Background Papers

The Long-Term PerspectiveStudy of Sub-Saharan Africa

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Background Papers

The Long-Term PerspectiveStudy of Sub-Saharan Africa

Volume 1. Country Perspectives

The World BankWashington, D.C.

Copyright i 1990The International Bank for Reconstructionand Development/THE WORLD BANK

1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

All rights reservedManufactured in the United States of AmericaFirst printing June 1990

The findings, interpretations, and conclusions expressed in this volume areentirely those of the author(s) and should not be attributed in any manner to theWorld Bank, to its affiliated organizations, or to members of its Board ofExecutive Directors or the countries they represent. The World Bank does notguarantee the accuracy of the data included in this publication and accepts noresponsibility whatsoever for any consequence of their use.

The material in this publication is copyrighted. Requests for permission toreproduce portions of it should be sent to Director, Publications Department, atthe address shown in the copyright notice above. The World Bank encouragesdissemination of its work and will normally give permission promptly and,when the reproduction is for noncommercial purposes, without asking a fee.Permission to photocopy portions for classroom use is not required, thoughnotification of such use having been made will be appreciated.

The complete backlist of publications from the World Bank is shown in theannual Index of Publications, which contains an alphabetical title list (with fullordering information) and indexes of subjects, authors, and countries andregions. The latest edition is available free of charge from the Publications SalesUnit, Department F, The World Bank, 1818 H Street, N.W., Washington, D.C.20433, U.S.A., or from Publications, The World Bank, 66, avenue d'Iena, 75116Paris, France.

Cover: derived from a METEOSAT image by the European Space Agency.

Library of Congress Cataloging-in-Publication DataThe Long-term perspective study of Sub-Saharan Africa: background papers.

p. cm.Includes bibliographical referencesContents: v. 1. Country perspectives - v. 2. Economic and sectoral

policy issues - v. 3. Institutional and sociopolitical issues - v. 4.Proceedings of a workshop on regional integration and cooperation.

ISBN 0-8213-1602-8 (v. 1)1. Africa, Sub-Saharan-Economic Policy-Case Studies. 2. Economic

assistance-Africa, Sub-Saharan-Case Studies. 3. Economic development-Sociological aspects-Case studies. 4. Africa, Sub-Saharan-Economicintegration-Congresses. 5. African cooperation-Congresses. I. InternationalBank for Reconsruction and Development.

HC800.L65 1990 338.967-dc2O 90-12639 CIP

Contents

Preface

Introduction 1Zafar Ahmed

African Countries

1 Long-Term Perspectives Study for Sub-Saharan Africa: The Situation inMauritaniaSidi Ould Cheikh Abdallahi 7

2 An Analysis of Sudan's Underdevelopment 17Baighis Badri

3 Sustained Growth and Development with Equity in Sub-Saharan Africa: TheCase of Mali 26Ibrahim Bocar Ba

4 Reflections on the Long-Term Perspective Study for Sub-Saharan Africa, withParticular Reference to Malawi 44Gilbert B. Chirwa

5 Profile of the Ethiopian Economy 60Befekadu Deguefe

6 Reflections on Long-Term Development Strategy in Tanzania 80Nguyuru H. L Lipumba

7 Reflections on Long-Term Perspectives for Sub-Saharan Africa with ParticularReference to Zambia 99John M. Mwanakatwe

8 Long-Term Development Prospects for Somalia 108Ibrahim Samater

Non-African Countries

9 The Nordic Social Market Economy Development Experience-Lessons forDeveloping Countries 122Radja M. Mitra

10 The German Development Case since the Second Industrial Revolution 169Uwe Otzen and Hansjorg Elshorst

11 Some Lessons from East Asian Development Experiences 173Eul Yong Park

Authors' Bioghraphies 182List of Papers Appearing in Volumes 2 and 3 of This Series 183

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Preface

In his foreword to the World Bank's report required a substantial reduction in the lengthSub-Saharan Africa: From Crisis to Sustainable of the original paper. The views expressed inGrowth-A Long-Term Perspective Study (LTPS), these papers are not necessarily in full agree-published in November 1989, Mr. Conable ment with those of the World Bank. Nonethe-noted: less, they are presented here to give the reader

T'he report is the product of a prolonged a more complete picture of the critical debateinquiry that has extensively involved surrounding Africa's future. Our experienceAfrican researchers, private businessmen, with the LTPS exercise has strengthened ourAandpublic offiials, pas well as a broad conviction that this is the right approach-thatand public officials, as well as a broad intellectual pluralism in development discus-spectrum of representatives of the donor sions is as much an asset as in other areas. Wecommunity. In this sense, the process has firmly believe that frank and open debatebeen as important as the product. about various aspects of economic developmentThe background papers presented in this in Africa will continue to help us move toward

four volume set are important components of promoting and monitoring consensus, and willthis "process." They incorporate over 50 contri- help with the implementation of concertedbutions by development professionals and action programs that will be needed to movecover a wide spectrum of themes. The process toward sustainable growth with equity inof mobilizing these inputs was one of the most Africa.exciting parts of the LTPS exercise. It was The process represented by these volumeshighly informative to discover how the same was most excitng. I was strongly encouragedissues can appear from different perspectives, by the intellectual and financial contributionsand how different interpretations can be drawn so generously given by our colleagues infrom the same set of facts, depending on the Africa as well as the donor community. I ambackground and experience of the author. personally grateful to these contributors and I

In preparing the LTPS, the Board and the am confident that this is only the beginning ofmanagement of the World Bank insisted that a continuing process of policy dialogue andinputs be mobilized from the development consensus building on developmentcommunity in Africa, and that these views be perspectives for Africa.reflected in the LTPS report. This approachproved very rewarding, and we believe thatthe LTPS exercise has helped the Bank tomove to a "high ground" that is not only in-tellectually sound, but that can also lay thefoundation for an improved consensus amongthe partners in Africa's development. Thisresult would have been impossible without the Ramgopal Agarwalacontributions of the individuals whose papers Chief, Special Economic Officeare presented in these volumes. Technical Department

Throughout these four volumes we have Africa Regionstriven to retain the unique flavor of the The World Bankauthors' papers while also seeking to assurestylistic consistency. In many cases, this has May 31, 1990

v

Introduction

Zafar Ahmed

There is an enormous variety among African This volume of background papers to thecountries with regard to their physical, social, Long-Term Perspectives Study (LTPS) includespolitical, economic, and resource situations. thinkpieces and country perspectives on eightCountries vary in size, population, and diimatic African countries written by eminent develop-zone; they vary in their economic strength and ment professionals from each country. Most ofper capita incomes; structurally, while many of these articles were written in 1987 and 1988 astheir economies are largely dominated by agri- contributions to the LTPS and reflect the auth-culture, some are richly endowed with mineral ors' perceptions of the situation of their indivi-resources. The continent is also culturally di- dual countries at the time. There are also threeverse in ethnic, lingustic, tribal, and religious papers reflecting the development experienceheritage. Politically, African states run the of the Nordic countries, Germany, and some ofgamut from functioning democracies to mili- the East Asian countries, which are included totary dictatorships, and they follow economic present alternative development paths followeddoctrines ranging from market orientation to by some non-African countries.various shades of state planning and central Sidi 0. C. Abdallahi sets the situation incontrol. Some would even argue that it is dif- Mauritania in the broader context of the trendsficult, if not impossible, to write a useful re- in Sub-Saharan Africa. Thus his paper hasport on Sub-Saharan Africa as a unit. general interest, but it is the institutional decay

Despite these diversities, however, a large that has taken place in Mauritania that is mostmajority of countries suffer from some com- graphically presented. Among the problemsmon problems: long-term decline in per capita that have emerged, the author refers to grow-incomes, rapid growth of population, low lev- ing corruption in the government, the increas-els of investment and domestic savings, low ing tendency of the people to look to govern-returns on investment, and decline in institu- ment for everything, the growing alienation oftional capacity. Past policies have also often the government from the people, and the uni-been similar and resulted in the neglect of versal decline in the capacity for decisionnak-agriculture, ecological degradation, inefficient ing and implementation. He argues that theseindustries, the deterioration of physical infra- factors-largely institutional and sociologi-structures, slow progress on social develop- cal-have exacerbated the economic crisis ofment, overextension of governments, and dis- the 1980s.torted incentive structures. Despite these re- Mauritania has always been largely a subsis-gional commonalities, it is in the context of tence agricultural economy, yet measures toindividual countries that these experiences find stimulate development in the sector have notvivid expression. received adequate attention. Environmental

degradation occurred unchecked through over-

1

grazing and exploitative use of resources, and forces. The lack of the political participation ofpeople responded to the challenge by migra- the people and disregard for the human factorting to the urban areas, which only shifted the in the development effort underpins the failurelocation of the problem. During the 1970s and in the economic arena. One has to concede,1980s, it seemed the only major step taken by however, that the nomadic people, small-scalethe government was to set up costly and inef- farmers, and others living outside Khartoumficient public enterprises. There has been little already operate in a market-based system.progress in getting people involved in develop- Bocar Ba, in his paper on the long-term per-ment. spectives in Mali, identifies two key problemns

He concludes that it would be possible to constraining the country's development. First,realize Mauritania's potential for growth if Mali's physical location as a landlocked coun-policies encouraging higher productivity and try with a dimate that has been characterizedcompetitiveness were followed for the produc- by wide swings in temperature and rainfalltive sectors, with a large role for the private causing drought and desertification poses somesector. Measures proposed to bring about this severe hurdles. Second, the extremely inade-turnaround include reducing the role of quate economic policies pursued in the paststate-run enterprises, avoiding monopoly situa- have thwarted the realization of Mali's truetions and protectionist policies, addressing the potential. The large public sector is a signifi-land tenure problems, providing price incen- cant drain on the economy because of its pon-tives, and promoting low-cost technology. derous and bureaucratic management, the exis-Some of these policies are now gradually being tence of oversized entities, and the operation ofadopted. inefficient monopolies and monopsonies. Ac-

Balghis Badri's paper presents the primary cording to Ba these public companies haveindicators of Sudan's underdevelopment and absorbed a large share of resources that couldoutlines the economic, political, and sociocul- have been used to promote other sectors, priim-tural factors that have led to the crisis in the arily agriculture.country. Economic underdevelopment is docu- The paper points out the potential of themented through indicators of widespread pov- vast regions of Mali suitable for agriculture aserty, decreased production and productivity, the key sector producing food and export corm-parastatal losses, the balance of payments cri- modities, as well as its exploitable potential forsis, and the debt crisis. Social underdevelop- gold. Remedies to correct the budget and bal-ment is characterized by unemployment, un- ance of payments disequilibria would alsoderdevelopment of human resources, decreased need to focus on sustainable econonicgovernment expenditure on social services, growth-for example, by protecting the socialdisparities between regions and social strata, sectors and infrastructure. A long-term strategyand massive displacement and involuntary would have to address the issues of agricul-migration of people because of war and tural policy and industrial strategy, populationdrought. Deforestation, soil deterioration, de- growth, human resource development, regionalsertification, overgrazing, and an animal popu- economic integration, domestic and externallation in excess of the land's carrying capacity financing requirements, and institutional devel-indicate environmental degradation. opment.

For Badri, the primary factor that has caused In his review of Malawi's past economicSudan's current economic crisis has been the performance, Gilbert Chirwa attributes impres-adoption of economic theories and models of sive growth rates during periods in the 1960sdevelopment without reviewing their applicabi- and 1970s to good commodity prices and im-lity for a given sociocultural and historical provements in yields for agricultural products.context. This, for example, led to the imple- Considerable basic infrastructure was also es-mentation of large-scale agricultural schemes tablished during this period. During the 1980s,that exduded the nomadic people, small-scale however, Malawi experienced unsustainablefarmers, consideration of food security, and balance of payments deficits, foreign exchangeenvironmental conservation. Other factors con- shortages, reduced export volumes, growingtributing to the crisis indude weak govern- budget deficits, high rates of inflation, andmental capacity and outreach mechanisms and reduced social services and provision of basiclarge expenditures on the military and security needs. Furthermore, droughts and floods

2

caused damage, as did insurgency activities in poses that the government start reform byMozambique that disrupted Malawi's tradition- "accepting the people as its partners in devel-al rail access to the sea and raised transport opment" and argues for the introduction ofcosts. market-oriented policies in the productive sec-

Malawi's primary assets of good arable land, tors followed by the application of socialistwater, and a climate suitable for crop produc- principles for the distribution of incomes andtion are strengths on which a long-term wealth.growth strategy can be built. The postindepen- In the 1980s Tanzania began grappling withdence development strategy emphasized the a persistent economic crisis characterized by aagricultural sector as a basis for sustained eco- severe shortage of foreign exchange, balance ofnomic growth. The National Rural Develop- payment deficits, large budget deficits, highment Programme, established in 1977, became inflation, and low or even falling rates of out-the framework for management of investments put and living standards. Against this back-and development of infrastructure, social ser- ground, Nguyuru Lipumba argues that thevices, natural resources, and popular participa- market-oriented reforms have to continue andtion in the rural sector. Estate output for tobac- be deepened. He analyzes issues that go be-co, tea, sugar, and coffee has continued to yond short-term macroeconomic adjustmentincrease. Inefficient pricing and marketing sys- and stabilization. Market-oriented reform ef-tems, however, have caused a shift in terms of forts are sometimes seen as short-term policiestrade against the smallholder sector, which has that will be reversed once the economy im-experienced declines in output. Industrial stra- proves. The author's approach emphasizes thetegy has focused on import substitution indus- importance not only of carrying on with soundtries, yet relied heavily on imported raw mat- macroeconomic management and price anderials. In the long term, sustained growth in income policies, but also of pursuing appropri-agroindustries will depend on raw materials ate sectoral strategies for agriculture, industry,produced in the agricultural sector. Increased trade, the provision of social services, as wellinvestment in infrastructure, especially in trans- as the reevaluation of the general role of theport, for the expansion of exports is recom- state in the development process.mended. Financial sector reform is required, Lipumba argues that policy reforms thatand Chirwa suggests that the government re- narrowly focus on short-term adjustment meas-frain completely from borrowing from commer- ures are insufficient for fostering long-term,cial banks and increase investment incentives sustainable growth, which must address criticalfor the private sector. dimensions such as health, eduction, skills, and

"The profile of the Ethiopian economy" by management capabilities, including an efficientBefekadu Deguefe provides a normative view civil service and public sector.and reviews the performance of the economy While emphasizing the need to establishup to 1987. It describes the state of affairs in economic balance, particularly real exchangethe various sectors and developments in mac- rates that do not discriminate against exports,roeconomic areas such as savings and invest- fiscal policies that avoid dependence on bankment, balance of payments, and fiscal and borrowing to finance government deficits, in-monetary policies. As with so many of the terest and credit policies, and growth of moneyother papers, the dominant themes are the supply in line with real demand for moneyproblems of an overextended public sector, the balances, the author argues that a stable mac-need for an enabling environment for small roeconornic environment is a necessary, but notfarmers and enterprises, the risks and costs of a sufficient condition for promoting growth.state intervention in marketing, the failure of The institutional set-up and the "rules of theovercentralized management at macro and game" must be clear and promote efficientsectoral level, and the devastating real and utilization of resources by economic agents.financial impacts of low savings and invest- Sector policies are equally important. In agri-ment. The paper gives a uniquely Ethiopian culture smallholder farmers need efficient mar-flavor to these generalities. keting systems for outputs and inputs and

The author is somewhat skeptical about pri- technical packages that can increase their pro-vatization and warns about "replacing public ductivity. A bimodal agricultural developmentmonopolies with private monopolies." He pro- strategy that will foster growth and equitable

3

income distribution should be based on in- sector and developing stronger linkages bet*-creasing the productivity of smallholder farm- ween agriculture and industry. Development iners. Where land is available, large-scale farms agriculture will depend on the adequate sup-should not be prohibited, but no special favors ply of funds for investment in infrastructureshould be offered. and institutional support, on the provision of

Lipumba argues that Tanzania is too small producer price incentives, and on appropriatefor a general import-substitution industrializa- technology to maximize productivity. Agricul-.tion strategy that will later switch toward ex- tural production should contribute by savingporting. New industries should immediately the foreign exchange now spent on productiontake into consideration the possibilities of ex- of basic needs goods for general consumption.,porting their products. And the government's Investments should be channeled to enterprisesextended involvement in Tanzania's economy producing capital and intermediate goods andlled to neglect in providing social and physical those using local materials. Mwanakatwe alsoinfrastructure. The author argues that there is advocates encouragement of the informal sectoran urgent need for systematic and streamlined and private entrepreneurs. He calls for im--sharing of cost of social services between the proved education, health, and living standardsgovernment and the recipients. In general, the as the basis for sustained growth.government should concentrate on providing Ibrahim Samater's paper focuses on recenitinfrastructure for markets where prices will economic developments in Somalia. The econo.-reflect the opportunity cost of resources, adopt my is dominated by the livestock industry,"market-conforming" instruments of economic which encompasses a large share of GDP, bet--policy, and maintain macroeconomic stability. ween 80 and 95 percent of exports, and 60

John Mwanakatwe's paper on Zambia richly percent of the population. During the 1970s theillustrates that country's experience as reflect- country experienced a serious drought and wasing many of the problems faced by Africa-the ravaged by war. The explosion in demandparadoxical situation of a large, diverse, re- caused by government expenditure, coupledsource-rich continent composed primarily of with decining production, plunged the econo-developing countries. Although it is rich in my into serious financial crisis. During thecopper, land, and labor, Zambia is one of the 1980s the government twice adopted and thenmost depressed economies in Sub-Saharan Afri- abandoned major reform programs. The pro.ca. Its population growth has outpaced growth duction of food grains improved somewhat,in GDP and food production during the past but the overall benefits of the reforms weredecade. It is a landlocked country, with high short-lived. Continued expansion in govern-transport costs for exports and imports. Un- ment expenditure outstripped the slow growth.employment, rural-urban migration, poor qua- in domestic revenues.lity of education, and lack of adequate health Samater is critical of the government's eco-services are major problems. The economy nomic policies and development strategies ofsuffers from chronic deficits, external debt the past two decades. While drought, war,problems, and dependence on copper for 90 influx of refugees, and other external shocks,percent of its merchandise export earnings. have contributed to Somalia's poor economicAgriculture has failed to develop because of a performance, slow economic development islack of consistent policies and adequate institu- primarily the result of inappropriate economictional support. Industrial projects that were policies-the government's expansionary fiscalestablished to utilize local agricultural raw policy, central bank deficit financing, interven-materials have had to rely on imports because tion in agricultural markets, and domination ofof poor linkages. The import-substituting in- the industrial sector. Samater criticizes Sub-Sa-dustriahization strategy is biased toward pro- haran Africa's statist development strategy andduction of luxury consumption goods for the advocates the establishment of democracy anddomestic market. Tariff structures have rein- popular participation to achieve long-term dev-forced this strategy, while the use of capital- elopment.intensive technology has aggravated the un- Samater recommends controlling inflation,employment problem. promoting financial development, and achiev-

Mwanakatwe outlines several policy guide- ing a sustainable balance of payments for eco-lines for promoting agriculture as the leading nomic growth. Currently Somalia's export earn-

4

ings amount to only about a quarter of im- The Nordic transformation from low-incomeports. Export promotion will require a realistic agrarian societies illustrates that rapid econo-foreign exchange policy coordinated with re- mic success is possible through higher pro-forms in public finance. Improvement in tax ductivity, while social gaps can be closed byadminiistration, rationalization of the tax struc- targeting programs. The early priorities in so-ture, expenditure reductions in defense and cial policy in these countries had major posi-security, removal of controls on the pricing tive effects in both the sociopolitical and equityand marketing of goods, increasing reliance on areas, as well as in raising productivity, andthe private sector, and restricting government their experience should be highly relevant tofocus to providing support services are recom- many of today's developing countries.mended. Moreover, the Nordic experience illustrates

This volume then presents three papers on that the key to sustainable economic develop-development experience of countries outside ment goes beyond the issue of the relative sizeAfrica. Developing and developed countries, of the public and the private sectors. Morewhether socialist or capitalist, are today facing important are the complementary roles of thea common challenge of how to reconcile stable state, private enterprises, and the informalgrowth, economic efficiency, equity, and sector-all of which must operate with a highlong-term environmental concerns, some of degree of efficiency.which traverse national boundaries. Skepticism Mitra condudes that the social market eco-is growing about development models that nomy paradigm and the early Nordic develop-emphasize either the magic of the marketplace ment experience-still little disseminatedor centralized planning and government inter- among policymakers-provide many relevantvention in the goods-producing sectors. Hence, insights not only for industrial market econo-there is a continuous search for alternative mies and reforming socialist countries, but alsodevelopment paradigms. Radja Mitra's paper for many developing countries, induding inexplores the features of the social market eco- Africa. In Africa, and elsewhere, there is annomy model, which combines a competitive urgent need to identify strategies for sustain-free enterprise system and market-oriented able development (beyond short-term adjust-economic policies with an active state role in ment measures) that will deal with the issuessocial services and physical and technological of economic efficiency, equity, and povertyinfrastructure. In this context the Nordic devel- alleviation. A critical question is how to pursueopment experience deserves attention. market-oriented policies that integrate the in-

The historical record of achieving growth stitutional and social dimensions of develop-with equity of the Nordic countries is out- ment. The paper argues that the social marketstanding by any standard. Not long ago they economy paradigm can provide useful insightswere agrarian economies with low income in the search for development strategies cap-levels. Starting with Sweden around 1870 they able of reconciling economic efficiency, equity,have all experienced high growth and rapid and environmental and other social dimensionstransformation into advanced industrial econo- for sustainable growth.mies. It is this remarkable early Nordic experi- The German development experience alsoence, and its relevance for development strate- has shaped in many ways the social marketgies today, that is analyzed in his paper. economy model, as shown in the paper by

At an early stage of development the Nordic Uwe Otzen and Hansjorg Elshorst. Germany'sgovernments assumed the responsibility for industrial development began around smallproviding primary education and a high-quali- and medium-size enterprises that initially sup-ty administration and physical infrastructure, plied local markets. The agricultural sector alsoleaving the goods-producing sectors to the achieved maturity with land reforms, improvedprivate sector, subject to market discipline. The terms of trade, technological progress, andstate actively promoted universal access to producers' organizations as important elements.social services, encouraged a harmonious part- But at the same time social development poli-nership between labor and entrepreneurs, and cies were pursued to build the human capitalkept a light reign on the private and informal through social investment and social legisla-sectors. tion. This human capital base was crucial for

the country as it recovered, reformed, recon-

5

structed, and adjusted in the postwar period. different areas; starting with a macro perspec-The combination of market-oriented economic tive on austerity and economic growth, therepolicies and an active social policy-or, the follows a discussion on the promotion of smallsocial market economy model-served and medium-size enterprises (SME), which isGermany well through its emphasis on social followed by remarks on the role of foreignpolicies for consensus among various groups. investments and technology transfer in promLo-In recent years the growing awareness of envi- ting SMEs in developing countries, illustratedronmental concerns and ecological issues may by two case studies.again find the social market economy frame- Japanese, Korean, and Taiwanese styles ofwork an appropriate paradigm. development were characterized by maximizing

The development experiences of the East future consumption, not current consumption,Asian economies are also often considered an while avoiding gross disparities in incomealternative strategy. Although it may be argued distribution and consumption patterns. Thethat the preconditions for the implementation growth with equity policies contributed to highof a top-down, state-guided, and export-led savings and a growth-oriented investment andindustrialization model requires developed consumption pattern. For example, in Taiwzn,basic human and institutional capabilities, it is, a very active role for SMEs was a central partnevertheless, relevant to ask what aspects of of their industrial success. The East Asian ap-the experiences of Japan, the Republic of proach to industrialization emphasized theKorea, and Taiwan deserve special attention by importance of export-orientation and humanpolicymakers in developing countries. resource training as the basis of industrial

The paper by Eul Young Park explores some development.lessons from the East Asian experience in three

6

1

Long-term Perspectives Studyfor Sub-Saharan Africa:

The Situation in Mauritania

Sidi Ould Cheikh Abdallahi

In many Sub-Saharan African countries per feeder roads, water points, and so on. What iscapita income in the 1980s was lower than it more, the government expects to receive aidwas in 1960. Foreign debt has soared. Govern- from abroad to meet these demands. Second,ment spending has far outpaced the growth of unemployment has risen, particularly in urbanGDP. A costly and inefficient para-public sec- areas. Even more frustrating is the fact that ittor has been set up and considerably expand- is increasingly affecting young people who,ed. Agricultural progress has slowed and in because they have received more education,some years declined. Industry, which was built are not resigned to idleness and poverty.gradually and painfully, is now stagnant. Infra- Third, there is the development, particularlystructures that have been developed are deter- among young people, of a strong trend toiorating for lack of maintenance. The remark- adopt the Western consumption model, whichable progress achieved in education and health is intensified by trips abroad and by theis being threatened by heavy cuts in the re- media.sources allocated to them and the high popula- In addition, there is corruption in govern-tion growth rate. The urban population, com- ment. This problem, which varies from countryposed mostly of groups with abysmally low to country, goes beyond the payment in moneyincomes migrating in large numbers from the or in kind for some favor. People often en-rural areas, is mushrooming at an alarming counter corruption when endeavoring to exer-rate. These facts are widely known today, even cise a simple right. Corruption may take otherif some governments are reluctant to admit forms that are even more serious because theythem. are less likely to be punished. Privileges may

Moreover, the societies themselves have be extended because a person belongs to theundergone changes that make the picture even same social group as the official involved ormore dismal. First, there is the development of because an influential person intervenes. Thewhat has come to be called the welfare men- development of corruption in Africa is largelytality. In many African countries, particularly the result of lack of motivation, the inability ofin the Sahel, many people expect the govern- unwieldy and inefficient African governmentsment to provide them with virtually every- to handle the public's problems properly andthing, from staple cereals to the construction promptly, and the growing gap between theand operation of dispensaries, market gardens, desire for a higher standard of living and the

7

limited resources usually available for achiev- understand dearly and judge the real situationing such aspirations. This gap is all the harder in their country.to take when traditional values have been Unfortunately the unfavorable trends weeroded and replaced by values emphasizing have just described do not seem to havematerial wealth, which then becomes the only prompted African countries to think deeplymeans to achieve status. While it is unfortun- about their development problems with a viewately true that corruption occurs in every socie- to implementing strategies to mobilize all econ-ty, what should be stressed here is how wide- omic and social areas of the national life andspread it has become in African countries and fit them into the framework of a realistic vis-the serious threat it poses for their develop- ion of developments abroad. This may bement. because most African leaders have rarely

Finally, it should be noted that African coun- known what the consequences of their deci-tries are developing in a context in which the sions are in time to be useful or how much ofpeople have no voice in the conduct of overall their problem is due to their economic poli-policies. Everything has taken place and con- cies-or lack of them-and how much is duetinues to take place as though overall economic to exogenous factors. This raises the issue ofand social policies are to be decided entirely the sometimes tragic deficiency of analyticby government leaders and officials. Of course, capabilities in African countries. Many leaders,government leaders' speeches have conveyed a no doubt sincere in their desire to pronmotedifferent message. In many countries grassroots progress and prosperity for their peoples, haveorganizations have been formed. But, in the been and still are, forced to take day-by-dayend, they have been asked to prodaim-loud actions that often result in decisions havingand dear-that what is undertaken by their contradictory effects because of the lack ofleaders is the best that can be done. Even consistent economic policies and ignorance ofwhen governments demand sacrifices of their the control mechanisms of an economy withpeople, the demands are made with high-flown multiple relationships and interdependence.rhetoric that does not answer the questions This deficiency in analytic capabilities is thepeople might want to ask, such as: Exactly result of several factors, induding lack of gen-why are we to mobilize and agree to make uine dialogue with the various populationsacrifices? What precisely are we supposed to groups about their specific problems and aboutdo? To avoid what? To achieve what end and development problems in general.by what means? While refusing to give peopleany voice in the government, leaders encou- The situation in Mauritaniarage resignation and patience with soothingwords. This has been particularly evident with The above observations apply particularly tothe implementation of structural adjustment Mauritania. Following is a brief description ofprograms. While these programs were designed the successive "development strategies" aclop-to correct overall imbalances that were incon- ted by the country, a review of developmentssistent with sustainable growth, they entailed in society and the environment, and a descrip-measures that could be deeply resented, such tion of the role played by the government inas blockage of recruitment for government developing the country.employment, adjustment of the exchange rate,higher public tariffs, and declining investment Successive development strategiesrates. Governments generally did not explainto the people the need for these programs and Prior to the 1960s, agriculture in Mauritaniathe efforts they required. Emphasis was placed was mostly subsistence farming, involving amainly on the investments planned for the little trade within the country and probablyvarious sectors and the advantages expected with neighboring regions of Senegal and Mali.from them. It rather seems that, aside from Fishing was confined to meeting the subsis-natural disasters and deterioration of the econ- tence needs of the people living along theomic situation abroad, African leaders feel that Senegal River and in some villages along thenothing should be said about any unfavorable seacoast. Extensive livestock raising was devel-developments. This attitude probably stems oped and it provided, along with gum arabic,from underestimating the people's ability to the country's principal, if not sole, export. The

8

government had a small staff and there were believed that this would help achieve moreno urban populations, because the large popu- social justice. In addition, the prospect of morelation centers of that period were rural in financial assistance from abroad was openedcharacter. In foreign trade, Mauritania was a up by the substantial aid offered by the Arabkind of hinterland of Senegal. oil-producing countries. Once aid from oil

With the opening in 1963 of the Kedia iron producers slowed down in the mnid-1980s, themine in the northwest, and the prospects for view that appeared increasingly to prevail wasworking a copper deposit, the theory took hold that the country's strategy should aim at devel-that the country's development should be oping the potential of farming and ocean fish-based on mining income. It was thought that eries through private enterprise.mining receipts would provide the investmentsneeded to develop infrastructure, livestock Changes in the environment and societyraising, and agriculture.

In 1968 this view changed and development The environment in Mauritania has beenof the rural sector was assigned priority in considerably degraded over the last thirtydevelopment objectives. This choice, however, years. The country's population is small-a-did not have any major impact on the agricul- round 700,000 at the start of the 1960s and lesstural sector's growth. To be sure, the modest than 2 million by 1988-for an area of a littlesteps taken in the sixty years since colonial over 1 million square kilometers. Nevertheless,times to improve animal health, provide more the country's environmental degradation iswater points, and clear firebreaks did result in largely the result of the activities of man anda substantial increase in the cattle, sheep, and his livestock.goat populations before the disastrous drought The degradation existed even before theof 1972-73. It is true that three large agricul- severe drought that struck the Sahel after 1969,tural development projects were devised. But, with varying intensity, year after year. Thewhile the first was speedily put into effect spectacular increase in livestock in the 1950swith assistance from the People's Republic of and 1960s because of the joint effort to im-China, the other two were not implemented prove animal health and increase the numberuntil much later because of lack of funds. A of water points resulted, particularly aroundpublic development corporation was estab- the water points, in areas virtually bereft oflished in the 1970s, with one goal being the plant cover. Tree cutting by a growing popula-development of irrigated rice-growing areas, tion for cooking, livestock protection, andbut its work was ineffective and too costly. household use; forest fires, which are particu-Measures to stimulate the development of larly destructive in years of good pasture; andagriculture have not received the attention they the drought, speeded up the process tremen-deserve. dously. Some regions that were known as

Overall, the priority given to agriculture in good places to pasture livestock in the summer1968 and officially maintained up to the pres- less than thirty years ago have become com-ent time has produced only limited results. pletely barren. This degradation occurred asIrrigated agriculture has recently attracted though nature were shedding its skin fromconsiderable interest in both rural and urban north to south and replacing it with a skin ofareas with completion of dams on the Senegal sand.River. The grain price rise that has occurred The few efforts made by the governmentrecently under the structural adjustment pro- and the people to preserve what they couldgram is no doubt one of the reasons. appear puny before the scope and speed of

Beginning in 1972-73, the government shifted this process. A long-range approach to thisits policy toward greater intervention in the situation can no longer be put off. Efforts musteconomy. The leaders of the country were be made to find the best way to meet thisimpatient to see development speeded up, and challenge. Should the population be encour-because private enterprise was doing little aged to maintain its present spatial distribu-(domestic companies were in their infancy and tion? Should the government encourage settle-foreign companies were hesitant to come in), ment of people in less threatened areas? Is itthe government felt its intervention was justi- preferable for the government to refrain fromfied and even necessary, particularly because it taking the initiative and merely act in response

9

to situations as they arise? The government year because of the great irregularity in themust consider these urgent questions and draw amount and distribution of rainfall in the rainyconclusions on its options for formulating its season. The development of irrigation systemsfuture development strategy. creates more secure areas, and extending theim

The people, most of whom were nomads at to increase productivity offers real hope for thethe beginning of the 1960s, reacted to the rapid people.degradation of the environment in two ways. A major problem that must be the center-First, there was a massive movement into the piece of any national strategy for the future isurban centers. In the space of a single genera- unstable population. Degradation of the envi-tion, the urban population mushroomed from ronment-a process that may be occurring toovirtually 0 percent to over 30 percent of the fast for the people and the government to curbtotal population. The second reaction was for significantly in the foreseeable future-seems topeople to settle down, either in existing rural have condemned the people to inexorablepopulation centers or around water points, displacement to the south and southwest andusually located near a main road. In the latter to settling in the urban centers or small com-case, people are living precariously, like "se- munities around the water points nearest thedentary nomads." Some of them try to work main roads in their search for new ways t:otheir way out of this situation by engaging in subsist.small business activities or market gardening.Others are forced to go back to the city and The government's role in developing the countryjoin the urban masses seeking work.

Nomads are no longer numerous. There are In Mauritania, perhaps more than in an,yno reliable figures on their number, but they other country in the region, everything had toaccount for only 15 to 25 percent of the total be developed from scratch when independencepopulation. The growing preference for a se- was achieved. In less than thirty years, sub-dentary way of life in rural areas is due to the stantial gains have been made to developfact that the nomadic life is becoming harder roads, ports, airports, water supply, electricand harder. First, the traditional nomad routes power, education, and health care. The govern-are changing because of the spread of the ment has taken over the mining industry anddesert. Livestock must be brought south and established domestic and international publicdriven across the Senegal River, far from the and semipublic companies. The private sectortraditional home bases set up by the census has developed remarkably, particularly sincecenters, where people can receive food assis- 1974. But we must recognize that these majortance and educational and health services. government actions have included errors andConsequently, nomads have often been com- deficiencies that are largely responsible for thepelled to leave their livestock for most if not country's critical situation in recent years.all of the year. They turn them over to sheph- Weakness in analytic capabilities, overestima-erds and settle where they can carry on the tion of public and para-public managementsmall business activities mentioned above and capabilities, and lack of genuine debate onraise cows or goats for milk if the required development policies are the main reasons forfeed can be obtained in the preharvest months. these errors and deficiencies.

Along the Senegal River valley, people have In 1969 the department in charge of plan-traditionally practiced floodplain and rainfed ning was composed of a director fresh out offarming. The degradation of the environment the university and two technical advisers.and the continued drought have made these Economic development plans have never gonekinds of farming more and more precarious. beyond setting priorities (for rural develop-Land submerged in the floodplains has always ment), defining needs (entering recurrent costsshifted raggedly, but over the last twenty years on the books), and listing the investment pro-there has been an almost constant decrease in jects proposed, but rarely studied, by the sec-it, partly because of the low rainfall and partly tors concerned. The need indicated by thebecause of the gradual accumulation of sand in planning department to record recurrent coststhe depressions in which the river water flows usually led merely to calculating their amount,out into the farming areas. The yield of rainfed but this exercise was made even more point-crops has varied substantially from year to less by the fact that the Finance Ministry dep-

10

artments concerned operated with plans that quired by any enterprise. The second point isusually did not extend beyond the following that the people themselves, along with govern-fiscal year. Studies on trends, factors affecting ment officials, seem to be hostile toward gov-the development of farm and industrial output, errnent companies that have large resources.and incentive measures that could be taken Large resources seem to them to be an indica-were seldom considered useful, and in any tion of waste and bad management. The lattercase implementing them went far beyond the point is a sociological argument different fromanalytical capabilities available in the country. those usually made against government com-Development was conceived as carrying out panies.the maximum number of projects. Certainly there has been little progress over

The deficiency in analytic capabilities con- the last thirty years in getting the people in-tinued over time, despite the growing com- volved in defining and correcting developmentplexity of the economy. Because of this defi- policies. The state has really been the onlyciency, which was both the cause and effect of agency responsible for these policies. Therethe lack of demand for such capabilities, many has, however, been one mass political partyeconomic decisions were taken without having that has organized movements of young peoplethe elements needed for appraising their im- and women, and later included unions. Thispact. This has had and continues to have con- party is theoretically responsible, through itssequences that are all the more serious because central and regional structures, for definingthe level of economic education of many politi- national guidelines in all fields and for im-cal and administrative decisionmakers is gene- plementing the accompanying policies throughrally low. This is perhaps because of the new- a government and parliament that it was sup-ness of the complex economic structures now posed to control. But, while it must be recog-in existence. There are few responsible officials nized that this type of organization has playedwho can see that a rise in a certain domestic a key role in maintaining national cohesivenessprice may signal something other than an and peace in the society, it must also be recog-unfavorable economic trend. There are even nized that the system has not given rise tofewer who can see in an exchange rate devalu- genuinely free and responsible debate withination any positive contribution to improving its various structures. The weight of the centraleconomic performance. For the most part, they and regional administration has been stifling,see things from the vantage point of the ulti- and because it has not wished or has not beenmate consumer. able to promote debate leading to correct ana-

In the 1970s and 1980s, the government es- lyses of the state of the country, of possibilitiestablished numerous public companies in fields and constraints, and of possible choices, andwhere it thought they were needed, because it because of its deficiencies in analytical capabili-regarded direct action by the state as appropri- ty, it has confined debate to minor issues andate or because of shortfalls in the private sec- to proclaiming the support of militants for thetor. These govermnent enterprises usually choices made by the national leadership.turned out to be inefficient and costly. The Thus the perception of the government as ancauses of this inefficiency, which are essentially outside force, with actions that can be ob-the same as those found throughout Africa, are served, but often without understanding theirwell known and need not be repeated here. purpose, dates back to the colonial administra-Nevertheless, two points should be made. The tion and has changed but little over the lastfirst concerns the systematic condemnation of thirty years. Other attempts to organize thegovernment enterprises as irremediable on the people into voluntary structures for educatinggrounds that their managers, being govermnent the masses have been undertaken successivelyemployees, are not motivated to act vigorously since 1978, but without notable results regard-in developing their enterprises. In fact, there ing our proposed objective, which is the emer-are managers of government companies who gence of a true debate in which more of theare competent and strongly motivated to suc- people will be involved in the choices thatceed; it must be recognized that government shape the country's future. It is still too earlyofficials are not usually inclined to give such to evaluate whether recently established townresponsible managers the resources they need councils will be able to help obtain greaterat the outset and the freedom of action re- participation by the people.

11

The country has professional organizations, ing efforts and sometime abrupt about-faces oftrade unions, the Chamber of Commerce, and the government in many African countries. Thethe Federation of Employers and Craftsmen, often abysmally small numbers of skilled per-but, probably for the reasons given above, the sonnel, limited administrative resources, androle of these organizations in promoting vigor- inadequate infrastructure left by the colonialous debate to make people aware of their powers have also played a part in the coun-responsibilities remains small. They confine tries' poor overall performance.their activities to specific complaints and do * The international community's insufficientnot seem to make any significant effort to knowledge and limited interest in Africa'simprove their members' level of training. development problems, at least in the 1960s

This lack of any real debate has in the past and most of the 1970s, resulted in insufficienthad a number of consequences, including defi- quantity, quality, and scope of aid. That isciencies and mistakes made in formulating and why international aid has actually supportedimplementing development policy and the the implementation of policies that are todaydevelopment of some negative attitudes that vigorously decried by international develop-may well mortgage the future heavily. These ment aid organizations.consequences include: The important thing today is not to con-* Isolation of the government from the people demn past experiences but to analyze objective-* Development of a welfare mentality in the ly the situation resulting from it and to devisepeople objective policies that will change current- Lack of scruples in handling public property trends. Research to improve both the scope* Failure to conduct studies before taking deci- and pace of application of these policies tosions, and the weakness of analytical capability correct current distortions within a tolerancestemming from that failure, which keeps the level supportable by African societies shouldgovernment and the people at a level of per- be a major concern for us. Development coop-ception limited to the possibilities offered and eration resulting in growth and greater effec-to the difficulties to be faced, which is not tiveness of outside aid could raise that toler-enough to promote more resolute action in ance level substantially.searching for ways to employ human andmaterial resources more effectively Strategy for long-term growth with equity- Development of odious practices-such ascorruption and nepotism-which tarnish the Prospects for the next generationgovernmnent's prestige and reduce its credibilityin the eyes of the people. The overall economic situation in Sub-Saha-

Criticisms that one may be tempted to make ran Africa has worsened over the last thirtyof African leaders' actions, however, should years. The picture for most African countriesnot fail to take into consideration the following today is not bright: a crushing debt burden,attenuating circumstances: stagnant agriculture and industries whose* In the wake of political independence, Afri- share of international trade is declining, un-can leaders have had, as an absolute priority, employment, and budget resources far belowto forge and consolidate nationalistic feelings the needs for normal operation of public ser-within the often artificial borders that are the vices, maintenance of infrastructure built in thelegacy of the colonial administrations, among past, and new investments. In addition, therepeoples who never had such feelings in their is a major shortfall in mobilization and effec-history. Attempts to set up one-party systems tive utilization of private savings. This situa-and to keep citizen and labor organizations tion results in increased dependence on foreignunder control were often less motivated by a aid to determine the substantive objectives,desire to achieve absolute power than by the nature, and number of national and regionalfear that the development of pluralist opinions investment programs, and in many cases towould lead to challenges to national unity. cover some operating expenses.* The lack of experience of the elite, who What are the future prospects given theduring the colonial period were excluded from present circumstances? Forecasts are uncertain,initiating action, taking charge of things, and but there are some trends that Africans willconducting national affairs, explains the grop- surely face in the coming decades. These are

12

rapid population growth and a reduction in is giving way in urban areas to more individu-many countries of available farmland. Trends alistic attitudes that tend to exacerbate feelingsin the world economy-such as changes in the of dissatisfaction and to polarization of thereal price of raw materials, private foreign well-to-do and the poor, whose interests areinvestment, and competition in the global increasingly felt to be antagonistic.economy-must be taken into consideration Because of insufficient resources, govern-even if economic and political factors may ments are finding it more and more difficult toarise from time to time that might cause these operate public services, develop educationaltrends to shift temporarily or permanently. and health facilities, and eliminate unemploy-

Before addressing the question of recommen- ment. Because of poor economic performancedations on new strategies for confronting these and the rise of corruption, governments riskproblems, it would be appropriate to review appearing to growing segments of the popula-the changes occurring in African societies, tion as instruments that serve the interests ofparticularly attitudes toward the state, in an the wealthy.effort to shed more light on the social contextin which these strategies should be defined. Prospects for Mauritania

For the most part, urban populations willcontinue to grow faster than rural populations, The trends described above as the majorat varying rates depending on the country. developments in African societies over the nextThis will produce the dual effect of a high two or three decades will all occur in Mauri-population growth rate and a rural exodus that tania. Mauritanian society has undergone majoris bound to continue because of the city's changes in the last couple of decades. Nouak-attraction, particularly for young people, and chott, the capital of the country, which hadthe unavailability of productive land, especially only a few hundred inhabitants some thirtyin the Sahel subregion of West Africa. Of years ago, now has, according to latest esti-course, countries could wait until the continu- mates, nearly 500,000, or one-fourth of theally declining living conditions of people in the country's entire population. Most are living inoutlying areas place some curbs on this exodus shanty towns under sometimes intolerablyand even in some cases cause a return to the unhealthful and impoverished conditions. Mostrural areas. But the trend will probably remain of what the people consume, as is the case forthe same over the next three decades. other urban centers and part of the rural pop-

The new jobs that will be created in the ulation, is imported, although the country wascities over the coming decades in both govern- nearly self-sufficient less than forty years ago.ment and industry will be able to absorb only Already noted is the dramatic decline in thepart of the urban labor supply. Unemployment nomad population, their movement toward thewill grow and the informal sector will increase south and southwest, the gradual replacementsubstantially, which may provide a subsistence of camps by villages, and the exodus fromincome to many people in the cities, but their some of these villages to the city where peoplesituation will often be precarious. Many young hope to find a better life. The drought haspeople, after receiving a general or technical played a major role in speeding up these chan-education, will have to be satisfied with low- ges. It does not appear, however, that in-level jobs in which their skldls will be under- creased rainfall, even if long term, could slowutilized. down the rate of urban growth. The country is

Social relations in African societies have moving toward a situation where the popula-begun to change, and this change will speed tion is largely urban, traditional values ofup in the future. The rural value system in- solidarity and mutual aid are gradually weak-herited from the past, which prevails even in ening, unemployment is rising, antagonismsurban centers, is increasingly giving way to a between the well-to-do and the poor are wor-new system of urban values, which in turn is sening, and, because of the lack of resourcesspreading to the countryside. The values of and the development of corruption, the gov-solidarity and mutual aid prevalent in tradi- emient's prestige and credibility are declining.tional family, tribal, and other groups, which This is the context in which a new develop-alleviated the social and psychological effects ment strategy must be quickly defined andof precarious material situations on individuals, carried out.

13

Some conclusions can be drawn from the long time millet and sorghum, grown throughabove brief analysis. The rapid rise in urban either rainfed or floodplain agriculture alongpopulations is accompanied by a weakening in the Senegal River for consumption on the farmthe traditional structures and organization of or for local marketing, were the only cropsAfrican societies, which are based on the fami- raised, except for small amounts of cowpeas,ly in its largest sense: the village, clan, tribe, sweet potatoes, watermelon, peanuts, and, inor caste. This weakening is due less to con- the oases, dates, barley, and hard wheat. Stait-scious rejection by individuals of their underly- ing in the early 1960s, catchment dams wereing values, structures, and systems than to the built, but it was not until the 1970s that sormefact that these individuals are engaged in new irrigated rice farming began to develop alongactivities and are living in different conditions the Senegal River and small market farms werein a world governed by a different value sys- established.tem. There have been and still are efforts to With the long drought over the last twentymaintain the solidarity and mutual aid of the years, the population growth, and the exodusclans or tribes within the modern social system from rural areas, the country's food needsthe African countries have adopted. Some of could be met only by rapid growth of foodthese values are still upheld by society in imports, particularly rice and wheat, most ofestablishing a community enterprise or helping which was provided through international fooda member of the clan or tribe who has suf- aid. Irrigated rice cultivation by a governmentfered a difficult blow. Nevertheless, those who enterprise has been so inefficient and costlyattempt to use their public, political, or econo- that the project has raised serious doubts aboutmic responsibilities to grant privileges to their the viability of this kind of project for bringingtraditional social group are regarded as having into production some 130,000 hectares of po-committed an injustice and are strongly con- tentially irrigable land. After two years, thedemned by public opinion. In spite of the pace of land development is growing rapidlycontinued survival of traditional social struc- because of private agricultural investment.tures, Africans aspire more and more to a Three points should be made here. First, thissociety based on equal opportunity and free- new interest in private rice growing appears todom. This evolution will increasingly deter- be one of the results of the rapid increase inmine their attitudes toward the state, political the producers' price, which was allowed bysystems, and economic policies. They will be the government in the structural adjustmentmuch less resigned to unemployment and measures taken in consultation with the IMFpoverty than in the past. and the World Bank. Second, all available data

indicates that the per hectare cost of privateAgriculture and industry development is much less than the cost of

public development, in large part because ofThe evidence shows that the potential for the joint use of equipment by several farmers.

developing agriculture and industry and the It should be noted also that joint use of re-policies implemented to realize that potential sources seems to have spread rapidly to otherwill for the most part determine the vigor and equipment such as combine harvesters and riceduration of growth in each African country. It milling units. Projects of this kind are nowis this author's contention that the develop- beginning to appear.ment of these two sectors must be accom- The third point is that new farmers comingplished mainly by the private sector within the from the cities, with which they keep in closeframework of a national strategy consisting of contact, have an entrepreneurial mentality thatpolicies promoting the development of produc- makes them more inclined to introduce innova-tion, higher productivity, and more competi- tions and seek greater productivity. Also, theytiveness. are more determined and are more apt to

struggle to create a favorable environment forAgriculture agricultural development. The government can

be expected to give such issues as farm prices,Mauritania is a semidesert country whose fertilizer, agricultural research, extension work,

insufficient and irregular rainfall can support and marketing more attention in the futureonly limited agricultural development. For a because of their pressure.

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Unfortunately, the prospects that now seem should also include penalties to curb forestto be opening up for rapid development of fires and overcutting of trees.irrigated farming, particularly rice growing, The future of livestock raising in Mauritaniamay run up against serious obstacles if ap- is difficult to forecast at this time. Despite itspropriate measures are not quickly taken by relatively large livestock population, the coun-the government. First, there are land tenure try has rapidly increased imports of milk pro-problems. The law on public domain in Mauri- ducts over the last twenty years. This increasetania does not recognize community ownership is the result of the rapid growth in urbanof land. Also, all land that has not been population and the fact that livestock ownersfarmed for a certain number of consecutive have to be separated from their animals foryears is considered to be vacant and unowned. virtually the entire year while herds are takenThose who want to claim the land usually do to pasture. The animals are turned over tonot have the official documents required for shepherds who take them to more temperaterecognition of a land title. This situation will areas, which are usually scarcely populated,have the foreseeable consequences of challen- while the owners gather together in fixedges and conflicts when the government awards camps or in villages around water points, andland grants to new farmers. Early signs of this the surrounding areas are speedily desertified.are visible already. The state must make every These livestock owners use imported dairyeffort to find ways to keep former landowners products to meet most of their own needs.from being robbed of their rights and to avoid While exports of live animals to neighboringdiscouraging the budding interest in irrigated countries have been substantially reducedagriculture, particularly among city business- because of the drought, the country's livestockmen and officials. production has nevertheless been able to satis-

Second, pricing policy must be addressed. fy meat requirements up to now.The government has been able over the last How can livestock be conserved and devel-two years to ensure that farmers receive a oped while at the same time curbing environ-profitable price, above the world market price, mental degradation and preventing the damagethrough financial aid from some lenders and and conflicts that would inevitably be causedthe margin over imported rice, which is taxed. by bringing large numbers of livestock requir-Rice output, however, is still well below total ing pasture into crop growing areas? Will it beconsumption. Obviously, significant develop- economically feasible to shift from the presentment of the country's production is not likely extensive livestock raising to more intensivewith this approach. To solve the problem, the methods? How can the optimum size of theconsumer will have to be made to pay the real livestock population be determined for rationalprice of production in the country. use of pastures, and what means could be

So it is important for the policy in this field used to ensure limitation to such an optimumto encourage all measures that will reduce number? Thought should be given to theseproduction costs and increase productivity, as questions in order to formulate a sound policywell as to control the growth of production so on livestock development, consistent withthat the subsidy level can be supported by the ecological goals.state and consumption price rises will be mod-erate enough to be supported by the consumer. Industry

The focus in nonirrigated farming should beon improved seeds of more resistant and ear- The causes of the difficulties encountered bylier maturing varieties of millet and sorghum, many African countries in developing theirthe campaign against environmental degrada- national industries are well known. Shortage oftion, and improvement of secondary roads to skilled labor, insufficient capital, a narrowfacilitate hauling and marketing farm products domestic market that does not provide econo-in food shortage areas. mies of scale, an unfavorable global environ-

In a country facing severe desertification, a ment preventing external economies, burden-vigorous policy on soil protection and reforest- some social legislation and taxation, and ad-ation should be implemented. Such a policy ministrative procedures snarled in red tape areshould include steps to encourage and stimu- factors that, combined or individually, thwartlate active participation by the people. It

15

initiative or lead to industrial output that is of from this sector without overexploiting itspoor quality and often not competitive. resources.

The thin market-some two million im-poverished consumers-constitutes the major Conclusionsobstacle to substantial development of process-ing industries in Mauritania. The country's It is the author's conviction that institutionalindustrial development goal over the next three factors have played a major role in contribu-decades should in our view be realistic. As a ting to the poor development performance cfgeneral rule, no project should be given tax African countries over the last thirty years. Inadvantages so large that the country as a many respects, these countries are today in awhole derives less benefit from it than the more difficult position than they were in theconcessions given to it. 1960s. Even if they do not have the assets to

Monopoly situations and continuous protec- undertake a new period of sustainable growthntive measures should be avoided. Government with equity, the profound distortions that havesupport for industrial projects should as far as resulted from their past development policiespossible be confined to the start-up period, and cannot be corrected without major disturbancesthe objective for regular operations should be unless more democracy and more responsibleproduction that is competitive with imports in participation of social groups in defining objec-the framework of a favorable exchange rate tives are included in their new strategies.policy. The farming and fisheries sectors While the imperative need to consolidateshould be given priority in the country's in- national unity may have caused many leadersdustrial policies. Development of agroindustries over the past thirty years to prefer strongl,ycould be a real stimulus to farm production centralized and dirigiste political systems, theand to its diversification. Increased local pro- imperatives of social peace, national cohesion,cessing of fisheries products is the only way and sustained economic growth call for morefor the country to derive more advantages freedom and citizen participation in the coming

decades.

16

2

An Analysis of Sudan'sUnderdevelopment

Balghis Badri

Indicators of Sudan's underdevelopment in Khartoum is not representative of the coun-try; it is clear that other areas are worse off.

Economic, social, and environmental factors The general perception of the people thathave had an impact on Sudan's underdevelop- their situation is worsening is expressed inment. The primary indicators of the country's popular songs. Their deteriorating state haseconomic and social crisis are described in this been manifested in rural-urban migration, thesection. growth of urban shantytowns, declining prod-

uction of staple crops, and the massive faminePrevalence of poverty of 1983-85. In 1984 there were five million

severely undernourished people living in theThe continued prevalence of poverty is an Darfur, Kordofan, and Eastern regions. There

indicator of the many shortcomings in the are still 3.2 million people living in these areas;Sudanese economy and of current development the remainder have migrated in search ofpolicies and priorities. The United Nations better opportunities (Abu Sin and El SammaniFood and Agriculture Organization has estima- 1987).ted that 58 percent of the population is poor(Abu Sheikha 1983). About 70 percent of the Environmental degradationrural population-which includes the 73 per-cent of the peasants who farm less than five Studies indicate that severe environmentalacres-is living in poverty. In the urban and degradation has resulted from both human andformal sectors the total number of poor has natural causes-drought, ineffective conserva-been estimated to be 10.65 million people, of tion policies and legislation, inadequate finan-whom 0.89 million live in urban areas and 9.76 cial resources allocated to environmental con-million live in rural areas. servation, and poor utilization of budgetary

The results of the 1978-80 household budget resources earmarked for environmental protec-survey in Khartoum revealed that about 43 tion. A major reason for environmental degrad-percent of urban households had an annual ation is the unplanned and unwise removal ofincome of less than SL1,000, the poverty line in the forest stock with no agroforestation. Thisurban areas, while 36 percent of rural house- has led to soil degradation and desert en-holds had an income of less than SL500, the croachment. Forestlands are being exploited aspoverty line for rural areas. The income level a source of energy and for agricultural activi-

ties, housing construction, and mechanized

17

agricultural schemes. Annual losses amount to75.7 million cubic meters against the allowable Displacement of rural population and migrationloss of 44.3 cubic meters, thus leading to a netannual loss of 31.4 cubic meters. Since 1983 It is estimated that about two million peoplethere has been an imbalance in the annual have moved from Darfur, Kordofan, and theincrement in tree production and total con- East to urban centers. About 1.5 million havesumption, which has amounted to a loss in the moved from the south because of civil warnorthern regions alone of 44,733 million cubic and are living around urban centers in themeters (Abu Sin and El Sammani 1987). The northern regions (Wanas 1987). The United1977-78 to 1983 budget planned for soil conser- Nations has estimated that displaced droughtvation, pasture, and forest was only S£37 mil- victims account for 25 percent of the popula-lion; much less was approved, and even less tion in Darfur, Kordofan, and Eastern regions.was actually spent (El Amin 1985). Seasonal migration, as a pattern of life to sup-

An objective of the 1966-70 anti-thirst cam- plement rural income, accounts for one millionpaign was to encourage well digging and the people who migrate during the months ofdevelopment of an extensive water supply November through April to various agricul-program. The program began, however, with- tural schemes and towns. The continuous mob-out a study of the carrying capacity of land ility of the rural population signifies not onlyresources and patterns of nomadic movement, an accepted way of life, but also the lack ofand it has resulted in overgrazing and soil rural development schemes and other oppor-deterioration. tunities that could generate income and e!m-

The number of animals exceeds the carrying ployment.capacity of the land in different regions. In theDarfur, Kordofan, and Middle regions the Urban shantytowns and unemploymentnumber of animals that suit the land's carryingcapacity and the actual animal population from The Ministry of Housing has estimated thatthe census of 1979 are as follows: one million people in greater Khartoum live in

unplanned residential areas and another oneAnimal Animals Excess million live in shantytowns. Open unemploy-carrying (1979 number ment in Sudan is in the range of 13 to 16

Region capaciti census) of animals percent of the labor force, which excdudesworkers employed in the informal sector. The

Darfur 4,527 6,054,149 6,049,622 informal sector is estimated to employ 50 per-Kordofan 4,385,440 5,883,344 1,497,904 cent of the urban labor force (Modawi 1987).Middle Regions 1,864,483 4,511,433 2,646,950 In 1976 the informal sector employed 25 per-

cent of the urban labor force. A recent studyWhen agroforestry, pasture rehabilitation, and by the World Bank's Social Dimensions ofconservation projects are not given priority, Adjustment Program showed that residents inovergrazing and soil degradation result. The the unplanned and shanty areas of Khartoumneglect of the environment leads to famine and suffer from lack of purchasing power andloss of human and animal life. availability of basic food. They do not have

access to social services, nor do they shareDecrease of production and productivity rationed food equally (Abu Affan 1988).

In 1956 agriculture accounted for 60 percent Underdevelopment of human resourcesof the gross domestic product; in 1978 it ac-counted for only 39 percent, even though the The literacy rate in Sudan is 20 percent, lifecultivated land area had increased by 87 per- expectancy is 50 years, infant mortality is 119cent and approximately 70 percent of the deve- per 1000 live births, and maternal mortality islopment budget has been allocated to the agri- 600 per 100,000 live births. About one-tenth ofcultural sector. The decrease in production is the population suffers from calorie malnutri-largely attributable to low agricultural produc- tion, only 20 percent have piped water, and 80tivity. percent do not have bath and toilet facilities in

the household. The share of social services in

18

govermment budget expenditures dropped from through direct and indirect taxes increased33.1 percent to 9.7 percent between 1971 and from 14 to 39 percent. The sector employs1980 (Abu Sheikha 1983). about 5 percent of the labor force. Public in-

Many other indicators would also depict the vestment in the industrial sector, however, hasdegraded state of the population-lack of so- put Sudan in debt and perpetuated the econo-cial services and social security, high school mic crisis. The govermment invested US$3dropout rates, and high student-teacher ratios. billion in industrial projects between 1973 andThe government has responded to the econom- 1978 and US$6.8 billion between 1978 andic crisis by further cutting resources for social 1983. The return on these parastatals has beenservices, while expenditures on military ser- very low.vices are expanding steeply. Social service The deficit of all government parastatals inexpenditures in the budget declined from 14.2 agriculture and industry from 1971-72 to 1982-percent in 1970 to 3.5 percent in 1978. Expen- 83 was estimated at S£885 million. These large-ditures on defense, security, and other non- scale development schemes appear to have leddevelopmental activities from 1965 to 1978 to underdevelopment of the country, and al-ranged between 13.7 and 44.3 percent, with an together they have not made much of a con-average of 22.9 percent (Ahmed 1987). tribution to the government budget (Ministry

The neglect of human resource development of Finance and Economic Planning 1988).by previous governmental policies has led tothe current disastrous situation. Plans to im- Dominance of consumer goods industry andprove this situation were made in the Four- construction sectorYear Salvation Program. In 1986-87, 11.8 per-cent of the total central government budget Investment should be directed to productivewas alocated to human resource development, assets and inputs rather than to constructionA much higher percentage is needed, however, and consumer goods. In recent years the pri-to speed up the pace of human development, vate sector has diverted its investment awayraise the capacity of ministries to provide the from productive assets; 46 percent of its invest-services, and train the personnel needed for ment is for construction, which constitutesbetter quality and more widespread human three times its investment in agriculture anddevelopment services. industry. About 54 percent of private sector

investment is in consumer goods industries.Losses incurred by agricultural and industrial The input industries constitute only 2 percentparastatals of private investment, while the public sector

has no investment in such industries (MinistryThe agricultural schemes-Gezira, Blue and of Finance and Economic Planning 1988).

White Nile, Rahad, New Halfa, Northern Agri- The rapid growth of consumer goods indus-cultural Corporation, Ski, Gash, and Tokar-co- tries and the construction sector have contribu-nstitute the big agricultural parastatals that ted to the emergence of a parallel market. Thereceived 43.8 percent of total development development of a black market in currencyfunds from 1981-82 to 1986-87. Investment in indicates an unhealthy economic and socialthe Kenna Project and the Rahad Irrigation situation. The volume of black market currencyScheme cost US$750 million and US$436 mil- was estimated at US$2.6 million a day in 1981lion, respectively, yet the overall contribution and US$3.1 million a day in 1984 (Ali 1986).of these schemes to GDP is only 2.5 percent. The volume of the black market is reported to

The contribution of the industrial sector be about double the export receipts. Because(sugar, kenaf, weaving and spinning, food, and the buying and selling of hard currency is easymanufacturing industries) to GDP in 1970-71 and profitable, it has adversely influencedwas 8 percent. The Five-Year Plan projected productive investment in the country. Thethat this sector's contribution to GDP would growth of the black market in other commodi-increase to 16 percent, but it reached only 9 ties has widened the gap between the havespercent in 1976-77 and dropped to 7 percent and the have-nots, increased the volume ofduring 1982-83. Capacity utilization in most local currency, and fueled inflation (Ahmedindustries is estimated at 25 percent. The sec- 1987; Omer 1982; Awad 1986).tor's total contribution to public revenues

19

Bank extended loans to 55 capitalists, whoDisparities between low- and high-income groups represented 33 percent of all recipients. Loansand regions by the Construction Bank were also highly

concentrated in favor of the large contractorsDisparities between regions are evident from (El Karsani 1986).

the level of per capita income, degree of in-dustrial concentration, regional budget and Imbalance in balance of payments and the debtcentral government contribution, distribution of crisissocial services, and extent of human resourcedevelopment. All of these have a bearing on The balance of payments deficit increasedthe influence of regional political leadership at from S£3.8 million in 1970 to S£516.9 mnillion inthe national level and the acquisition of key 1980. The negative trade balance increasedexecutive positions that aggravates the percep- from S£O.31 million in 1960 to S£482.84 milliontion and reality of regional discrepancies. in 1981. The budgetary deficit in 1984 exceeded

Available data show that the Khartoum, S£1 billion. These deficits have led to an enor-Central, and Eastern regions contribute 71 mous debt, which grew from US$332 millionpercent of net GDP. The contribution of the in 1971 to US$5,659 million in 1984 and roseWestern Region is 19 percent and that of the steeply to more than US$13 billion in 1986.Southern Region is 10 percent. This is because The debt outstanding as a proportion of totalof the concentration of large development export earnings was 93.7 percent in 1971 andprojects in the first three regions. Thus, the increased to 717.6 percent in 1984. As a per-first three regions have 85 percent of the mech- centage of GNP it increased from 11.6 percentanized and irrigated schemes and 90 percent of in 1971 to 77.2 percent in 1983. It was estima-the industries. The average yearly income in ted that in 1984, assuming an interest rate ofthese regions is SE533, about 20 percent higher 10 percent, Sudan would have a debt servicethan the national average. The Western Region ratio of between 80 and 90 percent.has 30 percent of the population, 35 percent of This gloomy situation is the result of a com-the land area, and a per capita income of only bination of factors, including development,E27.4, while the Southern Region has 27 per- projects that have not done well. Wastefulcent of the population, 26 percent of the land consumption, defense and security expendi-area, and an average per capita income of only tures, large nonviable development schemesS£14 (Ahmed 1987; Omer 1982; Awad 1986). with high investment and low returns, poor

The economic and social discrepancies am- debt management, misguided policies, poorong the various social stratas have also widen- performance of parastatals, over- protection ofed. The steep dedine in the income of low- civil servants, widespread corruption, marginal-wage employees can be measured from their ization of the supervisory role of the centralpurchasing power for foodstuffs. About 75 bank, and neglect of rural infrastructure deve-percent of the population does not have suffi- lopment have all contributed to Sudan's cur-cient income to buy the essential food, while rent balance of payments and debt crisis.only 17 percent can afford nutritious foods.Although the minimum wage increased more Causes of Sudan's present socioeconomicthan fourfold between 1969 and 1985, purchas- underdevelopmenting power declined sharply because of rapidinflation, which raised costs of basic necessities The current economic crisis is mainly theabout sixfold between 1969 and 1981. result of the adoption of economic theories and

While salaried groups (about 22 percent of development models of Western countriesthe urban population) suffered a steep erosion without reviewing their applicability to a dif-in their incomes, merchants and a few indus- ferent sociocultural background and historicaltrial capitalists greatly increased their incomes. context. The training of nationals in WesternThese merchants trade in gum arabic, sorghum, theories has led to the disorientation of econo-groundnuts, oil seeds, and livestock. One live- mists, planners, and politicians. They have astock merchant exported about 23 percent of very limited conception of alternative modelsall livestock, and five merchants accounted for and policies of development. They believe only70 percent of livestock exports. The Industrial in large-scale agricultural schemes, which are

20

considered the ultimate goal of development. gender issues. Furthermore, they assume thatWhen these schemes do not work efficiently, development will automatically follow andthe focus shifts to rehabilitation or privatiza- influence human welfare positively and equi-tion, but the relevance of the model to the tably. No measures are taken to counter theSudanese situation is never questioned. Alter- adverse side effects of large-scale schemes onnative models are viewed as outside the mod- the environment or on traditional society. Plan-em scheme of development and thus ignored ning policies have, therefore, marginalized theas irrelevant and incapable of developing the role of the traditional and informal sectors asnation. well as their creative abilities for survival and

Recently some organizations have started to self-developmentpublish the experiences of other models of * The weak supervisory and sanction mechan-development. The model of communism is no ism and laws within the public sector havealternative in the economic sense because it is weakened national institutions. The absence ofalso based on a large-scale agricultural and self-regulation, evaluation, and corrective meas-industrial development model. Moreover, econ- ures for wrongs within the economic schemesomic development cannot take place outside has had a deleterious effect on development.people's abilities, culture, and aspirations. * The government outreach mechanisms and

Furthermore, economic planning itself is very capacities at the grassroots level for productionweak, poorly organized, and inconsistent. De- and human resource development are weakvelopment planning in Sudan is being under- and have not incorporated traditional, tribaltaken in a way similar to that in industrial mechanisms of cooperative communication,societies where the market forces can play a supervision, and sanctions.big role in economic development with equity; * Taxation laws, currency control, pricingwhere social policies are planned to counter policy, subsidies, and investment are not con-the ill-effects of market forces; the physical sistent with development; they are biased inenvironment is different; and people are dif- favor of the higher-income groups and modemferent, socially, culturally, and politically. sector and do not focus on productivity in-

But this type of planning has exduded en- creases. Because there have been no seriousvironmental conservation, food security, and attempts to rectify this situation, a thoroughthe nomadic people and small-scale farmers. revision of these policies is needed. Further-These are outside the modem economic theo- more, the low capacity of the govemmentries and mostly outside the forces of the mar- machinery to implement policies has not al-ket. When 80 percent of the population is lowed even minimum gains from them.irrelevant to the economic plans and outside * The poor means of communication, trans-the realm of modem market forces, how can port, storage, and redistribution have furthereconomic measures operate and succeed? The aggravated the situation. Large-scale develop-market, after all, should comprise the people ment schemes require a developed infrastruc-responding and acting in their own interest. ture to succeed, but this has been lacking.

* The lack of recognition at an earlier stageEconomic factors that expensive development schemes were

inappropriate for Sudan has led to seriousThe deficiencies in economic measures un- consequences. It was not recognized that Su-

dertaken in Sudan are many, and they are well dan could not successfully implement an am-documented in various papers written for the bitious plan consisting of five sugar schemes,economic conferences held from 1986 to 1987. the Jonglai canal, oil pipelines, the Rahad ir-A brief summary of the more important ones rigation project, and a new oil refinery atis attempted below: Kosti. To these should be added other non-* Planning policies are not formulated dearly. productive schemes-construction of huge* Planning policies are not drawn consistently buildings such as Friendship Hall, Constitu-by a multidisciplinary body with integrative tional Assembly, Youth and Children Palace;efforts among the govemment, the private expensive telecommunications and road infra-sector, the grassroots, and the international structure; and the Port Sudan-Medani routecommunity. Nor do they take account of re- rather than small feeder roads for productivegional differences, environmental factors, or the areas.

21

* Lopsided borrowing policies and the absence tency of policies, antagonism toward academicof guiding principles for the proper allocation and research bodies, recruitment of incapableof external finance have prevailed rather than persons for higher posts, and corruption led toborrowing according to an overall plan that a grave political situation, the economic crisis,envisages a gradual eLimination of external and underdevelopment.finance in favor of reLiance on local resources. These were accompanied by other contradic-* Lack of motivation in the civil service has tory changes. At one level there was antago-led to opportunism and corruption rather than nism toward productive entrepreneurs. Atan increase in productive efforts and profes- another level there was support for businesssionalism. people engaged in nonproductive activities.* The growth of a huge black market in for- Other contradictory changes incLuded the aboli-eign exchange is also a cause for further dis- tion of traditional administration, introductiontortions because it has grown beyond the con- of regional rule without the proper machinerytrol of official abilities. This has undermined for people to participate politically, contractingthe implementation of economic policies and of a treaty with the south in 1972 and itsadjustment measures. abrogation in 1980, introduction of Islamization* The absence of full control over the foreign in 1983, and antagonism toward the traditionalexchange system and the marginalization of sector through neglect or encroachment on itsthe Central Bank have given the conmmercial land by irrigated and mechanized schemes.banks discretionary powers leading to major The lack of personal insight into economicweaknesses in the control of the money sup- development and a narrow-minded perspectiveply, inappropriate credit allocation among the led former President Numeiri to follow theprivate and public sectors, and investment in advice given to him to obtain economic profitnonproductive trade and construction. The and political strength. His personal convictionsresult has been a vicious circle of more money prevailed over a. sound and scientific basis ofsupply, inflation, dominance of the trade sec- development. Many indigenous and foreigntor, black market, and a decline in production investors took advantage of this atmosphere toactivities. obtain personal financial gains at the expense* The previous 16 years of the military regime of the country. The results were inefficientwere characterized by expenditures more on projects, fictitious projects, and promises ofcoercive activities than on human and environ- future profitable projects. Money was securedmental resource development; absolute neglect from local bank loans, external loans of variousof the traditional sector; and credit directed types, and the giving away or sale of govern-toward nonproductive, speculative, and quick ment assets and other facilities, all at the ex-profit-making transactions. The inevitable result pense of the public.has been an economic crisis, degraded environ- An analysis of the political situation underment, and underdevelopment of human resour- Numeiri is vital for an understanding of howces. an African leader under dictatorship (one-man* Unbalanced regional development policies rule) can destroy his country. A thoroughand projects have further aggravated the situa- understanding is vital not only for the localtion so that Sudan appears to be headed to- community, but also for the international com-ward the condition it was in 20 years ago. munity, which affects and will be affected bySudan's condition is aggravated by rising re- African leaders' performances.gional antagonism, civil war, and inequitabledevelopment between regions and social strata. Sociocultural factors

Political factors Few studies and little written material existson the sociocultural aspect of underdevelop-

The one-man rule during 1969 to 1985 was ment, whether for Sudan or in general. Incharacterized by great instability, changes in order to analyze the relationship between soc-political philosophy, lack of overall planning, iocultural factors and development, it is neces-and neglect of human welfare. The enormous sary to consider general attitudes, behavior,brain drain that occurred from 1978 to 1985 and institutions.greatly damaged the civil service. The inconsis-

22

According to Sudan's Five-Year Development unit through which an individual gains iden-Plan (of 1978-79 to 1984-85), development tity, support, and security. It is only duringmeans an increase in production, infrastructure, times of extreme poverty and starvation thatand private sector promotion. To achieve these individualism is believed to flourish, and it isobjectives, the government relied on the deve- only through prolonged migration that individ-lopment of agriculture through a tenancy sys- ualism and personal interests prevail. All thosetem that gives tenants many agricultural ser- who are not relatives, neighbors, or villagevices and inputs. The failure of the irrigated members are strangers with whom contactschemes of Gezira, Rahad, and the sugar es- should be kept to a minimum. Sex segregationtates not soley the result of administrative is maintained only in the presence of strangers.inefficiency, high costs, or lack of sufficient Development schemes typically have beenagricultural inputs or external trade. The hum- designed for people with a single unistrandedan factor is very important as well. The Rahad, survival strategy of dependency, economicAsayla, New Halfa, and Kennana schemes pursuit, individualism in both actions andwere located in areas inhabited by the nomads, future prospects, promptness, and a high valuewho are known for their indigenous survival for work time and material reward based on astrategies through animal husbandry, growing calculation of work hours and dedication tofood crops, and selling their labor in Gezira, work by all family members. But SudanesePort Sudan harbor, Tokar, and Gash. tenants and wage laborers have different chara-

The strategy for survival of pastoralists and cteristics; they consider wage labor and thefarmers in different parts of Sudan is a multi- tenancy as an option, an additional alternativestranded strategy in which all family members to the diversified economic activities that theyare considered as one unit. The strategy is can pursue. Tenancy takes the individual fami-adopted to earn enough to satisfy basic mini- ly out of the sociopolitical and cultural contextmum needs for food, shelter, and dothing. of the tribe and family and places it within anFurthermore, certain values are transmitted alien setting. Adaptation to the new settingthrough the process of socialization that guide and new attitudes takes time, but the schemesfuture behavior; an individual is part of an cannot wait.extended family and gains identity and sup- Agricultural or industrial schemes make aport through recognition of the kinship group. person forsake his animals and land and makeUnder this strategy, mutual support, visiting, it necessary to purchase even the basic foodspending of time, and working with others in commodities. Sheer economic calculationsthe group is considered the ideal. Kinship prove that nomadic people are more prosper-obligations are considered so strong that defy- ous than any of the Gezira tenants. Forsakinging them is catastrophic to an individual's land and animals is tantamount to forsakingwell-being-both now and after death. Sup- wealth and the source of life security. Thus theporting relatives by appointing them to enter- legitimate option for the people who wereprises or the civil service, despite bureaucratic encroached upon by large-scale schemes is tolaws, is socially acceptable. As people's fates think of the schemes as another source of theirare governed by destiny, planning for the survival strategies. When this is not possiblefuture is considered meaningless, although this because of tenancy regulations, the other ac-does not mean that people do not take precau- tivities are legitimately combined with tenancytions. activities. Family members continue to work as

The tribal system as a social institution is a team, not necessarily in agricultural schemes,based on communal ownership of basic pro- but often in diversified economic activities.perties of land, water, and pasture; cooperation The extensive labor and population mobilityin major economic activities; communal deci- of the Sudanese people is consistent with theirsionmaking; respect for the old and leaders; sociocultural heritage. What is called turnoverand mutual support during human crisis, per- in industry or off-farm activities in agriculturalsonal attack, and loss of property. It is based schemes is conceived of by the people as aon hospitality toward guests and strangers, legitimate and clever survival strategy. Thisrespect for contractual relations with other kind of strategy is possible under developmenttribal members, and responsibility toward schemes in which people want to join thehelpless nontribal members. The tribe is the activities, work little in many, but are basically

23

satisfied with the minimum they have. To inculcate values in work that promote greaterchange these attitudes toward a maximiization effort, promptness, and efficiency. Ethics areof profit will require a different style of or- needed to complement regulations. All this willganization for the development schemes. The require patience, time, and dedication fromtop administrators, who have a high standard African leaders to turn the country toward thestyle of life away from the people, will not road to true development.stimulate the people toward maximiLzing pro-ductivity. The natives are left to think of in- Conclusionsvestment alternatives to increase their ownsecurity. They know that, traditionally, security More research will be needed to answer theis achieved through cultivation of sorghum and following questions:millet and acquisition of animals. * What are the terms of reference for the

The government has not offered them any development we want?alternatives-no banks were introduced for * Who decides which model of developmenttheir benefit and no coaching provided in how to adopt?to use assets economically by selling animals * How can we guarantee that grassroots par-and investing in other productive endeavors. ticipation is realized in these decisions so thatSmall-scale rural industry is neither planned the elite is not allowed to continue its mono-nor introduced. The people should not, there- polistic decisionmaking in development?fore, be blamed for continuing in their tradi- * What are the attitudinal and cultural aspectstional saving and investment strategies. With- that would determine and influence develop-out available alternatives, and with no market ment models and policies and how can thesestimulation for acquiring productive goods or aspects be changed if change is desirable andeven services, the people continue (in their needed?simple lifestyle) acquiring the minimum, des- * Why have African models of developnmentpite the presence of large-scale schemes. They not been supported by the international com-will continue to look at these development munity? Would an assessment of these modelsschemes as government-owned, alien, and as be useful for African development?having encroached on their traditional land, * What are the basic human rights of Africanalthough they opened up opportunities for citizens and how can social justice be attained?seasonal labor. The people's attitude that it is And who defines rights and justice?governmental-theirs and not ours-is impor- The international community could help Sudantant in explaining the failure of these schemes. discuss the questions outlined above, formulateTribal value systems place things and people long-term policies with priorities, and iderntifyin a context of ours or others and alien. The legal and administrative measures needed toagricultural schemes fit the category of alien, support the implementation of such policies.,and thus full participation in them is lacking.

The need is great for a study of indigenous Selected bibliographypeople's aspirations; their conception of deve-lopment; and their views on work and reward; Abdel Magid, S., and K. Afan. 1986. "Pricingand cultural conceptions of time, leisure, dis- Policy and Subsidisation for Basic Commodi-tance, and the meaning of life. Also, their ties." In H. Esderts and M. Abdalla, eds.,conception of the role of the government in Macroeconomic Policies Conference Proceedings.development, participatory abilities, and wil- Khartoum, Sudan: Development Studies andlingness to engage in planning should be ex- Research Centre, Khartoum University. pp.amined. The attitudes of the growing urban 95-145.sectors, both of the elite and the common Abu Affan, B., et al. 1988. "Social Dimensionpeople, need to be analyzed and campaigns of Adjustment: Case study of Khartoum Pro-carried out, through the mass media and by vince." Economic and Social Researchpolitical mobilization, to counter the growing Council Research Paper No. 26.tendency to look for high economic returns Abu Sheikha, Ahmed. 1983. "Towards thethrough little effort and nonproductive activi- Alleviation of Rural Poverty in Sudan." In-ties. The civil service, the academics, and the depth study series No. 1, WCARRD follow-entrepreneurs all need to be encouraged to

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up program. Rome, Italy: United Nations ference. Khartoum, Sudan: Development StudiesFood and Agriculture Organization. and Research Centre, Khartoum University. pp.

Abu Sin, and El Sammani. 1987. "Population 254-275.and Environment in Sudan." In Saghyron, et El Karsani, I. 1986. "Defining the Identity ofal., eds., Population and Development in the Sudan's Economy and Agreeing on aSudan. Khartoum, Sudan: Sudan National Clearcut Concept of Development." In H.Population Committee. pp. 25-40. Esderts and M. Abdalla, eds., Macroeconomic

Ahmed, M. 1987. The Political Economy of Deve- Policies Conference Proceedings. Khartoum,lopment in the Sudan. African Seminar Series Sudan: Development Studies and ResearchNo. 29. Khartoum, Sudan: Institute of Afro- Centre, Khartoum University. pp. 7-52.Asian Studies, Khartoum University. Hooganboom, A., ed. 1987. Manual of Rural

Al Zubair, M. K. 1987. "Management of For- Extension and Development Program for Ahfadeign Debt." In H. Esderts and M. Abdalla, Women University Students. Khartoum, Sudan:eds., Management of the National Economy Ahfad University for Women.Conference. Khartoum, Sudan: Development Modawi, A. 1987. "Population, Employment,Studies and Research Centre, Khartoum and Adjustment Programs." In Saghyron, etUniversity, pp. 194-217. al. eds., Population and Development in the

Ali, A. 1986. "The International Monetary Fund Sudan. Khartoum, Sudan: Sudan Nationaland the Economic Anarchy in the Sudanese Population Committee. pp. 41-53.Experience with the Foreign Exchange Black Omer, B. 1982. "Some Constraints to RegionalMarket." In H. Esderts and M. Abdalla, eds., Development." DSRC Seminar Series,Macroeconomic Policies Conference Proceedings. Discussion Paper No. 19. Khartoum, Sudan:Khartoum, Sudan: Development Studies and Development Studies and Research Centre,Research Centre, Khartoum University, pp. Khartoum University.55-93. Salih, A. 1986. Financial and Monetary Policies in

Awad, S. 1986. The Phenomenon of Unbalanced the Sudan: Past Experience and Future Prospects.Regional Development and the Economic Rela- In H. Esderts and M. Abdalla, eds.,tions between the Centre and the Regions. In H. Macroeconomic Policies Conference Proceedings.Esderts and M. Abdalla, eds., Marcroeconomic Khartoum, Sudan: Development Studies andPolicies Conference Proceedings. Khartoum, Research Centre, Khartoum University. pp.Sudan: Development Studies and Research 151-213.Centre, Khartoum University, pp. 216-248. Ministry of Finance and Economic Planning,

El Amin, Mutasim. 1985. On the Problem of Government of Sudan. 1988. Sudan Four-YearResource Management in the Sudan. Environ- Salvation and Development Programme.mental Monograph Series 20. Khartoum, Khartoum, Sudan.Sudan: Environmental Insitute, Khartoum Wanas, B. 1987. "Report of the SquatterUniversity. Residence in Khartoum Province and

El Jack, A. 1987. "Organization of Government Southern Migrants Influx." Khartoum, Sudan:Machinery." In H. Esderts and M. Abdalla, Ministry of Housing and Public Works,eds., Management of the National Economy Con- Goverment of Sudan.

25

Sustained Growth and Developmentwith Equity in Sub-Saharan Africa:

The Case of Mali

Ibrahim Bocar Ba

This paper begins with an overview of the d'Ivoire, Guinea, and Senegal. The vastness ofbasic characteristics of Mali's economy, which its size and lack of natural borders outside theprovides a framework for the analysis. It ana- Faleme make regional development and trans-lyzes economic performance in the 28 years portation difficult and push up investmenitsince Mali achieved independence in the im- costs. There is potential risk of friction withplementation of the development plans and surrounding countries, because of the impreciseprograms introduced by the government with borders inherited from the colonial power.outside financial support and internal efforts. It From a customs standpoint Mali is extensive;also explores the prospects for sustainable its 7,000 kilometers of borders make it difficultlong-term growth with equity for Mali's econo- to monitor receipts. Bamako, the capital aridmy based on actual experience. largest economic center in the country, is near-

In the 28 years that Mali has been indepen- ly 1,200 kilometers from the major maritimedent, it has consistently faced many constraints ports of Abidjan and Dakar. The lack of anin its efforts to achieve economic development. outlet to the sea results in high transit costs.The country's physical characteristics and cli- Because nearly 80 percent of Mali's exportsmate continue to present significant difficulties. come from the rural sector, Mali's economy isAdditional constraints to Mali's economic dev- vulnerable to the vagaries of climate. Since theelopment are attributable to inadequate econo- first drought in 1973, Mali has experienced anmic and monetary policies. uninterrupted cycle of drought without three

consecutive years of good rainfall. Despite allPhysical and climate constraints efforts under successive development plans,

performance in the rural sector and industry.Mali's physical constraints are associated which is largely dependent on agriculture for

with its continental character and landlocked its raw material inputs, continues to be poor.location and the vastness of its territory. The Wide swings in temperature and irregularRepublic of Mali encompasses 1,240,192 square rainfall are responsible for production losseskilometers, with a semidesert northern area and food shortages; consequently the countrycovering nearly two-thirds of the territory. has required assistance from the internationalMali is surrounded by seven neighbors: Mauri- community. Desertification is accelerating: thetania, Algeria, Burkina Faso, Niger, C6te land is drying up from lack of rain and fre-

26

quent winds during part of the year are strip- directors and personnel, especially when theping the soil and leaving it infertile in areas enterprise has a monopoly or monopsony. Thethat had previously been very good for grain compensation scale is too low to provide suffi-crops. Erosion, brush fires, and obsolete farm- cient incentives.ing methods are undermining agriculture in Prior to 1985 sweeping reforms were avoid-certain areas. Over the long run, the available ed because of their possible social consequen-farmland will gradually shrink. ces. As a result the companies continued to

deteriorate financially and became increasinglyInadequacy of economic and monetary indebted to the major bank in the country, thepolicies Malian Development Bank, to suppliers, and to

the state through arrears in tax payments. InFrom the geographical standpoint, Mali is terms of the optimal use of local resources,

highly dependent on its neighbors for its for- these companies played a negative role byeign trade. Significant problems could develop absorbing a large share of the scarce resourcesif its economic policies were too divergent that could have been used to promote otherfrom those of its main neighbors. Until recent- sectors, primarily agriculture.ly, this has in fact been the case. The socialist Monetary policy decisions have not alwayspath adopted in the wake of the breakup of favored economic development. After signingthe Federation of Mali became a reality with the accords of November 1962 setting up thethe nationalization of all key economic sectors. West African Monetary Union (WAMU), MaliMali's neighboring countries opted for the did not ratify them. It established its own cur-liberal path of market economies. rency to build economic structures that could

Mali's economic policy decision, prompted serve as a basis for economic development byby the political circumstances of the time, re- replacing the barter economy that prevailed atsulted in a sizable public sector composed of the time. Unfortunately, the state's considerablelarge commercial and industrial companies. cash-flow difficulties and its attempt to pay forMost of these companies are no longer viable development through deficit financing led to abecause of the many constraints and conditions confusion of roles within the Bank of the Re-on their operations-the price freeze approved public of Mali (BRM). The BRM was an issuer,to protect the purchasing power of wage earn- and hence the guardian, of the monetaryers, political interference, and poor manage- health of the country. It also became a devel-ment. Experience has shown that the economic opment bank after it absorbed the former Malipolicies adopted for the key sectors-especially Development Bank. As a result, more moneyagriculture-did not stimulate production pro- was created than warranted by the economy toportionate to the financial sacrifices that were cover accumulated budget deficits and to fin-made. Prices were not sufficiently remunerative ance the first Five-Year Development Planto trigger positive reactions from producers. (1961-65). BRM officials were not able to recon-Excessive administrative and bureaucratic mnan- cile the functions of protecting the value of theagement and oversized entities hampered the currency and providing funding for economicachievement of the expected results. development.

The case of the Mali Import and Export The cash-flow crisis and the resulting short-Company, which until recently had the import age of foreign exchange led the governmentmonopoly for all commodities and an export into monetary negotiations with France, whichmonopoly for cotton, illustrates the poor per- ended with the signature in March 1968 of theformance of the public sector. The government French-Malian Monetary Accords. After a 16-did its best from the financial, fiscal, and cus- year period of bilateral cooperation, Malitoms standpoints and instituted several recov- joined WAMU in June 1984. Its experienceery programs to save public companies and within the WAMU shows that Mali's entry hadenterprises before making its recent decisions the benefit of giving it the same currency asto close some of them down. They were vic- its neighbors, and thereby facilitated the inte-

rims of the internal logic of the public enter- gration of its economy into a wider economicprise system. State ownership and the system arena, which in theory was advantageous. Maliof administrative management is not conducive also benefited from the necessary rehabilitationto sound management or extra efforts by the of its central bank and the introduction of a

27

monetary policy that better reflected the con- leaders have no control. Economic policies thatstraints of external equilibrium. provide appropriate incentives could attenuate

The positive aspects of integration notwith- the negative effects, whereas rigid practicesstanding, monetarist concerns sometimes hinder would aggravate them. In the past econo]micefforts to promote economic growth. Individual policy choices have caused the nationalizationWAMU members do not face the same econo- of all key sectors of the country's economxy,mic constraints; they are at different stages of even in areas where private initiative woulddevelopment, although they are all developing have had better chances of success.countries. As such, common rules and meas-ures consistent with the external equilibrium Potential of Mali's economyconstraint do not give all countries the samechances of developing. The model selected, Mali's potential could be tapped to miti-while retaining common general objectives and gate-if not offset-its physical and climatediscipline across the board, should be suffi- constraints. The entire Sudanese area andciently flexible to adapt to the differences. Guinean zone are vast regions suitable for

The monetary instrument did not allow the growing grains (millet, sorghum, maize, andoptimal use of all opportunities, given the rice) and cash crops (cotton and groundnuts).ceilings applied to the primary banks. The The 100-kilometer wide Central Delta of theprimary banks were not stimulated from the Niger River covers nearly 4 million hectares,standpoint of competitiveness and resource from S6gou to Timbuktu. The operations of themobilization. Moreover, banks with better re- Office du Niger use less than 100,000 hectares.sults were not encouraged by the possibility of The proper use of this rich alluvial soil shouldmaking sound loans to increase their earnings lead to food self-sufficiency and even exportswhen they had sufficient resources. Because to neighboring countries if yields are improvedthe only alternative they had was to make and the products properly marketed.remunerative investments on the monetary The two largest rivers in West Africa andmarket and abroad, Mali's banks paradoxically their tributaries offer great possibilities forended up financing the Ivorian economy be- irrigation and hydroelectricity. The Selinguecause the banks that had surplus funds could and Manantali dams, which have already beennot make new loans after their ceiling was built, represent 183 million and 800 millionreached. kilowatt hours of hydro potential, respectively,

The entire system rests on cooperation am- and Tossaye, Labezanga, Gouina, and Felou areong the primary banks of a country in order promising projects. The exploitable potential into ensure that the overall ceiling is not exceed- mineral and petroleum resources is limiteded. The banks, however, often are not alike. despite extensive exploration for uranium andSome are active and others are not. New banks hydrocarbons. The findings are promising fordo not have the same constraints as older gold, however, particularly in Kenieba, Kalana,ones, and they sometimes carry heavy liabili- Loulou, and Kodiaran. Private initiatives en-ties that absorb a large share of the allowable couraged by the government with the supportvolume of regular loans in the country for a of donors, in particular the United Nationsgiven fiscal period. The WAMU monetary Development Programme, are progressing suc-authorities plan to completely restructure such cessfully in these areas. United States and Jap-banks. Nevertheless, in the interest of sustained anese firms, encouraged by the preliminarylong-term growth, the whole of the WAMU findings, have requested and received long-monetary apparatus should be reviewed with- term exploration permits.out diverting the Banque Centrale des Etats de Mali is in the same situation as several otherl'Afrique de l'Ouest (BCEAO) from its task of countries that cannot count too heavily onmonetary surveillance. Such a review would mineral or petroleum resources; it must rely onhave to take into account all of the aforemen- the rural sector as its primary source oftioned shortcomings, which have a decisive growth. Malian leaders understand this and areimpact on long-term economic growth. concentrating on prospecting for gold, the es-

The basic facts and constraints that are hold- timated reserves for which are large, and oning back Mali's economy indude physical and rural sector development. Prospecting permitsnatural constraints over which the country's

28

for other minerals have been issued to foreign sectors has been generally good. During thefirms. 1980s Mali's financial situation deteriorated

sharply, rural production plunged, and theEconomic performance under development deficits of the public enterprise sector reachedplans and programs untenable proportions. Public enterprises are a

key sector of the economy; they control com-It has not been until recently that data have modity trade, including export of the major

become reasonably reliable; national accounts product, cotton. The state-owned sector shouldare unfortunately lagging. The data in this thus have been the major tax contributor.paper must consequently be viewed as orders In terms of the growth of the economy, fromof magnitude that indicate general trends in 1981 to 1985 per capita GDP declined by 1.3the economy that serve as a basis for the ana- percent a year, reflecting a drop in the averagelysis. standard of living. Because of the poor per-

formance of the rural sector, the contributionChanges in gross domestic product of agriculture to GDP in real terms decreased

by 15 percent. The share of GDP attributableThe 1970-73 three-year program was favored to the rural sector declined from 62.8 percent

by good rainfall and ended with average an- to 56.1 percent. The secondary sector, which isnual economic growth of about 4.75 percent. highly dependent on rural production, wasDuring the 1974-78 five-year plan, which was stagnant at about 11 percent. The tertiary sec-implemented after the first major drought of tor, however, increased from 27.4 percent to1973, average annual growth in GDP was 4.1 32.5 percent of GDP.percent. Under the 1981-85 five-year plan, how- The shift in favor of the public sector wasever, GDP grew by only 1.1 percent annually. related to a weakening of the key productiveIn 1986 rainfall was exceptionally abundant sectors because of the imports of nonessentialand GDP increased by 18.7 percent according goods. This situation triggered internal andto the official statistics from the National Dir- external disequilibria, and with it heavier reli-ectorate of Planning. According to the same ance on foreign aid to finance the budget andsource, in 1987 growth fell to 1.5 percent. From economic programs.1969 to 1985 GDP increased on average by 3.3 Since 1980 the government has felt it vital topercent a year. offset these trends, which were incompatible

The following conclusions can be drawn with the fundamental goals of building anfrom the data. independent and planned national economy.3 Whenever the gross domestic product was Senior policymakers therefore committed theincreasing at a satisfactory rate, it was pushed government to negotiate structural adjustmentby advances in the rural sector; the converse and economic recovery programs with thewas also true. International Monetary Fund (IMF) and the* Growth in GDP varied widely from year to World Bank. This decision was based on an in-year, with steep climbs interspersed with years depth analysis of the major causes of poorof negative growth during times of severe economic performance and internal and extern-drought. al disequilibria.* An overall increase in production in the The major causes of the worsening financialyears of good harvest, such as 1986, did not situation were poor management of the publicalways mean an improvement in financial enterprise sector and inadequate economicflows for several reasons, including a fall in policies. The contribution of the public sectorraw material prices and difficulties in credit has been disproportionately small, given itsand marketing. role in the economy. The public sector absorbs

It is not sufficient for production to be good; nearly 80 percent of bank resources and publiceconomic and financial management must be finance. It is a paradoxical situation-eveneffective so that full benefits can be derived when production is good, the quality of finan-from the efforts made in the productive sec- cial management does not permit the achieve-tors. It is difficult to understand why the coun- ment of commensurate financial gains. Defi-tn/s financial and cash-flow situations are still ciencies in financial management as a wholeprecarious when growth in the production

29

have been largely responsible for the current It is unfortunate that reduction in the budgetliquidity crisis. deficit was achieved by cutting or leveling off

spending on the social sectors (health and edu-Changes in public finance cation) and for maintenance of infrastructure.

The review of Mali's economy shows that theLike most countries of Sub-Saharan Africa, demographic growth of 2.85 percent based on

from 1970 to 1980 Mali experienced a very the 1985 census is far greater than the econo-favorable increase in the receipts of the state mic growth of 1.1 percent between 1981 andbudget, which increased from MF20.3 billion to 1985. Beyond the failings of financial manage-MF54.2 billion. Unfortunately, this was offset ment, Mali has a problem of inadequate econo-by astronomical increases in expenditures, mic growth over a long period. It is vital,which more than tripled, from MF21.9 billion therefore, to increase appropriations and maketo MF75.8 billion between 1970 and 1980 (see better use of them in the social programs andTable 1). the maintenance of infrastructure, which have

a direct impact on economic growth and sus-Table 1 Budgetary receipts and expenditure tained long-term development.(in millions of CFAF) A detailed analysis of changes in receipts

and expenditures indicates the need for a ma-jor restructuring of govermnent finance with

Year Receipts Expenditure Deficit the financial and technical support of the IMF,World Bank, and other donors. For receipts as

1970 20.3 21.9 1.6 a whole, direct taxes accounted for more than1974 24.0 30.2 6.2 55 percent of total budget receipts in 1985.1975 28.8 37.5 8.7 Such a situation is common in developing1976 36.8 46.8 10.0 countries.1977 48.4 54.9 6.5 It was recently observed that, owing to the1978 54.3 63.3 9.0 higher earnings of some companies, Mali's1979 54.9 72.5 17.6 direct taxes have increased in relative val-je1980 54.2 75.8 21.6 from 24.8 to 35.5 percent of total receipts. In

expenditures, the steep increase in personrLelSource: National Directorate of Planning. costs is striking, both in absolute and relative

values. Whereas receipts have remained fairlyReceipts began to level off in 1978, whereas constant and even declined in some years,

expenditures spiraled sharply upward through- expenditures have continued to increase inex-out the decade. The shortfalls in the state bud- orably. Personnel costs, which were 59.3 per-get increased from MF1.6 billion to MF21.6 cent of total expenditures in 1970, accountedbillion. These figures reveal that the poor per- for 74.4 percent in 1980.formance of the public sector had a decisive Beginning in 1982, with the adjustmentrole in budget shortfalls. They also show the measures introduced under the stand-by agree-risks and consequences of a lack of control ment, spending for personnel was stabilized atover budget expenditures, which increased about 67 percent of total public expenditures.almost totally independently of resources. That level is still high in relation to neighbor-

To cope with this situation, since 1982 the ing countries, where it represents a maximumgovernment has signed three stand-by arrange- of between 30 and 50 percent of expenditures.ments with the IMF, the last of which ended Mali's high level of public personnel spendingin March 1986. Even though the performance is the logical consequence of the automaticcriteria had not been achieved by March 1986, hiring of all graduates and the granting ofthese commitments made it possible to contain scholarships for higher education in the coun-budget deficits within tolerable limits, despite try and abroad. The civil service seems to bean overall unfavorable econonic picture until the only job outlet for those leaving school.1985. The deficits during the first half of the Expenditures on equipment for maintenance1980s were in the range of CFAF 4 to CFAF 5 and operation have declined in relative valuebillion. (15A percent of total public expenditures in

1980 compared with 22 percent in 1970). This

30

would indicate that government workers have Grain imports accounted for between 25 andless equipment for their work, which would 30 percent of total imports during the years ofaffect productivity. Expenditures for infrastruc- poor harvest. In 1974, grain purchases repre-ture, which are the Malian counterpart to in- sented 51 percent of the CFAF value of thevestment efforts, and the coverage of recurrent country's total imports. In 1976 and 1977, how-charges, ranged between 3 and 4.5 percent of ever, aided by better rainfall, Mali was a nettotal budget expenditures from 1983 to 1987. exporter of grains.

The volume of grain exports achieved inChanges in foreign trade and the balance 1976 and 1977 indicates Mali's potential in theof payments production and export of grains. If consistent

efforts are made to increase yields, Mali canBalance of payments figures show that short- achieve food self-sufficiency, even with average

falls have been attributable to structural deficits rainfall. Such efforts have succeeded in ricein the trade balance. Unilateral transfers production; following increased agriculturaltoward Mali have been, on the whole, favor- extension services, rice yields were increasedable. There were deficits in the balance of pay- by 3 to 4 tons per hectare. It is feasible thatments throughout the period from 1975 to Mali could eliminate grain imports-which1987, except in 1977 and 1987. Wide swings were CFAF 50 billion in 1985-and substantial-from year to year were attributable to the ly reduce its trade deficit.structure of foreign trade. Two condusions can Imports of the machinery and vehicles (in-be drawn from the data on foreign trade: the duding private cars) reflect the country's in-deficit in the trade balance is chronic, and the frastructure efforts. These imports graduallyexport-import ratio fel considerably between increased under the economic plans and pro-1970 and 1985. grams, especially between 1982 and 1986. Im-

Instability in foreign trade resulted from the ports of petroleum products stabilized, witheffects of climate on rural production. When- peaks during the years of drought to meet theever harvests were good and the prices for requirements for the transportation of food,raw materials (cotton in particular) favorable, especially that provided by food aid. "Otherthere was a dramatic recovery in the trade products" accounted for a large share of totalbalance. In years of drought, however, there imports, occasionally more than 30 percent,was a corresponding contraction in exports and because of the proliferation of nonessentialthe trade deficit grew markedly. imports. In addition to eliminating imports of

Two products from the rural sector, cotton grains, Mali could make substantial progressand live animals, represented 67.1 percent of by reducing "miscellaneous" imports throughtotal exports in 1970 and 80.1 percent of total bank credits and taxation measures.exports in 1980. In 1986 these two products The structure of the trade balance suggestsaccounted for 61.9 percent of Mali's exports, that if long-term sustained growth is to beand gold exports increased significantly to 16.4 achieved, efforts should focus on increasingpercent of total exports. These figures bear yields to expand rural production. This is thewitness to the impact on foreign trade of the basis of all progress in efforts to reduce thelack of diversification in exports and the prom- trade deficit; whenever the rural sector weak-inent role of the rural sector, which is heavily ens, it brings industry and foreign trade downdependent on rainfall. as well.

The internal structure of exports has been In exports, Mali could increase its receiptscharacterized by fluctuation in the share attri- from gold exports, which were nonexistent abuted to livestock, which was 27.8 percent in decade ago, and from "miscellaneous" products1970, 19.3 percent in 1980, and 33.7 percent in such as mangoes, green peppers, pepper, and1986. Exports of groundnuts fell by 2.5 percent woven mats. No efforts should be overlookedin 1981 and 2.3 percent in 1986. Fish exports in diversifying exports. If Mali does not makealso decreased because of the drought and the headway in the recovery of its exports, it mayefforts made by neighboring countries to devel- soon face new losses on external markets; itsop fishing and thereby reduce their imports neighbors are making efforts to increase pro-from Mali. duction of meat and fish, for which they had

in the past been dependent on Mali. The dec-

31

line in Mali's exports of meat and fish bears late. The result was that it was difficult towitness to this. determine the responsibility attributable to

poor management and that apportioned to aLong-term perspectives for growth failure to institute timely price increases.

The government did, however, make someThe changes in Mali's economy over the past progress in increasing prices to provide incen-

28 years form the basis for three fundamental tives to the rural sector and to ensure realisticconclusions regarding the long-term perspec- consumer goods prices. This policy stimulatedtives for growth and development with equity food and cash crop production and eliminatedin the country. The first conclusion is that any clandestine exports of grains to border corn-long-term development strategy must take munities. In the case of the Societe Malienneaccount of the fundamental constraints posed d'Importation et d'Exportation (SOMIEX), suchby the country's continental character, its vast- measures went too far; the consumer prices forness, and the impact of rainfall on the rural imported sugar were set at an artificially highsector and industry. These exogenous and com- level given its lower prices on the world mar-pelling constraints can be overcome through ket. The objective was to maintain the operaiE-realistic decisionmaking and policy objectives. ing equilibrium of the company, but even thisIt is possible to minimize the negative effects was not achieved. In this specific case, a mech-of the constraints. The magnitude of budget anism to lower prices should have reflecteddisequilibria, balance of payments deficits, and falling world prices. The lag in marketing farmdifficulties in meeting external debt obligations products, in particular grain, which has occur-would not have been as great had timely red frequently in recent years, was anothermeasures been taken and economic policies disincentive for the producers.and institutional structures corrected long ago. Recently grain harvests have been very

The second conclusion is that although it is good. Unfortunately, this has not provided thenecessary to reduce the major budget disequi- rural sector with sufficient financial resourceslibria to tenable levels, the corrections must because the grain crop has not been financedinvolve budgetary items other than the social in time by the banking system. Urgent grainsector and infrastructure. The third conclusion operations have been financed by the Maliis that while actions to remedy budget and Textile Fiber Company. Assistance was belated-balance of payments disequilibria are needed, ly sought from Mali's partners in the grainsefforts should center on the factors that have a program. These efforts were insufficient tolasting impact on economic growth. The major supplement bank credit at preferential rates. Asareas in which improvements are needed are a result, speculators and traders profited fromthe following: the weak position faced by rural producers,* agricultural policy who were being simultaneously pressured by• industrial strategy the authorities to pay taxes and by the exten-* population growth sion authorities to settle their accounts for* human resource development input purchases.* regional econonic integration The transport constraint (arising from the* domestic and external financing requirements country's large size and its limited system of* institutional structures. roads and rail service) made it difficult to

transport production surpluses to the areas thatAgricultural policy needed them, especially in the northern regions

where navigation is feasible for less than sixIn an effort to appease wage earners, the months of the year. Because of transportation

authorities froze consumer prices. This had and storage difficulties, abundance became asunfavorable repercussions on rural production difficult to manage as shortages. As a result,because it also affected producer prices. It periods of abundance were also periods oflikewise had an impact on the management of waste and enormous production losses.enterprises such as the Office des Produits The technological lag that is often used toAgricoles du Mali (OPAM), which accumulated explain poor yields plays a minor role in Mali.deficits throughout the period. By the time A lack of incentives and poor financial man-prices were increased it was most often too agement undermined rural extension and sup-

32

port services such as the marketing companies. these loans was onlent. The balance is shownThe ability of these entities to carry out their in the records of the organizations as subsidies.assigned activities has eroded over time. The Unfortunately the amounts in question are notexperience of the Rural Development Opera- only disproportionate with the CAA's owntions (ODRs) illustrates this aspect of the prob- resources, but also totally out of line with thelem. budget aUlocations that might have been made

In accordance with the priority accorded to to the Caisse. In addition, the management ofagriculture as a catalyst for economic growth the ODRs and agricultural enterprises wasand development, during the 1980s the goverm- such that debt service obligations, which werement promoted the ODRs and agricultural only a tiny part of the total debt contracted byenterprises as providers of rural extension. The the state on their behalf, could not be met.conventional technical services for agriculture Only three companies have correctly budgetedand stockraising were not well equipped. They for and are repaying their debts.were subject to rigid budget regulations that In general, the officials of these entities diddid not provide the necessary flexibility for not pay much attention to financial manage-financing operations in the field. The purpose ment, which nevertheless determines their veryof establishing the ODRs and agricultural en- existence, and focused only on production.terprises with financial autonomy and civil Unfortunately the results were poor. The lackstatus was to avoid such constraints. of skilU of the financial officials of those organ-

The impact of the ODRs and agricultural izations, which often followed the principles ofenterprises was evaluated by the government management accounting (summary accountingin conjunction with its development partners, of expenditures for amounts exceeding severalprimarily the World Bank. The analysis of their billion), attests to this lack of attention to fin-financial position revealed that the ODRs and ancial matters. Given that nearly 90 percent ofagricultural enterprises were heavily in debt. the country's development financing comesThe state earmarked large amounts of funding from outside sources and that the managementin all forms (external debt, budget subsidies, of the rural extension units was a factor, thebank loans) to them. The country's external pitfalls of such shortcomings are apparent.debt for these projects was CFAF 112.6 billion The government took these conclusions veryin 1986. At that time, the outstanding balance seriously and incorporated the CAA's otherwas CFAF 68.6 billion, or 12.6 percent of supplementary budgets so that the state budgetMali's total debt Of that amount, the portion would show all public expenditures andonlent (repayment of which was the ODRs' receipts and ensure that the means to coverdirect responsibility) was only CFAF 19 billion. them existed. The government also recognizedIn other words, the state was shouldering the that the entities had not fully carried out theirdifference of CFAF 49.6 billion through its mission, and that as state-owned enterprises,Caisse Autonome d'Amortissement (CAA). The their staffs were much too large, their manage-sector also received sizable subsidies, only ment bureaucratic, and their financial manage-some of which are shown in the accounting ment poor. Using case-by-case findings, therecords (CFAF 4 billion), along with subsidies government therefore decided to maintain onlyin the form of inputs. the viable operations and dosed down the

A study made in late 1987 under the aegis others. The inhabitants of the areas where theof the CAA showed enormous operating losses enterprises operate were brought into the re-of these entities, to the extent that the CMDT, form process.Segou sugar complex, and Mopti rice operation These reforms are part of the approach that(which were the strongest financially) were on seeks development from the bottom up. This isthe verge of colapse without the subsidies and the best assurance of the optimal use of re-other facilities. Despite these exceptions, even sources, of which a large share is repayable.after subsidies, the ODRs and agricultural This is also the best way to have beneficiariesenterprises were in disequilibrium because gradually take over the burden of developmenttheir cash flows were negative. financing. From the perspective of sustained

There is every indication that the funding of growth and development, this approach hasthese entities was not made with a view to the dual advantage of promoting the bestrepayment because only a very small share of resources and a better distribution of the finan-

33

cial burden involved in development between shift began to take place toward the establish-the state and the people. ment of small and medium-size enterprises by

The policy of developing low-lying areas and private entrepreneurs. On the whole, the out-reservoirs for the construction of small dams come has been a failure in terms of the fuidshas made it possible to make fundamental misspent in both the public and private sec-changes in certain areas of the country. This tors. The industrial sector has benefited frompolicy is part of the effort to reduce the impact long-standing tax exemptions, bank credits, andof irregular rainfall. Rice yields of 3 to 4 tons preferential rates, which have neverthelessper hectare are obtained when that crop is failed to prevent its companies from accumula-alternated with off-season crops (such as onion ting large operating losses.and tomato). This is also a way of providing Several audits and seminars have helped tojobs, primarily to the young, who would other- shed light on the primary causes these losses,wise be tempted to leave the rural areas, and which are:of guaranteeing their incomes. In these regions, * The oversizing of the enterprises in relationpeople are unemployed eight months of the to the potential market; the market studiesyear. used to justify their establishment sometimes

The foregoing shows the complexity of the exaggerated the true potential of the local mar-conditions that have to be met for agricultural ketdevelopment to succeed. There are a host of * Investment costs that are too high to permitinterdependent factors and an overall approach rapid amortizationmust be taken. * The length of Mali's borders, which encoura-

ges illegal imports of similar productsIndustrial strategy * The inferior quality of certain products

* Red tape and a tax system that encouragesSince its first development plan, Mali has imports to the detriment of local manufactur-

given priority to agriculturally based indus- ingtrialization, which utilizes local products and * Financing difficulties.discourages the emergence of an import sub- Experience in industrialization shows thatstitution industry. The strategy was to establish Mali abounds in good traders but suffers fromagroindustrial units that used raw materials a lack of innovative manufacturers in thesuch as cotton and groundnuts. The industrial Schumpeter sense of the term. Unlike tradi-sector's share in GDP has averaged 11 percent. tional commerce, manufacturing is not specula-

Because of its limited financial resources and tive in nature; it is more transparent andthe technological problems that industrializa- generally offers a smaller profit margin thantion entails, Mali entered into cooperative does traditional commerce. The manufacturingagreements with friendly countries such as the sector offers much less opportunity for illicitSoviet Union, the People's Republic of China, activity, and the work demands more skill, aand the Federal Republic of Germany. The greater sense of entrepreneurship, and moreMali Textile Company, Mali Vegetable Oil complex management. Unlike other countries,Company, Mali Tanneries, and others resulted Mali has used local expertise to develop itsfrom this initiative. It was not until the early industry. This approach has its disadvantages,1970s that small and medium-size enterprises however, in cases where available expertiseemerged in their present form. does not match the level of manufacturing

In performing its development role, the BDM capability required.endeavored to identify prospective developers In recent years several plants have success-among its traditional private clientele using the fully manufactured quality fabrics, yarns, tama-lines of credit offered by the German Kreditan- rind juice, and plastic products. They all, how-stalt fuer Wiederaufbau and to negotiate other ever, have financial problems. Mali's industrylines of credit from such sources as Electricite has not been able to produce a surplus, and itde France and the World Bank. Mali's indus- has been unable to prevent the import of simi-trial fabric is the result of the government's lar products.desire to establish large-scale industrial units in Under the current reform of public enter-the public sector. It was only when the enter- prises in conjunction with the World Bank, allprises began to experience difficulties that a enterprises that report to the ministry respon-

34

sible for state-owned companies have been widely held view among entrepreneurs, theaudited to determine their long-term viability. lack of a reliable tax base leads to the arbitraryOut of 26 companies, 10 were to be shut down lump-sum method of calculation.and 14 privatized. It was decided that the gov- There is an exaggerated tendency for the taxerinent should retain in its portfolio only authorities to operate on the basis of tax reas-those enterprises involved in strategic sectors, sessments, which consist of revising the taxa-such as energy or transportation. These indude tion of an enterprise over a three-year period,Energie du Mali, Mali Navigation Company, typically resulting in additional tax liability.and the National Tobacco and Matches Com- The practice is legal but lends itself to abusepany. Certain industrial enterprises, such as the and interferes with the management of enter-Mali Textile Company and the Superieur sugar prises headed by individuals who are conscien-complex, have been permanently entrusted to tious about their image as good taxpayers. InMali's Chinese partner for joint management keeping with its desire to encourage the pri-and plant renovation. vate sector and its basic concern to protect the

With regard to the private sector, based on country's economic apparatus, the governmentthe decision to encourage the coexistence of should foster good relations between taxpayersthe three sectors (public, mnixed, and private), and the tax authorities, who are in fact part-the government has revised the Investment ners.Code to facilitate the granting of authorizations At the banking sector level, external lines ofand to reduce the number of products. It has credit, which become either foreign exchangealso reduced the number of products subject to inflows or savings, should be freed from re-strict approval. Experience has shown that strictions. This would encourage the banks towaste, losses, and management problems are use external credit to promote small and medi-common in the large private and public enter- um-size enterprises instead of financingprises in Mali, while the small and medium- imports of nonessential products, which simplysize enterprises are much easier to manage. worsens the foreign trade imbalance. ImprovedThis phenomenon can be seen even at the level sectoral credit policy would serve as a weaponof bank credit management. Above a certain against banks that do not use their funds inthreshold, waste occurs and payment arrears the priority sectors that foster economic devel-become frequent. opment, but that instead seek lucrative, risk-

From a long-term perspective, in light of the free money market investments.serious problem of employment for Mali's This range of measures, with prudent finan-young people, the country's future will hinge cial management, could help provide the coun-on how successfully these problems can be try with viable industrial companies, therebytackled. Countries that are most successful in contributing to total value added and publicestablishing viable small and medium-size en- revenue. Overcoming the lack of agriculturalterprises in agriculture and industry will be and industrial expertise will be one of theable to approach the end of this century and main problems to be tackled in the mediumthe start of the next with the best chances of and long term.achieving social stability.

In the identification of new entrepreneurs, Population growthselection should be focused on the capacityavailable in the informal sector and on gradu- The census taken in 1987 put Mali's popula-ates of vocational schools and individuals with tion at 7.6 million. The average annual popula-experience in accounting. Competent indivi- tion growth rate is between 2.5 percent and 2.8duals from companies closed during the gov- percent. The situation may worsen in the nearernment's restructuring program should be future, given the country's population pyramidadded to this group. in which more than 50 percent of the people

In the field of financial management, trans- are under 20 years of age. This age bracket hasparent and reliable accounting, which is lack- a high childbearing potential. Mali's populationing at present, would improve the credibility could more than double in the next 30 years. Itof these enterprises with the banking system would be possible to thwart this trend with anand would be a means of protecting them appropriate mix of basic health care and edu-from a fiscal standpoint. Contrary to the cation programs geared to the most vulnerable

35

groups, particularly women. The problem of tions prevent an official stand on this key issuepopulation growth has to be analyzed in tan- as solely a matter of health.dem with the increasing demand of the popu- The public must be made aware of the riskslation for food products and for health and involved in uncontrolled population growth. i[teducation services. Even with the present pop- must understand that the country's currentulation, the country's performance in these food problems are going to be compounded bythree areas is sadly lacking and will become an increase in population. The authorities ineven worse if the population doubles. charge of handling this matter have a respon-

The ad hoc actions taken in a spotty fashion sibility to explain the impact of populationby the government are not sufficient to have growth on agriculture and industry, and onany significant or lasting success in checking requirements in consumer goods, food, energy,population growth. The most urgent need, in community infrastructure, health, and educea-relation to food production and the country's tion.limited resources, is to recognize that the pop- The rate of demographic dependence is ex-ulation problem exists. The official position, as tremely high in Mali. Expenditures for depern-given in an address delivered by senior gov- dents have multiplied, while a shrinking activeemnment officials to the World Population Con- segment of the population supports those whoference in Mexico, focused on production and are not yet of working age or are too old tonot on the existence of a population problem work. The seriousness with which the govern-in Mali. As things now stand, the country's ment treats this matter will directly determineleaders believe that as long as significant pro- the degree of confidence that can be placed ingress is made in the rural sector, population it and its intention to take into account thegrowth will not be a cause for concern, and it basic problems that need to be resolved in themight even be seen as the guarantee of a po- context of a sustained and long-term growthtential market, and hence an outlet for local policy. The population problem should be ana-production. Unfortunately, this reasoning ig- lyzed from the standpoint of quality. A betternores Mali's population projection in relation trained, educated, and healthy population willto the projections for the demand for food be better able to accomplish its growth targets.products over the long run.

This attitude ignores the results of the last Human resource developmentFive-Year Plan (1981-85). The ratio of domesticfood production to grain requirements for the The evaluation of Mali's economy has identi-period from 1981 to 1985 fell from 70.25 per- fied the following weaknesses:cent in 1981 to 65.8 percent in 1985, compared * Self-sufficiency in food has not beenwith an original estimate of 72.5 percent. This achieved, despite the efforts made toward thisphenomenon is attributable to: end under the development plans and pro-* An increase in minimum annual per capita grams.food requirements, which increased from 181 * Population is increasing at a rate faster thanto 185 kilograms (an increase of 4 kilograms the rate of increase in the production of foodper person) crops, with yields of generally less than 1 ton* Rapid population increase (2.5 percent year- per hectare, except in areas that have benefitedly) compared with the increase in grain pro- from extension services.duction (1.15 percent per year) between 1981 * The employment problem, which includesand 1985. maintaining existing numbers of salary and

Any notion that imports could help over- wage earners and priority jobs for young grad-come the problem would be quickly put to uates, is becoming increasingly acute.rest by the financial constraints involved. The There can be no solution to the problems ofpopulation factor and the need to control its food self-sufficiency, unemployment, and exter-rate of growth cannot be ignored. There is a nal imbalances unless the country has theneed for a comprehensive action program and capability it needs in the rural sector and in-a consistent strategy. Ad hoc measures outlined dustry.by the intelligentsia and the city of Bamakoare no longer sufficient, given the dimensions EDUCATION AND TRINNG. From the early yearsof the population problem. Religious considera- of independence, the country's leaders have

36

affirmed their strong determination to provide could be maintained, and the number ofMali with quality public education for all. schools could be increased by involving theMany efforts were made through budgetary parents in their construction.expenditure to translate this decision into The primary school enrollment rate is onlyfact-up until 1985. Since that time, however, 24 percent, even though financial expendituresspending for education has decreased from 28 of the education department have steadilypercent in 1985 to 20 percent in 1987, after increased in absolute terms. It should be pos-peaking at 32 percent in 1980. Spending in the sible, through the equitable distribution ofeducation sector gives priority to higher educa- resources, to bring Mali up to an enrollmenttion and fellowships at the expense of primary, rate equal to that of its neighbors, between 45secondary, and technical education and to the and 60 percent.teaching aids that are vital if the students are In the context of the privatization of theto be provided with quality education. This economy, there is a vital need for greater in-imbalance affects the relevance of training and volvement of private enterprise to ensure thathas unfortunate repercussions on employment the training offered by schools is tailored toat a time when this is an issue of crucial im- the jobs likely to be generated by the variousportance. The present situation is causing in- economic activities. Education is costing thecreased unemployment instead of providing government increasingly more, and becausethe remedy for it (15,000 graduates are current- education is just one of its myriad responsibili-ly seeking jobs). ties and its resources are limited, such coopera-

Without questioning either the necessity or tion with the private sector would be the bestadvantages of an elite capable of doing re- way to ensure that costs are borne by futuresearch, Mali's most urgent priority at the mo- users. Schools such as the Central School forment is to provide production- and manage- Industry, Trade and Administration, whichment-oriented training. In terms of the best use train middle-level personnel in accounting,of resources and equity, the current situation secretarial skills, and management, and thedemands our leaders' attention, particularly at School of Advanced Practical Studies inevitablya time when they are resolutely committed to require computer equipment, the cost of whichthe adjustment programs in which the optimal should gradually be borne by the users. Theseuse of resources must prevail. costs are currently financed by foreign aid. It

As a first step, spending should be redirec- would seem more appropriate for the Chamberted with a view to recasting the education of Commerce to assume these costs.pyramid. The problem of lack of skills in agrA- The present system, which dumps youngculture and industry can be resolved only by graduates onto the market, has, in a mannerreallocating the education system's resources to similar to that of the system of voluntary re-benefit primary education in order to broaden tirement, put a new type of developer andthe base of those who can read, write, and do entrepreneur on the market who schools havearithmetic. At the same time, technical and not initiated in even the most basic manage-vocational education needs to be strengthened. ment techniques and who have had no expo-Graduates of such training will find ready sure to the business world. This gap is theemployment within the small and medium-size result of a lack of an American-style linkageenterprises; many more of these enterprises are between the school and real life.needed in the agriculture and industry sectors. Those responsible for developing curriculaAll actions must point in the same direction, should be asked to introduce elements of man-toward enterprises that generate employment agement at all levels of education and to haveand toward schools that can provide the skills the necessary textbooks prepared. Some revi-needed in all branches of the economy. sion of curricula will be needed in the context

In the present financial situation, even if the of privatization. It is striking that, while therelative budget share of education spending is entire economy is moving toward the develop-maintained initially, it would be possible to ment of private initiative, the curriculum of thereduce the total amount of scholarships and to National Administration School still includesbenefit primary education and vocational and courses on Marxism and Leninism. Althoughtechnical training. The education department there are advantages to a good knowledge ofstaff currently assigned to primary education the two systems-capitalism and social-

37

ism-much of the time spent on these courses code). It would be a good idea to hold sympo-could be put to better use by strengthening siums and televised or radio-broadcast talks onaccounting, management, and data processing a regular basis with the participation of allskills. partners (including private entrepreneurs, gov-

The Chamber of Commerce could play a key enmuents, and bankers). The government isrole in this new approach. Private entrepre- well aware of the failure to tailor training toneurs are only theoretically involved in the employment and is currently preparing anCouncil on School Development, and it is not education sector adjustment project in conjunc-uncommon for them to complain about the tion with the World Bank. The education sec-poor standard of basic knowledge of the grad- tor has suffered from a lack of a consistentuates they hire in areas such as accounting. strategy geared to employment needs and fromThe best way to remedy this shortcoming is its failure to achieve the priority ranking itfor them to become actively involved in the deserves in planning. It is, in fact, striking thatcouncil by helping the Education Department education was ranked eleventh among nationalto assess the quality of the training given. priorities in the most recent Five-Year Develop-

Cooperation between private entrepreneurs ment Plan.and the research sector is virtually nonexistent.Mahan private entrepreneurs are not very in- HEALTH. In the opinion of experts, Mali hasterested in the fruits of research, which is de- formulated a clear and consistent health policyclining for want of users of research findings. geared to achieving 80 percent primary healthIt is other countries, unfortunately, that reap care coverage in the country by the year 2000.the rewards of research done in Mali, while Health care staff and infrastructure are con-the Malian economy could put it to good use. siderable, although the equipment is obsolete.This is true of research in both agriculture and The extent of the territory is such that it isstockraising. Uninformed developers in Mali virtually impossible to achieve full health carehave been known to spend huge amounts to coverage given the limited financial resourcesimport technical manufacturing processes that available. The present rate of health care cov(er-are already available in Mali at no cost. age is low (20 percent).

Study and fact-finding trips on different Besides the size of the territory, there is thecontinents to get an overview of trade and additional problem of the low literacy rate,industry at the international level would be which affects people's ability to understand theextremely helpful. In conjunction with the advantages of preventive health care and hy-Malian private sector, the United States gov- giene. The large number of people who are rioterinent started such a program to bring entre- self-supporting is another limiting factor thatpreneurs from the two countries together. The hampers efforts to increase health care cover-experiences of Southeast Asian countries, the age. Given the overwhelming preponderance ofRepublic of Korea and Thailand in particular, people under 20 years of age and the elderly,would be of interest. These are countries that the size of the active population that supportsstarted from similar backgrounds and have the rest of the population is small. In relationmade imnpressive progress. to the magnitude of the problem to be over-

In the context of the ongoing restructuring of come, budget allocations for health are far toothe economy, which is giving Mali's private low and will become even lower as populationsector a decisive role and must tackle the increases.problem of employment for young profession- In 1987, for example, the health budget wasals, an all-out effort to strengthen entrepreneur- approximately 4 percent of total gevernmentship and skills is vital. There will be no excuse expenditure, while in 1970 the Health Depart-for failure given the experience already gained ment's budget accounted for 15 percent of totalfrom the errors made in the public enterprise expenditures. Increases in the overall budgetsector and the sound foundation afforded by over time have worked to the detriment ofcooperation with other countries. spending to improve health care coverage,

Entrepreneurs are often unable to find the which is inconsistent with the targets assignedinformation they need in the texts governing to that sector. About CFAF300 million annuallytheir field of activity (such as customs and tax is allocated to health care facilities for the pur-information, banking regulations, and trade chase of medication, which, according to the

38

experts, is grossly inadequate to meet the Although Mali opted from the early years ofneeds of metropolitan Bamako alone. In order its independence for its own currency and forto correct these funding shortfalls, the focus government control of its economic structures,has turned toward the system of cost recovery, it has always been a member of most of thewhere good results have been achieved, par- subregional economic cooperation organiza-ticularly in the Kita, Bafoulabe, Kenieba, and tions. Mali is one of the few countries with aMopti regions. constitution that provides for its willingness to

Efforts to privatize medicine and simplify renounce part of its sovereignty to allow merg-red tape in filling prescriptions have been ers to further African unity. These provisionsgeared toward improving the distribution of are founded on both political considerationshealth care services. Real progress in the field and the goal of economic integration. From theunfortunately remains limited. Privatization perspective of Mali's long-term development,requires that developers have sufficient funds economic integration is a primary concern,to purchase equipment and employ competent because Mali's geography, national outlook,personnel. The solvency of the patients is a and economy demand that it maintain goodfactor in a country such as Mali, where the relations with its neighbors and that it entersocial security system is extremely limited. Per into economic cooperation arrangements withcapita income is $120 a year (1984 estimate). them.From the standpoint of cost recovery, the dis- Mali's chief wealth is its people. Maliansemination of health care services faces this nationals are widely scattered in the subregion,income constraint. Since Mali is 83 percent in Africa as a whole, and throughout therural and erratic rainfall and frequent droughts world. Resource inflows to Mali from its emi-are constant problems, subsistence is the grant population are more than CFAF 20 bil-number one priority for the Malian people and lion yearly. These emigrants play a very im-health concerns are inevitably relegated to portant role in the economic development ofsecondary importance. their communities of origin. Economic integra-

Experience has shown that Mali is an ex- tion with neighboring countries within thetremely vulnerable country with regard to framework of such organizations as the Westhealth, particularly in terms of the transmission African Economic Community (CEAO), Organi-of disease in urban areas. Similarly, Mali is zation for the Development of the Senegalfaced with drinking water and pollution prob- River (OMVS), and the Economic Communitylems, which are particularly acute in the rural of West African States (ECOWAS) is an exten-areas, where water supply infrastructure is sion of the monetary cooperation Mali practicesinadequate. Financial difficulties are at the crux with most of its neighboring countries.of all these problems and steps must be taken Experience has shown that most regionalto solve them if the health care coverage target economnic integration agencies have not metfor the year 2000 is to be reached. The finan- expectations because they were guided primari-cial resources currently available do not permit ly by the political considerations that promotedoptimal use of installed capacity (both equip- their formation. In general, Mali has benefitedment and staff), much less the attainment of from regional cooperation, which helpedhealth for all by 2000. finance priority projects of general interest

The problems to be overcome in making within the context of OMVS. An example issignificant progress are complex; priorities and the case of Manantali dam, which would other-deadlines must be set to proceed in phases wise probably not have materialized. Withinand funds allocated according to priorities. the context of the CEAO and Liptako-Gourna,Unlike the education sector, where the rede- Mali has managed to provide some tubewellsployment of budgetary allocations can, even at and infrastructure in rural areas with externalthe existing level, give better results, the health financing (including the Islamic Developmentsector does not have sufficient budgetary al- Bank, other Arab funds, and the African Dev-locations. Internal redistribution will not be elopment Bank).sufficient to achieve the desired progress. The results of trade cooperation are less

perceptible at the CEAO level and even less soRegional economic integration with ECOWAS countries. The use of different

currencies by these countries tends to slow

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down intraregional trade despite the existence DoMEsIc RESOuRcE REQUIRmsns. Regarding theof the West African Clearinghouse. Even in budget, the centralization of public fuadstrade where Malian manufactured products are through the elimination of the many supple-less competitive, the introduction of the free mentary budgets (that prevent resources frommovement of goods and people does not being widely used), which was adopted innecessarily imply a negative balance. The open- 1988 in the interests of having a single budget,ing up of competition has made it essential for must be continued. The fragmentation of re-industrial enterprises to improve the quality of sources made it impossible to ensure theirproducts manufactured locally. Mali's trade optimal use, whereas an integrated state bud-policy must take into account the length and get can better deal with the nature and scopeopenness of Mali's borders and the attitude of of the country's budgetary problems.Malian consumers. The amount of exemptions-which the tax

The flexibility and realism that have pre- authorities put at between CFAF 25 and 30vailed have borne fruit. Certain enterpri- billion per year-demands improved manage-ses-such as the Mali Textile Company and ment. There is a monitoring problem. The fightthe National Tobacco and Matches Com- against tax fraud and evasion, another sourcepany-have made some inroads into neighbor- of revenue loss, must be accompanied by edu-ing markets despite obstacles attributable to the cation and heightened civic-mindedness on theintroduction of domestic substitution taxes by part of government customs, tax, and treasurycertain member countries. Similarly, the re- staff-at both the assessment and the collectionsearch work undertaken by the Comite Perma- ends. Tax reforms and reform of the Tax andnent Inter-Etats de Lutte contre la Secheresse Customs Code must go still further, becausedans le Sahel (CILSS) has made it easier to the texts currently in effect were prepared inevaluate grain requirements and to provide the the context of nationalization of the country'scountries with a forecasting tool for the timely economic structures and not privatization. Theprediction of poor harvests so that appropriate same holds true of all support structures, suchmeasures can be adopted. Mali has also benefi- as the banking sector, insurance companies,ted from the establishment of vocational and consulting firms. These support structuresschools such as the textile training school in were tailored to promote public enterprises.S6gou and a center for research in solar energy The entire gamut of legislation governing thein Bamako. These investments represent a suf- different branches of economic activity in Malificient amount of infrastructure built within the needs to be adapted to the current restructur-CEAO and enables research to be furthered in ing efforts. The restructuring of the bankingareas that can benefit Mali. sector that is taking place in Mali and in the

West African Monetary Union member coun-Domestic and external financing requirements tries, and the restructuring of the insurance

sector go hand in hand with budgetary reform.An evaluation of the results of the As indicated earlier, encouraging efficiently

development plans and programs has suffi- operated banks to mobilize savings and ex-ciently highlighted the main weaknesses of the ternal lines of credit would be the best way toMalian economy, which are: The low and de- promote investment. Control of the funds col-cining rate of domestic contribution to devel- lected and their use by institutions such as theopment financing, and budgetary and balance National Social Security Institute, the priceof payments deficits. stabilization and regulation office, and other

These two weaknesses, which reflect the agencies that manage large sums of moneydomestic savings shortfall, have given rise to should make it possible to boost domestic sav-the excessive use of foreign aid, which, in ings and increase Mali's contribution to theaddition to being permanent, is also highly financing of its economic development. Finally,conditional. These imbalances could not be oversight of the management of developmentcorrected without sweeping reorganizations of projects with an eye to the repayment of on-the budgetary, banking, and foreign trade loaned credit is essential.structures with a view to providing more local In terms of spending, the austerity now inresources to help finance investments. effect must be maintained and steps taken to

increase allocations to the departments in-

40

volved in the rural sector, education, and to conceal and there is a sizable volume ofhealth. In view of the country's financial posi- illicit export activity. Action is therefore neededtion, a prior analysis of the use of budget al- to control this activity without scaring thelocations will be needed that favors sectors operators away. The aim should be to encour-contributing to economic development. This age a flow of trade that will benefit the operat-means that even within the framework of the ors, the banks, and the government. Mali is apresent overall budget, redeployment of spend- linchpin for these activities vis-a-vis most of itsing should be considered. The scrupulous ap- neighbors, including Guinea, Burkina Faso, andplication by banks of the sectoral credit policy Sierra Leone, in particular. Malian nationals aredecreed by the monetary authorities would very active in this type of transaction. Mangoesalso be a way of facilitating the use of funds are another product with export potential ifgenerated from savings for economic activities transportation and storage problems can bethat foster economic development. overcome.

In the meat sector, many contracts signedExrERNAL REsouRcE REQUIREMENTS. During the with the Libyan and other traders in Gabon

period from 1960 to 1987 the country's external and Arab countries could not be honored be-resource requirements increased in step with cause of limited basic infrastructure, such asthe increase in cumulative domestic and ex- cold storage plants. If efforts were made toternal deficits (public finance and balance of develop these commercial facilities there ispayments). The poor savings rate, which has every indication that Mali would be able toworsened despite the investment efforts under develop this activity considerably, because it isthe economic development plans and programs better endowed in this respect than its neigh-(26 percent during 1961-65, 15.2 percent during bors. It is for this reason that the Libyan-1970-73, and 9.7 percent during 1981-85), illu- Malian Livestock Development and Exportstrates this phenomenon. Company SOLIMA was formed.

In addition to this resource gap, the coun- Mali's debt service burden could be relievedtry's outward-oriented consumption pattern is slightly if help were sought from the Club ofsuch that imports of nonessential consumer Paris. The French govermnent will also have togoods comprise as much as 30 percent of total be approached for preferential debt treatmentimports. The increasing share of tertiary activi- with respect to the outstanding balance on theties in GDP is indicative of this trend. At a operational account that has already been con-sectoral level, the same is true of bank lending, solidated over 30 years (provisional balance ofwith consumer credit accounting for between CFAF 74 billion). It would be desirable for this50 percent and 75 percent of jobs in the bank- debt to be forgiven. As for the remainder ofing sector. the country's bilateral debt, Mali has entered

In the context of long-term sustained growth, into negotiations, in particular with the easternall these unfavorable trends will have to be countries and Egypt, with a view of reschedul-corrected to give the necessary priority to ing. Mali's debt structure is sound, but givenhigh-return investments in the use of the coun- its liquidity problems, the portion that cannottry's total resources. An all-out effort will be be rescheduled is steadily growing.needed to reduce Mali's dependence on other The only way the country will be able tocountries. To the extent that Mali's external meet its obligations will be to secure moreresource requirements are equal to the gap concessional aid within the context of struc-resulting from the unfavorable balance of pay- tural adjustment programs until the favorablements, immediate attention needs to be focused effects of economic policy measures and invest-on all factors that can help improve the cur- ments in productive sectors make it possible torent balance and on all external sources of generate adequate surpluses.capital (such as grants, subsidies, and loans).

In foreign trade, Mali has considerable-but Institutional structuresas yet insufficiently developed-export poten-tial. Its gold exports, which were not even In light of Mali's poor economic performancementioned as a memorandum item in the for- in key sectors, one cannot help but questioneign trade statistics, were estimated at CFAF the wisdom of the choices made among the22 billion 10 years ago. This substance is easy various sectors (informal, public, or private),

41

the decisionmaking process used in formulat- making regular payment of taxes and barking economic policy, and the role played by obligations).donors and nongovernmental organizations. The govermnent dreads the possibility of a

decline in tax revenue following of its divesti-RoLE OF THE INFORMAL SECrOR. The failure of tures and the closing of public enterprises. If

public enterprises to accomplish their assigned solutions could be found to these concerns, themission of ensuring that the public is properly public finance burden would be lightened andsupplied with staple foods and the successful the savings could be directed toward prioritydynamism of private Malian entrepreneurs has sectors of the economy and for use in the so-resulted in a well-developed informal sector. cial sectors in an effort to bridge the "socialThis sector has been valuable in keeping the gap."country properly supplied with millet, rice,salt, and other basic goods during critical peri- RoLE OF THE PRIVATE SECrOR. Malians have aods, particularly in the regions of Gao and long-standing reputation and tradition of beingTimbuktu and in small villages that are hard formidable traders; many thousands of camelsto get to during the winter. have crossed the salt route over the Sahara

Informal sector activity is flourishing in the and the Kola route to Burkina Faso and Ctefield of handicrafts. It could be improved with d'Ivoire. But since independence and the deci-increased supplies of materials such as wood, sion to adopt socialism 28 years ago, the pri-gold, and indigo. Unfortunately, this sector's vate sector has been pushed out to the fringescontribution to tax revenue is much lower than and its utility has been rejected. Merchantsit should be considering its prominence. Im- have been linked to illegal traffickers or state-ports of all kinds, a major drain on foreign less people. Because of the operation of mono-exchange, proliferate in this sector. polies and the attitude of the sector's detraLc-

In Mali the informal sector offers as many tors, this alienation of the private sector hasadvantages as it does disadvantages, and ef- confined it to activities that are strictly illegalforts to get it better organized might well snuff in terms of trade, customs, and tax regulations.it out. The best way of using it to advantage The absence-or rather the inefficiency-ofis, therefore, not to overburden it where taxes private sector support structures, despite theare concerned, to apply a flexible price policy, economic strategy favoring the coexistence ofand to promote a climate that will allow it to three sectors (public, private, and mixed), hasgrow. Some of its subsectors, such as tontines done nothing to further the development ofamong the women and mutual help funds private initiative. The only existing supportamong the smaL farmers, could benefit from structures were originally-and still are for thebetter organization. Similarly, maintenance most part-designed as part of the plan toactivities, an area in which the informal sector promote public companies and enterprises. Theexcels, should be encouraged by all possible banking system was dominated by the Devel-incentives. The key, however, is to avoid try- opment Bank of Mali (BDM), which was 100ing to organize the system as a whole because percent state-owned and financed more than 80administrative heavy-handedness would be percent of banking activities. In recent years,damaging to the enterprise seen in the infor- however, several private and mnixed banks andmal sector. consulting firms have come into being.

With the decision to close down SOMIEXRoLE OF TBE GovERNsmNT. Among the Sub- and other public companies and enterprises as

Saharan African countries, Mali is more famil- part of the economic reforms, the private sectoriar than most with the drawbacks of a country must be prepared to take over without ulteriortaking on profitable activities beyond its capa- motives. The regulatory structures governingcity for management and monitoring. It is not customs, taxes, and economic affairs, togetheronly the government that must guard against with the texts that govern their operations, willthis. The Malian private sector may also be ill- have to be reviewed along with all the neces-equipped to handle all the responsibilities in- sary accompanying measures.volved in performing its role and to honor allcommitments (such as setting fair prices and

42

Strategy for adjustment programs must not be guided by subjective opinions orby the interests of their countries of origin or

The commitments undertaken by the govern- cartels.ment under the structural adjustment programs From Mali's experience it is quite clear thathave so many economic, policy, and social the action of donors is not always coordinated,implications that an all-out effort will be re- as has been demonstrated in particular by thequired to avoid failure. Decisions to close large number of externally financed nonplandown companies are so important that a con- projects. Some order must also be introducedcerted effort is needed on all sides to make in Mali in the coordination among the varioussure that these programs, with the enormous departments and units involved. As much caresocial costs they entail, are successful. as possible should be taken to avoid submit-

From the Malian side, the experts and minis- ting all projects to all donors. Donors do notters who negotiate these adjustment programs respect government priorities and tend to havemust understand every detail of the programs their own preferences. The coordination ofand raise the appropriate questions at all levels foreign aid must be increasingly directedof authority. Such matters must be cleared up toward a joint steering by the World Bank andbefore the government commits itself formally, the African Development Bank, the leaders infor the sake of the credibility of the officials in this field, given the experience and credibilitycharge of the negotiations. The position of the of those two financial institutions.labor unions and other opinion groups, such as From a long-term economic growth and dev-journalists, must not be ignored. Acceptance of elopment perspective, the structural adjustmentthe program must be based on a conviction programs can be successful, provided the fol-that they will have a positive impact on the lowing conditions are met:country and not for reasons relating to the * A good economic and financial managementneed for funds to help the country over a policy is implemented by a government deter-difficult period. mined to accomplish its goals.

The donors, in particular the World Bank * An effort is made to further research, par-and IMF, must act in an objective and respon- ticularly in the rural sector, to improve yields.sible manner and have a dear awareness of * Donors provide the finandal support neededthe implications that the reforms will have for to implement the structural adjustment pro-the populations of beneficiary countries. They grams.

43

4

Reflections on the Long-Term PerspectiveStudy for Sub-Saharan Africa,

with Particular Reference to Malawi

Gilbert B. Chirwa

Landlocked Malawi became independent in groundnuts, cotton, sugar, coffee, pulses, andJuly 1964 and celebrated its political silver rce.jubilee on July 6, 1989. It has a total land area A further point about the resource base ofof 118,484 square kilometers, of which 24,208 is the Malawi economy is the absence of highlywater and 94,276 is land. lucrative mining industries such as gold, cop-

A population census taken in 1977 gave a de per, and diamonds. Even though such indus-facto total population figure of 5.5 mnillion. tries in developing countries often create seri-According to the last census (1987), this figure ous problems of structural imbalance and mal-increased to 7.9 million, of which 88 percent distribution of income, they do at least providewere estimated to live in rural areas and 12 capital resources to develop other sectors. Thepercent in urban areas. The figure of 7.9 mil- Malawi economy, therefore, relies on foreignlion for 1987 includes a proportion of refugee capital and foreign exchange realized fTominflux into Malawi. The population was estima- agricultural export proceeds to complementted to grow 3.07 percent a year between 1977 domestic savings to finance its development into 1982, 3.2 percent a year between 1982 and the public and private sectors.1987, and 3.66 percent a year after 1987. These The Malawi economy is an open economyrates were higher than the real growth of dom- and subject to adverse effects in the industrial-estic product over most of the period. ized world. The increased prices for imported

The Malawi economy is predominantly agri- goods that followed the energy crisis of thecultural; from 1964 to 1989 agriculture contrib- late 1970s adversely affected Malawi's terrms ofuted between 36 and 40 percent of GDP. Agri- trade. The balance of payments position wor-culture has a significant impact on the rest of sened soon thereafter with a severe reductionthe economy. Agricultural output accounts for in its external reserves. This deterioration since88 percent of total exports, 51 percent of total the 1970s has meant that there has been insuf-recorded employment, and employs 86 percent ficient foreign exchange to import necessaryof the active labor force. The sector is predom- goods and services. Growth in GDP was un-inantly subsistence (90 percent) and dominated satisfactory for most of the 1980s.by smallholders (78 percent). The main cropsproduced and exported are tea, tobacco,

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Past economic performance Postenergy crisis period of 1980-89

The main assets of Malawi comprise natural After the energy crisis of the late 1970s, theresources-good arable land, water, and a cli- performance of the Malawi economy deterio-mate favorable for crop production. There are rated. During this period the country experi-no minerals of real value; the country's pro- enced a steep rise in prices for imported fuelduction base is limited to agriculture and in- and for capital and other intermediate goods.dustry. The agricultural output is mainly smal- The overall effect on the merchandise tradeIholder and estate (plantation) production. The balance would have been reasonable if it weremain crops include tobacco, tea, sugar, coffee, not for the low prices for many of the coun-cotton, maize, groundnuts, pulses, and rice. A try's exports on the international markets thatmanufacturing sector also exists that is primari- characterized this period. Tea and sugar ex-ly agroindustrial, based on outputs of cotton, ports in particular suffered greatly with pricesugar, and groundnuts. drops up to 200 percent compared with their

To appreciate Malawi's performance since its 1978-79 levels.independence in 1964, it is useful to divide the The balance of payments position deteriora-period after independence into subperiods-the ted. The government experienced persistentpostindependence period of boom between current account deficits of between Kwacha (K)1964 and 1979 and the postenergy crisis period 22.7 million and K208.2 million, which led toafter 1979. depletion of the country's external reserves and

a tightening in access to foreign exchange. ToPostindependence period of 1964-79 finance these deficits, the government had to

borrow, seek grants, and transfer funds fromDuring this period the Malawi economy abroad. The country experienced heavy debt

enjoyed reasonable rates of economic growth service obligations as a result of heavy borrow-and development. During the 1970s the econo- ing on commercial terms, which added to themy experienced significant growth in real depletion of the country's external reserves. ForGDP. The impressive growth rates in the early Malawi, 1986 was the last year when debtyears of 1964 to 1977 were mainly the result of relief, stemnning from its 1982-83 reschedulings,good commodity prices for primary products could be claimed; the amount of debt reliefand expanded acreage with some improve- was small (K5.3 million). Malawi also soughtments in yields for agriculture products made rescheduling for the period from August 1987possible by timely availability of inputs, in- through March 1989. Compared with othercreased extension services, and research. In years, the current account balance improvedcertain circumstances the increased outputs in slightly in 1986 from a deficit of K166.2 millionproducts like cotton, sugar, rice, and ground- in 1985 to K163.6 million in 1986, which wasnuts not only assisted in expanding exports 7.2 percent of GDP, because of import contrac-but also provided a base for the economy to tion. With import recovery in 1988-89, the cur-expand its manufacturing sector (in textiles, rent account deficit continued to be relativelyrice milling, oil processing, sugar milling, and high.fuel). This period of increased productivity was In addition to the problem of increased pri-accompanied by the establishment of basic ces for fuel and other imported goods in mer-infrastructure-roads, railways, education, and chandise trade, high transport costs resultedhealth facilities. from the insurgency activities in neighboring

The overall balance of payments position im- Mozambique, which disrupted Malawi's tradi-proved because of increased export volume tional rail access to the sea. As a result, theand capital inflows. The performance of the country resorted to using the long and expen-government budget was satisfactory and recur- sive alternative routes through Durban inrent expenditure requirements for institutional South Africa and Dar es Salaam in Tanzania.support was small. Consequently, the cost, insurance, and freight

(c.i.f.) margins on imports increased. As a re-sult of the excessively high transport charges,the economy turned into a high-cost producer

45

with reduced competitiveness compared with dependent on the vagaries of weather and theother producers with similar products in the prices of international commodity and moneycontinent. markets. Sustained development was threat-

The government, with assistance from exter- ened as foreign exchange became too scarce tonal donors, has already invested heavily in the meet the demand for production inputs in thenorthern corridor route through the port of goods producing sectors of the economy. Limi-Dar es Salaam in Tanzania but the business tations of foreign exchange made it difficult forcommunity is now told to use Nacala which is the government to adequately operate andalso available. Nevertheless, the southern maintain its expanded fleet of vehides. Theroutes through the ports of Beira or Durban number of jobs recorded in the official sectorcontinue to take the bulk of the country's ex- of the economy increased steadily and put anports. Increased transport charges have thus added strain on resources. The size of the gov-contributed greatly to poor performance during emment service more than doubled. The popU-the period from 1980 to 1989. lation growth of over 3 percent a year threat-

Additional reasons for the poor performance ened the labor-land ratio.during this period were the high inflation rate The education and health sectors did notand a series of droughts that affected smallhol- perform satisfactorily. The government hasder production in 1986 and 1987. During 1988 made efforts to increase capacity in its schools.and 1989, floods, tremors, cyclones, and an Enrollment in schools has increased steadily atincreased influx of refugees placed considerable all levels, but given population growth, pri-strain on the economy. mary enrollment remains under 50 percent.

In short, despite recovery during 1988 and During 1985 to 1989, of the 80,000 primary1989, the subperiod from 1980 to 1989 has school leavers each year, less than 5,000 (5.5been one of generally depressed growth. The percent) were selected for secondary schoolsbalance of payments constraint has been one of and colleges. There is unemployment amongthe most significant limiting factors for Mala- primary school leavers and because of in-wi's economic performance in the postenergy creased limitations in the job market, this prob-crisis period. Data for GDP and sectoral lem is now extending to include secondarygrowth rates during the 1980s are given in school and college graduate unemployment.Table 1: Only about 5 percent of 1988 school leavers

have been able to find formal sector jobs.Table 1 Growth of production, 1980-87 In the health sector training opportunities

have existed in the past, but facilities for train-ing have not been made available locally. Most

1980-84, of the training in specialized fields has takenaverage 1985 1986 1987 1988EI place abroad, but only a few of those trained

have retumed. A recent announcement by theMinistry of Health indicated publicly that

GDP at factor Malawi's doctor-population ratio is one of thecost most unfavorable, at 1 doctor to 60,000 people.(1978 K million) - 841 851 863 908 This sad state of affairs was officially attribu-

Annual percent- ted to "human resource flight accompanied byage change 1.0 4.4 1.1 1.4 3.6 lack of relevant training in the country's health

Annual percent- problems."'age changeAgriculture 0.4 0.5 0.6 3.4 3.6 Postindependence strategiesIndustry 0.3 7.5 -1.8 1.5 4.8Services 2.1 6.6 2.7 -0.2 6.9 In view of the importance of agriculture in

the Malawi economy, since independence thea/ Preliminary estimate. government has focused its attention on tlhisSource: World Bank data. sector. To foster improvements and enhance

real incomes and the standard of living of theSixteen years after independence, the econo- 90 percent of the population in rural areas, the

my as a primary commodity producer was government launched a two-pronged attack in

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the smallholder sector. The first approach was and the planning and establishment of staffinitially through capital-intensive projects and housing, offices, essential roads, and allocationprograms financed by the World Bank and the of additional staff to minimize delay in imple-West German government that provided for menting the next phase. This was followed byintensive extension services, credit, marketing, a five-year extensive phase, with investmentsand building of related infrastructure. The only in production-related items, such as im-second approach was through provision of proved extension and training for staff andregular extension service in areas not covered farmers, marketing, supply of inputs and cre-by capital-intensive projects, with programs to dit, and construction of essential supportingresettle farmers to grow irrigated rice, tobacco, infrastructure. This was followed by a five-yearand other crops. Considerable achievements intensive phase, with more attention to research,were made in meeting targets for most prima- introduction of new crops and processing tech-ry agricultural products for export. The stan- nologies, opening of new areas of crop produc-dard of living of most farm people in the rural tion and settlement, land conservation andareas has improved. consolidation, animal husbandry, and construc-

The major projects concept, however, re- tion of additional infrastructure. The final stagequired heavy capital outlays, and this weighed was the consolidation phase, which involved aagainst the extension of this type of develop- continuation of intensive development on ament to other parts of the country within a sustainable basis and included social infrastruc-reasonable period of time. A change in empha- ture-especially in education, health, and ruralsis was therefore adopted that stressed projects industry. During this last stage of consolida-that required minimum capital and focused on tion, the local participating population wasinvestment only in elements that would have asked to form local committees, make plans,an immediate effect on production. Other in- and participate in decisionmaking with govern-vestments that were unlikely to have an im- ment extension staff.mediate bearing on production were deferred Implementation strategy for projects that fol-to later stages of a phased project. The Nation- lowed thereafter described three rural develop-al Rural Development Programme (NRDP) ment projects that would be started each year.emerged in 1977 with the objective of carrying These would be shared equally among thesome of the benefits of what were previously administrative regions of the country-North,known as "major projects" to other parts of the Center, and South. The criteria for determniningcountry. This concept involved initiation of priority, in addition to political directives, em-several integrated projects that combined im- phasized the following:provements for the complementary sectors of * areas with high but largely underdevelopedhealth, infrastructure development, marketing, potentialcommunity development, and education. Previ- * areas where farmers show considerable ini-ously most of these areas were induded in tiativeindividual ministry sectoral programs. Donors * areas of ready accessibilityfound it easier to fund some of these social * balance in providing development assistanceservices if integrated in agriculture projects. to all regions of the country.

The NRDP projects were initiated in an in- For planning purposes and organization fortegrated fashion and prepared in detail for the physical inplementation of these projects,funding by donors. To spread resources and the operating units are the Extension Planningensure that each area benefited, the invest- Centres (EPAs), Rural Development Projectsments were sequenced in each project entity. (RDPs), and Agriculture Development DivisionsProject components emphasized in the early (ADDs), which are all under the direction ofstages were those that would have an impact the Department of Agriculture Developmenton production, such as improved input supply, within the portfolio of the Controller of Agri-extension and training, marketing, credit to culture Services in the Ministry of Agriculture.needy farmers, construction of supporting in- To enhance project choices, the country wasfrastructure (feeder roads), and related housing divided into 180 EPAs that were ecologicallyfor staff. The projects prepared for each area uniform, had identifiable topographical bound-encompassed four phased stages. A two-year aries, and contained an average of 5,000 farmpreparatory phase allowed time for data surveys families. Subsequently the EPAs were grouped

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into a total of 40 rural development projects or rural development. An NRDP Co-CoordinatingDevelopment Areas (DAs), and a rural devel- Committee was established to coordinate poli-opment project was being implemented in each cies for NRDP at a national level, but it ap-one with donor assistance. Consequently the pears not to have been very effective.number of farm families totals about 25,000 per Several lessons may be learned from theRDP. agriculture strategy adopted and applied by

The EPA is now the basic unit for agricul- Malawi in its agriculture sector.tural extension service. It has been defined as * It has assisted in creating a framework fcra geographical center with an established per- the operation and management of investmentsmanent market, offices for credit, and extension for agriculture in the rural sector. If this isstaff to service the 5,000 farm families, or ap- adhered to, long-lasting results in growth inproximately 25,000 people. This level of unit production and export volume and generalservicing is consistent with the already estab- inprovements in the standard of living for alllished Ministry of Health subcenters or local Malawians are achievable.government wards utilized for the delivery of * It has helped in establishing the requiredhealth services. Within the EPA there are a infrastructure for marketing agriculture outputsnumber of smaller services for about 10,000 and inputs, including access to markets.people, or 2,000 farm families. These indude * Within this framework, social services suchmarkets for sale of produce, health posts, dip as maternal and child health, family planning,tanks for cattle, and schools. health services, water supply points, communi-

Next in line in the hierarchy is the Rural ty development, and rural growth centers canDevelopment Project Area (RDPA), consisting easily be integrated and operated.on average of four to five EPAs (25,000 farm * The agriculture strategy can assist in thefamilies or 125,000 people). These are deter- preservation of natural resource assets by ern-mined by overriding ecological factors. Cur- couraging high standards of crop husbandry,rently there are about 40 rural development soil conservation, and maintenance of forests.projects in Malawi. The RDPs, in turn, are * The creation of ADDs promotes the decen-grouped for purposes of supervision, account- tralization of decisionmaking and facilitates theing, infrastructure development, and evaluation participation and involvement of local people,in ADDs. Eight ADDs have been established in thereby reducing bureaucratic constraints.the country to ease the problem of "crossing in * It has helped to reduce some of the recur-funding" by donors, and each donor country rent cost implications on the government bucd-or community has been encouraged to concen- get arising from operation of these projects,trate its assistance through one ADD. The and it has shown how some of these costsADDs are, in turn, managed through policy could be recovered through user charges.direction by the Ministry of Agriculture Head- The strategy for the agriculture sector nowquarters, which has been restructured to fit in place in Malawi is required to be sustainedinto this strategy for rural development. There for long-term agriculture programs. This iisis a Controller for Agriculture Services at Min- necessary if development is to be sustainableistry Headquarters who is supported by the and equitable. It can be questioned in the caseChief Agriculture Development Officer and of Malawi's strategy whether, although theother specialist staff in crop production, mar- framework for operation of development pro-keting, credit, livestock production, extension, jects in the rural areas has been establishedand farmer training. and is in place, the projected targets for crop

This, in a nutshell, is the current strategy for output are realistic. This is, in my opinion, aphysical implementation of Rural Development question of time. Relative food surpluses inProjects in the agriculture sector. It has worked maize are being realized and, with liberaliza-and is continuing to work, given the available tion in prices and suitable infrastructure, moreenabling environment and the government's surpluses are likely to reach markets.political commitment to improve the welfare of For purposes of consistency, the governmentpeople in rural areas. The program requires should continue to place this emphasis on thelarge investment resources from donors. In preeminence of the agriculture sector as a basisaddition to the Ministry of Agriculture, other for sustained long-term economic growth. Agri-ministries and organizations are involved in culture will long remain the backbone of the

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economy. It will not only constitute the basis Further improvements in the country's bal-for growth and development by providing for ance of payments through a steady increase inexports and self-sufficiency, but also the basis export volumes and a diversified export basefor development of other sectors by making are emphasized by the government. Apartavailable raw materials to the manufacturing from some minor movements, however, com-sector and providing ready markets for pro- modity prices for the leading export crops ofduction inputs in industrial or U-Sector and Malawi, particularly tea and sugar, remainother backward and forward linkages. Present generally depressed. The forecast for each com-government goals emphasize this need to ex- modity on the world market indicates an ex-pand production and output in agriculture and cess of supply as other producers in develop-all other sectors to restore and ensure positive ing countries continue to expand their produc-growth rates of both per capita income and tion and off-take in the main markets is eithertotal GDP. Tentative estimates that have been static or declining.made and outlined in the "Statement of Devel- Room for diversification of agriculture ap-opment Policies for Malawi (1987-1991)" seem pears rather limited for Malawi, especially into indicate that in the near term, GDP is ex- the estate sector, while smallholder agriculturepected to grow on average by a high of 4.6 already appears well diversified. Althoughpercent in real terms in 1989, and is expected most tea and tobacco estates are diversifyingto increase to 7.3 percent by 1991. This impres- into coffee (which has an export quota), land issive growth in production and output is ex- a limiting factor on their viability in a periodpected to come from both increased agricul- of depressed prices.tural and industrial output. The level ofgrowth is expected to increase with improve- Industrial sectorments in transport with the reopening of chea-per access routes to the sea through the tradi- Government policy continues to place em-tional ports of Beira and Nacala in Mozam- phasis on industry as a complement to devel-bique. opments in agriculture and other sectors of the

The 4.7 percent growth rate is commendable economy. Since independence, the main em-for an economy of this type and would be phasis has been on import substitution indus-much higher than the rate of population tries, which derive raw materials from agricul-growth in the country. It has been stated by ture. Nevertheless, the country has experiencedthe government that assumptions behind this only modest growth in industries such as tex-impressive growth rate do not incorporate the tiles, sugar mills (including a plant that manu-other vigorous efforts already under way to factures ethanol for blending with importedreview development policies and other devel- petrol), oil processing, rice milling, and pro-opment strategies for the Statements of Devel- duction of agricultural implements.opment Policies that are aimed at broadening The basic constraints for most import sub-the base for production and export. The ex- stitution industries is their heavy reliance onpected growth rate would be higher than the inports of essential raw materials. Costs ofprojected 4.7 percent if all proposals currently these imports have risen sharply and causedincluded in government the Statement of Dev- increases in prices of final domestic products.elopment Policies are financed and implemen- Because the burden of such costs has beented. Traditional exports, namely tobacco, tea, passed on to consumers, who are faced withand sugar, will continue to dominate the ex- declining purchasing power, the markets forport list, although recently coffee has become a domestic products have declined in favor ofsignificant export crop (Malawi is a signatory imported products. There are some relativelyto the International Coffee Agreement). More efficient agroindustries in the manufacturingemphasis, however, will have to be placed on sector desiring to export, but they are not com-diversification to broaden the export base. Sec- petitive because of Malawi's high transporttoral shares in GDP have not changed much costs. The government needs to address theseover the period of the first-generation develop- issues. If properly encouraged, these industriesment strategy. The share of agriculture, for could provide the backward and forward link-instance, has been 36 percent for a long period. ages to both the agricultural and large-scale

industrial sectors.

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Over the long term, it is the govermnent's consequences of cutting back public experLdi-intention to encourage rapid growth and ex- tures on social services, including health andpansion of the industrial sector. Recently the education. These are major areas that havegovernment announced its commitment to suffered greatly as in other Sub-Saharan Afri-provide significant assistance to industry can countries with and without the Structuralthrough its tax reform program and an invest- Adjustment Programs. This is shown by recentment code is actively being discussed. The evidence from UNESCO/UNICEF of decliningphased tax program is aimed at, among other educational quality, stagnating enrollments,things, providing appropriate incentives for massive dropout rates in primary schools, andindustry and broadening the tax base, thus the school leavers problem. Moreover, the liter-allowing a reduction in rates. acy rate is low and the health care delivery

system is inadequate.Mining sector In the area of human resources, Malawi, like

any other country in Sub-Saharan Africa, hasThe government has assisted several mining been plagued by staff shortages in several

investigations. Most of them reveal that the technical fields, such as engineering, architec-country is endowed with certain mineral re- ture, accountancy, management, and medicine.sources in varying quantities, some of which Human resource development is a key to suc-have potential for exploitation on a small scale. cess for any economy. History shows this inThese indude potash and phosphates, lime- the examples of Japan; the United States; num-stone, coal, gypsum, and corundum. Con- erous European countries; and, more recently,straints to further mineral development include Mauritius. The world in general is movinglack of knowledge in mining, low capital avail- toward higher and more sophisticated techno-ability, poor institutional set-up, and an inabi- logies for which advanced education to devel-lity to attract mining companies with the tech- op human resources is paramount for both thenology and expertise to assess the size and urban and the rural areas. For education, it isquality of mineral deposits. The Malawi Min- the quality and acquisition of relevant skillsing and Investment Corporation has been set that counts and not quantity or mass produc-up, not only to address some of these issues tion of graduates.but also to stimulate investment in mines thatcould be economically exploited. For the fu- Economic and financial managementture, more work will be required to exploreand develop mineral resources with economic Malawi has, to date, maintained prudentpotential. financial management policies, but these need

to be improved during the second-generationSocial services sector development strategy. Still, various issues-in-

flation, foreign exchange management, taxation,Apart from provisions within the NRDP of interest rates, and wages-remain to be effec-

the Ministry of Agriculture, the social services tively tackled. There are two avenues to securesector has not been adequately covered in pre- economic survival over the long term. The firstvious programs of government. The economic is for the economy to become more efficient incrisis following 1979 worsened the situation its production and manufacturing technologilesbecause resource constraints reduced expendi- for export by making more acceptable productsture in the social services sector considerably. through the application of up-to-date researchThe Structural Adjustment Program (SAP), and technologies. The second is by promotingdesigned to deal with Malawi's crisis of 1981 these products in overseas markets. The gov-to 1988, would appear to have become a emient will need to take the lead and besource of additional problems rather than a more aggressive in supporting such promotionsremedy. While several of the SAP policies have to push Malawi products in selectedcontributed to restoring the foreign exchange markets.balance, easing balance of payments problems,and enhancing output in many sectors, theyhave not given suifficient consideration to thedeteriorating conditions of the poor or the

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nanced by other donors to a further $110 mil-World Bank Structural Adjustment Loans and IMF lion. In July 1988, under the Extended Struc-Stand-by Facilities tural Adjustment Facility (ESAF), the IMF pro-

vided SDR55.8 million over a three-year periodMalawi's balance of payments position prob- on low-interest terms. Relative to Malawi's

ably would have worsened from 1979 to 1989 GNP, these are large sums. A total of $394were it not for the considerable inflows of million has so far poured into Malawi underfunds from the World Bank, International Mon- Structural Adjustment Loans, excluding SDRetary Fund (IMF), and other bilateral agencies. 55.8 million of ESAF. As conditions for theseThese funds have been extended since 1981 to loans, the country has made some difficultsupport policy measures for balance of pay- sacrifices. The government is in the process ofments adjustment. abolishing prior foreign exchange approval for

The 1980s have been difficult. Because of imports. The exchange rate is to be reviewedadverse terms of trade, Malawi's international more often so that it reflects a true rate, andpurchasing power fell, although not as steeply the role of government agencies in marketingas for some other countries in Sub-Saharan farm produce was reduced by an act of Parlia-Africa. Since 1987 the country has been ad- ment in April 1987. To encourage participationversely affected by the war in Mozambique. of the private sector in the purchase and trans-More than 500,000 refugees have poured into port of smallholder produce from farms toMalawi, and the transport routes to the coast markets, the official marketing agency's mono-in Mozambique were disrupted for a long poly has been abolished in all crops excepttime. This made it more difficult to sustain tobacco and cotton.economic growth. Closure of the access routesto the sea has cost the country an extra trans- General economic considerations for theport cost of $50 million a year. medium and long term

The country anticipated these difficulties andquicldy began to deal with them with the as- In the past 10 years, Malawi has experiencedsistance of the World Bank and the IMF. In unsustainable balance of payments deficits,1981 the first Structural Adjustment Loan with foreign exchange shortages, reduced exportthe World Bank was arranged, followed by volumes, costly imports, high rates of inflation,two more in 1984 and 1986. The conditions growing budget deficits, and droughts andattached to these loans were intended to im- floods. The solutions to these problems are notprove economic management through improve- in Washington, D.C., but in Malawi. The short-ments in balance of payments, price incentives term stabilization policies that resulted in in-and income policies, efficient resource manage- discriminate reduction in government expendi-ment, restructuring of state-owned parastatal ture, devaluation, higher taxes, and customsorganizations, and removal of subsidies for and excise tariffs, if not carefully studied,fertilizer. At the same time, producer prices for might prove retrogressive. These may havesmallholder farmers were increased to provide adverse effects on the goods producing sectorsincentives for agricultural production and ex- of the economy and be inimical to growth inport diversification. With the transport links the long term.through Mozambique dosed, the landed cost Most of the decline in output and exportsfor inputs of fertilizer continued to increase had been attributed to inefficient pricing andthroughout the 1980s in the face of falling marketing systems. As a result, in the past theworld commnodity prices for most primary Agriculture Development and Marketing Cor-products. The profit margins and disposable poration (ADMARC), which is responsible forincomes of the smallholders were therefore marketing produce grown by smallholders onreduced. Removal of fertilizer subsidies, in the customary land, has experienced great variationface of intense protest, had to be done careful- in output. The downward trend in ADMARCly to take into account these constraints. purchases in recent years is attributable to the

Because the economy was sluggish in 1987, emergence of private traders who are allowedthe government redoubled its efforts for exter- by statute to participate in the purchase ofnal financing. In June 1988 the World Bank maize, a food commodity. Reductions in vol-approved a $70 million loan that was cofi- umes of purchases by ADMARC have also

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been experienced in cotton, groundnuts, and ments in technology and in the management ofpulses. Parallel markets also exist for ground- services to farmers. The strategy outlinednuts and pulses, which are increasingly used above is now established at the grassroots levelin established import substitution industries. and needs to be effectively used.Estate output has expanded steadily for tobac- Agricultural exports worldwide face limitedco, tea, sugar, and coffee. Potential exists for prospects. Efforts to develop agriculture inexpansion and diversification into other areas, Malawi need to be complemented by growthgiven appropriate incentives. For food crops in the manufacturing sector. To succeed in this(induding maize, groundnuts, and pulses) par- direction will necessitate the fostering of entrc-allel markets exist in many areas to circumvent preneurship of the type existing in Mauritius.the price restrictions in formal markets. The Malawi also needs to adopt appropriate tech-trend in the past has been that ADMARC, nologies to make it an efficient and low-costwhich sets guaranteed minimum producer producer.prices, has secured only nominal increases that The fast growth of export production ex-are not adequate to compensate the farmers for perienced in Malawi in the first years of in-rising costs of production, despite government dependence resulted both from expansion inassurance to protect the profit margins of the the estate subsector and the response of small-farmers. This led to the emergence of parallel holder producers to increased access to coII-markets in the informal sector. The price incen- sumer goods attained by producing cash crops.tive issues will therefore require greater atten- Policies later adopted by the government totion over the long term if indeed the govern- replace the inefficient and corrupt managementment intends to expand agricultural output of many of the old cooperatives have broughtand to ensure sustained food self-sufficiency some confidence to producers.above the current level of population growth. With the help of the National Rural Devel-

In the long term, correction of Malawi's opment Programme, it should not be difficultbalance of payments disequilibrium requires to foster mechanisms for transfer of technolo-extensive export promotion and broadening of gies, such as high-yielding varieties of seed,the export base. These can be achieved through iminplements to substitute for the hoe and axe,better incentives and removal of disincentives and other inputs used for production and mar-in the export sector. A selective approach keting. The NRDP approach, although notwould need to be applied, bearing in mind capital intensive, leads to high recurrent costssocial hardships. arising from the employment of large numbers

To provide incentives in the export sector of extension staff and the maintenance of vehi-the government has recently enacted the Ex- cles, buildings, and equipment. The currentport Incentives Act, which has yet to be imple- numbers of extension staff will be unsustain-mented. As the act now stands, it is unlikely able in the long run unless agriculture expandLsthat it alone will substantially improve the fourfold.competitiveness of Malawi's exports, least of The government recently granted permissionall the traditional exports-tobacco and tea- to private traders to market maize, a low-valuethat appear to be excluded from the incentives food crop; this should relieve ADMARC of thereform. Current focus is therefore in the wrong high operating costs related to maize. Never-place. For the long term it is essential that the theless, other crop authorities (incLuding thosestatute cover export production in traditional for tea and coffee), which are responsible foras well as new products. marketing their own produce, also depend on

the goverrunent to defray their costs. There isLong-term agricultural development and marketing an urgent need to streamline the managementstrategy and operation of these authorities. A major

issue is that some of these authorities mightIn Malawi's economy agriculture will con- not have capable and professional managers,

tinue to be the engine for growth and struc- by nature of their appointment.tural transformation for a long time. The gov- For sustained agricultural development inerinent should continue with policies that the long term, the key element for Malawi wilUemphasize bolstering this and related sectors. remain the smallholder farmer. Public invest-Such policies should include further improve- ments for NRDP in the long term need to be

52

concentrated toward increasing the productivity exchange. As a result, the industrial strategyof individual household units in the smallhol- has not adequately encouraged allocative andder sector. Collectively these increases will lead operational efficiency. Under these cir-to expanded growth in production and exports cumstances it is difficult to determine if protec-and thus help improve foreign exchange earn- tion has led to the emergence of efficient in-ings and self sustenance. Because agriculture in dustrial units in the country.Malawi is seasonal, it is necessary to provide Currently the government is addressingfarm inputs to generate employment in the off- some of these issues. In a statement to a sym-season. To deal with this issue, the expansion posium, Export Development and Promotionof the Rural Growth Centre project and other Strategy for Malawi, held in October 1988, arural credit schemes is vital and should be government representative made public thesustained. efforts to be made by government to initiate

The country's successful group association an industrial development policy and strategyhas been fostered by the government in rural that has been hitherto nonexistent. This indus-areas, alongside other community development trial strategy is reflected in the Statement ofefforts. Whereas the success of these groups is Development Policies (1987-96), in which thecommendable because they are free associa- focus is on three subsectors-the small- andtions formed by the people themselves, they medium-scale industries, import substitutionseem to leave out (or segregate against) the industries, and export industries. It has beenpoorest in their selection process. Government announced that the government is keen toeffort and policy should reorient this approach eliminate monopolistic industries and to en-and ensure the indusion of the poorest in the courage strong participation by the privategroup system. Otherwise the fight against hun- sector. Because the domestic market is small,ger, ignorance, and poverty will be incomplete established industries could benefit from econ-in the long term and growth and development omies of scale if some of the finished productswill not be sustained. were exported to compete with manufacturers

from other developing countries.Long-term industrial development strategy Any export strategy will eventually affect

industry and therefore should be part of theSustained growth in the long term will re- industrial strategy. The prerequisites to a vi-

quire structural transformation in the industrial able industrial and export strategy for Malawi,sector and especially in small-scale industry, therefore, indude not only a good industrialwhich indudes manufacturing from locally policy and strategy, but also appropriate incen-produced materials. This is necessary to sup- tives for producers. The Export Incentive Actplement the basic strategy for the agricultural (1978) is applicable to industry and will pro-sector and to foster forward and backward vide some fiscal and other incentives. It is,linkages and value added. Sustained growth in however, important that for the long term theagroindustries depends on raw materials from country's industrial policy and strategy shouldthe agriculture sector. A broader production be accompanied by an investment code andbase will enable greater opportunity and scope privatization policy. As a facilitator, govern-for industry. ment should also assist with training staff and

For a long time, government policy has been establishing industrial and export processingto encourage establishment of import substitu- zones to broaden the economy's productiontion industries to save on foreign exchange. base. This should foster entrepreneurship andThe theory has been that, if protected as infant industrialization. The government should intro-industries in the domestic market, the import duce a revolving fund for exports and reducesubstitution industries will eventually mature borrowing from commercial banks so thatand become export oriented. There are prob- more credit and foreign exchange are chan-lems in this type of approach in that some neled to the private sector. The liberalization ofindustries remain infants forever, and conse- the import of raw materials, spare parts, andquently remain inefficient. Others so estab- packaging for export-oriented units wouldlished continue to remain 100 percent depen- facilitate growth in the export sector. The in-dent on imported raw materials except labor, vestment code should contain incentives toand thus become a major drain on foreign attract foreign investors, whose capital is vital

53

for renewal and strengthening of production. 1964 to 1970 period. Deterioration in quality isGrowth of this type of industrial entrepreneur- evident in secondary and university education.ship in Malawi will require little government This will have adverse effects on long-terminterference. growth. Moreover, compensation to teachers

The Malawi government has for the past 10 has not been adequate. As a result, qualifiedyears faced a serious problem with transport experienced teachers have shifted to becomethrough its traditional ports to the export mar- general administrators or managers in privateket. As a result, the country's traditional ex- sector businesses.ports have become uncompetitive while im- Primary and secondary education is also notports have become costly, despite government free in Malawi. As the cost of providing ed-subsidies. Expansion of exports, therefore, ucation has risen over time, teaching materials,needs to be accompanied by further investment including pencils and notebooks, have becomein infrastructure. Investment in alternative unaffordable. As a result, an informal arrange-routes, including a consistent internal transport ment now exists whereby parents have movednetwork, is necessary to influence investment into cost sharing to provide some of these onin industry and the export sector. an ad hoc basis for their wards. Education mat-

For the long term, successful industriahza- erials have become particularly inadequate attion will depend on availability of abundant, lower levels of education. The government'scompetitive skilled labor and entrepreneurs policy to charge fees (and cost sharing on ancapable of using improved technologies, better ad hoc basis) is commendable for cost recovery,management, and reliable infrastructure. but it deprives the poorer sections of the com-

munity of basic education, making them un-Social services and basic needs able to prepare for advanced technology.

There is a need to improve the quality ofThe social services sector comprises health, secondary and post-primary education. Mass

education, and community services. There is a production of students only floods the jobneed to reverse the old scenario of low social market and results in widespread unemploy-indicators and to improve the standard of liv- ment and inflated employment. The publicing of people in the rural areas in the long sector has been the employer of last resort.term. Both health and education will require The provision of basic health services inadditional investment to address the current rural areas has been commendable. Health careimbalances. To enhance output and to ensure services provided by the Ministry of Healththat modern technology is available to the and the National Rural Development Pro-rural population, it is necessary that health gramme of the Ministry of Agriculture arefacilities, education (formal and informal), and targeted for the benefit of vulnerable groups.nutritional programs be made available to the Nevertheless, shortages of staff, drugs, aLndpoorest sections in the remote parts of the equipment either render some of these Uniitscountry. inoperative or cause delays in start up, thereby

In the past, several donors disassociated reducing their effectiveness. By and large thethemselves from funding some of these com- official health policy continues to focus onponents in rural areas on the grounds that raising the level of health of all Malawians bythey were consumption items with high recur- reducing the incidence of disease and loweringrent cost implications to government. As a death rates in the population. This, it is said,result, since 1981 government and donor re- will be done through the development of asources devoted to health and education have sound health delivery system capable of pro-been low. The levels of expenditure from gov- moting health and preventing and curing di-emnment resources have remained fairly con- sease. Primary health care has been adopted asstant in both health and education during the the basic philosophy in achieving this objective.period from 1981 to 1986. In line with the country's National Health

Although enrollment in primary schools has Plan, the government has in the past embarkedincreased significantly since independence, on a number of activities, including motherquality has decreased. This is seen in the read- and child health programs for children undering, arithmetic, and writing skills of pupils, five, construction of hospitals and other healthwhich compare unfavorably with skills in the facilities in the rural areas, promotion of the

54

concept of child spacing (to curb the rapidly ces will be required to complete other essentialgrowing population and to improve the health links and for the maintenance of those alreadyof mothers and children), and launching pro- established. The main reason for deteriorationgrams for children to encourage immunization of certain roads is lack of resources and inade-and other disease control programs. To allevi- quate maintenance. Because government re-ate the shortage of health staff, the government sources are also often limited, there is need forhas embarked on a project aimed at setting up the government to consider instituting usera medical school. A number of students are charges.currently doing their preclinical training abroad Because Malawi is landlocked, infrastructurebut are expected to complete their training in and long haulage routes to the seaports are aMalawi. major constraint on the competitiveness of its

In spite of past government efforts and pro- exports. Since 1985 the economy has relied ongrams, the activities set up for health care expensive routes through the ports of Dar esdelivery are by and large ad hoc because of Salaam in Tanzania and Durban in South Afri-inadequate resources. There is need in the long ca for its exports and imports. Successful estab-term for more resources to finance preventive lishment of alternative routes will increasehealth and disease control programs. This competitiveness and efficiency. At present, roadhealth program should be integrated with the transport competes favorably with other modesestablished frame of NRDP in the agriculture of transport in the movement of high-valuesector. products to and from export markets because

For political and equity reasons, the govem- it is faster and involves minimal handling andment has provided free medical services in transshipment. In view of the importance ofMalawi. The supply of drugs in government the transport sector to the economy, a fairlyhospitals has recently fallen short of demand. high share of public sector development expen-As a result, those who can afford to have diture is channeled toward improvements ofturned to private doctors. In order to encour- this nature. This trend should be continued inage cost recovery, this system could be formal- the future.ized by charging equal rates in goverrment Because of high vehicle operating costs andservice units. the long haulage transportation routes, vehicle

Recently the government has endorsed the life in Malawi is short and it is expensive toprogram for child spacing and family planning. replace vehicles engaged in transport. Assis-To enhance child spacing, attention should also tance from international institutions or bilateralbe given to sex education for girls and women. agencies should continue to be sought to re-

duce costs on exports and imports. This assis-Infrastructure sector tance can either be in the form of funds or

vehicles, induding spare parts. GovernmentBecause of its catalytic role in development policy favors encouragement of local Malawi-

for both social and economic sectors, induding ans in this trade provided they have the capi-modernization of the country, since indepen- tal, which is not easy to come by. The highdence the government has emphasized im- cost of long haulage trucks and fuel precludesprovement in access roads from the farm to Malawians from entering into the trade, whichthe market. Major rail links to export markets is currently dominated by foreign companies.overseas have been developed. Although somein,rovement has been made in communica- Energy sectortions, several parts of the country are poorlyserved. Because of the nature and scale of Malawi has long relied heavily on fossilinvestment required, the government will con- fuels as a source of energy for commercial,tinue to play a major role in the development industrial, and domestic use. It was not untilof infrastructure. 1979 (after the fuel crisis) that efforts were

Recently there has been massive investment intensified to utilize other traditional forms ofin the development of alternative transport energy, such as fuelwood and hydropower.routes through the ports of Dar es Salaam and Because of wide use of fuelwood, deforestationBeira and in the development of internal linka- has become widespread. In tobacco and teages to service these routes. Additional resour- production, fuelwood is used for curing and

55

barn construction; it is also used in making clothing, and fuel, are still controlled. Appro-bricks, smoking fish, brewing beer, and pro- priate incentives are provided to farmers, toducing charcoal. Under current trends of con- promote productivity. Since the oil crisis ofsumption, it has been estimated that available 1979, however, the terms of trade have turnedindigenous forests will be totally depleted in against the rural population. Prices for manu-10 to 15 years in the central and southern factured consumption goods, including vitalparts of the country. To redress part of the inputs of fertilizer, pesticides, and insecticides,current situation, the government, with assis- increased much faster than those for farmers'tance from the World Bank, has introduced produce. This has reduced purchasing power,programs to replant trees through wood ener- incomes, and the ability to afford food of ade-gy projects. There are also programs sponsored quate nutritional value. This situation worse-by brewery companies to supply free tree ned between 1983 and 1988, when the localseeds for planting. This effort will require fur- currency was devalued by about 87 percent.ther encouragement. The country's long-term Although devaluation assisted in increasingdevelopment objectives should continue to prices to producers, the costs of consumerinclude the commitment to use these fossil and goods rose much faster than expected. Thenonfossil sources of energy. Other programs to business community lost confidence in thepromote efficiency in consumption will need to local currency.be enhanced by the government and the pri- Public servants are permitted to participatevate sector. in agriculture. This policy helps to generate an

In 1988 Malawi's energy consumption was intermediate dass of entrepreneurs capable ofestimated at 2.9 mnillion tons of oil equivalent, investing in agriculture. It can be argued, how-of which 2.5 million tons came from firewood, ever, that this is a bad practice because it di-charcoal, and agricultural residues; the balance verts the attention of those employed in thewas imported petroleum products, electricity, public sector to business. Instead of concentra-coal, and ethanol. Per capita consumption of ting on their official jobs, they tend to travel toall forms of energy is 0.36 tons of oil equiva- their farms and to supplement their incomeslent, which is low compared with neighboring for investment in their farms. To resolve thiscountries. problem, government may wish to review em-

The Electricity Supply Commission of Mala- ployment in the public sector and encouragewi (ESCOM) is responsible for electricity pro- some of these civil servants to become full-duction and distribution. Currently ESCOM time farmers. A reduced public sector wouldsupplies electricity to some 35,200 consumers; also be more efficient and assist in reducingin 1987 only 2 percent of the population had the budgetary deficits.access to electricity. This number comparesunfavorably with those of neighboring coun- Control of credit expansiontries (10 percent in Zambia, 5 percent in Zim-babwe, 4 percent in Tanzania, and 6 percent in Credit expansion can often be controllecd byKenya). restraining government and parastatals from

Malawi has great potential for hydropower borrowing from the banking system and semi-in its Shire River. The potential also exists to financial institutions. The role of the bankingexpand the grid to cover most of the country. system in Malawi was transformed from thatIn addition to hydropower, limited quantities of a lender to private sector businesses (fromof coal are known to exist. Both hydropower 1974 to 1979) to that of a lender to the govern-and coal exploitation require large investments. ment and parastatals. By 1977 the govermment

was not only a net lender to the banks butPrices and incomes policy also owned the bulk of the resources. The

reverse occurred in the 1980s: the Central BankMalawi's prices and incomes policy empha- and commercial banks became more liquid

sizes equitable rural-urban income distribution than the government.2 As a result, the bulk ofthrough remunerative prices for producers in credit outstanding now is held by governmentthe rural sector and restrictions on wage and and statutory corporations. As evidenced insalary increases in urban areas. Prices for a 1988-89 and 1989-90, control of the governmentfew basic commodities, such as maize, sugar, deficit financed by borrowing from the banking

56

system and efficient utilization of credit are improving business, there is need to streamlinenecessary conditions for controlling inflation. priority areas for the private sector. At present,

The private sector is largely self-financing foreign exchange allocations for nonliberalizedand uses only limited bank credit as produc- categories are ad hoc and in certain cases go totive working capital. Although parastatal re- those engaged in the import of nonessentialstructuring has improved the situation, much goods. Scarce foreign exchange should be di-credit to the government and parastatals had rected only to import raw materials, industrialnot been used productively. Restricting credit spare parts, and equipment required in pro-to efficient parastatals and firms capable of duction for agriculture and industry. The im-repaying often guarantees efficiency and can port liberalization program currently in placedampen inflation. To promote growth, there- will require streamlining to benefit the goodsfore, financial sector reform is required. The producing sector, rather than the import ofrole of the government should be as a lender luxury goods. Current government initiativesto the banking system rather than the reverse. to streamline and simplify rules and regula-As a result of this monopolistic position, the tions for licensing for industrial investment,commercial banks have been rendered ineffi- including amendment of the Industrial Devel-cient. In 1988 customer complaints were com- opment Act to delete excdusive protection, ismon, and yet the commercial banks were an important step in this direction. But theseflooded with excess liquidity because of overall should also be accompanied by appropriatecredit ceilings that are only being relaxed in incentives, to be outlined in the Investmentline with reduced fiscal reliance on domestic Code. Incentives must be tangible, and thecredit. For the long term, financial sector policy economy must be open to competition. In thisshould be realigned to permit competition by way the economy can increase its supply ofallowing more banks to operate alongside the goods in the domestic market and help de-commercial banks. celerate inflation.

The government's pledge to increase theThe private sector availability of credit (by reducing its own bor-

rowing from commercial banks) is an impor-Reductions in government borrowing from tant step in promoting the private sector. It is

commercial banks and the central bank in line hoped that the government will refrain com-with fiscal control, import liberalization pro- pletely from borrowing from the commercialgrams, and allocation of more foreign exchange banks. The growth of the private sector couldto the private sector are instruments that be enhanced if the rate of interest for credit toshould help instill confidence in the private the private sector is reduced to boost demand.sector. The private sector at present is greatly If credit is available at reasonable terms, theencouraged by the improved economic situa- private sector and the business communitytion, particularly the government's policy to may be expected to take full advantage of theplace greater reliance on the private sector. import liberalization program and the commer-This increased confidence has manifested itself cial bank credit schemes and to diversify intoin increased capacity utilization in industiy- activities that expand export production andfrom around 20 percent at the beginning of substitute for imports.1988 to 60 percent by the beginning of 1989.

Recently the dialogue between government Trucking capacityand industry has continued to emphasize therole of the private sector in the economy and Landlocked Malawi continues to suffer set-to explain government policy and its commit- backs in its current account balance because ofment to improve the economic climate in the external payments for factor and nonfactorsector. Focus has been on the role of the pri- services such as transport, insurance, interest,vate sector as an engine for growth. dividends, and remittances. At present most of

Increased foreign exchange availability to the Malawi's transport system is made up of haul-private sector has been emphasized by the ers from South Africa, Zimbabwe, and Bots-government, particularly to those industries wana. Locally, only press transport appears toinvolved in production for the export sector. be competitive. Most transport is by foreignAlthough this is an important step toward haulers, who are paid in foreign currency. The

57

economy experienced a net increase in pay- to 1986 the annual inflation rate was around 4ments for transport in 1988 because of the lack percent. It increased abruptly to 15 percent inof Malawian trucking capacity and the in- 1986 and 37 percent at the beginning of 1987,creased volume of imports following the l- but decreased slightly to 26.7 percent by theberalized import scheme. In 1988 external pay- end of 1987, 31.5 percent at the end of 1988,ments for transport, insurance, and other re- and 26 percent at the beginning of 1989. Inlated items increased by 54.1 percent. The bulk recent discussions with private sector represen-of import traffic is carried by foreign haulers tatives, the government raised concerns aboutthrough long and expensive haulage routes, the high inflation rate. The root cause for thiswith c.i.f. margins on imports between 40 and is suspected to be not only monetary expan-45 percent, which are paid in foreign exchange. sion, but also hedging against further exchangeOther factor payments, such as dividends and rate movement. Inflation is commonly attribu-interest, have increased in line with the high ted to the steep devaluation of the Malawiinterest rates on the international markets. The Kwacha in 1986.long-term solution to this is for Malawi to In 1988 in particular, imports soared becausebuild adequate trucking capacity that can effi- individuals used the South African market as aciently compete with external haulers. source for importing luxury goods-includinlg

vehicles, clothing, and videos. This caused anThe debt service problem increase in domestic supplies of consumer

goods to the extent that domestic industriesIn 1980 and 1988 at the Paris and London experienced a deceleration in demand despite

dubs, Malawi successfully negotiated its debt the "Buy Malawian Products" campaign toburden with its creditors. The debt relief resul- promote demand for locally produced goods.ting from these negotiations has been quoted Devaluation improved competitiveness for Ma-as commendable and is said to have effectively lawi exports but significantly increased theimproved the overall balance of payments po- level of prices in the domestic market. Limitedsition for 1988. The rescheduled debts, how- foreign exchange reduced the availability ofever, exdude debts from multilateral institu- certain imported commodities. Scarcity andtions, which account for 75 percent of the hoarding in anticipation of higher prices werecountry's debt. Although Malawi has estab- extensive despite government's strong warn-lished a record for servicing its debts even in ings. Inflated prices following each devaluationtimes of great difficulty, its debt service ratio and increased transport costs added to rising(between 29 and 51 percent) is high and debt inflation. The Composite Consumer Price Indexservicing remains one of the most important (CPI) movement for all items in four urbanfactors weighing on the economy. These bur- centers in the country appears to have re-dens appear to be unsustainable in the medi- mained fairly constant at around 10 percent aum term at the present rate of borrowing and year from 1980 to 1986, but it jumped to 22reschedulings, for which interest is capitalized. percent in 1987 and 42 percent in 1988.

In its budget statement for 1989-90, the gov- Interest rates were increased. This affectederinent for the first time initiated a policy of credit to agriculture, industry, construction,limiting its development expenditure to conces- and other sectors. As the cost of credit in-sional loans and grants to avoid increases in creased, growth in industry and constructionthe national debt to unsustainable levels. This slowed down. To improve uptake of credit,is a commendable step for future loans; how- reduce the liquidity of commercial banks, andever, the buildup of the national debt is al- increase construction activity in the economy,ready high from previous borrowings, and this the Bank modified interest rates during thewill have an impact on the economy in the middle of 1988. This led to some improvementlong term. in economic activity in favor of agriculture and

industry. The lesson learned from this shortCrunching inflation experience is that interest is not the sole deter-

minant of demand for credit.Inflation in Malawi has been high since 1986; In July 1986, the government approved in-

it was 31.5 percent at the end of 1988 before creases in public salaries and wages, whichfalling to under 8 percent by end 1989. Prior were increased by 4 to 57 percent. This raised

58

the general wage level, because the parastatal curtailed demand for their products and ad-organizations and the private sector also in- versely influenced production.creased wages for their employees. Increases in In short, devaluation, high interest rates,salaries and wages in the private sector were government imposition of increased taxes ongreater than those in the public sector, because certain commodities, and increases in the gene-wages are traditionally higher in the private ral wage level spurred inflation to the currentsector than in government. The business com- levels. The government might wish to considermunity matched the wage increases by mark- instituting a more careful and selective ap-ing up prices of goods and products by the proach to levying taxes to reduce the unduepercentage increase in wages, plus a margin burden on low-income groups so that Malawi'sfor hedging inflation and transport costs. Fur- policy reforms within the Structural Adjust-ther public sector wage increases were an- ment Programs can be in the best long-termnounced in May 1989 to compensate partly for interest of the poor. The poorer sections of thethe freeze that has been in force since 1986. community have been hurt most during the

The budget session in March 1988 raised in- transitional period of correcting past mistakesdirect taxes on consumer goods including soft through the adjustment process.drinks, potable spirits, cigarettes, and beer.This had indirect spilldown effects on basic Notescommodities because fishermen and food pro-ducers in the rural areas are consumers of 1. Official statement in Daily Times, March 16,alcohol and beer. They absorbed the increases 1989.by raising prices for their commodities. This 2. Monthly Financial Statistical Abstract of Cen-

tral Bank.

59

5

Profile of the Ethiopian Economy

Befekadu Deguefe

Review of overall economic performance percent annually (see Table 1). On a sectoral basis,agriculture increased by 0.4 percent, while the in-

Gross domestic product (GDP) in Ethiopia over the dustrial sector declined by 1.9 percent, and the11 years between 1976 and 1987 was generally trade and transportation sector declined by 3.2 per-marked by decline, although there have been years cent.when it seemed to be on the way to recovery, onlyto revert to decline. Over the same period, per The 1978-79 to 1979-80 periodcapita income worsened sharply because of thecombined forces of stagnating or declining GDP These were the years during which a measure ofand a high popuation growth. To appreciate the domestic stability was achieved, the external ag-post-revolution economic performance, the period gression repulsed, and the government focused itsis divided into four parts. attention on economic development. The first cam-

paign to rehabilitate the economy was launchedThe 1974-75 to 1977-78 period during the 1978-79 fiscal year. GDP registered an

average annual increase of 5.6 percent Growth in

These were the initial years of the revolution, the agricultural sector increased by 3.6 percent be-characte. zed by domestic political, social, and .o -cause of the auspicious weather conditions. The

.oc instability and externalaggresso. ' - growth in the industrial sector was most impres-cnllyc .thnwrime and its phiosp were sive, the result of the rehabilitation of the manifac-

challenged on all fronts, which lead to concerted turing industries in Eritrea and the drive to fullcaend on ate fretaliator meas to consorte- capacity utilization of industries located elsewhere.ant concentratei retalnatory measures to consoat- The improvement in interal security gave a strongite. Cts occasionce a sudden boost to the resurgence of the transport and tradeity. Changed property rights occasioned a suden vsectors.social and economic break with age-old tradition,and the accompanying shock disrupted the pro-duction process. The mercurial domestic environ- The 1980-81 to 1982-83 periodment was reinforced by the Somali invasion andthe regime was forced to mobilize its resources to The year 1980-81 marks the onset of economicmeet these challenges to the territorial integrity of decline. GDP averaged a 3 percent growth rate. Thethe country. Economic performance under these agricultural sector suffered from the drought ofdifficult conditions was, not surprisingly, very 1981-82, posting an average growth rate of no morepoor, with an average rate of GDP growth of 0.4 than 2 percent. The industrial sector increased by

60

Table 1 GDP sectoral growth rates, 1961-62 to 1987-88(percent)

1961-62- 1967-68- 1974-75- 1978-79- 1980-81- 1983-84-1965-66 1973-74 1977-78 1979-80 198243 1984-85 198546 1987-88

GDP 4.4 3.4 0.4 5.6 3.1 -4.6 11.3 -3.8SectorAgriculture 1.9 1.8 0.4 3.6 2.0 -12.4 21.5 -11.4Industry 11.0 4.4 -1.9 12.1 3.9 1.0 4.0 2.8

Large scale 16.4 8.3 -0.3 18.9 5.8 0.6 5.3 3.6Small scale 7.8 5.5 -0.2 3.2 2.5 1.2 2.5 n.a.

Trade andtransport 9.4 7.0 -3.2 9.3 4.1 2.0 5.4 2.9

Other services 8.3 6.7 OA 5.6 3.1 3.8 3.5 4.5

n.a. Not available.Sources: Central Statistical Office, Statistical Abstracts, 1961-78 and National Bank of Ethiopia, Quarterly Bulletins,

1979-86.

about 4 percent. This growth came about from im- Sectoral performanceprovement in productivity because capacity utili-zation had been exhausted during the previous Agricultureyears.

Agriculture is the linchpin of the economy, con-The 1983-84 to 1985-86 period tributing 45 percent of the GDP, providing employ-

ment for 85 percent of the population, andThis period is characterized by an intense and accounting for 90 percent of exports. Its perfor-

devastating drought. Production in the agricultural mance over the decade since the revolution hassector dedined by more than 12 percent, resulting been not only very disappointing in terms of mag-in a GDP fall of 5 percent. During the 1985-86 fiscal nitude, but also marked by large degrees of insta-year, the economy recovered from the previous bility. As a result, the country could not feed itself,years' decline and GDP increased by 11.3 percent export volume was down, and industrial raw ma-and the agricultural sector by 21 percent. Neverthe- terial was short of the required quantity, thus weak-less, the magnitude of growth was insufficient to ening capacity utilization and increasing themake up for the losses sustained during the first pressure on the balance of payments.two years. The agricultural sector is characterized by three

types of ownership: private, cooperative, and state.The year 1986-87 Private farming is dominant, accounting for 93 per-

cent of the agricultural output produced from theGDP declined, mainly because of the drought. 6 million hectares it cultivates, equivalent to 94

The 11 percent decline in agriculture was attenu- percent of the total cultivated land. It is also theated by a 2.8 percent increase in other commodity most important source of exportables.production and a 3.8 percent increase in services. Cooperatives assume importance not in terms ofIn the meantime, the role played by the govern- their current contribution (2 percent of the total andment in the economic activity of the country in- cultivating 2.5 percent of the land) but as they re-creased phenomenally (see Table 2). flect what the rural sector may look like in the not

The overall picture during these 11 years is one too distant future. Currently, cooperatives are wellof general decline. The poor performance of the established in the resettlement areas, with a scat-agricultural sector was the main cause of shortages tered presence in the rest of the country. This stylein food and other necessities, the balance of pay- of operation is in accord with the government'sments deficit, inflation, the government deficit, un- policy of reconstructing and developing the societyemployment, and a precipitous fall in domestic on the socialist mode of production and so enjoyssavings. These aspects will be looked at in more government's active support and encouragement.detail in the following sections. The 10-year perspective plan has, among its other

61

Table 2 Government involvement in the economy, 1974-84(percentage of sectoral GDP)

Sector 1974 1979 1981 1984

Agriculture n.a. 1.5 2.5 2.0

Industry 10.2 53.1 55.9 58.3Large scale 2.1 87.6 89.3 89.2Small scale n.a. n.a. n.a. n.a.Construction n.a. 39.1 42.7 48.4Electricity and water 95.1 100.0 100.0 100.0

Distribution service 12.1 27.5 30.5 38.3Wholesale and retail trade n.a. n.a. n.a. n.a.Transport and communication 40.6 60.0 69.4 71.8

Other services 73.6 76.5 78.5 n.a.Administrative and defense 100.0 100.0 100.0 100.0Banking and insurance 51.0 100.0 100.0 100.0Dwelling 1.0 36.2 35.9 36.4Education 75.0 87.6 91.6 94.3Health 51.3 78.7 83.6 87.6

n.a. Not available.Source: National Committee for Central Planning.

objectives, the intention of increasing the number ating the farms on an economic basis, like businessof cooperatives to cover 50 percent of the rural enterprises.population. Although agriculture is the most crucial eco-

The state farms are the creation of the revolution; nomic activity in the country, and is often taken astheir nucleus was the nationalized commercial a barometer for the rest, its primordial responsibil-farms. They underwent phenomenal expansion ity is to supply an adequate quantity of food atafter 1979, with a maximum total cultivated area of reasonable prices to the society, a task at whicb itsome 220,000 hectares in 1982. Ever since, the sub- has failed abysmally.sector has been experimenting with acreage, per- In quantity, total food production declined ccn-

haps to discover its optimum level In 1983-84 tinuously between 1979-80 and 1981-82, recoveredacreage was decreased to 179,000 hectares and cur- in 1982-83 to a record level since the revolution, butrently stands at about 200,000equivalent to some declined to the lowest level in 1984-85. On a per3.5 percent of the cultivated land and contributing capita basis, food production declined from an av-5 percent to the total agricultural output. erage level of 231.5 kilogram (kg) in the period

Despite the large amount of resources piped into 1970-71 to 1973-74 to 195 kg in 1979-80, falling tothe sector in the form of direct monetary outlay, its worst level ever of 100 kg in 1984-85, to increaseskilled workers, and modem inputs such as trac- to 143.3 kg during 1985-86. In the following yeartors, fertilizers, insecticides, and improved seeds, it this trend failed, and per capita food productionhas failed to make a commensurate contribution. declined by 10 percent to 125 kg (see Table 3).Rather than contributing to the state treasury, it hasestablished itself as an unquenchable sponge, PRoBLEMs INHBING AcRICULTuRAL PRODUC-draining not only the state treasury but the finan- TION. The agricultural sector is faced with a numbercial institutions as well. of complex and interrelated problems, some of

The problems of the state farms are simple. They which are exogenous and others endogenous. Theare overmanned, bureaucratic, and often estab- most significant exogeneous problem afflicting thelished on unsuitable sites. These problems have sector is the recurrent drought. The northern partsresulted in inefficiency, entailing very high cost of of the country, comprising the Eritrea, Tigrai, andproduction. The solution lies in directing and oper- Wollo regions, are particularly prone to this prob-

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Table 3 Population and food production, 1979-80-1986-87

Output Percent changeCultivated Yield per

Population land (000 Total (000 Per capita hectare Cultivated Total Yield per(million) hectares) quintals) (kgs) (quintals) land output hectare

1979-80 38.5 6,056.9 74,955.8 194.7 12.4 n.a. n a. n.a.1980-81 39.4 5,676.9 65,554.7 166.4 11.5 -6.3 -12.5 -7.31981-82 40.4 5,652.5 63,905.8 158.2 11.1 -0.4 -4.0 -3.51982-83 41.4 6,087.9 77,981.1 188A 12.8 7.7 24.0 15.31983-84 42.5 5,646.3 63,563.2 149.6 11.2 -7.3 -18.5 -12.51984-85 43.4 5,613.0 47,309.5 109.0 8.4 -0.6 -25.6 -25.01985-86 44.9 5,934.8 64,331.1 143.3 10.8 5.7 36.0 28.61986-87 46.2 6,100.2 57,898.0 1253 9.5 2.8 -10.0 -12.0

Average

1979-80-1982-83 5,868.5 70,599.3 176.9 12.0 n.a. na. n.a.1983-84--1985-86 5,731.4 58,401.3 134.0 10.2 -2.3 -17.3 -15.2

n.a. Not available.Source: National Comnmittee for Central Planning Office.

lem. The recurrence of the drought in these regions feed himself and his family until the next crop. Ifand elsewhere in the country is explained by ad- the rains fail to come on time, or at all, the annualvanced and pronounced environmental degrada- crop season is missed and the peasant is exposedtion. About a century ago, 40 percent of the country to starvation and the attendant consequences.was estimated to have been covered by forest; cur- Second, drought does not necessarily mean anrently, no more than 4 percent is forest. The moun- overall shortage of food in the country. Studiestainous, most densely populated regions have have shown that during the 1972-73 and the 1983-suffered considerable soil erosion and are consid- 84 drought, the free market was well stocked withered unfit for cultivation, cereals. In the towns, where the starving flocked

The solution to the problem is of a long-tern and and died for lack of food, merchants were com-costly nature. It would involve massive reforesta- plaining of the low volume of cereal sales.tion, decreasing the population density throughwell-planned resettlement programs, development The implications of the foregoing are obvious.of land use policy, and proper soil management Prudent governnent policy could have avoidedschemes. the ugly consequences of the drought and catered

Although the drought is a natural phenomenon, to the long-term development of the agriculturalits devastatingly detrimental impact on the popu- sector. Purchase and stocking of food to supply notlation could be prevented, and at its worst attenu- only the politically vocal urban minority but alsoated. Man countries, develoed and developin g to meet the emergency need of the rural minorityared. Many witnthies' peveloped and developing, could have minimized the heavy human toll occa-are afflicted with this problem but avoid its devas- sioned by the drought. Second, this stop-gap mea-tating consequences. The main causes of the hun- sure would have been unnecessary if theger and starvation are sociopolitical, and reflect the govewument had its priorities correct and focusedbackwardness of the agricultural sector and the govedement h i prrigtieor antdufocuseon the development of irrigation; introduction ofinadequacy of government policy. new techniques such as improved agricultural

The agricultural sector is overwhelmingly de- practices, improved seeds, and fertilizer; and,pendent on rain, which, together with traditional above all, not tampered with the entrepreneurialagricultural techniques, limits output at subsis- quality of the private sector. If the government failstence levels. The greater of these two problems is to learn from its follies and failure, a repeat of thethat of technique, because the peasant is incapable tragedies of the recent past is not only possible butof producing much more than he would need to highly probable.

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Of an estimated 2.3 million hectares of irrigable grams before and since the revolution, EPID suc-land, less than 5 percent is currently exploited. This ceeded in making crucial inroads in acquaintingshifts heavy reliance to rain-fed agriculture, with the farmer with improved (often imported, andresults wholly dependent on capricious and unpre- some locally developed) seeds and fertilizer. UI-dictable weather. The technique of production is fortunately, the office was terminated and the staffvery backward. The Ethiopian peasant continues to disbanded after the revolution, and it has yet to beuse farming equipment that has been traced as far replaced with an equally effective organization.back as the sixth and seventh centuries. The peas- The effect of fertilizer and improved seed onant has not been a recipient of modern technology, productivity has been amply demonstrated. Tablenot so much because he does not want it, but sim- 4 summarizes information obtained from the fieldply because it is not there, and, where available, its on the difference that improved techniques andcost is prohibitive. fertilizer would have on yield per hectare.

Agricultural research, it is fair to say, is at its While the positive impact of improved tech-most incipient stage, despite a beginning dating niques and the use of fertilizer are widely acceptedback a generation. Not only are the research sta- by policymakers and the enthusiasm and absorp-tions inadequate given the enormous ecological tive capacity of the peasant is high, fertilizer use isenvirons, but their results and products are also not constrained both by availability and cost. Fertilizereasily accessible, if at all, to the peasant. reaches only 10 percent of the peasants, with an

Before the revolution, significant strides were average use of 10 kg per hectare. Not only is themade in acquainting the farmer with improved percentage of the population using fertilizer low,seeds and fertilizer through the Extension and Proj- the quality of use is also insufficient For example,ect Implementation Department (EPID), a semiau- in Kenya fertilizer usage per hectare is as high astonomous body under the Ministry of Agriculture 38 kg per hectare. Use of improved seed is evenfunded by the World Bank and the Swedish Inter- lower. The proportion of peasants with access tonational Development Agency (SIDA). The objec- improved seed is not more than 2 percent, with ative of EPID was to provide the peasant with the per hectare usage of 0.8 kg.minimum package of modern-day inputs and was The import of fertilizer, the sole source of supply,designed as an alternative to the "balanced" ap- has dedined over the years, both in quantity andproach, where the maximum possible effort and value. Its highest level of import reached in 1979-resources were concentrated in limited sub- 80, has yet to be duplicated despite the rhetoric ofregionsan experiment that was tried and aban- giving agriculture the highest priority. The result isdoned because of the prohibitive cost in a number an increasing dependence on food imports. On theof locations. assumption that using fertilizer would, on the av-

EPID enjoyed wide representation, was staffed erage, increase production from 50 percent (usingat the grassroots level by dedicated professionals traditional techniques) to more than 200 percent(mostly graduates of the agricultural schools), and (with improved techniques), a rational decisioinwon the confidence of the peasants and a deserv- would have called for the allocation of a largeredly fine reputation. Unlike other extension pro- amount of resources for its importation rather than

Table 4 Average yield per hectare under different technological mix(quintals)

With fertilizer With fertilizerWithout and traditional and improved

Crop fertilizer techniques techniques

Teff 7.1 113 20-22Wheat 10.5 15.9 32-40Barley 9.9 153 30-40Maize 14.5 212 50-60Millet 10.0 143 25-30

Source Ministry of Agriculture, Proposal to Subsidize the Cost of Fertilizer to the Peasant (Amharic, January 1982,unpublished).

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importing food grain to contain the impending cri- In the first instance, AMC lacks the financial andsis. infrastructural capacity to purchase, store, and dis-

Deplorable as the effort of the government is to tribute the marketable surpluses in the country. Asupply the peasant with essential inputs to bolster generous assessment of its documented purchasesthe growth of the sector, the farmer has lately of estimated domestic production amount to, onshunned the use of the very small amount of fertil- the average, not more than 8 percent of cereals andizer that is made available to him because, given 6 percent of pulses (see Table 5). The anomaly ofthe low state-determined price for his output, the giving such an organization a monopoly power ishigh cost of fertilizer prohibits its use. apparent from its recorded accomplishment. In the

During the first six years of the revolution, the best of years, its purchase share does not approachpeasant purchased a quintal of fertilizer at the sub- 10 percent of the cereals produced in the country.sidized price of Birr 51. On the average, the use of AMC's bureaucratic management and its mo-fertilizer increased his income by Birr 71 per hect- nopoly over the control of movement of agricul-are net of the cost of fertilizer. In 1981-82, the cost tural produce has exacerbated the shortage byof fertilizer increased by 125 percent, while the making it impossible for cereals to move from sur-government procurement price increased by about plus to deficit areas. Large stocks of cereals and10 percent. The net income per hectare plummeted other produce are known to rot on state farms andto Birr 14. For crops such as maize and millet, the in the stores of agricultural service cooperativesreturn was negative. The crop year 1985-86 gave because AMC is incapable of purchasing and mov-some respite to those peasants intending to use ing them where they are needed and does not allowfertilizer when the cost of fertilizer was rolled back private traders to do so. Such bureaucratic controlsto Birr 81.4/quintal, increasing the average net re- have led to corrupt practices within the AMC andturn per hectare to Birr 58. Given the risk involved have encouraged the development and growth ofin incurring additional cost, the "certainty equiva- parallel markets.lent" of the gains of using fertilizer does not seem AMCs policy on purchases from the peasantto be very encouraging. and the private trader is based on a compulsory

quota. Each Peasant Association (PA) is allocated aMARKETING OF AGRICULTURAL PRODUCE. The quota for delivery to the AMC at the state-ordained

shortage of domestically produced food is com- prices. The quota is divided proportionatelypounded by the government's unsavory marketing among the members of the PAs. If the produce of aand distribution policy. The Agricultural Market- peasant is insufficient to cover his quota obliga-ing Corporation (AMC) was established with the tions, he is required to deliver the full amount byobjective of stabilizing market prices by providing purchasing from the market. Since the peasant doesan alternative source of cereals to the consumers. not have the cash to acquire the cereals to fulfill hisLater its role was expanded to indude the supply quota obligation, his only alternative is to disposeof pulses and oilseeds to the Ethiopian Oilseeds of some (or all) of his assets. Failure would meanand Pulses Export Corporation and the distribu- that the peasant would not have access to the com-tion of fertlizer and improved seed to the peasants. munity shopthe sole source of supply of some ne-This latter assignment was later transferred to the cessities and certainly the cheapest source forMinistry of Agriculture. others compared with the free market. In addition,

To carry out its mandate, AMC was granted the he may be denied the use of the land allotted toexclusive right to purchase the produce of state him. Such a policy is not only inhuman, since thefarms, resettlement farms, agricultural coopera- producer is left with nothing to sustain himself, buttives, independent producers, and private traders is obviously counterproductive, both politicallyand to distribute these to public enterprises, con- and economically.sumers, and exporters. No cereals, pulses, and oil- Private traders have to agree to deliver 50 per-seeds could be transported from one region to cent of their purchase to the AMC at the officialanother by any person without its express and writ- price no matter how much they have paid to theten permission. Unfortunately, the AMC, which producer to be granted the license to transport theirrather than living up to expectations created an stock to a market of their choice. It is this govern-artificial shortage, is responsible for skyrocketing ment policy that must be held responsible not onlyfood prices, and it contributed in no small measure for the artificial shortages of food supply in theto the decline of agricultural production. country but also for their very high market prices.

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Table 5 Domestic purchases by AMC, 1981-82-1986-87(000 of tons)

Item 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87

Cereals 347.1 499.3 252.6 332.7 185.7 235.5Teff 84.3 70A 85.4 72.9 27.6 77.4Wheat 110.2 177A 60.9 11.7 64.7 1763Barley 25.9 49.0 47.2 9.8 11.0 48.0Sorghum 28.3 32.0 21.8 19.4 7.5 36.2Maize 98.3 170.5 37.3 118.9 74.9 195.2

OriginState farms 180.0 152.7 189.0 143.6 116.4 235.5Private and coops 167.1 346.6 63.2 179.1 69.8 381.6

Pulses and oilseeds 89.7 105.0 131.2 77.9 44.9 78.1Pulses 57.6 56.0 56.0 32.3 8.4 38.9Oilseeds 32.1 49.0 75.2 45.6 36.5 39.2

Others 0.2 0.5 - - 0.6 -

Total 89.9 105.5 131.2 77.9 45.5 73.1

Total domesticPurchase 437.0 604.8 383.8 410.6 231.2 617.1

Source: AMC.

Consider the following highly plausible scenario. lacked the essential leverage and control over theA private trader buys 100 quintals of wheat at Birr producing enterprises (agriculture and industry)45/quintal at a total cost of Birr 4,500. He sells 50 and the freely operating market to enforce its rul-quintals to AMC at the official price of Birr ing.31 /quintal and receives Birr 1,550, sustaining a loss With the nationalization of the production andof Birr 14/quintal. Let all cost per quintal (such as distribution enterprises in 1975 and the organiza-transport and handling) to Addis market equal Birr tion of the people on a residential basisurban30 per quintal, making up a total of Birr 1,500 on dwellers' associations in the cities and peasant as-the 50 quintals he retains. This brings his overall sociations in the rural areasthe government had thecost to Birr 4,450 = 4,500 -1,550 + 1,500, and the per essential infrastructure to enforce its fixed pricequintal cost to Birr 89, which with his profit margin policy. Accordingly, urban dwellers' shops, the ag-may be rounded to a free market price of Birr ricultural service cooperatives, and state retail out-100/quintal. lets were established as the nucleus of the official

The verdict on the AMC, however considered, is market. The free market is tolerated and operatesthat it has not lived up to expectations. Its opera- parallel to the official market, not so much for itstion has served neither the interest of the producer inherent benefits but because it is beyond thenor that of the consumer. It is time to dose its power of the state to obliterate it; it serves to satisfyoperation or have it compete with independent essential needs that cannot be provided by thetraders. state. In the long run, however, the government's

declared objective is to replace the market with theAGRICULTURAL PRICE PoLIcY. The present re- residential and state retail enterprises and thus

gime came to power by, among other things, capi- crowd out private traders.talizing on the inflationary situation in the country The state-determined prices for agriculturaland legislating the "roll back" of prices to an in- goods are not only below the cost of production,credible level. Nevertheless, the market failed to but they are also grossly inequitable. Table 6 pres-take notice of the new prices, not only because they ents some basic microeconomic data reflecting thewere unrealistic but also because the government operations of the agricultural, and particularly the

66

food-producing, sector. First to be noticed is the to reach the peasant with modem amenities suchdifference in prices offered to the two producing as health and educational services, electricity, deansubsectors. The peasants receive, on the average, 66 water, and modem production techniques. Thispercent of the price per quintal paid to the state must be taken as a ruse compared with the moreenterprises. Such discrimination is not only inequi- important intention of creating an environmenttable but it is also misdirected from the point of conducive to the communization of the peasantry.view of national interest. Peasant agriculture pro- The uncertainty of the future, the disruption tovides a livelihood for no less than 85 percent of the their traditional place of residence and work, andpopulation, and therefore any discrimination the adjustment to the new environment must allagainst it is a deliberate breach of the govermnent's contribute to the state of malaise rampant in thedeclared objective of improving the welfare of the rural areas.people. Because the subsector accounts for no less The overall result of these policies is ever-dedlin-than 95 percent of the domestically produced food, ing real incomes. Prices for output remained con-the very low price paid to the farmers harns the stant between 1981 and 1987, while the cost ofnational interest of food self-sufficiency; if this goal living increased (as measured by the Addis Ababais to be achieved, the peasants must be encouraged retail prices index, the only such measure in themore by monetary rather than moral incentives. country). The deterioration of agriculture is thusIndeed, the price offered to the peasant is not very tantamount to the deterioration of welfare in thedifferent from the cost of production. On the as- country.sumption that the peasant is twice as productive asthe state farms, the cost of production is found to Industrybe greater than the official price (see Table 6). It isno wonder that food production in the country is The industrial sector is at a low stage of devel-not increasing at all. To hold the weather responsi- opment, whatever standard of measurement isble is to extend one's imagination to its most brittle used. It accounts for no more than 10 percent ofpoint. GDP, of which 50 percent comes from small-scale

In addition to the low and discriminatory prices, and handicraft industries. Output is characterizedthe political fetter is no less inhibiting. Although by light consumer goods, and there is a heavy de-the legislation and directives, and indeed the offi- pendence on imported capital goods, spare parts,cial pronouncements, preach the voluntary nature and raw materials.of the govemment's desire to restructure peasant Prior to the revolution, this subsector was aagriculture on a communal basis, in practice pri- major source of growth. Between 1963 and 1967, itvate producers are forced to become members of posted an annual average rate of growth of moreproducers' cooperatives. To hasten its drive to com- than 16 percent, followed by 8 percent betweenmunization and augment its control over the peas- 1968 and 1974. Postrevolution performance is dom-ant, the government is intensifying its villagization inated by a low and unstable growth rate. Betweenprogram. Villagization is advocated as the means 1975 and 1978 the major constraint was one of

Table 6 Comparative cost of production, state prices, and free marketprices for selected agricultural products, 1985-86(Birr per quintal)

Free marketprice as percentage

Cost of production Official price Free of prices ofrarket

Crop State Peasant State Peasant wholesale State Peasanttype farms farms farms farms price farms farms

Wheat 73.0 36.0 47.0 31.0 106.0 226.0 342.0Maize 59.0 29.0 31.0 20.0 81.0 261.0 405.0Barley 82.0 41.0 40.0 27.0 109.0 253.0 374.0

Source Central Comnmittee for National Planning.

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security, leading to the closure of the manufactur- investment to employment ratio of Birr 94,686 pering industries in the Eritrea region, which then job created.accounted for about 40 percent of the output of the The performance of the medium- and large-scalesubsector. Another contributing factor was the manufacturing industries is summarized in Tableslowdown in the rest of the country because of 7, which shows the number of public enterprisespolitical instability, coupled with transport prob- losing money and the amount of loss.lems that affected the distribution of output and the The major problems facing public manufactur-acquisition of raw materials. The result during ing enterprises are more political than economic.these four years was an actual decline in the output The first major problem is the lack of distinct andof manufacturing industries. measurable objectives. Although the basic objec-

The years 1979 to 1981 were years of revival. The tive is often cited as the creation of surplus for newsecurity problem was attenuated, and all manufac- investment, the government's other objectives andturing industries were pushed to their limit. There- operational mechanisms are in clear conflict withafter, production started to retreat; the direct and this goal.indirect causes of this could be traced back to agri- The organizational structure of public enter-cultural performance and distorted government prises begins with producing enterprises and in-policy. The poor performance of agriculture re- cludes the corporations, the ministry, and thesulted in a failing volume of exports, and the con- Council of Ministers. Major decisions are made bysequent fall in foreign exchange earnings affected the council, such as those involving closure of losS-the availability of imported raw materials and making plants and the expansion or establishmentspare parts for existing firms and capital goods for of new enterprises, and the Ministry, such as ap-new investment. proval of budgets, appointment of managers, and

During the next eight years, a major effort was planning employment. The corporation and enter-made to establish new industries and expand exist- prise managers operate under the principle ofing plants. Some Birr 640 million was invested es- "Democratic Centralism" and so are expected totablishing 14 new enterprises, of which Birr 226 implement, in full and to the letter, decisions mademillion (or 36 percent) went to finance a cement by the council and the corporation. Such an orga-factory at Mugar with an annual capacity of nization and decisionmaking process leaves no300,000 tons. Another large-scale investment is the room for shop and enterprise initiative.Kombolcha Textile Factory, with a capacity of 20 In addition to the organizational constraints,m-illion square meters. All the new establishments management at the corporation and enterpriseare capital intensive, creating new employment op- level are stymied by the interference and activeportunities for only 6,756 people. This gives an involvement of the representative of the Party and

Table 7 Number of public enterprises losing money and extent of loss, 1979-80-1984-85

Proportion ofindustries under

Of which Ministry of Industryunder Ministry reporting loss

Public of Industry (percent)enterprises Valuereporting of loss Value

Year loss (m Birr) Number (m Birr) Number Value

1979-80 45 182.5 28 12.6 62.2 6.91980-81 54 107.3 34 21.3 63.0 19.81981-82 63 131.7 37 22.7 58.7 17.21982-83 67 108.7 35 22.8 52.2 21.01983-84 75 137.2 44 30.0 58.7 21.91984-85 79 167.3 58 78.2 73.4 46.7

Source National Committee for Central Planning.

68

various committees, including those of control, hand them over to the Ethiopian Domestic Distri-youth, women and labor union, with multifarious bution Corporation (EDDC). This arrangement isand often confficting roles and responsibilities. The responsible not only for the shoddiness of the prod-representative of the Party is the all powerful king, ucts but also removes the need to produce goodsthe labor union is interested in more pay and less that have market demand. What is important isrigorous working conditions, and the representa- again the quota target and not the requirements oftive of the Working Peoples Control Committee the market. These and other structural problemscontrols the assets of the firm to a point where it have created an industrial environment that inhib-sometimes is impossible to change a spare part in its profitability and growth.stock.

As if these problems were not enough, the man- SMALL-SCALE ENTERPRISES. The private sector isagers at the corporation, and particularly the enter- limited to small-scale industries because of admin-prise level, are prevented from pursuing a istrative constraints and lack of access to essentialwell-defined and measurable objective by multiple inputs, including skilled manpower and importedand often conflicting objectives. Public enterprises and domestically produced raw materials. The phi-are expected to create employment opportunities losophy behind the government's treatment of theand are often directed to include on their payroll private sector is simple and straightforward. Be-people the enterprises do not need. As a result, the cause the state has defined for itself the objective ofenterprises are overmanned. They are required to creating a socialist society, the private sectorproduce at their full capacity, but they are often should, in the final setting, be replaced by commu-constrained by the supply of raw materials and nal ownership and production. It would, therefore,spare parts. be in the long-term interest of the state to confine

Public enterprises are expected to generate prof- the private sector to minor activities, while grad-its to finance their operation, accumulate reserves ually turning private operators into cooperatives.for their future expansion, and contribute to the Accordingly, the machinery of the state isnational treasury. But these objectives are thwarted trained against private enterprises. Legally they areby additional constraints such as the price policy, allowed to deal in those activities which the state isthe quota production requirement, and the separa- incapable of taking over. Their capital is to be notion of marketing from production. more than Birr 200,000 for retail trade, Birr 300,000

Prices are fixed by the government, and once for wholesale trade, and Birr 500,000 for industries.established are very difficult to change. What All owners of enterprises must be operators withinmakes such a policy difficult to reconcile with the the enterprises, thus ruling out portfolio invest-profit motive is that the government is incapable of ment A person is limited to only one license andcontrolling the cost of production. Imported raw branching out is forbidden without the express ap-materials constitute, on the average, 50 percent of proval of the ministries.the cost of production and producing enterprises Administrative hurdles further constrain pri-obtain them at cost. The adjustment to price often vate sector initiative. To get an industrial license,granted to raw material producing domestic enter- applicants are required to submit a complete cost-prises are not carried through to the using enter- benefit analysis of their project to the Handicraftprises. For example, when the price of cotton was and Small-Scale Industries Development Agencyrevised, the government failed to adjust the prices (HASIDA), an organ of the state establshed pur-for the textile manufactunng enterprises. portedly to encourage and support private sector

The producing enterprises pursue the cost plus initiatives but whose actual record is otherwise.pricing for their accounting purposes, which, need- The details of the information required (such asless to say, does not encourage efficiency. Enter- demand, revenue, cost, and source of raw materi-prises are assigned a specific quota to be produced, als) for up to the first 10 years of the life of thein principle, at the least possible cost as provided project have proven an excellent and most effectivefor in the budget But the more important of these deterrent. Those who have the patience and thetwo conditions is the quantity rather than the drive to complete the analysis are frustrated withbudgetary constraint. As a result, cost overrun is a the length of time (often not less than one year)common phenomenon. HASIDA needs to digest it and issue the permit.

Producing enterprises are not responsible for the This hurdle is followed by other problems, includ-marketing of their products but are required to ing allocation of a site by the Ministry of Urban

69

Development and Housing and the municipality Macroeconomic performanceand obtaining bank credit for its establishment.

Savings and investmentOnce established, private sector concerns are

subjected to further constraints. The government'spolicy of absorbing all graduates from commercial A major impediment to the growth of theand technical high schools limits their capacity to Ethiopian economy is the low level of investment.obtain skilled workers. (The same allocative proce- During the prerevolution era, this was explaineddure also applies to university graduates, but the by the low level of income, which in turn limiitedneed of the private sector for this level of training the volume of savings, and the absence of financialis not significant). The government's discrimina- institutions to transfer what small savings theretion against the private sector is further evidenced were from the surplus to the deficit units of theby the allocation of bank credit and foreign ex- economy.change to the private sector. Since the private sector The ostrevolution environment has growncomes last on the lst for fundng, the axe linutingcomes~~~~~~~~ las ontefsvo tdng h x ntn more depressive. In addition to dwindling in-bank credit and foreign exchange allocation for the me depressive.amn aon to divndl i-

imoratonofra atril ftnalsvery comes, savings became more paltry for several r ea-verely on the sector. sons. Savings declined at a rate faster than income

because government policy constrained potentialThe policy of the government has had three im- savers and destroyed the motivations and aspira-

portant impacts on the private sector. First, it is ions of those members of society who could havepushed toward conspicuous consumption, and ff saved. If there is any reason to save, it must be for

peopushedecid tow cnvspicuo s cspo an retirement. Investment outlets for the private sec-peopl decide toxinst it isain ent suhe as tor have been rudely emaciated by the policies ofaris, returants, itis. retird, and oter- the state. Neither is the government in a position to

priskinghenturena es. Secod thed mor the save. In an environment of this nature, it is noprisn eternus are uhdith wonder that savings are falling and investment isunderground economy, with a flourishing business finaed by extenal resources.estimated to be as much as 15 to 25 percent of GDP. financed by extemal resources.Third, the licensed enterprises are forced to operateat low levels of capacity, as shown in Table 8. DOMESnC SAVINGS. Prior to the revolution, do-

mestic savings was on an upward trend, averagingThe combination of these constraints has re- 12 percent of GDP (at current market prices) be-

duced the rate of growth of small-scale and handi- tween 1967 to 1974. This volume of saving may notcraft industries from an average of 6 percent during have been high enough to finance an investmentthe 1967-74 period to practically nil after the revo- level sufficient to transform the economy from lowlution. income to middle income in a short span of time. It

Table 8 Comparative capacity utilization between public and privateenterprises, 1984-85

(percentage of capacity)

Public PrivateActivity enterprises enterprises

Food processing 100 44Alcoholic drinks and beverages 87 11Textiles 70-80 11Leather 50-100 50Woodwork 80 40Printing 90-95 19Chemnical and related 70-80 50Nonferrous metals 70-95 5Metals 80-100 15

Source: National Committee for Central Planning.

70

nevertheless was respectable compared with some The nationalization of rural land and the subse-of the low-income countries of developing Africa. quent distribution to the peasant, along with the

Nevertheless, postrevolution savings reversed drive toward cooperatives, has also contributed tothis upward trend and declined continuously. In the decline in savings in the rural areas, because the1983-84, savings amounted to 3 percent of GDP, measure effectively destroyed the ambition ofdecining to 1.8 percent the following year. During those capable of producing surplus. This policy has1985-86, savings recovered to 2.7 percent of GDP. not only switched productive resources from thoseThis volume of savings is low by any who are capable of using it efficiently (and thusstandardwhether in comparison with past perfor- saving) to those who are incapable of doing so, itmance or with other countries. For example, be- has also forced potential savers not to produce astween 1979 and 1984, savings in Cameroon was 25 much as they could have by limiting the size ofpercent of GDP and 15 percent in Kenya; even their land (not more than 10 hectares) and impos-faltering economies such as those of Tanzania and ing other conditions. Instead people are forced intoZambia managed a savings ratio of 9 percent and subsistence-level farming by being forced to join8 percent respectively. cooperatives.

The declining share of savings in GDP is attrib- These problems are, of course, compounded byuted in a large measure to the increase in govern- a p rowing at a rser thande byment consumption, with marginal contributions a population growing at a rate faster than the in-from private consumption (see Table 9). crease in income. An estimated 3 percent annualrate of population increase and a rate of income

Among the major factors contributing to the in- growth that is barely half that rate not only de-crease in central government consumption, the fol- creases savings but threatens the very survival oflowing can be cited: increasing defense the population.expenditures, the financing of an ever-expandingbureaucracy, increasing debt servicing require-ments, and transfer payments largely in the form GROSS FDIED CAPrIAL FoRMAION. Investmentof pension payments and subsidies. has managed to capture about 11 percent of GDP.

The nationalization of commercial firms, manu- This more or less approximates the 11.9 percentfacturing industries, and other profit-generating average attained during the 1967-74 period. Thisactivities also contributed to the decline of savings. clearly indicates that the share of investment hasFirst, efficiency and productivity have been so im- failed to increase during the latter period relativepaired that the government is forced to make up for to the prerevolutionary period. While the stagna-the losses. The nationalized firms made a profit and tion in investment may be taken as consolation incontributed to national savings when they were the face of dedining savings, the increase in pro-under private ownership. Second, what profit en- ductive assets has not been commensurate with theterprises manage to generate is transferred to the level of investment. Investment has largely gone tocentral treasury and is not matched by an equal replace old machines and the increasing cost ofamount of savings on the part of the government, capital has eroded the purchasing capacity of theleading to the diminution of savings. residual.

Table 9 Consumption expenditure as percentage of GDP, 1967-87

TotalPrivate Government

Year consumption consumption Consumption Saving

1967-1974 77.8 10.5 88.3 11.71975-1978 79.5 14.8 94.3 5.71979-1983 80.6 15.6 96.2 3.81984-1985 81.7 19.5 101.2 -1.21985-1986 79.9 17A 97.3 2.71986-1987 77.1 19.9 97.0 3.0

Source Computed from various issues of Quarterly Bulletin (National Bank of Ethiopia).

71

FINANCING INvEsrMEN. The level of investment and 1980. In other words, not only is the country'sis not only low (given the needs of the society), but saving and investment low, what it gets out of eachits financing also poses a serious cause for concern. unit of investment is getting smaller and smaller.During the prerevolutionary decade domestic sav-ings financed no less than 98 percent of the invest- Balance of paymentsment cost. Postrevolution financing has dependedon external financing for up to 100 percent of these In tandem with the domestic economic decline,costs (see Table 10). the balance of payments situation has advanced

What makes such financing unusual is not that from a very comfortable position to one that isforeign aid and borrowing are high, but that this is indeed precarious (see Table 11). When the newaccompanied by dedining savings in the country. regime came to power, the balance of paymentsThis makes the country an excellent candidate for was at its healthiest ever, with a net reserve positiondebt crisis in the immediate future. of Birr 700 million and an external debt of about

As if the low level of investment and its total Birr 800 million. The reserves declined to as low asdependence on external financing in the face of an Birr 5 million (during the second quarter of 1985),ever-declining savings rate is not of sufficient con- while the official external debt jumped to Birr 4cern, the situation is exacerbated by inefficiency. billion. Not to be indebted or to have a comfortableThe incremental capital output ratio has increased reserve position may be luxury for developingfrom 3.1 in the 1961-68 period to 4.0 during 1967- countries, but what is unfortunate for Ethiopia is73, and it more than doubled to 9.3 between 1975

Table 10 Financing of investment, 1967-86

Financing of investment(percent)

Investment as Savings as Domestic ExternalYear percentage of GDP percentage of GDP savings finance

1967-74 11.9 11.7 98.3 1.71975-78 9.0 5.7 63.3 36.71979-83 10.3 3.7 35.9 64.11984-85 11.8 -1.2 0.0 100.01986 9.4 2.7 28.7 71.3

Source National Conmittee for Central Planning.

Table 11 Balance of payment indicators, 1974-86

Percentage of GDP Import Changefinanced in Importing

Current by foreign capacityaccount export assets of reserve

Year deficit Export Import (percent) (m Birr) (months)

1974 3.9 8.6 13.3 69.1 -13.8 11.81975 0.3 9.0 11.5 78.2 -80.2 13.21979 4.7 9.3 15.2 61.0 95.0 4.41983 6.8 8.1 17.7 45.7 141.9 1.51984 8.9 9.3 21.2 43.3 87.6 0.71985 8.8 7.5 20.4 34.9 -95.8 1.41986 7.2 8.8 20.1 42.3 -352.4 3.3

Source: Computed from various issues of Quarterly Bulletin (National Bank of Ethiopia).

72

that the country does not have much to show for larger deficits, which were initially financed byits profligacy. drawing down reserves and later by increasing ex-

ternal borrowing.SOME CAUSES FOR THE DETERIORATION OF THE

CURRENT ACCOUNT. A number of variables, some REVENUE. The shift toward centralism and theexogenous and others endogenous, have contrib- consequential demand on government resourcesuted to the ever-widening current account deficit. has increased government expenditure to an un-Exogenous variables generated externally, such as precedented level. Current expenditure, whichthe oil price shocks, a slowdown in the economic amounted to 11 percent of GDP prior to the revo-activity of the OECD countries, deteriorating terms lution, increased to 22 percent by 1986, while capi-of trade, and the drought, have all received the tal expenditure jumped from less than 3 percent toattention they rightly deserve. 10 percent. Thus, the central government ac-

A small country like Ethiopia is unable to influ- counted for a third of GDP. To finance ever-increas-ence any of these situations to its advantage and ing expenditures, the government introduced newshould therefore adjust to them through the imple- taxes, increased existing rates, and required publicmentation of policies that bring about the necessary enterprises to transfer what profit they generated.structural transformation. Instead, the government Today the highest marginal tax rate goes up to 93has pursued policies that have brought about an percent, for an annual income approximatingever-worsening internal and external balance. Con- US$16,000 and above.sider, for example, the volume of exports. In a sit- The intensive and extensive resource mobiliza-uation where the external environment is tion effort increased revenue almost fourfold fromunfavorable, the correct policy would have re- Birr 619 million in 1974 to Birr 2.7 billion in 1987, aquired an increase in the volume of exports to pro- growth of 12 percent yearly. Consequently, revenuetect the domestic economy from recession and to increased from its average level of 10 percent ofmaintain a sustainable balance of payments posi- GDP over the 1967-74 period to 23 percent a decadetion. A review of experience over the past decade later (see Table 13).indicates that the volume of export has actually An important point to note with respect to thebeen, on average, less than 60 percent of the pre- source of income is the declining share of tax reve-revolutionary period. nue in the totalby about 10 percentage points be-

This intolerable situation was intensified by tween the 1967-74 and 1975-86 periods. At thesurging imports, which averaged an annual same time, nontax revenue is responsible for up togrowth rate of 15 percent (in value terms) between a quarter of ordinary revenue, most of which is1975 and 1986. During the same period, the volume made up of the transfer of public enterprise profits.of exports decreased by 2.5 percent (see Table 12), Despite the increased rates, indirect taxes have de-while that of imports averaged an annual growth cined from their prerevolutionary level because ofrate of 3 percent. The combined effect of these the growth in parallel market tax evasion. Consid-shocks pushed the current account into larger and ering the constrained nature of the private sector

Table 12 Volume of major exports, 1970-86(000 metric tons)

1975-86 asMajor export 1970-73, 1975-86, percentage ofitems annual average 1974 annual average 1970-73

Coffee 78.2 61.7 74.7 95.5Hides & skins 12.5 11.8 9.6 76.8Cereals 91.8 143.9 43.6 475Pulses & oilseeds 82.3 103.9 22.3 27.1Fruits & vegetables 20.9 23.5 13.1 62.7Meat 10.9 18.4 2.6 23.9Cotton 2.7 6.4 4.0 148.2

Source National Comnmittee for Central Planning.

73

Table 13 Components of ordinary revenue, 196746

Contribution (percent)

Revenue 1967-74 1975-78 1979-83 1984-86 1975-86

Tax revenue 87.0 81.4 78.8 75.2 77.6Direct taxes 24.8 21.3 26.5 29.9 27.1Indirect taxes 29.3 20.4 21.5 22.4 21.8Taxes on foreign trade 32.9 39.7 30.5 22.9 28.7

Nontax revenue 13.0 18.6 21.2 24.8 22.4

Total 100.0 100.0 100.0 100.0 100.0

Source. Computed from data obtained from the Ministry of Finance.

and the growth of the parallel economy, the in- the low average of Birr 125 million during the 1967-crease in direct tax must reflect the higher contri- 74 period, capital expenditure increased at an aLn-bution made by public enterprises. nual average of Birr 1 million between 1975 and

1986. Impressive as this achievement is, it neverthe-EXPENDrrURE. Expenditure, both ordinary and less is a much lower proportion of the planned

capital, has become an increasing phenomenon. investment. Between 1979 and 1986, actual invest-Ordinary expenditure has averaged a rate of ment averaged 63 percent of the planned invest-growth of 12 percent annually since the revolution. ment. The discrepancy results from the giapGeneral serviceswhich incorporates defense, secu- between ambition and the availability of financialrity, and the bureaucracyabsorbed an average of 11 resources, particularly the foreign exchange conm-percent of GDP and posted an annual rate of ponent, as well as the limited absorptive capacitygrowth of more than 14 percent (see Table 14). of the central government and its parastatals as

It is to be observed that the income of the gov- reflected by the shortage of skilled workers andermnent is growing at approximately the same rate managerial and organizational constraints.as its ordinary expenditure. This leaves no room for The rough balancing of ordinary revenue andcentral government savings to finance its invest- expenditure in the face of the growing investmentment, which averaged an increase of 18 percent component has increased the overall deficit from 3annually between 1975 and 1986. Beginning from percent of GDP during the 1967-74 period to 9

Table 14 Central government revenue and expenditure as percentage of GDP, 1967-86

Revenue and expenditure 1967-74 1975-78 1979-83 1984-86 1975-86

Ordinary revenue 10.2 14.3 19.1 22.3 19.2Tax 8.9 11.6 15.0 16.8 14.9Nontax 1.3 2.7 4.1 5.5 4.3

Ordinary expenditure 11.0 16.0 18A 21.6 19.0General services 4.9 9.2 11.0 12.0 11.0Others 6.1 6.8 7.4 9.6 8.0

Surplus -0.8 -1.7 0.7 0.7 0.2

Capital expenditure, of which 2.7 4.6 6A 9.7 7.3Economic development 2.0 3.9 5.3 8.4 6.2

Overall deficit 3.5 6.3 5.7 9.0 7.1

Source. Computed from informration obtained from Central Statistics and the Ministry of Finance.

74

percent thereafter. This has, in turn, required in- it increased by 11 percent, 28 percent, and 19 per-creasing use of external and domestic borrowing. cent for the three years beginning in 1972 for the

same reason. Over the 1967 to 1974 period, moneyMonetary policy and money supply supply (M1) averaged a 9 percent annual growth

rate while the volume of money (M2) grew at a rate

Prerevolutionary monetary policy was charac- of 12 percent annually.terized by extreme conservatism; price stability Post-1974 monetary policy changed drasticallywas its prime objective. The amount of money re- from its old conservatism to a revolutionary ap-leased was tied to the net foreign asset position of proach. The National Bank was released from thethe country. The law establishing the National requirement to back its issue by foreign exchangeBank of Ethiopia in 1963 required the bank to back and gold and could create as much money as itthe notes and coins it issued by a minimum of 20 wanted to. This fit, as was intended, thepercent in foreign assets or gold. This itself was government's policy of not tolerating financial con-quite a concession to the needs of the economy and straints on the implementation of its plan. The com-an improvement over the previous requirement, bination of the newly acquired power of the centralwhich was as high as 100 percent in 1945, and bank to issue money without constraint and thelowered to 25 percent in 1959. government's desire to fulfill its ambitious plans

The goal of price stability was also reflected in boosted the money supply. For example, the moneythe amount of money commercial banks and other supply (M1) increased by an annual average of 22financial institutions could create. In addition to a percent between 1975 and 1978. During the past 11reserve requirement (5 percent on savings and time years money supply (Ml) averaged an annual in-deposits and 10 percent on demand deposit), liq- crease of 15 percent, while the volume of moneyuidity ratio (30 percent of demand deposit), and grew by 13 percent Although this was much largervariable discount rate, the tight monetary policy of than the available supply of goods, the impact ofthe central bank was bolstered by strong moral such a large increase on prices was ruled out, be-suasion, where a suggestion from the governor was cause prices were frozen and could be changedoften followed as an order. only at the will of the state (see Table 15).

The major determinant of the amount of moneyfloating in the economy was therefore the balanceof payments, because the central bank had no way DETEr OF oN SUPPLY. The twoof sterilizing the money supply from changes in the major determninants of moneyforeign assets andreserve position of the country. For example, domestic creditchanged roles during the pre- andmoney supply (M1) decreased in 1967 and 1971 postrevolutionary periods. As pointed out above,whenthey bapplan ofl) pecreaymen in deficit, an foreign assets were the major determinants of

when thebalnc ofpamenswsndfitnd money supply during the prerevolutionary era.Table 15 Money supply and price The postrevolutionary foreign asset position wasdevelopments, 1967-86 one of continuous decine. Between 1975 and 1978,(percentage change over preceding year) foreign assets declined at an annual rate of 15 per-

cent, by 23 percent over the 1979-84 period, and

Money supply increased during the next two years (see Table 16).Money_supply The high rate of monetary expansion between 1975

Year Ml AP Pnice movements and 1984 is therefore attributable to expansion of.___________________________

domestic credit.1967-74 9.0 11.9 3.11975 26.3 7.9 6.5 Loans extended to public enterprises take up the1976 31.2 23.5 28.6 lion's share of the noncentral government credit.1979 13.0 9.8 16.1 This is in line with the government policy of dis-1983 15.7 15.4 1.0 criminating against the private sector. What is un-

1985 13.1 13.6 19.1 fortunate for the financial institutions, and1986 18.2 15.6 15.8 particularly the Commercial Bank of Ethiopia

(which lends from the deposits made by its clients),a. Addis Ababa retail price index. is the large proportion of outstanding loans. BySource Central Statistics Authority and National Bank 1976,50 percent of the loans were nonperforming.

of Ethiopia. Of the credit given to state farms, the arrears

75

Table 16 Determinants of money supply, 1967-86(percent change over previous year)

Detenninant 1967-74a 1975-84a 1985-86b

Domestic credit 115 19.3 8AGoverrnment 11.8 57.3 5.6Noncentral government 12.3 13A 10.0

Foreign assets 22.1 -19.1 150.0

a. End of year.b. As end of June.Source- National Bank of Ethiopia.

Table 17 Percentage of overdue loans

CommercialBankof AID Housing and

Year Total Ethiopia Bank Savings Bank

1973 42 39.3 51.5 9.91974 37 25.5 51.2 19.31975 37 19.3 59.0 14.21976 46 30.0 64.1 14.4

Source- National Bank of Ethiopia.

amounted to 53 percent of their disbursement (see (by about 18 percent both in 1985 and 1986), givenTable 17). the rate of growth of the economy and the rate of

The major cause of the repayment problem price increase.springs from the fact that the financial institutions The new monetary policy, inaugurated in 1986,cannot review the viability of the projects or pro- is believed to be counterproductive. In an economygrams into which they are pouring money. Neither that is swamped by money, one would expect thedo they have the means to force repayment. Public government to pursue a tight monetary policy andenterprises find themselves in a bind because they accordingly increase the interest rate and the re-do not operate in ways that would make profit and serve requirement of the financial system. Instead,repayment possible. The government does not not only has the interest rate been lowered, but sohave the financial capacity to subsidize their oper- has the reserve requirement, which decreased theations and lacks the foresight for their proper man- required ratio on demand deposits from 10 percentagement and the commitment to dedare bankrupt to 5 percent. This policy was implemented at a timethose firms that cannot pay their way. The only when the liquidity of the banking system was veryaltemative is to plod along, with an ever-increasing high and the economy required less rather thanlevel of indebtedness, with repayment most un- more money. The government seems to believe thatlikely in the existing environment. the structural economic problem occasioned by

distorted policy can be solved by more money.

CREDrr AND INTnREST RATE POLICY. The interest Postrevolutionary credit policy is designed andon credit and deposits was changed in 1986 after 22 operated in favor of the socialized sector (coopera-years, along with the credit policy. tives and public enterprises) and against the pri-

Maintenance of equilibrium in the monetary vate sector. Of the total outstanding loans extendedsector would have required, as the rough indicator by the Commercial Bank of Ethiopia, the Agricul-given in Table 18 shows, a smaller money supply tural and Industrial Development (AID) Bank, and

76

Table 18 Some indicators of monetary policy stance, 1975-86

Money as Income velocitypercentage of GDP of money

Year Ml AO Ml M2 Supply (percent)a

1975 15.0 20.7 6.7 4.8 n.a.1976 18.2 23.7 5.5 4.2 3.01979 16.7 23.3 6.0 4.3 2.31983 21.8 30.4 4.6 3.3 9.61984 23.8 33.8 4.2 3.0 13.11985 27.2 38.9 3.7 2.6 18.21986 28.1 39.3 3.6 2.5 18.5

n.a. Not available.

a. Obtained by deducting from the volume of money the amount that it should have been if it had increased at anamount equal to the rate of growth of GDP and inflation.

the Housing and Savings Bank as of June 30,1986, tion, an occurrence that one fails to observe in the36 percent were owed by the central government, Ethiopian scene.52 percent by public enterprises and cooperatives,and the remaining 12 percent by the private sector. Employment

Not only is the socialized sector favored in the Of the total 1987 population of 46.2 millionvolume of credit, but also in its cost As Table 19 (composed of 49 percent male and 51 percent fe-indicated, the private sector is required to pay male, of which 47 percent are below the age of 15higher rates relative to the sociahized sector for the and 6 percent above the age of 60), the economi-same activity. cally active population is estimated at 30.3 million,

of which 98.2 percent are gainfully employed. ThisThe typical aftermath of the increasing resource suggests an open unemployment level of about 2

gap filled by expansionary monetary policy is ob- percent of the economically active population. Thisserved in the rate of inflation. The curious phenom- rate of unemployment, which is below the cur-enon observed in the Ethiopian monetary scene is rently accepted nonaccelerating inflation rate ofmoney hoarding. In an inflationary economy, one unemployment (NAIRU) of about 5 percent in thewould expect to see excess money supply trans- developed countries, is not entirely implausible,lated into excess demand and accelerating infla- considering population distribution in the country.

Table 19 The old and the new interest rate(percent)

PublicActivity Cooperative enterprises Private Old

Aquaculture 5.0 6.0 7.0 9.0-9.5Export 6.0 6.0 6.0 7.5-8.0Dwelling (construction) 4.5 4.5 7.0 9.0Dwelling (purchase) 6.0 6.0 8.0 10.0Import/ferdlizer 5.0 6.0 7.0 12.0Other imports 5.0 6.0 9.5 9.5Industry, mining, electricity

and water 6.0 8.0 9.0 9.5

Source National Bank of Ethiopia.

77

Of the economically active population given long catalogue: the unemployment of skilled work-above, 28.2 million, or 93 percent, live in the rural ers in a situation where there is shortage of skilledareas and are considered to be "employed." Ac- labor.cordingly, there is no "open unemployment" in therural areas of the country, although the level of Social services"disguised unemployment" is estimated to behigh.

Thegh ubneooialacieppltonu- The country has made important strides in so-

bered about 2.1 eillion, of which 1.6 million, or75 cial services, including education and health. TIhepercent, are employed and 0.5 million are unem- most important achievement is in the literacyperyent, he uemployent l.e is, t re less drive, which started with the establishment of theployed. The unemployment level is, therefore, less Ntoa ieayCmag oriaigCmthan 2 percent nationally but a high 25 percent in National Literacy Campaign Coordinating Coin-the urban areas, an economically wasteful, socially mittee in 1979 and the launching of its program indepressive, , an politcaly dneoslefl June of the same year. Training is conducted in

depressive, and pohtically dangerouslevel.some 15 local languages and lasts for about sixThe unemployment level is bound to grow more months. This has raised the literacy rate from under

serious in the coming years if present policies are 10 percent in the prerevolutionary period to overcontinued. The capacity of the public sector to cre- 60 percent thereafter. In recognition, the countryate employment has been stretched to its liit. was selected for numerous awards, includingAgriculture is not producing the essential surplus UNESCO's literacy prize and the Internationalfor reinvestment in nonagricultural activities. Reading Association Literacy Award. A measure ofWhat investment is made in the manufacturing success has also been achieved in formal education.industries is unable to create significant employ- Preschool facilities such as kindergarten and childment, not only because it is small but also because care centers have grown to number about 800, andof its capital-intensive nature. Private sector em- they are staffed with 5,000 teachers, most of whomployment generating capacity is curtailed by gov- are graduates of preschool teacher training centers.emmnent poicy. Elementary and secondary education is expand-

The problem is acute and is likely to grow worse ing at a rapid rate compared with the pre-with each year's school leavers. While the govern- revolutionary period. Elementary enrollmentment has been able to absorb graduates from the increased from about one quarter of a million inuniversities, no employment training or skill devel- 1960 to some 3 million. During the same period,opment scheme is provided for those who leave the secondary enrollment increased from 26,000 toschool system earlier. Of particular concern are 750,000. At the tertiary level, enrollment more thanthose who complete high school and are unable to doubled between 1964 and 1984, from under 8,00enter the universities or obtain scholarships tooverd 7,000.abroad. For example, 180,000 students sat for uni-versity entrance exams in 1987, and 6,000, or 4 The impressive advances in enrollment at allpercent, were admitted to the higher levels. If we levels is obtained partly by expanding existing fa-assume (generously) that 10 percent got scholar- cilities, building new ones, and intensive utiliza-ships abroad and 40 percent found employment, tion of existing facilities through increased classthere were 97,000 unsuccessful entrants into the size and introduction of the "shift system,"labor market. This number will increase in the fu- wherein up to three different groups of students areture, given the limited capacity of higher education taught daily. The proliferation of schools and thein the country, as well as limited availability of increase in enrollment has not been without prob-scholarships. lems, the most important of which is the deteriora-

The ability of the government to productively tion of educational quality.use the graduates it employs has been saturated, Important advances have also been made in thealthough social and political pressure may force it health subsector, although statistics are hard toto continue to expand employment. This, however, come by to make a comparative presentation, par-is not a lasting solution, and the day may not be ticularly with the prerevolutionary era. Access; tovery far when the government has to limit or dis- modern medicine, clean water, and family plan-continue its policy of guaranteed employment for ning, for example, have become easier because ofgraduates of higher educational institutions. The expansion and the balanced distribution of institu-country would add yet another contradiction to its tions. The intensive drive toward immunizatioin of

78

children and the training provided to mothers have Specific steps that need to be taken should in-contributed to the decline in infant mortality. clude the following:

* Liberalization and deregulation of the domesticProspects for future generations economy. Rather than hinder private sector activ-

ity, the government should pursue a vigorous pol-The preceding pages have demonstrated the so- icy of encouragement. It should broaden the joint

cial and economic plight engendered by distorted venture rule that limits partnerships between for-policies. The prospects depend very much on the eign capital and the government to include thecourse and shape government policy will take. If private sector and allow the free flow of people andthe government persists in pursuing its current pol- goods within the country.icy and strategy, the future will be very dim indeed. * The government should assign quantifiable ob-

The fact that neither centralism nor the market jectives to the public enterprises (such as profitabil-serves the best interest of society is widely ac- ity) and delegate commensurate power to theknowledged. The Eastern block is trying to get out management. It should make the enterprises re-of its central planning bind by reforming itself; sponsible for the marketing and distribution ofmeanwhile, despite much publicized privatization, their products. This requirement would force themimportant services continue to be provided by pub- to produce quality goods that would appeal to thelic enterprises in the West. This points toward the consumer.direction that future policy should take. TheEthiopian government must muster its courage, Privatization in the Ethiopian context is a non-admit the failure of its current policies, and under- operative policy for a number of reasons. First,take remedial measures. It should start by accept- there are few, if any, people capable of raising theing the people as its partners in development. necessary capital to purchase the firms on offer,

Second, its socialist objective can best be unless foreigners are allowed to participate, whichachieved in distribution rather than in production. may be politically unacceptable given the existingPolicy should accordingly focus first on creating environment. What is more, privatization underthe wealth that would be distributed thereafter. current Ethiopian conditions is likely to lead toWith socialism of the type pursued in this country, replacing public monopoly with private monopolywhere no wealth is produced, the end result is the rather than competition. Second, privatizationleveling of society at increasingly low levels of pov- would lead to the "crowding in" of the very smallerty. Therefore, the policy objectives should be: amount of private sector capital. The nation wouldfirst, focus on production of wealth; second, dis- gain more from the employment of these resourcestribute this wealth equitably. in new activities rather than the replacement of

This logic would lead to the obvious conclusion ownership. In any case, the issue should not bethat an opportune environment for each and every who owns the enterprises as much as the degree ofcapable person to pursue his legitimate interest efficiency of their operation.should be created and the govermnent should pro- The Ethiopian currency is grossly overvalued.vide the necessary support and interest for its fur- Nevertheless, devaluation should be contemplatedtherance. The support could come in different after the market has attained a degree of stability.forms. Economically, it should assume the leader- As an instrument that affects the external and in-ship role, participate and engage in directly pro- ternal dimensions of the economy through its im-ductive activities through well-managed and pact on relative prices, the environment in whichefficiently run public enterprises. Through a sys- prices act as an effective guide for resource alloca-tem of subcontracting, tax concessions, and credit tion should first be created. Devaluation in an econ-arrangements it should encourage the revival and omy where prices and the market are constrainedfurther development of the private sector. But the would have more costs and less (if any) benefit. Itfirst and most crucial step is the deregulation of the is only after the domestic economy is liberalizedeconomy. that one should consider the issue of devaluation.

79

6

Reflections on Long-Term DevelopmentStrategy in Tanzania

Nguyuru H. I. Lipumba

Over the past decade Tanzania has been grap- families. The main source of income has notpling with a persistent economic crisis charac- been the official wage or salary, and henceterized by a severe shortage of foreign ex- employees generally have not put full-timechange; unsustainable balance of payments effort into their formal duties. The availabilitydeficits; large budget deficits; high rates of and quality of social services such as educa-inflation; low, and in some years negative, tion, health care, and dean water, which aregrowth rates of output; and falling per capita supposed to be offered more or less freely byincomes and standards of living. The govern- the government, have deteriorated. It is clearment has adopted a number of short-term that free services cannot be sustained. Thestabilization and adjustment programs, includ- government has generally lost control of theing the National Economic Survival Program I economy.and II, the Structural Adjustment Program, and The glimpses of recovery seen in 1986 andthe recent Economic Recovery Program (ERP). 1987 should not lead to complacency and theThe main objective of these programs was to belief that a sustained economic recovery hasarrest deteriorating economic growth. been initiated. At the same time, it would be a

The most serious adjustment efforts that mistake to belittle the limited success that hasaddressed the major macro imbalances in the been realized because of the continuing hig]heconomy started with the 1984-85 budget and cost of living and perceived increase in con-culminated in the adoption of the ERP. These sumption inequalities. It would be economical-efforts, particularly the "own funded" import ly disastrous if the market-oriented reformsliberalization schemes, the exchange rate ad- that began in 1984 and were intensified withjustment, the increase in producer prices, and the implementation of the ERP were reversed.attempts to control govermnent expenditure, Unfortunately, the ERP has not been imple-have yielded some positive results. The severe mented within a medium- and long-term dev-shortages from 1980 through 1983, which elopment strategy. The market-oriented policdesthreatened the political stability of Tanzania, have sometimes been seen as short-term poli-have been drastically reduced. Good weather des that would be reversed once the economyand the liberalization of grain trade have gene- improves. The Party Guidelines on Economicrally improved food availability. Supplies of and Social Development for 1987 to 1992 doconsumer goods improved at very high prices, not take the ERP as a starting point; insteadwhich highlighted major problems facing work- the Party has adopted objectives that are noters in the formal sector. Official wages and feasible given the resource constraints facingsalaries have not supported the minimum con- Tanzania.sumption requirements of workers and their The objective of this paper is to highlight

medium- and long-term economic development

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issues facing Tanzania and possible policy Investment and savingsoptions. The first part of the paper discussesoverall economic performance up to 1985 in Low GDP growth rates have not been caus-order to understand the long-term develop- ed by lack of investment. From 1964 throughment problems. Part II discusses medium- and 1985 gross fixed capital formation accountedlong-term macroeconomic management and the for 22.8 percent of total GDP and should haverole and type of economic planning appropri- supported an average annual GDP growth rateate for Tanzania given past experience and of 6.5 percent, assuming a gross incrementalconcrete conditions facing the economy. Part m capital output ratio of 3.5. Growth of GDP wasdiscusses medium- and long-term agricultural higher during 1964 to 1969 when the share ofdevelopment policy. Part IV raises issues on investment in total GDP was 17.7 percent. Therelevant industrialization strategy. Part V looks major cause of low and decreasing growthat issues related to financing the provision of rates in Tanzania has been the inefficient utili-social services and basic needs. Part VI discus- zation of capital.ses development of economic infrastructure. The agriculture sector's share in total invest-Part VII analyses problems related to prices ment fell from 23 percent in 1966 to 13 percentand incomes policy, and Part VIII contains in 1973. The transport sector accounted for theconclusions. highest percentage of investment allocation,

which increased from 33 percent in 1966 to 50Past economic performance percent in 1972. The manufacturing sector did

not record an increase in its share of totalOverall economic growth in Tanzania has investment. It is understandable that, given the

fallen over time. The average annual growth low level of development of transport infra-rate of GDP fell from 5.5 percent during the structure and that Tanzania is a fairly bigFirst Five Year Development Plan period (1965 country with difficult terrain, investment into 1969) to 1.1 percent during 1980 to 1985 (see roads and railways necessarily utilized theTable 1). The average annual growth rate of largest share of investment. The share of agri-value added in sectors that contribute to gross culture, however, decreased despite officialmaterial production-agriculture, mining, man- policy commitment to agriculture and ruralufacturing, construction, utilities, and transport- development.-decreased from 5.0 percent during 1965 to Data on the sectoral allocation of investment1969 to -0.3 percent during 1980 to 1985. Value from 1976 to 1986 indicate a large increase inadded in manufacturing grew at 11.8 percent a the share of the manufacturing sector in theyear from 1965 to 1969, but fell by 4.9 percent second half of the 1970s, which coincided witha year from 1980 to 1985. Only public adminis- the attempt to implement the Basic Industrytration, the government wage bill, has shown Strategy. From 1976 to 1983 the share of manu-persistent high rates of growth. facturing was on average 25 percent of total

gross fixed capital formation, while agricultureTable 1 Average annual growth rates of GDP accounted for only between 7 and 9 percent.and sectoral GDP Despite increased investment in manufacturing,(percentage) growth decreased and became negative in the

1980s.1965- 1965- 1970- 1975- 1980- During the 1960s gross domestic savings

Category 85 69 74 79 85 could finance almost all of the gross invest-ment. But in the 1970s domestic savings

Gross domestic financed only between 55 and 70 percent ofproduct 3.3 5.5 3.6 3.4 1.1 gross investment, except during the coffee

Gross material boom years of 1976 and 1977. Gross domesticproduct 2.3 5.0 2.5 2.5 -0.3 savings as a percentage of GDP decreased

Agriculture 2.2 3A 1.6 2.7 1.3 from a peak of 29 percent in 1977, to 8 percentManufacturing 3.6 11.8 5.6 3.8 -4.9 in 1984, and 10 percent in 1985. Since the 1978-Public adminis- 79 financial year, the government has been a

tration 8.9 4.5 13.3 12.3 6.1 negative saver. The financing of investmentwas increasingly dependent on foreign sources.

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Structure of production a year. The decrease in the purchasing powerof exports is largely explained by the fall in

Structural transformation includes reduction the volume of exports because the net barterof the agricultural sector's share in GDP and terms of trade did not significantly changein the total labor force, and increase in the over this period. The trend growth rates formanufacturing sector's share in total GDP and the period obscure changes in exports thatemployment. Table 2 shows the structure of have taken place. From 1960 to 1972, the vol-GDP for the period from 1966 to 1985. The ume of exports grew by 3.0 percent a year andpercentage share of agriculture in total GDP the volume of imports grew by 6.5 percent,decreased from 48.7 percent in 1966 to 41.0 while the terms of trade did not change. Thepercent in 1974, and that of manufacturing volume of exports and imports fell by 6.2 andincreased from 9.5 percent in 1966 to 12.2 per- 3.3 percent a year respectively from 1972 tocent in 1974. From 1974 to 1985 the share of 1985. The terms of trade decreased by 2.7 per-agriculture barely changed, while that of man- cent. The combination of deteriorating terms ofufacturing fell from 12.3 percent in 1978 to 8.4 trade and the fall in the volume of exports ledpercent in 1984. Despite a huge investment in to a fal of 8.9 percent a year in the purchas-manufacturing, structural transformation of the ing power of exports. It should be noted, how-economy has hardly taken place. ever, that the worsening of the terms of trade

began in 1977 when the volume of exports wasTable 2 Structure of production already falling.(percentage of GDP)

______________________________ _ ===Table 3 Trend growth rate of trade indexesof Tanzania

Category 1966 1970 1974 1978 1982 1985 (percentage)

Agriculture 49 45 41 41 40 40Mining and 1960- 1960- 1960- 1966- 1972-

quarrying 3 1 1 1 1 1 Index 85 66 72 77 85Manufacturing 10 11 12 12 10 8Electricity Volume of exports -3.1 4.6 3.0 -5.0 -6.2

and water 1 1 1 1 2 2 Volume of imports 1.9 5.9 6.5 3.0 -3.3Transport 5 7 8 8 7 8 Purchasing powerConstruction 4 5 5 4 4 2 of exports -3.4 5.7 3.0 -2.6 -8.9Commerce 15 15 14 13 11 11 Net barterFinance 8 10 10 10 11 12 terms of trade -0.3a 1.2a O.Oa 2.4 -2.7Public _

administration 6 7 10 13 18 19 Note: Computed using Tentative Trade Indicesof Tanzania.a. Not statistically significant.

International trade Source: UNCTAD, Handbook of InternationalTrade and Development Statistics (Geneva, 1986).

Within the agricultural sector the share ofproduction for domestic consumption has in- The main condusion derived from analyzingcreased and the share for export has fallen. the trend growth of volume and purchasingExport performance worsened more than GDP power of exports and terms of trade is thatperformance. Nominal exports fell from a peak falling purchasing power of exports is largelyof 29 percent of GDP in 1966 to 6 percent of explained by falling volumes of exports andGDP in 1985. Table 3 shows the trend growth not by deteriorating terms of trade. In the past,rates of the volume of exports and imports, Tanzania has not exhausted opportunities pro-purchasing power of exports, and the terms of vided by traditional exports as a source oftrade for the period from 1960 to 1985. During foreign exchange. During the 1980s commoditythis period the volume of exports decreased by prices have been very weak. The terms of3.1 percent a year while the volume of inports trade are likely to worsen because the growthincreased by 1.9 percent annually. The purchas- of world demand for commodities exported bying power of exports decreased by 3.4 percent Tanzania has been low and is expected to con-

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tinue falling. In addition, many developing cigarettes, apparel, cement, batteries, and non-countries, particularly in Africa, depend on ferrous metals go mostly to neighboring coun-similar exports and are attempting to increase tries. Low output and comparatively high unitthese exports. Tanzania, however, should costs have prevented sustainable growth ofincrease production of traditional exports. The manufactured exports.opportunity cost of resources used for exportproduction, mainly unskilled labor and land, is Table 4 Volume of Tanzania's Major Exports:very low. The social return of using these re- 1966-85sources to earn scarce foreign exchange is high. (thousands of metric tons)

Table 4 shows the volume of Tanzania'smaior exports from 1966 to 1985. Coffee, theleading export, has stagnated at around 50,000 Export 1966 1970 1975 1980 1983 1984 1985tons. Although the volume of coffee exportshas generally exceeded the allocated quotas, Coffee 43 45 54 44 50 55 43Tanzania's share of the high-priced mild Arab- Cotton 86 61 40 31 40 29 22ica coffee has decreased compared with that of Sisal 199 217 97 43 27 21 15Kenya and Colombia. The rate of growth of Tea 6 7 10 13 17 11 12tea output and export has been lower than that Tobacco 2 6 9 8 5 5 8of Kenya, and quality has deteriorated. Sisal Cashews 72 77 97 9 11 34 22fiber exports in 1985 were less than 10 percent Cloves 14 5 8 8 1 2 12of 1970 exports. Brazil replaced Tanzania asthe leading producer and exporter of sisal, and Source: United Republic of Tanzania, Customsin recent years Kenya has exported more sisal and Excise Department: Annual Trade Reportsthan Tanzania. Cotton exports have generally and Mali ya Uchumi wa Taifa Katika mwaka 1986.decreased since 1972, while cashew nut exportspeaked in 1974 and since then have drastically Balance of payments crisisfallen. Cashew nuts are a semniluxury commod-ity, and thus have relatively high income and The decrease in exports has contributed toprice elasticities of demand in the world mark- the balance of payments crisis of the pastet. The potential for increasing foreign ex- decade. In 1967, the trade balance recorded achange earnings is great if the export supply small surplus of $4.2 million. Except for aof cashew nuts can be increased. Other minor small balance of trade deficit in 1965, both theexports such as cardamon, tropical fruits, and trade balance and the current account balancevegetables could also be increased given ap- were positive for all other years from 1961 topropriate institutional setup and incentives to 1967. The first major balance of payments crisisproducers and exporters. was experienced in 1974, when the balance of

Agricultural exports account for between 80 trade deficit rose sharply to $339 million andand 85 percent of total exports. Exports of foreign exchange reserves fell by $143 millionmanufactured goods have not significantly (see Table 5). This crisis was partly caused byincreased. Before 1979, nonpetroleum manufac- the quadrupling of oil prices and an increasetured products accounted for 5 to 10 percent of in food imports when grain prices were high.total exports. An export drive of manufactured The coffee price boom of 1976-77 improved theproducts increased the share of nonpetroleum balance of payments, but the war with Ugandamanufactured exports to 18 percent in 1979 in 1978-79 and the doubling of oil prices trig-and 1980. Since 1981 the volume of manufac- gered another severe balance of payments cri-tured exports has fallen, but their share of sis that has persisted to the present. Sincetotal exports has remained around 10 percent. 1978, official export earnings have financed less

The composition of manufactured exports than 50 percent of total imports. Increasedhas not changed over the past 15 years. The dependence on external financing of importsdominant exports indude petroleum products, occurred despite a drastic decrease in the vol-tobacco, cotton textiles, and sisal fabrics. Pro- ume of imports. The volume of imports incessed tobacco, spun textiles, and sisal ropes 1982 and 1983 was only 50 percent of the peakare exported to markets in developed coun- volume of 1978. Excessive imports due to over-tries. Petroleum products and manufactured expansion of aggregate demand was not theitems such as canned food, bakery products, fundamental cause of the severe balance of

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payments disequilibrium. The main cause was official entities, particularly agricultural market-the decline in the aggregate purchasing power ing enterprises and other parastatals. Table 6of exports resulting from the decrease in the shows the distribution of total credit outstand-volume of exports. ing among central government, official entities,

and the private sector. The bulk of domesticTable 5 Balance of payments, 1967-85 credit has been allocated to the government(US$ millions) and parastatals. The control of the money sup-

ply thus depends mainly on controlling gov-ernment deficits and lending to loss-making

Item 1967 1974 1978 1980 1982 1983 1984 parastatals.

Trade balance 4 -339 -689 -713 -697 -435 -486 Table 6 Percentage share of total creditExports 237 410 497 506 415 380 388 outstanding to government parastatalImports 229 749 1186 1219 1113 815 874 organizations and the private sector, 1966-86Services (net) -9 25 28 19 39 23 -43Transfers (net) 10 49 172 129 119 103 160Current account End of year

balance 5 -265 -490 -565 -539 -308 -369 1966 1970 1974 1978 1980 1982 1984 1986Capital trans-

actions (net) 21 125 211 227 193 208 36 Govern-Exceptional ment -19 12 33 44 61 65 61 60

financing - 7 17 123 177 154 49 Parastatals 2 45 51 47 33 28 36 35Overall Private

balance 15 -143 -263 -178 -109 -138 -159 sector 117 41 14 9 6 6 3 5

Source: Ministry of Finance, Planning and Econ- Note: Computed using data from Internationalomic Affairs, Dar es Salaam, Tanzania Economic Monetary Fund, International Finance Statistics,Trends, Vol. 1, 1988. (Washington, D.C., 1986.)

Long-term inflationary pressure Long-term developments in government finance

During the 1960s Tanzania experienced low The role of government expenditure in therates of inflation not significantly different economy has dramatically increased over thefrom the inflation rates of industrialized coun- past 25 years. The share of government expen-tries. The rate of inflation increased from 4 diture in total monetary GDP is estimated topercent in 1970 to 27 percent in 1975. The de- have increased from 27 percent in 1964 to 62crease in growth in agricultural production and percent in 1980. As a percentage of total GDPthe increase of prices of imports, induding oil, including subsistence, government expenditurecontributed to the surge of prices. The agricul- increased from 17 percent in 1964, to 36 per-tural recovery and the coffee boom of 1976-77 cent in 1980, and to 31 percent in 1985.improved aggregate supply and helped reduce Before the Uganda war, recurrent expendi-the rate of inflation to 5 percent in 1976 and ture was in line with recurrent revenue. Thean average of 1 percent from 1977 to 1979. The recurrent budget normally registered a smallUganda war and the oil price surge of 1979 surplus that was used to finance part of theignited the high rate of inflation that has per- development expenditure. We can distinguishsisted throughout the 1980s. two subperiods. Recurrent expenditure before

Before 1972, when growth of output was decentralization in 1972 was growing at anreasonable, growth of the money supply was average annual rate of 12.7 percent, but fronmnot associated with high inflation. After 1973 1972-73 to 1977-78 it grew at an average an-and particularly in the 1980s, however, high nual rate of 21.9 percent. The rapid growth ofmoney supply growth rates were associated government recurrent expenditure, althoughwith high rates of inflation. The rapid growth largely financed by recurrent revenue, was notof the money supply has largely been deter- associated with efficient utilization of resources.mined by government borrowing from the Government expenditure in the regions wasCentral Bank and commercial bank lending to mainly for salaries and other personal emolu-

84

ments. The services that the regional personnel Medium- and long-term macroeconomicwere supposed to provide lacked the necessary managementmaterial inputs.

Government finances were thrown out of We have discussed the macroeconomic im-balance as a result of the Uganda war. Recur- balances that have characterized the Tanzanianrent government expenditures increased by 49.1 economy over the past decade. These includepercent. A large recurrent budget deficit was foreign exchange shortages, unsustainable bal-recorded. After the war, recurrent expenditure ance of payments deficits, high rates of infla-continued to grow at high rates. Thus, the tion, and persistent government recurrent andrecurrent budget deficit has recorded persis- overall budget deficits. These imbalances aretent, large deficits since 1978-79. no longer short term in character, but are fun-

Government has borrowed from the banking damentally ingrained in the economy and re-system to finance development expenditure quire a long-term solution.since 1968-69. For the period from 1968-69 to1975-76, bank borrowing financed between 25 Achieving balance of payments adjustment withand 35 percent of the government development economic growthbudget. In general, government borrowingfrom the banking system before 1978-79 was As explained above, the main cause of thenot excessive. Excessive and inflationary gov- drastic fall in the purchasing power of exportsemnment borrowing began with the 1978 war that has led to the balance of payments crisisand has continued to the present. has been the decrease in export volumes. In

Government expenditure since 1978-79 has general, government policies have not promo-grown faster than government revenue. Gov- ted export production. One of the objectives ofemmnent efforts in tax collection, particularly in economic policy was to transform the economythe formal sector, have been commendable. gradually from export domination and towardNevertheless, tax evasion on nonsalary income a rising local market. The main domestichas been very high, partly because of excessive causes of poor export performance have inclu-marginal income tax rates. Import duties, par- ded poor incentives for agricultural exportticularly on consumer goods, have been gener- production, an inefficient marketing system,aily high, but the collection rate has been low institutional uncertainty, bias against invest-because of widespread exemption, both legal ment in the agricultural sector, and import-and illegal. It is generally agreed that it is substituting industrialization that induced apossible to increase government revenue from shift in the terms of trade against agricultureimports by a general reduction and simplifica- and did not lay a foundation for promotingtion of duties and removal of widespread ex- exports of manufactured goods. Major agricul-emptions. tural exports have been marketed through a

Given the budgetary imbalances, there is monopoly of state agencies or government-need to review the role of government in the supported marketing cooperative unions. Pro-provision of services. The traditional govern- ducer prices for export crops have been set byment role of providing and maintaining infra- the government. Nominal prices have beenstructure should be given high priority. The increased, but they have not compensated forprovision of basic services such as health, edu- inflation, and thus real prices have decreased.cation, and clean water are important but, Government prices offered to producers ofwherever possible, user fees should be charged export crops have been mainly influenced byto reduce the financial burden to the central world market prices, the exchange rate, andgovernment. Already unorganized user fees are the margins of the marketing institutions. Overimposed; what is needed is the political cour- time, marketing costs have increased, partlyage to systemize user fees in the provision of due to increased transportation costs and part-services so that the administrative costs of ly to inefficient management of monopsonisticcollecting user fees are not too high. marketing institutions.

The exchange rate has been overvalued sincethe early 1970s and thus has constrained in-creases in domestic producer prices. The rela-tive prices of export crops to food crops,which are mainly sold in local markets where

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prices are determined by supply and demand, Controlling inflation and promoting financialhave fallen. The falling real exchange rate and developmentthe increase in real producer prices of locallyconsumed food crops have adversely affected Probably the worst impact of inflation inexport crop production. Long-term balance of Tanzania is the demoralization and amoraliza-payments equilibrium with economic growth tion of public sector employees whose realrequires the promotion of exports. Removal of formal incomes have been severely reduced. Ahistorical overvaluation of the currency and growth-oriented control of inflation in Tanzaniamaintenance of a stable real exchange rate and should focus not only on monetary restraint,trade regime are necessary conditions for pro- but also on measures to stimulate production.moting exports of services such as tourism. Control of credit expansion can be achieved

Trade and exchange rate policies that have largely by restraining government and para-been implemented by the government since statal borrowing from the banking system. The1984 have significantly affected the real ex- banking system in Tanzania has been trans-change rate. The partial liberalization of own- formed from being a lender to the privatefunded imports clearly showed that the effec- sector in 1966 to 1968 to being a lender totive exchange rate for imports was a multiple government and the parastatal sector. Duringof the official exchange rate. The major devalu- 1966 to 1968, the government was a net lenderation of 1986 and the adoption of the crawling to the banking system and most of the creditpeg reduced the wedge between the effective went to the private sector. By 1976 over 90market-based exchange rate and the official percent of total credit outstanding was held byone. Since 1984 Tanzania has basically operated the government or parastatal organizations.a dual exchange rate regime. Probably 30 to 35 The control of the overall government deficitpercent of the imports are financed at an effec- financed by borrowing from the banking sys-tive exchange rate that is market determined, tem and efficient utilization of credit is neces-while the rest is at the official exchange rate. sary for controlling inflation. The private sectorThe exchange rate policy objective should be to is largely self-financing or uses informal sectorunify the exchange rate and bring back the credit and does not have easy access to bankBank of Tanzania to the center stage of an credit. A significant chunk of credit to theopportunity-cost-oriented management of for- parastatals and government has not been usedeign exchange. It should be emphasized, how- productively and cannot be repaid. Restrictingever, that this cannot be done by administra- credit to inefficient parastatal organizations andtive fiat. The positive factor of own-funded limiting extension of credit to firms that areimport liberalization and the widespread avail- able to repay the credit would improve effi-ability of basic consumer goods throughout the ciency and dampen inflation.country should be maintained. Unification of To promote growth and structural transfor-the exchange rate for current account transac- mation and modernize the Tanzanian economy,tions requires the equalization of the official financial sector reform is long overdue. Theexchange rate of own-funded imports that will monopolistic position of the National Bank ofencourage nonofficial exporters to directly Commerce (NBC) has made it lethargic, ineffi-transmit their foreign exchange and earn Tan- cient, and unresponsive to customers. The com-zania shillings rather than indirectly transmit mercial bank is not operating commerciallytheir foreign exchange by purchasing and sel- and has accumulated loans to parastatal organ-ling imported goods in the domestic market. izations that are unlikely to be paid. There isThe parallel market for foreign exchange to need not only to reform the NBC, but also tofinance capital flight is likely to continue. allow other commercial banks in major com-Stringent measures to limit capital flight mercial centers, such as Dar es Salaam, Aru-through proper documentation of exports and sha, and Mwanza, to start operation in com-imports are likely to succeed when the official petition with NBC. A thorough study of thisexchange rate is unified with the effective ex- issue is required. During the transition andchange rate for imports. Given the very low given the existing institutional setup, rapidlevel of development of the financial market movement to positive real interest rates mayand an inefficient commercial banking system, cause havoc, not only to other parastatals, buta crawling peg is preferable to an auction also to the banking system itself. The bankbased on a floating exchange rate. may attract financial savings without being

86

able to find productive enterprises that are The expansion of export crop production bywilling to borrow. smallholder farmers (a few expanded their

farms to between 10 and 20 acres and employ-Agricultural development strategy ed farm laborers) was seen by President

Nyerere as encouraging the development ofIn the first five years of independence (1961 capitalist relations of production in the rural

to 1966), the agriculture sector recorded high areas. To arrest the development of rural capi-rates of growth, particularly in export produc- talism, the Arusha Declaration encouraged thetion. The fast growth of agricultural exports establishment of Ujamaa villages-"economicproduction was not a result of government and social communities where people live to-policy; it mainly arose from the desire of gether and work together for the good of all."smalIholder producers to increase their pur- In policy statements, the Arusha Declarationchasing power by producing cash crops. The emphasized agriculture and rural developmentwidespread availability of consumer goods was through the formation of Ujamaa villages. Thean adequate incentive for increasing cash crop Presidential Circular no 1. of 1969 directed thatproduction. This process of expanding small all government policies and the activities andcash crop production began in the early 1950s, decisions of all government officials must bewhen it was ignited by the dollar shortage in geared toward emphasizing the advantages ofthe United Kingdom and the Korean War com- living together and working together for themodity boom. good of all; discouraging the continuation of

After independence, the policies adopted by private individual farming; and dampening thethe government included the introduction of urge for private expenditure on consumer andmarketing cooperatives throughout the country, farm durables in favor of communal expendi-which mainly aimed at eliminating the Asian ture on things like cooperatively owned farmmiddlepersons. Many of the newly introduced implements, stores, water supplies, goodcooperatives and some of the old ones, such as houses, dispensaries, nursery schools, roads,the Victoria Cooperative Union, experienced and community centers. It said that theinefficient and corrupt management. The coop- government and Party must assist in theeratives were given monopsonistic status, and establishment of Ujamaa villages and giveprivate traders were restricted even before the them priority in all credit, servicing, and exten-former were well established in their business- sion services-at the expense of the individuales. The official granting of monopoly power to producer if necessary. It also said thatstate-supported marketing cooperatives and cooperative farming and cooperativeinstitutions, before such institutions had proven production must be looked upon as the mainthemselves by providing better services to source of economic growth in the rural areasfarmers, was the root cause of persistent inef- and that the emphasis of the cooperativeficiency in agricultural marketing. This inef- movement must be shifted from marketing toficiency has been the leading stumbling block producer cooperatives.to increasing marketed agricultural output and The voluntary response of the peasants to-transforming the agricultural sector. ward forming Ujamaa villages was too slow

The agricultural development policy adopted compared with the desire of Party leaders.in the first five-year plan was based on the Given the existing technology, particularly theWorld Bank "transformation approach." The lack of large-scale mechanization, which is stillobjective of the policy was to establish modem not feasible in the medium run, any economiesfarms in new settlements. The strategy was of scale in large-scale communal productioncapital intensive and involved "spoon-feeding" would have been outweighed by diseconomiesthe settlers, some of whom were taken from of scale in managing and organizing labor inurban areas. The approach proved to be a production. The reluctance of peasants joiningcostly failure and was abandoned in 1966. The Ujamaa villages led to the involuntary villagi-impressive performance of the agricultural zation program that established permanentsector during this period was mainly the result villages in most of the rural areas, particularlyof an increase in acreage for export crops by the least developed. A 1981 resolution directedsmallholder farmers, without any significant that every village must have a communal farmtechnological transformation in the form of of not less than 100 hectares. While the sharewidespread use of off-farm inputs. of output from communal production has nev-

87

er been significant, political and institutional be much lower than that of individual farms.support for private farming, induding small- Moreover, it was observed that the poor spentholder farms, has been lacking. Development more time in the village farm than the non-policy in practice has not favored the agricul- poor, which worsened their income position.tural sector. Investment in agricultural research To have a chance to succeed, production coop-has been minimal and has not taken into con- eratives in the village should be voluntary andsideration production constraints facing small- composed of small work teams of not moreholder peasants. than 10 households. The initiative to cooperate

The marketing of agricultural produce was should come from peasants themselves, andand is a major problem facing the agricultural not from directives issued by the governmentsector. The government has been opposed to or the Party.private trading, particularly the marketing of There is a widespread popular belief thatagricultural crops, but so far an efficient coop- large increases in agricultural output can beerative and state-run marketing system has not attained within a short period if large-scalebeen designed. Cooperatives, induding a few farms, both private and state-owned, werethat were efficient and had grassroots support, encouraged. This view is also implicit in thewere abolished in 1976. They were abolished otherwise analytically sound Agricultural Poll-partly because they were considered inefficient cy Paper of 1983. The state-in conjunctionbut also to eliminate a politically semi-indepen- with aid donors such as Canada, in the case ofdent power base of a relatively rich peasantry wheat; Democratic People's Republic of Korea(Kulak class). Govermnent-owned Crop Auth- and Iran, in the case of rice; and theorities, which had the function of both market- Netherlands, in the case of maize--hasing and agricultural extension, replaced the embarked on large-scale farming. Privatecooperatives but proved to be more inefficient. individuals, particularly entrepreneurs, haveCooperatives under the control of the Party been encouraged to start large-scale farms. Thewere reintroduced in 1984, but they have so official policy is that the large-scale farmsfar not proved to be efficient marketing institu- should not interfere with the village agricul-tions. They are unlikely to succeed in remov- tural activity. They should neither appropriateing marketing inefficiency because of lack of land near villages nor use labor from villagecapable management that is both professional communities, which implies that the farmsand able to mobilize support and instill con- must be capital and imported inputs intensive.fidence in smallholder producers. Large-scale, capital-intensive farms are costly

The key element in designing an egalitarian and unlikely to be economical. The large-scaleagricultural development program is to recog- state wheat farms continue to flourish largelynize that the basic unit of production in the because of Canadian aid. It is unlikely thatagricultural sector is the smallholder farm, these farms will be self-reliant once thewhich, given the current resource endowment, Canadian aid is cut off.is an efficient user of scarce resources. At -this -In-- -general, -Tanzaua- is -not-- facing -a severestage of development, public investment land shortage, and there are large tracts ofshould be directed toward improving produc- land that have yet to be opened. Governmenttivity of smallholder farmers. A detailed analy- policy should not discourage the developmentsis of a survey of 20 villages throughout Tan- of efficient self-reliant, large-scale farms. Itzania concluded that the poor are poor because would be a grave mistake, however, to devoteof low returns to labor rather than because of a large proportion of public funds to financea shortage of labor. The provision of off-farm their establishment or to offer subsidies in theinputs through a rural credit program would form of low-interest loans or special foreigngo a long way toward increasing agricultural exchange allocations. Fast agricultural growthoutput and eliminating rural poverty. will continue to depend on farms of less than

Village-wide communal production is likely 10 hectares. Moreover, development based onto be inefficient because of organizational dis- these farms would also be more egalitarian.economies and lack of mechanization. If com- Smallholder agriculture is still dependent onmunal production is not voluntary, peasants unskilled labor, simple implements, and theare likely to sabotage agricultural production. expansive use of land. Sizable increases inIn the survey noted above, both labor and land agricultural productivity require a steady in-productivity of the village farm was found to crease in the use of off-farm inputs, such as

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chemical fertilizers, pesticides, and farm equip- Industrialization strategy and trade policyment. Research and development of appropri- are interlinked. A large domestic market isate agricultural technology, including farm necessary to reduce the cost of protection andimplements, high-yielding and drought-resis- attain comparative advantage in industriestant varieties, and pest control must be priori- characterized by significant scale economies.ties in an agriculturally based development Small economies such as Tanzania are unlikelystrategy. The technical packages must be loca- to succeed in establishing industries with dyna-tion-specific and should take into consideration mic comparative advantage by initially depend-constraints facing smallholder producers. At ing on the domestic market. Industrializationpresent, Tanzanian agricultural research centers strategy needs immediately to take into con-are few and understaffed. Experienced local sideration the possibilities of exporting. Anscientists have been lost to other countries in industrialization strategy that is biased againstthe region or to international institutions be- exports will be more costly in a small economycause of low pay and deplorable working con- than in a large one.ditions. The need to retain local staff with The main objective of development policy inexperience in the Tanzanian environment can- the industrial sector before the Arusha Dedara-not be overemphasized. tion of 1967 was growth. Private investment

Lack of efficient agricultural marketing con- was attracted by legal guarantees on repatria-tinues to be a major constraint to growth of ting profits and capital. The domestic marketagricultural output. Economies of scale in was protected by tariffs, but few quantitativemarketing exist, but granting monopolies to restrictions were used. Industrialization in Tan-state-run institutions is not the best way to zania during the 1960s was characterized ascapture economies of scale. In general market- perverse capitalist development. It was capital-ing cooperatives and other public enterprises intensive, had limited linkage effects, and crea-should compete with private traders and es- ted uncompetitive oligopolistic structures. Ittablish their dominance by providing to farm- was also dependent on foreign sources forers better services at lower cost. At the Tan- capital and technology. With the benefit ofzanian level of economic development, agricul- hindsight, however, it may be concluded thattural marketing is generally a profitable com- industrial growth was particularly impressivemercial activity that does not require subsidies in the period up to 1967. Investment and in-from the central government. Minimum guar- puts in the industrial sector were efficientlyanteed prices for certain strategic food crops utilized.such as maize may be necessary in remote After the Arusha Declaration, governmentregions with high potential. The minimum policy emphasized public ownership of majorguaranteed prices should not be too high, firms in the manufacturing sector. Major manu-however, and must take into consideration the facturing firms were nationalized, and new,cost of transportation to consuming centers. In large investments were concentrated in thecases of price guarantees, the subsidy element public sector. Over time, multiple social andmust be known and paid for by the central commercial objectives and direct political inter-government and not by the marketing enterpri- ference in management have reduced the abili-ses. ty of management to run their enterprises com-

mercially, and they have also reduced manage-Industrial development strategy ment's accountability for losses made by their

enterprises.An agriculturally based development strategy The Arusha Declaration policy document

does not imply neglecting industrial develop- criticized those who argued that industrializa-ment. Indeed, economic growth and structural tion rather than agriculture was the basis oftransformation entail a higher rate of growth economic development. Nevertheless, allocationin the manufacturing sector than in the agricul- of public investment continued to favor manu-tural sector. Sustained high growth in the man- facturing relative to agriculture. The majorufacturing sector is dependent on growth in shortcomning of the Arusha Declaration accord-the agriculture, which will provide a domestic ing to socialist economists was that it lackedmarket, raw materials, inexpensive food, and an industrial development strategy. Withoutsavings and foreign exchange to finance indus- industrialization, they argued, socialism wouldtrial development. lack a material base. To correct this anomaly,

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some economists proposed the basic industrial- whole, the sector is very inefficient. It is bothization strategy, that is, the establishment of capital intensive and import dependent. Akey industries that are required directly or number of manufacturing activities have nega-indirectly in the production of all goods, such tive value added when their inputs and out-as iron and steel, metal processing and engi- puts are valued at world prices. Out of nineneering, chemicals, paper, textiles, and food. industrial subsectors that were surveyed inApart from textiles and food processing indus- 1984, only two subsectors-food products andtries, which are wage goods that are usually beverages and tobacco-appeared to be operat-established in the early stages of import sub- ing efficiently. First-stage import substitutingstitution, this strategy can be considered as a industries such as textiles and tannery andbalanced second-stage import substitution in- leather goods, which usually are the first in-dustrialization, in which establishing industries dustries to export manufactured goods effi-producing capital goods and intermediate in- ciently from developing countries, appear to beputs predominates and requires a "big push" producing inefficiently. In the case of tanneriesin investment effort. and leather, value added at world prices is

The government adopted the basic industry negative. If these measures provide a correctstrategy in 1975 and used foreign aid and assessment of the manufacturing industry, thenloans to establish some of the industries. It the sector at present is a major burden to thewas expected that the basic industry strategy economy.would lead to rapid industrial growth and A long-term industrial development strategystructural transformation, generate employment, must take into consideration the existing in-and improve income distribution. The location dustrial structure and its potential for beingof industries was supposed to promote rehabilitated. Both the rehabilitation of estab-balanced regional development while the man- lished industries and investment in new indus-agement was to incorporate worker participa- tries should not ignore international competi-tion and foster self reliance. tiveness. Although it was not implemented

Massive investment in the manufacturing correctly, there is a fundamental flaw in thesector doubled the installed capacity between basic industrial strategy. First, industries were1974 and 1984. Most investment was in inter- established depending on availability of fund-mediate and capital goods, which by 1984 ac- ing, regardless of the appropriate sequencing.counted for 51 and 14 percent of the installed Second, the strategy ignored comparative costs,capacity, respectively. Manufacturing capacity and the ability to finance recurrent costs ofhas expanded, while output has decreased these import-dependent industries was notbecause capacity expansion has been accom- taken into consideration adequately. The op-panied by increasing capacity underutilization. portunity cost of foreign exchange was under-The fall of export earnings has decreased for- estimated in the project analysis of these in-eign exchange available to finance current im- dustries. In addition, the importance of econo-ported inputs. There are new industries, such mies of scale, both internal and external, inas the Morogoro Shoe Company, that have most of the basic industries (particularly ironnever operated at even 10 percent of their and steel) was underestimated. If the basicinstalled capacity. Most industries have been industries had to depend largely on the dom-established using external finance that is tied estic market, the unit cost would be enormous;to the purchase of technologies from countries outputs of other industries using inputs fromproviding funds. These imported technologies the domestic basic industries would be at highdo not necessarily reflect the factor proportions cost and internationally uncompetitive.of Tanzania. Private firms that provided the The own-funded import liberalization andtechnology made their profits from the scale of the exchange rate adjustment have exposedmachinery, not on whether the factory would some of the domestic industries to competitionbe efficient and make profits. Most of these and realistic costs for imported inputs. Someindustries would not have been established if industries have failed to provide cash cover forfirms from donor countries that supplied the import support and for inputs that can bemachinery had to take the risk of success or imported under the open general licencefailure of the enterprises in Tanzania. scheme. This is not only a problem of lack of

A controversial World Bank study of the credit, but also of the high cost of importedmanufacturing sector conduded that, on the inputs facing import-intensive industries. The

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rehabilitation of industries should largely be entrepreneurs capable of selecting appropriateconfined to industries that can effectively com- technology, given the domestic factor andpete with imported goods. Some industries resource endowment. The role of governmentmay be facing negative rates of protection be- for countries like Tanzania is indispensable incause importers of consumer goods evade pay- providing the basic education necessary for aing duties, while importers of inputs through modem industrial labor force. Encouragementofficial channels pay tariffs. Improvements in of managerial and entrepreneurial talentstariff collection on imported consumer goods is through training is also required. The role ofnecessary if limited protection is to be granted government is also vital in providing physicalto domestic producers. If the duties cannot be infrastructure for industry, including transport,correctly assessed and collected, duties on in- communications, and power systems. These aretermediate imports for the relevant industries usually natural monopolies or public goods,should be removed. and they can best be provided by the govern-

The inefficient industries can be categorized ment, particularly in the context of developinginto two groups. First, there are the structural- countries.ly inefficient. The installed technology is highly State-owned enterprises in the manufacturingdependent on imports and generally inappro- sector were established not to supplement thepriate. Even with the best management it may private enterprises, but to replace them. A fewprove to be impossible to make such industries enterprises have performed well, but mosteconomically efficient. Second, there are indus- have had disappointing results. These enterpri-tries that are inefficient in the utilization of ses do not have the flexibility of adapting toscarce resources because of a poor management changing economic conditions. The incentiveand incentive structure. Improvement in man- structure does not reward management foragement may lead to better performance. Un- success and does not penalize failure. Over 70fortunately, it is not easy to distinguish bet- percent of the capital stock of the manufactur-ween the two categories of industries through ing sector is held by public enterprises, whichstatic measures of efficiency, such as domestic account for less than 50 percent of the econo-resource cost and effective rate of protection. my's total value added.These measures can be completely wrong if Private manufacturing firms have capturedenterprises are using more input per unit of the limelight as the leading enterprises in theoutput because of managerial incompetence consumer goods sector. Nevertheless, the "rulesand if the prices of inputs are low. If the mar- of the game" relating to the role of the privateket structure was competitive, and managers, sector are not clear. A stable and clear legalparticularly of public enterprises, had an "arms and institutional setup encouraging the privateleng" relationship with the government and sector in the manufacturing industry is re-politicians, and profitability of enterprises quired and should go hand in hand with fos-determined managers' job security, the market tering competition in the domestic market. Incould be depended on to select winners addition, improvements in general macroecono-through revealed efficiency. The past experi- mic management, particularly removal of un-ence of Tanzania is that the degree of competi- sustainable balance of payments deficits, wouldtion has been low, public enterprises in the improve the attractiveness of Tanzania to directmanufacturing sector have not been financially foreign investment in the manufacturing sector.autonomous, and the careers of managers have Special efforts should be made to attract ex-been politically determined, largely indepen- port-oriented manufacturing industries that willdent of the performance of the enterprises they utilize domestic resources. The Southeast Asianmanage. hnprovement of efficiency in the med- newly industrializing countries (NICs) facingium term requires a policy framework that export quota restrictions are appropriate sour-fosters competition and guarantees financial ces of such investment. Joint ventures in whichand managerial autonomy and promotes the the foreign investors will have a stake in theselection of managers according to their com- successful running of the enterprises should bepetence. Thus reforms in the manufacturing encouraged. To attract labor-intensive indus-sector must not only be technical, but also tries that will utilize and train the abundantpolitical. unskilled labor, the labor market needs to be

In the long run, successful industrialization more flexible.depends on the existence of skilled labor and

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The industrialization debate has overempha- and professionals. The education system. issized specific products, particularly iron and generating a low-quality labor force, which willsteel, that are seen as vital in establishing an have adverse impacts on long-term growth.engineering industry. Iron and steel and other Government expenditure on education is tooheavy industry should be established only on low. Experienced teachers and administratorsthe basis of international competitiveness, be- have moved out of education to public enter-cause the domestic market is small. Other skill- prises and general administration. Funds devo-intensive industries that are important for tech- ted to the Ministry of Education have increas-nical progress cannot develop if the locally ingly been overstretched, and a smaller propor-produced inputs are too expensive. tion has been devoted to providing teaching

equipment and materials. Governrment objec-Provision of social services and basic needs tives of providing "free" education have not

been targeted to those who could not afford toThe provision of social services and basic pay for their education. Cost sharing with

needs, including education, basic health, and parents developed in an ad hoc fashion becausenutrition, is no longer seen as consumption the government failed to provide educationalexpenditure, but as an important factor in det- materials. Moreover, this cost sharing is con-ermining the quality of the labor force that fined to the lower levels of education. At theinfluences the ability to acquire new skills and higher levels of education, government paysincrease productivity. The provision of basic not only for educational materials, but also forneeds has been a key policy objective in Tan- living expenses. We have reached a situationzania since the adoption of the Arusha Declar- where the nominal and real incomes of mostation. The adult literacy campaign, universal of the students are higher when they are sLud-primary education, establishment of health ying at the university than when they startcenters and dispensaries in the rural areas, and working.the nutrition education campaign have all More resources need to be devoted to educa-aimed at fulfilling basic needs for the broad tion, but internal efficiency in the utilization ofmajority of the population. these resources also needs to be improved. The

Some critics have associated fiscal imbalances objective of providing basic education to allwith the govermment's attempts to provide children is commendable. The quality of thisbasic needs beyond its resource capability. education needs to be improved, mainly byThere is no evidence for such an assertion. The increasing the quality and morale of teachers.proportion of government resources devoted to Training, better pay, and a better workingeducation accounted for 17.2 percent of the environment are important, but improved man-total government budget in the 1964-65 finan- agement of the education system is also re-cial year, between 11 and 14 percent from quired. Clear stipulation of cost sharing with1967-68 to 1983-84, and below 7 percent after parents is needed, as well as widespread avail-1984-85. Education's share in total government ability of educational materials that can beexpenditure is below the average for develop- purchased by parents. Local governments ating countries. the village and district level could decide

Primary school enrollment has increased which children genuinely need assistance fromsince the adoption of universal primary educa- local governments to meet expenses for text-tion in the mid-1970s. The quality of primary books and writing pads.education, however, has drastically decreased. The Arusha Declaration rightly emphasizedThe reading, arithmetic, and writing skills of the need to make schooling relevant to workdass-seven graduates are in many cases lower after school. This objective has been misinter-than those of the class-four graduates of the preted to mean more manual work and cul-1960s. Some of the class-seven graduates are tural activities and less classroom work onfunctionally illiterate. Secondary schools admit reading, writing, and arithmetic. There is anless tfian 2 percent of the primary school grad- urgent need to emphasize the basic elements ofuates, which is among the lowest percentages primary education and improve the quality ofin the world. The quality of secondary educa- practical education. There is need to expandtion has deteriorated considerably. Low-quality secondary and postsecondary education, butentrants to postsecondary institutions has led such expansion should be closely related to theto low-quality university graduates, technicians, job market The financing of some recurTent

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costs, particularly the upkeep of students, nutrition, health education, and food supple-should increasingly be borne by the students ments.and their parents. Private initiatives in starting Improved nutrition and health for children issecondary schools that have gained momentum related to the size of families and the frequen-should be encouraged, but coordination is nec- cy of pregnancies. Family planning and childessary to assure relevance and quality. spacing have been accepted as necessary for

The share of health in govermment expendi- improving the standard of living of the familyture has decreased since it peaked in 1977-78 as a whole, and of women in particular. Mod-at 7.3 percent. The provision of basic health em and traditional sex education for girls andservices in the rural areas is commendable, young women needs to be given attention.although lack of drugs and basic medical Because abstinence is not generally accepted,equipment has reduced the effectiveness of official promotion of safe contraceptives mayhealth centers. In general, resources have been be necessary to promote family planning anddevoted more to curative medicine and less to avoid dangerous, unhealthy, and inhumanpreventive medicine. Children's immunization abortions.to prevent communicable diseases has in-creased, but it is not comprehensive and wide- Development of economic infrastructurespread throughout the country and largelydepends on foreign-funded projects. Mosquito Developing countries, including Tanzania,control programs to reduce the incidence of are by definition characterized by a lack ofmalaria have largely been abandoned. adequate economic infrastructure in communi-

Government policy has been committed to cations, power generating capacity and trans-providing free medical services, including pro- mission systems, and water supply for bothvision of drugs. The availability of drugs in domestic and industrial use. The traditionalgovernment hospitals has been decreasing and role of government in the development processpatients have had to purchase their own drugs. was largely seen as investment in infrastruc-The shortage of drugs has led to the appear- ture to reduce transport costs and make powerance of a parallel market in medicines. Some and water supply readily available for indus-of the medicines that are supposed to be dis- trial and domestic use. Moreover, the econo-tributed free of charge by the government are mies of scale related to transport infrastructureactually sold in the parallel market. Thus, cost and public utilities make these sectors naturalsharing is already practiced, but the funds are monopolies that can best be run under publicprivately appropriated. Thus, there is a need to control, even in industrialized market econo-systernize cost sharing in the provision of med- mies.ical services.

Improved nutrition is the leading mechanism Transportfor disease prevention. Better nutrition dependson adequate income, availability and accessibi- Tanzania is a large country with a largelity of nutritious food, and nutrition education. population and economic centers in geographi-The low growth rate of agricultural output, cal peripheries of the country. Lack of ade-including food, in the past two decades has quate transport infrastructure and an efficientaffected nutrition status, particularly for chil- transport system are the leading constraints todren. The nutrition status of the majority of rapid economic development. A large scale ofthe population can only be improved through investment, particularly in the late 1960s andan increase in food production and incomes of early 1970s, was devoted to the developmentthe poor. It is not financially feasible for the of infrastructure, particularly the transport linkgovernment to guarantee adequate nutrition for with Zambia. The existing transport infrastruc-the whole population. Selective and targeted ture is in bad shape. The road link has deteri-government intervention, however, can help orated to the extent that construction of a newprevent certain nutrition-related diseases. Iodiz- road is necessary. The major cause of deterior-ing salt, for example, can prevent goiter, which ation of transport infrastructure is the lack ofis still widespread. Health center programs can adequate maintenance. Resources allocated fortarget their efforts on vulnerable groups, par- maintenance of existing infrastructure haveticularly pregnant women and lactating moth- been inadequate and the management of theseers and their children, to provide them with resources inefficient. Strengthening the main-

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tenance capacity of transport infrastructure is ces-hydroelectricity, coal, and imported petro-an urgent matter. leum-accounted for only 8 percent of total

In Tanzania, apart from rehabilitating exist- energy consumption. Among the comnmercialing railway lines and improving operating sources of energy, petroleum accounted forefficiency, more resources should be devoted to 91.6 percent, while hydroelectricity accountedroads. Export of transport services to neighbor- for only 8 percent and coal for 0.4 percent. Theing landlocked countries is an important for- transport sector is the leading user of commer-eign exchange earner whose potential has not cial energy and accounts for 51 percent of thebeen exhausted. This entails improvement in total commercial energy used and 56 percentthe transport link with these countries and of total petroleum imports. The industrial sec-improvement in the port facilities. tor used 25 percent, while households con-

While government maintenance of transport sumed only 12 percent.infrastructure has not been adequate, more Long-term development objectives must in-interest has been directed toward public own- chude the development of conventional andership of bus and truck companies. These com- nonconventional sources of energy. Prospectingpanies have generally operated inefficiently. and development of hydrocarbons requiresWith the benefit of hindsight, nationalization large amounts of risk capital. So far, the pros-and formation of public enterprises for road pects for liquid hydrocarbons do not seemtransport was not necessary to improve trans- good. In retrospect, taking a loan from theport efficiency. Road transport is a competitive World Bank for oil prospecting and inviting aindustry with relatively easy entry and exit. relatively inexperienced (Algerian) companyRegulation policy for road transport should try (SONATRACH) to do the prospecting was ato improve competition while guaranteeing costly mistake. Given the scarcity of domesticpublic safety rather than restricting private capital and know-how in searching for oil, it isfirms and controlling transport prices. important to focus on a legal framework of

To finance road maintenance, user charges in prospecting rights that will attract internationalthe form of fuel and tire taxes carn be imposed. oil companies with capital and know-how andStrict control of fares and road tariffs usually protect national interests in case of successfulends up hurting remote areas with poor trans- discovery.port links. Rather than imposing price control, Natural gas in economic quantities has beenwhat is required is an improvement in the discovered in Songo Songo Island that can beinfrastructure and the promotion of competi- used not only as a source of energy, but alsotion among private transporters. for manufacturing of fertilizers. Once gas pro-

duction and a pipeline to Dar es Salaam haveEnergy been developed, appropriate policies and meas-

ures will be needed to substitute liquid fuelNinety-two percent of energy consumed in with natural gas to reduce dependence on oil

Tanzania is from biomass, mainly fuelwood imports.and charcoal. As population increases, defores- There are proven reserves of over 300 mil-tation reduces the availability of fuelwood. In lion tons of coal, mainly in the Mbeya region,certain regions of Tanzania, particularly the but sales of coal amounted to only 2,900 tonscentral arid region comprising Dodoma, Sin- in 1987. The coal deposits are not of very highgida, and Shinyangam, deforestation has led to quality, but they can be used for power gener-a shortage of fuelwood. Women walk long ation. In the early 1980s it was planned thatdistances in search of fuelwood. Deforestation coal production should be increased to 300,000in rural areas must be confronted within the tons a year by the mid-1980s to meet the ener-framework of rural development. Afforestation gy requirements of the Mufindi Paper andprograms must be promoted. Rural and agri- Pulp Factory and the Mbeya Cement Factory,cultural development includes the increasing and possibly for tobacco curing in the Taborause of energy other than human and animal region. Production of coal decreased frompower. Rural electrification could be an impor- 10,800 tons in 1982 to 2,900 tons in 1987. Thetant stimulant to establishing small-scale in- planned increase in production has not materi-dustries in rural areas. alized, partly because of a lack of donor sup-

The UNDP/World Bank (1984) energy sector port and poor planning and coordination.report showed that commercial energy sour-

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Tanzanian hydroelectric potential is estima- cy. Moreover, as a monopoly, TANESCO mayted to be 3,800 megawatts, but less than 10 tend to take advantage of consumers, thuspercent is currently being exploited. The major price reviews should be undertaken by anadvantage of hydroelectric power is the low independent board that will take into consider-recurrent cost of generating energy. The main ation marginal cost pricing and developing aconstraint of developing hydroelectric power is fund for paying TANESCO investment loans.the huge investment required. Hydroelectric The increase in power generation capacitypower projects generally cost $1,500 to $2,500 and the extension of the national power gridfor each installed kilowatt, compared with $800 to western and northwestern Tanzania shoulda kilowatt for a large oil-fired plant of similar boost the possibility of rural electrification. Thepower-generating capacity. The net present expanded use of energy resources other thanvalue of a hydroelectric power project is larger fuelwood will depend on the development ofbecause of low operating costs, and thus the nonconventional sources of energy such asdevelopment of hydroelectric power should windmills, solar energy, biomass, and smallcontinue to be at center stage of long-term hydroelectric plants. So far, no headway hasenergy development. been made in developing these nonconvention-

The thermal electricity generating plants in al sources of energy in the rural areas. TheTanzania are all oil-fired despite the fact that availability of local technical know-how andthe price of an equivalent amount of coal is 25 financial resources are major constraints inpercent the price of oil. Installing coal-fired developing nontraditional sources of energy.plants to back up hydroelectric power stations For long-term rural development, local govem-must be seriously considered, given the pos- ments need to develop the capability to initiatesibility of exploiting domestic coal. In Tan- small-scale power generating plants using non-zania, however, the cost of coal-fired plants conventional energy.should be compared with that of gas-firedplants, given the existence of large gas depo- Prices and incomes policysits.

Long-term energy policy must include meas- Since the Arusha Declaration, Tanzania hasures aimed at improving efficiency in the utili- been in the forefront of promoting a develop-zation of energy, because a unit of energy ment strategy that has emphasized equitableserved is worth more than a unit of energy income distribution. To achieve this objective,produced. In the transport sector, better roads, the policy instruments used include emphasisvehicles that are in better condition, and good on rural development; nationalization of thedriving could save as much as 30 to 40 percent major means of production; wages and salariesof fuel consumption. Efficiency in fuel consum- compression; progressive income taxes; andption cannot depend on pricing policy alone. price controls.In the 1980s, prices of fuel were high and fuel Agricultural and rural development wasconsumption generally was not subsidized. supposed to address the major inequality bet-Rehabilitation and maintenance of roads and ween the rural and urban population. In prac-enforcement of minimum standards for vehi- tice, government policies in rural areas empha-des will be necessary. sized institutional reforms, particularly the

There is a significant loss of electric power formation of Ujamaa or permanent villagesfrom inefficiency in the transmission system. rather than incentives, and a policy frameworkSince 1983, 20 percent of the power generated conductive to promoting productivity and in-has been either used by the generating plants creasing agricultural technical change. Rural-or lost, compared with less than 10 percent urban terms of trade were against the ruralprior to this period. Improvement in efficiency population, and thus rural-urban inequality didcan increase power availability from existing not fall. The positive agricultural price policyplants by 10 percent or more. Electricity pri- that began first with prices of food crops incing policy is supposed to cover not only the the mid-1970s and later incorporated exportcurrent cost of generating electricity, but also crops in the 1980s, contributed toward reduc-the capital cost incurred by TANESCO in in- ing urban inequality. Exchange rate and produ-vestments. This pricing policy is the appropri- cer price policies under ERP favor rural produ-ate one as long as the current costs are not too cers of tradable goods who are net foreignhigh as a result of overstaffing and inefficien- exchange earners.

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The nationalization of the major means of sumption of wage and salary earners. Otherproduction was supposed to reduce income sources of income are officially neither knowninequality caused by profits accruing to private nor taxed.shareholders. The profits of public enterprises Price controls on essential commodities arewere to be used for the general welfare of the aimed at protecting consumers from price in-population, mairly through expansion of the creases. Low-income consumers spend a highproduction capacity. Public enterprises have proportion of their income on essential com-not lived up to their expectation regarding modities. Thus, effective price control of essen-their potential to generate surplus for invest- tial commodities is more beneficial to low-in-ment. Thus, whatever income equality has been come consumers than to high-income consu-contributed from the nationalization has been mers, even when both purchase essential com-costly and unintended, mainly emanating from modities at subsidized prices. In practice, ininefficient utilization of nationalized assets. the medium and long run, extensive price

The Arusha Dedaration adopted wages and controls have not benefited the poor becausesalaries policies that prohibited senior officials they generally lead to the development ofin the public sector from receiving two or parallel markets where price-controlled goodsmore salaries or incomes from private invest- are sold at risk-premium market-dearing pri-ment ventures. The wage and salary differen- ces. Only a few well-connected officials aretials between the lowest paid wage earners able to purchase essential goods at controlledand senior civil servants and parastatal execu- prices. The poor generally have to pay highertives were compressed. Within the public sec- parallel market prices. Moreover, when pricetor the salary ratio of the lowest paid to the controls are effective on the producers side,highest paid has been reduced from 1:50 in they tend to discourage increases in supply of1961 to 1:9 in 1977. The relative stagnation of price-controlled goods, leading to steeper in-the high salary scales, significant though inter- creases in prices on the parallel market. Inmittent increases in minimum wage, and prog- general, price controls are not an effectiveressive income taxes contributed to the com- means of preventing the worsening of incomepression of salary differentials. It has been distribution.argued that the compression of salary differen- Inflation has severely reduced formal sectortials does not necessarily imply reduction in wages and salaries to the extent that the lead-formal income inequalities among public sector ing incomes policy problem is no longer equi-employees because of fringe benefits given to table income distribution among formal sectorsenior civil servants and parastatal executives employees, but adequate formal remunerationin the form of housing and transport. The fall that is a necessary, though not sufficient, con-in salary differentials, therefore, overestimates dition for establishing an efficient civil servicethe decrease in income inequality among the and public sector. Few public sector employeespublic sector employees. It should be noted, can live on the official formal salary. Theyhowever, that the proportion of middle and have to operate private businesses during worksenior public employees receiving housing and time or appropriate public funds, legally ortransport benefits has fallen sharply. In gener- illegally. The incentive structures in the publical, it can be argued that formal income in- sector promote inefficiency. For example, seniorequalities of public sector employees have fal- officials receive real higher real incomes whenlen. traveling than when they perform their duties

Progressive income taxes are the main in- at their stations. There is a tendency to arrangecome equalizing policy instrument in industri- unnecessary traveling to supplement formalalized market economies. In Tanzania income salaries.taxes significantly reduce income differentials Minimum wages and salaries in Africa havein the public sector. In the private and infor- been criticized as being too high, leading tomal sector, however, incomes are underreport- internationally uncompetitive production struc-ed and tax evasion is rampant. Given tax eva- tures. In reality, inflation has wiped out realsion, progressive taxation has not necessarily minimum wages, which are lower now thanled to reduction in income inequality. More- they were at independence. The average realover, even in the public sector formal real wage of formal sector employees shows aincomes have drastically fallen and they fi- trend fall of 13.6 percent from 1974 to 1986.nance only a small proportion of total con- The problem now is wages and salaries that

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are too low to promote efficiency in the public nance government deficits, interest and creditsector. The situation is even worse for skilled policy that encourages saving and efficient uselabor. An increasing number of highly trained of credit, and growth of money supply in lineTanzanians are looking for and taking jobs with real demand for money balances. Highabroad with international institutions. Many and variable inflation rates that are likely to bestudents completing studies abroad experience caused by overexpansionary credit policy area drastic fall in income when they start full- not conducive to the financial deepening andtime work in Tanzania. efficient use of financial and real resources that

The public sector is the leading employer in is necessary for promoting growth.Tanzania. The problem of low wages and sala- A stable macroeconomic environment is nec-ries is first and foremost a problem of public essary, but not sufficient, for promotingsector employees. In the private sector, com- growth. The institutional setup and the "rulespensation of employees is higher than in the of the game" must be dear and promote effi-public sector. The solution to this problem cient utilization of resources by economiccannot be an overall increase in wages and agents. Promoting the functioning of competi-salaries. Since the 1978-79 financial year, the tive markets, even in areas where public enter-recurrent budget has been in deficit. Across- prises are involved, is necessary. Grantingthe-board increases in salaries will only worsen monopolies in areas where competitive marketsthe budget deficit. Such increases would have can exist is not conducive to efficient utiliza-to be financed by borrowing from the banking tion of resources.system, which is bound to be inflationary. In the agricultural sector, it was noted thatThus, the only way to increase real wages smallholder farms will continue to be efficientwithout incurning unsustainable budget deficits producers of agricultural commodities. Whatis to tackle the problem of overstaffing in the they need is an efficient marketing system forpublic sector. Priority government services their outputs and inputs and technical pack-have to be identified and the staff require- ages that can increase their productivity. Apartments assessed. A medium-term program of from investment in infrastructure, there are nostreamlining the public sector can be designed substantial economies of scale that can be tap-and should include the reduction of public ped through village communal production.sector employees with a one-time redundancy Diseconomies of scale resulting from organiz-payment to enable workers to move full time ing labor and constructing an appropriate in-into the private sector. For those remaining, centive system will overwhelm any possiblestrict work discpline will need to be instituted. economies of scale. It would be a mistake to

Politically, implementing such a program pressure peasants to enter into communal pro-may not be easy. Ideologically, it can be easily duction. Any cooperative production mustbranded as an antiworker program, regardless strictly be on a voluntary basis.of the fact that the current formal wage is It was noted that widespread, large-scaleinadequate to support the worker and his or agricultural production is unlikely to be anher family. A united leadership that is dedi- economically viable agricultural developmentcated and forthright can and should institute a strategy because it makes intensive use ofprogram that will make the public sector more scarce capital and foreign exchange. Existingeffective. The cost to those who will lose pub- large-scale state farms tend to be dependent onlic sector jobs will not be too high-particu- foreign capital inflow, and some are likely tolarly when there is compensation-because the collapse once foreign aid is cut off. Widespre-present real wage is not very much anyway. ad private, large-scale farms are unlikely to

succeed unless offered special favors by theConclusions government, such as subsidized capital and

foreign exchange. A bimodal agricultural devel-This paper has analyzed the medium- and opment strategy that will foster growth and

long-term development constraints facing Tan- equitable income distribution should be basedzania. It has emphasized the need to establish on increasing the productivity of smallholdera medium-term macroeconomic balance, par- farmers. Where land is available, large-scaleticularly real exchange rates that do not dis- farms should not be prohibited, but no specialcriminate against exports, fiscal policy that favors should be offered.avoids dependence on bank borrowing to fi-

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For industrialization, it was argued that past state. Increasingly, recipients of social servicespolicies ignored the role of international corn- are charged for services rendered. There is apetitiveness. Given the available resources, the need for systematic and streamlined cost shar-basic industry strategy is costly and infeasible. ing for social services between the governmentMost of the established industries are depen- and the recipients. In general, the governmentdent on intermediate imports. Both the rehabi- should concentrate on providing infrastructure,litation of old industries and the establishment adopt "market-conforming" instruments ofof new industries should use the criteria of economic policy, and maintain macroeconomicefficiency in the utilization of scarce resources. stability.Tanzania is too small for a general import In wage policy it was noted that real officialsubstituting industrialization strategy that will wages and salaries, particularly in the publiclater switch toward exporting. New industries sector, were too low and not conducive toshould immediately take into consideration the efficiency. Given the large budget deficit andpossibilities of exporting their products. overstaffing in the low-skill positions, an ac-

The government's extended involvement in ross-the-board increase in wages and salaries isthe economy has led, in part, to the neglect of likely to be inflationary and will not promotethe traditional role of providing social and efficiency. Streamlining the civil service andphysical infrastructure. The maintenance of public enterprises will entail reducing publicinfrastructure has been neglected. Government sector employment of low-skill labor, increas-allocates a small proportion of its total expen- ing payment to remaining employees, andditure to education and health. In principle, strengthening discipline and accountability. Forsocial services are supposed to be offered free long-term development, an efficient civil ser-of charge. In reality, Tanzania is not a welfare vice and public sector are necessary.

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7

Reflections on Long-term Perspectivesfor Sub-Saharan Africa

with Particular Reference to Zambia

John M. Mwanakatwe

Africa is a huge continent with a great diver- gross domestic product continued to grow atsity of peoples, religions, and cultures. Among only 1 percent annually. The total number ofthe continents of the world, it is second only refugees in Africa had reached two nillion,to Asia in size. It is a continent rich in resour- based in Angola, Somalia, Sudan, Tanzania,ces, but unfortunately poor in performance. It Zambia, and Zaire. Moreover, at the end ofhas practically all known minerals, including 1987, the external debt of Sub-Saharan Africangold, diamonds, copper, silver, iron, and coaL countries reached US$129 billion.Bauxite, asbestos, and precious stones of every Pessimists do not expect that African coun-kind and description are abundant. A number tries will emerge from these economic dol-of countries produce oiL Moreover, the con- drums in the foreseeable future. Many predicttinent's climate enables inhabitants to produce a worsening of the present economic situation.every conceivable kind of crop. And yet Africa, However, the author of this paper believesin spite of its central location and vast mineral that, given radical reforms in agricultural andand other resources, commands very little in- economic policies, it is possible to put most, iffluence and power in world affairs today. Sub- not aDl, African countries on the path of sus-Saharan African countries are among the poor- tained growth and social development.est in the world.

At the end of 1986, the long years of Economic conditions in Zambia todaydrought finally broke over most of the con-tinent. Nonetheless, famine conditions persisted Generalizations about African countries canin the Sahel region and in Botswana, Ethiopia, be misleading. There are vast differences inMozambique, and Sudan. The United Nations geography, politics, culture, and economicsEconomic Commission for Africa has painted a among the various countries. Nevertheless, it isgloomy economic picture for Africa because of possible to find many things in common. Anits persistent poor performance in the agricul- analysis of the economic situation in Zambia istural sector, low productivity levels in nonagri- useful because it represents one of the mostcultural sectors, heavy dependence on imports depressed economies on the African continentfor domestic production, and failure to diversi- today. It is a paradoxical situation consideringfy. The average annual growth of population Zambia's enormous potential in resources. Butwas estimated at about 3 percent, whereas the the paradox applies as much to Zambia as to

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Africa as a whole-a large, diverse, and excep- depressing picture must be added that domes-tionaDy resource-rich continent composed prim- tic economic performance has been disappoint-arily of underdeveloped countries. An attempt ing. Consumption has quite clearly increased atwill be made to darify some of the factors that the expense of investment. Agriculture has nothave caused the Zambian economy to decline made the hoped-for contribution to self-reli.sharply during the past 15 years. ance. The mining sector has been through a

A well-known feature of the Zambian econo- phase of relative stagnation. And with ominousmy is its heavy dependence on copper mining. signs for social and political unrest, the growthCopper accounts for 90 percent of merchandise of employment has not matched the expansionexports. The development of the niiing indus- of the labor force. Recently there has been atry, for which privately owned companies des- noticeable contraction of employment.erve credit, has not been paralleled by the In the budget address to the parliament ondevelopment of other sectors of the economy. 29 January 1988, the Minister of Finance andlZambia provides a classic example of a dual National Commission for Development Plan-economy in which the mass of rural people ning admitted that high unemployment wasremains untouched by the benefits of develop- one of the major problems in Zambia's econo-ment in the small modernized sector. my. Figures available on formal employment

Zambia's financial and economic difficulties reveal the severity of the problem. The totalstarted with the decline in real copper prices number employed dropped from about 382,000that began in 1975. Whereas the average price to 357,000 between 1980 and 1987. In order toof copper in 1974 was kwacha (K) 1,326 per tackle the unemployment problem, the govern-ton, in 1975 it plummeted to K793 a ton, mark- ment set aside K20 miDLion in 1988 for resettle-ing a decline of 40 percent. Perhaps a bigger ment schemes, K20 miLLion for irrigation proj-factor than the decline in copper prices in the ects, and K10 million for income support prog-collapse of government revenues from copper rams. However, the mechanics for implemen-is the rise in unit costs of output. This is a ting the resettlement schemes were not detailedfunction of diminishing copper deposits, in- in the budget address. It is doubtful that un-creasing costs associated with deep mining, employment can be remedied by such haphaz;-and the additional costs of other inputs, such ard schemes.as fuel. Oil imports, exduding lubricants, rose It appears that the only hope for resuscita-in cost from K11.5 miDLion in 1972 to K116.37 ting the Zambian economy is to diversify rap-million in 1973 and K187.54 million in 1974. idly into agriculture so that the dominant role

The foregoing is not a complete account of of copper as a foreign exchange source and athe factors that have caused Zambia's economic contributor to government revenues is reduced.crisis. As a landlocked country, the transporta- It will also be imperative to reduce substantial-tion of goods (imports and exports) has always ly government recurrent expenditure. Althoughbeen costly. FoLLowing the unilateral declara- the size of the civil service has been pruned, ittion of independence by Rhodesia in 1965, is still too big and too top-heavy to be sus-most trade to the south was cut off. Transport tained by a declining economy. Substantialdifficulties arose for both exports and essential reduction of recurrent expenditure will releaseimports. Rerouting Zambia's imports and ex- investible funds for investment in developmerLtports was a costly exercise that undoubtedly projects, especially in agriculture and manufac-contributed to the worsening of the economic turing.crisis in subsequent years. In particular, the It has been observed in recent years thatclosure of the Lobito route and the resulting revenues have tended to be consistently lowercongestion at Dar-es-Salaam compounded Zam- than expenditures. In fact, revenues have ten-bia's problems. ded to be stagnant. In the 1988 budget, a reci-

The economic situation in Zambia became pe for economic stagnation rather than growthperilous when the price of copper dropped to is found. The deficit in 1988, although smalleran average of only K793 per ton in 1975. Con- in real terms, will be largely financed by bor-sequently, there was a trade deficit of K105.7 rowing from the banking system, which willmillion at the end of that year. The trade reg- undoubtedly cause a much greater inflationaryime has been highly protected and has promo- impact than the deficits of 1985 through 1987.ted cost-prohibitive import substitution. To this

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Finally, the most intractable problem for In spite of the progress that has been madeZambia is the debt problem, which will require during the past 25 years in the expansion ofmuch foresight and courage to solve. Zambia's education and health facilities, the human re-total external debt rose from about US$3.3 source gap between African countries and dev-million in 1980 to an unprecedented US$6A eloped countries is still wide. In Sub-Saharanmillion in 1987. Zambia cannot reasonably be Africa, less than 80 percent of the populationexpected to repay the external debt from its between the ages of 6 and 12 enroll in primaryown resources without some relief measures. education; less than 20 percent of those agedNor can Zambia ignore its moral obligation to 13 to 15 and only 10 percent or less of thoserepay the loans it has contracted. An answer to aged 16 to 20 enroll in secondary education.the problem lies in genuine discussions among Obviously, the number of pupils who eventual-interested parties to find a fair and mutually ly reach institutions of higher learning is veryacceptable solution. small indeed. In each case, males considerably

out-number females. These figures representEducation and health substantial improvements over the situation of

25 or 30 years ago, but even in countries inOne of the primary objectives of all African which over 80 percent of males and 60 percent

governments is provision of adequate facilities of females enroll in primary school, about 50for the education and training of children of percent of the total may leave school withoutschool age. It has long been recognized and achieving functional literacy. This represents aaccepted that every child has a right to educa- great waste of human and financial resources-tion. It has been further accepted that a critical -as indeed does much of Africa's educationalshortage of educated and trained local workers system, given its frequently poor quality at allis an obstacle to economic expansion and social levels.advancement. Since the late 1950s and early The poor quality of schooling is in part the1960s, when most countries in Sub-Saharan result of the inability of governments to allo-Africa achieved independence, efforts have cate sufficient funds for education in theirbeen made to increase facilities for the educa- development programs, especially in recenttion and training of children. Much progress years. In Zambia, a blueprint has been prod-has been made, especially with expanding uced by the government for the provision ofprimary education. Available statistics show education for all by the year 2000. The blue-that in many countries nearly 100 percent en- print estimates that, with a teacher-studentrollment in primary education was achieved by ratio of 1 to 100 and the use of 85 percentthe end of 1986. Among countries that ach- trained and 15 percent untrained teachers, totalieved this remarkable progress are Botswana, recurrent costs for the envisaged universalCameroon, Kenya, Mauritius, Togo, Zaire, primary education program would be K483.80Zambia, and Zimbabwe. In most of these coun- million by the year 2000, against the figure oftries, adult literacy rates exceed 70 percent. In only K140.36 million allocated for all primarysome countries, however, very low rates of schools in 1986. This constitutes a more thanliteracy still prevail and primary school enroll- 300 percent increase by the year 2000. Addi-ments have actually fallen. tional expenditures would be required for new

Efforts have also been made by African gov- dassrooms and for other necessary administra-ernments to improve health facilities for their tive infrastructure. Any effort to promote prog-people by establishing hospitals, dispensaries, ress in education will depend heavily on avail-and clinics and providing training for the im- ability of increased financial resources.plementation of primary health care programs. The evidence shows that, in general in Sub-As a consequence, life expectancy increased Saharan Africa, standards of education arefrom approximately 39 years in 1960 to 50 falling in spite of the presence of better-edu-years in 1985. Significant efforts have also been cated teachers. The economic recession experi-made in providing social services intended to enced by so many countries in this region hasimprove living conditions, such as better water forced governments to introduce administrativesupply, housing, and facilities for transport arrangements that are not conducive to theand communications. maintenance of high standards and efficiency

in schools. The number of pupils in class in

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Zambia's primary schools is already too high ing overextended. In Zambia, 53 percent of thefor effective teaching. It is not uncommon for a population lives in urban areas. It is ironic thatteacher to teach as many as 50 or even 60 Zambia is reported to be the most urbanizedpupils in a class. In the 1950s and 1960s, the black African nation, yet it is endowed withaverage size of a class in primary schools was abundant and fertile arable land that couldabout 40, which even at that time was much easily absorb unemployed people in profitablehigher than that prevailing in more developed agricultural activities.countries. Textbooks, educational aids, and African governments will have to faceequipment are hard to come by. Desks are squarely the issue of the population explosion.sometimes not available in schools. Policies aimed at bringing down birth rates are

To enhance health conditions, apart from in order. In addition, improved agriculturalcontinuing to increase and improve health policies, such as better producer prices; feederfacilities, African governments should concen- roads; marketing facilities; and improved accesstrate on improving nutrition. In addition, they to welfare centers, clinics, hospitals, and electri-should devote available funds to improving the city in the rural areas would help stem thequality of water supplies, environmental hy- drift of rural dwellers to the towns and cities.giene, and sanitation. Improvement in medicalservices is imperative. But the beneficial effects Agricultureof improved medical services are easily nul-lified in an environment where sanitation is Agriculture occupies a central place in Afri-poor and environmental hygiene does not ex- can economies. Unfortunately, in many coun-ist. Surprisingly, in some African countries tries this important sector has been neglected.little or no attention has been given to the Some countries have suffered severe droughtselimination of such conditions as a way of over the years that have retarded agriculturalraising living standards. performance. In some cases, however, these

calamities have become scapegoats for poorPopulation policies performance.

In practically all countries in Sub-SaharanGrowth of population has a direct and im- Africa, peasants have a critical role to play in

mediate bearing on social and economic condi- expanding agriculture. Peasants do not usetions prevailing in Sub-Saharan African coun- much capital or require sophisticated machin-tries today. Any realistic long-term view of ery. Their methods of agricultural productionprospects for the development of countries in are usually labor-intensive. But they requireSub-Saharan Africa must take into account the some resources to purchase seed, fertilizer, andconstraint of high rates of population growth. other agricultural inputs. Sufficiently attractiveThe continent's average growth rate in 1986 incentives hold the key to increasing output inwas estimated at about 3 percent, compared agriculture. Producer prices should meet thiswith the world average of 1.8 percent. The criterion.World Bank has estimated that unless popula- Employment of a sufficient number of well-tion growth rates in Africa are reduced quick- trained, properly motivated agricultural exten-ly, the population could soar from 450 million sion workers is necessary to enable peasants toin 1987 to over one billion by 2010. make effective use of available resources and

In most countries in Sub-Saharan Africa, to apply modem techniques to maximize croppopulation growth is outpacing the growth of production. Agricultural infrastructure in ruralgross domestic product. The social implications areas is often nonexistent; feeder roads arefor such high growth in population when it is poor, bridges over small rivers are unreliable,not matched by a correspondingly high or and depots do not have proper handling facili-even higher rate of growth in gross domestic ties for marketed crops. Simple technology isproduct are enormous. One result is that peo- essential for peasants to achieve higher produc-ple in rural areas have tended to migrate to tivity and food security in Africa.urban areas in search of paid employment. In many countries in Sub-Saharan Africa,Available social services, such as houses, there is abundant land suitable for growing aschools, hospitals, and water supplies, often variety of crops. Labor too is abundant. Apartinadequate for existing populations, are becom- from the countries in the Sahel and occasional

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drought, sometimes persisting over a period of of grinding mills, water points, and improvedtwo or more years, the dimate in many parts stoves in the rural areas would release muchof Africa is suitable for agriculture. Failure to of the energy of women for agricultural prod-develop agriculture is basically the result of a uction.lack of consistent agricultural policies with In Zambia there is strong evidence that sec-adequate institutional support. Governments do ure land titles increase agricultural production.not make available sufficient resources and In recognition of this, the govermment hassupport services for the development of agri- established settlement schemes in all provinces.culture compared with other competing inter- These schemes provide well laid-out farmsests. It is not surprising that the contribution with individual ownership.of agriculture to gross domestic product con- At present, land in Zambia is managed bytinues to be low. many authorities or institutions. There is no

It has long been recognized that agriculture publicized channel of appeal against excessiveis crucial for the economic survival of Zambia. use of authority by any one of these institu-The country has good climate and rich soils tions. The result is a great demand for andfor the growth of a variety of crops, vege- pressure on the less than 1.5 million hectarestables, and fruits. Unfortunately, it has not of state land. The new breed of farmer, withbeen possible to pursue consistent agricultural knowledge and money, sees the limited statepolicies. Too many schemes for large-scale land as providing the necessary security foragricultural production have been launched investment. Hence, the relatively wealthy andand later abandoned without any tangible res- educated Zambian has failed to go back to theults. In 1980, a 10-year program called Opera- village. This has deprived the villages of capi-tion Food Production was launched. The objec- tal investment and skill so vital to the develop-tive of the program was to establish two mech- ment of agriculture.anized state farms of 20,000 hectares in each of To achieve a substantial increase in foodZambia's nine provinces, as well as to assist output in Zambia in the longrun, it will bethe rural reconstruction centers (RRCs) estab- necessary to adopt realistic policies for thelished in the early 1970s. The RRCs and the agricultural sector and to pursue them relent-state farms have not so far contributed much lessly and consistently. A number of policyto the food production effort. In the 1987 fiscal guidelines are in order:year, agriculture, together with forestry and * The agricultural sector should be accordedfishery, contributed only 12 percent to the high priority by the government in restructur-gross domestic product. ing programs. The choice of agriculture as the

Zambia has the capacity to contribute sig- leading sector is based on its potential to con-nificantly to food output in Africa. With 74 tribute to foreign exchange needs through im-million hectares, of which 42 million are ar- port substitution in the food industry, as wellable, Zambia has the opportunity to choose the as diversification of exports. The agriculturesource of output growth. Currently only about sector has the highest potential in the medium2 million hectares of Zambia's arable land are term, and perhaps the long term.under cultivation. This is less than 5 percent of * In 1987, 91 percent of gross domestic prod-the available arable land. Nevertheless, even uct was spent on public and private consump-using the available deared land on a more tion, leaving only 9 percent for investment. Inefficient basis, Zambia can produce large sur- order to sustain high levels of production inpluses of both food and cash crops. This is agriculture, there is a need for investment andpossible with the use of available technology- consumption allocations to be restructured. The-seeds, fertilizer, and support services. aim should be to increase the amount of funds

Most of the rural population in Zambia con- for investment in the agricultural sector.sists of women and children, because men * Land tenure policy should be considered. Itwork in the mines. The women cannot manage is unlikely that commercial banks and privatelarge fields. Therefore, productivity must be lending institutions will extend substantialincreased through yield increases. Higher prior- credit to small-scale farmers on a medium- andity should be given to cassava and sorghum, long-term basis until changes are made in thetwo of the most important food crops for fami- traditional land tenure system.lies in the rural areas. Moreover, the provision

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o It is necessary to avoid a rigid pricing sys- Manufacturingtem for agricultural crops. The aim should beto allow farmers to obtain fair prices that are For the majority of developing countries, andnot unduly distorted by the dominance of the Sub-Saharan countries in particular, theprice controls established by the government. desire for rapid promotion of industrialization* Credit institutions set up primarily to assist has remained a fundamental objective. Indus-small-scale farmers should be organized effi- trialization has been viewed as a principalciently. They should also receive support from route to increased levels of productivity andthe government to ensure that the needs of the national income, alleviation of balance of pay-farmers are satisfied. ments constraints, diversification of economies,* Marketing and other support institutions reduction of excessive dependence on primaryshould be made efficient. exports, and ensuring the transfer to modern* Grain storage facilities should be improved. technology within the developing countries.* The number of extension workers should be Industrialization also has been regarded as aincreased to make them effective in advising way to transform rural subsistence econormiesand gWuding farmers. They should be provided into commercial economies and to create jobwith transport to enable them to reach farmers opportunities for the many unemployed andin remote areas. underemployed, and thus raise per capita out-* The role of peasant farmers is particularly put and living standards. Industrialization hasimportant in the long run. Few publicly owned been thought to bring with it necessary amdlarge-scale agricultural enterprises have been desirable changes in social and cultural atti-successful in Zambia. It is reasonable, there- tudes and institutions through the modernizingfore, to suggest that available resources should effect of imported organizational methods andbe used to improve the agricultural efforts of technologies. It has been regarded as a meanspeasants and small-scale farmers. to promote national unity and security. Ini The goal of self-sufficiency in food should be short, industrialization has been viewed as avigorously pursued. Promotion of nontradition- principal vehide for catching up with the dev-al export crops should be pursued cautiously. eloped market economies.There should not be a shift in policy from the The experience of industrialization in Sub-goal of self-sufficiency to promoting nonfood Saharan Africa, however, has been unsatisfac-export crops. In general, the Lagos Plan of tory. The objective of conserving foreign ex-Action gives the broad guidelines for develop- change, for example, has had only limitedment on the basis of self-reliance. It gives high success because many industries have beenpriority to the achievement of self-sufficiency heavily dependent on imported inputs. Inin cereals, livestock, and fish products. It calls Zambia, for example, processing industriesfor a greatly increased flow of resources to have had to rely on imported raw materialsagriculture and remunerative price policies to because local production has not been forth-increase agricultural productivity. coming, especially from agriculture. The coum-

The long-term prospects for achieving self- try imports 90 percent of its requirements ofsufficiency in food production in Sub-Saharan wheat, milk and fishmeal for processing intoAfrica are good if correct priorities are set and animal feed, all barley used by the breweries,followed steadfastly and in a realistic manner crude vegetable oil for the manufacture ofby African governments. It is important to cooking oil, and steel for the large number ofnote, however, that development in agriculture, metal fabricating factories. In addition to inter-as indeed in other sectors, largely depends mediate materials, the same industries haveupon an adequate supply of funds for invest- been involved in the importation of new mach-ment Also, the development of the agricultural inery and equipment. The country relies heavi-sector will depend on introducing gradually ly on costly expatriate staff to manage newsome simple and appropriate technologies to projects and operate new machinery.maximnize productivity. Industrial performance in export promotion

has been disappointing, largely because prod-uction is primarily oriented toward meetinglocal demand, with exportable surpluses emer-ging only after local demand has been met.

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Interindustry linkages have been frustrated cent of all manufacturing firms analyzed inbecause agriculture has responded only mildiy 1978 produced mostly for the luxury market,to the potential backward linkages from indus- and less than 10 percent produced for thetry. This has been the result of poor producer mass market or for inputs for mass industries.prices, lack of marketing facilities, inadequate The use of capital-intensive technologies hasfinancing, and lack of clear and coherent partly been reinforced by the tariff structuresguidelines. Thus industrial projects that were that emerged after independence. Nominal andestablished to utilize local agricultural raw effective tariff structures tend to favor the do-materials more often have been resorting to mestication of consumer goods against inter-imported inputs. mediate and capital goods. This tends not only

The performance of industrialization in gene- to give the greatest incentives to the least es-rating employment has been disappointing. sential imports for domestication, but also toOne explanation has been that industries have exacerbate the tendency toward prematureadopted capital-intensive as opposed to labor- widening of the productive structure (the prod-intensive techniques of production. In some uction of sophisticated, high-income durablecases, industries have undermined employment consumer goods) rather than the developmentin the informal sector. Modem shoe and sandal of backward linkages toward intermediate andfactories, for example, have tended to reduce capital goods industries.the market for the small handicrafts workers There is urgent need for a new strategywho formerly made shoes of leather or worn- aimed at establishing a strong industrial baseout rubber tires. that may be both self-sustaining and suppor-

Probably the most important single and gen- tive of the process of development in other-eial explariation for -the poor performance of sectors of -the economy, especUlfly`~ the snmali-industrialization in Sub-Saharan Africa has scale, agricultural and informal sectors. Such abeen the industrial strategy adopted-that is, strategy would give greater priority to produc-the import-substituting industrialization strate- tion of basic needs goods for general consump-gy. Since independence, most Sub-Saharan tion. It would also involve deliberate long-termAfrican countries have been following this efforts to strengthen basic industries, such asstrategy, which takes as given the existing channeling new investments to enterprisesdistribution of income and its associated fea- involved in the production of capital and inter-tures (high demand for nonessential consumer mediate goods for other sectors and utilizingdurables and personal services by middle- and local materials as appropriate.upper- income groups; depressed demand for Resources for this type of strategy could beessential, mass consumption goods) and is available if. (a) the necessary incentives wereheavily dependent on a variety of foreign in- devised to stimulate the existing modern in-puts (such as product specifications and prod- dustries to produce more efficiently and profi-uction technology). By adopting a market- tably; (b) investment in existing consumerbased, import-substituting industrialization goods industries were limited to maintainingstrategy, planners have permitted market forces existing productive capacities, except for thoseto shape decisions concerning which industries producing essential basic needs goods; and (c)should be established, where and how. Even in the mining industries, in particular, financedtheory this approach seems more likely to have their needed capital, replacement, and develop-aggravated the situation than to have helped ment expenditures with their own retainedrestructure the dualistic features of these econ- earnings or from external sources.omies, as is clear from the evidence from LatinAmerican countries, such as Brazil. Public policy for development

In the case of Zambia, the growth of in-comes in the urban areas after independence In order to have meaningful development,(mainly among the middle- and upper- income the Sub-Saharan African countries should notgroups), has tended to bias demand toward treat growth led by agriculture and growth ledluxury consumption goods (sophisticated, ad- by industry as mutually exclusive, becausevanced technology, durable consumer goods, they are closely interlinked. Industry couldand personal services) as opposed to simple, provide a domestic market for agricultural rawmass consumption goods. More than 75 per- materials and foodstuffs; produce appropriate

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farm inputs that, over time, could contribute to munications between towns and regions; theexpanded agricultural productivity; provide provision of feeder roads in the rural hinter-new jobs for underemployed agricultural work- land; and the provision of inputs and servicesers; and set off chains of development in rural such as credit and health and educational fad-areas that could contribute to restructuring lities in the small towns. Public policy shouldentire economies. The agriculture sector could help to develop the secondary cities and smallprovide the savings for capital formation in towns and maximize the linkages betweenindustry, provide labor for industry, and stim- agricultural and nonagricultural sectors byulate demand for industrial services and in- ensuring an appropriate allocation of govern-dustrial inputs. Agricultural output could also ment expenditures between secondary andstimulate nonfarm activities in trading and primary cities and, within the cities, betweenagroprocessing. the poor and the better-off.

There should be a fuller recognition of the In other areas of policy, it is recommendedvibrancy of the informal and traditional sector that to conserve and earn foreign exchange,and of the key role it can play in the nonfarm African planners should not treat import-sub-sector over the coming decades. This sector can stituting and export-oriented industrializationgenerate employment for new entrants to the strategies as mutually exclusive. In industdalnonfarm labor force (graduates and school development plans, both private and publicleavers), provide an effective way of utilizing sector investment allocations should be equallythe potential of women for economic develop- considered. Governments should review seri-ment, help in building the capacity for various ously their orientation toward the establish-repair and supply services for the modern ment of domestic capital goods industries,sector, and act as a spawning ground for the without which an indigenous technologicaldevelopment of an entrepreneurial class, which base is unlikely to develop. A detailed investi-is essential to successful industrialization. gation of the role of foreign capital and the

Public policy should aim to do the following potential for regional cooperation in the estab-in order to help the informal sector develop: lishment of such industries is required. Utiliza-recreate the image of the informal sector; avoid tion of such regional bodies as the Preferentialartificial discrimination in favor of modern Trade Area (PTA) and the Southern Africanindustry against the informal sector (such as Development Coordination Conferenceovervalued exchange rates and excessively high (SADCC) should be emphasized.selective tariffs and quotas, cheap credits, tax Government expenditures should be in-breaks, and subsidized utilities and infrastruc- creased to encourage manufacturing in ruralture provided to modern industries); improve areas. Govemnment funding alone, however,the practice of apprenticeship; make it possible will not be enough. Private entrepreneursto strengthen the links between the formal and should participate in the process of establisliinginformal banks; and provide security for infor- small-scale and large-scale manufacturing enter-mal enterprises by granting them a minimum prises in rural areas. Experience in Zambia hasof legal protection. shown that, given the appropriate incentives

Nevertheless, while helping the informal and necessary encouragement, the private sec-sector, public policy should also aim to devel- tor can perform functions vital to the economicop the long-term capabilities of modern indus- development of the country. For example, it istries. This could be done through formal edu- the private road haulers who have been res-cation and training, internal on-the-job training ponsible during the last decade or so for theby industry, use of existing technology to meet distribution of fertilizers and seed to ruralthe production needs of industry, and the use farmers and for the transportation of theirof consultancy organizations of various types. produce (such as maize, rice, groundnuts, rice,Special attention should be given to the im- wheat, soybeans, and sunflower) to maize silosprovement of standards and quality control, and other storage depots throughout the coun-and efforts should be made to promote link- try. The government is, therefore, not encurn-ages between and within industries. bered directly with the supervision of fruck

Public policy should also aim at improving drivers, maintenance of trucks, obtaining spareinfrastructure through the construction and parts, and labor-related problems. The contri-maintenance of highways, roads, and telecom- bution of small private transporters to econom-

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ic development in Zambia has been conmmen- the long run, such neglect causes more stagna-dable. tion.

Many other successful small private entrepre- Much has been said already about the exter-neurs are well established in the footwear, nal debt of African countries. The problem ispottery and earthenware, arts and crafts, and becoming worse every year. No long-termprinting and publishing industries. Most of perspective on the recovery of African nationsthese small enterprises have been established can be regarded as realistic if a solution toin recent years. Entrepreneurs have mobilized Africa's external debt problem is ignored.the necessary capital or financial support, Shared responsibility among African countries,found tools or equipment and raw materials, creditor nations, and international financialand located the necessary premises and the institutions needs to be accepted. A flexibleneeded markets. A common feature among approach and genuine goodwill among lendersmost such private enterprises is spontaneity and debtors will make it possible to find solu-and flexibility. It would be undesirable to stifle tions to the problem.such initiative, and its promoters deserve en- Economic reform programs should aim tocouragement and support. narrow existing budget deficits, reduce and

The goal of self-reliance enunciated in the eliminate subsidies altogether, and restrict bor-Lagos Plan of Action is applicable as much to rowing from the banking system. Lending toagriculture as to industrialization. It is vital the private sector should be increased andthat countries in Africa increase their degree of balance of payments deficits should be reducedeconomic integration in order to contribute to to manageable levels. Borrowing of short-termrapid overall recovery and growth. For the credits with less than five- to ten-years repay-process of industrialization to succeed in Afri- ment periods should be avoided. Above all,ca, economic cooperation among African coun- realistic exchange rate adjustments and struc-tries is the key. tural adjustment policies have to be pursued to

achieve an increased volume of exports.The road ahead Economic growth will remain the primary

concern of governments in Sub-Saharan AfricaThe provision of adequate funds for devel- from now to the year 2000 and beyond. Agri-

opment is vital. Without substantial funds for culture, especially food crops, security of sup-investment in key sectors, such as agriculture, ply, and integrated rural development, willit is difficult to see how real growth can be continue to be the priority area for many yearsachieved at a time when many countries in to come. The mobilization of resources will beSub-Saharan Africa are grappling with severe critical to the achievement of the expected rateproblems of regression. Self-reliance should be of economic growth. Governments, as part ofthe basis of any meaningful program for devel- their self-reliance efforts, wil be expected toopment in the Sub-Saharan region. But, for formulate effective policies to encourage dom-rapid development, foreign assistance-not estic savings. It will be necessary for politicalmerely food aid-will be necessary. leaders to fornulate pragmatic policies that

Any realistic long-term perspective on Afri- will ensure the steady capital flows so des-can development must consider improved edu- perately needed for stimulating economiccation, health, and living standards as a basis growth. The road ahead promises to be full offor sustained growth. Experience has shown challenges. Vision, courage, and commitmentthat in a period of economic regression, these are needed to face these challenges success-aspects of development are easily neglected. In fully.

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8

Long-Term Development Prospectsfor Somalia

Ibrahim Samater

The main objective of this paper is to outline the food production has increased by an average ofmedium- and long-term development issues fac- only 2 percent a year since the 1960s. Today, pering Somalia. It begins with an analysis of Somalia's capita food production is below what it was priorpoor economic performance during the past two to independence in many of the countries in Sub-decades and a review of its experience with stabili- Saharan Africa. Somalia not only fits into this gen-zation programs during the 1980s. Vast changes in eral picture but provides one of its darkest spots.government policies and renewal of popular par- During the late 1970s and the 1980s, Somalia,ticipation are recommended to reverse the long- like many countries in Sub-Saharan Africa, experi-run trend of stagnation in Somalia's productive enced a chronic economic crisis of severe propor-sectors. Macroeconomic and sectoral policies to tions. The crisis continues and is characterized bypromote long-term, equitable growth are empha- foreign exchange shortage, unsustainable balancesized. The issues of development strategy and of payments and budget deficits, very high rates ofdemocratic "regeneration"in Africa and their rele- inflation, low and sometimes negative productionvance to Somalia are discussed. A doser look into growth rates, high population growth, and de-the past is advocated not only to identify past er- creasing per capita incomes. The living standard ofrors, but also to discover the existing basic the population would have declined but for thestrengths on which to build the future. generous inflow of food and other assistance hi the

1980s. The economic crisis has been exacerbated bySomalia's economic performance during the past severe external shocks induding drought, bordertwo decades conflicts, and refugee influx. The country has also

faced the problems of political instability and civilWhile there have been some bright spots, Sub- war.

Saharan Africa on the whole has exhibited poor Table 1 provides a general picture of productioneconomic performance during the past two de- growth in Somalia since 1970. Present data is col-cades. Population in Sub-Saharan Africa has in- lected through ad hoc and limited surveys; in somecreased by approximately 3 percent a year, but sectors the data is close to guesswork. Hence there

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Table 1 Growth in gross domestic product by sector and general government consumption, 1970-87(annual percent)

GeneralGDPat government

Year factor cost Agriculture Industry Services consumption

1970 -1.7 .. .. .. 6.81971 0.6 -1.7 5.1 4.7 -1.31972 8.4 6.2 1.7 17.9 168.71973 -3.0 -4.4 -15.6 6.7 -2.01974 -25.0 -35.3 2.8 -12.0 -1.61975 43.9 73.1 -3.0 15.8 5.21976 0.5 3.6 10.7 -10.9 -17.51977 27.2 35.3 8.2 12.7 2.61978 1.7 5.1 -30.0 3.9 44.81979 -6.1 -11.1 20.2 3.7 7.61980 8.0 7.0 10.4 10.1 -47.21981 7.6 14.9 -7.0 -8.8 10.81982 3.1 1.7 5.4 7.1 9.81983 -14.1 -17.7 -13.4 -1.5 -0.81984 9.9 14.1 3.7 -0.5 -16.31985 10.0 12.6 7.3 2.4 -2.61986 4.3 -6.8 8.8 0.9 8.91987 12.5 15.3 3.0 6.1 22.0

.. Not available.Note: Based on data in 1980 Somali Shillings.Source: World Bank, World Tables 1988-89 vol. II (Washington, D.C., 1989).

are wide fluctuations in the data. Despite the pau- al prices and marketing, together with favorablecity of national data in all sectors and the unre]i- weather conditions, accounted for the increase inability of the figures, one is forced to use them, if the production of food grains, especially maizeonly as a guide to trends. and sorghum (see Table 2).

Although wide fluctuations in the growth rates Despite the improvement in agricultural pro-of the productive sectors are partly due to weak- duction, which had a modest impact on GDP, thenesses in data collection, especially in the livestock overall performance of the economy left much toarea, other factors should be taken into account. be desired. Macroeconomic imbalances in theThe data for the 1972-75 period reflects the effects economy as a whole showed no sign of being cor-of the serious drought of 1973-74. By 1977 the rected. While external current account deficits andeconomy recovered from the effects of the drought. domestic savings gaps are to be expected in a poorIt suffered a sharp decline in the subsequent peri- economy, these gaps were particularly wide inod, largely because of sharp increases in govern- Somalia. The current accounts deficit and the gapment expenditure induced by the Somali- between domestic investments and domestic sav-Ethiopian war of 1977. The explosion in demand ings as ratios of GDP stood at 22 percent and 21caused by government expenditure, coupled with percent, respectively, in 1985. With both public anddeclining production, plunged the economy into private domestic savings remaining negative forserious crisis manifested by high inflation, low ex- many years, the gap was met by aid flows that fi-port earnings, and large budget and balance of nanced all investment and even part of domesticpayments deficits. consumption.

Reform measures, including price liberaliza-tion, partial devaluation, and some curtailment in Causes of poor perfonnancegovernment expenditure, resulted in a turnaroundfor the productive sectors beginning in 1981. This Many factors explain Somalia's poor economicturnaround had its ups and downs, but imnproved performance, including drought, war, refugee in-incentives arising from liberalization of agricultur- flux, and external economic shocks. But one cannot

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Table 2 Agricultural production, 1970-86(thousand metric tons)

Staple crops Cash crops

Year Maize Sorghum Sesame Sugar Bananas

1970 122.1 158.1 43.4 46.0 45.51971 99.4 128.7 35.3 .. 150.81972 114.9 149.1 41.0 30.3 188.51973 98.9 128.4 35.4 30.6 168.31974 96.8 125.7 34.7 33.2 157.51975 103.6 134.7 37.3 30.0 106.01976 107.6 139.3 38.8 24.0 96.61977 111.3 145.1 40.6 21.4 65.21978 107.7 141.1 40.0 29.1 69.71979 108.2 140.1 40.6 26.8 72.21980 110.5 140.5 38.4 34.1 60.41981 157.3 206.9 27.1 30.8 69.01982 150.0 235.0 57.0 30.5 78.71983 235.0 120.0 59.5 39.5 98.91984 270.1 221.2 46.0 62.21985 382.0 226.0 100.0 60.01986 381.9 251.3 52.4

Not availableSource: World Bank data.

avoid the conclusion that Somalia's slow economic economy, the government nationalized fuel importdevelopment is primarily the result of the adop- and distribution, foreign trade, all financial institu-tion and implementation of inappropriate strate- tions, and the few major industrial establishmentsgies and policies. The financial and monetary that were in private hands, such as power plantscrises-marked by high inflation, large budgetary and the sugar factory and its plantation estates. Itand current accounts deficits, phenomenal expan- made major inroads into retail trade, grain pur-sion in money supply, and mounting external chasing and distribution, and pricing policies ondebt-are directly attributable to the government's most items. Government policy gave priority to in-expansionary fiscal policy and central bank deficit dustrial investment by the government and prolif-financing. Wages in the public sector have been eration of state enterprises in many fields. It gaveheld down by government policy (there are no free preference to collective over private initiative. Thelabor unions), and various prices are controlled by result was an erosion of incentives for the produc-the government. Excessive demand and high infla- tive sectors, overvalued exchange rates, ineffectivetion rates have been caused by expansion in gov- investment programs, demoralized public servic-ernment expenditure that went directly to military es, and poor performance in the public sector.expenditure and the upkeep of the huge public sec- In agriculture (excluding livestock and forestry)tor bureaucracy. the government's weighty role was manifested

The economic crisis is said to be the result of the through control of output and input markets as1977-78 war with Ethiopia and the subsequent in- well as ownership and management of a great partflux of refugees into Somalia. These factors certain- of modern production processes in the field. Thely contributed to the problem, but they were Agricultural Development Agency monopolizedimposed on an already sick economic system suf- the marketing of sorghum, maize, rice, and oilfering from long-run stagnation in its productive seeds. The National Commercial Agency monopo-sectors. Since 1970 the government has embarked lized the sale of imported items such as sugar, tea,on a policy of bringing about economic transfor- coffee, wheat, edible oils and other imported foodmation through what it terms scientific socialism. items, specifically food aid. Establishments pro-To control the so-called commanding heights of the cessing agricultural products monopolized items

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in their fields of operation-cotton by Somaltex, percent of both value added and employment andsugar by SNAI and the Juba Sugar Project, and 95 percent of gross capital formation in manufac-fruits and vegetables by the canning plant of ITOP. turing industries. The industrial sector dependedInput supplies like fertilizers, spraying equipment heavily on the government's development fundsand chemicals, seeds, provision of drugs, and trac- and loans from the financial sector. About 27 per-tor services were monopolized by many interlock- cent of the 1974-78 Five-Year Plan public invest-ing government agencies, while the Development ment was allocated to industry, which received 21Bank and the Commercial Bank (both government- percent of the loans and advances from the finan-owned) and their branches acted as the sole sourc- cial sector between 1976 and 1980.es of agricultural credit Government intervened in Yet, as mentioned earlier, performance has beendirect agricultural production through the opera- dismal since the late 1970s. By 1984 capacity utili-tion of state farms and major settlement schemes zation in public enterprises was only 26 percentoccupying more than 100,000 hectares of mostly ir- and their contribution to GDP was 39 percent of itsrigated or potentially irrigable prime land and the 1978 level. While the private sector maintainedownership and management of over 15 agricultur- productivity and real wages, the public sector in-al processing industries. creased its employment by 60 percent from 1978 to

The most telling effect of such government in- 1984, owing to the policy of recruitment of all sec-tervention on agricultural production was in the ondary school leavers. The prolonged economicmarketing system, which failed to maintain incen- crisis depressed real wages and resulted in absen-tive prices. The Agricultural Development Agency teeism, low morale, moonlighting, pilferage, and,(ADA), responsible for grain purchases from the finally, massive outflow into the private sector andfarmers and sales to the public, was created to, emigration into the neighboring Gulf countries.among other pursuits, stabilize prices, mobilize re- Although the foreign exchange problem was thesources for further investment in agriculture, and most immediate cause, many other factors contrib-ostensibly protect farmers from exploitation by uted to the decline of industrial activity, includingtraders. It ended up, after a decade, forcibly appro- distorted systems of protection, mainly throughpriating grain at declining real prices-in 1982 it quantitative restrictions and an ad hoc tariff struc-was buying red sorghum at one-half the 1973 price ture; poor choice of investments; insufficiency ofin real terms. The farmers reacted very early to this managerial and technical skills; and poor labordisincentive by avoiding the agency, selling their performance. Understandably many underlyingsurplus surreptitiously, and reducing the produc- structural problems-such as the quantity andtion of surplus grain beyond their subsistence quality of labor, the resource endowment, a smallneeds. Even in the heyday of its power, the ADA internal market accentuated by nomadism, andwas marketing only 37 percent of the total maize competitive external markets, among others-in-and sorghum produced. The farmers never fully terfere with industrial development in Somaliaaccepted what the ADA offered; the black market and require long-term solutions. But it remainswas born with its monopoly. dear that government intervention in matters of

The lack of incentive prices was accompanied management, pricing, wages, and employmentby incapacity of public management in the produc- have worsened the situation.tion processes owned and managed by the govern- Accentuating these distorting policies in thement. Almost all agricultural enterprises were productive sectors is the general situation of publicdisappointing in their output performances and finance. Data on central government operationsreturns on investment. Furthermore, the interven- suffer from serious weaknesses: current and capi-tion of the government in the input and output tal expenditures are not clearly distinguished,markets and its undertaking of production activi- budgetary accounts do not cover total central gov-ties overloaded its meager capacity to such an ex- emient transactions, and little is known abouttent that the other necessary functions expected extra-budgetary expenditures, which are presum-from the public sector-such as proper registration ably security matters. Although these deficienciessystems, water and drainage management, and re- inhibit economic analysis of public sector expendi-search and extension-seriously suffered. tures, certain condusions are clear from the gener-

The tiny industrial sector of Somalia has been al picture. The gap between total revenue andheavily dominated by the public sector as a result expenditure, expected in a poor developing coun-of the several waves of nationalization mentioned try, has been steadily expanding over the years un-earlier. By 1978 the public sector accounted for 80 til it exploded in the 1978-80 period. The result was

III

Central Bank deficit finandng of current expendi- inflation rate were reduced and production oftures of 920 million Somalia shillings in 1979- commodity exports increased during 1982 andabout 10 percent of GDP. Lack of financial disci- 1983. In 1984, however, the government aban-pline in government entities, the role of the state as doned the stabilization programs. The overall def-the main employer in the urban sector, and the icit rose sharply in 1984 and 1985 (with publicmassive expansion of military, paramilitary, and sector borrowing from the banking system dou-other security forces are the main elements behind bling in one year), in 1984 exports fell to 45 percentthe large budgetary deficit. The recorded expendi- of the 1982 level, arrears on debt service mounted,ture on defense-not including interior and police, and the inflation rate reached record levels.national militia, and other defense-related expen- Faced with these difficulties, the government,ditures-in 1978 and 1979 amounted to over 8 per- again with the assistance and financial supportl ofcent of GDP. the IMF, the World Bank, and other donors, adopt-

Large fiscal deficits resulted in internal and ex- ed a major adjustment program in early 1985. Theternal imbalances. The internal imbalances were government also outlined a medium-term devel-reflected in a tripling of the money supply between opment strategy in a policy framework paper that1977 and 1981, an acceleration of the inflation rate reflected agreements reached with the donors. Theto 59 percent in 1980, and reduction in private in- stated objectives of these programs were to restorevestment. Externally the imbalances were reflected financial equilibrium and lay the groundwork forin a widening of the chronic current account defi- sustained economic growth. But in October 1987cit, serious decline in foreign reserves, and expand- the government fixed the external value of the So-ing foreign debt with mounting arrears in debt mali shilling at a rate much below the auction rate.repayment. Somalia's debt service ratios were 168 In February 1988 it imnposed price controls on apercent and 104 percent in 1984 and 1985, respec- large number of goods. As a result the programtively, compared with 26.9 percent and 31.8 percent came to an abrupt halt.for the same years for Sub-Saharan Africa as a At the beginning of the reform in 1981, producerwhole. Current debt service obligations during prices for agricultural crops were raised and a par-1986 and 1987 (that is, excluding the outstanding tial devaluation of the Somali shilling was effected.arrears at the end of 1985) exceeded $150 million a The monopoly of the ADA in grain marketing wasyear, an amount greater than the sum of annual ex- abolished and farmers could freely sell theirport earnings and remittances of nationals work- produce in the market. These measures had someing abroad. In 1986, after the government positive impact. There was improvement in agri-abandoned its stabilization policies, the inflation cultural production, especially in maize and sor-rate jumped to a record 92 percent and arrears on ghum, that moderately affected overall GDPdebt service increased to about $190 million. growth in 1984 and 1985. The fiscal situation and

the balance of payments also experienced slightStabilization programs during the 1980s improvements in those years, even though the def-

icits in both remain large and the overall imbalanceBy 1981 the situation became untenable. With in the economy remains threatening. Improvement

prodding from donors, including the World Bank, in the performance of the tiny industrial sector isthe International Monetary Fund (IMF), and other yet to be seen.bilateral donors, the government realized that a These policy changes represented only the firstchange in course was essential and reluctantly em- faltering steps along the path of restoring financialbarked on a series of economic reforms. Foremost equilibrium, rehabilitating agricultural and indus-among these reforms were price and trade liberal- trial productive capacity, and laying the founda-ization and foreign exchange reform under stabili- tions for long-term equitable growth. The stepszation programs supported by the MF. faltered because the government had not only

From 1981 to 1983 two stabilization programs shied from the hard choices it faced, but also re-supported by lIMF stand-by arrangements were treated on several occasions from the correct, nec-implemented. Among the measures taken under essary steps previously taken.these programs were exchange rate adjustment, The price liberalization itself was only partial.fiscal and monetary restraint, and liberalization of Government monopoly or public control in thedomestic agricultural prices and marketing. There pricing and marketing of important agriculturalwere some improvements in the economic and outputs and inputs remains. For example, thefinancial situation: the overall budget deficit and Hides and Skins Agency (HAS) monopolizes the

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collection, wholesaling, and export of hides and Public resource mobilization and expenditure reductionskins. Similarly, export of frankincense and myrrh,products that are unique to Somalia, are monopo- Public resource mobilization and a relevantlized by government-sponsored cooperatives, and public expenditure program are issues that havethe export of bananas is totally in the hands of a not yet been seriously tackled in Somalia. General-go emnment-private joint venture company. These ly speaking, the government has to establish pru-important areas for export expansion and potential dent budget policies, raise revenue in the leastforeign exchange earnings did not show the im- costly ways, and institute efficient public spendingprovement exhibited by livestock exports as a re- policies tailored to poverty alleviation. Judged bysult of the reforms. the ratio of revenue to GDP, the Somali economy is

not heavily taxed. Nonetheless, improvement ofThe half-hearted nature of the foreign exchange tax administration and rationalization of the tax

reform made its operation cumbersome and its structure could increase revenues.effects mixed. Instead of instituting a market- There is substantial scope in expenditure reduc-determined uniform rate, in 1985 and 1986 the gov- tion. Although the government has abandoned theemmnent applied a system of multiple exchange policy of guaranteed employment for school leav-rates: the official rate, which applied to debt trans- ers, military expenditures use up most of the recur-actions, military and diplomatic expenditures, and rent budget. Dismantling or reducing the hugepetroleum imports; a free market rate, which was defense and security apparatus and decreasing al-used in all private imports and some public enter- locations to general administration compared withprise imports; and a small third market, adminis- economic and social services are areas for improve-tered by the government-owned Commercial ment. In recent attempts at expenditure reduction,Bank, for tourist receipts, overseas travel expendi- the axe, ironically, has fallen on development ex-ture, and imports financed by commodity aid. The penditures rather than on unproductive expendi-free market rate that replaced the previously exist- tures. Public investment programs rarely give theing parallel (black market) rate has helped export- necessary attention to the recurrent expenditureers and reduced some administrative controls, but implications of new projects. For example, m 1986the existence of the different rates creates distor- development expenditure and recurrent expendi-tions and encourages underinvoicing. ture composed 48 percent and 52 percent of total

government expenditure respectively, while theContinued expansion in government expendi- comparable proportions for Sub-Saharan Africa

ture outstripped the slow growth in domestic were, on average, 25 percent and 75 percent for therevenues. In nominal terms total government ex- 1981-85 period.penditures increased by 170 percent from 1983 to It seems that in Somalia preference is given to1985 while domestic revenues increased by only 22 new expenditures rather than to maintaining andpercent. The increasing deficit could only be fi- operating existing facilities and services. Evennanced, in the absence (or decreased availability) within recurrent expenditure, priority is given toof commodity, food, and other aid programs, by re- general administration instead of economic andcourse to bank borrowing. The resulting fiscal cri- social services. For example, expenditure on gener-sis undermined efforts to put the economy on the al services (induding defense) increased from 83path of stabilization and steady growth. percent in 1984 to 89 percent of total recurrent pub-

Reforms enacted between 1985 and 1987, a perii- lic expenditures in 1986, while spending for socialod.ffvorblewee c s bro t a t and economic services fell from 17 percent in 1984

odcofern favora ule athera ronditions d b pouhts about to 11 percent of the total in 1986. The comparablerieovery in bananagriulur thereveal production poort figures for Sub-Saharan Africa, on the average, forlivestock and bananas. But the reversal that took the period from 1981 to 1985 were 63 percent forplace at the end of 1987 brought with it central general srvc and 37 percent for

general services and 37 percent for economic andbank financing of the budget deficit and runaway social services. As a result, services for roads, agri-inflation, and again resulted in a serious slowdown culture, education, and health have deteriorated-of the initial spurts in growth. The government is sometimes to the point of nonexistence. In such anow conducting discussions with the World Bank situation, new investments in development pro-and the IMF on the implications of these new poll- grams are clearly misguided.des and on ways of getting the previous stabiliza- The public investment or development programtion and growth programs back on track. must not become a cosmetic document, discarded

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as soon as it is printed. It must be realistic and nomic imbalances. These must be accompanied bystrictly followed. To be realistic, it must be strongly micro policies that encourage economic agents-coordinated with the yearly budgets of the Minis- households, firms, and private and public enter-try of Finance. The capital expenditure of the bud- prises. This is all the more relevant and urgent be-get must serve as a revolving one-year plan of the cause some of the serious shocks to whichinvestment program itself. In this way it is possible countries must adjust are external. The oil crisis,to balance the availability of resources (foreign ex- international interest rate fluctuations, unpredict-change and local currency) and the demands of the able movements in the prices of commodities andprojects. It is sad that such a simple recommenda- raw materials, protectionist measures by industrialtion is being made today on such a straightforward countries, and inported inflation are externalmatter; the practical steps for its implementation shocks that policymakers in individual countrieswere started in 1968, only to be discarded in 1971 cannot control. Furthermore, such trends as popu-by the new military regime. lation growth, low rates of savings, low efficiency

of investment, depletion of natural resources, andEconomic policies and long-term growth environrmental decay, as manifested by the advanc-

ing desert, underscore the depth of the AfricanAlthough the glimpses of recovery witnessed crisis-a crisis that cannot easily be treated by de-

during 1982-83 and 1985-86 were short-lived, it mand management through adjustment policies.would be disastrous if the market-oriented reforms The crisis demands long-term perspectives onwere reversed because they have not led to total re capital accumulation, increasing productivity andcovery. The implementation of these reforms was competitiveness, and institutional developmentnot carried out as part of a medium- and long-term (incduding human resources). There is an urgentdevelopment strategy. Such a strategy would en- need to restore economic balance to a level compat-compass the larger social and political framework ible with available resources. Short-term stabiliza-that provides an enabling environment for the de- tion policies can be viewed as a necessary bridge tovelopment process to succeed. In Somalia in the long-term growth. There is thus an urgent need for1980s market-oriented policies were viewed as a judicious mixture of short-term stabilization pro-short-term palliatives, designed to obtain the coop- grams and long-term imperatives.eration of foreign donors. From a long-term perspective, the salient mac-

roeconomic issues are controlling inflation, pro-Macroeconomic policies moting financial development, and achieving

sustainable balance of payments with economicWe have discussed the macroeconomic imbal- growth. The last may appear to be an impossible

ances that characterize the Somali economy and task in the present-day Somalia, where exportgovernment attempts to deal with them. These im- earnings amount to only about one-quarter of im-balances include foreign exchange shortages, high ports. This is the consequence of decades of urbanrates of inflation, unsustainable and persistent bal- bias; poor incentives for agricultural and livestockance of payments deficits, and recurrent and over- production for export; almost no investments inall government budget deficits. These imbalances the livestock sector, which dominates Somalia'scan no longer be considered temporary; they exports; and emphasis on import-substitutingshould be dealt with in a long-term perspective. industries, which did not lay the foundation forThe measures discussed above are necessary but exports of manufactured goods. As a result, ex-not sufficient conditions for a long-term solution. ports-in volume, value, and purchasing power-

Stabilization policies-which Somalia has only have been falling.partially attempted to pursue-usually rely on re Promotion of exports is essential for long-termductions in domestic credit and government defi- balance of payments equilibrium with econorniccits. They also include devaluation measures growth. Even if this is not achievable for a longintended to reduce imports and stimulate exports. time, striving toward it, and greatly reducing theIf these measures-such as indiscriminate expen- imbalance, is desirable. From a macroeconomicditure reduction, credit restrictions, and the like- point of view, an exchange rate regime unbiasedare adopted with only short-term stabilization as against export production is an essential condition.the goal, they may have adverse effects on produc- This means the correction of any currency overval-tion. Adjustment policies are required that address uation and maintenance of a stable real exchangethe fundamental causes of the major macroeco- rate. In this connection, the back-and-forth attitude

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of the government toward devaluation, as well as ties and widespread controls over the private sec-the prolonged existence of multiple exchange rates tor. In a situation where the civil service iswill not suffice. Neither will occasional auctions demoralized and where managerial and technicalsupported by foreign aid, because this is likely to skills, already scarce, have been drained out, itlead to wide fluctuations, depending on the avail- does not pay to overload the public sector. Such at-ability of such aid. Producers need stable signals. tempts by the state stifle initiative and breed the at-Gradual unification based on a crawling peg may mosphere of corruption, crisis, and stagnation.be the best approach. These constraints will have to be relaxed. The

Foreign exchange policy must be coordinated best way of doing so is to encourage the privatewith the larger issue of public finance. The real ex- sector to be more active. Even if the public sectorchange rate will fall when the domestic inflation activities in production processes were performingrate is high relative to trading partners. The desta- optimally, they would not compensate for stagna-bilizing nature of high and variable ranges of infla- tion in the private sector. It remains true that thetion are well known. In a period of high inflation private sector is large. The greater part of contribu-the folowing are likely to occur. tion to GDP by crop production is privately orga-

* Investment of resources in inflationary hedges, nized, mostly by small farmers. More than 20such as real estate, rather than in productive activ- percent of the population is engaged in that sector.ities The livestock industry-admittedly the backbone* Unstable prices that may not offer proper guide- and bulk of the Somalian economy, encompassinglines for resource allocation 60 percent of the population, 50 percent of GDP,* Government control of prices of essential goods, and 80 to 95 percent of exports-is virtually allwhich discourages their production and creates private.smuggling and parallel markets Opening the door to private sector activity,* Disproportionate impact on salary and wage however, should not be understood as a passiveearners, leading to demoralization of public sector recommendation. To persuade the private sector toemployees and, consequently, to absenteeism, cor- increase its efforts in investment and productivityruption, and low productivity. calls for a combination of policy measures. Among

these are a clear enunciation of the attitude towardMairesintaianin s etabe echages ratresteary . the sector, rationalization of policies to improve in-

flaionary pressures. In Somalia today, measures to centives, elimination of bureaucratic proceduresclationtryl pressures.i n Somaliae growthoday,ems At stifling private initiative, and replacement of directcontrol inlation could be growth-oriented. At cnrl ihidrc n aktdtriepresent most credit from the banking system goes conhanls wmth indirect an market-determinedto government and parastatals. The private sector mechanisms.(except, probably, for urban commercial activities) This new approach would not usurp the role ofis largely self-financing or uses the informal sector the public sector. There are enough tasks to engagefor its credit purposes. The majority of small farm- all the resources the government can mnister-ers and nomads rarely approach the banking sys- finances, skilled staff, and organizational ability.tem for credit. A large proportion of loans to These are in the areas of physical and social infra-parastatals has been-and continues to be- structure and the overall management of the econ-unproductively utilized. Restricting such credit omy on a macro level. Even in the case of physicaland government deficit financing by borrowing and social infrastructure, all activities need not befrom the banking system cannot be considered re- handled by the central government; more respon-cessionary. On the contrary, such restrictions are sibilities should be devolved to local authorities.the first essential step on the road to controlling The sectors producing goods are better left to mar-inflation. Public expenditure reform should be im- ket orientation.plemented under this broad perspective. The state is duty-bound to institute, guide, and

Ineffective management, inappropriate eco- help implement a growth-oriented developmentnomic policies, and insufficient support services strategy. It should neither monopolize norpresent major constraints on the development of completely abstain from important productivethe productive sectors. The meager capacity of the activities. It should provide the proper environ-public administration today is overstrained by ex- ment-legal, institutional, and economic-that en-treme centralization and the dual tasks of trying to ables all, including the government, to participatemanage extensive public sector production activi- in the development process.

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In the present economic circumstances of Soma- sources. Giving them the necessary priority is alsolia, the government should create a sound macro- the most egalitarian approach. Public investmenteconornic environment with less control over should therefore be directed toward improvingprivate sector activity and a reorientation of its their productivity. Small farmers are today mainlyown spending. Immediate steps in macroeconomic dependent on unskilled labor, simple implements,management would include the following. and expansive use of land. Measures to raise pro-

* Establishment of a realistic, market-related ex- ductivity would include the use of farm inputschange ratab mento irof realisource market-reationex such as fertilizers, pesticides, new seed varieties,changde stratger improtives resourexallocatin a and farm equipment. Research and developmentprovide stronger incentives for exporters of appropriate technology-inchuding farm imple-* improvement in tax administration, reduction in ments; high-yielding, drought-resistant crop vaxi-government expenditures, realocation of govern- eties; and pest control-must be based on thement expenditures toward economic and social particular conditions and needs of these farmers.sectors, and more transparent accountability by The notion that economies of scale wiU be real-state agencies ized with the existence of large mechanized farms* Removal of controls; on the pricing and market- is widespread, even though it is not corroborateding of goods by actual experience in the Somalian case. The ini-* Adoption of economic profitability criteria and tiative to cooperate should come from farmerscost recovery for projects in the public sector, with themselves, without compulsion by political au-a greater role for local authorities. thorities. At the same time the emphasis on small

farmers should not mean the discouragement of ef-Sectoral policies ficient large-scale farms. Nevertheless, subsidies to

such large farms should be discouraged and largeIn the goods-producing sector, in general, there investment of funds in these establishments

must be increasing reliance on the private sector should not be made when reasonable returns arewhile government dedicates itself to support ser- not on the horizon.vices-such as research, management, and mainte- Judging from the response of agricultural pro-nance of major infrastructure; the enactment and duction to previous reforms and assuming the rec-enforcement of regulations; and the like. Of imme- ommended incentive system, input supplies, anddiate concern is reform of public enterprises, both services are put in place, crop production couldagricultural and industrial. grow at 4 percent a year during the next two de-

cades. At this rate agricultural production wouldAGRicuLTuRE. Thirteen percent of Somalia's grow faster than population and allow for modest

63.7 million hectares are potentially cultivable and increases in per capita living standards.45 percent are considered suitable for grazing.Nevertheless, only a small proportion of the poten- INDusiRy. The manufacturing sector has beentially cultivable land is currently utilized. As dis- dominated by state enterprises and has not faredcussed earlier, the main problems with Somali well. Of immediate concern is reform of public en-agriculture are the government's emphasis on terprises that have been a major drain on public re-large state farms, monopoly by state agencies of sources. The private sector, however, is toothe agricultural input and some output markets, inexperienced to take over and operate efficientlyand general bias against small producers. most of the large public enterprises. Such a reform

The liberalization of the grain market in the would therefore include, after careful study, liqui-1980s has increased production. This is a good step dation of nonviable enterprises, privatizatiort offorward. Agricultural marketing is generally a some, when possible, and rehabilitation of essen-profitable commercial activity that should not re- tial enterprises on a competitive basis.quire subsidies from the central authorities; it is a The small- and medium-scale private sector,function easily performed by the private sector. If particularly in the informal sector, has shown amarketing cooperatives and public enterprises are great deal of dynamism. It is capable of developinginvolved, they will have to compete with private small-scale industries, especially those based ontraders and establish their positions by offering livestock and agricultural resources. Entrepreneur-farmers better services at lower costs. ial qualities are abundant in the Somali population.

Given the current resource endowment, small What is required is to strengthen these qualities byfarmers are the most efficient users of scarce re- the addition of technological and managerial ca-

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pacities. This can be done-not by direct invest- Development strategyment in mnanufacturing by the state, as has been thecase in the past, but by the provision of the proper In the preceding sections an attempt was madeeducational, infrastructural, and institutional sup- to briefly review the performance of the Somaliport. In the long run, successful industrialization economy in the last decade or so. Like many otherdepends on skilled workers and entrepreneurial countries in Sub-Saharan Africa, Somalia has beencapacity, given the resource endowment. economically on the decline since independence.

Despite severe external shocks, a large part of thedecline can be attributed to inappropriate develop-

FOOD IMPORTS AND POPULATION. Efforts to in- ment strategies and wrong economic policies. Thecrease production and streamline macroeconomic Somali government, albeit reluctantly, has accept-management would be negated if parallel mea- ed the need for change. But since the faltering re-sures were not adopted to reduce food import forms attempted so far have not been sufficient todependency, improve population control, and ori- put the country on a sound path of development,ent projects to poverty alleviation. With regard to further necessary steps are recommended in thisreducing food import dependency, food aid paper.programs must be redesigned to make them com- The recommended steps are not all that novel.patible with and supportive of development of The question is what has prevented their imple-agricultural growth and related industries. Food mentation up to now. Are the suggested reme-aid must be viewed as a transitory program that dies-particularly that of giving broader scopewill help to sustain vulnerable groups and . to the private sector-realistic? Development

anarrowing gap be n tthrough private enterprise, capitalist develop-anarrowng gaeprbetweentota praceoductiong count- ment, has been known for its built-in inequality,surt ion. The peseractieousing coundter which perpetuates itself through the maldistribu-part funds for general government expenditure, tion of assets such as land, financial wealth, andwhich contributes to lack of fiscal and monetary physical capital, and the concentration of the eco-discipline, must cease forthwith. nomic surplus in a few hands. To overcome or cor-

Population policy is necessary if economic rect this tendency was the rationale for stategrowth is to be attained. What is required here is a intervention in the first place in its differentnew orientation by policymakers to alert the gen- forms-progressive taxation, government provi-eral public to the dangers involved if the pronatal- sion of essential services and infrastructure, andist attitude is not chaniged. Because this is a matter total nationalization of the productive processes.that impinges on cultural and religious values, care How can this new emphasis on the pivotal role of

must be taknonsrei s in fthe private sector be reconciled with the simulta-must be taken to ensure that techmcal steps m fain-ily pnnaradssoneous emphasis on equitable growth and the im-ily planning and related issues do not boomerang. perative of poverty alleviation?Hence the involvement of the community, its el- Any attempt to answer these and similar ques-ders, midwives, and other cultural mediators must tions requires a reexamination of the developmentbe carefully utilized. process as a whole in its political, cultural, and his-

Assuming the adoption of measures for a torical context. It is ironic that the progress of thegrowth-oriented strategy, and barring the effects of discipline of economics and its promotion to theunpredictable external shocks (both natural and status of a science pushed the original conceptionseconomic), various reports have projected a real of its founders into the forgotten background. TheGDP annual growth rate of 4.1 percent up to 1991, dassical economists from Ricardo to Marshallwith agriculture taking the lead. With a population placed their analysis in the context of the historicalgrowth rate of roughly 3 percent a year, per capita development of society as a whole (they were con-GDP growth would s R be small. It is estimated, cerned with Western society, of course) and did notGDP growth would still be small. It IS estimated, consider their condusions as valid precepts appli-however, that population intervention policy cable anywhere and anytime. Present develop-could reduce annual population growth to 1.4 per- ment experts, rarely inspired by the samecent (assuming accelerated fertility decline) or 2.6 preoccupations as their predecessors and takingpercent (assuming a gradual fertility decline). The the characteristics of the Western model as univer-achievement of the latter figure, should it take sal ends, rushed headlong with their prescriptionsplace, would be impressive. for modernization. The ruling elites of the devel-

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oping world, particularly in Africa, who were affairs were viewed with suspicion while the inter-molded by the same educational process and who ests of family, clan, and tribe commanded loyaltyhave thus developed the same outlook and some- and sacrifice.times similar interests as their Western counter- In Africa on the eve of independence, was gen-parts, were even more enthusiastic in their uine liberation possible within the confines andmodernizing endeavor. They considered develop- framework of the colonial state? With hindsightment and modernization as more or less synony- this question can be answered in the negative. Themous. And because modernization implied that new African leadership that inherited the colonialthe attributes of modern or developed (that is to state did not question its relevance, but rather theysay, Western) societies were good, it followed that adopted its machinery. Because the new Africanthose attributes must be acquired. The consequent machinery lacked the efficiency and experience ofdevelopment strategy gave scant attention to the its predecessor, it tried to fill the lacunae, notreal complexities-problems, potentialities, possi- through qualitative transformation but throughbilities, and probable directions of success-of the expansion. Consequently the state was given ansocieties that were to be developed. The present overriding role, which was rationalized as spread-crisis in African development is a dear witness to ing the fruits of independence. The early constitu-the pitfalls of the previous approaches. tional democracies, modeled on the West, mostly

The critique of the previous approach allows degenerated into empty shells. Authoritarianus-with the benefit of hindsight-to focus on the methods-one party systems, personality cults,attributes of the society to be developed. Our de- military dictatorships, and secret police-arose invelopment efforts must be based on existing reali- order to elicit compliance from the people. Suchties rather than on envisioned ideals to be attained. compliance could not be ensured through the sat-This, in turn, requires a doser look into the past, isfaction of their genuine demands. Hamperednot only to recognize the reasons for the errors, but with a machinery ill-suited for the new histolicalso to discover the existing basic strengths on tasks and thus unable to deliver the goods, the newwhich we should build. African states became increasingly concerned with

Development strategy, especially in Africa, so short-term security matters rather than long-termfar has been statist in approach: decisions have development. The situation today is characterizedbeen taken from the top downward and state ap- by repression, stagnation, and mass starvation. roparatuses have taken over the responsibility of ini- expect the implementation of sensible economictiating and running things while the people have policies-recommended both by patriots and sin-been onlookers rather than participants. Needless cere donors-in such an atmosphere, without firstto say, this obviates the essential in development, changing the overall framework and approach,which is the learning process of the majority of the borders on naivet6.people. But what has not often been asked is why Compounding matters is that some of the poli-this approach-which we now perceive as mistak- cies, programs, and projects have been ifl-con-en-took root in the first place. ceived and unrealistic. Furthermore, the external

On the eve of independence, Africans thought economic environment-deteriorating terms ofthat they could utilize the state for the attainment trade and the world financial system and its insta-of their aspirations. Whether the nature and the bility-coupled with the weak bargaining positionstructure of this state was conducive to or obstruc- of African countries and disunity among Africantive of the attainment of the desired goals was not countries present formidable obstacles as well asexamined in the early euphoria of political inde- challenges. Despite decades of official develop-pendence. But the colonial state was born out of a ment assistance and inflow of private capital, to-long history of suppressive society through the day there is a net transfer of resources to the Northmonopoly of force, dividing to rule, and subordi- from the developing world. This anomaly is em-nating the economy of the subjected to the interests bedded in the structure of the international eco-of the victors. The result was a divergence between nomic system and the pattern of developmentthe interests of the state and its machinery on the presently pursued.one hand and that of civil society on the other. The For too long African intellectuals in leading po-colonial state was viewed as an alien and oppres- sitions, as well as others, have argued that thesive entity; civil society took refuge in strengthen- African predicament is totally externally deter-ing communal and kinship systems. Hence mined. The corollary of arguing this is clear: theorganization, management, and control of public cure will have to come from outside. On the con-

ll8

trary, for Africa to exit from the existing debilitat- moral issues. If we are to overcome the inhibitinging predicament requires a delving inward. The legacy of the colonial state, as well as the outsideexternal economic environment-faced by all obstades of the larger environment, we should notcountries-presents some limiting parameters; it only know what is, but we should also look into thedoes not completely dictate internal development. mores of our society for ways of transforming it.Indeed, if the latter is put on a correct path, the To elicit the necessary participation of the peo-possibility of putting the external environment to a ple in the development process means finding cre-good use is a challenge. ative political initiatives. Needless to say, these

An inward-looking perspective is bound to political processes should not repeat what we haveview development in its totality by encompassing already seen in Africa, and elsewhere, namely ex-the political, the cultural, and the purely economnic. hortations and slogans, and sometimes coercedThe limits to a development pattern that does not mass mobilization intended to rubber stamp whatexamine the status quo but only extends it by add- has already been decreed by an authoritarian state.ing more technical projects and borrowed money This approach breeds cynicism, alienation from thehave already been reached. An inward-looking sate, and further withdrawal into the precolonialperspective, to avoid the mistakes of the past, must communal and kinship ties. What is required is thefirst turn to the potential of the domestic economy integration of this cultural heritage-the conmuu-and society. As President Julius Nyerere has noted, nal and kinship ties that command loyalty and re-the greatest resource is our people. They are skilled spect-into the formal political structures of thein survival, a skill which is of vital importance to state. The state and civil society need no longer bethem, and to our development. Our people have juxtaposed entities. Instead, democracy must beshown that they have the ability to learn new tech- established in an African context, not necessarilyniques of production or living and are willing to copying the formal structures of the West.adopt-or adapt-them once they are convinced While the specific structural forns such demo-of their validity in their own circumstances and the cratic regeneration will take will vary according tousefulness of these new techniques to their lives. the situation, certain common broad features can

These thoughts underline certain attitudes that be outlined. There must be a limit to the arbitraryare essential in any reexamination of development authorities of the all-powerful state. Economic andpolicy. These include, to begin with, that African political power must be shared in society and theindigenous values and institutions are not, as often rule of law must be paramount over the role of thethought in the past, inimical to development. As- holder of power. Precolonial Africa, surviving to-sumptions and beliefs about the contradictory na- day in communal traditions, was rich in theseture of development need and indigenous cultural broad features of a democratic society. The all-values imply that development policy must be powerful personal dictator, who presides over thepursued in spite of the people. The result is a dicta- fate of the rest of society with the support of an im-torial attitude or, as Claude Ake puts it, develop- personal military and security machine is a prod-ment becomes "an epic struggle, of the very few uct of modern times, a postcolonial product.who know, to manipulate or coerce the many who Rarely in history did an African ruler have suchare ignorant into a new and better mode of being in power. Councils of elders, chosen through lineagespite of themselves."On the contrary, if develop- or other means of popular suffrage, prescribed thement is to be the process of institutionalizing capi- powers of the ruler-king or chief. There weretal formation, absorption of technical knowledge, codes of conduct, elaborated through discussion,and, as a result, raising the all-round standard of custom, and heritage, which even the king couldliving-materially and culturally-then there is no contravene only at his own peril.alternative than building on the participation of Democratic practices and values could be inte-the greatest number of people possible. grated into the institutions of modern statehood.

And they ought to be if Africa is to survive theDemocratic regeneration present crisis. Such integration should start at the

village level. Freely chosen representatives at theThe above remarks by President Nyerere allude village level, who should shoulder responsibility

to another related, and most essential, aspect of the for local affairs (normal administration as well asproblem. This is the realization that the present cri- development programs, which can hardly be dis-sis in Africa is not solely about economic matters tinguished at this level), could form the first rungbut, on the contrary, involves larger political and of a pyramid that would culminate at the national

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level. At the village, district, and provincial levels through the comnmitment of the people to, theirthe communal, dan and ethnic interest could be participation in, and their internalization of the re-combined with that of the nation at large. The quirements of the development process. Economicpeople must be able to choose their leaders and growth must be institutionalized through histori-recall them if they abuse the authority given to cal continuity.them. There must be sanctity of individual life and Development through private enterprise hasproperty. some built-in inequalities. Nevertheless, after a

Power sharing can also be expressed through quarter of a century of African experience of totalthe growth and development of nongovermnental state control of the economy, to oppose the devel-organizations (NGOs). These voluntary organiza- opment of the private sector amounts to chicanerytions take different forms, ranging from special- Indeed, experience has shown that the state, moreized professional institutions to grassroots bodies often than not, can be used as a vehicle for increas-at the local level. They should have a role in the ing inequality. Furthermore, the experience of theformulation, discussion, and implementation of majority of countries in the developing world indevelopment programs. It is these private associa- the last two to three decades shows that inequalitytions, as well as popularly responsive local and na- and the mass poverty accompanying it do not nec-tional govermnent, that give body and substance essarily disappear with the attainment of growth.to programs of national development. This is the On the other hand, those exceptional cases-suchreal meaning of decentralizing the overly central- as Taiwan-where growth was accompanied byized state. It is not a mere transfer of power to low- the amelioration of poverty indicate that extremeer bodies of the central government itself. inequality in income distribution need not be a

necessaiy condition in the early stages of develop-Role of the private sector ment. Poverty is not a function of the rate of

growth per se, but rather of the pattern of growth.This inward-looking perspective gives us, in the Poverty-inducing growth is compatible both with

words of some African scholars, "a new domestic a system of unrestrained laissez faire and a stateorder that is culturally relevant, morally justifiable, domination. For poverty alleviation, and hence theeconomically vibrant, and politically geared to real reduction of inequality, what is required is a prac-liberation"(The State and the Crisis in Africa: In tical development strategy that has two main ies-Search of a Second Liberation, Seminar at the Dag sential goals.Hamnmarskj6ld Centre, Uppsala, Sweden). It is also On the supply side, the aim of this strategy is, orordy within this overall framework that we can at- at least should be, to raise the productivity of thetach any meaning to, and reap the full benefit of, farming sector, especially that of small farmers;increasing the role of the private sector. What is create more employment, especially for the land-required of this sector is not only to relieve the less; use labor more productively in public workpublic sector of certain burdens the latter cannot programs; and establish labor-intensive industriesproperly handle. The private sector is also expect- that rely on local materials and meet local needs.ed to act as a catalyst in releasing the energies of On the consumption side it should aim to satisfythe people in the development process. But the re- minimum levels of material needs such as food,quired response may not be fully elicited in an un- shelter, and clothing and assure access to essentialfree situation. People cannot be expected to behave public services such as pure water, sanitation, pub-rationally as consumers and producers and irratio- lic transport, health, and education. The need tonally as citizens. The free flow of information, so elicit, activate, and coordinate the contribution ofessential to the growth and success of a vital pri- both public and private sectors to the attainment ofvate sector and the full accountability of the public these goals is clear.sector, can only take place in a less restrained polit- This new perspective and development strategyical atmosphere than presently pertains in Africa. implies, for its realization, fundamental alteration

If increasing the role of the private sector is es- of power relationships in the society-political re-sential for the steady increase of the accumulation lationships as well as the distribution of wealth, in-of the investable capital or economic growth, is this come, and economic power. It can be realized onlycompatible with equitable distribution? The ques- with the people's attainment of their humantion of sustainability has already been answered rights-freedom, security, and democratic partici-implicitly. Sustainable growth must endure over pation. These rights, however, cannot be bestowedthe longer run and this can only be ensured paternalistically by anyone. They will have to be

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demanded and taken in a historical context by the A useful illustration is the livestock sector,people themselves. which is by far the largest industry in Somalia. It is

here that the entrepreneurial spirit of the SomaliRelevance to Somalia people is starkly in contrast with the dampening

effect of current economic policy. The projects in-troduced and run by the government to help this

The above general remarks are intended to pro- sector are in shambles. It has been observed thatvide an overall context within which particular the animal health and marketing infrastructure inrecommendations can make sense, especially in assembly areas in the hinterland, along stockthe case of Somalia. It is not farfetched to regard routes, at staging areas near the principal ports,Somalia as the country par excellence, where such and at the ports is poor and deteriorating. Waterpolicies are urgently needed and where they can be reservoirs are punctured or inoperative, dips andexpected to have an immediate positive impact. spray pumps do not exist or are not used, holding

Nyerere's observation to the effect that "our grounds are badly maintained and quarantine fa-greatest resource is our people,"is typically true of cilities are in a hopeless state of disrepair. Yet trad-Somalia in more than one sense. The country has a ers are required to pay local government and portharsh climatic environment and lacks fuel and taxes, veterinary inspection fees, and customs du-nonfuel mineral resources. But this harsh environ- ties, with little or nothing in the way of services inment itself has instilled hardy and stoic qualities in return.the Somali people. They are enthused with an en- In contrast, nomads and traders involved in theterprising spirit, ready to exploit existing . ortu- sector have shown a capacity for flexibility, prob-nities and willing to take risks. Taking advantage lem solving, and defending their interests. Whileof their location, they have long been engaged in nomads have been engaged for centuries in the far-trade between East Africa and Asia Minor. Even to- flung network of trade and thus have strongly de-day the informal trade extending from Arabia to veloped commercal attitudes, it is the traders whoZimbabwe is mainly carried on by Somali truck have so far shown greater self-organization. Faceddrivers and owners. The extended family system with the failure of the governent to keep its com-drives beenandowner theoughout ethen ged famiy s mitments, the traders took it upon themselves tohas been adopted throughout the ages as an eco- provide the needed facilities for private holdingnomic unit geared for the survival of its members. grounds, fodder, water, and shade for their ani-One family member may be a skilled trades work- mals waiting to be shipped.er in town, another a merchant, and another left to All told, the advantages of releasing the ener-tend livestock in the nomadic hinterland. All their gies of the people for development are abundant inincomes buttress one another. As such, the Somali the private sector: the productive sectors are main-family system exhibits the qualities Claude Ake ly private, and the people are enterprising. It ishas cited: self-reliance, internal balance, and auto- tragic that rather than building on these advantag-centric dynamics. es, the Somali state has so far stifled them.

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9

The Nordic Social Market EconomyDevelopment Expenrence-Lessons for

Developing Countries

Radja M. Mitra

The search for development models in the cold system,* one that effectively combines market-on-war era reflected a perception of a dichotomy in ented economic policy and free enterprise with ac-economic systems, with the relatively pure market tive social policies directed by governments. Thesystem, like that of the United States or United purpose of this paper is to point to strategic lessonsKingdom, at one pole, and the planned socialist that developing countries can draw from the waysystem, like that of the Soviet Union, at the other. the Nordic countries transformed themselves intoRecently this perception has been somewhat mod- modem industrial social market economnies andified by analysts who daim that the state-guided achieved impressive growth with equity.industrialization models of Japan and the Republic All of the Nordic** countries-Denm,ark,of Korea represent another complete system. An Finland, Norway, and Sweden-were relativelyeven greater diversity has been amply revealed by late to begin transforming themselves into modemeconomic historians. Among the European coun- industrial societies. Less than a century ago theytries, for example, the Nordic and German expen- were still low-income economies lagging belhindences point to yet other useful models, which may Western Europe in per capita income and structur-be described as the "social market economy' al transformation. Up to the mid-nineteenth centu-

ry, the Nordic countries had backward agrarianeconomies with poor infrastructure and little man-

The author wishes to acknowledge the contrbutions to this ufacturing industry. Starting in the 1870s, in thework of Ramgopal Agarwala, Chief of the Special Economic Of-fice, Africa Technical Department, World Bank. He providedkey analytical precepts and guided the study's development.Vijay Jagannathan, Peter Knight, Nikos Papandreou, Stanley * See further the appendix to this paper.Please, Pushpa Schwartz, Raj Sharma, Kalanidhi Subbarao, I Throughout this paper, the term "Scandinavia" is used toBertil Wahlstedt, Bension Varon, and Gertrud Wmdsperger at denote Denmark, Norway, and Sweden, and the term "Nordic"the World Bank and Krister Andersson and Leif Muten at the to denote Denmark, Norway, Sweden, and Finland. Most of theInternational Monetary Fund provided valuable comments to discussion in this paper does not include Iceland, the fifth Nor-various drafts of this paper. dic country.

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case of Sweden, and later for the other three similar paths toward socioeconomic transforma-countries, they experienced high growth and tion. They also share easy access to the economical-transformation into advanced industrial econo- ly more advanced countries of continental Europe,mies. Between 1870 and the mid-1960s, per capita all have homogeneous populations with similargross national product (GNP) in Sweden alone cultural traditions, they have experienced little orgrew at a rate second only to that of Japan. In 1987, no stifling feudal or colonial rule, and political con-the four Nordic countries had an average per capi- ditions have been favorable for peace and close in-ta gross domestic product (GDP) of $19,135, which tra-Nordic relations. Although the Nordicwas slightly higher than that of the United States, countries are not unified formally or functionallyalmost as high as that of Japan, and 45 percent and also display some differences in their socioeco-higher than the European Community (EC) aver- nomic development, they are more homogenousage. than African, Latin American or most Asian coun-

Establishment of the welfare state in the Nordic tries. Thus, for the purpose of simplicity, wherecountries after World War II and their structural their development experience has been similarproblems during the 1970s and 1980s, with the they are referred to as a unit.snowballing of goverunent expenditure, offer les- The paper starts with a description of the Nor-sons and nonlessons for developed industrial dic econormic development record followed by acountries. The Nordic countries' earlier historical discussion of the factors that have contributed toexperience, however, has received comparatively development. Specific factors are treated next,little attention among development economics with special attention to the historical sociopoliti-scholars and is barely known to policymakers in cal prerequisites, the role of the state, the demo-developing countries. In light of the remarkable graphic revolution, education and skillseconomic transformation of the Nordic countries development, physical and technological infra-beginning in the 1870s, their earlier development structure, public administration, entrepreneur-experience deserves further research and disserai- ship, financial institutions, labor relations,nation among policymakers. cooperatives, and the general societal ethos, fol-

It is this early historical experience that is re- lowed by a section on integration into the interna-viewed here. The objective is not so much to make tional economy. The paper ends with sections onjudgaients about the past or to suggest that other aspects of the Nordic experience and the socialcountries should try to replicate the Nordic devel- market economy paradigm that may provide les-opment experience in toto, but rather to look for- sons not only for industrial market economies andward in attempting to conceptualize alternative reforming socialist countries, but also for the de-styles of development and their relevance to long- veloping world, including Sub-Saharan Africa.term development problems in the developingcountries. The era following World War II certainly The Nordic development recorddeserves a detailed analysis, particularly to deter-mine the issues of the sustainability of the welfare In spite of major problems of reliability andstate system and lessons and nonlessons for poli- methodology in comparing historical national in-cymakers in Eastern Europe who have recently come data, it can be concluded that the Nordicdisplayed interest in modeling their societies on countries have- had a very impressive economicthe Nordic countries' experiences. The central con- performance. According to estimates by Anguscern of this paper, however, is the early develop- Maddison, Sweden's per capita GDP grew at thement experience of the Nordic countries because rate of 2.1 percent during the period from 1870 tothat is where the most useful lessons lie for the de- 1913, which was a higher rate than that achievedveloping countries. by any of today's advanced developed countries

Given the broad objective of this paper, general- (ADCs). From 1913 to 1950, Sweden was again inizations are unavoidable. The paper concentrates the lead (2.2 percent), with Norway (2.1 percent)on the Swedish experience because it is a leading and Finland (1.7 percent) close behind, followed byrepresentative of the Nordic experience generally. the United States (1.6 percent), and Dernark andAmong the Nordic countries Sweden was the pio- Switzerland (1.5 percent each).' In the era follow-neer in establishing a modern industrial society ing World War II, however, the growth perfor-and inspired the transformation of other Nordic mance of the Nordic economies, with the exceptioncountries. The Nordic countries are alike in their of Finland, was no longer higher than the averagesocietal traditions and generally have followed for other industrialized countries (Table 1).

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Table 1 Estimates of growth of GDP per capita, 1820-1979(Annual average compound growth rates, constant prices, percent)

Country 1820-70 1870-1913 1913-50 1950-73 1973-79 1820-1979

Denmark 0.9 1.6 1.5 3.3 1.8 1.6Finland n.a. 1.7 1.7 4.2 2.0 n.a.Norway 1.0 1.3 2.1 3.1 3.9 1.8Sweden 0.6 2.1 2.2 3.1 1.5 1.8

Australia n.a. 0.6 0.7 2.5 1.3 n.a.Austria 0.7 1.5 0.2 5.0 3.1 1.5Belgium 1.9 1.0 0.7 3.6 2.1 1.7Canada n.a. 2.0 1.3 3.0 2.1 n.a.France 1.0 1.5 1.0 4.1 2.6 1.6Germany 1.1 1.6 0.7 5.0 2.6 1.8Italy n.a. 0.8 0.7 4.8 2.0 na.Japan 0.0 1.5 0.5 8.4 3.0 1.8Netherlands 1.5 0.9 1.1 3.5 1.7 1.5Switzerland 1.7 1.2 1.5 3.1 -0.2 1.6United Kingdom 1.5 1.0 0.9 2.5 1.3 1.AUnited States 1A 2.0 1.6 2.2 1.9 1.8

Arithmeticaverage 1.1 1.4 1.2 3.8 2.0 1.6

n.a. = Not available.Source: A. Maddison, 1982.

Even more impressive are the Nordic countries' late nineteenth century, and productivity was low.social indicators, such as income distribution, inci- According to Simon Kuznets and Paul Bairoch'sdence of poverty, health, education, and welfare. estimates, the per capita income in Denmark,Today the Nordic countries rank very high in the Finland, and Sweden around 1830 and 1860 wasworld in per capita income, the overall educational low-in comparison not only with the levels instandards of the work force, life expectancy at England, but also those in Belgium, France, thebirth, and other health indicators. Netherlands, Spain, and Germany. In 1860,

Several of Scandinavia's social indicators in the Sweden's level was similar to those in Bulgaria,nineteenth century (in some cases even in the eigh- Greece, and Portugal, comparable to many parts ofteenth century) were far above those of countries the developing world today (Table 2).with similar per capita incomes. Literacy was com- From 1720 to 1840 there was little or no changeparatively high, infant mortality low, and life ex- in the percentage of the population dependent onpectancy high. Moreover, their administrative each of the principal sectors of the economy. Thecapabilities were fairly well developed. Method- agricultural sector remained dominant, employingological problems and lack of data make it ex- more than 75 percent of the population in Finland,tremely difficult to draw long-term cross-country Norway, and Sweden. Within the agricultural sec-comparisons of income distribution before the tor,there were some disturbing trends, particular-1950s.2 Indicators measuring the standards of ly during periods of rapid population growth. Nothealth and education, however, suggest that the only was the average holding of the landowningScandinavian countries at least tried to provide ba- peasantry declining, but more seriously, the per-sic needs for wide sections of their population, un- centage of the population belonging to the agricul-like many other European societies. tural proletariat (cottars, crofters, servants, and

paupers) increased sharply. Between 1750 andRecorded historical growth 1850 this group expanded from about 20 percent to

40 percent of the Swedish population.3 Moreover,The Nordic region was predominantly agranan well into the nineteenth century, famines were not

and the industnal sector was backward until the uncommon in the Nordic countries. In 1867

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Table 2 Per capita gross national product, Europe, 1830-1973(Market prices; 1960 U.S. dollars and prices)

Country 1830 1860 1913 1929 1950 1973

Denmark 208 294 862 945 1,277 2,716Finland 188 241 520 590 1,027 2,797Norway 280 401 749 1,032 1,652 3,495Sweden 194 225 680 897 1,712 3,411

Total Europe 240 310 534 571 749 2,077

Early industrializedcountries a 298 454 846

Later industrializedcountries b 252 328 641

Nordic countries c 210 273 692Russia, Romania, and

Bulgaria 171 180 324Mediterranean

countries d 259 309 393

Note: Constant 1970 geographical boundaries. Three-year annual averages except for 1913.a. Belgium, France, Switzerland, United Kingdom.b. Austria-Hungary, Germany, Netherlands.c. Denmark, Finland, Norway, Sweden.d. Greece, Italy, Portugal, Serbia, Spain.Source: S. Kuznets, 1966, pp. 279, 307.

Finland had a bad harvest, and the following year the period from 1860 to 1910, Sweden had the high-one person in five died from starvation in certain est per capita income growth rate in Europeareas, and the country as a whole experienced an (2.0 percent), followed by Denmark (1.9), Germany8 percent population loss. Agriculture was back- (1.4), Switzerland and France (1.3), and Finlandward, and urbanization or other social changes did (around 1.3 percent). During this period the Nor-not show much promise of imminent improve- dic countries had become top performers in termsment.4 of economic growth, whereas Russia, the countries

Data for 1860 show more substantial differences of Eastern Europe, and the Mediterranean nationsamong European regions than in 1800. By 1860, not lagged far behind (Table 3).only Great Britain, but also Belgium, France, andSwitzerland were in the heyday of the indusrial These growth trends resulted not only in ine-revolution. The per capita income of this industrial quality of income levels inside Europe, but also be-core group was about 70 percent higher than in the tween Europe and the developing world. In 1800Mediterranean region and 60 percent higher than the per capita GNP of Europe was esimated to bein Scandinavia. Eastern Europe had only 40 per- some 20 percent higher than that of the developingcent of the per capita GNP levels of the industrial countries, but by 1830 the gap was probably closercore group, which had more than doubled their to 50 percent, and by 1860 was in excess of 100 per-per capita incomes during the period from 1800 cent. It was close to 210 percent around 1900 andto 1860. The peripheral countries could not reached 240 percent in 1913. Part of this growingkeep pace. In the Mediterranean countries and gap was no doubt the result of a decline in per cap-Scandinavia per capita GNP grew by 40 percent, ita income levels in the developing countries out-while Eastern Europe experienced a growth rate of side Europe between 1800 and 1900. By 1913less than 10 percent. Europe's per capita GNP was probably 3.4 times

The income gap between Scandinavia and the higher than that of the developing countries; byindustrial core countries did not narrow until after about 1975, this figure had risen six to seventhe 1860s, when dramatic changes took place. For times.5

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As already mentioned, Sweden led the Nordic the 1950s and 1960s, which helped to narrow thecountries in per capita GDP growth from 1870 per capita income differences among them.to 1913. Thereafter, up to 1969, Sweden's econo- Besides having impressive economic achieve-my did not grow any faster than Finland's or ments in common, the Nordic countries also haveNorway's, although its growth has been more sta- many similar political and cultural characteristics.ble than that of Finland, which has been the most The Nordic countries have close historical ties.uneven of the group owing to periods of very slow From 1381 to 1814, Norway was united withgrowth, or even retrogression (for example, during Denmark, and then with Sweden until 1905, whenthe civil war of 1918-19 and the two wars in 1939- it became independent. Finland was part of40 and 1941-44). Finland has consistently had low- Sweden from 1154 to 1809, then fell under Russianer GD. per capita than the other Nordic countries. supremacy until 1917, when it declared its inde-Up to World War II, Denmark had the highest GDP pendence. Danish, Norwegian, and Swedish areper capita, w e N y arelated Germanic languages, whereas Finnish be-per capita, while Norway and Sweden had s imf lar longs to a different language group in the Uraliclevels and approached Denmark's levels before the family. A high proportion of educated Finns havewar. World War II affected each country differently traditionally used or understood Swedish.and altered the comparative wealth of the Nordic Favorable physical conditions gave De.mark ancountries. After the war, Sweden became the advantage in agriculture from an early period. Ru-wealthiest among the Nordic countries, partly be- ral society in Denmark in the seventeenth andcause it had not suffered destruction during the eighteenth centuries largely resembled the feudalwar.6 In part because of its recovery efforts after societies of continental Europe. Norway's roughthe war, Finland-but also Denmark and topography made the land transport of its prod-Norway-had higher growth rates than Sweden in ucts difficult in the early years. State planning and,

Table 3 Annual rate of growth of gross national product and population, 1830-1910(percent)

Total GNP a Population a GNP per capita

Country 1830-1910 1860-1910 1830-1910 1860-1910 1830-1910 1860-1910

Dennmark 2.62 2.94 1.01 1.06 1.60 1.86Firdand 2.14 2.43 1.03 1.16 1.10 1.26Norway 2.05 1.84 0.94 0.80 1.10 1.04Sweden 2.23 2.70 0.82 0.73 1.40 1.96

Total Europe 1.74 1.88 0.82 0.92 0.92 0.96

Early industrializedcountries b 1.80 1.72 0.54 0.55 1.25 1.16

Later industrializedcountries c 1.98 2.24 0.87 1.00 1.10 1.24

Nordic countries d 2.26 2.51 0.92 0.90 1.33 1.60Russia, Romania,

and Bulgaria 1.76 2.21 1.10 1.25 0.64 0.94Mediterranean

countries e 1.00 0.94 0.60 0.67 0.39 0.28

Note: Benchmark years are three-year annual averages.a. Total increase including effects of territorial changes.b. Belgium, France, Switzerland, United Kingdom.c. Austria-Hungary, Germany, Netherlands.d. Denmark, Finland, Norway, Sweden.e. Greece, Italy, Portugal, Serbia, Spain.Source: S. Kuznets, 1966, pp. 280,283.

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in recent years, state enterprise, have played a absolute improvement after 1830 may be the resultgreater role in Norway than in more "capitalist" of the accelerated advancement in agriculturalDenmark. Public expenditure as a share of GDP techniques, including the continued rapid spreadhas been, and still is, lower in Finland than in the of the potato and the increasing production of oatsother Nordic countries. As a result of these various to fuel London's horse-powered transport system.differences, economic, political, and social change The continued growth of the agricultural proletar-took place at different rates in the four countries, iat, however, makes it seem unlikely that per capi-with Finland's transformation coming somewhat ta income in agriculture increased appreciably. Thelater, but being more compressed. overall improvement in per capita GNP must be

Agricultural modernization, for example, start- attributed largely to the increasing relative size ofed later in Finland and Norway than in Denmark, the nonagricultural sectors.7

and the building of the physical infrastructure, no- Sweden was the first to experience the industri-tably railways, began first in Denmark and al takeoff, sometime between 1850 and 1870, andSweden, then considerably later in Finland. A Finland the last. The date usually assigned to thisstream of Swedish inventions emerged at the end event in Sweden is 1870, because of the spectacularof the nineteenth century, when Finland had just industrial boom that occurred in the early part ofstarted to take the first hesitant steps to establish its the decade. However, some important events oc-engineering industry. The intrasectoral and inter- curred before 1870, notably the great increase insectoral linkages with industry and agriculture be- timber exports starting around 1850, which may became a dynamic force in the Swedish economy in viewed as having ignited the industrial transfor-the latter part of the nineteenth century, but mation. In the Nordic countries this was a periodFinland did not experience such a structural trans- of large investments in infrastructure, rapid devel-formation and a buildup of linkages in the goods- opment of human resources, and breakthroughs inproducing sectors until after World Wars I and II. private sector entrepreneurial initiatives in trad-

ing, finance, and industry. The period of industrialThe four phases of development transformation was often rocky for new entrepre-

neurs and gave rise to many social problems andBroadly speaking, the transformation of the tensions manifested, for example, in severe hous-

Nordic countries into wealthy industrial nations ing shortages, seasonal unemployment, and nu-took place in four phases: (1) preindustrialization, merous strikes.from 1820 to 1870, during which there were only In the interwar period, European economiessmall changes in per capita income levels; (2) the had to cope with volatile prices, exchange rates,industrial takeoff, 1850-70 to 1914, a time of very and trade regimes and, therefore, uneven growth.high growth rates compared with the rest of the Although the Nordic countries suffered throughworld; (3) continued industrial transformation and similar problems, particularly unstable growthhigh growth rates between the wars, 1919-39; and and unemployment, they were somewhat more(4) the establishment of the welfare state after successful in managing their economies and re-World War ll and modest growth rates compared corded significantly higher growth rates than thewith the Organization of Economic Co-operation European average. During this period, the Socialand Development (OECD) average, except in Democratic parties in these countries became aFinland. strong political force. The 1930s saw the emergence

The preindustrialization period was character- of more interventionist governments whose poli-ized by small increases and even stagnation in the cies were inspired by Keynes and the Stockholmgrowth of per capita income and slow growth in school of economists. In addition, some path-trade and industry. Some developments that took breaking agreements between employers andplace, however, were to become important to fu- trade unions ushered in a period of industrialture industrialization, such as the improvements in peace. The private sector continued to be the en-health and education, institutional changes in the gine of growth, however, and the share of the GNPinformal sectors, and structural changes in the ru- consumed by governments, although growing,ral economy. The turning point for Sweden ap- was still small.pears to have occurred in the 1830s, when the per After World War 1I, the Nordic countries begancapita income started to increase, although it was building the modem welfare state-first Sweden,not until the 1870s that Swedish growth began to then Denmark and Norway, and finally Finland.outpace the European average. To some extent, the Similar activities were under way in continental

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Europe. Since the 1970s, Denmark, Norway, and Europe maintained their agrarian economies weUlSweden have been faced with a number of struc- into the twentieth century (Table 4).tural problems: lower saving and investment ra- Of the Nordic counties, Finland was the slow-tios and high public expenditures that have est to make the industial transition. In 1910, for ex-pushed taxes to unprecedented levels while ample, 65 percent of Finland's economically activesquelcchg incentive structures. Furthermore, theirsteadily increasing trade dependency has resulted popreationwas stll6in the agricultural sector,steadily ~ ~ ~ ~ ~ ~ ~~wera Dcrmarkn hadd onpndnc 36s ercetulatcudm more vulnerability to changes in the external ture. Sweden had about 3 percent in agrture Sween ad aout32 percent of the laboreconomic envirounment. By the early 1980s, eco- force in industry by 1910, but Finland did not reachnomic growth in these three countries had slowed that level until the late 1960s. Despite these initialdown and was no longer higher than the OECD differences, and the differences in their natural re-average. Since then, the growth of trade has gener- sources, the profiles of production in the four Nor-ally been lower than the OECD average, and the dic countries quicyl converged.9number of man-days lost in sick leave and indus-trial disputes has risen sharply, especially in Once the Nordic transition was under way, ag-Sweden. Thus, it is apparent that a great industrial riculture continued to play an important role, notpast does not guarantee a great industrial future. only in ensuring food security, but also in contrib-

Despite the current structural problems, howev- uting to the health and income of the population.er, the social market economic system has so far The shift from subsistence to entrepreneurial agri-enabled the Nordic countries to reconcile their de- culture was promoted by land reforms, investmentsire for stable growth with social equity and envi- in infrastructure that linked rural areas with urbanronmental concerns. Although far from painless markets, and government commercial policies thatand by no means inexpensive, structural adjust- created an environment in which new entrepre-ment has been deliberately pursued in the 1970s neurs, rural cooperatives, and other bottom-up in-and 1980s. The effort to integrate social concerns itiatives could thrive. Increased productivityand adjustment policies has resulted in compara- enabled farm labor to move to nontraditional em-tively low levels of unemployment in Finland, ployment. The modernization and commercializa-Norway, and Sweden. While the welfare state tion of agriculture (which included dairy farming,models adopted in the Nordic and other European livestock, forestry, and fishing) took place alongcountries after World War II are urged to under- with the expansion of domestic and foreign tradetake major reforms, the Nordic countries have so and the establishment of new financial institu-far been able to maintain a somewhat unique so- tions-all of which provided fertile ground for en-cioeconomic system that balances their economic trepreneurship. At the same time, the authoritiesand social objectives. recognized the importance of taking a long-term

view of the exploitation of natural resources, andStructural transfonmation therefore instituted measures to protect resources

such as land, forest, and fisheries. Their pioneeringBy the 1860s, a number of countries in Europe efforts, particularly in forest conservation, have

were already well on their way in structural trans- yielded high long-term returns.formation. The share of industry in both GNP and The industrial expansion in the Nordic coln-employment had increased sharply, while the tries began with private entrepreneurial initiatives,share of agriculture had declined. In England, for usually linked to local natural resources: iron in theexample, agriculture's share of GNP had already case of Sweden; forests in Sweden, Norway, andfallen to 22 percent and the sector employed some Finland; and fishing in Norway. Although this ex-20 percent of the labor force. In contrast, industry pansion was led by exports of manufactured goodsaccounted for 34 percent of GNP and over 40 per- and natural resources-and agricultural productscent of employment, while the service sector (in- in Denmark and the southern part of Sweden-thecluding transport and communication) claimed local market itself provided the main impetus, to34 percent of GNP and 14 percent of employment. the expansion of agriculture, construction, andThe countries of northwestern continental Europe physical infrastructure. Many Swedish firms thatfollowed a similar path in the 1860s and 1870s. have become multinational enterprises-such asMeanwhile, the ratios among sectors in the periph- Alfa Laval in food-processing equipment, ASEA ineral economies remained unchanged.8 Indeed, the railways and energy, Ericsson in telecommunica-Mediterranean countries and those of Eastern tions, and Volvo in transport equipment-started

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Table 4 Employment distribution and contribution to national income, 1860 and 1910(percent)

Agriculture Industry

Total National Total Nationalemployment income employment income

Country 1860 1910 1860 1910 1860 1910 1860 1910

Denmark 55 36 48 30 25 29 26Finland 75 65 65 47 7 12 13 25Norway 69 43 34a 24 16 25 21a 26Sweden 72 49 39b 35C 15 32 19b 38c

France 4 3d 3(e 42' 35 g 3 8d 39e 3 0f 379Great Britain 23h 6i 22h 6' 4 3h 54 i 34h 401Greece 88 64 75 9 13 18Hungary 75 64 70 62] 5k 24 18 26Italy 72 55 55 47 20 30 20 25Russia 89 80 71 53 13 19 13 20Spain 71 71 .. 40 17 17 .. 23

a. 1885. g. 1908-10.b. 1861-65. h. 1841.c. 1901-05. i 1901.d. 1866. j. 1913.e. 1911. k. 1870.f. 1872-82.Source: L. Berend and G. Ranki, 1982, and S. Kuznets, 1966.

by serving local needs, domestic as well as those in Savings, investments, and trade ratiosthe neighboring Nordic countries.

The early pattern of investment in Sweden and An analysis of the structural changes in the pat-its neighbors illustrates a case where expenditure tern of use of GNP in the Nordic and other Europe-was concentrated in agriculture, human resources, an countries shows that the share of governmenthousing, and infrastructure and did not shift to the consumption and gross capital formation (domes-industrial sector until after the industrial takeoff tic and national) were markedly low in the periods(Table 5). before 1939, and those of private consumption

Table 5 Distribution of gross investment in fixed assets in Sweden, 1866-1915(percent)

Manu-facturing

Agri- and PublicYears culture mining Transport Housing services Total

1866-70 28 14 19 31 8 1001881-85 20 19 13 40 8 1001896-1900 10 21a 17 42 10 1001911-15 9 26a 19 31 15 100

a. Including 1 percent commerce.Source: L. Lundberg, 1969.

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were high. In the era following World War II there in following a development path that dependedwas a marked increase in government consump- heavily on trade expansion. The ratio of trade totion and the gross national capital formation re- GNP in these countries was lower than in othermained constant or increased, while the share of West European countries of comparable size bothprivate consumption expenditure in GNP de- before and after World War 1I14 (Table 7).clined.

The pattern in savings and investment relative An economic explanation for Nordicto GNP also tells a story of economic growth. Be- growthtween 1860 and 1914, domestic capital formationas a proportion of GNP rose in most Western coun- The coincidence of several factorstries, with the exception of the United Kingdomand the United States. In some European countries, Economists typically attempt to explain eco-however, the rise did not begin until after a fairly nomic growth by analyzing changes in saving andlong period of substantial growth of GNP and investment, productivity, impetus from export ori-when industrialization was well along, In Italy, for entation, and influx of foreign capital and know-example, it occurred after 1900, in Norway after how. In contrast, sociologists and political scien-1894, and in Sweden after 1900. In terns of the ra- tists emphasize the significance of political and in-tio of gross saving to GNP, there is no clear evi- stitutional factors and the role of the state.dence of a significant raise in Sweden and Norway Typically the Nordic development experience haLsuntil World War Il0 (Table 6). been analyzed by focusing either on economic or

Although the capital-output ratio is exceedingly "noneconomic" factors. Moreover, some analysesdifficult to measure in the European countries be- focus on extemal factors, whereas others concen-fore World War I, there are some indications of a trate on internal conditions. A holistic and multi-rise over the long term. From the mid-nineteenth disciplinary approach is needed to analyze thecentury to the first half of the twentieth century extent of complementarity and contradiction ofthere was a rise in the net domestic incremental different approaches.capital-output ratios. In Sweden, this ratio is esti- The coincidence of many favorable factors inmated to have increased from 2.6 to 3.6 percent Sweden's development process as summarized byover this period, while it rose from 4.0 to 5.1 per- Assar Lindbeck include improvements in agricul-cent in Norway, and from 2.4 to 2.8 percent in ture, education, and public administration; grow-Denmark (estimates exclude land and subsoil re- ing international demand and new technologiessources)."1 that suddenly made raw materials (particular]y

The share of capital import or export relative to forests and iron ore) highly valuable; regionallyGNP or GDP was not particularly high in the Nor- dispersed incomes generated through the produc-dic countries, with the exception of Norway dur- tion of certain export products such as timber; highing the period from 1895 to 1924. In Denmark and capital and goods imports combined with heavySweden there were two decades between the 1870s labor emigration; favorable developments in theand World War I when foreign financing account- terms of trade; freedom of action for able individu-ed for 20 percent or more of domestic capital for- als in the private sector and the emergence of amation. After World War I the ratio of capital class of private entrepreneurs; 150 years of peace;imports to national product declined in all of the and a "calm" labor market, manifested in agree-Nordic countries, and Denmark and Sweden shift- ments between employers and employees fored from net debtor to net creditor nations.12 peaceful solutions to labor disputes.'5

All four Nordic countries benefited greatly from For a long time much of the explanation for thethe rapid expansion of world trade and technolog- rapid economic growth in Sweden, Norway,ical advances, beginning at various times in the and Finland was sought in their accelerated ex-nineteenth century. Denmark, Norway, and ports, initially of timber, iron, and other goods re-Sweden's combined share of world trade increased lated to natural resources and later also offrom 2.0 percent in the 1860s to 2.8 percent by the manufactured engineering goods. This explana-turn of the century, and 4.1 percent by 1937.13 The tion emphasized that the Nordic developmentexpansion in the Scandinavian countries' trade is path presupposed major impetus to growth froimreflected in increases in the proportion of trade to foreign demand that resulted in domestic and for-national product from around 1850-70 onward. eign investment. Subsequently the terms of tradeThe Nordic countries were, however, not atypical also improved. The increased export income,

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Table 6 Distribution of gross national product by final use(percentage share in GNP, based on totals in current prices)

Gross domestic Capital Gross nationalPrivate Government capital exports or capital

Country and years consumption consumption formation imports (-) formation

Denmark1870-89 92.0 9.8 -1.8 8.01890-1909 88.8 13.5 -2.3 11.21921-30 87.8 11.9 0.3 12.21950-59 68.6 12.5(9.6) 18.9 0 18.9

Norway1865-74 83.8 3.8 11.3 1.2 12.51875-94 84.7 4.8 11.9 -1A 10.51895-1914 83.6 6.6 14.7 -4.9 9.81915-24 78.1 8.5 18.9 -5.5 13.41925-34 77.5 8.7 14.4 -0.6 13.81950-59 60.0 12.5 (8.9) 29.9 -2.4 27.5

Sweden1861-80 85.3 4.4 10.8 -0.5 10.31881-1900 85.0 5A 11.2 -1.6 9.61901-20 81.6 5.8 13.1 -0.5 1261921-40 75.0 8.6 15.8 0.6 16.41941-59 64.8 14.3 21.0 -0.1 20.91950-59 61.9 16.8 (11.9) 21.2 0.2 21.4

Germany (botmdaries of the period)1851-70 81.6 4.0 13.7 0.7 14.41871-90 73.1 5.9 18.9 2.1 21.01891-1913 68.7 7.1 23.0 1.1 2411928 76.1 7.2 18.2 -1.5 16.71950-59 58.7 14A 23.7 3.1 26.8

Italy1861-80 87.3 4.2 10.0 -1.5 8.51881-1900 84A 4.8 10.8 0 10.81901-10 78A 4.2 15.9 1A 17.31921-30 78.5 5.6 18.1 -2.2 15.91950-59 68.2 12.0 20.8 -1.0 19.8

Japan1887-1906 92.0 10.1 -2.1 8.01907-26 86.5 14.1 -0.6 13.51927-36 84.7 15.9 -0.6 15.31950-59 59.5 10.3 29.4 0.8 30.2

United Kingdom1860-79 82.7 4.8 9.4 3.1 1Z51880-99 81.9 5.8 8A 3.9 1Z31900-14 78.6 7.4 8.7 5.3 14.01921-29 82.0 8.9 6.8 2.3 9.11950-58 66.9 16.9 (9.4) 15.5 0.7 16.2

United States1869-88 76.7 3.6 20.6 -0.9 19.71889-1908 73.6 4.4 21.4 0.5 21.91909-28 74.7 4.9 18A 2.0 20.41929-38 77.9 9A 12.3 OA 12.71946-55 66A 15A 17.3 0.9 18.21950-59 63.7 17.9 (7.5) 17.9 0.5 18.4

Note. Figures in parentheses in column 2 are for civilian consumption.Source: S. Kuznets, 1966, pp. 235-38.

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however, is only one aspect of the Nordic develop- Thus, the explanation for economic success goesment path. The most conspicuous role of foreign beyond an analysis of external factors.trade in the Nordic transformation was concentrat-ed in the period of industrial takeoff (1870-1910, in Sources of growth-capital and laborthe case of Sweden). Favorable terms of tradehelped spur economic growth, but only during According to economic theory, growth islimited periods. Indeed, expansion of foreign trade brought about either by increases in production in-was only one component of development. Also im- puts (primarily capital and labor) or by increases inportant were the linkages that extended beyond the productivity of those inputs. Simon Kuznets'the export sector and created a local industry re- studies of European history show that increasedsponsive to local needs. Because the Nordic coun- input of man-hours and capital by itself, played atries effectively developed linkages between minor role in the long-term economic rise of out-various sectors, as well as domestic and interna- put per capita and that scanty savings were nottional markets, they avoided the chronic structural necessarily an insuperable obstacle to the start of

industrial growth. Certainly, modern economicproblems ofsmalexporteconomeswithmigrowth in Europe was not attained by greater exer-

domestic markets, like those of many former colo- tion-that is, by more working hours per capita,16

nies in the developing world. Moreover, most of and capital accumulation was low. However, thethe capital needed for economic development was ratio of capital to output was kept down by capitalmobilized from domestic sources and managed by savings innovations, investments in training, andlocal financial and entrepreneurial enterprises. other arrangements that permitted greater output

Table 7 Share of foreign trade in national product(percent; based on volumes in current prices)

Early phases Before World War I 1920s 1950s

Category and country Date Share Date Share Date Share Date Share

Denmark (GDP),commodities 1870-79 45.6 1910-14 61.6 1921-20 57.3 1957-63 52.6

Norway (GDP), comnmoditiesand services a 1865-74 55.5 1905-14 69.2 1920-29 63.5 1947-56 77.4

Sweden (GDP),commodities 1861-70 27.7 1911-13 40.4 1921-30 31.9 1957-63 36.5

Australia (GNP), 1861-70 40.0 1911-13 38.9 1924/25- 35.8 1956/57- 27.7commodities 28/29 62/63

Canada (GNP),commodities 1870-80 30.9 1911-13 32.2 1926-29 41.5 1956-60 31.2

Germany, commodities, propor-tion to net total usesb 1872-79 36.7 1910-13 38.3 1925-2 31.4 1955-59 35.1

Italy (GNP), commodities 1861-70 20.6 1911-13 28.1 1925-29 26.3 1957-63 25.0

Japan (GDP), conmnodities 1978-87 10.3 1908-13 29.5 1918-27 35.5 1950-56 18.8

United Kingdom (GNP),commodities 1837-45 21.6 1909-13 43.5 1924-28 38.1 1957-63 30.4

United States (GNP),commodities 1834-43 12.9 1904-13 11.0 1919-28 10.8 1954-63 7.9

a. Shipping is a major component in Norway's trade.b. Net total uses is the sum of expenditure on private consumption, govemrnent consumption and net domestic capital

formulation.Source: S. Kuznets, 1966, p. 312-14.

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with a relatively small supply of natural resources economic growth show that improvements in theand productive capital. Consequently, a large quality of human resources and technology (the re-share of the long-term growth rate must have been sidual factor) greatly affected economic growth.19

the result of increases in the output per unit of in-put-at least when inputs are measured as simple Sociostructural and institutional factorsman-hours and material capital. Note, too, thatsaving and investment were, to an equal degree, The sociostructural and institutional prerequi-the result and the cause of economic development, sites for the Nordic development paths have been

In the Nordic countries, increased voluumes of summed up by Dieter Senghaas in the followingcapital and labor account for only a part of the way:20

economic growth. The rest of the explanation forthe high GNP growth rates has to be ascribed to * an agrarian structure that did not imnpede agri-theciightyNP gnreas. rThe ratio of investrent to cultural modernization (few large estates, preva-productivity increases. The ratio of invesbnent to lence of medium-size farms open to innovation,national income eventually increased, which in eradication of vilage penury, and openness ofturn pushed industrialization further along. Even landowners and tenants to institutional reformsmore significant, however, was the efficient mobi- and technical innovation)lization and use of domestic capital, the astute modete ral m novaon)strategies of financial institutions, innovation, and * moderate rather than gross inequality in the dis-entrepreneurial skill. As pointed out by Joseph tibuton of importantresourcesSchumpeter, innovation leads to structural chang- * income distribution that facilitated saving fores both in enterprises and economic sectors; it also productive investment and fueled sufficientlychanges relations among economic sectors or in- large demand for additional as well as new equip-dustries. In many parts of the developing world to- ment and consumer goods to make a favorable im-day, deficient entrepreneurship, in quantity as pact on domestic economic growthwell as quality, is a major obstade to economic de- * high average level of education among the pop-velopment. For countries in Sub-Saharan Africa ulation (high literacy rates and growing enroll-some believe that although capital and entrepre- ment in advanced educational institutions, such asneurship are complementary, the influence of en- vocational training schools, technical colleges,trepreneurs is more important.17 technical universities, and polytechnics)

To understand why the Nordic countries did so * private enterprise prepared to invest, facing thewell in increasing productivity and mobilizing risks of competition, and backed by an expandingcapital and labor (from foreign or domestic sourc- banking systemes) into productive investments over the period * polihtically organized peasantry (cooperativesfrom 1870 to 1950, one must first look at the "edu- and agrarian parties) and an industrial workingcational capital" embodied in its labor force, entre- class organized into trade unions and labor partiespreneurs, and bureaucracy. Unlike other forms of as a counterweight to state and industrial bureau-capital, human capital grows by its use. There are craciesimportant intergenerational factors; for instance, * the spread of technical innovation in all sectorsthe parents' health and education. Access to educa- as the basis for sectoral and macroeconomic pro-tion and training is also an effective way to pro- ductivi ains and intemnational competitivenessmote social mobility and equity. Human beings are buildty g an mternahonal (andthus both the end and the means of equitable and * building an infrastructure as a basis for (andsustainable growth. The relationship of education consequence of) intrasectoral and intersectoral dif-to productivity is highly complex both in cause ferentiaton, especially the intermeshing of agri-and effect, because it is affected by the quality of culture and industy and the emergence of urbaneducation, the learning opportunities outside of agglomeratonsformal education, and the intelligence of the indi- * a stable political system, resulting from progres-vidual.18 The development experience throughout sive democratization of political institutions andthe world demonstrates that major advances in growing political power of new social movements.human resource development are necessary, Not all of the factors listed above were presentalthough not sufficient, as preconditions for simultaneously in each Nordic country, but evenachieving sustainable and equitable economic when they were lacking initially or had littlegrowth. Econometric studies of the contributions weight, they grew in importance during the nine-of the production factors to the Nordic countries teenth and early twentieth centuries.

133

Beyond the late-starter and impoverished Nor can the Nordic record be fully explained bysophisticate arguments invoking the "impoverished sophisticate" arguL-

ment; that is to say, compared with other countriesThe rapidity of economic growth in the Nordic at similar levels of income and stages of industrial-

countries during the period from 1870 to 1950 can ization, Sweden in particular in the mid-ninE-partly be explained by the fact that their industrial teenth century was a relatively advanced society intakeoff occurred later than in other Western Euro- the sense that its governmental, technical, and fi-pean countries-the "late-starter argument." In nancial institutions were well estabLished, and itpart the comparative rapidity of Nordic economic had high educational standards.22 Also, its societaltransformation can be attributed to the high attitudes and values were more conducive to eco-growth that was achieved from a low starting nomic growth than was the case in other countriespoint, and that they were late starters in industrial- with similar income levels.ization and thus benefited from the technologicaland other advances of nations that industrializedearlier. Indeed, it is misleading to compare growth ly requires productive resources, a low rate of re-rates across countries that are in disparate phases tur in human capital investments leads one to askof development and also face a different external why such large quantities of human capital accu-environment. But, even after taking this into ac- mulated in the first place. One possible answer incount, the economidc achievements of the Nordic the Swedish case is that the population put an un-countries are impressive by international stan- usually high "noneconomic" value on certaindards. In a comparison of the growth records of types of human capital, especially literacy and ele-East European, Mediterranean, and certain Latin mentary education, as reflected in its government-Amierican countries lke Argentina-all of which and church-subsidized educational system. On a

periphera lat sta.ers i in- more basic level, the formation of human capital iswere tNral latrestarly standoustraszating ied to cultural, rehgious, legal, and political influ-the Nordic countries cearly stand out as having ences. But, one may ask, if Swedes were so sophis-outperformed the others in economic develop- ticated, why weren't they rich and why did theyment. The Nordic economic performance over the y yayiypast hundred years is comparable to that of Japan. not idustralize earlier?Moreover, the Nordic countries' performance has One way of reconciling a low per capita incomebeen equally or even more impressive than that of and little industrialization with relatively largemost other OECD countries in achieving stable stocks of human capital is to argue that the countryand balanced economic transformation and also in was technologically backward and that its resourc-alleviation of poverty, introduction of social secu- es were poorly allocated and utilized. But that isrity schemes, and fostering democratic participa- only part of the answer. There were no legal, cul-tion. tural, political, social, or institutional obstades to

What needs to be explained about the Nordic the efficient use of resources and to the introduc-countries' industrialization is its remarkable rapid- tion of modern technology in Sweden in the miid-ity and how high economic growth was reconciled 1800s. If we look at other possibilities-such as thewith equity. What was it that made it possible to per capita stock of physical capital and the avail-develop physical and institutional infrastructure ability of natural resources, or external economiicand mobilize capital, labor, entrepreneurship, and factors, we find that a strong demand for naturalresearch capability so efficiently and so very quick- resources by nearby industrial powers may alsoly in response to new economic opportunities? serve as a partial explanation for the rapidity of

As already mentioned, it would be naive to Nordic development, especially before 1945. Butthink of economic growth in the Nordic countries this explanation fails to account for the differenceas an automatic response to foreign demand. in the timing of economic transformation amongAmore accurate interpretation would be that an the Nordic countries and other European coun-increase in foreign demand and advances in tech- tries, or for the fact that countries with similar re-nology created a set of opportunities for entrepre- sources may be unable to achieve rapid exportneurs, workers, and savers, and that these growth. Furthermore, foreign demand does notopportunities were exploited with skill and alacri- fully explain the pattern of industrial transformLa-ty. History is replete with countries that have faced tion, with its dynamic linkages among economnicsimilar opportunities but have not perform as sectors, or the roles of the actors-labor, entrepre-well21 neurs, and government.

134

Empirical studies from a large number of coun- periphery that were unable to keep up with thetries in Europe and elsewhere show that the new developments and presented them with pros-relationship between educational levels (or admin- pects of various kinds of subjugation. But whatistrative capacities) and economic performance is some perceived to be a source of danger, othersby no means linear. Advances in education, admin- saw as an opportunity. The technological achieve-istration, and science, for example, typically oc- ments of the leading industrial nations, the spreadcurred several decades or even centuries before of know-how they had acquired (for example, inperiods of significant increases in per capita in- production technology, transport and communica-come or signs of industrial takeoff. Furthermore, is tion, and medicine), and the transplantation ofcan be argued that not only the Nordic countries their institutions could also bring progress to pe-but also, for example, Japan, Korea, the United ripheral Europe, where similar religious and cul-States, Germany, or even China or some South tural milieu and geographic proximity facilitatedAmerican countries like Argentina experienced the spread of positive influences.23

periods in which it can be asserted that they were"impoverished sophisticates". The most direct economic pull that the early in-

One can conclude that the impressive record in dustrializing core countries exerted on the periph-terms of literacy, administrative and scientific ca- eral countries was their ever-growing demand forpabilities, life expectancy and political stability food and raw materials. But backward Europeanwere important and necessary conditions, but not nations were at no small risk of becoming distortedsufficient conditions to explain the rapid economic and one-sided complementary economies. Thedevelopment. The development of these precondi- major component in this relationship of attractiontions was not evenly spread among the Nordic and repression was international trade. Accordingcountries. Moreover, once again history is replete to some calculations, in the early years of the in-with countries that faced similar opportunities but dustrial revolution, between 1820 and 1880, thedid not perform as well. In conclusion, the expla- volume of world trade grew more than niefold.nation for rapid growth combined with equity in Between 1750 and 1913, it grew fiftyfold24the Nordic countries must be sought in the coinci-dence of several factors. This calls for a broad, in- The domestic social and institutional changes interdisciplinary, historical approach. the Nordic region in the seventeenth and eigh-

teenth centuries are noteworthy because they wereSocioeconomic factors underlying the Nordic much less ambiguous than the extraordinarilytransformation slow and inconsistent transformation in Eastern

Europe and the Balkans. The Nordic nations dis-Two fundamental historical developments must play some unique characteristics in the way the an-

be kept in mnind when examining the structural cient regimes were replaced by modern capitalisttransformation of the Nordic economies: first, the societies. As summed up by Berend and Ranki, thepolitical, social, cultural, and economic "pull" of Nordic pattern of transformation can be character-the industrially more advanced Western European ized as a gradual aboltion of the remnants ofcountries on the periphery; and second, the'impor- medieval institutions, without rebellions or revo-tant domestic changes taking place in all spheres of lutions. In their place a consistent institutional

life. structure, based on modern capitalist and bour-

Extea,l "pull versus domestic change geois democratic relations, was erected. Aroundthe 1860s the Nordic countries reached the decisive

The socioeconomic changes in the Nordic coun- turning point, leaving most of the old feudal fea-tries were dosely related to developments in the tures of society behind them. Thus, at a time whenWest European industrial core countries, especial- the core industrial nations exerted their economicly Great Britain and Germany, with which they "pull," the institutional impediments to answeringhad dose cultural and economic ties. The changes the Western challenge had largely disappeared. Intaking place in the core countries were a complex their place were a free labor force, guarantees ofsocioeconomic and political phenomenon that free enterprise (in trade, agriculture, and industry),threatened the political system, military power, and the security of private property. The condi-and socioeconomic structure of the more back- tions for credit and investment to increase produc-ward nations. It put pressure on countries on the tion were also in place.25

135

Homogeneity and a stable political setting lished the legal and institutional framework ofcapitalism. Second, the state carried out the eco-

The formation of the modern nation-state and nomic activity that was essential for the develop-the establishment of a political system where the ment of a modem economy, such as investments inlegitimacy of power was dosely related to success railways, canals, roads, pubic utilities, schools, andin securing the interest of wide sections of the na- health services.27

tions populations was a necessary, although not State action appears to have immediate eco-sufficient, precondition for growth. Partly for geo- nomic significance in three types of historical cir-strategic reasons and the homogeneity of their cumstances: (1) when the state is creating a newpopulations, the Nordic countries benefited from a nation (its actions are lkely to promote economicsupportive, stable, and predictable polihtical setting growth, even though its political goals have great-that created a favorable investment climate. A er priority); (2) when a new and relatively weakbarely self-sufficient rural population of relatively leadership is trying to consoldate its power by in-independent farmers, the physical isolation of the creasing the state's power and intemationalScandinavian peninsula from the European conti- weight (in rineteenth centuy Eu e, suchnent, the difficulty of inland travel, and a harsh impnatural cmate forced a disciplined organization, a a great deal of economic actvity); and (3) whenspirit of togethemess, and consensus-building in the state takes direct action to overcome back-local conmmunities.thstttaedietatotovrcmbck

local commueneitia.. wardness, or uses the means it alone has at itsthe homogeneity o the Noramicpuation, lor disposal to make up for the shortcomings of mar-

the case in Japan and Korea, had ramifications for ket forces or to stimulate their operation.8the institutional and political setting for develop- Hitorcal sisuhase thatment. The sense of family, community, and shared Historical analysis has dearly estabhshed thatexperience that existed produced both a degree of the role of the state in economic development wastrust among the governed and a sense of responsi- considerably greater in Eastern Europe than inbility in those governing that became a cornerstone Western Europe. Little attention has been given,of the "middle way" sought by the Nordic coun- however, to the role of the state in Southerntries in their economic and political systems. Europe and the Nordic countries. The latter are

The absence of a strong classical tradition in the usually glossed over as classically liberal countriesearly stages of development (before the mid-nine- that experienced a minimum of state interventionteenth century) also had many ramifications. in the industrialization process or its initiation. AGovernment institutions-particularly the bureau- more detailed economic and historical analysiscracy and government "interference"-were not shows that the Nordic countries partly differedattacked as early on or as forcefully as elsewhere in from other Western European nations with respectmuch of Western Europe. The combination of a to the role of the state.29

weak classical tradition and a vibrant social liber- Bert Hosewitz, who introduced the concepts oftarian movement dominated the political scene in "autonomous" or "spontaneous" and "induced"the Nordic countries until the interwar period. econonic development, belongs to those who doSince the 1920s, however, the working-class par- not classify the Nordic development process asties and the labor union movement have made imn- purely spontaneous. He categorizes the Nordicportant contributions to the growth of social pattern somewhere between the "spontaneous"democracy. and the "induced" models of development, plac-

ing it somewhere between the English and GermanThe debate on the role of the state models.30 Furthermore, an analysis of the Nordic

development experience casts doubt on the validi-The vast literature that has grown up around the ty of Gerschenkron's assumption that the measure

role of the state in development amply demon- of economic backwardness and state interventionstrates that its role varies from one economic sys- are correlatives.31 The relatively small role of gov-tem to another and among the stages of emient in Nordic industrialization might be sur-development. During the course of European cap- prising if the a country's degree of backwardnessitalist transformation, the state was engaged in two were measured simply by its income level. Thevital activities.26 First, it created the institutional Nordic countries' development rather supports anframework conducive to growth; that is, it abol- hypothesis that relates a large governmental role inished traditional feudal institutions and estab- countries with high degrees of backwardness to

136

deficiencies in human resources and institutions, main instruments of social policy were compre-and not in per capita income as such. hensive unemployment, health, and pension

schemes; institutional regulations providing for la-The Nordic social market economy pattern bor representation in industry; and, most recently,

comprehensive environmental policy initiatives.In the Nordic type of social market economy, the These policies encouraged broad public participa-government played a key role in the social sec- tion in social and economic decisionmaking andtors-education, health, sanitation, housing, and provided a healthy and well-trained labor force.infrastructure-and in guaranteeing liberty and The income distribution and social policies hadsocial and economic justice. These actions created direct effects on long-term economic growth. First,a favorable environment for the goods-producing they stimulated the demand for, and subsequentlysectors and for the mobilization and effective utili- the supply of, items such as housing construction,zation of labor and entrepreneurship. The goods- consumer goods, and transport equipment, whichproducing and financial and trading sectors were led to local expansion and created linkages in agenerally privately owned and operated and were wide range of goods and services. Second, the em-disciplined by the competitive price mechanism phasis on maintaining equity, eliminating poverty,and open market. As a result, resources were effec- and minimizing unemployment helped mobilizetively utilized, induding those of the government, the work force and promoted higher labor produc-human resources, and capital surpluses generated tivity.by the private sector. The public sector in the Nordic countries was

From the very early stages of industrialization, small before as well as during the industrial trans-the Nordic countries avoided nationalizing or sub- formation period. It played more of a cooperativesidizing infant industries. Even strategic industries (but not distorting) role that allowed the Nordicthat processed natural resources along with engi- countries to spontaneously follow "natural" se-neering, textile, and heavy industries and their quences and linkages successfully in various stag-supporting financial and trade institutions were es as they developed their social and physicaldeveloped by private entrepreneurs. In Sweden, resources and established their position in the in-the long tradition of using parastatals and state ternational economy. The Nordic experience alsomonopolies was largely restricted to well-defined suggests that entrepreneurship that is encouraged,areas such as the generation and transmission of but not directed, by the state can be a prime moverelectric power, railways (especially main lines), in the early establishment and expansion of thepostal and telephone services, and state monopo- goods-producing sectors and trading and financiallies for the distribution of alcohol and tobacco. institutions.Thus, although the importance of the Nordic stateenterprise and state intervention in general have Government expenditure and state enterpriseincreased since World War II, even today thegoods-producing sectors are in the hands of the The governments' share of total expenditure wasprivate sector. Public ownership of assets (3 to small in the Nordic countries during their period8 percent in manufacturing industry) and employ- of industrial transformation. Mythological prob-ment in publicly owned industries (3 to 7 percent lems makes it difficult to estimate accurately andof total employment) are still low in comparison compare long-term trends in the distribution of na-with most European countries. tional product by users. Available data, however,

The market-oriented and free enterprise eco- suggest that the government consumption share ofnomic policies were combined with important so- GNP was between 2 and 6 percent in the Nordiccial policies from the early stages of countries up to World War I. It was not until afterindustrialization. Social policies avoided dispari- World War I that this share of GNP rose signifi-ties in income, provided universal access to social cantly beyond the 6 percent level. Governmentservices, and consistently sought to promote har- revenue from taxes and fees remained below 9 per-mony among the social partners--organized labor, cent of GNP in Sweden until World War Icapital, and government. Early on, the Nordic soci- (Figure 1). Since then, the public sector in the Nor-eties strove for universal literacy, while at the same dic countries has taken a greater part in directingtime emphasizing high-quality, if limited, higher income, savings, and the credit supply, while con-education. Labor mobility was also encouraged. At tinuing to follow a liberal, market-orienteda later stage in the industrialization process, the economnic policy toward the private sector-with

137

Figure 1 Tax revenues in relation to GNP, Sweden, 1900-85

percent

70

60.

50 Total revenuesp'

40

30 .. es/Taxef and fees

1910 1920 1930 1940 1950 1960 1970 1980

Source: K. Anderson, 1987.

low tariffs and relatively little govermnent inter- culture the figure was close to zero.32 Governmentvention in production, investment, pricing, and collective consumption as a percentage of GD]P inwage formation. Economic planning has been con- 1960 was higher in the United States and the Unit-fined mainly to social policies and to infrastruc- ed Kingdom (more than 16 percent) than. inture, rather than to experiments with government Sweden (less than 16 percent), and far higher thanmanagerial initiatives or detailed regulation of pri- in Denmark, Finland, and Norway (12 to 13 per-vate enterprise; hence, the authorities have ab- cent). From 1970 on, however, Sweden andstained from an aggregated type of input-output Denmark topped the list, and by 1980, Norwayplanning. and Finland also moved ahead of the United

states.33

Because data are lacking, it is difficult to esti-mate the state-owned sector's share in earlier stag- In the early 1950s, the state-owned sector ines of Nordic development. Possibly this share was Sweden represented 12 to 13 percent of the totalbetween 4 and 12 percent in the periods before fixed investments and in the early 1970 aboutWorld War I. For the era following World War II, 10 percent. In Denmark the public share was alsostatistics dearly show the private sector's domina- low; only the United States and Portugal had ation in production. They show that no more than smaller share. In the mid-1970s, the public share ofabout 15 percent of output was produced in the total employment in Demnark, Finland, andpublic sector in Sweden in 1950, and only up to 20 Norway was 3 to 4 percent, which is very low byto 25 percent in the early 1970s. On the demand international standards3 (Table 8).side, however, public consumption and invest- Before World War II, Norway flirted with state-ment accounted for about 20 percent of GNP in run industries for a time, and a Swedish 'State1950, and increased to 30 percent of GNP in the Industrial Holding Company was created in 1970early 1970s. In manufacturing, the public sector ac- under a government dominated by a new genera-counted for only 5 percent of output, and in agri- tion of radical Social Democrats. Although the

138

company was instructed to operate as a private ing, and safeguard consumer interests and envi-corporation (that is, under corporate law, with an ronmental concerns.independent, nonpoltical, and competitively paid Moreover, the key to Nordic success was notmanagement), its main ventures (in steel, forest only the relative size of the public and the privateproducts, petrochemicals, and shipbuilding) have sectors, but more importantly the complementarynot been successful. and efficient way the state and the private enter-

Since the late 1970s, the Swedish governmuent, in prise functioned. Unlike the countries of Easternparticular, digressed somewhat from earlier poli- Europe and many in todayhs developing regions,cies of avoiding state ownership in the goods-pro- the state-owned sector m the Nordic countries hasducing sectors (as reflected in the formation of operated effectively with a high degree of account-state-owned companies such as Statsf6retag, Sven- ability and cost recovery, and with a minimum ofska Vary, and LKAB) and givng large subsidies to abuses such as rent-seeking, and therefore mini-industries that were no longer competitive. The mized the need for subsidies.politicians claimed that intervention was neces- The demogaphic revolutionsary to save jobs and economically vulnerable re-gions from economic recession. The industrial The quantitative growth and quahtative devel-intervention policies proved to be unworkable and Thent of the "human and th e devel-

costly, so that. bytemd,8steSeihgv opnment of the "'human factor," the principal forceeoie n thad r s the picy. behind production, is among the most striking fea-

tures of the industrial revolution and one that un-The limited scale of government ownership in doubtedly pushed the European countries toward

the goods-producing sectors from the very early capitalistic transformation.stages of development until today makes the Nor- Although the nineteenth century witnessed adic countries unique compared with the countries moderate decline in birth rates, there was a simul-of continental Europe, as well as those in other taneous rapid fall in death rates, which allowed theparts of the world. Further, public policy not only population of European countries to multiply rap-stimulated private entrepreneurship but also "in- idly. Britain, for example, experienced a fourfoldposed" a high degree of social responsibility on the increase; the average life expectancy doubled,entrepreneurs-for example, in their treatment of drastically changing the age structure of the popu-labor. It also fostered efficient tax collection, and, in lation. In the Nordic countries, population grew atthe era following World War II, promoted the de- an average rate of 0.8-1.0 a year between 1830 andvelopment of an elaborate system of incentives to 1910.35 Although the Nordic countries experiencedreinvest in capital equipment and training of labor, several waves of emigration to America duringencourage workers to participate in decisionmak- this period, most analysts are of the opinion that

Table 8 Share of public enterprise in total employment, 1975-76

Country Percentage share

Denmark (1976) 3.6Finland (1976) 3.2Norway (1975) 3.0Sweden (1975) 7.1

Austria (1975) 13.9Belgium (1975) 6.9France (1976) 11.5Gernany, Fed. Rep. of (1976) 8.9Ireland (1976) 8.0Italy (1973) 6.6Netherlands (1976) 4.0Spain (1976) 3.6United Kingdom (1986) 7.9

Source: L. Waara, 1980.

139

the net effect on the Nordic economies was rela- nutrition. In addition, the Nordic countries weretively neutral when viewed from a long-term per- leaders in the public health field. Sweden, for ex-spective.36 On the whole, the Nordic demographic ample, created a system of district physicians. Thisprocesses followed continental European trends. system improved the quality of child care at lowThere are some features, however, that set them cost, more through the spread of information thanapart from the rest of Europe. through actual medical treatment. But the mea-

From the data on life expectancy in the Europe- sures to improve sanitation and health servicesan countries in the mid-eighteenth century, it ap- were not the only reason for the demographicpears that the Nordic countries already had much changes in the Nordic countries. Another group ofthe same life expectancy at age 10 and a somewhat factors were related to the development of agricul-higher life expectancy at birth than the much richer ture and transportation, in part because of thecountries of northwestern Europe. Child mortality adoption and institutionalization of innovationsbegan to decline about 1750 and then dropped developed in the core countries.39

markedly after 1800. The total Swedish death ratewas about 96 percent of that of Western Europe in Education and skills development1800-21, 87 percent in 1821-40, and 71 percent in1871-80. In the last period, the Swedish death rate The early advances in education in the Norclicfor children under five was about 59 percent of that countries was not merely a response to the eco-of Western European levels, and the overall Scan- nomic challenge of the industrial revolution. It wasdinavian death rates were dropping faster than not the demand for a better qualified labor force,those of Western Europe as a whole.37 Between one specific to the machine age, that stimulated1901 and 1910, the birth and death rates in the Nor- mass education. Even in the most advanced coun-dic countries (with the exception of Finland) tries, the connection between the advances in edu-had fallen to the levels of the European industrial cation and science and the industrial revolutioncore countries, whereas in Southern and Eastern was by no means a direct one.40In England, for ex-Europe birth and death rates remained significant- ample, the revolution in education got under wayly higher. in the late seventeenth century, which was well be-

Longevity also improved in the Scandinavian fore the industrial revolution. By the mid-1660s,countries, in contrast with the other peripheral half of England's young people were literate, andcountries.38 In the early nineteenth century, the av- between a tenth and an eighth of those in theirerage European in the core countries could expect teens were attending secondary school. Two and ato live 25 years, but the life span increased to 48-54 half percent of young adults were attending uni-years by the twentieth century. By 1910 the Nordic versity.41 In Germany, the spread of education wascountries had the highest life expectancy in all of encouraged by the realization of Luther's educa-Europe. With their average of 55 years, they even tional aims. The result was elementary public ecdu-surpassed Britain and France. Meanwhile, life ex- cation, introduced through the public educationpectancy in Southern and Eastern Europe was still order of 1763, which was enacted well before theapproximately 10 to 20 years lower (Table 9). industrial revolution began in Prussia.

The early decline in the death rate and great Educational advances also predate capitalisticpopulation increase up to the mid-nineteenth cen- industrial transformation in Europe's peripherytury in the Nordic countries are usually attributed and other parts of the world. By the middle of theto the fact that these countries were at peace, to the nineteenth century, the Japanese educational sys-introduction of the potato, and to the use of vac- tem had already reached the standard of the mostcines to cope with smallpox and cholera epidem- advanced European countries, whereas industialics, which had decimated many populations in takeoff did not come until the twentieth century.medieval times. But these lifesaving measures had Similarly, Korean literacy rates were comparative-also been used elsewhere in Europe. Income ly high by Asian standards in the first half of thegrowth also fails to explain why death rates fell twentieth century, while industrial takeoff notfaster in Scandinavia than in the rest of Europe as strike until the 1960s.Sweden's per capita income declined relative to The same lack of correlation is observable in thethe rest of Western Europe after 1750 and after European periphery. Denmark had already made1800. In part, the answer seems to lie in the growth primary school attendance compulsory by the endof literacy and thie availability of education, which of the eighteenth century, as did Norway in 1827, afacilitated the spread of knowledge of hygiene and country not only less developed than Denmark,

140

Table 9 Birthrates and life expectancy, 1820-1975

Births per 100 Years of lifepopulation expectancy at birth

Country 1820 1900 1978 1820 1900 1975

Denmark 3.15 2.97 1.21 54.6 73.7Finland 3.66 3.26 1.35 46.7 71.2Norway 3.33 2.97 1.28 43.7 56.3 75.0Sweden 3.30 2.70 1.12 35.2 55.7 75.0

Australia n.a. 2.82 1.57 70.9Austria 4.30 3.50 1.13 40.1 70.2Belgium 3.23 2.89 1.24 47.1 71.0Canada 5.69 2.72 1.52 73.4France 3.17 2.13 1.38 39.6 47.0 72.5Germany 3.99 3.56 0.94 46.6 70.6Italy n.a. 3.30 1.27 44.5 72.3Japan n.a. 3.24 1.50 72.0Netherlands 3.50 3.16 126 32.2 52.2 74.6Switzerland 3.29 2.86 1.14 34.5 50.8 74.5United Kingdom 3.03 2.87 1.23 38.7 50.5 71.8United States 5.52 3.23 1.52 47.3 72.1

Average 3.78 3.01 1.29 37.3 49.2 72.6

n.a. = not available.Source: A. Maddison, 1982.

but one that had been a poor Danish province for a ly in relation to religious works; (2) about 1820-60,long time. Sweden followed suit in 1842, and compulsory education was introduced at the lowerFinland in 1866, even though it was part of the Rus- elementary level and literacy increased markedly;sian Empire at the time. (3) from about 1860 or 1870 to 1939, more emphasis

By the 1850s, less than 30 percent of the adult was gradually placed on secondary and higher ed-population in the Nordic countries was illiterate, ucation (literacy levels were already high) and thewhich was even lower than the levels in England teacher-pupil ratio and formal vocational and tech-or France. In contrast, the illiteracy rates were close nical training expanded (after 1900, primaryto 75 to 80 percent in Southern Europe and 90 to 95 schooling continued to receive dose attention,percent in Russia and the Balkan region. Around while higher education expanded, although it was1850 the Nordic countries were among those with limited to a small segment the population); andthe lowest illiteracy in Europe, despite their back- (4) from the 1950s onward, schooling up to the sec-ward economic structure and low per capita in- ondary level became compulsory and the numbercome. By 1850 Sweden's adult illiteracy rate had of students attending college and university in-dropped to about 10 percent, and by 1891 only one creased significantly.Swedish army recruit per thousand could not read In Sweden, the first milestone in educational ad-and only nine per thousand could not write. By vances was the Church Law of 1686, which called1900 the general standard of education of the entire on parish priests to teach every young person inpopulation of Scandinavia was at par with that of their charge to read the Gospel and other specifiedthe most advanced European countries, where illit- religious works and to write. With the reintroduc-eracy had dropped to 1 to 2 percent from 60 per- tion of confirmation during the eighteenth centu-cent a century earlier 2 (Table 10). ry, the educational responsibilities of the dergy

The educational system in the Nordic countries became formalized. Although such legal instru-evolved in stages: (1) during the seventeenth and ments are not always effective, a number of addi-eighteenth centuries, the church took on the princi- tional factors facilitated the spread of literacypal responsibility of providing education, especial- by the clergy. To begin with, the clergy were

141

numerous, and university-trained. Furthermore, a versities in the mid-nineteenth century. The per-large number were the children and grandchildren centage of the population in university in 1830 wasof peasants. Thus the countryside was covered by on par with that in the Netherlands and well aheadinfluential educated persons, perhaps half of them that of Belgium. In 1830 the ratio in Sweden wasno more than two generations away from peasant similar to that in Germany in 1880 and France instatus, whose legal duty and ideological convic- 1889.46 During the period between 1870 and 1900,tions required them to strive for universal literacy however, the student-population ratio of Swedishamong the population.43 secondary schools remained almost constant, as

After 1800 Sweden began to expand the system did the budget provided for these institutions,of formal schooling. At first the emphasis was on which did, however, allow salaries to be kept inlearning to read and write and do arithmetic, but line with general income growth.47

eventually, natural science, social science, and re]Li-gion were added to the curriculum, along with Toward the end of the nineteenth century,skills such as woodcraft and metalworking. By Sweden began to step up its pace of building illsti-1839,1,097 of Sweden's 2,308 parishes had either a tutions of higher education. In 1827 the Swedishpermanent or itinerant ("ambulatory") school. government opened the doors of the Technical In-Legislation passed in 1842 required all parishes to stitute in Stockholm, with two professors and twohave at least one permanent or itinerant school in adjuncts; in 1876, the institute was reorganizedoperation by 1847.44 By 1859 all but 7,000 of the into the Royal Institute of Technology. The Karolin-more than 500,000 children of school age in ska Institute in Stockholm was founded in 1810 asthe country were receiving formal education.4 5 As an establishment for training army surgeons, andthe expenditures on elementary education in- by 1856 there were two universities in Sweden,creased after 1900, the teacher-pupil ratio contin- Uppsala and Lund, with 13 professors each. Theued to rise and more and more itinerant schools University of Stockholm got its first two professor-were replaced with permanent ones. Between 1870 ships in 1881, and Gothenburg University startedand World War I, the percentage of the Swedish up in 1891 with seven professorships. In the mid-population attending elementary schools re- nineteenth century, Uppsala University boastedmained fairly stationery, and attention turned to about 800 students, and Lund 400. In the autumnimprovements and the expenditure per pupil in- term of 1900, the number of students at Uppsalacreased. had increased to 1,421, and at Lund to 675. By 1951

Although not large in absolute number, a rela- Uppsala had 6,994 students (2,535 were women),tively large percentage of Sweden's youths were Lund 4,458 (1,607 were women), and Stockholmattending "academic" secondary schools and uni- University college 4,458.48

Table 10 Illiteracy in Europe, circa 1850

Less than 30% illiteracy 30 to 50% illiteracy Over 50% illiteracy

Denmark Austrian Bosnia-HercegovinaFinland Empire (40-45%) BulgariaNorway Belgium (45-50%) Italy (75-80%)Sweden (10%) Portugal

Germany England and(Prussia 20%) Wales (30-33%)

France (40 45%) GreeceNetherlands Ireland HungaryScotland (20%) MontenegreSwitzerland Romania

Russian Empire (90-95%)SerbiaSpain (75%)

Note: Approximate percentage of adult illiterates is indicated where known.Source: C. Cipolla, 1969.

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Between 1871-75 and 1921-25 in Sweden, the ways (typically secondary lines), and canals werenumber of students in the faculty of theology de- also owned and operated by private individuals.clined, while those in history, mathematics, medi- The Nordic governments showed foresight incine, and law more than tripled. Secondary school planning the location of railways and roads. Some-enrollments and budgets began to rise substantial- times strategic and political considerations guidedly after 1900, but universities and the higher tech- investment decisions, but on the whole the invest-nical and commercial schools did not expand in ments were economically sound and sparked in-the same way until after 1905. The Stockholm digenous entrepreneurship in agriculture,School of Economics was founded in 1909 with pri- construction, and manufacturing industry. By es-vate financial contributions, and a major expan- tablishing a large number of communication hubssion of the Higher Technical Institutes was decided and small towns in various regions, Sweden wasupon in 1911, the latter founded by the govern- relatively successful in avoiding the problems thatment. one-sided urban development has generated in to-

The comparatively high standards of education day's developing countries. Other examples of thein all Nordic countries gave added impetus to tech- dynamic interplay between the state and the pri-nological and organizational developments in the vate sector indude the energy and telecommunica-agricultural sector. When the industry started to tion sectors, where the Swedish governmenttake off, labor was better prepared for the urban played a major role in planning while the privateand industrial environment that was taking shape, sector made an important contribution to subcon-with its new occupations and on-the-job training. tracting as well as in advancing technological stan-Moreover, in contrast to today's developing coun- dards. This interplay between the private andtries, the Nordic countries did not experience public sectors resulted not only in efficient produc-widespread negative attitudes toward manual or tion and distribution, but also in comparativelypractical work. On the contrary, there was a posi- low costs of electricity and telecommunication ser-tive attitude toward practical work, even among vices.the upper dasses. The Nordic countries successful- Moreover, the Nordic countries paid serious at-ly developed special schools for practical training tention to project planning, efficient systems ofin technical and professional skills. Even at the el- subcontracting, accountability, monitoring, andementary school levels, the teaching staff was usu- the use of modern technology. This resulted inally very qualified and their profession was well comparatively high levels of efficiency, quality,respected. In addition, high standards in the uni- and cost recovery. In sum, the investments in phys-versities produced not only high-quality teachers, ical infrastructure and their effective utilization il-but also well-trained bureaucrats, economists, en- lustrate the successful partnership between thetrepreneurial managers, technicians, and scien- private sector and the municipalities and centralTists. government.

An equally significant component in the NordicPhysical and technological infrastructure countries' industrialization was their comparative-

ly sophisticated standard in applied science andAnother crucial component of Nordic develop- technology, especially since the latter part of the

ment was the effort put into building the physical nineteenth century. From medieval times onwardand technological infrastructure. Large invest- the elite in Nordic countries kept themselves in-ments were made in the development of infra- formed about the scientific trends in continentalstructure, especially during the initial phase of Europe. The inflow of foreign know-how was facil-industrialization and after the industrial takeoff. itated by their knowledge of Latin, French, andInvestments in railways and roads stimulated in- German, as well as openness to migration. In theternational as well as local trade (Table 11). seventeenth century walloons from Belgium came

The main investments in facilities such as roads, to Sweden as instructors and specialists to advanceports, main railway lines, telecommunications net- the metallurgical industries. From the expansion inworks, electric power, water supply, sewerage, mining and its related industries, a new, wealthyand waste treatment were planned and financed bourgeois dass eventually emerged.by the government, both at the national and local Moreover, Scandinavians tend to think of them-level. The private sector acted mainly as a contrac- selves as rational and practical people. Indeed,tor and supplier of inputs to various projects. In Sweden has been called a land of engineers in viewthe earlier stages, however, many of the roads, rail- of its many technical inventions, although Swedes

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Table 11 Length of railways, 1860-1914(thousands of kilometers)

Country 1860 1870 1880 1890 1900 1914

Sweden 0.5 1.7 5.9 8.0 11.3 14.4Denmark 0.1 0.8 2.6 0.2 2.9 3.7aNorway .. 0.4 1.1 1.5 2.9 3.1aFinland 0.1 0.5 0.9 1.9 2.9 3.4a

signifies either that there were no railways, or less than 100 kn of line altogether.a. Data for 1910.Source: 1. Berend and G. Ranki, 1982, p. 98.

have also made many contributions to pure sci- veloping countries, in which modern public ad-ence. The outstanding Swedish innovations of the ministrations were built by external powers, thenineteenth century include the safety match, nitro- Nordic countries had a long indigenous traditionglycerine as an explosive, the cream separator, the of well-organized government because they werefloating light buoy, and the self-adjusting ball never colonized (even when it was under Russianbearing, not to mention the technologies used in rule, Finland had a high degree of autonomy).steel production, pulp and paper, electrical and Also, as in East Asia, the state has been consideredtelephone equipment, machine-tool building, ma- an essential instrument of society, not only in safe-terial testing, and ordinance.4 9 guarding national security and maintaining law

Without the establishment of high-quality do- and order, but also in solving various socioeco-mestic educational institutions led by world-dass nomic problems.research scientists and the emphasis put on on-the- The roots of Sweden's modern civil service canjob training, these advances would not have taken be traced back centuries before industrialization.place. Admittedly, a great deal of knowledge came The early bureaucracy was staffed primarily byfrom abroad during the industrial takeoff period, members of the aristocracy or talented laymen aLndbut it is important to recognize that foreign tech- it served as a check on royal power. Even afternology was modified and many innovations add- 1866, when the aristocracy's formal political powered, particularly in agriculture, infrastructure, and waned, the civil service coittia ted to draw uponengineering, that later served as the technical foun- the traditions established . arlier: As a result, partdation for multinational corporations. of the cream of every Swer lsh generation was at-

As was true in Japan, Nordic industrial devel- tracted into the civil servict , where prestige andopment is full of examples of cross-fertilization of considerable influence were 'raditionally guaran-foreign technology and local capability to improve teed.technology and apply it commercially. Technologi- The class of civil servant that e aieiged during thecal development in the Nordic countries was un- nineteenth century was efficien, co )mpetent, hon-dertaken by the state as well as private initiatives. est, and fairly well paid. Despite .e limited scopeCommercial applications of technological advanc- of government responsibilities dxring the "ultrali-es were mostly financed and managed by private beral" period that lasted for most of the nineteenthentrepreneurs, while the government had a major century, the tradition of honesty among civil ser-role in providing education and supporting pure vants remained strong, as did their respect for law,sciences and basic research. Unlike Japan, the Nor- discipline, and good organization. The high educa-dic countnes did not have or pursue any elaborate tional standard of those in bureaucracy had a pos-industrial or trade policies with a major emphasis itive impact on their organizational efficiency, ason top-down, long-term strategic planning. well as the quality of output. It is also worth noting

that those in high positions in the bureaucracy of-Well-organized and effective public administration ten come from financially well-to-do aristocratic

families, and they had an urge to contribute to theWell-organized public administration, at the creation of an enabling environment for private en-

central and municipal levels, contributed greatly trepreneurship and effective public finance.to enable rapid economic growth. Unlike many de- In sum, the administration, although small in

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number and budgets, was exceptionally well well-qualified pool of certified public accountants,equipped to formulate and implement policy financial officers, and business leaders-not toschemes and laws, to secure the basic societal mention civil servants. And, in contrast to otherneeds of the majority of the population, to stimu- countries, for example England, several Nordic in-late private sector initiatives, and to help create the dustrial-financial groups, like the Wallenberg fam-environment of cooperation that is one of the hall- ily in Sweden, generally practiced meritocraticmarks of the modem Nordic economic and social principles for recruitment of management, even atmodel. an early stage of industrialization.

The infant industry period was often rocky. Typ-Entrepreneurship and financial institution building ically, it took years and many anxious moments

before industrial ventures became first viable, andIn addition to promoting central and local pub- eventually vigorous. In the beginning, entrepre-

lic institutions, the Nordic socioeconomic environ- neurial appetites were wetted by low levels of tax-ment fostered the development of informal sectors ation, although this was not an unusualand strong grassroots initiatives, which induded characteristic for the Nordic countries. In addition,farmers, blue-collar and white-collar labor, and corporation laws provided a measure of securitychurches, as well as individual entrepreneurs. for entrepreneurs and investors. By 1872, 45 per-Thus, during the economic transformation, institu- cent of the industrial workers in Sweden were em-tion building in the private and informal sectors ployed by companies registered under theprogressed relatively smoothly. As mentioned ear- Companies Act ("Aktiebolag"), and by 1912 thislier, industrial and agricultural production, along share was as high as 80 percent. From about thewith trading and financial activities, were left turn of the nineteenth century, private banks inlargely to the private sector. At the same time, the particular played a vital role in launching many ofgovernment created favorable conditions for a the larger ventures. They also attracted foreign fi-price-driven market, which encouraged business nancing for ventures beyond the capacity of theand the growth of profits for reinvestment in pro- Nordic capital markets, facilitated reconistructionduction. Among the measures used to encourage and mergers, and identified candidates of merit toentrepreneurship were the development of techni- manage certain enterprises.cal and managerial expertise, relatively free mar- In the eighteenth and nineteenth centuries, thekets (although cartels did exist), the price financial institutions in the Nordic countries weremechanism, minimal regulation, and reforms af- far better developed than those in other countriesfecting company law. In response to these mea- with similar per capita income levels. The Swedishsures, new goods-producing firms and private 'Riksbank" (the Swedish Central Bank, founded intrading and financial institutions emerged, along 1657 as a private bank but placed under the controlwith professional organizations for auditors and of Parliament in 1668) made Sweden probably theengineers and employee federations. first country to convert successfully to noncom-

In the early stages of development, new entre- modity money. By the 1850s, Sweden had largelypreneurial talents emerged in the informal and in- converted to paper currency. In addition, the coun-termediary sectors, and dynamic small and try had a well-functioning financial market and atmedium-size enterprises emerged from bottom-up least the rudiments of a modem commercial sav-initiatives. The new spirit of entrepreneurial risk- ings bank system. By the 1870s, Sweden's financialtaking became a dynamic force in both urban and system was staffed by knowledgeable personnelrural society. As was the case in Germany, industri- and was as sophisticated as that most other coun-al managers were engineers by training and their tries achieved only at an advanced stage of indus-inventions gave rise to successful "genius indus- trialization. The ratio of commercial plus nationaltries," especially in the early stages of industrial- bank assets to GNP also demonstrates the level ofization. Their success was also facilitated by the sophistication in the early stages of industrializa-early establishment of indigenous financial institu- tion. In 1900 and 1913, this ratio was higher fortions (first serving clients in the agricultural sector Norway and Sweden than for Belgium, France,and trade, and later in industry), which were pri- Germany, Great Britain, Italy, the Netherlands, thevately owned and disciplined by market risk. In United States, or Japan50 (Table 12).Sweden, the Stockholm School of Economics, a pri- The ability of the general public to becomevate institution established in 1909 and the first of accustomed to paper money early, along withits kind in the Nordic region, began to turn out a bank deposits and insurance policies, and that

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Table 12 Financial assets as a percentage of GNP, 1861-1913

(1) (2) (3) (4)Assets ofnational

bank of issue (1) + Assets (2) + Assets Assets of+ commerical ofsavings of mortgage all financial

Country banks banks banks institutions

Denmark1880 33.3 63.1 94.1 951900 41.9 82.4 143.2 1471913 58.0 92.8 176.4 184

Norway1880 48.9 84.5 100.1 1071900 65.6 107.7 128.7 1361913 79.2 129.1 145.2 166

Sweden1861 29.4 35.0 48.0 601880 48.0 60.2 82.9 891900 74.5 97.6 112.9 1231913 87.2 112.9 123.1 136

France1860 8.6 10.5 12.4 191880 23.1 25.7 33.3 501900 32.6 46.2 59.0 961913 41.4 53.8 66.1 104

Germany1860 26.3 31.1 37.8 401880 25.9 44.1 63.6 731900 36.6 68.0 100.5 1141913 45.3 95.3 131A 158

Great Britain1860 37.3 42.1 43.2 571880 58.3 65.1 69.6 951900 50.7 60.1 63.1 331913 49.4 59.2 61.9 103

Switzerland1860 30.1 48.9 52.7 561880 95.7 120.1 143.0 1531900 102.4 123.4 156.5 1841913 180.1 196.8 276.9 287

United States1860 17.8 22.2 22.2 281880 29.1 39.1 40.4 491900 53.5 69.0 70.1 861912 58A 71.8 72.9 91

Source: R. Goldsmiti, 1969, Appendix D.

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indigenous financial institutions were well estab- Swedish banks are particularly interesting be-lished greatly accelerated the economic transfor- cause they have maintained close links with localmation. Foreign, especially British and French, municipalities. The first savings banks were estab-capital, however, also played a significant role in lished in 1820, and by 1880 there were 346 suchfacilitating Nordic economic transformation before institutions all over the country. Their basic opera-World War I, even though the role of foreign finan- tions were geared toward promoting savingscial institutions was not normally a direct one. The among private individuals and households andSwedish national and local governments and providing credit for local projects. Eventually theymortgage institutions relied primarily on foreign also provided economic advice, consumer infor-bond markets. Between 1860 and 1914, more than mation, finance for housing, and insurance servic-80 percent of Sweden's national government debt es. Each bank developed as an independent,was held abroad.51 autonomous institution whose activities were lim-

Swedish commercial banks became more direct- ited to a specific geographic area. They had no for-ly involved with industrial firms after 1900. mal owners, but could be regarded as semipublicStockholm's Enskilda Bank was a pioneer in be- entities. The responsibility for operations were incoming extensively involved in railways and man- the hands of the trustees, half of whom were elect-ufacturing industry. Commercial banks were ed by the municipal or county council within itsrelatively free of the government intervention that area, while the other half were elected by all thehampered the development of financial institu- trustees and represented the depositors. The sav-tions in other countries.52 In the Nordic countries, ings banks were established to benefit the public.financial institutions were allowed to set up and to They began with a "basic fund" that was graduallymobilize capital through their own resourcefulness repaid. Profits were accumulated in a reserve fund,and private sector initiatives, as can be seen in the corresponding to the shareholders' capital. Privategrowth of private commercial banks as well as co- profit was not the basic motive of these institu-operative banks and savings banks. tions. Rather, their surplus was reinvested in the

The savings banks provide a good example of banks.53

bottom-up initiatives by local communities. Unlike The role of the Nordic governments in establish-their counterparts in England and in France, the ing and expanding financial and industrial ven-saving banks in the Nordic countries (as well as in tures was generally passive. They shared aGermany and Italy) functioned by and large with- philosophical commitment to private enterprise,out much government interference. They were a free trade regime, and ordinarily avoided exces-self-reliant institutions that ran small operations. sive restrictive regulations, while encouragingThey collected a large number of small local sav- competition and bottom-up initiatives. Unlikeings and made these available for productive in- Germany, there was little or no direct state inter-vestments. Before these banks opened, small vention or planning of the organizational structuresavings were usually stored privately by house- of major industries. Early on, the state contributedholds, and thus were not always held safely and long-term financing for major new ventures, butearned no interest. The savings banks also played this function was soon taken over by the privatean important social role as they became instru- banks and the capital market. The relations be-ments for combating poverty and promoting de- tween the political leaders and private industryvelopment at the community level. They were generally good, and remained so even in theencouraged even the poorest people to save and decades after 1930, when Social Democratic partiesfree themselves from the moneylenders. at the left of center were generally in office. One

In Norway, given its special geography, the sav- important contribution of the state was its foreignings banks provided vital support to economic de- exchange policy, which permitted Nordic exportvelopment. From the collection of small deposits, industries to remain competitive.54 Occasionallythe savings banks built up a flexible credit system the state also exercised some persuasion in wagebased on the needs of the local community. When developments.the industrial transformation began, the savings The drive toward structural transformation re-banks were already widely established as local and ceived added impetus from wage levels, whichindependent credit institutions that could meet lo- were comparatively high at an early stage of indus-cal lending needs. Private commercial banks and trialization. In the 1870s and 1880s, the wages forother credit institutions were also being developed industrial workers in Sweden were significantlyat this time. lower than in England or Germany, but then shot

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up so rapidly that by 1905 they were higher than transformation period, labor unrest was commonanywhere else in Europe, with the exception of in all Nordic countries. Sweden, for example, hadEngland. This increase forced growing capital in- numerous strikes (Sundsvall 1879, Storstrejkentensity in industry after the 1890s. From 1900 on, 1909, and Lund 1930) until labor and employers fi-Swedish industry had to rely on improvements in nally worked out mechanisms for peaceful settle-productivity to boost its competitiveness because ment of disputes.the cost of labor was becoming high by interna- Paralleling the dynamic developments in thetional standards (Table 13). private sector, there was a surge in institutional ca-

In sum, industrial advancement in the Nordic pacity in the form of new cooperatives, tradecountries can be attributed in large part to thrifty unions, churches, and political organizationsentrepreneurs who were able to organize produc- (NGOs) in all Nordic countries. These nongovern-tion efficiently and were open to trade and tecdni- mental organizations become important instru-cal advances. Historically, the Nordic countries ments in tackling the sodoeconomic problems thathave been quite successful in phasing out indus- the rapid industrial transformation had generated.tries unable to maintain international competitive- The labor movement gradually assumed a broadness, such as textile and shoe manufacturing; iron role, including not only wage bargaining but also,ore and copper; lower-end pulp and paper; the en- for example, support for temperance sodeties andgineering industry; and, lately, steel and ship educational programs and help for the unem-building. The period with major state intervention ployed, while the cooperatives gave impetus to lo-in Sweden, from about 1978 to the late 1980s, was cal initiatives in the distribution of consumersomewhat exceptional. Historically, structural goods and 'm providing low-income houshig.transformation along the lines of shifting compar- These organizations provided an important insti-ative advantage has ordinarily been managed by tutional framework for linking laborers and farm-the private sector, without much government ers with the state and the private sector in aintervention or nationalization. This development partnership of mutual respect. Some nongovern-was also fostered by the efficient Nordic banking mental institutions also formed close ties to politi-systems, which encouraged bottom-up initiatives, cal parties; for example, the farmers' associationshabituated the population to banks at an early and cooperatives became linked with the Swedishstage, served as vehicles for the introduction of Farmers party (Bondefoirbundet), and the tradecapital from abroad, mobilized domestic savings, unions with the Social Democratic Party Fromand provided talented entrepreneurs with the sup- 1930 onward trade unions became a powerful forceport they needed for new ventures.55 in the economic and political life of all Nordic

countries, and their opinion could not be neglectedLabor relations by industrialists or governments.

Entrepreneurs and labor eventually developedThe rapidity of the social and economic trans- mutual respect for each others' interests. This is re-

fornation in the Nordic countries resulted in seri- flected in the "Saltsj5badsavtalet" achieved inous social problems, including unfair exploitation Sweden in 1938-a milestone agreement betweenof labor and consumers by industrialists and employees and employers to institutionalizewholesalers, volatility in employment and wages, procedures to preserve labor peace. This was fol-and housing shortages. During the early industrial lowed by an occupational safety law in 1942, an

Table 13 Index of wages for industrial workers, 1905-78(Sweden = 100)

Year France Genmany United Kingdomn United States Sweden

1905 77 89 119 213 1001930 49 66 85 166 1001953 66 60 69 233 1001970 71 81 56 141 1001978 68 99 44 84 100

Source: P. Brown and M. Browne, 1968, and Sveriges Arbetsgivar Forening, 1979.

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apprenticeship law in 1944, and an employer and Nordic countries were also, for the most part,employee committee law in 1946. These agree- blessed with able leaders who encouraged thements were the result of negotiations between em- Social Democratic left and the liberal center to putployers' associations and labor unions and paved aside their differences and to commit themselvesthe way for a system of re ilating labor relations to a free market economy as well as social reform.without state interference. For several decadesthereafter, the Swedish labor market enjoyed a pe- Cooperativesriod in which the number of man-days lost in in-dustrial dispute was significantly lower than in The cooperative movement in the Nordicmost countries of continental Europe. Employee countries also followed a somewhat different pathparticipation in decisionmaking in private and from its counterparts in other parts of Europe. Inpublic institutions was legally codified in Sweden England, where they originated among the weav-in the 1970s (Medbetiinamandelagen). ers of Rochdale, cooperatives were based on the

At virtually every stage of industrial develop- belief that the profit motive behind industrializa-ment, labor-management relations in Scandinavia tion had to be transformed and society remadewere far more harmonious than on the continent of through the force of higher ideals. From the begin-Europe, in Great Britain, or in the United States. ning, the Nordic concern was a less philosophicalThe mutual trust and respect between labor and and utopian one-the cooperatives in the Nordicmanagement and their commitment to a rational countries were concemed with practical solutionsquest for economic efficiency were reflected in the to immediate problems. They were primarily inter-institutionalization of procedures designed to pre- ested in lower prices and higher quality, to be ob-serve labor peace, after which the incidence of tained through distribution, and later production,stnkes become low, and the adoption by the Cen- for the use of the people instead of for profit. Antral Organization of Trade Unions in Sweden, in early aim of these cooperatives was to destroy mo-the World War II era, of the so-called solidary wage nopolies. As they gathered strength, they dared topolicy. The general thrust of this policy was that fix their own prices at whatever level they consid-average wages should advance in line with the ered reasonable. Many cooperatives started in in-overall growth in social productivity, but that dustrial centers, but then spread to rural areas.within this framework there should be a gradual Although their members consisted largely of in-narrowing of wage differentials. dustrial and agricultural workers, they attempted

In addition, the Nordic countries were charac- to demonstrate the universal value of cooperationterized by the desire of both the unions and man- by appointing members of the upper classes, in-agement to provide maximum training, labor cluding members of the royal family, to high-rank-safety, and employment security. Moreover, la- ing positions in the movement.bor generally supported modernization and struc- Sweden's individual cooperatives united intural change, on the condition that every effort be 1899 to form the Cooperative Union (Kooperativamade to cushion the effect on the individual work- F6rbundet), which in 1911 waged a successful bat-er through generous unemployment benefits, or- tle for lower prices against the margarine cartel,ganized support of retraining, and, if necessary, and thereby gave the public tangible proof of therelocation. This is in sharp contrast to the Luddite power of cooperation. With this victory in hand,tendencies that often prevailed among unions in the union carried the price war to other fronts,Britain, with strenuous, but in the end self-defeat- combating monopolies in sugar, soup, chocolate,ing resistance to labor-saving machinery in the flour, and rubber. Sweden's Cooperative Unionprinting and shipbuilding industries. and the cooperatives in Denmark, Norway, and

It is not easy to explain fully the underlying fac- Switzerland evolved into central organizationstors in this evolving cooperative approach in labor that acted as wholesalers, manufacturers, educa-and management relations. Various factors might tors, and propagandists. They were different frombe suggested, such as a historical tradition of com- the British Cooperative Union, which embraced amitment to justice and social equity, a rationalistic number of units, each of which carried out a differ-bias, discipline, and acceptance of authority, or the ent function. The Nordic groups developed impor-public school system and compulsory nilitary ser- tant educational programs, which helped paidvice, which brought different social classes togeth- employees of the retail societies to advance them-er and inculcated shared values among them. selves, and also motivated them to improve serviceDuring the period between 1930 and 1960, the in the stores. By the 1930s more than 10 percent of

149

the retail and wholesale trade in Sweden was car- only provided primary education and administra-ried out through the cooperatives. No satisfactory tive services in the preindustrial period, but alsoestimate is available on the volume of manufactur- helped shape the religious and ethical attitudesing in cooperative factories, but about one-third of that became the foundation of Nordic social stabil]-the households were enrolled in cooperative sod- ity. That stability was in part responsible for theeties by the 1930s.57 peaceful way the Nordic countries developed their

The economic depression in the early 1930s modem democratic political systems. Another im-proved the stability of the cooperative movement portant factor was the strength of the numerousbeyond reasonable doubt. The number of stores landholding farmers during the preindustrialowned by local societies expanded from 2,411 in period.1926 to 3,990 in 1934. Agricultural cooperation also Apart from Denmark, the Nordic countries nev-made considerable headway in the Nordic coun- er experienced the degree of feudalism experi-tries, particularly in dairying, following the exam- enced by continental Europe. Peasants were freeple of Denmark, where the cooperatives almost agents, and the land reforms and agricultural mod-took over the entire business of processing and ernization they pushed for in the early part of themarketing farm products.58 nineteenth century were not necessarily geared to-

Housing was another area in which nongovem- ward eliminating the landowning nobility, whosemental organizations became important to wide members gradually moved into other positions insections of the population. In addition to the efforts society, particularly in administrative and militaryof central govermments and municipalities, the co- offices. Nevertheless, many in the nobility stilloperative movement, sometimes together with the played a large role in agriculture. Danish andstate, helped make low-cost housing available. southern Swedish manors initiated the agricultur-Stockholm, for example, experienced an acute al revolution and helped expand the capitalistichousing shortage from the turn of the century into transformation of the agricultural sector. The aris-the 1920s and 1930s. Every garret and every cellar tocracy and landowning classes were also strongwas occupied. The slums bred crime, disease, and supporters of the transformation in industry,social decay. Numerous remedies had been tried- trade, public service, and technical education.philanthropic building projects, municipal lodging In Sweden the nobility was too large to subsisthouses, and municipal farms for the poor-but all on land rents and military salaries alone, althoughproved ineffective. Rents at the end of World War I it was not large by European standards, and manywere outrageously high in all the large Swedish cit- turned to the civil service for their livelihood, asies. Real estate interests were combined in what they did in the other Nordic countries. Young no-was in effect a housing trust. In 1916 the Stockholm blemen faced stiff competition for advancementCo-operative Housing Society was organized, both from commoners and from other noblemen.sponsored by the powerful Central Labor Union, As a result, the nobility developed an unusual re-and for the first time prospective tenants them- spect for education, competence, and hard work.selves, who made up the new organization, had Such attitudes had a positive effect on the accumu-the right to determine what kind of housing they lation of skills, education, and economically usefulwanted. Six years later a national organization, the attitudes throughout Nordic society.60

Tenants Savings Bank and Building Society At the same time, the peasants were working(Hyresgasternas Sparkassa och Byggnadsf6ren- hard to advance themselves. By European stan-ing) was formed. By the 1930s at least 15 percent of dards, the Swedish peasantry wielded a remark-the families in Stockholm were living in coopera- able amount or political power, even before thetive apartment houses. Like the cooperatives in parliamentary reform of 1866. From about 1680,other fields, those concerned with housing were Sweden had been controlled either by a four-estatecarefully planned and financed, and competed in Parliament, in which the peasants constituted onnethe open market.59 estate, or by absolute monarchs relying on peasant

support to control the nobility. Thereafter, Parlia-Societal ethos-passion for justice, equity, ment became a bicameral institution, with theand consensus peasants in control of one chamber. Consequently,

their concerns received considerably more atten-As mentioned earlier, the church, too, had a tion than was usual in the rest of Europe. The po-

hand in development by laying the basis for the litical power of the peasants, which later spread toNordic countries' strong educational system. It not the industrial labor class, along with their access

150

to a higher education, also helps to explain the revolution, and the expansion of industry and in-high degree of social mobility in the Nordic states. ternational trade-gave rise to a tripolar capitalis-In particular, many peasant sons become clergy- tic class structure62 comprising farmers, themen in the noncelibate protestant church. Tradi- working class, and a new bourgeoisie in businesstionally the more intelligent and ambitious boys of and administration (Figure 2). The size, education,the lower classes were channeled into the clergy occupational positions, and political leverageand lifelong careers in the civil service. The most among the classes changed as the economic trans-able rose to high-ranking positions and could even formation unfolded. From the late nineteenth cen-be given the status of nobility. In the eighteenth tury onward, the emerging class of independentcentury and later, the sons, grandsons, or great- farmers gradually moved into a more importantgrandsons of clergymen formed the majority of position in society. With greater industrial devel-Sweden's administrative and scientific elite.6 oiini oit.Wt rae nutildvlSweden's aiopment and the rise of the service sectors after

The many changes that were taking place in the World War I, however, they were displaced by anineteenth century-the individualization of agri- more skilled and well-educated working class, in-culture, the commercial and technical agricultural cluding a large number of white-collar workers.63

Figure 2 The model of relationships in the tripolar Nordic class structure

Upper class inWorking class business and

administrationLabor Capital

Concern: Concern:Wages, social Prices, taxessecurity

Organizations:Organizations: State bureaucracy,

Trade unions Trade associations

Dominant party: Land Dominant party:Labor Conservative

Farmers

Concern:Prices, subsidies

Organizations:Farmers' associations

Dominant party:Agrarian

Sources: M. Alestalo and S. Kuhle, 1987; Refornulated based on H. Uusitalo, 1975, and H. Valen and S. Rokkaan, 1974.

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The efforts to the harmonize interrelationships Integration into the internationalin this tripolar class structure constituted the basis economyfor the development of the Nordic countries mod-em social market economy, with its emphasis on The way in which the Nordic countries interact-income distribution and social policies. That is to ed with the external environment during their eco-say, the political system that evolved in the Nordic nomic transformation is also of considerablecountries allowed broad participation in decision- interest. The first point to note is that throughoutmaking, which enhanced social and political sta- the various stages of development, these countnesbility. During the economic transformation, were open to trade and technical advances fromnumerous institutions were established represent- abroad. Second, the allocation of investment re-ing various interest groups in society (from con- sources promoted a pattern of export growth thatsumers and religious groups to labor unions and allowed trade to become a dynamic force for sus-employers' federations). Most of these groups tainable economic growth. Third, the Nordic coun-were financially independent of the government. tries demonstrated great potential for regional

Along with broad participation, the principle of integration and cooperation. Fourth, their experi-universal rights was a vital component of the Nor- ence illustrates the importance of a number of so-dic approach to social and economic transforma- cioeconomic preconditions allowing trade totion. The educational reforms in the first half of the become a dynamic force for sustainable growth.nineteenth century were followed by other reformsin education along with some in health and social Expansion of trade and investmentsecurity, which emanated from the widespread be-lief that all members of society had the right to a Trade helped to accelerate industrializationbasic education, housing, health care, and employ- throughout Europe, and the Nordic countries werement. These common goals were a binding force among those that recognized the importance of ex-among the different classes, interest groups, and panding trade at an early stage of development.the government, which promoted political stabili- Between 1870 and 1913, their exports grew at a ratety and economic efficiency, as well as equity. slightly lower than average for the industrial coun-

The passion for justice and equity that has been tries, but then outpaced them from 1913 to 1950a salient feature of the Nordic development model (Table 14).was focused on providing universal access to basic At first exports were agricultural and natural re-education, health, food security, and shelter in the sources; later they moved into processed commod-early years. After World War II, when the Nordic ities and increasingly sophisticated industrialcountries became more affluent, the scope of their goods. Industrial expansion in the home marketequity goals broadened to indude an increasingly was delayed, however, by low real income andelaborate system of income and social welfare poor communications. The breakthrough in tradeschemes, some of which are today considered ex- and industry in Sweden occurred in the 1870s atcessive or inefficient by critics of the modern wel- the time of rapid growth in internal communica-fare state.64 tions. Investments in communications were neces-

Another important factor to consider in the Nor- sary to improve distribution facilities if andic model is the respect for the law, ingrained in integrated home market was to be developed. Be-the public during centuries under absolute mon- cause the demand came from foreign markets,archs. Without this respect, alongside discipline however, industry could begin to expand even be-and respect for authority, private entrepreneur- fore these investments were made.6 enship and the informal sectors could not have devel- In the beginning, the growth of Nordic exportsoped as they did, and the implementation of social was sparked by a strong foreign demand for rela-and economic reforms would have been far less tively lightly processed primary commodities-successful. particularly timber, high-quality iron ore (and the

In sum, cultural factors that placed a high value pig iron and steel produced from it), and agricul-on education and organizational skills, discipline tural produce from the rich soils of Denmark andand loyalty, justice and the striving toward ratio- southern Sweden. Once the Thomas process ofnality and practical solutions, combined with the steelmaking was developed, Swedish exportspolitical tradition of broad participation in deci- of high-phosphorous iron ore expanded. Norwraysionmaking, abetted economic growth to a sub- became an exporter of nitrogen fertilizers, whichstantial, if unquantifiable, degree. were produced using the electric arc process fueled

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Table 14 Growth of export volume in selected countries, 182G-1979(annual average compounded growth rates, percent)

Country 1820-70 1870-1913 1913-50 1950-73 1973-79 1820-1979

Denmark 1.9a 3.3 2A 6.9 44 3 .2bFmland n.a. 3.9 1.9 7.2 3.7 n.a.Norway n.a. 3.2 2.7 7.3 6.9 n.a.Sweden n.a. 3.1 2.8 7.0 1.0 n.a.

Australia n.a. 4.3 1.3 5.8 3.9 n.a.Austria 4.7 3.5 -3.0 10.8 7.9 4.0Belgium 54c 4.2 0.3 9A 3.5 4.3eCanada n.a. 4.1 3.1 7.0 3.2 n.a.France 4.0 2.8 1.1 8.2 6.1 3.7Germany 4.3d 4.1 -2.8 12.4 4.7 3.6fItaly 3.4 2.2 0.6 11.7 7.1 3.7Japan n.a. 8.5 2.0 15.4 7.6 n.a.Netherlands 2.9 3.3 1.5 10.3 3.4 3.7Switzerland 4.1 3.9 03 8.1 4.3 3.7United Kingdom 4.9 2.8 0.0 3.9 4.7 3.0United States 4.7 4.9 2.2 6.3 4.9 4.4Arithmetic

average 4.0 3.9 1.0 8.6 4.8 3.7

Note: Figures are not adjusted for changes in geographic boundaries.n.a. = not available.a. 1844-70.b. 1844-79.c. 1831-70.d. 1836-70.e. 1831-79.f. 1836-1979Source: A. Maddison, 1982.

by the country's abundant hydropower. Quite ear- and Norwegian engineering industries also ex-ly, export goods contained a high degree of manu- panded their exports. The rapidity of Finlands' in-factured imports; for example Sweden imported dustrial advancement after World H, whichhalf of its need of ordinary steel products while it received an initial impetus from the need to meetexported the same or even a larger volume (by val- war reparations to the Union of Soviet Socialist Re-ue added) of special steels. Eventually cellulose ex- publics, were particularly impressive. After theports overtook timber and wood products and war, Finland made its shift from pulp to paper ex-mechanical pulp as the pnncipal forestry exports, ports more quickly than Sweden. Norway made itsand still later a high proportion of the cellulose mark in shipping, fertilizers, aluminum, and otherproduction was converted into paper, although metallurgical products, while Denmark was suc-tariff duties in the European continental coun- cessful in expanding its agricultural and livestocktries favored imports of pulp. The most remark- production and exports.able Swedish achievements occurred with the Although the Nordic countries lagged behinddevelopment of a whole range of engineering most of Western Europe at the outset of industrialproducts for export, particularly ball bearings, sep- development, they had comparatively liberal tradearators and pumps, heavy electrical equipment, regimes working. According to a Swedish tarifftelecommunications equipment, pneumatic air commission report, the indexes of tariff levelstools, mining machinery, refrigerators, vacuum for 50 industrial products in 1913 were 100 forcleaners, automobiles, trucks, buses, and steam- Sweden, 51 for Denmark, and 88 for Norway, com-and diesel-powered ships. Although Swedish pared with 110 for Germany, 139 for Austria-Hun-companies were pioneers in these sectors, Finnish gary, 201 for France, 182 for Italy, and 372 for

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Russia.66 Moreover, trade ordinarily emerged as a semifinished goods, or an industial expansionresult of market forces, rather than "top-down that from and early stage targeted primarily indus-mercantilist" policies of the type found in some of trial niches on foreign demand, as has been thethe export-oriented economies of Asia, with their case in the East Asian market economies in recentcomprehensive export promotion and import sub- decades. Rather, the Nordic export orientation de-stitution policies. veloped in response to both internal and external

The trade expansion in the Nordic countries market forces and had a beneficial impact on ex-was not linear and both the volume of trade and ports as well as home industries. The early expan-trade policies went through cydes. Trade was dis- sion of industrial entrepreneurship was primarilyrupted by the two World Wars. During the 1870s linked to the domestic resource base and toand 1880s the trend in Sweden was toward a high- demand arising from the agricultural sector,er ratio of exports to GDP and policies in favor of construction, and infrastructure investments--al-trade liberalization. After a swing in the opposite though exports, which also induded specializeddirection, these trends reappeared in the 1920s, engineering products and for which the domesticonly to die down and reemerge after 1950. In one market was too small-increasingly became theof the intervening periods, from around 1890 to driving force in industrial expansion.1910, tariffs were increased. The effects of higher Once unfurled, the move toward industrial ex-tariffs on the timber and iron industry have been ports made the Nordic countries specialize and ac-hotly debated. Some experts have argued that the quire a competitive advantage, and it forcedhigher tariffs had a positive economic effect on the individual industries to "keep on their toes" andgrowth of infant industries, whereas others claim labor unions to exercise discipline in order to staythat they dampened growth in new areas of indus- competitive in export markets. It also made gov-trial production.67 erumnents acutely conscious of the need to main-

Generally speaking, the Nordic countries were tain a stable currency and paved the way forsuccessful in macroeconomic management, in- contacts with foreign traders, industrialists, bank-cluding exchange rate policies. The depreciation of ers, engineers, and scientists. To some extent, ex-the Swedish crona after 1931, for instance, provid- port expansion also helped to check the growlth ofed the impetus for a more expansive labor market oligopolistic home market industries. This exportpolicy and also strengthened industrial competi- orientation was a natural outgrowth of the earlytiveness, especially in the Swedish home market. Nordic comrnitment to free trade.The Nordic countries managed inconing foreigninvestment prudently, borrowing capital from Regional cooperationabroad mainly to finance the construction of much-needed infrastructure (especially railways), while Although several of the proposed schemes forlocal financial institutions and entrepreneurs im- Nordic cooperation never materialized, intrar-plemented and managed projects. With the excep- egional trade and cultural and political interactiontion of Norway, direct foreign investment in equity among these countries helped promote industrial-was fairly restricted, in contrast to the situation in ization. With their common cultural backgroundsmany of today's newly industrializing countries. and geopolitical concerns, these countries wereThus, as in Japan, the magnitude of foreign direct disposed to seek productive investments and eco-or indirect investment in the Nordic countries was nomic relations in an atmosphere of cooperation.small compared with local investments. Neverthe- The Nordic countries have demonstrated the scopeless, the contribution of foreign technology and for regional integration and cooperation in spite ofknow-howtoNordicdevelopmentwassignificant. their relatively similar resource endowment and

competitive-rather than complementary--pro-Balanced path of export-orientation duction patterns.

Stable and peaceful political relations fosteredAnother significant aspect of the Nordic devel- economic cooperation that was carried out without

opment experience was that many of the firms that a high-cost institutional structure. The public sec-later became multinational enterprises started by tor's noninterventionist but encouraging role al-serving "local" needs-that is, both at home and in lowed intraregional trade, as a percentage of totalneighboring Nordic countries. In the main, the Nordic trade, to grow from 12 to 13 percent priorNordic countries' export-oriented expansion was to World War I to about 30 percent thereafter.68not chiefly based on imports of raw materials, or Regional cooperation was particularly beneficial to

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the intraregional mobility of labor. Labor became tax linkages (governments may derive tax reve-mobile at an early stage, and without much hin- nues-directly and indirectly-that will benefitdrance from bureaucratic regulation. The role of the domestic economy). In the Nordic countries,government was to facilitate the creation of an en- the first two linkages were very strong, whereas di-abling envirorunent in which private enterprise rect government revenues from trade were on theand labor could be the prime actors promoting the low side because tariffs were low (taxes were, how-expansion of regional economic links. The Nordic ever, levied on traders' profits). Third, since themodel of regional cooperation thus stands in con- Nordic economies had developed a high capacitytrast to the more bureaucratic, interventionist and for structural transformation, they were able totop-down government efforts in many parts of the gain from trade. In sum, the Nordic experience isworld today. in sharp contrast to that in many of today's devel-

oping countries where (1) the economic stimulusExports as an "engine" of growth from foreign demand is weak; (2) linkages are

weak or ineffectively utilized, which makes it im-The Nordic experience supports the hypothesis possible for exports to serve as an engine of

that countries with small populations need to es- growth; and (3) economic transformation is ham-tablish export-oriented industries in which they pered by price rigidities, limnitations in technical orhave a comparative advantage at an early stages of managerial capabilities, and low mobility of pro-industrialization. If there is a bias against exports, duction factors.industrialization is unlikely to proceed smoothly. The first of these conditions depends to a largeThe expansion of exports and imports in goods extent on the intemational environment, whereasand services was a dynamic factor in structural the other two depend on domestic policies. It is tootransformation of the Nordic countries because it simplistic to suggest that export expansion or a fa-forced them to adjust their economic structures vorable extemal environment is the primary expla-and policies in response to shifting comparative nation for Nordic economic success. Theadvantage. The Nordic development path fol- fundamental reasons that explain the ability oflowed a spontaneous or natural sequence of struc- these countries to take advantage of exportstural transformation, with one important element as stimulus to development can be found bybeing that incentive structures were not biased analyzing the socioeconomic prerequisites for dy-against exports. Exports served as an important namic development.source of demand for domestic inputs and, The Nordic experience confirms that it is unreal-through the multiplier effect and higher incomes, istic for developing countries to view trade as anfor domestic goods. Exports provided foreign ex- "engine" that, if throttled up, will automaticallychange and ensured financing for intermediate lead to growth. Rather, trade should be seen as anand capital goods imports. Furthermore, in ex- "invitation" to growth (or as a facilitating factor).ploiting their comparative advantage, the Nordic Whether or not a country can respond to the invi-countries found an opportunity to pursue large- tation will depend on the nature of the invitationscale production and step up capacity utilization. (for example, the strength of the demand stimu-Competition in foreign markets provided incen- lus), the extent of the domestic linkages, and thetives for higher productivity, and thus led them to country's ability to take advantage of the possibil-seek and adopt technological change and expand ities for transforming itself.into new product niches. The strong demand for natural resources from

As the Nordic experience illustrates, several nearby industrial countries was certainly anconditions must be met if trade is to serve as an es- important factor in the rapid Nordic economic de-sential component of sustained development. velopment, especially before 1945. But this expla-First, the demand stimulus from abroad has to be nation fails to account for the difference in thestrong. Second, there must be positive linkages be- timing of the economic transformation bothtween trade and the domestic economy: forward among the four Nordic countries and when com-linkages in production for the export sector, which paring the Nordic and the other European coun-will give other domestic economic sectors an in- tries, and that other countries with similar naturalcentive to grow; and backward linkages that allow resources have been unable to achieve such rapidexports of agricultural products, for example, to export growth. Furthermnore, foreign demandstimulate industry through increased domestic does not fully explain the pattem of industrialpurchasing power. In addition, trade can generate transformation, with its dynamic linkages among

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economic sectors, or the roles of the actors-labor, Structurally, this system was characterized by (1) aentrepreneurs, and government-in the transition. stable and predictable connmitment to the market

Because the export industry developed at the economy with private ownership of the means ofoutset of industrialization in the Nordic countries, production and open and competitive markets--atthe home market was not yet large enough to com- the same time limiting negative externalities orpete for labor and capital. Later, when competition abuses that might occur in a free market economy;did develop between the two markets, the home and (2) governments had a major commitment toindustries responded with a variety of innovations social policies, development of human capital, andthat raised their productivity. Export expansion other social concerns such as infrastructure andtherefore encouraged growth in other sectors, part- overseeing the exploitation of natural resources. Inly owing to the multiplier-accelerator effect that keeping with the principles of a market econormy,the bigger demand for export products had on the costs were reflected in prices-and prices served toindustrial sector, and partly because of "external allocate scarce resources-but, at the same tirne,economies." The interesting question is why many the state pursued active income distribution andof today's developing countries that produce raw other social policies to promote equity. The Nordicmaterials seem to be traveling a different path- economic transformation in agriculture, as well astoward an advanced export sector but an underde- in industry and finance, was inspired largely fromveloped home market industry. Part of the bottom-up rather than top-down initiatives. Fromexplanation may be that they lack the linkages be- the early nineteenth century through the industrialtween the export and domestic sectors that were takeoff, the Nordic governments fostered an en-characteristic of the Nordic countries, as well as abling environment for flexible private sectortheir "neutral biases" in trade and industrial poli- growth by actively promoting equitable and uni-cies, and their enthusiasm for entrepreneurship.69 versal access to social benefits and encouraging aThe next question that arises, then, is whether to- harmonious partnership among the state, labor,day's developing countries can benefit from the and entrepreneurs, while not overr-egulating thelessons of the Nordic experience. private sector.

This experience was in sharp contrast with thatLessons from the Nordic experience in socialist states, where the governments took

ownership and direction of the means of produc-The social market economy--an alternative tion, and also controlled cooperatives and thedevelopment model labor movement. It differed from "purely" market-

oriented philosophies, where both social and eco-The development debate can benefit a great deal nomic development have been left almost entirely

from analyses of the diversity of paths and strate- to market forces, often resulting in large incomegies for development provided by the experience disparities and great wealth existing alongsideof various countries. Because of the uniqueness of acute poverty. It also differed from the plannedeach developing country, scholars and policymak- economic development approaches in the devel-ers draw on different development experiences, oping countries in Africa and South Asia, whererecognizing that patterns of specific countries in a governments tried to capture the "commandinggiven historical situatic. cannot be fully replicat- heights" of the economy in the goods-producinged. Japan's industrialization, for example, success- sectors. It differed, too, from the Japanese andfully drew from lessons from the Dutch trading Korean experiences, in which the state played ahouse experiences, German industrial policies, leading role in establishing, targeting, and protect-and from the American Deming's model of quality ing key industrial sectors.control, despite the many cultural and other differ-ences between Japan and these countries. The Nor- Global relevancedic countries made selective use of lessons mainlyfrom France, Germany, and the United Kingdom, In many cases the development strategieswhile avoiding strategies inappropriate to their that have evolved over the past 40 years-from im-special socioeconomic circumstances. The Nordic port-substitution industrialization to export-ledmodel-like any other-is not completely replica- growth, or centralized state planning to the "magicble, but it may offer useful lessons for others. of the marketplace"-have run into serious prob-

The Nordic development experience illustrates lems. Since the 1970s, much of development strat-the principles of a social market economy system. egy discussion has been concemed with failures of

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state planning and government intervention in the tutions or physical and human infrastructure fromproductive sectors. For the future it would be scratch. Rather they urgently need to restructureworthwhile to analyze development paths and their economic and political system (for example,strategies that reconcile economic growth and effi- price and enterprise reforms) toward a market-ciency with long-term social concerns. In this con- oriented system that also ensures social stability.text the social market economy paradigm is one The social market economy paradigm may provethat offers policymakers a coherent and compre- attractive to them because it offers a comprehen-hensive framework70 (Figure 3). sive framework for reconciling economic efficien-

As early as in the 1930s, Marquis Childs de- cy and social concerns that can ensure democracyscribed the Swedish system as a well-functioning and political stability.synthesis between laissez-faire capitalism and ab- For developing countries, the Nordic experi-solute socialism.7 Since then the Nordic countries ence before the establishment of the welfare state ishave developed into mature welfare states and of particular relevance. But before the social mar-have often been cited as useful models for ad- ket economy paradigm can be extended to the de-vanced capitalist countries, not only with regard to veloping countries, it will need to be modified. Forsocial policies, but also for private sector manage- example, the role of the state depends on its capac-ment philosophies. ity and ability to implement regulatory policies

In recent years, however, some observers have successfully. In this respect, the Nordic and othertaken the relatively slow growth of GNP and trade European countries as well as the East Asian coun-in Denmark, Norway, and Sweden in the 1970s tries had a long tradition of societal discipline andand 1980s as a signal of a system in crisis. Even the administrative capacity, in sharp contrast to mostrenowned Swedish system of centralized collective of today's late starters in development, especiallywage bargaining has had problems, and some con- in the Sub-Saharan Africa region.cerns have arisen about the sustainability of the In South and Southeast Asia, developmentstate welfare system. It can be argued, however, thinking has been dominated by either Anglo-that the current predicaments represent medium- Saxon market-oriented models or state planningto long-term structural transformation problems models, and lately to some extent by the economicthat can be corrected, and that the Nordic countries successes of Japan and East Asian newly industri-have experienced structural problems since the alizing countries (NICs). Again the Nordic para-1970s because they deviated from their traditional digm of state-market roles could provide usefulpattern, in which the state's role was to promote insights. For example, the debate among IndLanadvances in the social sectors while leaving the policymakers might benefit from the social marketgoods-producing sectors to private initiatives and economy paradigm-with the state intervening inmarket mechanisms. Many observers have point- the market only when absolutely necessary to cor-ed to the dangers associated with too big a role for rect the market's power structure and distribution-the state, such as excessive government regulation al results, or to deal with environmental andand intervention and high tax levels leading to in- technological externalities-as they attempt to re-efficient resource allocation and disincentives that form the heavy regulatory and dirigiste plannedinhibit entrepenuerial and individual initiatives. In industrialization policies adopted after indepen-these respects the Nordic countries offer many dence. The commodity-exporting ASEAN coun-nonlessons. tries may have important lessons to learn, too, with

Many of these nonlessons are also highly rele- respect to the government and the private sectorvant to the reforming socialist countries in Asia aiding each other in the development of infrastruc-and Europe. Socialist countries transforming to- ture and the exploitation of local natural resourcesward market-based systems could draw useful les- with due regard for local and international marketsons from the Nordic countries in the functioning signals. The Nordic experience also demonstratesof democracy, labor relations, and the manage- the scope of regional cooperation without exten-ment of state as well as private enterprises. In for- sive institutional structures and a top-down inter-mulating market-oriented reforms and seeking ventionistic approach. Newly industrializinggreater integration into the world economy, the so- countries seeking to establish or design social wel-cialist countries may not want to go all the way to fare programs may learn from well-tested Nordica market-oriented system. The development issue schemes, while avoiding the negative effects, suchfor Eastern European countries, compared with as excessive taxes and other dampening of eco-developing countries, is not one of building insti- nomic incentives.

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Figure 3 Three phases of development thinking

1950s and 1960s: Emphasis on planning, dirigism, Mid-1970s and 1980s: Emphasis on market, 1990s and beyond: The social market economyand self-reliance price mechanisms, and trade paradigm and globalism

1. Role of the state versus the market

Governments assume the "commanding heights" of Skeptical about the role of the state in economic devel- The social market economic paradigm-a multidi-economic development by planning and intervention. opment. Reliance on market and prices and private en- mensional framework that combines market-orientedDominating perception was that markets were highly trepreneurship, reflected in efforts to minimize price economic polices and a competitive free enterpriseimperfect and that "standard rigidities" resulted in lit- distortions, removal of subsidies, improvements in in- system with an active role for the state in social sectorstle, if any, economic response to price changes. The centive structures, and privatization policies in the (for example, education, and health), physical andview that physical capital was the scarce factor led 1980s. technological infrastructure, and environment.economists to develop planning models.

2. Development path

Emphasis on nation-building and self-reliance. Pessi- Optimism about trade as an engine of growth Balanced growth paths; emphasizing the importancerrism about trade and foreign investments as "en- (1980s)-reflected in trade liberalization and skepti- of local as well as international markets-industry, ag-gines" of growth. Emphasis on investment in heavy cism about import substitution. Environment and nat- riculture, as well as service sectors-and the linkagesindustry and physical infrastructure and institution- ural resource constraints (for example, energy) and among sectors, increased global interdependence, andbuilding. Steady increase in government expenditure social dimensions (for example, equity, poverty allevi- concerns about equity and enviromnent call for newin goods-producing and social sectors. Universal ac- ation, and basic needs) emerge as critical issues for strategies integrating economic, technological, and so-cess to basic health care and primary education are sustainable growth. Rapid technological change in- cial dimensions of development at the national, re-identified as fundamental goals for socal develop- creasingly emerges as the key factor underlying struc- gional, and global level.ment. tural transformation and the trend toward

globalization. Fiscal constraints force governments toreexamine expenditures in goods-producing as well as

3. Role of donorsa social sectors.

Lending linked to national planning with emphasis on Central role in resolving debt issue and emphasis on Emphasis on how to integrate economic growth andestablishing an industrial base (induding heavy in- macroeconomic management; improvements in in- efficiency with equity, environmental, and other socialdustry), infrastructure, and increased food produc- centive structures and efficiency of the prices-market concerns. Deeper and broader criteria for lending, thattion. mechanisms. Structural adjustment lending becomes is, "investment lending" where ma -ro-economic is-

an important component of the World Bank's opera- sues are seen as essential but far from sufficient crite-tions (1980s). ria. Emphasis on quality of macroeconomic

management, efficiency of the public sector, povertyalleviation, income distribution, and environmentalconcernis.

Note: The periods given above are, at best, approximations and cannot be generalized across countries. A somewhat more detailed analysis may result in the identification offour or five phases of development thinking. (1) The first postcolonial period, 1950-70, in which the state was assumed to play a large role in the development process;(2) the period of the oil and debt crises, 1974-79, with a somewhat "mixed bag" in state dirigism versus emphasis on the market mechanism and the path of development;(3) the period 1980-89, emphasizing the role of private entrepreneurs, and "the magic of the marketplace"; and (4) the 1990s and beyond.a. Institutions such as the World Bank, UNDP, UNIDO, and prominent bilateral donors.

The Nordic experience also shows that stable The economic crisis in Sub-Saharan Africa hasand sustainable development critically depends on led to a search for policies to restructure economiesimproved social conditions and productive labor and to start the process of recovery. It will not berelations. It is essential that in the very early stages easy to increase savings by curtailing consump-of industrialization, efforts are made to establish tion, particularly among the elites, or to increasemechanisms to promote mutual respect between productivity and competitiveness. Nevertheless,labor and employers and to solve industrial dis- income distribution and social policies have im-putes peacefully. It has also been debated whether portant direct consequences for long-term eco-India would have had better prospects for stable nomic growth. They can alter the pattern oflong-term development if higher priority had been consumption, and thereby stimulate local expan-given to social development, including universal sion and linkages in a wide range of goods-literacy, in lieu of the emphasis on investnents for producing and service sectors, and they can help toa forced, rapid industrialization. Similarly, Latin mobilize the work force and promote higher laborAmerican policymakers have been urged to search productivity. Such changes cannot take place un-for new coherent and consistent socioeconomic less political and socioeconomic concerns are giv-paradigms to deal with issues such as income dis- en due attention in the overall strategy oftribution and cooperation among the major eco- development. Indeed, the quality of governance isnomic and social actors. central to success in economic development. Afri-

can countries need to devise their own strategiesLessons for Sub-Saharan Africa for sustainable development, which will have to go

beyond the necessary focus on macroeconomicconcerns and fiscal discipline, and build on their

Following independence, the countries of Sub- social and cultural strengths, such as communitySaharan Africa pursued industrialization in the spirit and sharing.hope of transforming their traditional economies, Fundamental differences exist between thebecause their long-term prospects for commodity development context African countries faceexports seemed poor and they had a strong desire today and the historical, economic, and culturalto reduce their dependence on manufactured im- preconditions for Nordic transformation from low-ports. Agriculture was relegated to the secondary income agrarian economies to modern industrialrole of providing tax revenues to finance develop- economies. Africa is still strLggling to establish ba-ment. African leaders believed that government sic political preconditions for stable economic de-had to play a commanding role in implementing velopment, such as a strong sense of nationalismthese strategies. The Sub-Saharan Africa region and nation-building; values conducive to modernnow lags behind other developing countries in in- economic development, such as social discipline;frastructure, administrative capacity, technology, ethnic harmony and peaceful intracountry and in-trade, and industrial development. Social indica- tercountry relations-all of which preceded the in-tors such as literacy, nutrition, and infant mortality dustrial take-off in the Nordic countries byhave shown little or no improvement in many Sub- decades, or even centuries. Unlike the NordicSaharan African countries in the 1980s. In a num- countries, most African nations are culturally andber of countries, expenditure on social services is ethnically heterogeneous.sharply down, school enrollments are falling, nu- There are, however, sonte similarities in the pre-trition is worsening, and infant mortality contin- conditions for economic development between theues to be high. Open unemployment in the towns, Nordic and African countries. The size of domesticespecially of educated youth, has been on the rise. markets is in general too small to allow for econo-Institutional decay is reflected in the poor condi- mies of scale for many types of modern industry,tions of once world-class universities, the disinte- and there is considerable scope for regional coop-gration of paved highways, and the collapse of eration. Both regions-unlike the East Asiansjudicial and banking systems. Overstaffed and NICs-have areas with major domestic natural re-poorly managed public bureaucracies are dead- sources such as land, minerals, and electrical pow-weights on the productive sectors. Many govern- er, which, if properly exploited, can be a dynamicments are racked by corruption and are unable to internal growth factor. Also, both regions have tra-hold the confidence of the population at large. In ditionally emphasized group solidarity and tradi-many places, ethnic strife is exacting a terrible toll tions of broad participation in decisionmaking.on helpless people.72 Further, their value systems place a considerable

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emphasis on communitarianism (that is, equality * A key role for the government in effectively im-and justice through consensus, the rights as well as plementing social policies and the development ofduties of membership in society, and local commu- human resources. Social policies should aim atnity needs) as opposed to individualism (that is avoiding gross disparities in income and access toequality through opportunity, justice through con- social services. Thus, emphasis is placed on reduc-tract, and competition to satisfy consumer desires). ing or controlling monopoly power and overcon-In sum, while there are some similarities there are sumption by the elites and on providing universalalso many historical, geographic, temporal, and access to basic education, health services, sanita-cultural differences between the Nordic and Afri- tion, housing, and other social services. The centralcan countries. Several fundamental themes in the government, municipalities, entrepreneurs, andNordic development experience, however, may be the informal sector all make major efforts to stimu-more congruent with participatory African struc- late human resource development and promotetures. the acquisition of technical expertise and manage-

A basic precondition for sustainable economic rial and marketing skills.development in Africa is a supportive and stable * A high degree of cost recovery in public invest-political setting-both internally and toward ment and services provided by the state and localneighboring countries-that promotes a favorable communities; striving for cost-effective education,and predictable investment climate. Moreover, avoiding excessive spending on expensive higherthree structural and strategic aspects of the Nordic education at earlier stages of development; stress-historical experience may be particularly relevant. ing the importance of careful planning of projects,* First, the roles of the state and the market are de- accountability, and monitoring quality in all publicfined along the lines of a social market economy, sector undertakings.that is, free enterprise and market-oriented policies o Emphasis on the sense of family and community,are effectively combined with an active state role in shared experience, and responsibilities, especallyfunctions of law and order, macroeconomic man- at the community level. It is crucal to mobilize lo-agement, social services, physical infrastructure, cal resources through the broad participation ofand the environment.anSecond,nmajorupreindustrialtsocietal efforts nongovernmental organizations and groups such* Second, major preindustrial socetal efforts in as farmers' associations, cooperatives, rural finan-promoting universal primary education and estab- cal institutions, and entrepreneurs and to encour-ishing high-quality administrative capacity. age bottom-up development efforts.- Third, bottom-up developmental efforts with aminimum of top-down dirigiste, centralized plan- A societal ideology that promotes justce, part-ning and intervention, especially in the goods-pro- nership, solidarity, and consensus among sociealducing sectors. Emphasis on local-regional and ethnic groups honesty at all levels in society;resource utilization dunng the early development a strong sense of social responsibility among thephases; government, private sector, and informal economic and political elites; and promoting con-grassroots sectors aiding the process of developing ditions conducive to social mobility and mutual re-local resources according to "natural" sequences spect for each others interest between employeesand linkages, resulting in a broad-based path of and employers.economic transformation, as opposed to a path * Emphasis on mobilizing local human and natu-with "missing middles," such as intermediate ral resources and capital, and local and regionaltechnology and skills. markets, while remaining open to technological

Other components of the Nordic experience that advances from abroad and adjusting to changes inwould be of interest to Sub-Saharan African or oth- the external trading environment to remain com-er developing countries can be summarized as fol- petitive internationally. Firm commitment to pIro-lows. mote stable and peaceful international relations* Private ownership in the goods-producing sec- and fostering of regional cooperation through en-tors, even in the case of strategic or large indus- trepreneurial initiatives.tries, and avoiding nationalizing or subsidizing Finally, as in the case of the Nordic countries,infant industries; public policies that not only stim- the economic transformation has to be significant-ulate private entrepreneurship but also foster en- ly self-sustaining, based on national strengths andtrepreneurs to be socially responsible (for example, drawing on traditions of self-reliance. Indigenousin the treatment and training of labor, collection of resources will have to be mobilized and managedtaxes, and incentives to reinvest profits). through institutions and policies that reflect local

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traditions and needs, that nurture local values and followed a spontaneous or natural sequence ofinnovations. structural transformation that made the most

of the linkages among the different sectors, levelsConcluding remarks of skills, and available technology. It also benefited

from the partnership established among the socialThe Nordic countres' histoncal achieve- actors-labor, entrepreneurs, the state, and NGOs,

ments-whether measured in GDP growth, eco- which spawned a productive work force; creatednomic and social equity, or some other standard- an enabling environment for the expansion of theare impressive. Currently, the Nordic countries are goods-producing, financial, and trading sectors;searching for ways to reform their societies. and produced strong linkages between the urbanAmong these efforts are proposals to implement and rural economies and the formal and informallower marginal income tax rates while sharply sectors. Public policy was largely neutral, but notraising taxes on activities that pose threats to the passive; it favored a liberal trade regime and aenvironment, efforts to reduce industral subsidies minimum of targeting and subsidies for the estab-and state intervention and ownership in the lishment of new industries. At the same time, thegoods-producing sectors, and reforms to produce state oversaw the equitable distribution of socialmore cost-effective high-quality health and social services and infrastructure investments to all re-insurance schemes. It is still too early to judge the gions. It also provided information services andoutcome of such efforts, or the way in which a the necessary regulatory and judicial services to"second-generation welfare state" or a reformed ensure equal treatment of all citizens under thesocial market economy might evolve and adapt to rule of law.the needs of a postindustrial era of global interde- The industrial transformation in the Nordicpendence. It should be kept in mind that current countries faced the repeated challenges of socialstructural problems in the Nordic countries reflect problems and tensions, such as in severe housingtheir advanced stages of development, and do not shortages, periods of high unemployment, and nu-necessary diminish the usefulness of lessons merous strikes. NGOs and bottom-up initiatives,drawn from their earlier, highly successful trans- however, played an important role in stimulatingformation periods-which are of direct relevance broad-based development and coping with someto today's developing economies. of the problems of rapid structural transformation.

As this paper has shown, the rapidity and com- The role of churches in education, of the coopera-paratively steady progression of the Nordic trans- tives in securing affordable consumer goods andformation from low-income agrarian societies to housing, of local savings banks in mobilizing smalladvanced industrial economies cannot be narrow- savings used by local investors, of the small andly attributed to factors such as export-oriented medium-size entrepreneurship in diversifying ag-industrialization, a favorable timing and geo- riculture, trade, and industry; and of the contribu-graphical setting, a wealth of natural resources, or tions of farmer associations and the laborcultural and ethnic homogeneity. As with Japan movement toward consensus-building among theand the East Asian NICs, their success in export- social actors are some of the examples. The Nordicoriented industrialization has to be traced to a countries may have experienced an even more rap-broader range of socioeconomic factors, many of id industrial take-off if they had implemented ef-which produced changes in the domestic socioeco- fective mechanisms for peaceful resolution ofnomic environment before the industrial takeoff industrial disputes earlier than in the 1930s.period. These factors enabled the Nordic countres The Nordic economic transformation resultedto transform themselves from within and respond from the evolution of a social market economy thateffectively to changes in the external environment. effectively combined free enterprise and market-For example, early advances in education, health, oriented economic policies with an active role forand administrative capabilities facilitated their ad- the state in social policies. Although the govern-aptation to modem capitalistic requirements and ments were small in numbers of state employeeshelp to explain why they were more successful in and financial resources, they effectively pursued acatching up with the industrial core countries of crucial strategic role, for example, in agriculturalEurope than the other backward areas of the conti- reforms, infrastructure investments, and social ser-nent. vices. The state-owned sectors in the Nordic coun-

Nordic development proceeded from a broad- tries ordinarily operated with a high degree ofbased and well-balanced path of transformation; it accountability and cost recovery, a minimum

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of abuses such as rent-seeking, and thus the need velopment beyond short-term adjustments thatfor subsidies was kept to a minimum. will improve economic efficiency and equity and

High literacy levels, early advances in health alleviate poverty. A critical question is how to inte-and technology, a well-educated and disciplined grate market-onented policies with the institution-cadre of civil servants, effective processes of capital al and social dimensions of development. Theformation, and export-orientation were all impor- social market economy paradigm and the earlytant, but not sufficient factors for achieving high Nordicdevelopmentexperiencestilllittleknownand sustainable growth. Equally important were and little disseminated among policymakers in de-the efforts to mobilize and utilize human resources veloping countries-deserves a closer look in thiseffectively, motivate people to work, transfer context.skills, and organize institutions. Underlying thesefactors were cultural values that placed a high pre-mium on education, discipline, loyalty, justice, and Appendix. Theories of the social marketrationality, and political traditions of broad partic- economy paradigmipation in decisionmaking. In this respect, the is-sues of creating an enabling environment for The "social market economy" (Soziale Mark-economic development goes beyond those typical- twirtschaft7 3) was developed as a theoretical con-ly covered in economic analysis. cept by scholars and politicians in Germany. Its

Other important factors were a consistent and evolution can be traced further back to Bismarckcoherent policy framework and stable and predict- and his distrust in the British type of free marketable policies. To a large extent, growth has depend- economy that had led to social polarization anded on a public policy that allowed capital to rnisery. Bismarck had a pioneering role inaccumulate through private financial institutions, Germany's industrial catching-up, as well as in thean appropriate incentive system for entrepreneur- unfolding of a new era of social policies. Later,ship and labor, and the price and market mecha- German scholars like Walter Eucken, Franznism. An enabling environment, in its broadest Bohm, Erich Preiser, and Wilhelm Ropke, memm-social, political, and legal dimensions, was created bers of the Ordo-liberal school,74 and politiciansand helped mobilize to the fullest new as well as like Ludwig Erhard refined and applied the socialalready existing capacities. Moreover, from the market economy paradigm to guide the economicearly stages of industrialization until today, the miracle in the Federal Republic of Germany fol-Nordic experience clearly illustrates that the issue lowing World War II. The pioneers who developedof sustained economic development goes beyond the paradigm were firm antifascists who opposedthe relative size of the public and the private sec- all forms of totalitarianism. They were committedtors. More important are the complementary roles to building a sustainable socioeconomic systemof the state, private enterprise, and the informal that would not only assure economic efficiency butsector-all of which must operate with a high de- also address major social concerns, including equi-gree of efficency. ty and democracy.

Developing and developed countries alike, The central thrust of the Soziale Mark-whether socialist or capitalist, are today facing a twirtschaft in Germany was the need to create, incommon challenge-how to reconcile stable an environment of general political freedom, a sit-growth, economic efficiency, equity, and long- uation of economic freedom for the individualterm environmental concerns. Many have become within the rule of law. As its advocates saw theskeptical about development models that empha- problem, this could not be achieved either by cen-size either the magic of the marketplace or central- tral planning or by laissez-faire, whether or not theized planning and government intervention in the latter was associated with ad hoc interventionism.goods-producing sectors. A continuous search is The social market economy paradigm can be de-on for alternative development paradigms. The so- scribed, in a simplified form, as a multidimension-cial market economy paradigm reconciles the two al framework that combines a competitive freepoles. It combines a competitive free enterprise enterprise system in the goods-producing sectorssystem and market-oriented economic policies and market-oriented economic policies with an ac-with an active state role in social services and tive state role in the social sectors, provision of in-physical and technological infrastructure. frastructure, and environmental concerns. This

In developing countries and elsewhere, many system differs from the pure market economy in itsnations are seeking strategies for sustainable de- emphasis on income distribution or equity, the

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social responsibilities of private sector entrepre- of a social market economy-shows many similar-neurs, building a consensus among employers and ities to Eucken's paradigm. In a revised form thelabor, and balancing the interest of the social ac- social market economy concept can be expandedtors, including the state versus the private sector. It to analyze the development of the Nordic coun-also differs from the East Asian type of state- tries from agrarian into modem industrial societ-guided market systems by placing less emphasis ies. Such a development-oriented paradigm could,on top-down centralized planning, and giving a in a modified form, also be adapted to socialistcomparatively small direct role to the state in tar- countries seeking market-oriented and democraticgeting, establishing, and protecting key industries reforms and African nations in their search to rec-and controlling the trading and financial sectors. oncile growth and efficiency with equity and social

A fundamental underlying theme of the social concerns.market economy paradigm is the need for a broad In Asia, Singapore 78 -although different fromanalytical focus that sees the central issue of stable the Nordic countries (for example, ethnically het-economic development as closely intertwined with erogenous and having a more authoritarian stylepolitical, economic, and social and ethical issues. of government)-has a somewhat similar socialThe paradigm provides a framework for a func- market economic system, with the state having ational free market mechanism that not only accom- major role in the social sectors and infrastructure,modates economic growth and efficiency goals, while the goods-producing sectors have largelybut also assures sustainable development with eq- been left to private entrepreneurship. Thus, Sin-uity, human dignity, individual freedom, and jus- gapore might be classified as a modified socialtice. All of these goals are interrelated; together market economy, as opposed to Hong Kong withthey are believed to be vital for achieving stable its more pure market economy.and sustainable economic development. The un-derlying dilemma that led to the development of Adaptation of the social market economy para-the social market economy paradigm as a new syn- digm to developing countries79 will requirethesis of a socioeconomic order was that all of modification to their different socioeconomic cir-these goals could not be achieved in a system that cumstances, the result of their historical experi-solely relies on the "magic of the marketplace" ence. First, the paradigm will need to be modified(that is, the Manchester-Chicago type of market so that it better applies to long-term development,economy) or in a state-directed economic system.75 including different stages of economic, institution-

Some key features of the social market economy al, and social transformation from an agrarian toparadigm, as defined by Walter Eucken76, can be an industrial and postindustrial society. Second, itviewed as "structural" and "regulating" princi- has to be adapted to country-specific precondi-ples, based on the concepts of freedom, liberty, and tions and the present historical circumstances insocial justice. Among the "structural" principles which development is to take place. This aspect isare 7: reflected in the increased importance of coordinat-* A stable and predictable commitment to an open ed efforts to plan technology and industrial andand competitive market economy with private environmental policies that transcend generationsownership of the means of production, while at the as well as national boundaries.same time stressing the importance of limiting the Furthermore, the role of the state will depend onnegative extemnalities or abuses that might occur in each country's historical circumstances-for exam-a free market economy ple, its ability to implement regulatory policies* A stable and predictable commitment of the state successfully. In this respect the Nordic countries,to social concerns, for example, income distribu- Germany, and East Asia have been historically for-tion, a just legal framework, a developed infra- tunate in developing traditions of societal disci-structure, and consensus among social actors. pline and administrative capacity, in sharp

The "regulatory" principles address: contrast to many of today's late-starters in devel-* The price mechanism so that all costs are reflect- opment. For example, in Sub-Saharan Africa to-ed in prices that serve to allocate scarce resources day, priority needs to be given to basic nation* Income distribution and other social policies ac- building and administrative capacity to providetively pursued to promote equity and to reduce, the necessary preconditions for a successful stateregulate, or control monopoly power. regulatory and facilitating role, as well as an en-

The Nordic socioeconomic transformation- abling environment for the expansion of privatealthough predating continental European theories entrepreneurship.

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Notes nological progress tends to make capital equip-ment obsolete in short order and, despite large

1. According to Simon Kuznets' estimates, the new investments, the volume of capital has beenhighest per capita growth income rates in the kept down, which in turn indicates that technolog-world from 1860 to 1960 were recorded in the Nor- ical innovations have been capital-saving. At thedic countries and Japan. Sweden led with an aver- same time, it means that investment in new capitalage per capita income growth of 28.3 percent per was a precondition for the growing contribution ofdecade (1861-65 to 1960-62), followed by Japan the residual (the technical) factor's share of thewith 26.4 percent (1879-81 to 1959-61), Denmark output. This would lead to the conclusion that di-with 19.4 percent (1870-74 to 1960-62), and rect expenditure-for example, on education,Norway 19.0 percent (1865-74 to 1960-62). Com- health services, and internal migration in search ofpared with Maddison, Bairoch, and Kuznets, better work (items that are currently classified asKrantz and Crafts' estimates show higher per cap- consumption)-are in fact investments in humanita levels for Sweden in the nineteenth century and capital and should be included in investment re-lower long-term growth rates. See S. Kuznets sources. See L. Jorberg and 0. Krantz (1976),(1966), p. 65 and 0. Krantz (1987). pp. 380-83.

2. S. Kuznets, (1966), pp. 160-217. 20. D. Senghaas (1982), pp. 90-91.3. S. Carlsson, (1961), p. 40 and K Samuelsson 21. L. Sandberg (1978), p. 652.

(1968), pp. 78-79. 22. L. Sandberg (1979).4. I. Berend and G. Ranki (1982), pp. 50- 52. 23. I. Berend and G. Ranki (1982), pp. 21-22.5. P. Bairoch (1976), pp. 287,300. 24. 1. Berend and G. Ranki (1982), pp. 21-22.6. L. JTrberg, and 0. Krantz (1976), pp. 379-80. 25. 1. Berend and G. Ranki (1982), pp. 42-43.7. L. Sandberg (1978), p. 652. 26. B. Supple (1976), pp. 302-03.8. L Berend and G. Ranki (1982), p. 17. 27. Eckstein distinguishes four types of state9. D. Senghaas (1982), p. 80. mntervention: the creation of the societal infra-

10. S. Kuznets (1966), pp. 234-43. structure; the development of direct forms of direc-11. S. Kuznets (1966), p. 77. tion and control, including the tariff system and12. In Norway, capital imports amounted to various concessions; the creation of state enterpris-

more than 5 percent of GNP and to between 30 to es; and central planning. See A. Eckstein (1958).40 percent of gross domestic capital formation in 28. B. Supple (1976), pp. 309-10.three decades: 1890-99, 1900-09, and 1920-29. 29. For a comparative summary of the roleS. Kuznets (1966), pp. 333-34. of including Eastern and Southern Europe and

13. S. Kuznets (1966), p. 307-08. Scandinavia, see I. Berend and G. Ranki (1982),14. 0. Krantz (1987), pp. 16-18. chap. 4.15. A. Lindbeck (1974), p. 7. 30. B. Hoselitz (1959).16. During the period of from the 1860s to the 31. "On Gerschenkron's interpretation, we

early 1950s, the average decline in man-hours of might well ask-with the state economic interven-labor per capita was an average of 2 percent for tion being as minimal as it was-whether the Scan-Denmark and Sweden and 2.3 percent for Norway. dinavian countries were not so far behind theKuznets (1966), p. 73 and pp. 82-85. leading industrialized nations as to need a special

17. L. J6rberg (1975), p. 96. boost to speed up their economic development. If,18. A. Maddison (1982), p. 110. on the other hand, we consider the fact of their19. Even though the contribution of labor and backwardness indisputable, then this one histori-

capital remained constant, production is estimated cal example will serve to cast doubt on the validityto have increased about 1 to 2 percent a year since of Gerschenkron's assumption that the measure ofthe latter part of the nineteenth century, thanks in economic backwardness and state intervention arepart to increased education and better know-how. correlatives. Although quantitative indicatorsThis type of estimate must be viewed with caution, show Scandinavia's economic development tohowever, because the calculation was carried out have been behind Western Europe's, and the accel-by fitting a Cobb-Douglas function with a trend eration of its economic growth to have beenfactor and no scale effects. Furthermore, the mea- delayed, Gerschenkron might still list the Scandi-sures used for capital and labor were shaky. Capi- navian countries as instances of his second type,tal is less important than the residual (knowledge, namely, the type where banks gave impetusknow-how, and the technology factor). Swift tech- to industrialization. If, however, we see state

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intervention in the context of interrelated econom- currencies were tied to the British pound; at theic, social, domestic, and foreign policy develop- time Britain was their most important single ex-ments, then it will be obvious that in Scandinavia, port market. Some observers accused Sweden oftoo, it was not only the lower level of development taking unfair advantage of the situation by depre-that determined the means finally adopted to pro- ciating more than the pound, but the differencemote economic growth, though doubtless that also was not substantial and many other factors were atplayed a part." I. Ber(nd and G. Ranld (1982), p.64. work (for example, quality of management and be-

32. A. Lindbeck (1974), p. 8. havior of labor unions).33. OECD (1983). 55. L. Sandberg (1978).34. L. Waara (1980). 56. A. Johansson (1989).35. P. Bairoch (1976), p. 283. 57. M. Childs (1961), pp. 51-65.36. I. Berend and G. Ranki (1974), p. 44. 58. M. Childs (1961), pp. 51-65.37. L. Sandberg (1979), p. 233. 59. M. Childs (1961), pp. 51-65.38. A. Milward and S. Saul (1973), p. 132. 60. L. Sandberg (1979), p. 241.39. L. Sandberg (1979), p. 234; I. Berend and 61. L. Sandberg (1979), pp. 240-41.

G. Ranki (1982), pp. 52-54. 62. M. Alestalo and S. Kuhnle (1987), pp. 9-13.40. The correlation between educational im- 63. K. Samuelson (1968).

provement and economic advancement in Europe 64. S. Graubard (1986).was by no means linear. Nor were the improve- 65. L. Jorberg (1975), pp. 107-8.ments in the periphery simply a transplantation of 66. Swedish Trade Commission Report 1913,the inmovations of the European industrial core. To quoted in E. Jensen (1937), p. 151.account for the big differences in the development 67. L. Ohlsson (1969).stages of the educational systems in various coun- 68. F. Wendt (1959).tries we must look at the intricate and problematic 69. Walter Hoffmann has suggested that at theinterrelations between standards of education and beginning of the industrialization phase in West-training and social developments. It goes beyond ern countries the consumer goods industry domi-the scope of this study to discuss the general corre- nates, but later it is overtaken by the capital goodslations between economic advances and educa- industry and its share in the industrial sector is re-tion; it is dear, however, that no modem industrial duced. But Sweden did not fit this pattern. Abouttransformation can take place without a minimum 1870, before industrialization had seriously begun,standard of general education necessary to satisfy consumer goods and capital goods were equal inthe demands for skilled labor of modem industry, importance. According to Hoffmann, such a distri-and to ensure the competence needed in the pro- bution normally occurs much later. One possibleduction of goods and services, induding a modern explanation for the Swedish situation is that its in-state administration. See I. Berend and G. Ranki dustrialization was largely due to its adaptation to(1982), pp. 54-56. external demand. Exports were the dominant stim-

41. R. Freeman Butts (1974), pp. 4-5. More re- ulus for the capital goods industry; sawmills andcently, these figures have been regarded as an the iron industry contributed most of the produc-overestimation. tion value. In turn, their expansion resulted in

42. C. Cipolla (1969), pp. 94,115. the growth of the consumer goods industry. See43. L. Sandberg (1979), pp. 229-30. L. J6rberg (1975), p. 108.44. A. Peterson (1934), pp. 49- 50. 70. The author wishes to note the special contri-45. L. Sandberg (1979), p. 230. butions of Ramgopal Agarwala to the synthesis46. B. Mitchell (1975), pp. 771-72. provided in this section.47. A. Guinchard (1914), pp. 394,413. 71. M. Childs (1936).48. J. Bukdahl (1959), pp. 243-45. 72. World Bank (1989).49. M. Hallvarsson (1980), pp. 7-9,33-35,79-85. 73. The term "Soziale Marktwirtschaft" was50. L. Sandberg (1978). coined by Alfred Miller-Armack, who was both a51. T. Gardlund (1947), pp. 123 - 26. scholar and senior official in the Ludwig Erhard52. L. Sandberg (1978). administration. See Alfred Miiler-Armack, 'The53. I. Korberg (1987). Meaning of the Social Market Economy" in54. In the 1930s, for example, when several Eu- A. Peacock and H. Willgerodt (1989a).

ropean countries suffered from overvalued or fre- 74. Major works on the theories of a social mar-quently changing exchange rates, the Nordic ket economy are now available in English. These

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indude: A. Peacock and H. Willgerodt (1989a . 1974. Economic Development in East-Centraland b); and Standard Texts on the Social Market Econ- Europe in the 19th and 20th Centuries. New York:omy (1982). Columbia University Press.

75. A. Miiller-Armack, "The Social Aspects of Brown, P., and M. Browne. 1968. A Century of Pay.the Economic System" (originally published in London.1947),in Standard Texts on the Social Market Economy, Buchanan, J. 1986. Liberty, Market and the State.(1982), pp. 17-21. Brighton, U.K.: Wheatsheaf Books.

76. W. Eucken (1950, 1952), Eucken Walter, Bukdahl, J. 1959. Scandinavian Past and Present."What Kind of Economic and Social System?", in Denmark: E. Henrikson Arnkrone.A. Peacock and H. Willgerodt (1989; originally ap- Carlsson, S. 1961. Svensk Historia II. Stockholm:peared in the first volume of the Ordo yearbook, Bokforlaget Bonniers.1948, under the title "Problems of an Economic and Childs, Marquis. 1961. Sweden the Middle Way. NewSocial Order"). Haven, Conn.: Yale University Press. (Original-

77. See further S. Karsten (1985). ly published in 1936).78. J. Gayle (1988), pp. 69-71. Clark, C. 1957. The Conditions of Economic Progress.79. All of the German Ordo-liberal thinkers be- New York: Macmillan.

lieved that economic development only was possi- Cipolla, C. 1969. Literacy and Development in theble if the individual was put at the center of the West. Baltimore: Penguin Books.development process. According to R*pke, "hot- Crafts, N. 1983. "Gross National Product in Europe

t uecrrand handi- 1870-1910: Some New Estimates," Explorationstomup encouragement to agiutr in Economic History. October, pp. 387-401.craft activities is needed. They believed that the in Ec 1970. Entreeri Ati in7Swe1 -

real obstades to development are to be found in DahmIn, E. 1970. Entrepreneurial Activity in Swep-the lack of a sound rule of law; this generates un- lishedufory th CanbEcnomi Mass.ocitiocertainty and causes capital flight or makes inves- by r D.rUcwAn.tors shun the poor countries in the first place. byRt D. Urw1i9.There is also the lack of the "sociological humus," Eckstein, A. 1958. Individuarhsm and the Role nofwhich permits private entrepreneurship to flour- the State in Economic Growth,a In Economicish. Gerald Curzon, "International Economic Or- Development and Cultural Change.der: Contribution of Ordo-liberals" in A. Peacock Erikson, R., E. Hansen, S. Ringen and H. Uusitalo,and H. Willgeroth, (1989a), pp. 187-88. On the rel- eds. 1987. The Scandinavian Model: Welfare Statesevance of the paradigm to developing countries; and Welfare Research. New Yorkl M. E. Sharpe.see H. Hernmer (1985) and J. Todenhofer (1978). Eucken, W. 1989. "What Kind of Economic and So-

cial System?," In A. Peacock and H. Willgerodt,

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10

The German Development Casesince the Second Industrial Revolution

Uwe Otzen and Hansjorg Elshorst

Industrial development * from the late nineteenth century on, govern-ments actively supported dose cooperation

Germany's industrial development began in the between leading enterprises and the expandingnineteenth century in the wake of the second science sector.industrial revolution with the application of Labor unions and a Socialist party weremajor technological inventions on a large scale established at an early stage of industrial dev-by pioneering entrepreneurs. Fragmented by elopment and put increasing pressure on gov-historically drawn borders, the nation found emment and industry to improve the lot of theitself competing with industrially more ad- working class. As a political force their successvanced Great Britain. German industrialization remained limited, but their mounting pressurestarted in backyard workshops producing for did contribute considerably to the introductionthe local market. Although a fair number of of social legislation under Bismarck. Thus, bythese workshops were later to grow into large the last quarter of the nineteenth century thecorporations through major technological break- stage was set for the precedent of combiningthroughs and diversification (Diesel, Siemens, industrial and social development: pressureKrupp, Zeiss, and the like), small and medi- groups fought for the gradual improvement ofum-size industries continued to play a vital the lot of the underprivileged classes, and gov-role both as specialized suppliers in the emerg- emnents appeared to forsake the short-terming industrial networks and as generators of vested interest of their clientele in order toskills and employment. The nineteenth century avoid disruptive revolutionary developments orgovernments, although influenced by the feud- sacrificing the basic loyalty to the politicalal rent-receiving classes, managed to create a system of sizable groups in society.favorable environment for industrial develop-ment Agricultural development* a customs union already existed prior toGerman unification in 1871 Agricultural development in the nineteenth* protective duties were imposed, predomi- century depended on four major factors: landnantly on British goods, to protect "infant in- reform, improved terms of trade for the agri-dustries" cultural sector, technical progress, and farmers'* governments invested heavily in physical cooperatives and associations. After the wars ofinfrastructure and education liberation against Napoleon the not yet united

German states successively launched land re-

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form programs that freed the farmers from environment and gradual integration into Wes-feudal bondage and granted them individual tern Europe; from the mid-1960s to the earlyland titles. Farmers responded by rapidly rais- 1980s, when Keynesianism was espoused in aning land use intensity. The agricultural sector attempt to stimulate growth after the recon-improved steadily after 1825, before leveling struction and cope with the two oil priceoff after 1875. From then on, yield improve- shocks; and the early 1980s to date, a phasements based on mineral fertilizer, horse- marked by supply-side economics and renewedpowered farm mechanization, and improved skepticism about the efficiency of macroecono-plant varieties and breeding stock became the mnic finetuning, though in combination withmajor driving force for higher agricultural pro- structural policies and a strong emphasis onduction and income. A cooperative movement research and development.for marketing, credit, and savings supportedthis development, particularly in the disadvan- Postwar reconstruction and developmenttaged peasant areas and the small-scale produ-cing sectors. On balance, agricultural develop- In 1948 a currency reform legislated by thement was not sacrificed to rapid industrializa- military occupation govermnent of the Alliedtion, but itself induced a considerable demand Forces introduced a new monetary unit, thefor inputs, capital, and consumer goods. deutsche mark, and heavily devalued all mone-

tary assets. The reform aimed at neutralizingFurther industrial development the inflationary overhang left by war financing

policies by drastically reducing the internalDevelopment during the first half of the public debt. As a complementary measure,

twentieth century was severely interrupted by Germany's external prewar and postwar debtstwo world wars, the world economic recession, were settled in the London Debt Agreement ofmassive reparations payments, dramatic infla- 1953. With more than 50 percent of the origin-tion, unemployment combined with sociopoliti- al daims canceled, the country's debt servidingcal polarization, and a planned (war) economy. obligations were realistically adjusted to itsYet this was a period of vigorous attempts at economic capacity. The agreement paved thefurther industrial development, especially in way for normalizing Germany's external finan-the capital goods sector. The process was sup- cial relations and restoring its creditworthinessported by large-scale government investment in on the international capital markets. The cur-research, education, and vocational training in rency reform marked the beginning of a se!riesall sectors. of Allied interventions in the economic and

After World War II, the western territories of financial fields. Decartelization and other meas-the "Deutsches Reich" were constituted as a ures were introduced to free the economy fromfederal state consisting of ten "'Lnder," each all residual noneconomic constraints: fromwith its own government and founded on the price and wage control, rationing, allocation,principles of parliamentary democracy and a and artificial exchange rates.constitution providing for the separation of Introduced by the military occupation gov-powers and guaranteed basic human rights, emient before the creation of the Federalcivil liberties, and rights to private property. In Republic, the currency reform and initial liber-today's federal system, decentralized policymak- alization measures were instituted without aing and economic development have become proper parliaments, and therefore they initiallyconstitutional elements with the central govern- implied a great political risk for all partiesment (Bund), the state governments (LUnder), involved. The lifting of price and wage con-and the local government with its municipali- trols was fiercely opposed by the Social Demo-ties and rural communes (Gemeinden), each crats, for example, and the fundamental adjust-having a vital role to play. ment program received its first serious setback

A review of economic policymaking in the when German labor unions called a generalFederal Republic of Germany in the postwar strike in 1948.period reveals three major phases: from 1948 Between 1948 and 1954, under the aid pro-until the mid-1960s, when policies were strong- gram known as the Marshall Plan, $1.5 billionly market-oriented in the context of rapid re- was supplied as a special treasury fund to theconstruction, a favorable economic international federal government and distributed through

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government channels and the Bank for Recon- being of the young democracy and to achiev-struction (Kreditanstalt fur Wiederaufbau). The ing economic prosperity. On economniccounterpart funds generated from payments by grounds, social policy was seen as instrumentalimporters were invested mainly in public hous- in overcoming the traditional antagonism bet-ing, energy, infrastructure, small and medium- ween capital and labor and thereby fostering asize industry, agriculture, and basic resources social environment conducive to a smoothlydevelopment. The reconstruction program can functioning economy. Despite the unchallengedthus be seen as the first example of a concert- concentration of productive capital, labored development program financed by substan- gained a remarkable share of economic powertial initial external funds, commodity aid, gov- in exchange for its support for the marketernment funds, and self-financing by private economy. The main instruments of social poli-firms. The success of the Marshall Plan and cy were the establishment of comprehensivethe reconstruction program has to be attributed unemployment, health, and pension insuranceto at least two essentiai factors: the availability schemes and institutional regulations that madeof highly qualified labor and a productive provisions for labor representation in the mainapparatus, which had not been completely areas of industry. The combination of a mar-destroyed during the war as is sometimes as- ket-oriented economic policy and an activesumed. The immediate postwar period was social policy came to be known as the "Sozialefurther characterized by a dramatic increase in Markwirtschaft" (social market economy). Anpopulation in the Federal Republic of Germany additional major factor of Germany's sustainedfrom 39 million in 1937 to 50 million in 1955, postwar growth has been continued integrationwhich was mainly the result of the influx of of Western Europe, which has provided a sec-over 10 million highly qualified refugees from ure outlet for more than 50 percent of Germanthe lost eastern provinces. A special enactment exports and will culminate in the creation ofwas passed in 1952 to integrate the new ar- the single European market in 1992.rivals into the economy, equalize the war bur- With continued large-scale industrial devel-den, and thereby promote equity among the opment, however, environmental pollution andvarious social groupings. ecological damage have put a new strain on

The main task of economic policy in the the whole socioeconomnic system and provokedpostwar period was to create a legal and finan- criticism of its capability to respond. Comparedcial framework within which markets could with other industrial nations, Germany reactedoperate efficiently. This policy emphasized free to this threat at a fairly early stage and is nowand fair competition enforced by antitrust le- investing an increasing fraction of the GNP ingislation, free trade, and clearly defined poli- environmental protection-the current figure iscies in the monetary, fiscal, and income redis- 3 percent. The achievements of awareness-rais-tribution fields. Because the main task of mon- ing and political action have been the result ofetary policy is to ensure price and currency the work of pressure groups both within andstability, a strong and independent Central outside the political parties.Bank (Deutsche Bundesbank) was established There is increasing recognition of the needand given a legal mandate, irrevocable by gov- for ecological considerations to be as much aernment, to pursue these objectives. part of economic and political life as is today

Economic and financial policies were sup- the case with social justice. There is increasingported by social policies that sought to facili- acceptance of the need for balanced tradeoffstate consensus between the social partners: between economic development and ecologicalorganized labor and capital. Representatives of integrity. Basically, the concept of "Sozialelabor movements of various political orienta- Markwirtschaft" is an open one and is expec-tions joined to form a national German trade ted to be sufficiently resilient to meet this newunion (Einheitsgewerkschaft), which became challenge. Government, however, is seen tovery powerful and able to maintain its inde- have an indispensable role to play as the prov-pendence from government and private busi- ider of legislation, since awareness-raisingness. The involvement of labor in industrial alone does not seem to prevent either industrymanagement through workers' councils and or consumers from spoiling the environment.economically strong trade unions was believed Strong political efforts will have to be made toto be essential both to protecting the well- convey to industry and consumers that envi-

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ronmental protection is a prerequisite for sus- Bechtel, H. 1967. Wirtschafts- und Sozialge-tamable growth and is therefore in their own schichted Deutschlands. Munich.interest. Environmental problems are increas- Lipschitz, L., and T. Mayer. 1988. "Acceptedingly perceived as global threats that will re- Economic Paradigms Guide to German Poli-quire strong commitments on the part of both cies," IMF Survey.industrial and developing nations in which Lutge, F. 1960. Deutsche Sozial- und Wirschaftsge-development cooperation will also have a role schichte, 2d ed. Berlin. Gottingen, Heidelberg.to play. Miiller-Armack, A. 1981. Genealogie der Sozialen

Marktwirtschaft. Frtihschriften und weiterfaihr-Bibliography ende Konzepte, 2d ed. Berlin, Stuttgart.

Amdt, H. J. 1966. '"West Germany, Politics ofNon-Planning," National Planning Series,New York.

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11

Some Lessons from East AsianDevelopment Experiences

Eul Yong Park

This paper explores some lessons from the East country encourages savings, equity and growthAsian experience in three different areas: a tend to be positively corelated.macro perspective on austerity and economic A high rate of savings linked with a highgrowth; a discussion on the promotion of small rate of investment is the manifestation of aand medium-size enterprises (SME); and re- society that puts a high priority on maximizingmarks on the role of foreign investments and future consumption rather than current con-technology transfer in promoting SMEs in dev- sumption. Japan and advanced developingeloping countries, illustrated by two case stud- countries in Asia, such as Taiwan and theies. Republic of Korea, tend to have higher rates of

savings than other countries-nearly 30 percentAusterity and economic growth: Toward of GDP. There are a number of explanationsmaximizing future consumption, not current why savings rates in these countries tend to beconsumption higher. The most important factor appears to

be their macroeconomic policy regimes,How does austere behavior by consumers especially interest rate policies. Taiwan, for

affect the long-term economic growth of a example, has maintained a positive real interestdeveloping country? When we define austerity rate since the early 1950s, which helped toas a high savings rate relative to disposable maintain price stability and encourageincome or gross domestic product (GDP), consumers to save for the future. In the caseausterity is essential for healthy economic of Korea, when its interest rate policy was onegrowth, assuming that savings are invested of financial repression between 1968 and 1979properly and do not leak out of the economy and interest rates were kept low, domesticin the form of foreign capital outflows. Recent- savings were less than investment demand,ly, Fajnzylber suggested a hypothesis linking necessitating large inflows of foreign savings.the rate of savings and the level of equity. He Since 1980, however, when the govermnentfound that countries that practice growth with made a long-term commitment to priceequity policies tend to have higher rates of stability and to maintaining a positive realsavings and higher rates of GDP growth than interest rate, the savings rate has grown and incountries that experience economic growth recent years has reached the level of Taiwanwith deteriorating income distribution. In other and Japan.words, it is found that when a developing A second factor explaining the high savings

rates appears to be related to cultural values

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and a strong sense of economic nationalism. factors tend to inhibit the growth potential ofMany people in East Asian countries would Sub-Saharan countries.rather sacrifice current consumption for greater What can be done to correct consumptionconsumption possibilities in the future, even if patterns and to promote savings and invest-the return on investment (and savings) comes ment in Africa? The experiences of East Asianto the next generation rather than to them- development over the last decades suggest aselves. This future orientation is also revealed few directions, some of which may not be easyclearly in their high level of investment in to implement quickly because they require anhuman resource development. Their investment educated high-income class and strong commit-in education, even when their per capita in- ment on the part of political leaders. First, thecome in the 1950s and early 1960s was com- adoption of sound macropolicies, especiallyparable to other developing countries, was correct interest rate policies to maintain posi-much higher than most other developing coun- tive real interest rates, is most important. Thetries. negative real interest rates that many develop-

The third factor explaining the high level of ing countries adopted to promote industrializa-savings relates to the equity issue. We are not tion have tended to hurt industrialization andsuggesting that there is a positive correlation growth in the long run. Negative real interestbetween the level of equity and the savings rates induce chronic surplus demand for bankrate. Case studies in the past have shown in- financing, which cannot be met by the insuffi-consistent results on this issue. When we con- cient supply of funds resulting from the lowsider the relationship in the long term, how- rate of savings, discouraged by negative inter-ever, the level of savings and investment, gro- est rates. The privileged owners of firms inwth performance, and the level of equity seem favored industries receive loans at a rate lowerto proceed together. Income distribution in than the market-clearing rate, which makesadvanced developing countries in Asia has them richer and strengthens the role of govern-been much more equitable than in other devel- ment. This tends to generate inefficiencies inoping countries. For example, the average in- the economy, discourages entrepreneurs with-come ratio of the lowest 40 percent in house- out strong links to the government, and weak-hold income to the highest 10 percent for Latin ens the dynamism of growth.American countries in the 1970s was 0.3, A second goal should be the promotion ofwhereas for Korea it was 0.7 (in the case of equity. One of the ways to do this has alreadyTaiwan, it was estimated to be higher-0.8). In been mentioned. In typical developing coun-the long term, equity tends to promote re- tries, agrarian reform, including land reform tostrained consumption patterns, higher savings, distribute land equitably among farmers, isand economic efficiency, whereas inequity ap- most important. Both Taiwan and Korea wentpears to promote increasingly skewed income through successful land reform in the earlydistribution, lavish consumption patterns, a days of their industrialization process in thelow level of capital productivity (in terms of late 1940s, which helped them to use the agri-higher capital-output ratios), and even social cultural sector as a base for rapid industrializa-unrest. Hence growth dynamism in such coun- tion. As seen in many Latin American coun-tries is lost. tries and the Philippines, concentration of land

The situation in Africa tends to more closely ownership should cause serious concern.resemble Latin America than East Asia, with The third objective should be to build anthe presence of high levels of consumption environment in which lavish consumption pat-(that is, low savings), high levels of foreign terns are not respected. The most importantdebt, inequitable income distribution, and low part of such a policy is strong comrnitment onreal interest rates. Under these conditions, lav- the part of the political leadership to free bu-ish consumption patterns are bound to grow, reaucracy from corruption and ban, throughwhich may kill growth dynamism. It also ap- high tariffs, the most conspicuous luxury pro-pears that inequality in income distribution ducts, including such consumer durables asand unrestrained consumption by the upper- luxury cars. This policy was adopted bylevel income class tends to strengthen high-cost Taiwan and Korea in their early stages of dev-businesses in African countries. All of these elopment and clearly worked, so that conspicu-

ous consumption by the higher-income class

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and high-level bureaucrats was viewed as im- such as cement manufacturing, or assemblymoral or even illegal (evidence of corruption plants of product-centered technology. A largeor evidence of income tax evasion). number are owned or controlled by the gov-

The fourth condition for successful develop- ernment. Also these large firms, for the mostment is the promotion of a future-oriented part, were originally foreign-owned and man-value system. A sure way to do this is to con- aged by expatriates. Thus, there were not en-tinuously make long-term investments in hum- ough opportunities to breed and train Africanan resources development, in particular prima- entrepreneurs capable of managing modemry schools and basic education. Long-term firms.investment in basic education both reflects and The most likely sources of entrepreneurs instrengthens the future orientation of social Africa are either the government or large firmsvalues. This commitment should be backed by owned and controlled by the government orreforms to promote meritocracy rather than foreigners. Compared with foreign entrepre-nepotism in the recruitment of public officials neurs, induding Asians, African managers andand to fill other positions at various levels. would-be entrepreneurs tend to have moreHere again, strong commitment by leadership secure, government-guaranteed jobs. Risk-tak-is required. Donor countries may be able to ing in the private sector, an essential ingredi-exert a positive influence in this process in ent of entrepreneurship, does not seem verycountries where meritocracy is not well devel- widespread, making it a tough environment foroped by supporting human resource develop- breeding entrepreneurs.ment and by insisting on the gradual adoption There seem to be two main factors inhibit-of meritocracy. ing the development of entrepreneurship in

Africa. The first is the "high-cost" businessPromotion of small and medium-size environment, where entry barriers are ratherenterprises high. The colonial legacy of most African coun-

tries led leaders of new African nations toOne of the key ingredients of successful regard private businesses as exploitative be-

industrial development in East Asia, especially cause frequently they were backed by colonialin Taiwan, has been the active role of SMEs. policies guaranteeing success through controlThey have been the source of dynamic entre- of entry and elimination of effective competi-preneurship, the training grounds for skilled tion. Negative attitudes toward the privateworkers, an efficient medium of diffusion of sector and capitalist economic regimes re-technology and know-how, and supporting mained strong even after independence becauseactors in dynanic growth through division of a lot of private sector businesses were stilllabor with large firms. In Africa there are nu- controlled by foreign interests, includingmerous small, cottage-type industries and some Asians. In this kind of environment, govern-large-size firms, but no healthy and strong ments frequently became inhibitors rather thanSMEs in the middle. It is clear that dynamic supporters of private sector development andgrowth of the economy through industrializa- entrepreneurship. Bank loans and governmenttion cannot occur because of this "missing import licenses, for instance, became a meansmiddle." Backward linkages (that is, manufac- for the government and banks to squeeze priv-ture of parts and components) of the opera- ate sector firms. Private firms in return reques-tions of large manufacturing firms do not take ted that the government create an environmentplace because there are few reliable SMEs that in which domestic entry barriers were high,can be efficient suppliers and manufacturers of and government protection against foreignparts and components. Typical large firms rely imports was also high. In this way, they couldon imported parts and components or produce collect high economic rents by conducting busi-parts and components themselves, which is ness in a high-cost business environment.rather inefficient and costly. This type of business environment led to

A number of factors explain why SMEs did weak competition (oligopoly) or no competitionnot develop vigorously in the African context. (monopoly) in the market. In this kind of en-First, there is a lack of development of African vironment, microenterprises rarely grow toentrepreneurship. In Africa, large firms are become medium-size firms. The most damag-either those with process-centered technology, ing result of the high-cost business environ-

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ment was the elimination of dynamic competi- wan, which has a long tradition of monetarytion, which is the breeding ground for entre- policy that provides high real rates of interestpreneurship. on savings deposits and other appropriate mac-

The second factor inhibiting the development ropolicies, achieved excellent records of priceof entrepreneurship is the lack of trained man- stabilization and high savings (in 1987 netagers. Highly trained labor is in great shortage savings as a percentage of national income wasin nearly all African countries, and is in great 39 percent, the highest in the world), which indemand in the government, banking sector, turn helped SMEs to gain easier access to in-and private business sector. vestment financing and to grow vigorously. In

the case of Korea, which adopted a monetarySome lessons from the development of SMES in policy with a key feature of maintaining a realAsian NICS interest rate hovering near zero during the

period from 1968 to 1979, the savings rate wasNearly all Asian newly industrialized coun- low and inflation was high. Chronic surplus

tries (NICs) and Japan have relatively well- demand for capital and government allocationdeveloped SMEs in their industrial sector. of investment capital were the predictable re-What then are the main factors that promoted sults. Given this situation in Korea, discrimina-the development of SMEs in East Asia? Pro- tion against SMEs in favor of large firms inbably the most important factor was simply investment financing became common.markets where competition was the rule of the There is another important factor that hasgame. All firms have had to compete vigorous- resulted in different performance by the SMEly in domestic and foreign markets. In such an sectors in Taiwan and Korea: government in-environment, each firm must do everything it tervention in SME operations. Although it iscan to maximize the efficiency of its operations not easy to document precisely the degree ofin order to survive. Division of labor among intervention in each country, the general con-large firms (for example, assemblers) and SMEs sensus is that government intervention through(for example, producers of parts and compo- the red tape required of SME entrepreneursnents) is generally preferable to vertical inte- has been much greater in Korea than ingration of operations. Taiwan. This explains why start-up SMEs are

The second factor is the lesser degree of so numerous in residential areas in Taiwanesediscrimination between large firms and SMEs. cities, which would be inconceivable in Korea.In the Asian NICs, appropriate macroeconomuc These two factors-SMEs' easy access to finan-policies, especially interest rate policies, were cial institutions for investment capital and theimportant in attaining high rates of domestic degree of government intervention in SMEsavings so that most investment could be do- operations-appear to explain a great deal ofmestically financed. This means that SMEs' the differences in the industrial structures inaccess to investment financing through formal Taiwan and Korea.financing institutions has been relatively good. The result of the different policy environ-This contrasts sharply with other developing ments in Taiwan and Korea was differentcountries, where inappropriate macropolicies, growth paths for the SME sectors in these twoespecially government adoption of lower than countries and different structures of industrialmarket-dearing interest rates, have repressed organization, despite the fact that Korea in thefinancial markets, which results in a low sav- 1980s corrected its macropolicies and achievedings rate and chronic unmet demand for in- price stabilization and a high savings rate,vestment capital that normally leads to govern- comparable to those of Taiwan, and that Koreament allocation of investment capital. This type adopted policy measures to promote SMEs toof situation results in discrimination against compensate for past discrimination. SMEs'SMEs versus large firms, and SMEs have dif- share of the total value added in manufactur-ficulty gaining access to bank financing of ing, employment, and manufacturing exportsinvestment capital. has been significantly lower in Korea than in

When we compare the history of SME devel- Taiwan (see Table 1).opment in Korea and Taiwan in the 1960s and1970s, the impact of appropriate macropolicieson the development of SMEs is apparent. Tai-

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Table 1 Comparison of SMEs in Korea and Third, the Korean government adopted aTaiwan, 1984 series of incentive measures for large finns

(assemblers) to help SME manufacturers andsuppliers of parts and components by provid-

Feature Korea Taiwan ing capital, technology, and managementknow-how such as quality control. This policywas consistent with growing appreciation on

Number of SMEsa 40,490 120,981 the part of large firms of the need for doseSME's share of value added 36.3 55.0 cooperation with strong and competitive SMESME's share of exports 25.4 69.0 component suppliers in order to increase theirSME's share of employment 54.9 72.0 own competitiveness. Large assemblers and

SME parts suppliers are now working togetherNote: Manufacturing only. to increase "common' competitiveness anda. SME: Defined as manufacturing companies efficiency. There is a good deal of evidence towith less than 300 employees. suggest that the SME sector of Korean industrySource: Korea: Industrial Census for 1984; SME is growing more vigorously as a result of theseTrade Statistics for 1984; Taiwan: Industrial new approaches. The most important reformStatistics for 1984. appears to be the changes in macropolicy mea-

sures that removed discrimination againstKorea's recent SME promotion policies SMEs, rather than the government's special

programs for providing investment finance at aIn order to offset the past bias against SMEs preferential rate, although they also helped.

in Korea and to promote their becoming strongand competitive, the Korean government has The role of foreign firms in developing SMEsadopted a number of programs in recent yeaLs in developing countriesthat appear to be enjoying success. The mostimportant measure has been the adoption of The economic interactions between privateappropriate macropolicies to create an environ- sectors in Africa and East Asia (Japan, Korea,ment in which discrimination against SMEs and Taiwan) in direct investment, trade, andwill be eliminated. Through a series of stabili- technology transfer are not very significant, butzation policies between 1979 and 1982 period, might become more important in the future. Inincluding monetary policy in which the real such an environment, it will be interesting tointerest rate was set at a high level to attract review case studies to see what foreign firms'increased savings, Korea finally succeeded in activities can do to help the development ofeliminating chronic high inflation, and the SMEs and the creation of entrepreneurship insavings rate began to increase to a level com- LDCs. Following are two cases from whichparable to Taiwan and Japan, 30 to 35 percent lessons can be drawn on the positive and cata-of GNP. The government also gradually re- lytic role that foreign firms can play in themoved itself from allocating investment finan- development of SMEs (and entrepreneurs) incing as excess demand for investment funds Africa.came down. These macroeconomic policy chan-ges were critical in removing discrmination Case 1: Garnent export indusfry in Bangladesh andagainst SMEs compared with large firms. Daewoo of Korea

Second, the Korean government adopted aseries of measures to help SMEs grow. These In the early 1980s,l the business environmentmeasures provided investment finance to SMEs in Bangladesh was regarded as unfavorable tofrom funds set aside especially for that pur- industrial development. Nevertheless, a suc-pose, allowing SMEs to avoid, to a certain cessful garment export industry has developedextent, competition with large firms. They also by combining catalytic elements of local andprovided venture capital for firms that did not foreign entrepreneurs. It began as a joint ven-have adequate start-up capital. The government ture between a local entrepreneur and Daewoo,combined these approaches with extension and a large Korean company. Technology, know-advisory services. how, and management, which the local partner

in Bangladesh learned from the foreign part-

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ner, were quickly diffused within the country, operations of garment manufacturing, but alsoso that new garment production and export to reinforce that learning by participating inactivities by other entrepreneurs (some old and the entire operation of the successful garmentsome new) increased rapidly. The government manufacturer and exporter and the corporatealso changed policies to support and accom- culture of Daewoo.modate the needs of this new industry, many The training program was comprehensive,of whose producers were SMEs. As a result, covering all operations as well as the roles ofgarment exports grew at an annual average managers, supervisors, and production work-rate of 106 percent between 1981 and 1987 and ers. Without such a well-organized trainingbecame the most important nontraditional man- program run by a producer it would haveufactured export in Bangladesh, reaching a taken many years to reach the level the Deshlevel of $299 million in 1986-87. workers achieved after only seven months of

There were a number of important factors in training. The uniqueness of the training pro-the fast development of the garment industry gram induded: the location factor, that is, thein Bangladesh. First, the collaboration with a foreign partner's modem, successful operatingforeign firm experienced in the industry was plant; the large number and composition ofimportant, because Bangladesh lacked produc- trainees, that is, 130 managerial, supervisory,tion technology, a trained work force and su- and production-worker candidates; and thepervisors, and marketing know-how. It also intensity and method of training, with thedid not have entrepreneurs with the skill and trainees working side-by-side with Koreanexperience available in foreign countries. The workers, whose productivity and efficiency inactive involvement of a foreign firm willing to garment manufacturing were among the high-transfer this technology and know-how, as well est in the world. We can readily see the dif-as to provide training of managers, workers, ference between the Daewoo type of trainingand supervisors, and to provide marketing and more typical training programs for work-channels, solved many of the initial problems. ers in developing countries, whereby a fewThis seems an important lesson to be learned workers are trained in a foreign partner's plantby other developing countries: foreign firms for a few months, or a few trainers from ad-can be a catalyst for industrial development. vanced countries come to the local partnex's

The second important factor for success was plant for a limited period of training. Manage-the special type of training the Bangladeshi ment training with such intensity and durationworkers received from the foreign partner in in an environment of successful operations isthe initial stage of development of the garment rare for a developing country worker-managerexport industry. The very successful training of training program. When the plant actuallya large initial batch of workers and managers began operations, a team of supervisors fromplayed an important incubator-catalyst role in Daewoo stayed with the Desh plant to tackleproducing more skilled workers and managers any problems arising in the early stages offor a whole industry. How did it begin? Desh, operation.the local partner, recruited 130 workers for The Daewoo-Desh contract not only provi-training at Daewoo's main garment plant in ded worker training for Desh, but also plantPusan, Korea. They filled, after the training set-up, purchase of machinery and parts, pur-period, 4 management positions, 97 production chase of fabric and other necessary raw materi-supervisory positions, and 29 actual production als, and export marketing support. This wasslots at the Desh plant in Bangladesh. They the best combination for the start-up of plantalso received seven months' intensive training operations in a country that lacked criticalat the factory, working side-by-side with factors and capabilities. The foreign partnerKorean technicians and managers. played an essential catalytic role. Even better

There are a number of ways in which for Desh was that the partnership was not zinDaewoo's training is unique. First, only a few the form of a joint venture, but in the form oftraining programs involve such a large number a contract. When Desh thought they haLdof workers trained in the foreign partner's learned enough from Daewoo, the former end-plant for such a long time and with such in- ed the contract and hired Korean supervisorstensity. This enabled workers not only to learn and managers individually to do the job with-their jobs, the skills and know-how of specific out paying high rates of royalty to Daewoo.

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Desh produced garments for export This namely management capability. Third, the Ban-provided two additional benefits that rein- gladesh government had maintained distortion-forced the success of Desh operations. First, the ary policies discouraging exports. Local institu-level of demand and growth potential was tions for supporting the export sector weremuch higher than if they had been producing very much underdeveloped. Through a colla-for the domestic market, workers and mana- borative effort by two active partners, onegers learned much faster, and the firm's opera- foreign and one local, the country was able totions were forced to be more efficient because overcome the initial unfavorable conditions,of competition in export markets. Second, which led to successful development of theDesh, with the help of Daewoo, was able to industry. This should be the most importantpersuade the Bangladesh government to adopt lesson for other developing countries.an efficient export industry support system andcorrect a distorted trade policy regime that Case II: The Sister Industry Program in Tanzaniahindered exports. This was possible becauseDaewoo was an experienced operator in Korea, The Sister Industry Program2 (SIP) is a pro-where a support system and neutral trade gram financed by foreign aid and designed toregime were well developed, and because it create new SMEs in Tanzania and to helpwas easier for the Bangladesh government to them acquire industrial capabilities (production,carry out reforms for an export industry than administrative, and other managerial skills)for domestic-oriented industries. through international technology transfer from

The most remarkable facet of the develop- sister SMEs in Sweden, mostly in areas ofment of Bangladesh's garment export industry import substitution. As in the case of the Ban-was the speed and extent of diffusion of gladesh garment industry, this program in-Desh's technology and know-how, originally volved the development of SMEs and the crea-received from Daewoo, and the subsequent tion of entrepreneurship. It began in 1977, andrapid growth of the industry. One hundred by 1986, 30 new SMEs had been set up underand fifteen workers originally trained by the SIP in Tanzania.Daewoo left Desh to start their own operations There are a number of significant characteris-or to work for others. This was one of the tics of the SIP program:most important factors explaining the rapid * It was in part an operation financed by Swe-increase in the number of garment factories dish foreign aid, and Sweden's foreign aidmanufacturing for export from a few in 1979 agency and the Ministry of Industry and Fin-when Desh began operations to more than 700 ance in Tanzania worked as monitors and gua-at present. Although late start-up companies rantors of the program. Therefore, it was not athat hired former Desh workers and supervi- commercially based, market-oriented program,sors still needed to get additional help from as in the Bangladesh case. Involvement of Swe-technicians and supervisors, as well as from dish SMEs as senior sisters was only possiblesuppliers of imported inputs such as fabrics in most cases because of guarantee arrange-and marketing experts from Korea and other ments made through the two governmentNICs, there is no question that those who agenciesreceived training from Daewoo and Desh and * design of production facilities was done bythen left Desh for other companies, in many the Swedish SMEcases their own, were the most important med- * training was provided at a functioning SMEium of technology diffusion. in Sweden, but in most cases only for a few

In sum, a remarkable aspect of the garment Tanzanians at a timeexport industry in Bangladesh is that success * assistance was given by the senior sister oncame despite initial conditions regarded as a long-term basis, for as long as 10 yearsunfavorable for developing an export industry. * SIP and the senior sister compensated forFirst, the country did not have critical factors weaknesses in Tanzanian local networks andsuch as production technology and know-how, infrastructure.trained human resources, and marketing know- Almost 10 years of SIP operations show thathow needed to successfully compete in interna- the results are not very encouraging for manytional markets. Second, the country did not participating SMEs in Tanzania, although therehave local capacity to integrate these factors, are some success stories. First of all, most Tan-

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zanian SMEs participating in the program pro- were needed for successful operations. Theduce goods for import substitution. Only one Swedish SMEs, the foreign partners in theout of eight SIP SMEs studied had export ex- Tanzanian case, were small in scale and didperience. Hence, capacity utilization rates were not have much international experience, whichrelatively low, generally below 50 percent. in turn himited their ability to serve as cata-Despite the contribution made by Swedish lysts in the process of international technologysenior sister firms in transferring their produc- transfer.tion technology to Tanzanian junior sisters, few The Bangladesh case was geared towardhave developed the capability to improve export product manufacturing and marketing,transferred technology. Another disappointing and, therefore, in selecting projects, considera-aspect of the performance of SIP firms is that tions of comparative advantage and competi-the diffusion of technology either within a firm tiveness in international markets were mostor between firms through movement of Swed- important. The Tanzanian case dealt with im-ish-trained SIP workers and managers original- port substitution projects; therefore, competitionly trained by Swedish firms to non-SIP firms and efficiency were not the most importantwas not extensive. concerns. The training program for developing

country workers and managers was different inComparison of the case of Bangladesh and Tanzania the two cases. In the Tanzanian case, a more

or less typical training program was providedA comparison of the two cases discussed for developing country trainees, which includ-

above shows interesting contrasts. The Bangla- ed bringing in a few trainees to plants of thedesh experience was predicated on a commer- foreign partners, followed by sending foreignciaily based contract between foreign and local trainers to developing country partners forpartners. Each partner behaved according to its further training. The Bangladesh case was, asown needs in the marketplace (that is, no sub- discussed above, somewhat atypical in terms ofsidies). Tanzania's case was only partly based its intensity, the number of people involved,on commercial considerations. When other and the location of training.things are equal, nonsubsidized, market-orient-ed operations are more likely to be efficient Japanese and Korean approaches to SME foreignthan subsidized operations. These differences investmentmay be seen in the attitudes of foreign part-ners in the two cases. The foreign partner in At present, Japanese and Asian NICs arethe Bangladesh case. Daewoo, did its best to going through significant structural transforma-build an efficient garment export industry in tions in their respective economies. An import-the country to make profits from their efficient ant part of this process is the reduction ofoperations. As a result, the training program relatively labor-intensive SME manufacturers.and other aspects of the transfer of technology The major factor behind this change is theand management know-how were excellent in sharp increase in real wages, which have risentheir support of the local partner. even further relative to foreign countries be-

The foreign partners in the Tanzanian case, cause of the sharp appreciation of the Japanesehowever, were much less sure of their role, yen, the Korean won, and the Taiwanese dollarand their willingness to participate and help against the U.S. dollar since the autumn ofTanzanian SMEs was linked to the guarantees 1985. As a result, labor-intensive export pro-of both the Swedish and Tanzanian govern- duct manufacturers, which are more likely toments. Another major difference between the be SMEs, gradually have been losing theirtwo cases is the size and experience of the international competitiveness. In the case offoreign partners. Daewoo, the foreign partner Japan, the producers of low-end products thatin the Bangladesh case, was a large multina- can be produced relatively easily with conven-tional company with a great deal of experience tional technology have been losing in competi-in the garment export industry and in foreign tion to NIC producers of the same products.operations in many countries. Therefore, even Higher wages and greater international com-in Bangladesh, with its unfavorable investment petition have forced many SME producers inand business environment, Daewoo knew ex- those countries either to close down or toactly what types of training and assistance move to low-wage countries (such as ASEAN

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countries), which have relatively favorable Japanese and Korean SMEs in their foreigninvestment environments. investment-using GTCs as investment part-

SMEs in general do not have much experi- ners-enables them to invest in areas (and inence in foreign investment, and because of projects) not deemed possible were they pur-their size they are much more risk averse than sued alone.large firms when considering foreign direct A second characteristic of Japanese andinvestment. East Asian SMEs are no exception Korean SMEs' foreign investment in developingin this regard. Japanese SMEs and, to a certain countries in recent years is their heavy con-extent, Korean SMEs, however, have character- centration on labor-intensive products for ex-istics that can reduce the risks of foreign in- port, rather than import substitution activitiesvestment. First, when they make foreign invest- that enjoy heavy import protection of hostments, Japanese SMEs usually seek partners countries. The probability of success of suchthat are Japanese general trading companies projects is greater, especially when foreign(GTCs), which are likely to have a large partners are involved in the investment pro-volume of information on the potential host jects, because export-oriented projects are nor-country and also on the industry the SMEs mally premised on the exploitation of the hostwant to enter. Frequently, investment by a country's comparative advantage. This pro-Japanese SME in a host country is initiated at motes the competitiveness of both the firm andthe suggestion of a Japanese GTC that is famil- the host country through fast learning (risingiar with the business environment of the host learning curve and declining cost curve) rein-country as well as the potential of the invest- forced by the discipline of international mar-ment project. kets. Finally, export projects are more likely to

The involvement of Japanese GTCs in invest- be welcomed by host governments, who arement projects starts from the very beginning. A often facing chronic balance of payments prob-GTC usually becomes a small equity sharehol- lems. Also, the probability of correcting a dis-der, with 5 to 15 percent of total equity. (This tortionary policy environment is higher in anexplains why a large Japanese GTC typically active export-oriented economy than with im-has more than 200 direct foreign investment port-substitution-oriented industrialization.operations.) This is a very efficient way to Finally, the Japanese and East Asian ap-reduce the investment risk faced by Japanese proach emphasizes the importance of humanSMEs undertaking foreign direct investment resource training as the basis of industrialbecause the Japanese SMEs (which have super- competence. When it is done intensively, as inior production technology and know-how) get the case of Desh workers and managers atpartners with superior knowledge of trading Korea's Daewoo plant, it becomes the key in-and marketing and the business environment gredient in overcoming an unfavorable invest-of the host country. Korean SMEs also tend to ment environment.use Korean GTCs as partners in foreign invest-ment. In the case of Taiwan, SMEs generally Notesuse the network of overseas Chinese business-men who are already well established in po- 1. Case I is based on Yung Rhee "The Catalysttential host countries, rather than Taiwanese of Development," (Washington, D.C.: Worldtrading companies. This explains why Taiwan- Bank, 1988). Processed.ese SME investment is strong in Southeast 2. Case II is based on S. Alange, "AcquisitionAsia, where the activities of overseas Chinese of Capabilities through International Techno-businesses are very strong. The approach of logy Transfer," 1987.

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Authors' Biographies

Sidi Ould Cheikh Abdallahi was Minister of Salaam. He was the resident adviser for theFisheries and has held various other positions Long-Term Perspective Study in the Worldin the Mauritanian government. He was the Bank office in Tanzania. He wrote his paperresident adviser for the Long-Term Perspective on Tanzania in 1988.Study in the World Bank office in Mauritania.He wrote his paper on Mauritania in 1988. Radja M. Mitra is a consultant to the World

Bank. He has worked as an economnist at vari-Balghis Badri is a professor at Khartoum Uni- ous Asian studies research institutes and forversity in the faculty of Economic and Social the Swedish government, with assignments inStudies. She received her B.Sc. in Social An- India, Indonesia, Japan, the Republic of Korea,thropology and Sociology from Khartoum Uni- Malaysia, Singapore, and UNCTAD in Geneva.versity and her Ph.D. in Sociology of the Famni- He holds Masters degrees from Harvard Uni-ly from Hull University, England. Her paper versity and the University of Stockholm. Hison Sudan was written in 1988. paper on the social market economy paradigm

and its relevance to Sub-Saharan Africa wasIbrahim Bocar Ba was managing director of written in 1990.the Banque de Developpment du Mali. He wasthe resident adviser for the Long-Term Pers- John Mwanakatwe was Finance Minister in thepective Study in the World Bank office in Zambian government. He is now the seniorMali. He wrote his paper on Mali in 1988. adviser on the promotion of clearing facilities

in the Preferential Trade Area for Eastern andGilbert Chirwa has held various positions in Southern African States. He was the residentthe government of Malawi and was the resi- adviser for the Long-Term Perspective Study indent adviser for the Long-Term Perspective the World Bank office in Zambia. His paper onStudy in the World Bank office in Malawi. He Zambia was written in 1988.is presently executive officer in The Tea As-sociation of Malawi Limited. His paper on Uwe Otzen works with the German Develop-Malawi was written in 1989. ment Institute. He co-authored his paper on

German development in 1989.Befekadu Deguefe is a professor of economicsat the University of Addis Ababa. He was the Eul Yong Park is the director of the Interna-resident adviser for the Long-Term Perspective tional Development Exchange Program at theStudy in the World Bank office in Ethiopia. He Korean Development Institute. His paper onwrote his paper on Ethiopia in 1988. the East Asian development experience was

written in 1989.Hansjorg Elshorst is the general manager ofthe Deutsche Gesellschaft Fur Technische Zu- Ibrahim Samater was Minister of Planning insammenarbeit. Mr. Elshorst co-authored his the government of Somalia and was a consul-paper on German development in 1989. tant to the World Bank. His paper on Somalia

was written in 1988.Nguyuru Lipumba is a professor in the depar-tment of economics at the University of Dar es

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Papers Appearing in Volumes 2 and 3of This Series

Volume 2: Economic and Sectoral Policy Issues

IntroductionZafar Ahmed

The Internalization of the Policymaking ProcessDavid W. Steedman

High Project Costs in AfricaDonald King and Herman G. van der Tak

Analysis of Project Costs in Sub-Saharan Africa in Selected SectorsJanardan Prasad Singh

Building Firm Foundations: Africa's Infrastructure in Long-Term PerspectiveAndrew Lemer

Sustainable Growth in African AgriculturePaul Harrison

The Response of Farmers to Ghana's Adjustment PoliciesW. Asenso Okyere

Exchange Rate Reforms under Ghana's Economic Recovery ProgrammeJohn S. Addo

Structural Problems of Industry in Sub-Saharan AfricaSanjaya Lall

Formal and Informal Small Enterprises in the Long-Term Future of Sub-SaharanAfrica

Jacques Giri

The Susu Credit System: An Ingenious Way of Financing Business Outside theFormal Banking System

A. Sena Gabianu

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Volume 3: Institutional and Sociopolitical Issues

IntroductionZafar Ahmed

Sustaining Development on the IndigenousClaude Ake

Indigenous African Systems: An AssessmentGeorge B. N. Ayittey

Political Developments and Environment in AfricaByron Tarr

The Changing Context of Institutional Development in Sub-Saharan AfricaGoran Hyden

The Lifestyle of Senegal's Elites and their Macroeconomic ImpactMakhtar Diouf

Creating an Enabling EnvironmentGoran Hyden

The Endogenous EconomyJanet MacGaffey with Gertrud Windsperger

Nongovernmental Organizations and African Development: An InquiryGeorge B. Baldwin

Women's Groups: An Underutilized Grassroots InstitutionConstantina Safilios-Rothschild

A Profile of Sudanese WomenBalghis Badri

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The World Bank

In November 1989 the World Bank released the report Sub-Saharan AfiicaFrom Crisis to Sustainable Growti. This Long-Term Perspective Study ana-lyzes the continuing economic crisis In Sub-Saharan Africa and the strate-gies and policies necessary to achieve sustainable development with equity inthe region during the decades to come.

The process of preparing the report was as important as the product. Duringits compilation, hundreds of African researchers, development practitioners,private businessmen, and public officials, as well as representatives of thedonor community and academics, were consulted for their intellectual contri-butions. Many of these individuals prepared background papers. Others par-ticipated in numerous workshops and discussions in Afiica and elsewhere.

As a contribution to the continuing debate on how to achieve sustainablegrowth in Sub-Saharan Africa, a selection of these background papers andthe proceedings of a workshop on regional integration and cooperation arebeing published in four separate volumes.

The Long-Term Perspective Study of Sub-Saharan Africa

Volume 1. Country Perspectives

Volume 2. Economic and Sectoral Policy Issues

Volume 3. Institutional and Sociopolitical Issues

Volume 4. Proceedings of a Workshop on RegionalIntegation and Cooperation

ISBN 0-8213-1602-8