Acknowledgements



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Conclusion

The IMF and the World Bank have been instrumental in the development of a new paradigm of North-South financial flows, dominated by commercial capital. However, some of these financial flows have played a central role in the East Asian and Russian financial crises. The international community has to address problems arising from the new paradigm while the problems arising from more traditional financial flows - the chronic debt problems of the poorest countries - persist.


Undaunted, the Bank is moving still further in this direction, through the development of guarantees for commercial capital flows; and the Fund is seeking to consolidate and accelerate the process, by extending its mandate to encompass the liberalisation of capital account transactions. At the same time, both institutions are increasingly preoccupied with massive rescue packages in response to the East Asian and Russian crises. However, while they have made some belated efforts to deal with the continuing debt problems of low-income countries, through the HIPC Initiative, this has received neither the attention nor the resources that it needs.
This raises a number of serious issues, which this paper has sought to address. Clearly, given the scale and scope of this paper, the answers are fairly tentative. Nonetheless, the discussion does suggest a number of areas of serious concern, which raise equally serious questions about the roles of the Fund and the Bank in relation to North-South financial flows.
There must be real doubts about the appropriateness of the new paradigm even in the better-off and more robust developing economies, let alone in the poorest and least-developed. The financial cost of commercial capital flows is high, and is generally higher in poorer than in richer countries. The benefits of portfolio equity investment, in particular, appear limited, and the costs and risks attached to it are considerable. Even in the case of direct investment, the benefits may be considerably less than is widely assumed, and may well be insufficient to compensate for the high rates of return demanded by investors, especially in low-income countries. The East Asian crisis shows all too clearly the risks inherent in the new paradigm of unfettered movement of large commercial financial flows.
This raises serious doubts about the proposal to extend the IMF's mandate to cover the liberalisation of capital account transactions. The case for such a change seems to be based almost entirely on theory and supposition, for which there is little if any evidence. Recent experience, particularly of the Mexican and East Asian crises, seems to point ever more strongly in the opposite direction; and even the World Bank's support for this proposition seems at best half-hearted. This would seem to argue strongly for the proposal at least to be deferred until the potential effects can be rigorously investigated in the light of recent developments.
The promotion of commercial capital flows to low-income countries seems particularly questionable. However, if aid budgets continue to decline, the continued exclusion of these countries from commercial flows would seem to imply an ever-decreasing level of capital inflows. Increasing IMF (ESAF) and World Bank (IDA) lending would not help: this would represent little more than a shift in control over a more or less fixed level of aid.


Greater debt reduction for the poorest and most heavily indebted countries could be much more helpful. This would not only reduce the outflows of debt-service from these countries, but also help to increase investment by removing the "debt overhang" effect. Moreover, this need not have a substantial effect on aid flows, if the financing were appropriately designed.
In all these areas, what is needed is a paradigm shift within the Fund and the Bank. At present, their actions are driven by their world view and the interests of their largest shareholders - the major developed country governments. They have promoted commercial capital flows, based on an instinctive belief that markets work and the encouragement of their major shareholders, whose multinational companies, institutional investors and banks profit from such flows. They have launched massive "rescue packages" for Mexico, Russia and the East Asian countries, because the same commercial interests would stand to lose billions of dollars (and the developed countries would risk contagion) without them. By contrast, their efforts on the debts of the poorest countries have been belated and limited, partly because of an underlying belief in the sanctity of contracts, and partly because some major developed country governments are reluctant or indifferent, while the beneficiaries are among the poorest countries - and the smallest shareholders.


APPENDIX

World GDP growth for 1992-2020 is projected at 2.9% PA. This might suggest annual growth in the demand for non-oil primary commodities of perhaps 1½% PA (since in most cases demand grows more slowly than income). If output of these commodities exceeds this rate, prices will fall in real terms, as supply increases faster than demand. As noted above, such a reduction is envisaged, amounting to 1-2% PA. Since the price elasticity of demand for most primary commodities is also relatively low (that is, the price falls faster than supply increases), this might be compatible with output growing by, say ½-1% PA faster than demand growth - that is, at about 2-2½% PA. While the faster decline in real oil prices, coupled with greater income and price elasticity of supply, would allow a faster growth rate for oil exports, this might still be limited to about 6% PA.


This means that much of the projected growth in the region's exports will have to come from increased exports of manufactured goods. A rough estimate suggests that these might need to increase by 9-10% PA in 1997-2006, and by 14-16% PA in 2007-20. These rates of growth would be exceptional for most countries: for 2007-2020, such a growth rate is in line with the exceptional performance of East Asia in 1991-6, and much faster than recorded or projected for any other region between 1980 and 2020. In 1981-94, only Thailand and Hong Kong achieved export growth of 14% or more (World Bank, 1997e, Table 5). It seems implausibly optimistic to assume such strong growth in manufactured exports from Sub-Saharan Africa.
This interpretation of the projections also implies an increase in the share of manufactured goods in the region's total exports from around 20% at present (concentrated in a handful of countries, most notably South Africa, Mauritius and Zimbabwe) to 70-75% by 202062. Again, this seems highly improbable.
It is nonetheless possible, in principle, that the projections could be internally consistent. Firstly, the commodity price projections appear to refer to 1997-2006, while the export volume figures refer to 1992-2020. It is therefore possible that the export growth (and the associated reduction in commodity prices) is expected to occur mainly in 2007-20, so that most of the volume growth is included in the projections, but most of the resulting fall in prices is excluded. However, this would imply a much greater decline in export prices than that envisaged above, and a marked acceleration in this deterioration after 2006. Even without this assumption, the projections suggest a serious decline in the terms of trade (that is, the price of exports relative to imports), of around 18% by 2020, even assuming that manufactured export prices keep pace with import prices.
This interpretation is clearly possible; and the increase in the export growth rate between 1997-2006 and 2007-20 would appear to be consistent with this general pattern. However, this would represent a far from positive outlook. By reducing the real growth rate of export revenues well below the volume growth projection, it significantly reduces the proportion of countries for which commercial borrowing would be sustainable from 2007 even if they had attained a sustainable starting position.
Secondly, it is possible that a faster fall in the prices of commodities exported by Sub-Saharan Africa (associated with faster output growth) is off-set by slower falls or actual increases for other commodities. This would imply a faster decline in Africa's export prices, and a slower growth of its export revenues, throughout the period, making commercial borrowing more clearly unsustainable up to 2006 and less likely to be sustainable thereafter.

Thirdly, it is possible that a rapid increase in the production of commodity exports by Sub-Saharan African producers could be off-set by a reduction in production elsewhere. However, this seems unlikely. It is by no means obvious that the price declines projected would be sufficient to induce a substantial reduction in output by other producers: overall non-fuel commodity prices are projected to be higher in 2006 than in 1991-2 (World Bank, 1997e, Figure 1-10, p18); and those for metals and minerals above their 1993 trough.
Moreover, historical experience suggests that most producers have tended to be reluctant to wind down production in primary (or other) sectors even when their goods are produced at greater cost than those supplied by producers in other countries and they are able to produce alternative products more competitively. Often governments will provide large subsidies or impose protectionist measures to maintain the sectors concerned. Agriculture in the EU and the US are conspicuous examples. Some countries have even responded to falling world prices or intensified competition by developing new productive capacity using alternative technologies (eg cocoa in Malaysia, cut flowers in the Netherlands, rice in the United States).
This appears to be the view taken in the Bank's projections, at least for agriculture (which accounts for around three-quarters of SSA's non-oil commodity exports. Taken together, World Bank (1997e) Tables 1-8 and 1-9 imply an increase in the market shares in primary agricultural exports between 1992 and 2020 for the OECD countries (from 57.6% to 57.8%), the newly-industrialised economies (from 2.0% to 4.8%) and the "Big Five" (China, India, Brazil, Indonesia and the transition economies, from 13.7% to 18.5%). This reduces the share available for other developing countries from 26.7% to 18.9%. While this includes various other regions, the prospects for an absolute increase in Sub-Saharan Africa's share within this dramatically decreasing envelope seem limited.
If Sub-Saharan Africa's market share is to decline over this period, this means that a given growth rate of world exports of commodities will be associated with a significantly slower rate for Sub-Saharan Africa. To illustrate, if the growth of world supply is 2-2½% PA, as assumed above, and SSA's share of the world market falls at the rate suggested by the "rest of the world" figures cited above (that is, by about a quarter between 1996 and 2020), the region's agricultural exports would grow at no more than ¾-1¼% PA. If this were the case, manufactured exports would need to grow still faster than is suggested above, and the proportion of manufactured goods in total exports would reach an even more implausible level.

END NOTES




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