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CONFIDENTIAL AFRICAN DEVELOPMENT BANK AFRICAN DEVELOPMENT FUND ADB/BD/WP/99/116 ADF/BD/WP/99/102 30 September 1999 Prepared by: OPEV Original: English
Probable Date of Presentation to the Committee on Operations and
Development Effectiveness: TO BE DETERMINED
FOR CONSIDERATION
MEMORANDUM TO : THE BOARDS OF DIRECTORS FROM : Omar KABBAJ President SUBJECT : REVIEW OF BANK EXPERIENCE IN TRADE ADJUSTMENT
PROGRAMMES*
Please find attached hereto, the above-mentioned document. Attach:
*Questions on this document should be referred to: Mr. G. M. B. KARIISA Director OPEV Ext. 4052 Mr. O. O. OJO Chief Evaluation Officer OPEV Ext. 4262
SCCD: W. A. A.
AFRICAN DEVELOPMENT BANK AFRICAN DEVELOPMENT FUND
ADB/ADF/OPEV/99/02 MARCH 1999 ORIGINAL: ENGLISH DISTRIBUTION: LIMITED
REVIEW OF BANK EXPERIENCE
IN TRADE ADJUSTMENT PROGRAMMES
Table of Contents Preface I. Introduction II. Background to Programmes III. Issues in Trade Adjustment Programmes IV. Lessons for the Bank
Preface
As part of its contribution to the negotiation process of ADF-VIII, OPEV prepared a
paper on Bank Group experience in policy-based lending since 1986. That paper raised series
of issues mostly in the areas of design, implementation and outcomes of those programmes.
While the paper was in the main critical, it concluded that although the Bank Group entered
policy-based lending operations with relatively little experience, it has since acquired
considerable experience with this lending instrument, partly because of its collaboration with
the World Bank, which had been responsible for initiating many of these programmes.
This present report is a continuation of that earlier OPEV effort. Its purpose is to
review Bank Group experience with a subset of policy-based lending – sectoral adjustment
programmes. Sectoral adjustment programmes (SECALs) are aimed at addressing adjustment
issues in a specific sector of the economy. In other words, the aim is to deepen and fine-tune
the adjustment process in a given sector. As an increasing number of African countries
undergo the initial phase of the adjustment process, the need to fine-tune and deepen that
process would become more obvious. Hence SECALs would probably and gradually replace
the conventional economy-wide adjustment programmes as tools of economic reform. This
report reviews Bank Group experience in trade and/or industry adjustment programmes. The
aim is to draw relevant lessons for the Bank that could be useful in future operations.
One of the major findings of this report is that while SECAL is quite desirable,
particularly as an instrument for deepening the reform process, it does not perform well in an
unstable macroeconomic environment. A major recommendation that flows from this finding
is that the Bank should ensure that the macroeconomy is stable before it introduces a sectoral
adjustment programme.
The choice of countries for this review has been dictated by considerations of size and
variations in development experience of the chosen countries. Two of the countries —Nigeria
and Tunisia—are representative of the large economies in Africa, while Malawi and
Mauritius are representative of the small economies. Ghana appears to be representative of the
medium-sized economies. It is hoped that the lessons drawn from this variegated experiences
can be easily generalised to the rest of Africa.
REVIEW OF BANK EXPERIENCE IN TRADE ADJUSTMENT PROGRAMMES1
I. Introduction
1.1 Policy-based lending operations in the form of structural adjustment programmes
(SAP) and sectoral adjustment programmes (SECAL) entered Bank Group array of lending
instruments in response to the economic crisis which engulfed most African countries since
the late 1970s. Subsequently, policy-based lending has become an important lending
instrument not only in terms of resources committed to it, but also in terms of policy leverage
it has conferred on the Bank. In terms of resources, the Bank Group has committed a total of
UA 3452.7 million to PBLs. Of this amount, ADB commitment was UA 2449 million, while
that of the ADF was UA 1003.7 million.
1.2 While in general, policy-based lending has focussed on economy-wide policy reforms
as embodied in SAP, the recognition that some key sectors of the economy (for example, the
trade sector), might require more specific adjustment measures has prompted the Bank to
finance sectoral adjustment programmes in some African countries. The objective was, in the
main, to deepen reforms in carefully selected sectors and to concentrate efforts on specific
issues in such sectors. Following economic crisis of the 1970s, studies were conducted aimed
at establishing the underlying causes of the crisis. One of the conclusions of the studies was
that the loss by Africa, of competitiveness in international trade, was partially responsible for
the crisis. The loss of competitiveness arose from the pursuit of inappropriate economic
policies (e.g. over-valued exchange rates, restrictive trade regimes) and the absence of
institutional frameworks for trade promotion. It was thought, that the reform of the trade
regime would restore or enhance competiveness. While there were variations in the content of
the programmes, they all had the major objective of eliminating the anti-export bias inherent
in the policy stance of the concerned countries. This was to be done primarily through
exchange rate liberalisation, tariff reform, elimination of domestic distortions, and the
establishment of institutional framework for trade promotion.
1 This Review was prepared by O.OJO, OPEV. Questions on it should be addressed to him on ext. 4262 or to Mr. G.M.B. Karrisa, Director, OPEV, on ext. 4052
2
1.3 The rest of the Review2 is divided into three sections. Section II discusses the
background to the implementation of trade adjustment programmes in the reviewed countries,
while section III deals with critical issues in trade adjustment programmes. The lessons for
the Bank are summarised in the last section.
II Background to Programmes
2.1 Virtually all the countries herein reviewed relied heavily on one or a few primary
commodities for fiscal revenue and foreign exchange earnings. Most experienced one kind of
commodity boom or the other, as a result of which public expenditures expanded rapidly.
Most also failed to take corrective measures when the boom subsided or when oil prices
escalated significantly, with consequent manifestation of domestic and external payments
difficulties. They all exhibited, in varying degrees, overvaluation of national currencies and
other forms of economic distortions which, tended to tax exports. The combined effect of all
these was a gradual loss of competitiveness in international trade. Trade adjustment became
necessary in order to expand exports and diversify the production base of the economy.
(i) Malawi
2.2 During the second half of the 70s, the economy of Malawi, which had made
impressive progress after independence, began to slow down as a result of the combined
effects of adverse terms of trade and weak economic policies. The government reacted to the
crisis by implementing a series of stabilisation and adjustment measures during 1981-86.
Although the economy responded favourably to these measures, it began to weaken again as a
result of the re-emergence of the factors (e.g. the deterioration of the terms of trade), which
had initially caused the crisis. Government response took the form of formulating a
2This Review draws on the following programmes for the analyses that are herein contained.
Malawi: Industrial and Trade Policy Adjustment Programme (ITPAP) Ghana: Industrial Sector Adjustment Programme (ISAP) Nigeria: Export Stimulation Programme (ESP) Mauritius: Industrial Sector Adjustment Programme (ISAP) Tunisia: Industrial Sector Adjustment Programme (ISAP)
The evaluation reports on Mauritius and Tunisia have, sometime in the past been circulated for Board discussions, but are herein included along with the new evaluation reports in order to broaden and generalise the experience with trade adjustment programmes. This review should be read alongside the evaluation reports.
3
development strategy for the period 1988-91, the aim of which was to deepen the adjustment
process by addressing those impediments, which continued to hamper the resumption of
growth.
2.3 Such impediments so identified were to be found in the continuing weakness of the
industrial, trade and financial sectors. In industry, activities were concentrated on a few
commodities and there was little linkage between the sector and the rest of the economy. In
the area of trade, exports were correspondingly concentrated on a few agricultural products.
Export performance was further constrained by an overvalued exchange rate. In the financial
sector, performance was limited by the oligopolistic nature of the sector, with two banks
controlling over 80 per cent of the market.
2.4 It was against this background of general poor economic performance and structural
weaknesses in the industrial and trade sectors that the Industry and Trade Policy Adjustment
Programme (ITPAP) was formulated. The programme followed a series of World Bank-
supported adjustment programmes which were implemented during 1981-86. ITPAP was a
policy-based, sector-oriented programme, whose objective was to stimulate growth in the
industry and trade sectors through trade, price and exchange liberalisation, fiscal discipline,
tax reform, export promotion, the promotion of small-scale enterprises and the reform of the
financial system.
(ii) Ghana
2.5 Between 1970 and 1980, Ghana’s real GDP declined steadily by about 3.7% per
annum, partly as a result of oil price hikes, the collapse of commodity prices and earlier
economic mismanagement. Indeed, the GDP declined by 5.6% and 6.5% in 1981 and 1982
respectively. In response to this crisis, the PNDC government launched in April 1983, the
Economic Recovery Programme (ERP), which was designed to reverse the declines in the
economy. The Programme was in two phases – Phase I (1984-86), and Phase II (1986-88).
2.6 As a result of the implementation of Phase I of the Programme, economic performance
improved relatively. But by 1988, when Phase II was completed, it became obvious that in
spite of its achievements (e.g. the balance of payments position had turned from negative to a
surplus while the rate of inflation had declined from 123% in 1983 to 39.8% in 1987), output
4
growth in the productive sectors, such as the industrial sector, still remained below its
potential. In order to consolidate the gains of the earlier recovery programme, the Government
shifted its emphasis to the reform of specific sectors of the economy, which continued to
exhibit weaknesses. The industrial sector was one of such sectors. Following a series of
sectoral studies by the World Bank, ISAP was put in place to provide policy-based, quick-
disbursing assistance to the Government to help raise industrial output, and non-traditional
exports. The Industrial Sector Adjustment Programme (ISAP) had two main strategic themes.
First, output expansion was to be achieved in the short-run through the efficient utilisation of
existing capacity, rather than through capacity creation. This objective was to be met by the
rehabilitation of existing plants and by the removal of production bottlenecks. In the long-run
however, measures would be implemented to improve incentives in favour of exports, create
conditions for market mechanism to play a bigger role in resource allocation, and thereby
create additional capacity. In order to achieve these objectives, policy reforms were to be
implemented to liberalise the exchange and trade regimes, promote non-traditional exports,
remove price and distribution controls, reform state-owned industrial enterprises and
liberalise the financial sector.
(iii) Nigeria
2.7 Until the 1970s, the Nigerian economy grew rapidly, thanks to the expansion of oil
revenue. While this development was to benefit import substituting manufacturing industries,
it led to the virtual neglect and almost total collapse of traditional agricultural production and
non-oil export expansion. The bias against agriculture worsened by other inappropriate
policies, notably the over-evaluation of the national currency, the Naira. In the early 1980s
however, oil prices started to decline. Export earnings fell from US$ 23 billion in 1979 to
about US$ 6.5 billion in 1986. The corresponding fall in external reserves led to the
accumulation of large trade arrears, and build-up of external debt.
2.8 By 1983, the economic crisis had reached crisis proportions and it had also become
apparent to the Government that the decline in oil revenue was not a transitory phenomenon.
A need was therefore felt for a permanent solution to the over-dependence on oil earnings. It
was against this background that the Government initiated discussions with the International
Monetary Fund (IMF) on possible ways of restructuring the Nigerian economy. These
discussions had reached a fairly advanced stage when in a national debate, the public rejected
5
the idea of an IMF-imposed programme even though the need was felt for policy reforms. The
Government interpreted the outcome of the debate to imply that Nigerians wanted a
restructuring of the economy as long as the restructuring was not imposed externally. The
Government then proceeded to design a home-grown economic reform programme, which
was first embodied in the 1986 Government budget. The reforms contained in the budget
were similar to, and in several respects (e.g. the goals which the government set for itself)
more stringent than the proposed IMF programme. But by rejecting the IMF loan while
implementing a home-grown structural adjustment programme, the government broke the
complimentarity between adjustment and financing, and unwittingly, made the adjustment
process more painful in terms of lost output and declines in living standards.
2.9 The aims of the reforms were to restructure and diversify the productive base of the
economy in order to reduce the dependence on oil and to achieve fiscal and balance of
payments viability over the medium and long term. The budget also contained specific policy
measures designed to bring about the needed adjustment. These included the elimination of
petroleum subsidies, the introduction of a 30% surcharge and the imposition of an income tax
levy. The export sector was to be assisted by the introduction of a package of export
incentives, like the retention of export earnings, the rebates of import duty, the introduction of
Export Credit Guarantees and Insurance Schemes and the rediscounting of short term export
bills. These measures were not fully implemented partly because of the lack of political will
and the collapse of oil prices in 1986.
2.10 The collapse in the oil prices severely affected both the implementation of the reforms
in the 1986 budget as well as the national economy. This prompted the Government to
respond with the formulation of a Structural Adjustment Programme (SAP) covering the
period July 1986 to June 1988. The Programme (which was formulated with the assistance of
the World Bank and the IMF) built on earlier initiatives, but this time, it was broadened to
include exchange rate and trade policy reforms with overall macroeconomic restraint. It also
emphasised the reduction in the size of the public sector and improvements in its efficiency.
2.11 Central to this programme was the imperative of reducing the dependence of the
economy on the oil sector. Thus the support which the World Bank gave was geared towards
the reform of policies in order to permit non-oil production as a step towards the reduction of
6
the economy on oil exports3. In the same vein, the Government approached the Bank Group
for a loan to finance the Export Stimulation Programme. Although there were no cofinancing
arrangements between the two institutions, the two loans were indeed complementary as the
Structural Adjustment Programme provided a common framework under which the two
institutions operated.
(iv) Mauritius
2.12 By the mid 70s, the Mauritian economy has weakened considerably following the
collapse of sugar prices. But the Government took no immediate steps to reverse the trend in
its expenditures, which the boom in sugar prices had generated. The resulting budget deficits
were financed by an increasing recourse to non-concessionary foreign borrowing. Thus
Mauritius found itself in a crisis situation, which was further compounded by other exogenous
factors, including the second oil price increase of 1979 and adverse terms of trade.
2.13 Amidst excessive budget deficits, strong domestic demand and rising inflation, the
current account of the balance of payments registered a huge deficit. The erosion of foreign
exchange reserves coupled with the heavy recourse to external borrowing on non-
concessional terms led to a substantial increase in the country’s external debt obligations, with
the debt service ratio increasing from 1% in 1976 to 10% in 1979.
2.14 In order to address these macroeconomic imbalances and restore economic growth, the
Government of Mauritius, assisted by the World Bank and the International Monetary Fund
embarked on a series of stabilisation and structural adjustment operations between 1980 and
1986. In all, five successive stand-by arrangements and two structural adjustment
programmes were successfully implemented. Under the programmes, substantial policy
reforms were carried out. In agriculture, the main focus of the reforms was rehabilitation of
the sugar sub-sector and enhancing its productivity through land reform, altering the structure
of the export duty and abolishing all restrictions on mill closures. In industry, an outward-
looking strategy was adopted which included eliminating quantitative restrictions on imports,
initiating a programme of tariff reform and encouraging foreign private investment in the
3 In addition to a US $ 452 million Trade Development and Export Promotion Loan, the World Bank also approved a medium-term lending programme whereby it would lend Us $ 1000 million in support of Nigeria’s structural adjustment progrmme for a period of three years.
7
export-processing zone (EPZ). In tourism, measures were undertaken to promote Mauritius in
selected markets and a programme was designed to address issues relating to air access
policy, hotel capacity and marketing strategy. The stabilisation component effectively
addressed domestic and external resource imbalances through demand management policies
and export incentives.
2.15 The resulting export-driven economic expansion contributed to the reduction of
unemployment from 11% in 1980 to 5% in 1986. Fiscal restraint, combined with a significant
export supply response, ensued in a dramatic improvement in the country’s balance of
payment position, with the current account improving substantially from a deficit of 15% of
GDP to a surplus of 5% over this period. The fiscal deficit decreased from over 9% of GDP to
3%, contributing to deceleration of the annual inflation rate from 30% to 2%. There was a
marked recovery in domestic resource mobilisation as a result of an increase in the real rates
of interest, with gross domestic savings increasing from 20% to 29% of GDP. The resulting
decline in the need for external borrowing contributed to a decline in the debt-service ratio
from 20% to 18% during the period.
2.16 From the foregoing, it could be seen that the successful implementation of the
stabilisation and adjustment programmes between 1980-86 created a very favourable
environment for sustained export-led growth and development in Mauritius. The steps taken
in liberalising the trade and exchange regimes improved resource mobilisation, restrained
public expenditure, restricted credit expansion and strengthened institutional capacity all
contributed to providing a solid foundation for Mauritius to build upon and take full
advantage of favourable developments in the international economy.
2.17 The underlying objective of the Industrial Sector Adjustment Programme (ISAP,
1987-89) was to build on the earlier efforts at expanding the country’s export-oriented
manufacturing sector in order to generate adequate foreign exchange earnings, diversify the
export base and create additional productive job opportunities. The thrust of policy under
ISAP was to render the manufacturing sector and indeed the economy as a whole, more
responsive to market forces by phasing out the regulatory system and the incentives then in
existence under the Development Certificates. The policy measures under ISAP included: i)
the adoption of a programme for the simplification of the tariffs schedule; ii) reduction of
maximum tariffs on imports from preferential sources; iii) discontinuation of the incentive
8
scheme through Development Certificates for import substituting enterprises; iv)
improvement in the design and functioning of the duty drawback system for exporters; and v)
further reduction of the number of products under price controls.
(v) Tunisia
2.18 The Sixth Economic and Social Development Plan (1982/1986) identified two
economic constraints, which the Tunisian economy would face in the years ahead:
(a) Growing unemployment;
(b) pressure on the balance of payments as a result of the fall in the level of
hydrocarbons produced;
2.19 To respond to these constraints, the plan set for itself three objectives:
(a) redirecting investments towards labour-intensive projects;
(b) reducing internal demand and strengthening the savings capacity;
(c) promoting manufactured exports as a way of compensating for the decrease in
hydrocarbon exports and reversing the decline in the terms of trade.
2.20 Under the Sixth Plan, an Economic Adjustment and Recovery Programme was
implemented. The programme which was supported by the World Bank, was aimed at
implementing policy reforms which would open up the economy to external trade and make
the industrial sector more competitive. The measures which were implemented included the
devaluation of the Dinar by about 28% during 1985-86 and the elimination of obstacles to
export expansion. As a result of the implementation of this programme, the manufacturing
sector expanded rapidly to about 14% of the GDP. Apart from phosphates and textile
subsectors, the manufacturing sector was producing basically for domestic consumption. The
9
limits to import substitution were being reached as internal demand was shrinking because of
the fall in oil production and oil prices.
2.21 In order to compensate for the decline in oil revenue and break the constraints
imposed by a shrinking domestic demand, it became imperative to revitalise the
manufacturing sector. Such a revitalization programmme was contained in the Seventh
Development Plan (1987-91). The Plan contained within it, an Industrial Sector Adjustment
Programme, which had three main objectives. These are the stimulation of the manufacturing
industry; the stimulation of exports of finished goods other than fertilisers and petroleum
products; and the creation of additional jobs in the manufacturing industry. These objectives
were to be achieved through the implementation of trade and price liberalisation measures.
The combined effects of these policies were expected to stimulate growth in the
manufacturing sector and enhance the growth of non-traditional exports.
III Issues in Trade Adjustment Programmes
i) Timing and Sequencing
3.1 One of the pertinent issues in sectoral adjustment programme is that of timing and
sequencing. Is the programme appropriately situated in the context of national economic
policies? Are the policies within it internally consistent with each other? Consider, for
example, the first question. A major requirement for the success of a trade liberalisation
programme is the prior stabilisation of the national economy. If the economy had not been
previously stabilised, liberalisation may lead to the expansion of imports with consequent
adverse effects on the balance of payments. This is more likely to happen under conditions of
inflation and over-valuation of the national currency. In Ghana, an earlier reform programme,
the Economic Recovery Programme (ERP), has considerably stabilised the economy, hence,
the balance of payments account improved both during and after the trade reform. In Malawi,
the trade reform programme was being implemented simultaneously with an economy-wide
reform programme. In other words, the economy had not been previously stabilised. Partly as
a result, the balance of payments worsened during and after the trade reform programme. In
Nigeria, the economy was experiencing tremendous external and internal shocks when the
Export Stimulation Programme (ESP), and a parallel World Bank-supported adjustment
10
programme were introduced. The absence of prior stabilisation of the economy led to a
considerable worsening of the balance of payments situation.
3.2 In Mauritius, previous stabilisation and adjustment efforts had created a conducive
atmosphere for the introduction of a SECAL. Budgetary deficits and external account deficits
had been reduced, while inflation had been brought under control. It was into this
environment that the Industrial Sector Adjustment Programme (ISAP) was introduced in
1987. As a result of these previous efforts, ISAP reinforced and strengthened the balance of
payments account. Indeed, the current account balance turned from negative in the period
before the programme to positive during and after the programme. In Tunisia, prior
adjustment efforts under the Sixth Plan had created a conducive environment for the
implementation of ISAP. Consequently, industrial exports (in particular, textiles exports
expanded rapidly, thus contributing to the improvements in the balance of payments.
3.3 The second question is the extent to which the policies within a SECAL are consistent
with overall economic policies. If they are not consistent, there could be conflicts among
policies. Consider, for example, trade liberalisation and the requirements of revenue
mobilisation. Trade liberalisation may make the attainment of fiscal balance difficult
particularly where a large share of government revenue is derived from import duties. This
raises the question of whether or not tax reform should precede trade reform. In Malawi,
fiscal deficit was high prior to the implementation of the programme. But the Industry and
Trade Adjustment Programme (ITPAP), as an economy-wide programme with sectoral (trade)
focus, had some tax reform measures built into it. The outcome was however not
encouraging. The tax reforms did not significantly alter the reliance of the government on
import duties, presumably because the tax reforms took place alongside trade reforms rather
than before. Thus, international trade taxes continued to average about 20% of total taxes,
both during and after the programme. Revenue concerns might have played a role in the
inability of the government to liberalise the tariff component of the trade reform. In Ghana on
the other hand, the tax system had been reformed under the ERP. This partly explains the
success of the government in liberalising tariffs. In Nigeria where the government has
traditionally relied on the oil sector both for revenue and foreign exchange earnings, the
potential conflict between the requirements of revenue mobilisation and trade reform did not
really materialise because of this peculiar nature of the economy (i.e. its reliance on the oil
sector). This made it relatively easy for the government to carry out the policy measures
11
contained in its industrial policy document. Under this policy, the government was able to
abolish the remaining trade prohibitions and licensing requirements.
3.4 Currency devaluation and the reform of the trade regime are usually key policies
under trade policy adjustment programmes. The former policy represents an attempt to make
the economy competitive again by eliminating currency overvaluation, while the latter is
aimed at opening up the economy to international trade by rationalizing tariffs in order to
remove undue discrimination and non-tariff barriers. While each policy is desirable in its own
right, their combination in trade reform programmes could be counter-productive if the
sequencing is not right. Currency devaluation is supposed to make exports cheaper and
imports more expensive in local currency terms. But if a programme of trade regime
liberalisation accompanies currency devaluation, the result could be unrestricted flow of
imports relative to exports. This in turn could undermine the process of industrialisation of a
country, in particular the growth prospects of the so-called infant industries. Although there is
not much evidence to support the much-talked about “de-industrialisation” of developing
countries, such de-industrialisation could be the ultimate outcome of a policy conflict between
currency devaluation and the liberalisation of the trade regime.
3.5 The conclusions which can be drawn from these pieces of evidence are that
appropriate timing and sequencing of SECAL is crucial to its success. By nature and design,
structural adjustment programmes are difficult to implement because they contain too many
policy measures, and they tend to task the energy of young and sometimes fragile
bureaucracies that are typically found in Africa. But sectoral adjustment programmes on the
other hand, are relatively easier to implement largely because they have fewer policy
measures, and they impose less administrative burden on bureaucracies. It is therefore
tempting, because of this relative ease, to argue that countries and lending institutions should
concentrate on SECAL. The evidence above shows that in spite of the relative ease of
implementing them, SECAL cannot succeed where the macro-economy had not been
previously stabilised. The choice, therefore, is not between one and the other. Rather, the
policy problem is one of appropriate timing and sequencing of sectoral adjustment
programmes in the overall reform process.
12
ii) Programme Content, Design and Relevance
3.6 Two of the programmes (Malawi’s ITPAP and Tunisia’s ISAP) were economy-wide
reform programmes but with industrial focus. The thrust of ITPAP was trade liberalisation,
which was complemented by flexible exchange rate management, reduction in fiscal deficit
and reform of the tax system. The reform of the foreign exchange system was accompanied
by the elimination of quantitative restrictions on competing imports and the rationalisation of
the tariff structure. Administrative and procedural impediments to industrial development
were removed, and export processing zones established for the purpose of promoting
industrial exports.
3.7 The reforms in the trade sector took place alongside the general policy reforms in the
economy. While this might have an advantage (for example, it slightly side-tracked the timing
and sequencing problem referred to above), it had the disadvantage of having too many policy
measures to be implemented. For a young and fragile bureaucracy like that of Malawi, the
burden of implementing several measures was too great. This explains why some measures –
those relating mostly to institutional development – remained unimplemented at the end of the
programme.
3.8 The programme was however relevant to the problem at hand as industrial
performance was poor prior to the implementation of the programme. Although IASP was an
economy-wide programme, its industrial focus made it very relevant to the declared objective
of the government.
3.9 Like ITPAP, Tunisia’s ISAP was a reaction to the economic difficulties, which faced
the country as oil prices collapsed in the 1980s. It was also an attempt to liberalise the trade
regime and enhance capacity utilisation particularly in the industrial sector. In addition to
those policies relating to general reform measures, the programme had components dealing
with the reduction of quantitative restrictions, tariff reforms, and administrative measures to
encourage exports. Until the programme was introduced, Tunisia had experienced severe
economic difficulties, which stemmed from the decline in oil prices. The programme, which
was an attempt to correct these shortcomings, is particularly relevant in the light of those
shortcomings.
13
3.10 The other three programmes started out as sector-specific programmes. Following the
implementation of its Economic Recovery Programme, the Government of Ghana, assisted by
the World Bank, undertook a study of the country’s industrial potential. This study formed the
basis of the industrial sector adjustment programme. The programme was supposed to build
on an earlier reform programme by focussing exclusively on enhancing industrial output and
exports. This was to be achieved through the liberalisation of exchange and trade regimes,
export promotion and removal of price and distribution controls. As the programme was
aimed at expanding industrial output, which continued to be low in spite of previous
adjustment efforts, it can be judged as relevant both to the sector and to the economy at large.
3.11 Nigeria’s Export Stimulation Programme had, as its major objective, the reduction of
the economy on oil exports. This was to be achieved through the expansion of exports
financed by loans to prospective industrial exporters. The Programme was supposed to benefit
from the favourable response of the economy, to an on-going World Bank-supported
adjustment programme. The main features of the adjustment programme included measures to
stimulate domestic production, removal of administrative regulations, control of budgetary
deficits and encouragement of the private sector. Central to this programme, however, was the
deregulation of the foreign exchange market and the trade regime. The ESP was then
supposed to take advantage of the conducive environment, which the adjustment programme
would create. But in reality, there was no-one-one correspondence between the World Bank’s
programme and the Bank’s ESP. It was simply hoped that the World Bank’s programme
would create the enabling environment for the successful implementation of the ESP. Further-
more, in both design and implementation, the ESP looked more like a line of credit, without
the responsibility that goes with a line a credit for project selection. Partly because the
economy had not been stabilised (a SAP was being implemented simultaneously with the
ESP), policy conflicts arose in the process of implementation. For example, the devaluation of
the national currrency (the naira) increased the domestic currency value of the loans to the
beneficiary companies. Similarly, the deregualation of interest rates increased the domesstic
currency cost of the loans. The appraisal report did not factor these possibilities into the
design of the ESP, hence there was no mechanism for mitigating their adverse effects. Their
combination however with the absence of adequate prudential regulatory framework in the
Central Bank was to produce the subsequent distress in the finacial system. It is thus obvious
14
that the ESP was plagued by faulty design right from the design stage, and this fault was to be
carried over into its implementation and eventual outcome.
3.12 Prior to the implementation of the ESP, the government had relied to the tune of over
90% on the oil sector for its fiscal revenue and foreign exchange earnings. Non-traditional
export performance was also constrained by currency overvaluation and other distortions. The
ESP, whose objectives were the reduction of the economy’s dependence on oil for its revenue
and the expansion of non-traditional exports, was thus relevant to the problems facing the
economy.
3.13 Having previously undertaken adjustment measures, the Government of Mauritius
sought to reduce its dependence on sugar exports by diversifying the economy’s production
base. Government action in this regard was heavily influenced by economic and sector studies
carried out or financed for it by UNIDO, the World Bank and the IMF. The underlying
philosophy of the programme which resulted from these studies, was to facilitate the further
expansion of the country’s export-oriented manufacturing sector in order to generate adequate
foreign exchange earnings, diversify the economy and create additional productive job
opportunities. The policy measures under the ISAP included the adoption of a programme for
the simplification of the tariff schedule, reduction of maximum tariffs on imports from
preferential sources, discontinuation of the incentive scheme through the Development
Certificate for the import substituting enterprises, improvement in the design and functioning
of the duty drawbacks system for exports and further reduction of the number of products
under price controls.
3.14 In all the five cases, there were compelling cases for the programmes. Although they
might differ in terms of policy package and orientation, they all had goal of expanding
industrial output and exports. While some had this goal subsumed in a larger programme
(Malawi and Tunisia), others were stand-alone programmes. But the objective was the same.
The programmes as well as the policies therein contained are thus relevant when evaluated
from the standpoint of the problems, which gave rise to them. In terms of outcome, all the
programmes, except Nigeria’s Export Stimulation Programme, were successful. But there
were variations in that success.
15
iii) Complementary Supply-Side Policies
3.15 Trade reform policies by themselves would not increase export production. They have
to be assisted by other complementary supply-side policies. Such policies include growth-
oriented policies which redirect the economy towards production, and policies, which create
and support institutions for trade expansion. In Ghana, previous reform efforts had addressed
these supply-side policies. Domestic distortions were eliminated, thus paving the way for the
restoration of an enabling environment for the resumption of growth. The government also
launched the Accelerated Divestiture Programme whereby several public enterprises were to
be privatised. An Investment Promotion Act was also passed to encourage private investment.
The government also started a programme to address the inadequacies in infrastructure –
water supply, electricity, communication, etc. All these policies were aimed at enhancing the
effectiveness of the trade reform programme.
3.16 In Malawi, previous reform efforts have gone a long way in eliminating or reducing
domestic distortions. In addition, administrative impediments to industrial expansion were
removed through the Industrial Promotion Act. Export Processing Zones were created, while
an Investment Promotion Agency was set up to assist private sector investors. The financial
sector was also reformed and greater participation encouraged within it.
3.17 In Nigeria, the enabling environment had not been created prior to the commencement
of the ESP. But a World Bank-supported programme was being implemented simultaneously
with the ESP. Although the exchange rate was being gradually devalued, domestic distortions
were still prevalent. In the course of implementing ESP however, the institutional framework
for export promotion was created. The Nigerian Export Promotion Council was established
and trade officers were attached to Nigerian overseas missions. The Council as well as the
trade officers were to gather and disseminate information on Nigeria’s export potentials and
identify areas for market penetration by Nigerian exporters. The Nigerian Import-Export Bank
was also established to provide financial support to exporters. The government launched in
1989, the policy framework paper (Industrial Policy in Nigeria: Policies, Incentives,
Guidelines and Institutional Framework). This policy framework paper set out the policies
and incentives for industrial expansion. To further boost non-oil export expansion, the
16
financial system was deregulated to permit free entry and market-determination of interest
rates. All these policies were aimed at creating a growth-oriented environment, thereby
providing a catalytic boost to the working of the trade reform measures. If the outcome of the
ESP fell below expectations, this should be attributed to other factors other than the absence
of complementary supply-side policies.
3.18 In Mauritius, a series of adjustment programmes, which were financed by the IMF and
the World Bank between 1981-1986, has created a conducive environment for a sector
adjustment programme. Quantitative restrictions on imports were reduced, while the incentive
system under the Development Certificates were eliminated. In the area of institutional
support, the export-processing zone was created to attract foreign investment. In Tunisia, the
failure of the Sixth Economic and Social Development Plan brought to the fore, the need to
create a more appropriate environment for the resumption of growth. This enabled the
Government to embark on the implementation of a structural adjustment programme in 1986.
The industrial adjustment programme was part of the larger structural adjustment programme,
which had as its aim, the stabilisation of the economy. From 1987 onwards, the trade regime
was gradually liberalised. Within the overall structural adjustment programme, reform
measures were aimed at liberalising investment codes, regulating banking activities and
encouraging export production. The structural adjustment programme thus contained those
supply-side policies, which were to enhance non-oil export production and exports.
iv) Programme Ownership
3.19 In all cases, lending institutions (IMF, World Bank, and to some extent, the ADB)
took the lead in the identification of the programmes. In some (Ghana and Mauritius), there
were prior economic and sector studies by one or two of these institutions, the purpose of
which was to deepen knowledge of the sector before programme formulation. While the
programmes appear to be driven by donors, the respective governments embraced them once
they (the programmes) were formulated. To this extent therefore, it can be said that they
demonstrated some degree of ownership of the programmes. But beyond this, there was little
or no evidence of a consultative process that tried to share this ownership with the general
public. This was particularly true in Ghana and Malawi as the evaluation missions to those
countries found out. In Nigeria, the reverse was the case. There, the government embarked on
17
the adjustment process after a nation-wide debate among all major economic operators about
its desirability. The feedback, which one received during the evaluation mission to that
country, was that the private sector was fully aware of the ESP and eagerly wanted to
participate in it. But factors other than ownership issues (e.g. poor implementation and
supervision) were to adversely affect the outcome of the ESP, whereas, in Malawi and Ghana,
the success, which the respective programmes achieved, could have been greater if there were
greater national consensus for the programmes. In Tunisia, ISAP was an integral part of the
development policy, which the government initiated on its own for the period 1986-91. The
government was later to play an active role in the preparation of the programme. Even before
the implementation started, it took some steps (e.g. abolition of export licensing, improvement
of export tax system, and the creation of institutional structure capable of promoting export
growth) in order to pave the way for the successful implementation of the programme. During
the implementation, the government went to great lengths to present it to private sector
operators. This way the need for sacrifice (which the reforms entailed) was well understood
by all. In Mauritius, the government played a critical role in the industrial sector adjustment
programme. Although UNIDO and the World Bank conducted the studies which gave rise to
the programme, once it was formulated, the government demonstrated its strong commitment
to it through out the period of implementation.
3.20 It bears re-emphasising that development can proceed best whenever a government
seeks a participatory approach. Such an approach creates understanding of the issues at stake
and the necessity for making sacrifices. Without such an approach, the ensuing ignorance of
the benefits of adjustment could create discontent and thereby undermine the adjustment
process.
v) Programme Implementation
3.21 There were no implementation problems in both Ghana and Malawi. In both countries,
Bank supervision was adequate and the executing agencies performed satisfactorily. In
Nigeria, the situation was different. The implementation of the ESP was marred by several
factors including poor project selection. The executing agency, the Nigerian Import-Export
Bank, delegated the responsibility for project selection to the participating banks, many of
which did not have the requisite capability for the exercise. Consequently, wrong project
choices were made. This problem was further compounded by the fact that neither the
18
executing agency nor the consulting firm appointed for the programme, supervised the choice
of projects. There was therefore no means of stopping the funding of badly appraised projects.
Furthermore, many of the projects did not have working capital, as the responsibility for this
was not made clear from the outset. These and other implementation problems could have
been resolved if the Bank fulfilled its responsibility towards the programme. The appraisal
report called for a supervision mission at the end of each of the three tranches. But throughout
the life of this programme (1989-94), there was only one supervision mission by the Bank. By
this performance, the Bank did not avail itself of the opportunity to correct growing flaws in
the implementation of the programme. The combination of poor performance (on the part of
the Bank and the executing agency), the unstable economic environment and the
shortcomings in the appraisal report (e.g. the lack of clear delineation of responsibility for
project selection and the provision of working capital) predisposed the ESP to failure.
3.22 In Tunisia, there were no serious implementation problems. While the government
was able to persuade private sector operators on the need for the pursuit of adjustment
measures, it failed to submit regular progress reports on the implementation of the programme
as required by the loan contract. This was to limit the exchange of views between the Bank
and the borrower. Bank supervision too was inadequate. For example, only one supervision
mission was carried out in June 1989, nearly two years after the signing of the loan
agreement. The implementation performance in Mauritius was satisfactory. Except for the
initial differences of opinion between the borrower and the government, there were no serious
implementation problems. Co-ordination between the Bank and the World Bank, a co-
financier of the programme, was also adequate.
vi) Programme Outcome and Sustainability
3.23 As an economy-wide programme, the outcome of ITPAP was satisfactory. As a result
of the effects of the programme, the performance of the GDP was impressive. As a trade-
focussed programme, ITPAP was also relatively successful. The trade regime was liberalised
as well as the exchange rate. Administrative bottlenecks, which stood in the way of industrial
and private sector development were removed, while institutions for the promotion of exports
(e.g. export processing zones) were established. The consequence of all these were that
industrial production increased. The index of industrial production (1984=100) fluctuated
between 100.8 in 1987 and 138.6 in 1991. All sectors in industry benefited from this
19
performance with food, beverages and tobacco, clothing, textiles and footwear’s sub-sectors
as the best performers. The performance of manufacturing exports was along similar lines.
Non-traditional exports increased in value terms from US$ 27.2 million in 1992 to US$ 58.6
in 1996. But the supply response could have been much better were it not for the human and
institutional capacity constraint facing the economy. Indeed, it was this observed capacity
constraint which led to the implementation of the successor programme—the
Entrepreneurship and Capital Market Adjustment Programme. The aim of this programme
was to address, in part, some of the human and institutional capacity constraints which had
precluded a better supply response in the economy.
3.24 The reform process in Malawi is fairly sustainable. There is evidence of continuing
government commitment. But this alone would not be enough. The government would need
to go beyond its own commitment and seek political consensus for the reform efforts through
the involvement of the organised private sector. Sustainability would also require donor
support in the areas of debt relief, financial flows including direct foreign investment, and
capacity building for export promotion. The government would also need to investigate
further those areas where the country has comparative advantage for the promotion of non-
traditional exports.
3.25 In Ghana, the response of the economy to ISAP was fairly impressive. In the short to
medium term, the aim of IASP was to facilitate the utilization of installed capacity which had
been run down by past economic mismanagement, through the rehabilitation of existing
plants. Thus the quick-disbursing loans of ISAP were used for this purpose and the response
of the economy was immediate. At the aggregate level, the GDP recorded positive growth
rates. This situation was similarly true of other indicators. The reforms in the trade sector also
yielded positive results. The depreciation of the exchange rate paved the way for export
expansion. Cocoa exports, in particular, increased significantly. Of significant interest is the
performance of non-traditional exports. Non-traditional exports, which accounted for 9.2%
and 12.7% of total exports in 1996 and 1997 respectively, increased to 15% in 1998. The
number of non-traditional exporters increased from 1,729 in 1990 to 3,278 in 1997, while the
value (of non-traditional exports) increased from US$ 62.3 million in 1990 to US$ 329
million in 1997. Processed agricultural products, textiles and crafts dominate the non-
traditional export category.
20
3.26 In the long run, the aim of ISAP was to increase capacity utilisation in the industrial
sector. Although the estimated target of 52% set at appraisal was not achieved, significant
progress was achieved in increasing capacity utilisation from its low levels of 18% and 25%
in 1984 and 1985 respectively. Sub-sectors like tobacco, beverages, food processing and
wood processing actually exceeded 52% in their rate of capacity utilisation. The success of
the programme is attributable to the prior stabilisation of the economy, the economic studies
that preceded it, and government commitment to the programme.
3.27 In Ghana, the evaluation mission found that ISAP was not particularly well known. It
was, in the words of one private sector operator, a government programme. The sustainability
of the reform process would therefore require not just government commitment, but its ability
to reach out to the populace to seek nation-wide consensus for its policies. The government
would also need to deepen the reform process as a step towards the industrialisation of the
economy.
3.28 In Nigeria, the ESP was a dismal failure when measured against its objectives. At the
aggregate level, the GDP recorded positive growth rates, but this performance had nothing to
do with the ESP – it was attributed mostly to the developments in the oil sector. While some
institutional measures for export promotion (e.g. the establishment of the National Export
Promotion Council, and the Nigerian Import-Export Bank) were put in place, the ESP was a
failure in terms of its declared objectives. Industrial output actually declined during the ESP
and post-ESP periods. Capacity utilisation in the industrial sector, which was estimated at
78.7% in 1977, had declined to a low rate of 29% in 1995. Non-oil exports did not increase as
expected, as oil exports continued to dominate the export scene. Before the ESP, the share of
oil, which averaged 95% annually, remained unchanged during and after the ESP. While a
few beneficiary companies recorded some success in expanding exports and in increasing
capacity utilisation, the overall outcome is that at the aggregate level, the ESP did not achieve
the objectives of increasing industrial output, increasing capacity utilisation, and reducing the
dependence of the government budget on revenue from the oil sector which were at the
appraisal. The poor response of the industrial sector to the ESP can be traced to faulty design,
poor implementation, unstable macroeconomic environment and absence of adequate
prudential regulation and control of the financial system. It was certainly not due to lack of
financial and human resources.
21
3.29 The gains of the ESP, though not sustainable, were further undermined by the failure
of the revolving fund scheme to generate the necessary funds to be recycled into new projects,
and by the cancellation of a follow-up programme (the Industrial Export Support Loan) by the
government. But all these need not undermine ESP as a development strategy. Both the
government and donors would need to rededicate themselves to the goal of reducing Nigeria’s
dependence on the oil sector.
3.30 The programme in Tunisia was a success in that it was able to stabilise the economy
and pave the way for the resumption of growth. The trade regime and domestic prices were
liberalised. Value added in the manufacturing sector increased by more than 60% during the
period. This performance is attributable, largely, to the export industries, notably the textile
and agro-allied industries. In the case of Tunisia, the most important factor in the outcome of
the programme was the prior stabilisation of the economy.
3.31 In Mauritius, the manufacturing sector recorded a rate of growth of 8% during the
ISAP period and a rate of 6.5% during 1990-1993. Industries within the EPZ also recorded
impressive performance. As a result of all these, GDP growth rate was also impressive and
has remained consistently so. The ISAP reinforced the reform process in Mauritius and made
a significant contribution to the effort to diversify the economy. This success is traceable to
the combined effects of prior stabilisation of the economy, the reform of the tariff system, the
financial and human resources made available by Hong Kong investors who wanted to take
advantage of the opportunities provided by the EPZ.
3.32 The programmes in both Tunisia and Mauritius are both sustainable. The
macroeconomic environment in both countries is now reasonably stable such that they can
absorb future sector adjustment programmes without difficulty. Both have also showed that
with appropriate policies, Africa can compete in the export market for industrial goods.
IV Lessons for the Bank
4.1 Perhaps the single most important lesson that can be derived from these programmes
is that a sectoral adjustment programme performs best in an economy which had been
previously stabilised, as available evidence shows that distortions and macroeconomic
imbalances undermine the success of sectoral adjustment programmes. In a country’s lending
22
programme, the policy problem confronting the Bank is not whether to choose SECAL or a
SAP in the adjustment process, but rather how to appropriately time either of these
instruments for maximum impact. It should not matter which of the lending institutions
(World Bank or ADB) had previously financed the stabilisation programme for the economy.
What should be important to the Bank is that before it embarks on sectoral adjustment
lending for a country, it must satisfy itself that the economy is stable as judged by the relevant
indicators and that major structural issues have been addressed. Beyond timing, there is also
the question of sequencing of policies within an adjustment programme. This sequencing
becomes important in order to eliminate policy conflicts – conflicts which could undermine
the success of the programmes.
4.2 Another lesson is that prior economic and sector work is important to reform
programmes. In the case of trade adjustment programmes, one needs to know in advance, the
structure of the tariffs, the incentive structure and the likely response of the various industrial
sub-sectors to any reform package. Such knowledge, which can be acquired either through
prior in-house economic and sector work, or through information gathered from the economic
and sector work activities of other donors, would go a long way in enhancing the quality-at-
entry of sectoral adjustment programmes.
4.3 A trade reform programme should ideally be anchored on a system of adequate
information about export opportunities. Thus trade reform would not alone be sufficient, there
ought to be institutions for trade promotion and the dissemination of information on export
opportunities. There should also be a conducive environment (policies and institutions) for
investment in export-producing industries. This is what would make the trade reform
programme a worthwhile effort. Furthermore, a trade liberalisation programme for a country
should not be formulated without regard to its impact on its neighbours. In other words, such
a programme should take into account the regional or sub-regional consequences of such a
trade reform. Failure to take these into account could undermine the domestic outcome of the
programme and it could also impact, negatively, on a country’s neighbours.
4.4 In most of the programmes, there was no explicit indication of performance variables
with which to access their outcomes. Where there are indications, these are usually vague.
The use of the MPDE approach to programme planning would be helpful in identifying, at
appraisal stage, the benchmarks to be used for future evaluations..
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4.5 Bank supervision is crucial to the outcome of any project or programme. This
becomes even more critical in adjustment programmes, which are of very short duration. In
one of the programmes (Nigeria’s ESP), Bank performance was particularly unsatisfactory as
there was only one supervision mission throughout the life of the programme. This is in spite
of the fact that the appraisal report provided for a mission after the release of each of the three
tranches. Many of the implementation problems, which these programmes (particularly ESP)
faced, could have been avoided if Bank supervision was adequate.
4.6 Finally, it needs to be recalled that development is about people. As such people ought
to have a sense of ownership of the development process. This can be largely achieved if they
are involved in that process. A participatory approach would make obvious the gains to be
expected from the sacrifices which people are called upon to make during the process of
adjustment. Without such an approach, social tensions (borne mostly out of ignorance of the
necessity of adjustment) could undermine the adjustment process.