The Perils of Africa

The development of global institutions had heralded an era of globalization. Politicians and economists had made promises that this would be a positive force of globalization which will see markets emerge and support weak national economies. For a time this was true, and to a degree it had worked. Globalization had effectively integrated the developing world to the developed. What was distinct in this “first round” of globalization was the wealth of knowledge which the developing world could now acquire.

Stiglitz makes it clear that this worked both ways, and uses some straightforward examples to explain the benefits of open markets and global recognition of issues. One example being the opening up of the Jamaican dairy market to U.S. imports in 1992 which saw the price of milk drop so that even poor children could access it. To sound cliché it was a double-edged sword; it was clear that opening a market to foreign firms could undermine state-owned enterprises but then again also provide new technologies and greater productive efficiency.

What was becoming clearer during the 90s was the increasing gap in income equality, between increasing proportion of the population living in poverty in regards to total world income (adjusted for inflation) increasing by an average of 2.5% annually. As globalization began to be criticised it was quickly associated with American style capitalism, which Stiglitz argues is still progress. He is undoubtedly a capitalist, an American, and a neo-Keynesian economist and already there is an assumption that capitalism is a form of progress for all. However, on this point I struggle to find a suitable replacement. Stiglitz highlights the manner in which free market and capitalist reforms were imposed on African nations and how he would have done it differently to ensure success. What quickly arises is often the issue in economics is that you don’t actually know what would have been more successful as you only chose one method in the end – you hope (but inevitably) there is no “next time”. As Friedman often says when choosing a specific economic policy following a certain line of theory you are ultimately deciding upon a lesser evil.

I believe one of the most significant points that Stiglitz raises was the question of to what degree did developed nations benefit relative to the degree that developing nations benefitted? From my position in 2013 you can see that the boycott and protest surrounding the trade and national conferences of the time, was as a result of the people perceiving globalization to be far more advantageous to developed countries. Here Stiglitz takes the perspective that the inevitable existence of special interest and the connection between the IMF and Washington would have always ensured irrespective of the policy decisions made that the end result would benefit them. Such is human nature and sadly a system of “good faith” cannot be depended upon.

One of the first examples Stiglitz employs is of Ethiopia and the handling of macro policy by the IMF. The first issue he raises sets the tone for what becomes an inherent aspect of IMF policy and instructions. The Ethiopian government had two sources of revenue, foreign aid and taxes. The IMF argued that their “budgetary position would be solid” if their expenditures would be based only on taxes and within this line of thought aid should be kept in reserves for that inevitable ‘rainy day’. The IMF logic was flawed, as foreign aid was contributed with the interest of developing and sustaining schools and health clinics. The IMF argued that foreign aid was not as stable as tax revenue, and this perspective may have worked for a country which was lingering between developing and developed. But Stiglitz statistical analysis showed that foreign aid was far more reliable than taxes, often coinciding with the economic situation and the institutions of the nation. Furthermore, the IMF often acted as a barrier to progress rather than an enabler.

The main issue with IMF policy of the time was the extensive use of conditionality. It was clear that Ethiopia had a government capable of handling their economy, but still needed IMF support (in regards to actual monetary aid) as the economy was developing. Ethiopian sentiment was that the IMF acted in a neo-colonial manner, forcing the government to implement certain strategies. The IMF felt that this was procedure, and an integral part of their covenant. Stiglitz points this failure at special interests, and the failure of the IMF to apply different methods to differing situations. What becomes clear in the Ethiopian example is as Stiglitz notes is that the means are often confused with the ends. Here enters the IMF’s infamous devotion to “liberalising markets” and “opening-up banking systems”. There is no conspiracy here, the IMF genuinely thought that through these means credit instruments would be more accessible and at more competitive rates. Ethiopia is not the only example of this IMF policy prevailed with devastating effects, following along were Botswana and Kenya. Market liberalisation had led onto liquidity crises in Botswana continuing as they hoped the IMF would support them, and opening the banking systems had only led to credit being unobtainable for local firms, as they were high-risk as judged by foreign banks and investors.

To summarise the IMF’s involvement in Africa throughout the late 20th century it was clear that they were not creating policy that suited transitioning and developing economies. The “one size fits all” approach did not work, and it had bred corruption in the nations with diamonds, and had allowed warlords such as General Amin of Uganda to come into power. The issue being ultimately that the IMF saw nations they were assisting as “client countries” when it should have been the other way around. Stiglitz goes far in blaming the IMF for the perils of Africa, however I think that it must be put into perspective that local militias had existed during colonial rule as well, and at the time many African nations were still to a degree divided into tribes within a country – making having one government difficult and ground for civil wars and corruption. Ethiopia is a frustrating example, as the countries potential was clear, and the IMF was a barrier to progress rather than a partner.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s