Problems of international Money, 1972-85

International Monetary Fund

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1996
• ISBN:
  9780939934584

NONE

4 Balance of Payments Adjustment and Developing Countries: Some Outstanding Issues

Tony Killick ^*

THE TERMS “BALANCE OF PAYMENTS ADJUSTMENT” and the “costs” of such adjustment are often used in a very loose and sometimes distorted fashion. References to adjustment and its costs abound in the recent literature but these are almost never defined, even though, on examination, their meaning is far from self evident. An attempt is made in this paper to respond to this deficiency before turning to discuss some problems associated with the design of adjustment programs in developing countries and with the long-term retreat from the notion of adjustment as an international process.

Comment

Stanley Please

My comments on Tony Killick’s paper must be read in the context of agreement with most of what he has to say. Specifically, I agree with his emphasis on the need for symmetrical adjustment (of surplus and deficit countries in the framework of a multilateral approach); the need, nevertheless, for developing countries to live in the world as it is—warts and all—and to formulate their policies accordingly; and with his reservations about the relevance of the tradables concept for policy purposes and his emphasis on the need for cost-minimizing adjustment programs and on programs that stress not only pricing issues but other aspects of economic reform.

My comments are on the policy and operational implications of his analysis for the Fund and the World Bank—the weakest part of his paper. These comments fall into three sets of issues: global issues; the problems of moving from a balance of payments adjustment target to growth and poverty alleviation as priority objectives within a viable balance of payments program; and finally comments on the pace and content of adjustment programs, particularly for sub-Saharan African countries.

Global Issues

Killick asserts the need for surplus countries to share the burden of adjustment to avoid the dangers of an inefficient one-sided and deflationary world economic system. But what, as a practical matter, can the Fund and the World Bank do, other than encourage and berate the surplus countries? Neither Killick nor any of the many other contributors to this seminar, who have taken a similar line (such as Tsoukalis) have any answers to this question in a situation in which only deficit countries borrow from the Fund and only developing countries borrow from the Bank. Neither institution has an operational handle on the surplus or developed countries that would permit them to support or to “insist” on their contributing to the adjustment process.

The challenge to the Fund and to the Bank is, however, different, and Killick does not explore it. It is to take a more active role in leading developing countries as a group to take joint action on commodity issues (such as tropical beverages in which they have a monopoly), on counter trade (by, for instance, increasing tea and coffee quotas to African countries in exchange for preferential import concessions to Indian and Brazilian industrial goods), and on the management of external debt obligations. The objective of such leadership would be to encourage solutions to these and other serious problems. These solutions would be reasonably efficient even in a second-best situation. The Fund and the Bank, in their pursuit of first-best global solutions, count the danger of encouraging the adoption of solutions that are both unfair and inefficient.

Specifically, the Fund should be using its surveillance responsibility to examine the appropriate exchange rate structure for developing countries as a group. At present this surveillance is limited to developed industrial countries. It is, in fact, very curious that the Fund makes devaluation the centerpiece of virtually all its national adjustment programs for individual developing countries, yet it offers no analysis, advice, or leadership regarding the appropriate structure for the exchange rates of developing countries as against those of developed countries. Would a simultaneous devaluation of all developing country currencies be desirable for stimulating efficient South-South trade, for instance, or for providing immediate preferences for exports from developing to developed countries, or for mitigating the inflationary impact of isolated devaluation in any particular developing country? I would have liked Killick to have focused his analysis on these issues. Are these proposals sensible conceptually? Are they politically and administratively feasible? The time has come to move from simply reprimanding the industrial countries toward determining what unilateral action can be taken by developing countries. Failure to do so will mean that the best global solutions pursued by the Fund and the Bank will be the enemy of the good.

Growth and Poverty Alleviation

There is also a need to give increasing priority to what Killick refers to as the “primary objectives” of the Fund—full employment, growth, and economic development. Killick emphasizes that balance of payments viability has had to be accorded pride of place in recent years. This is true, given the failure of so many countries to implement structural adjustment programs during the 1970s when they were borrowing heavily from commercial banks. As a consequence, an emphasis on demand management programs has been the only feasible approach to the financial emergencies facing so many developing countries.

I would have liked Killick to have given more attention to what needs to be done now if developing countries are going to move beyond financial crisis management to putting growth, development, poverty alleviation objectives back on center-stage. Aiming for these objectives must still recognize the importance of balance of payments viability in the likely context of a continuing shortage of external resources—given terms of trade projections, likely levels of interest rates and of concessionary and nonconcessionary funds, estimates of market access for exports to industrial countries, and so on. For instance, more attention needs to be given to public expenditure programs with greater discipline in targeting spending on the vulnerable groups in society (such as children and the poor) and to more low-cost and replicable investments in health, education, sewerage, water supply, housing, and so on.

If this movement from crisis management to a longer-term development strategy is to be commenced, then the World Bank’s role must be enhanced as against that of the Fund. Yet Killick gives no attention to the issue of Bank-Fund collaboration. For instance, instead of the Fund always being the lead institution in the negotiation of a package of economic measures, should this responsibility not pass to the World Bank?

Pace and Content of Adjustment

Finally, I have a reservation to express about Killick’s discussion of the pace and content of adjustment programs, particularly as this discussion relates to the problems of sub-Saharan African countries. Killick argues, first, for more external financial support to enable adjustment efforts to become effective and, second, for less demanding programs in African countries because their capacity to adjust is limited.

I have no difficulty in accepting the proposal for more external support for adjustment programs, except that it is politically unrealistic. The World Bank’s 1984 Joint Program of Action for Africa argued for a $6 billion special facility for Africa to be disbursed over three years. In fact, only £1.1 billion was mobilized, and much of this was not additional for Africa or for developing countries as a whole. With this being the present and prospective political reality, would Killick still argue for less demanding programs of policy reform when, unlike Latin America and Asia, many African countries have to adjust to a trend decline in their economies? Major changes in African economic strategies are required if the African disaster is to be reversed. The operational problem for the Fund and the World Bank is how to keep the feet of governments to the fire of policy reform, and how much action should be expected up front to reflect a commitment to policy reform.

The other operational question for the World Bank and Fund in Africa relates to the composition of programs. Killick observes that action on those variables that determine the speed and extent of supply responses to changes in prices, are not preconditions for Fund drawings—these include agricultural marketing reform, improvements in transportation, availability of incentive goods, and so on. Nevertheless, price changes and particularly exchange rate adjustment are still the centerpiece of Fund programs and the issue which receives most prominence both in negotiations and in public discussions. Although currency devaluation is critical in all African countries, it will prove ineffective unless matched by the institutional and other changes that are required to evoke appropriate supply responses. Such ineffectiveness will bring into disrepute the whole effort at policy reform in Africa.

Here again, Killick fails in his paper to examine the relevant roles of the Fund and the World Bank in Africa. The World Bank, rather than the Fund, has the appropriate staff and experience and also the relevant time horizon for the formulation and implementation of action that will affect the components of the policy packages that are required to address the African problem. The programs must be as “tough” as Fund programs, but different in content. Killick weakens his argument for the latter by emphasizing the need for less harsh programs.

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Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Introduction
• The International Monetary System Since 1972: Structural Change and Financial Innovation
• Exchange Rate Management and Surveillance Since 1972
• Balance of Payments Adjustment and Developing Countries: Some Outstanding Issues
• The Role of Reserves in the International Monetary System
• The Debt Problem
• The Role and Resources of the Fund
• International Monetary Arrangements and Future Adaptation
• Appendix
• Footnotes