussion back to the strategy of endogenous development, the only one likely to ensure that the future of Africa is genuinely in the hands of Africans. This strategy will rely on the use of resources and know-how indigenous to each country, confidence in the people and in their capacities for organization and development, and, lastly, the definition of social and economic objectives in keeping with the resources available and with the environment. Development of this kind will mobilize and involve the largest number of socially active individuals, who will share in the task of determining the choices and objectives of society. In this sense, it will be development for the nation and for the people.