ZAMBIAN OPEN UNIVERSITY.

SCHOOL OF LAW AND SOCIAL

SCIENCES

DEPARTMENT OF DEVELOPMENT
STUDIES

MODULE DS 2 / f;i S/ / Q._

FOUNDATION OF DE.VELOPMENT
ST.UDIES II

M. Lipalile
BA (UNZA) MA (The Hague)
Se~lid Edition 2006 ·
©ZAOU
ISBN
 ...

TABLE OF CONTENTS

PAGE

Introduction 1

Unit 1 Theoretical Approaches to the Definition of Development 2

Unit 2 International Flow of Financial Resources 15

Unit 3 Agricultural and Development Projects 26

Unit4 Trade Patterns in LDCS 41

Unit 5 Policy-based Lending and Conditionality 47

Unit 6 Balanced Development 51

Unit 7 Urban Informal Sector 59

Unit 8 Food Aid 67

\

.Unit 9 The International Economic Order 77

References 86

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 Introduction

This course builds on the issues raised in module one concentrating however on
the roles of government, nongovernmental organizations and intergovernmental
actor in the development process. The course therefore introduces you to
sectoral, regional and international aspects of development focusing specifically
on democratization, structural adjustment and globalization.

Objectives: at the end of the module you should be able to:

a. Analyse the social and economic basis of development strategies;
b. Demonstrate an understanding of the controversy surrounding the
roles of the state and the market in development and the different
policy implications of each perspective;
C. Demonstrate an understanding of basis knowledge of the relatioship
between the various levels of non governmental actors and the
national economy.
Assessment
Continuous assessment
Two essays of 15% each 30%
One home test 20%
Final Examination 50%
Total 100%

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 UNIT1
THEORETICAL APPROACHES TO THE
DEFINITION OF DEVELOPMENT

Introduction and Definition of Key Concepts

Defining development is a difficult task because of the realization that

conventional development theories expected to improve the socio-economics
welfare of poor people proved ineffective or even counterproductive.

Objectives: At the end of this unit you should be able to:

• Discuss theories of development
• Explain issues of development
• Define poverty in all its ramifications
• Discuss characteristics and magnitude of poverty

In most cases the definition of a problem is usually related to solutions offered.

Common concepts used in the theoretical perspective of framework of
development includes:-

a) Theory => a set of ideas or body of knowledge that is systematically and

logically organized to explain the interrelationship between phenomena -
cause - effect relationship e.g. Human Capital Theory
CAUSE: Education => Improved Skills .
EFFECT: Improved Productivity

b) Modernization=> a process of change towards those types of socio and

economic and political systems that have been developed in Western
Europe and North America from the Seventeenth to the Nineteenth
Century and then spread to other European countries and in the
Nineteenth and Twentieth Century spread to South America, Asian and
African continents.

c) Modernization Theory => ideas often regarded as being necessary for

sustained economic growth. They include rationality, economic planning,
social and economic equalization and improved institutions and attitudes.

d) Dependency => is an extension or branch of the Theory of Dominance. It

is a situation where developing countries have to rely on developed
countries domestic and international economic policy to stimulate their
own economic growth. It can also mean the adoption by developing
countries of developed countries education systems, technology, culture,

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politico-economic systems, attitudes, consumption patterns, dressing etc.
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2
 Topic 1: Modernization Theory

Dominant during the period 1950-1960s. Premised on the concept of Stages of

economic growth through which all countries must pass. It is an economic theory
of development in which a right mixture and quantity of savings, investment and
foreign aid are deemed necessary to enable LDCs proceed along a path of
economic growth followed by the ADCs. Development is synonymous with rapid
aggregate economic growth. It is an imitative process derived from Western
countries experience of economic history. Modernization theory was boosted by
the emergence and dominance of capitalism and the advancement of the
industrial revolution.

Economic growth and development are equated to higher levels of utilization.

Growth was perceived to be a natural phenomena/process which could be
enhanced by the correct and timely application of inputs and savings and
investment are important for a 'take-off into self-sustaining development.
In summary, modernization theory is premised upon the six following
characteristics:

a} Imitative kind of development process

b) Today's ADCs were once peasant/agrarian economies
c) LDCs could learn important lesson's from ADCs experiences
d) Premised on the growth and expansion of capitalism and the industrial
revolution
e) Major source of growth are savings and productive investment
f) With the correct amount of savings and investment and timely application
to the production process and with correct institutions and economic
policies LDCs can transform into ADCs.

" -..,,.,,

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 Activity

The modernization theory emphasizes savings and productive investment as

major sources of gro~Jth. In the light of low levels of investment in most
developing countries analyze the reasons why growth is stagnant in some
countries. Wha; could be the alternative to growth in such countries?

Topic 2: WW Rostow's Linear Stages Theory

Rostow was a British industrialist who postulated stages of development

which would lead to economic take off. He identified the following stages:

a) Traditional Society - production is for subsistence, Absence of

economic structure. Production limited by insufficient production
techniques. No savings.
b) Preconditions for 'take-off' - emergence of agriculture as a leading sector;
Improvement in transport and other social facilities, Peasant mentality
revolutionary.
c) Take-Off Stage - revolutionizing peasant mentality. 5-10% of national
income is saved due to sustained growth in national income, strong
intersectoral linkages. ·
d) Drive to Maturity - industry emerges as leading sector. 10-20% of national
income is saved. Economy moves from consumption to production.
Strong middle class and skilled administrators put in place.
e) Age of High Mass Consumption - economy moves from consumables to
service provision
<

Limitations/Weaknesses
a) Lack of savings and productive capacity
b) Lack of an efficient government bureaucracy
c) Colonialism
d) Poor attitudes and absence of support institutions
e) Poor infrastructure

Activity

1. An efficient government bureaucracy has nothing to do economic

growth. Do you agree or disagree with this statement? Give reasons.
2. Poor infrastructure is a limitation to growth. List five infrastructures
1
which come to your mind which are limitations.
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......

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 Topic 3:Structural Model

Issues in Development Studies

Why the concern with development issues by LDCs?

a) because of the realization that poverty is not inevitable

b) change in balance between the population and resources
c) to remove their dependency on developed countries i.e. compete and
trade with ADCs on an equal basis
d) development does not occur spontaneously. Need for some development
effort on the part of government
e) objective of every government in order to improve standards of living.
Eliminate poverty and promote sustainable development.

What is Development?

Development is a normative term that can be defined differently by different

people depending on time period and context. Traditionally development has
been defined in terms which were100 percent economic, i.e. the ability of an
economy to generate and sustain an annual increase in its GDP/GNP at rates of
about 5 to 7%. The assumption was that increases in national income and gross
domestic product would trickle down to the masses in form of employment and
other economic opportunities. Issues of poverty, equality and employment were
not taken on board.

In real terms development is a multidimensional process involving quantitative

and qualitative improvements in an economy through the efficient utilization of
resources, better social division of labour and capital and the utilization of
improved and appropriate technology. It entails the growth and expansion of the
productive base and basic service provision focusing speciftcally on equity and
efficiency considerations. At a higher level development involved the creation of
conditions necessary for the realization of the human potential - education and
health critical here. Implies also an or fulfillment. Life should be enjoyed and
not obtained at a high cultural cost.

A realistic evaluation of development should examine the status of poverty,

unemployment and inequality.
Sustainable Development - implies a process that is manageable, irreversible
and interdependent. It is a path of growth that meets the needs and aspirations
of the present generation without compromising the ability of future generations
to meet their own needs. It is a concept for a pattern of economic growth that
recognizes the limitations imposed by the type of technology adopted and social
1 organization in place. -....,~

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 Measures of sustainability

a) strong intersectoral linkages

b) environmental awareness
c) gender sensitivity
d) balance between equity and efficiency considerations
e) balance between financial and economic benefits

What Is rural development?

A development strategy designed to improve the socio-economic well being of

the rural poor focusing specifically on vulnerable groups like small-holder farmers
and the landless. From within the vulnerable groups attention is focused
specificaUy on the weakest among this group such as women or/and children.
Why the concern with rural development?

a) Make rural areas more productive and less vulnerable to poverty, nature

b) It is agro-based and agriculture is important due to:-

i) Providing man with food and other basics
ii) Providing industry with raw material and surplus product in form of
labour and capital
iii) Providing industry with market
iv) Convenient occupation of LDCs due to low capital intensity

c) Focused on SHF
i) Numerical majority
ii) Direct attack on poverty
iii) Cost effective
iv) Integration into money economy
Constraints of a rural based development strategy

a) Biological nature - affected by factors, seasonality, immobility of

factors of production etc.
b) Inelastic demand - changes in price of agricultural commodities or
incomes of people irrelevant
c) Organization difficulties - agricultural activities scattered over wide areas
and is in small units. Important implications on extension services, credit
and community development.

., ........

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 Where do Poverty issues come in?

Development is intended to eradicate poverty and raise standards of life.

Poverty - a broader perspective is that it is a synonym for deprivation and covers
all or most aspects of hardship.
In the narrower technical sense it refers to measurements of the assessment of
deprivation (income data, _consumption levels) and is usually ascribed (gender,
underprivileged social groups)
Standard definition - low income households inability to have sustained access
to the basic needs of life, such as food, shelter, clothing and basic services like
education, health transport.

Measurements of Poverty

Three majorways:-

a) National economic statistics - poverty can be measured in terms of GDP,

Income per Capita

b) Physical quality of life index - life expectancy, child mortality and adult
literacy

c) Basic needs approach - presence or absence of basic needs {FSC) as

well as essential services (HETp)

Topic 4: Poverty
Poverty is a common identifying feature of developing economies and is
exhibited in form of low incomes, high infant mortality, poor housing and low life
expectancy.

Definitions
In general terms poverty is a synonym for deprivation and covers all or most
aspects of hardship. It implies lack of material and cultural goods which impedes
the nonnal development of individuals. Therefore, to be poor is to be incapable
of calling on one's resources to meet own or family's biological needs. To live in
a pennanent state of isolation and insecurity, live in inadequate housing and
work in poor and inhuman conditions. Poverty has many facets:-

a) Absolute Poverty

A situation where a population or section of a population is only able to

meet its bare subsistence essentials of food, shelter and clothing in order
to maintain minimum levels of living. It refers to the minimum level of
consumption that is necessary for human survival and focuses on the
., economic dimension of living such as access to food, shelter, and clothing
(Basic needs approach). It is very common in developing countries
,.
......
particularly in the rural areas.

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 b) Relative Poverty

Falling behind other income groups or individuals in terms of access to

existing opportunities to facilities that enhance quality of life like education
and health. It focuses on the issue of social stratification and concept of
class. It is the inabHity to have access to goods that are considered
normal to many in a given society. It is common in developed countries
and urban areas of developing countries.

c) Institutional Poverty

Is a new type of poverty induced by introducing new technologically

advanced lifestyles and a new consumer oriented ( ) ideology which can
not be part of the communal society. It is acquiring tastes, wants and
needs which one has no fmancial capacity to afford or manage.

d) Subjective Poverty

Refers to the perception about one's poverty status, irrespective of access

to basic needs or customary goods in society. It focuses on one's own
perception or personal analysis about one's poverty situation irrespective
of situational factors, social group or gender considerations.

i) Case Poverty - found in affluent societies where an individual or an

individual family suffers poverty. Their poverty is very visible
compared to the living conditions of the individual or families in the
surrounding area. It occurs where a certain family or individual do
not share in the general well-being of society due to mental
deficiency, bad health, excessive procreation, lack of, inability
to adapt to the discipline of modern life or a combination of several
of these.

ii) Unity Poverty - Found mostly in rural areas and in informal and
squatter areas in cities. It is a situation where almost everyone is
poor in a community. Living conditions of the rich here more
visible. People here are poor not because of personal handicaps
but a complex set of circumstances such as isolation, drought, war
etc.

1 e) Poverty Datum Line -

.....

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 The real income per head or expenditure which is used to detennine the
proportion of people whose income falls below a minimum level necessary
for human survival.

f) Poverty Gap

• The sum of the difference between the POL and income levels
below the POL

g) Poverty Alleviation
Refers to a situation where the harsh or severe effects of poverty are
ameliorated or confronted by a relevant government ministry, NGO or
cooperating body under the direction of government. It is a short tenn
measure or plan.

h) Poverty Reduction
Refers to a situation where there is an actual reduction in poverty levels
with a view to eliminating it altogether. It is a long-tenn measure or plan.

i) Poverty Eradication
Doing away with core poverty/absolute poverty and creating conditions
that enable the majority to access basic nees of life such as food, shelter
and clothing and basic services like education and health.

Activity

1. Distinguish poverty from unemployment

2. Define poverty in all its ramifications
3. Discuss characteristics and magnitudes of poverty.
4. List at least three strategies governments can adopt to eradicate
poverty.

Topic 5: Causes, Characteristics and Magnitude of Poverty

Causes: The poverty crisis in developing economies is a function of:-

a) Inappropriate policies, such as import substitution, industrialization which

did not lead to enhanced linkages in the economy and labour maximizing
technologies claimed by unproductive people and poor targeting.
b) External shocks - the increases (400%) in the price of oil which had
" negative implications on food security and investment patterns (1930
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depression and 1973179 oil shocks).

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 c) Colonial factor - promoted unequal exchange relationships and class
exploitation.

Other Important causes of poverty are:-

i) Overpopulation strains existing resources

ii) Preference, lazy, no ambition or/and poor value system
iii) Natural poverty - lack of resources or presence of poverty inducing
conditions
iv) Ignorance - function of lack of education. People cling to primitive and
poverty inducing methods of doing things.

Activity

1. Several causes of poverty have been listed. Which ones are more
relevant to the Zambian situation? Any others not mentioned?

Topic 6: Economic Characteristics of Poverty

A high level of per capita income is no guarantee of low poverty levels.
Therefore, there is a need to have an adequate knowledge of economic
characteristics of poverty in order to formulate effective poverty management
policies. To attack poverty it's vital to have a detailed knowledge of its location,
extent and characteristics.

Common characteristics of poverty:

a} Poverty affects a disproportionate number of women. In practically every

country, more women than men are at the lowest levels of income.
Additionally there is an increasing incidence of poverty in female-headed
households representing 17 - 28% of total world households. Dual role of
women puts a heavy burden on women.
b) Most poor people are loc.ated in rural areas and are primarily engaged in
agricultural and associated activities. Two-thirds or the core/absolute poor
scratch a living from subsistence agriculture as small holder farmers or as
lowly paid fann hands. The remaining one third is located in urban areas
as street hawkers, informal trading, petty services and small scale
commerce.
Poverty of Female-Headed households is related to thelr status:
- less educated
- less employment opportunities
- less access to capital, land and technology which affects eff1eiency in
production ·
., Due to the above gender issues gains dominance in any poverty reduction
strategy. -...
10 -?;
 Extent of poverty

40% of the population in LDCs lives in absolute poverty. Areas of poverty

concentration include sub-Saharan Africa, South Asia and pa~ of Latin America
where three-quarters of the population live in poverty and two·thirds of the world
population lives.
Although poverty exists in developed countries it is less in terms of total numbers
and percentages.

Poverty in LDCs is a function mainly of:-

- Poor policies
- Uneven distribution
- Weak institutions
- Colonialism

Activity

"In practically every country, more women than men are at the lowest levels of
income". How applicable is this statement to the Zambian context?

Topic 7: Agricultural Exports Vs Manufacture Exports

Most economies of LDCs are oriented towards the production of primary

products as opposed to manufactured products. Primary products constitute their
major export earnings on the world market. For instance, primary products
account for 94% of sub-Saharan Africa's export earnings. Although several
LDCs have made significant progress in manufacturing over two-thirds of all
LDCs imports by value are manufactures. The above is a product of political and
economic linkages between LDCs and DCs as a result of imperialist and trading
patterns of the 19th Century.

Agricultural Exports

Agricultural exports have traditionally played a vital role in the development

efforts of LDCs. The dependency by LDCs on agricultural exports was a function
of colonialism. Using the theory of comparative advantage colonial powers
convinced the colonies to concentrate on the production and export of labor
intensive products such as agripultural products. The above tended to
perpetuate the dependency on primary product exports by LDCs. As a result
three quarters of LDCs exports consist of primary commodity exports. However,
" negative demand and supply factors made the expaftsion of agricultural exports .........
difficult and constrained the development efforts of many LDCs.

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 Negative demand factors: the Negative Demand Factors included:

(a) Low per capita income elasticity of demand

(b) Low price elasticity of demand
(c) Development of synthetic substitutes
(d) Growth of agricultural protection in DCs
(e) Severe competition among LDCs for a share of the world market
(f) Stable population growth in the DCs reached replacement levels so that little
expansion of demand for LDCs raw materials is expected

Negative supply factors

(a) Structural rigidities of many LDCs rural production systems due to limited
resources, poor climatic conditions and faulty or inappropriate socio-
economic support institutions
(b) Domestic market bias due to government policies that encouraged
production for the home market
(c) Uneven distribution of any increase in export earnings which frustrated
export promotion strategies

Due to the above demand/supply factors and the spectacular performance of the
newly industrializing countries of Asia most LDCs have shifted their focus on the
promotion and expansion of manufactured goods for export

Manufactured Exports

The slow growth rate of primary commodity exports and the spectacular export
performance of the NICs of East Asia led many LDC governments to focus on
the expansion of manufactured exports. The above was seen to be a viable
option to the dependency on primary commodity exports because:-

(a) Manufactured exports have higher income and price elasticity of demand
vis-a-vis primary commodity exports
(b) Was in line with IMF and World Bank prescriptions for the economic
development of LDCs. IMF and IBRD officials were of the view that the
development of LDCs could best be served by allowing market forces and
free enterprise to prevail while maintain minimum government intervention
(c) Based on the practical experience of the NICs of East Asia.

Therefore, the promotion and expansion of LDCs manufactured exports was

boosted by the extraordinary performance of the NICs. Over the past three

1
decades Taiwan's total exports grew at an annual rate of 20% while those from
South Korea grew even faster. In both cases this export growth was led by -....
12 "
 manufactured goods, which contributed over 80% of both nations' foreign
exchange earnings.

For LDCs as a whole, manufactured exports grew from 6% of the total exports in
1950 to 45% by 1988. However, over 75% of this growth in exports is accounted
for by the "four NICsn and the share of LDCs manufactured exports as a
percentage of total world trade has remained relatively small.

Despite the spectacular performance of the NICs prospects for LDCs expanding
manufactured exports are constrained by the foflowing:-

(a) Growing protectionism against LDCs exports by DCs: caused by the

penetration of NICs products on the wortd market such as Taiwan's labour
intensive products which are very competitive and as a result frustrate the
economic activities of DCs. DCs respond by adopting tariff and no-tariff
barriers against LDCs low priced manufactured exports as more LDCs
emulate the success story of NICs.
{b) Different socio-political and trade environment existing at the time NICs
were industriaHzing:-
(Q Expansion of NICS manufactured exports occurred at a time when
world trade was growing and protectionism was low (18% in 1967-
73)
(ii) Contrary to the belief that the success story of NICs was as a result
of liberalization the fact is that most NICs partially liberalized their
economic and centralized planning with strict control on imports
and the exchange rate. In other words they adopted both ISi and
EP strategies.
(iii) NICs had a low level of indebtedness, relied less on the IMF and
IBRD as a major source of finance and the greater involvement of
MNCs in export promotion. Easy access to Euro/Petro dollars.

' --..., ...

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 Activity

1. Analyze the negative supply factors many LDCs face

2. The success story of newly industrialized countries can be attributed to

(i) ····-·················· .... ·........................... ................................ .......... .

, _

(ii)

(iii)

(iv)

(v) ..... "' ................................ " .......... ... ........... ....... .

" ., ,.

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 UNIT2

INTERNATIONAL FLOW OF FINANCIAL RESOURCES

Introduction: A country's financial position is as reflected in its balance of

payments and the level of monetary reserves depends on: (i) Current Account
Balance (Commodity Trade) (ii) Capital Account Balance (Net Inflow/Outflow of
Private/Public Financial Resources).

Most developing countries particularly non oil exporting countries incur deficits on
their current account balance hence a steady inflow of foreign financial resources
constitutes an important in gradient in their long term development strategies.

Objectives: At the end of this unit you should be able to:

• Explain what foreign aid is and
• Discuss the necessity and consequences of aid
• Explain types of private foreign investment

Topic 1: Foreign Aid

The international flow of financial resources takes two forms.

(a) Foreign direct investment - Mostly through multi-national

corporations and private interest banks.
(b) Public development assistance - Foreign Aid from individual
national governments and multi-international donor agencies.
The international transfer of public funds in the form of loans or grants either r
directly from one government to another (Bilateral Assistance) or indirectly
through multilateral assistance agencies like the IBRD.lts objective should be
non commercial from the donor point of view and should be characterized by
concessional terms- soft interest rates and repayment period for borrowed
capital.

Why Donors Give Aid: Two major motivations for giving aid are:
1. Political:

(a) Donors use aid to score political victories. USA used aid to combat
the spread of communism, during the cold war era.

(b) Western Europe has frequently used aid to prop up friendly political
regimes in LDCs whose continued stay in power was in their
national self interest (Sec~rity) .

., ...... .
,

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 2. Economical:

(a) Foreign exchange constraints hinder economic development in

LDCs. Therefore external finance (Loans and Grants ~an play a
critical role in supplementing domestic resources in order to relieve
savings or forex bottlenecks.

(i) Finance needed imports

(ii) Private alternative to domestic savings in matching
investment opportunities
(iii) Humanitarian grounds.

Why LDCs Receive Aid

(i) Critical. input in the development process as it supplements scarce

domestic resources.
(ii) Political leverage to existing leadership to maintain itself in power.
(iii) Morally the rich have an obligation to contribute towards the welfare of
the poor.

Effects

(i) Hinders growth in recipient's countries in that it reduces savings and

worsens income inequalities as it focuses on the modem sector.

Private Foreign Investment

The investment of private foreign funds in the economy of a developing nation,

usually it is by multinational corporations (MNCS).

MNC - An international or transnational corporation with headquarters in one

country but branch offices in a wide range of both developed and developing
countries - Enterprise that owns and controls productive activities in more than
one country. Foreign direct investment by multinational corporations is the most
dominant form of foreign investment. Principal form of foreign investment is
North-South flow of development finance.

Private DFI and MNC

DFI involves much more than the simple transfer of capital or establishment of
factory in a developing country.

Involves - Production technologies

., -
-
Managerial services
Diverse business practices -, ....

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 Two Major Characteristics of MNC

(a) Large size

(b) Central control of worldwide operations and activities, many MNC have
annual sales exceeding GNPs of LDCs in which they operate. ·Historically
their focus was on extractive and primary industries particularly
(Agribusiness) local food processing and export- oriented agriculture and
local food processing, petroleum and non fuel minerals. However
manufacturing are gaining ground and account for 28% of FOi in LDCs.
(Petroleum 40% and mining 9% by 1990).

Arguments for PFI

1. Filling the resource gap between targeted investment and locally

mobilized savings.
2. Filling the gap between target forex requirements and those denied from
net export earnings and net public foreign aid.
3. Filfing the gap between target government tax revenue and locally raised
taxes, tax MNCs.
4. Filling the gap in management, technology and skills.

Types of Private Foreign Investment

Three major types are-:

(0 DFI - Normally equity investment with control and management of

operations of the firm.
(ii) Portfolio Investments - This is private investment in which there is no
control and management of operations of the firm.
(iii) Borrowing from foreign firms and individuals.

Major Factors that Influence Flow of Private Foreign Investment-:

(Q Favorable Political Environment - Stable currencies, low inflation,

minimum risks of nationalization, manageable risk.
(ii) Favorable Economic Environment - Low taxes, favorable repatriation
rates, low interest rates.
(iii) Support Services - Good infrastructure markets and technical
personnel.

1
-
...,:

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 Arguments against PFI

1. MNCs may lower domestic savings and investment by stifling competition

through exclusive production arrangements, failure to reinvest much of
their profits, inhibiting the expansion of local industries etc.
2. Reducing foreign exchange earnings due to substantial importations of
intermediate and capital goods and repatriation of profits, management
foes etc.
3. Modest contribution to public revenue (inform of corporate tax) due to
excessive investment allowances, liberal tax concessions etc.
4. Little impact of management entrepreneurial skills, technology and
overseas contacts provided by MNC on developing local sources of these
scarce skills and resources.
5. Promotes uneven development patterns by reinforcing dualistic economic
structures, encouraging prod of inappropriate products and influences
unworkable policies i.e. socially undesirable projects, economy
concessions, damages lost economies and gaining control over local
assets.

Private Investment.._ Portfolio investments

DFI ► Equity investment and managements

Banning from foreign firms (individuals)

Foreign Investment possible Gains

Export Orientation Employment Creation Industrial Linkages

+ BOP + Y Generation + Support industry

Restaurants, hotels
+ Forex + Labour skiff + Export value added
- Unemployment
+ Government revenue

Factors that affect flow of investment

Favorable political environment ~ t a b l e currencies, minimum risks low

., ~~nitiation levels.
-..., ...
Managing risk

18
 1. Avoidable - Risk no investment
2. Insurance - Insure investment
3. Negotiate - Level agreement defining rights and responsibilities. .
4. Structure investment - Financial/operating costs only possible with foreign
Party's participation.

Economic Environment - Low taxes, favorable reproduction rates, low interest

rates

-Markets
- Communication

Topic 2: Protectionism and Economic Liberalism

M. P. Todaro argued that in economic development, in the third world, the

concepts of protectionism and liberalism are closely linked to issues of
international trade. In almost all national economies international trade plays a
vital role in promoting economic development. One of the most evident
advantages of international trade is international specialization based on the
principle of comparative advantage in both resource endownment and natural
ability basically nations trade because of different abilities and resources. On the
basis of the above different nations tend to have international differences in
production costs and product prices by contracting on the production of those
products in which a country has a comparative advantages in terms of resource
endowment or natural ability the world population benefits through trade because
production will be based on the lowest relative cost which reflects the resource
base of a given nation. However, beginning from the 1950's debate as to which
trade model would be ideal vis-a-vis the development prospects of LDCs
emerged. These can be broken down into import substitution strategies which
basically entail a high level of protectionism and export promotion strategies
which entails free trade among nations of the world.

Protectionism (Import Substitution Strategies: Import substitution strategies

gained dominance in the early 1950. Import substitution proposes that LDCs
promote the domestic production of goods that would otherwise be imported
using protectionist approaches. The major protectionist measures used are tariff
barriers and non tariff barriers such as quota allocations. The major objectives of
protectionism are:-

a. Infant Industry Protection - There is need to protect domestic industries

against low cost foreign competition until such a time when they achieve
the economies of scale necessary enough protection the infant industry
1 will achieve scale economies and compete directly with developed country ..............
producers.

'·
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 b. Employment Creation: Protectionism can lead to employment creation in
the sense that low cost foreign competition will be eliminated. Low cost
foreign competition will create unemployment in the higher cost domestic
industry by shifting demand from local to imported products. Boosting
domestic production will result in the build up of local rural and urban
industry and hence generate employment. This also clocks the activities
of multinational corporations which are able to under price and force infant
industries out of business.

c. Balanced Economic Growth - Protectionism through state intervention in

the areas of legislation, taxes, subsidies and regional development
programmes can also foster balanced growth between rich and poor
regions of one nation and to a lesser extent minimize the negative effects
of rich nation's natural tendency to grow at the expense of LDCs.
Additionally duties on trade restrict imports (+BOP) and is the major
source of government revenue (reinvestment). Despite the greater self
reliance that can be achieved by protectionism most countries were
moving towards free trade as early as the 1970 and with the blessings of
the IMF and world bank in the 1980. This is basically because
protectionism has a negative effect on efficiency and growth, 151
strategies encourages production under a high cost structure and
exacerbates LDCs BOP growing big due to the nature of protectionism.

Economic Liberalism: Economic liberalism gained dominance in the 1970's and

1980's. The major instruments of economic liberalism is the operation of mark.et
forces based on free trade, starting from the 1980 liberalization became very
fashionable as a result of IMF and World Bank's concerted efforts to promote
free trade. This was basically as a result of the failure of LDCs industrialization
efforts based on highly protected domestic markets which imposed sections
limitations on nation's economic growttJ and welfare. LDCs markets were too
limited to sustain a modem dynamic diverse economy on self sufficiency basis
due to domestic markets constraints as they keep prices for industrial products
uncompetitively too high and ·-erodes purchasing power of nationals. The
cumulative effect of the above is to lower the productive capacity of any given
country law. Therefore liberalization based on export promotion strategies were
designed to cure the chronic problems associated with 151. The major
objectives and benefit of economic liberalism includes-:

a. Promotes competition, improved resource allocation and consequently

lowers the cost of production. Low production costs entails economic
welfare.
b. Eliminates costly economic distortions caused by government
~ interventions in both the export and foreign exchange markets and allows
the mark.et forces to allocate scarce resources rather than corrupt and
ineff1eient government officials.
-, .
20
 c. By raising factor productivity and lowering production costs liberalization
accelerates overall economic growth by increasing profits and
encouraging greater savings and investment.

Economic Policy Reforms: An economic policy is a statement of objectives

andmethods for achieving those objectives (policy instruments) by government
and business entities. Examples of government economic objectives are
maintaining free stability and promoting balanced regional growth. Policies for
achieving the above objectives are price control (Legislative control, Fiscal
poficy) and taxation respectively.

Therefore economic policy reforms basically entails restructuring a country's

economic policies towards a more efficient and responsive path. Failure by
centralized planning to foster economic development resulted in the emergence
of economic policies based on free market models whose major advantage is
efficient and economic use of world's resource endowment.

Topic 3: Structural Adjustment Programmes

SAPS implies the reallocation of resources until the optimal position is achieved.
This is done in response to changing structural conditions and is meant to adapt
an economy to large and unexpected changes, changes which may be
unfavourable {favourable) to the set objectives pursued by governments. Within
the context of development literature· SAP, is basically a change from a set of
wrong policies to better policies by both price and non price measures.

Background to SAP: Most LDCs experienced contractions in their economies

due to various internal and external factors in the 1960's which led to structural
problems and prompted the IBRD to initiate SAPS in order to reverse the trend.

Internal Reasons

a. Import Substitution lncentives(ISI) adopted in the 1960's led to debt

problems and a home market bias in production which was costly to
maintain. Protectionist policies adopted exacerbated structural rigidities
inherent in LDC's
b. Food shortages experienced in many LDCs as a result of food aid meant
scarce foreign exchange was channeled towards food imports at the
expense at industrial raw materials and spares leading limited use of
installed capacity and hence limited intersectoral linkages.

1 -...
21
.
External Reasons

a. Increase in oil fees of 1973 pushed up fees in LDCs. High production

costs and economic use of raw materials from LDCs led to chronic BOP
problems for LDCs.
b. PL 480 which was designed to reduce USA grain surplus destroyed LDCs
domestic food production and consequently to a high import bill which had
negative effect on LDCs industrialization effort.

Agents of SAPS: SAPS are designed, conditioned and supervised by IMF and
Workl Bank while their implementation is a government task. The IMF is
primarily concerned with stabilization policies and are concerned with short term
reduction of a country's budget deficit, balance of payment and inflation
commonly referred to as demand side management reforms

International Monetaray Fund (IMF): The IMF is concerned with short

term reduction of a country's budget deficit, BOP deficit and a reduction in
inflation. They are basically demand side reforms involving fiscal and monetary
restraint. In other words they are stabilization polices commonly instruments
such as devaluation, removal of subsidies, reduced public expenditure, increased
taxation, credit squeeze, tariff reduction and liberalization. Policies last from 3 -
5years .

World Bank: The World Bank is primarily concerned with long term
improvements in the structure of the economy by bringing about changes in
relation prices and institutions designed to ensure greater efficiency and as much
as possible to forestaH future payments and stabilization problems. These are
supply side reforms intended to make the economy more responsive, flexible and
better able to utilize scarce resources and thereby create sustainable long term
growth. Policy tools used by the World Bank includes privatization and the
promotion of a free market environmeot collectively taken. They are intended to
maximize efficiency gains in production and to eliminate structural rigidities in
production.

World Bank - Lending operations started 1948. Financial resources comes from
sale of bonds in private international markets and member subscriptions. Hard
currency loans - from IFC policy based lending and conditionality, conditionality
and policy based lending is international lending agencies should impose
conditions for loans that are in the interest of a receiving country. If conditions
are in the interest of recipient countries then one expects policy makers/national
governments to pursue these conditions. In other words one pays for good
advice ideally and not being paid for following it.

.,
..........

22
 ,,,,,,--· .--------.. '
• Reasons why Conditions are Imposed by Lending Institutions lnclude:-

1. Assumption that policy makers may be ignorant of causal relationships

and needs instruction.
2. Their causal analysis of links between policies and results may differ from
that of donors. They may view, for instance, direct controls as being more
effective than indirect policy tools like devaluation.
3. Their forecast of the future state of the wor1d may be different - borrowers
are usually optimistic and lender pessimistic.

B = In 10 years copper prices will increase

L = In 10 years copper prices will decline

4. Different objectives - Lender objectives is to restore financial positions

while borrowers is to achieve economic growth.
5. Different weights to same objectives
Government • Support Base while Donor • Poorly represented groups
6. Conditionally is meant to exercise leverage not to persuade other
considerations in imposing conditionality includes-:

Different ideology (Between imperialist exploitation and being a

victim of an outdated ideology.
Risk aversion in adopting policies with uncertain outcomes
different.
Different discount rates and different time frames (i.e. Borrower
- short form gain, lender - long tenn gain
Policy makers may share analysis, forecasts and objectives,
attitude to risks and time horizons but assess costs of transition
better policies as too high. Because foreign funds are not there
to fill foreign exchange gaps but to add flexibility to an economy
wishing to change its cpurse from bad to good policies.

From the above it is clear that economic policy making operates in highly
uncertain areas and as such conditionally should be replaced with negotiation.
Another difficulty is that policy conditionally is fungible and resistant governments
can yield to one type of policy while pursuing that objectives with another. In
addition it is cumbersome and time consuming to include all possible to
implement or to monitor all implementation.

Despite the above it would be unreasonable to propose that money should be

given without regard to its use by recipients. Conditionally is intended to:

Improve macro economical performance.

Facilitate effective investment.
~
BOP equilibrium. -.,
Internal price stability.

23
.
Increase productivity in the private sector.
Increase volumes of domestic savings.
Increase capacity to debt servicing.
Lend to good policy formulation.

Cross Conditionality in 1980s to Date

IMF and World Bank policies sometimes overlap. Accepting IMF conditionalities
is prerequisite for the Wor1d Bank coming in with structural adjustment loans and
policies.

Economic reform is composed of short term market economic stability and

medium term adjustment. Cross conditionality is important in achieving desirable
policy sequencing. Therefore stabilization or the removal of macro-economically
disabling balance of payments and fiscal gaps as well as inflation has to come
before "adjustment" or creation of conditions for sustainable growth.

Different Mandates

IMF and World Bank policies are similar and sometimes overlap. However they
have major differences.

IMF - Concerned with short term reduction in a country's budget deficit, BOP
deficit and inflation. Basically demand side reforms involving fiscal austerity and
monetary restraint They are stabilization policies using tools such as
devaluation, removal of subsidies reduced public expenditure, credit squeeze,
taxation and liberalization.

World Bank - Concerned with medium/long term improvements in the structure

of the economy by changing relative prices and institutions in order to ensure
effteiency and forestaH future payments and stabilization policies. They are
meant to make the economy more responsive and flexible to be better able to
utilize scarce resources. Major tools used are privatization and promotion of
liberalization friendly environment.

IMF/World Bank Conditionalities

Major reason for conditionally is differences in objective between host

governments and lending institutions. Due to their financial character SAPS are
designed, conditioned and supervised by donors while their implementation is a
government task - this implies a degree of negotiation and conditionality by the
parties involved.

The major objective of government is to balance its current account without

1 sacrificing growth while Bank/IMF one is to restore financial positions and -.., ....
repayment positions (BOP and CIA balance).

24
 Broader Objectives

(0 Restore and diversity the productive base - more from TES to NTES.
(ii) Achieve fiscal and BOP viability by a wage freeze increased reduced
subsidies and budget cuts.
(iii) Lay basis for sustainable non inflationary growth - using monetary
instruments like control of money, supply, credit creation and adoption
of real interest rates.
(iv) Reduce dominance of the unproductive public sector and enhance
sectoral performance through privatization, liberalization and
deregulation.

Activity: Questions for Reflection

1. Critically discuss the motives for providing Aid to developing countries.

2. What are the advantages and disadvantages of PFI?

3. What are the advantages and disadvantages of protectionism?

4. Critically analyze the major objectives and benefits of economic

·liberalism.

5. How did SAPS come about? List some of the disadvantages.

6. What policy tools are used by the World Bank to create sustainable
long term growth?

7. Discuss the advantages and disadvantages of privatization.

8. Compare and contrast IMF and World Bank policies, conditionalities

and objectives.

1
.........

25
 UNIT3
AGRICULTURAL AND DEVELOPMENT PROJECTS

Introduction: According to the VVorld Bank a project is an investment activity in

which financial resources are expended to create capital assets over an
extended period of time and which lends itself logically to planning,
implementation and financing as a unit When this investment activity is located
within the agricultural sector or is designed to boost productivity in the sector
then the project is an agricultural project. All projects have a projected stream of
costs and benefits. These are commonly referred to as the project's cash flow.
The cash flow of projects usua!iy covers a relatively large number of years i.e.
between 10 to 20 years attending on the usual life of its main assets. The total
number of years covered by a project's cash flow constitutes the project's life the
difference between benefits and costs for each year of the project life is called
the project's net cash flow. Under normal circumstances a projects net cash flow
tends to be negative in earlier years when the project is under construction and
becomes positive only after the project has been complete and start producing
goods/services for which it was designed.

Objectives: At the end of this unit you should be able to:

• Outline agricultural project objectives, planning and implementation.

• Assess the effects of ARD projects on rural development.
• Trace the background of IMF and World Bank involvement in Africa.
• Analyze the impact of SAPS on developing nations.
• Define Fiscal and Monetary Policies of IMF and World Bank.
• Critique the terms trade fiberalization, market liberalization and institutional
reforms.

Topic 1: Project Costs: project costs are usually divided into tw'o:

(a) Investment Costs - Cost of construction and installation of projects

physical assets, staff training costs and cost of building up stock of
materials and spare parts needed to operate the project
(b) Operating Costs - Cost of materials, labour etc used to operate and
maintain project, most investment costs are concentrated in the early
years of the project though replacement of shorter lived assests also
constitute an investment cost

TC =OC+ IC Infrastructure Project• TC= Vital Investment

Crop Production * TC = Operating Cost

Project benefits consist mainly of the value of the output of (Goods and
Services) the project at project end the scrap value of equipment replaced
during the project's life is included as a benefit. ~, ,,

26
 When project benefits and costs do not result in cash outlays and receipts
(Public Roads) the expression 'flow of benefits and costs' as opposed to
cash flow is used.

Objectives of Agricultural Projects: There are both short term and long term
project objectives.

Short Term Objectives - Define specifically what the project is expected to

achieve, for instance, improved input services, increased yields, greater
production or more employment opportunities.

Long Term Objectives •·- Are defined in the context of broader sectoral,
multisectoral and nationa! policies. The objectives are to achieve sustained
development consistent with national policies through the attaimnent of short
term objectives. In the case of ARD projects long term objectives are often
described in terms of improvement in living conditions of the rural population and
alleviation of (Rural) poverty.

It is important to note that project objectives especially short term ones may need
to be modified during implementation either because of changes in the external
environment or the pace of change bought about by the implementation process
itself. For example a project with an initial objective of providing short term credit
to 5,000 farm households may have to modify its objective if a rise in interest
rates causes demand for credit to drop.

Grouping of Project objectives~ project objectives can be grouped in four

hierarchical categories-:

(a) Inputs - In the context of agricultural projects inputs include such project
services as devc➔loping infrastructure, improving extension delivery
systems and supplying recommended farm inputs.
(b) Outputs - Include productivity and other changes in the farming system
that result from utilizing these services.
(c) Effects -Agro--economic benefits accruing to the project beneficiaries.
(d) Impact - Expressed in terms of changes in the living standards of the
target population and region involved.

Agricultural and Rural Development (ARD} Planning and Implementation:

There is a natural sequence in which projects are planned and carried out.
This sequence is often called the project cycle. The project cycle is
normally divided into 5 stages.

(a) Project ldentificatio~ The first stage in the cycle is - find potential
projects, sources from which suggestion may come from includes
technical specialists and local leaders. Ideas for new projects may also ··,
come from proposals to extend existing programs.

27
 Programme Development Water Resources Additional areas of
irrigation normally, suggestions for new project usually arise because
some agricultural products are in short supply or will be in the near future
if production is not expanded or imports increased, since most locals have
economic development plan we find that most operating agencies in the
process of speaking an economic development plan suggest specific
projects to purpose.

(b) Preparation and Analys~ After identifying a project a process of

progressively more detailed preparation and analysis of project plans
commences.

Feasibility study- Provide infom1ation for deciding whether to begin

more advanced planning, defines project objectives, examine
alternative approaches to the project and shares the pmject to frt its
physical and social environment.

Detailed Planning and Analysis - Stage where loss promising

projects are eliminated and selected projects are redefined and
detail studies such as cropping patterns, month by month labour
requirements and deta~ed budgets are done.

To design and analyse effective projects, various aspects must be

considered to deterrnine ·how remunerative a project investment will
be. Project preparation and analysis can be divided into six
aspects-:

Technical Aspect- Technical analysis concerns the projects inputs

(Supplies) and output (Production) of real goods and services.
They examine the poss,ible technicru relations in a proposed
agricultural project - such as soils in the project region and their
potential for agricultural development. ft also identifies information
gaps that needs to be filled.

Institutional - Organizational - Managerial aspects - Concerns a

whole range of issues that revolves around the overlapping
institutional, organizational and managerial aspects. It answers
questions lime the appropriateness of institutional setting, how
administrative organization of project relates administer projects
such as a complex water project.

Social Aspects - Concerns the broader social implications of

proposed projects and favours projects favouring low income
.. ,.
,:,,..
groups.

28
 HYV + Tractors - Displacement of tenant farmers - unemployment.

Commercial Aspects - Concerns arrangements for marketing the

output and supply of inputs to project

Financial Aspects -- Concerns the financial aspects of proposed

project on its various participants such as fam1ers, private sector,
public sector and project agencies. Market prices are used and
they take subsidies and taxes into account It estimates the projects
financial efficiency, incentives, credit worthness and liquidity and
judges how much participating farm families have to live on.

Economic Aspects - Determines the likelihood that a proposed

project will contribute significantly to the development of the total
economy and that its contribution will justify its using scarce
resources. It takes the viewpoint of an individual, treats subsidies
and taxes as transfer payments and users shadow or accounting
prices.

Topic 2: Effects of ARD Projects on Rural Development

The effects of ARD are various and many depending on project design and
stated objectives. But in general tem, the following are widely cited in
development literature-:

(a) Agricultural projects improves the quality of life in rural areas by:

(i) Reducing unemployment and under employment through the labour

intensives technologies normally adopted.
(ii) Increasing the quantity of goods and services available to the rural
population.

(b) AP redistributions income in favour of the poor - by generating jobs

incomes are redistributed to the fom1ally unemployed.

(c) AP fosters linkages in the economy and merges into externalities such as
administrative skills leamed during project duration.

(d) ARD projects lead to increased productivity in the rural sector through the
provision of various inputs that increases productivity.

(e) ARD projects may lead to a favourable BOP of LDC - Exports, reduction
in imports.
Structural Adjustment Programmes (SAPS} ~ ... ,.,_._

29
The two institutions were born together in 1944. The 1930's were characterized
by the Great depression. This had two main impacts:

Declining production and trade in the emerging third world.

It caused disturbances in the international monetary system as it
resulted into widespread currency instability the world over.

So, while the second world war was going on, plans were underway to regulate
the international monetary system. This was to be done by setting up an
international financial institution. .As the war came towards the end, Europe and
Japan lay in rains with devastated economies and worthless currencies. Only
the USA emerged with its economy intact. Therefore, only the USA could help
both its allies enemies rebuild their economies.

In an attempt to achieve this, the USA and its allies met in Bretton Woods, USA,
in 1944. The meeting reached an agreement which led to the creation of three
major institutions. These were the IMF, the WB and the Bretton Woods
Exchange Rate System (BWERS).

Activity

Diagrammatically represent a project cycle.

Topic 3: The mandate of IMF

The original mandate of the IMF was to manage the international monetary
system, especially the BWERS, This mandate of the IMF rested on two factors:

(a) Exchange Rate Stability: Against the economic background and financial
confusion of the 1930's, it was deemed necessary to have fixed exchange
rates. The reason behind this was that this would ensure orderly
exchange of currencies. In terms of operation, countries agreed to fix their
currencies to the dollar or gold. They were not allowed to change these
rates 1 percent above or below the agreed parties, This was aimed at
creating order in the international monetary system.

(b) Multilateral Credit: Under this arrangement, each country had some
borrowing rights which it could use to borrow money from the IMF. This
was largely meant to meet short-term BOP deficits. To access these
funds, each member was allocated a quota depending on the economic
significance of the country. As a result, since the USA had the strongest
economy that time, they had the !argest quot.a, that is, 36% (which has
now declined to 17.78% ). ~ ....

30
However, fmm 1967, the role of the IMF was overtaken by events, for example,
there was an improvement in world monetary stability and liquidity in the 1960's.
Thus, control of the international monetar; system was no longer necessary.

The IMF therefore changed its role to management of structural adjustments,

debt management in indebted countries and the remintegration of East European
Countries into the world economy.

•-•-~-•-------••-•NW•••••-•_,,.._,_ _ __

Activity: QUESTIONS FOR REFLECTION

1. Trace the origin and mandate of IMF, World Bank and the Bretton
Woods Exchange Rate System (BWERS).

2. Describe the number of measures a govemment can adopt to reduce

budget deficits according to IMF fiscal policies.

3. What prescriptions are recommended by the IMF to slow down

inflation?

4. The so,.-.cal!ed short-term stability measures have a lot of

disadvantages. Mention any three.

5. Critique the concept of market liberalization.

6. Define the following terms: Trade liberalization, market liberalization

and institutional reforms. Cite disadvantages.

7. Define and apply the term "Structural Rigidities'\

8. Critique the following terms: devaluation, removal of subsidies.

9. Discuss the major failures of SAP in the Zambian cont.ext.

····-·....-~..._.,..,...._____________
,,. __________ ....._____
,

'b<.....__ «

31
Topic 3: The Mandate of the World Bank (IBRD)

The WB group comprises 3 institutions: The International Bank for

Reconstruction and Development (IBRD); the International Finance Corporation
(IFC); and the International Development Agency (IDA).

The initial official name of the WB was IBRD. However, the addition of the IFC
(in 1956) and the IDA (in 1960), changed it to what it is today- The World Bank.

At the time of establishment, the mandate of the Wor1d Bank was:

(a) To promote reconstruction and development in Europe {which was in ruins

because of the war).
(b) To promote the long-tern, balanced growth of international trade.

Over the years as Europe developed, the main mandate of the World Bank
shifted to promoting development in 'Third World Countries'. So, the World Bank
started lending money to deserving member countries for specific projects.
These projects included hydro-power plants, road construction,
telecommunications, etc.

In this regard, the main mandate of the World Bank became to finance or
promote development particularty in the LDC's.

Background to IMF/World Bank Involvement in Africa: In the immediate post~

war independence era, Africa and the rest of the third world enjoyed high
economic growth rates (average 6.7% per annum). Most LDC's experienced
massive developments in their infrastructure like roads, rail\Nays, electric power
plants, etc. As a consequence, there was generally a considerable rise in
people's standards of living in these cpuntries. There was rapid expansion of
education, health, water and sanitation, etc.

Unfortunately, the sharp oil prices and deteriorating TOT sharply affected these
countries' economic petionnance. Economic problems set in from the mid-
1970's. These problems assumed crises proportion in the 1980's and have since
continued to date.

To counter these problems, most of these countries opted to borrow as they

understood the external shocks to be temporal. They borrowed from the so-
called fuel money from oil-producing countries hoping to repay when the export
prices recovered. Unfortunatety, their export prices never recovered. So, when
the owners of the money wanted it back, there was a crisis. The LDC's did not
have the money to pay back.
S:,-..

32
Meanwhile, the economic crisis continued. In an attempt to resolve these
problems, and since they could no longer borrow from international banks, most
countries resorted to the IMF and World Bank for financial support.

However, the IMF and WB attached conditionalities to their loans. They wanted
to help these countries achieve economic st.ability and long-term growth. So,
they introduced ~t~bil~iton_ and structuraJ_~~gjustment QOll_cies. When the
IMFNVB gave money to a country, measures were taken to ensure that the
concerned country implements the right policies (SAPs).

So, simply defined, condltionalities are the explicitly commitments that countries
make upon borrowing money towards policy implementation.

Structura1 Adjustment Programmes (SAPss): Most LDCs are implementing

SAPs, most donors now regard adoption of SAPs as a necessary condition
before they can release their assistance. The message that there is no
alternative economic policy to structural adjustment is now fully embraced by
many third wortd leaders. This is because many scholars have acknowledged
the contribution of structural and external factors to the worsening economic
crisis in Africa. They argue that athe c1is1s was caused and aggravated by
government policies that stood in the way of efficient markets. The result was
that economic distortions were created which in tum perpetuated and worsened
the crisis.

The IMF/WB therefore argued that there was urgent need to eradicate
government perpetuated economic distortions. These distortions include
oveivatued exchange rates, price controls, subsidies and sufficient government
inteivention, etc.

The main objective of the IMF/WB SAPs therefore, is to stabilize the economy
through adjustment of domestic demand to the reduced level of resources. In
practice, adjustment often refers to the attempts to adapt to sudden, usually
unpredictable, large and unfavourable changes, usually include deteriorating
TOT mainly brought about by declining prices of exports and rising prices of
Imports.

The aim of adjustment then, is to reduce the vulnerability of a given economy to

future shocks by increasing flexibility, and adaptability through the interplay of
market forces.

On the other hand however, there may also be need to adapt to favourable
changes. These include. for example, an unexpected improvement in TOT or
inflow of additional foreign capital. in this case, the objective of adjustment would
be to maximize the benefits from such an occurrence. So, structural adjustment
is not the animal it has bean made to be. it is just the national reaction to the .,...

33
changing environment. Unfortunately, LDC's waited too long before they began
to adjust their economics hence the complications.

Nearly all SAPs are aimed at reducing state participation in the economy and
thus, to allow market forces to operate more freely. The underlying assumption
is the private sector. Thus, it should therefore lead the process of economic
restructuring.

However, the belief in the efficiency of the private sector is so great that the
privatization and liberalization of the economy is carried out even when and
where the necessary conditions for the efficient operation of the market forces do
not exist.

SAP policies can be broadly divided into two: .. Demand side and supply side
policies. They are also called stabfil?.fljion and structural adjustment policies
respectively. The IMF mainly focuses on stabilization (demand side) policies
while the WB focuses on structural adjustment (supply side) polices.

It should be noted that demand side policies are typically stabilization policies
aimed at reducing BOP deficits and increasing stability in the economy by
reducing inflation.

On the other hand, supply side policies are typically structural adjustment
measures.

However, it is important to note that these measures are difficult to separate as

they are usually implemented almost simultaneous~1-

(i) Demand side/Stablisation Policies (IMF Policies}:

Demand side policies have been defined as measures whose primary

objective is to reduce the aggregate level or rate of growth of nominal
domestic demand and consumption. Broadly defined, they include
correcting inflation and BOP deficits. Demand side policies are usually
short-term in nature.

Stabilisation theory mainly focuses on excessive money supply and over-

valuation of the exchange rate as the sources of inflation and BOP's
deficits. This is why the principal traditional policy measures for achieving
economic stabilization are reduction in money supply an devaluation of the
exchange rate.

Demand side/stabilization policies are divided into two broad categories,

fiscal and monetart policies.
1t-».,,

34
(a) Fiscal Policies: The main goal is to reduce budget deficits. To
reduce these deficits, there are a number of measures which a
government can adopt.

(i) Cutting Public or Government Expenditure: These involve

reducing government spending (on social services) and then
introducing or widening the tax base. Examples of these
measures in Zambia include the introduction of user fees
and the Zambia Revenue authority {ZRA).

(ii) Wage Controls: For example, the wage freeze. This is aimed
at limiting disposable income, hence restraining domestic
demand.

(iii) Abolition of Subsidies: This involves abolition of both

consumer and producer subsidies with a view to removing
distortions in both consumption and production, Another aim
of subsidies' removal is to try and bring the budget in line
with available resources. You try to compress local demand
while trying to increase (release) local resources to balance
BOP and reduce budget deficits.

(b) Monetary Policies: These deal with

i. The control of money supply and/or

ii. The decontrol of real interest rates (devaluation).

Interest rates form the main monetary policy instrument The main
goal of monetary policy is to maintain low rates of inflation. It is
argued that inflation is normally attributed to increases in money
supply. That is, where governments print money rates are used as
a tool to curb inflation.

For example, if you increase bank interest rates, the result is

declining inflation. This is because of two main reasons:

High interest rates make borrowing from banks very

expensive thus, fewer individuals or companies borrow from
the banks, thereby limiting money supply.
High interest rates make saving more profitable as people
earn high interests (profits) on their savings. As a result,
many individuals or companies are tempted to bank their
money, thereby, or siphoning excess money from the
economy. It is this contraction on money supply that leads to
the slow down in inflation. ··· ·•.. ,

35
 To contain excess money supply, the Zambian government
adopted tight monetary controls in 1993, cash budget system was
introduced, which was supposed to balance expenditure and
revenues.

Devaluation of exchange rates (or currencies) is meant to increase

exports and reduce imports i.e. reducing BOP deficits. This is
because devaluation makes exports cheaper, thereby encouraging
more sales in the export market On the other hand, devaluation
makes imports more expensive, thereby discouraging imports. The
net outcome ls the reduction in trade deficits (BOP deficits).

it is argued that these dernand - Side policies tend to have a

concretionary affect on the economy. Demand - side policies aim
to achieve economic stability within a very short time. In general,
demand side fiscal and monetary policies aim at restricting real
incomes. That is why they are called demand management
policies. They deal with the demand side of the economy.

The main criticism is that they tend to have oontractionary effects

on the economy. it is argued that the so-called short-term stability
is achieved at the expense of economic growth, employment and
consumption.

(c) Supply Side/Structural Adjustment Policies (WB Policies):

Structural adjustment/supply side policies are longer-term
adjustments to changes in the economic environment. They have
been defined as measures intended to increase the volume of real
goods and services supplied by the domestic productive sector at
any given level of aggregate domestic demand.

As was stated earlier, demand-side policies are meant to reduce

aggregate domestic demand to the !eve! of domestic resources.
On the other hand, supply - side policies are meant to raise local
production of goods and services to meet aggregate domestic
demand.

Classification of Policies: the policies tend to fail into four main areas:

(a) Measures designed for mobilization of domestic resources: These include

both fiscal and monetary policies. As far as fiscal policies are concerned,
they include the following:

(0 Broadening of the Tax Base: In Zambia, the policy led to the

establishment of the Zambia Revenue Authority (ZRA) in 1994. s:••..,_._

36
 The aim was to enhance Zambia's capacity to mobilize domestic
resources through taxes.

(ii) Incentive to ailocate resources to productive sectors, That is,

government influences where private investors put their money
through indirect mechanisms like taxes or infrastructure
provision. The aim is to shift resources from non-productive
sectors to productive sectors or activities.

{iii) Cost-Sharing Scheroos: In Zambia, the best example is the

introduction of user-fees in health centers, schools, colleges and
universities.

(b) Monetary Policy Measure:;";: include the !liberalization of interest rate

determination. This means allowing the market to determine bank interest rates
by remov!ng government controls.

L The second area is irnproving the efficiency of resource

allocation and use by the public sector and parastatal
enterprises. In the Zambian context, it meant restructuring and
rationaliZing the public sector and giving them more autonomy.
We also saw deliberate efforts by government ministries
towards recruiting and training of a highly qualified workforce.

ii. The third area involves liberalization. This has two main sub-
components -- Market and trade liberalization.

a. Trade liberalization: These are measures to do with

the trade regime. They include trade liberalization,
removal of tariffs, etc. This is meant to give equal
opportunities. to both import and export sectors to
grow equally and oompetiUvely.
b. Market liberalization: This means the decontrol of the
price· system to allow market forces to determine the
prices. This measure is widefy used in the agricultural
sector and the energy sector. In Zambia, example
include liberalization of agricultural marketing and in-
put delivery. Also, the effort by ZESCO to bring
electricity tariffs to economic levels represent the
energy sector.

c, Institutional Reforms: Generally speaking, the kind of

measures you find include abolition of parastatals,
priviatisation, down sizing of workforces
(retrenchments), etc. In Zambia, a good example is ?\,,.,..

the public sector refonn undertaken by the Zambian

37
 government. Also, as a measure to reduce
government involvement in the parastatats, the
Zambian government privatized state - owned
enterprises. To facilitate this process, the Zambia
Privatization Agency (ZPA) was established in 1992.

Note that, these supply side policies and demand side policies have to work
together. The normal sequence is that stabilization must precede adjustment.
The reason why stabilization must precede adjustment is that stabilization
poHcies are easy to control. Moreover, there is need for some level of stability
before structural adjustment policies could make any tangible contribution to
economic growth.

The main problem has been that the supply response has been slow in coming.
The reason given for this slow response is the existence of what are called
structural rigidities. For example, most economies' in Sub-.Sahara Africa are
mono-economies. For example, if the copper industry becomes unprofitable (as
in the case of Zambia), adjustments to shift resources from the mining sector to
others may not occur as there are no developed alternative sectors. To shit
resources from mining to agriculture would require the development of the
productive capacity in agriculture first This is likely to take very long and it also
needs investments which most LDCs do not have. This slows or hinders supply
responses to any structural changes.

So, what has happened in most adjusting countries is that demand - side
policies tend to overshadow supply side policies.

Topic 4: Critique

tn terms of successes, SAPs resulted in significant improvements in macro-

economic management and stabilization, at least until 1997. Zambia's economic
management, at least in the short-tenn, had improved considerably since 1992,
especially in monetary and fiscal discipline. This discipline caused a quick
reduction in fiscal deficit from 6.1 percent in 1991 to 1 percent in 1996. The tight
monetary and fiscal policies had reduced inflation from the triple digit levels of
192 percent in 1992 to about 35 percent in 1996 and 18.6 percent 1997.

The reforms have also made progress in freeing the aconbmic environment from
government control. Sectors such as manufacturing; transport, and tourism
recorded growth of 3.1, 8.9 and 3.4 percent respectively in 1996.

However, these developments were positive only in quantitative rather than

qualitative terms. Most of these developments have been overshadowed by lack

38
Terms of Trade: The concept of terms of trade was developed with reference to
international trade. T =T basically implies the ratio of export prices (PX/PM) T =
T for a country improved if,

(i) Export prices .(but import prices decline.

(ii) Export prices 4 more than the A in import prices.

(iii) Export prices • but import prices remain constant

(iv) Export prices v but import prices 'f' more.

(v) Export prices remain constant but import prices fa!L

TOT also improve if increased producHvity in export industry is not translated in

the form of a fall in prices, If agriculture price and income elasticity of demand for
agricultural products is low and as such a fall in prices of agricultural
commodities will nom1aUy not secure a proportionately high income from abroad.
In the c.ase of LDCs in general and Africa in particular TOT have been mostly
negative and are connected to Africa's Agrarian Cris.is. VVorsen1ng TOT for
primary commodities forced Africa to Start Borrowing from international
institutions such as the IMF to rneet their food shortfall resulting in debt problems.
This means that Africa exports more but gets less for its exports and hence don't
have the resources needed to make structural changes in their agricultural
sectors. In order to finance debt servicing LDCs embarked on:

(i) Import Reduction: LDCs sought to achieve export surpluses by import

reductions combined with !SL This represented an import strangulation
and was not compatible with their developrnent objectives.
(ii) Export Expansion: As a result of the failure of ISi there was an urgent
need to eam more forex to at ~ny price. Export led growth strategies
implied adopting policies such as devaluation. This increased export
supplies but it also made exports cheaper and cut LDCs ability to
modernize agriculture and led to a crisis in the agricultural sector.

The above situation led to policy makers in LDCs to shift emphasis from
export production to domestic production in order to promote sole
sufficiency and to diversify its export base away from traditional to non
traditional exports.

~•·v,

42
 UNIT4
TRADE PATTERNS IN lDCS

Introduction: Trade policies are important In most LDCs as they shape the
pattern trade is going to take. In addition, most African economies are open with
foreign trade accounting for over a quarter of GNP, with the exception of oil
producing nations and the N!Cs most LDCs serve their forex from the sale of
primary commodity exports. In looking at trade policies and patterns of many
countries (LDCs + DCs) many questions arise.

Objective: By the end of this unit you should be able to:

0 Define !ntemational Trade and the role it. plays in African economies.
• Analyze terms of Trade.
• Compare and contrast problems of cash crop and food crop production.
• Define Domestic Trade

Topic 1: International Trade

International trade plays a vital role in the historical development of LDCs. This
is due to the fact that 1ntemationa! trade enables countries to specialize in the
production and export of commodities in which they have a comparative
advantage. Since agricultural exports constitute a major source of foreign
exchange earnings and represents a large economic activity/sector i1 most LDCs
international trade is of crucial importance to most LOCs development efforts. In
addition most lDCs ptimary commodity exports have traditionally accounted for a
sizeable production of individual countries gross national products. Despite the
fact that LDCs have bean major suppliers of most important agricultural
commodities in worid markets many LDCs suffered severe decreases in the
volume or their principal agricultural exports and in their market share.
Furthermore the markets and p1ices of those exports are often very unstable
making their dependertt.,)f on primary commodity exports very risky and uncertain.
Although domestic policies of LDCs play an important role in the deterioration of
their economies other factors such as deteriorating tenns of trade for LDCs Vis-
awvis and price fluctuations of LDCs exports on international markets have a
more direct bearing on LDCs agriculture crisis. The above was reinforced by
LDCs domestic policies such as 151 and the belief in the greater role of
government in agriculture marketing pricing.

-..

41
All these indicate that if Zambia has to benefit from SAP, drastic measures have
to be put in place to counter these social dimensions of SAP.
------------··-·-··--·-- ............................................--,
Activity

1. List five (5) advantages of ARD projects in rural areas.

'-------~-----------------..---·--..··-----·--...._.._____..... ...--..---.. , ,

Topic 5: Adjustment with a Human Face

Until recently, WB!IMF •~ supported adjustment programmes have focused

narrowly on economic problems, with little attention given to social
consequences. They have emphasized short-tem1 restoration of BOP
equilibrium and financial stability.

However, poorly due to grO\l\ling realization about adjustment related social costs,
both the WB/IMF have in recent years accepted poverty alleviation as an
important component of SAPs. By the mid-1980s it was recognized that
adjustment experiences were negatively affecting human welfare. It's now
generally accepted that SAPs should include measures to protect the vulnerable
groups. Thus, in recent years, many SAPs have included projects in areas such
as health and nutrition, and rehabilitation of social, health and economic
infrastructure.

Programmes to cushion the poor included measures to target subsidies, low..

interest loans or grants to vulnerable sections such as the lowly paid, the
unemployed and small - scale produces"

However, in most cases, not enough resources are set aside for the protection of
vulnerable groups. As a result, on~/ a small segment is covered by such
programme. Moreover, the greater intended recipients as is misused by corrupt
and selfish leaders at both national and project levet Therefore, a lot more need
to be done.

s •. ,. ~~-

40
of qualitative economic growth, decline in many economic sectors and lack of
improvements in living standards of the people.

Thus, although SAPs are meant to achieve economic stabilization which is a

necessary condition for economic growth, in practice this may not be so. Recent
evidence indicates that trade liberalization whe-n accompanied by complete
opening up of the economies may actually destabilize the very basis for domestic
accumulation and crowd out upcoming activities. The Zambian case is a very
good example. The tendency has been to check the indigenous private sector
and enhance the dominatkln of international capital.

Also, devaluation leads to rising inflation and to declining real wages and
salaries. The removal of subsidies (both production and consumption) has an
effect of increasing prices and thus accelerating 'iha cost of living. This further
worsens inflation and pressures.

Therefore, the main failures of SAP have been the negative economic, political
and social impact it has had on the whole economy. Per capita incomes have
fallen from US$405 in 1991 to US$250 in 1996. Between the years 1995 and
1996, the debt service ratio jumped from 25% to 30% of annual savings, the
figure which is now about 60%, private consumption has also declined by 5.3%.

The social dimensions of these economic policies have manifested themselves

through various social ills such as poverty, unemployment, crime, prostitution and
street vending. Statistics on poverty, inequalities and other social indices present
a very grim picture. Seventy Six percent (76%) of the Zambian people, and
about 84% of the rural population, live below the poverty datum line. Further, the
top 5% of the population had 40% of all the national income while the bottom
23% had only 1.7% of nationai income (fhis is according to the household
budget survey of 1993/94).

So, when judged in tem1s of poverty and living standards, SAP have virtually
failed as Zambians are worse off today than they were three decades ago. The
poor economic and social perfom1ance indicate that liberalized markets, as
currently managed, have failed to live up to expectations. Massive
unemployment due to company closures has thrown many Zambians into abject
poverty.

The general conclusion as far as Zambia's experience is concerned is that SAPs

are anti-development They bring about economic stagnation because of their
contractional effects. SAPs also have economic, consequences which are not
good. Apart from rising poverty, inequality and unemployment, dumping of
foreign products is another problem. Foreign goods are introduced cutting off
local factories and reducing local markets for local goods.
-;t,,,,✓;

39
 Activity

1. What are some of the setbacks LDCS have suffered with reference to
lntrm1ational Trade?

Price Fluctuations: Most LDCs derive their foreign exchange from the export of
one or two primary commodity exports for which they receive low variable and
often declining prices on ¥>1orld markets. in agricultural trade the tendency is for
price rises being followed by slumps, leaving those producers who switched to
growing the crop due to high prices counting their losses instead. This leads to
agricultural producer's incapacfcy- to invest in the development of the agricultural
sector and hence leads to food insecurity. The problem was compounded by
efforts of international institutions such as the IMF of encouraging debtor
countries to grow cash crops. When countries raise their output simultaneously
the only winners are multinationals who purchase the crop at competitive prices
and consumers in DCS who pay less for their commodities because of induced
competition among primary commodity exporting LDCs. When LDCs receive low
export prices at a time VJhen their import bin for essential commodit.ies such as
flSh and food is raising their ability to invest in modem agricultural development is
seriously constrained and it also underrnines their food security objectives. Since
the international market for agricultural commodities is perceived to be unstable,
unreliable and unresponsive to the needs of lDCs populations the debate
whether to promote domestic production or export production became heated.
Most policy markers fei that domestic production promotion was the best
alternative due to deteriorating TOT and fluctuations in prices when dealing with
export crops. Furthermore it was felt that producing for the domestic market
would not only reduce their vulnerability but would atso encourage LDC's
government to invest in structural changes in the sector and hence foster
sustainable production patterns and ultimately agricultural development

Topic 2: Domestic Trade

With the failure of export oriented trade strategies in LDCs most governments
advocated for the agricultural production for the home market It was felt that
export crop oriented policies in agriculture were taking away resources from food
crop production and that by increasing food imports which had to be paid for in
foreign exchange the much needed overs.es earning were channeled away from
production to consumption. As a result many LDC's governments were forced to
take an active role in the sector in order to invest considerably in raising
agricultural productivity due to rising ooncems with the declining per capita food
production and rapid rises in food imports by the 1930's . In the 1960's the ••·,.
widening productivity gap between DCS and LDCS and more recently declining

43
agricultural productivity in LDCS and evidence of massive rural poverty increased
LOCS concerns for producing for the domestic production included land reforms,
improved crop husbandry techniques and intensification. Frequently the
promotion of food production for the domestic market has forced government to
fonnulate not just a policy of encouragement through advisory seivices, credit
provision and control of agricultural marketing but also control of agricultural
production at all stages and the use of laws and regulation to ensure viable
agricultural practices, Problems of rising food imports and scarce resources
encouraged investment in modem techniques of food crop production. However
production or food crops proved more expensive than local hand tillage or
imported food stuffs. Efforts to achieve large scale food production through state
farms have also not succeeded and now emphasis is on changing the pattern of
trade to NTES and manufactured goods.

Producing for the Domestic Market: The notion that government should play
an active role in restoring agricultural production for home consumption arise out
of the realization that producers for export markets were channeling scarce
resources away from food production" This led to food shortages and increasing
inability for government to finance imports of food. In addition producing for
domestic markets would lead to improved production methods and to crop
diversificatiort This notion which began in the 1930's gained momentum in the
1960's due to the widening productivity gap between DCS and LDCS worsening
nutrition standards and declining per capita food production in LDCS and RARD
rises in food imports. As a result many LDC governments invested heavily in
agricultural productivity. In recent years, government preoccupation with, for
domestic production was reinforced by growing evidence of rural poverty and an
increasing threat to agricultural productivity due to extensive migration from rural
areas.

Emphasis was placed on land reforms., improved husbandry and b1tensification.

In most cases the promotion of domestic market production forced government
not just to formulate an enabling policy environment through advisory services,
credit provision and marketing control but also to intervene in agricultural
production at all stages and through regulations and laws backed by Police
inspection.

In Africa investment was channelled towards mechanization and large scale farm
units. In the final analysis mechanization proved too expensive for most African
governments because it implied the issue of subsidies which could only be
fmanced from export taxes. In may lDCS cycle production especially in mare led
to a system of mare and produce marketing boards. Due to the increased
productivity or hybrid seeds a pressure on available agricultural infrastructure
resulted in significant post harvest losses. In addition import substitution was also
a prominent feature in this switch to domestic market production, for instance
vegetable and sugar cane production was introduced inorder to reduce the ... , ,.
imports cost of many LDCS, However a cost benefit analysis of producing for

44
export. market shows that domestic production was not very successful due to
high production costs, limited agricultural infrastructure and low productivity due
to government dominance in agricu!turai production, marketing and pricing.

Cash Crop versus food Crop Production: The issues of food crop versus
cash crop production are closely connected to issues of international trade
versus domestic trade. Normally the production of food crops and cash crops
are trade offs rather than compliments. Although many authors distinguish
between food crops and cash crops frequently many cash crops are also food
crops and therefore overlap the categories chosen especially when there is more
than one market and many uses to which a crop may be put

Cnh Crop Production: In the earty part of the 20th Century the main emphasis
to develop LDC'S agncultural sector was placed on cash crops. This was
designed to eam mom foreign exchange, to generate government revenue
through export taxes and to take advantage of the widening scope of world
markets for tropical products. The rationale for producing cash crops was based
on the principle of comparative advantage. Since it could be economically viable
to export non food agricultural products and use the proceeds to import food.
Liberalization is the major piie conduction for producing cash crops and the major
short coming of producing cash crops is that it increases the dependency of a
given country on foreign supplies. for a greater proportion or its food needs. This
is undesirable gi'ven the unreliable nature of grain suppliers on world markets. In
most LDCS the most important cash crops includes coffee, sugar, cotton, maize,
wheat, rice, tea and cocoa. Due to the dependency of LDCS on DCS for their
market and to price fluctuation many LDCS emphasize on diversification of trade
as a major policy 1tam. Although many cash crop patterns are subject to
environmental factors, political and economic linkages play a vital role in the
pattern of cash crop marketing. These trade systems reinforced by special
pricing arrangements makes it difficult for regional integration to be effective in
Africa. In addition low price elasticities pf most agricultural export products from
LDCS makes the prospects of increased sales of those cash crops limited and
makes a strong case for diversification. This is because of adverse terms of
trade facing many LDCS resulting in suppliant export ea.mings that made it
difficult for LDCS to invest in agricultural infrastructure and wanted development
efforts of many LDCS, The failure by cash crops to initiate or facilitate LDCS
development effort was basically due to rising oil prices, fertilizer prices and food
import prices. The above made most LDCS incapable of sustaining food items
produced and those consumed aggravated food deficits in LDCS leading to
rr:any policy makers to advocate for the growing of food crops. Most LOS
development anatysts also felt that domestic policies such as overvalued
exchange rates which altered the TOT against exportabfe agriculture
commodities also contributed to their import Incapacity and proposed that in
addition to producing food crops market forces should determine the exchange
rate and processed agriculture Eixports should be promoted. •. ,

45
 Activity

Mention any three constraints that lead to the agricultural producer's

incapacity to invest in the development of the agricultural sector.

Topic 2: Food Crop Production

In many LDCS food production is the largest segrnent/element in the production
system. After an earlier emphasis of export production the trend has switched to
food crop production for the internal market because it was felt that the reduction
in world trade would favour food production and reduce LDCS dependency on
DCS for food imports. This dependence on DCS for food imports is worsened by
climatic factors such as irregular shortages due to pests, diseases or variability of
moisture a.nd growing populations. The reduction of export production would go
a long way in mitigating these constraints on food supply. In most LDCS
increase in food production has been a function of increasing the total area under
production. The reason why many LDCS fail to increase productivtty is because
of the high costs involved which many of them can't sustain. The leading food
crops of many LDCS includes rice, cassava, wheat, maize, plantain, sorghum,
yam, millet, groundnuts and coco-yams. However due to crop specialization and
adoption of exotic crops many of these crops experienced a decrease in variety
of plant stocks. The adoption o'f exotic food crop varieties had negative
implication on LDCS food security position and agricultural potential because it
implied using scarce foreign exchange resources for food imports as opposed to
structural changes in the sector. As a result many LDC development analysts
prescribed the setting of domestic prices above worid market prices in order to
curtail imports and to reduce LDCS vulnerability to shortages on the world
markets or to high food prices on world markets. The above was viewed as a
viable policy option due to: •

(a) Unfavourable demand prospects for LDC agriculture exports

(b) Lack of compilmentarily between food and cash crop production
(c} Lack of congruency between food locally and food consumed locally.

Because of dietary habits changing from traditional staples towards importables,

most LDCS adopted a policy of agricultura! import substitution which favours a
selective closure of the food economy and implied an implicit tax on cash crop
production. When this failed to work due to various factors focus began to shift
towards high value non traditional exports and manufactured exports.

~--,.,

Activity

Why has the trend changt?d from cash crop production to food crops for
the internal market'? Mention two major reasons.

---·-···-··-···--·---------

J+.h
 UNITS

POLICY- BASED LENDING AND CONDITIONALITY

C/PBL is a paradox because it is difficult Justify why international lending

agencies should impose conditions for loans that are in the interest of a receiving
country. If conditions are in the interest of recipient countries then one expects
policy makers/national governments to pursue these conditions. In other words
one pays for good advice ideally and not being paid for following it.

Objectives: At the end of this unit you should be able to:

• Define the conditionafities of lending institutions
• Compare and contrast the different mandates of the IMF and Worid Bank

Topic 1: Conditkms: conditions imposed by lending institutions include:

(i) Assumption that policy makers may be ignorant of causal relationships

and needs instruction.
(ii) Their causal analysis of links between policies and results may differ from
that of donors. They may view, for instance, direct contrast as being more
effective than indirect policy tools like devaluation.
(iii) Their forecast of the future state of the world may be different~~ borrowers
are usually optimistic and lender pessirnistic B:::: 10 year copper price •
L = 10 years copper price,-

(iv) Different Objectives - Lender objectives to restore financial position while

borrowers achieve economic growth.

(v) Different weights to same objectives: Govemment = support base donor :::
poorly represented group.

Conditionality is meant to exercise leverage not to persuade other

considerations in imposing conditionality includes:

o Different ideology {B - Imperialist tlxploitation I L - victim of outdated

ideology)
@ Risk aversion in adopting policies with uncertain outcome.
® Different discount rates and different time frame (b - short term gain/ L
- long term gain).
e Policy makers may wish to find a scape goat for popular measures and
lenders are ideal victims.
@ Policy makers may share analysis, forecasts and objectives, attitude
for risks and time horizons but asses costs of transition to better
policies as too high. Because foreign funds are not there to fill
foreign exchange gaps but of adding flexibility to an economy
wishing to change its course from bad to good policies.

47
From the above it is clear that economic policy making operations in highly
uncertain areas and as such conditionality, should be replaced with negotiation.

Another difficulty is that policy conditionality is tangible and resistant

governments can yield to one type of policy while pursuing their objectives with
another. In addition it is cumbersome and time consuming to include all possible
policies in an agreement to close all loopholes and it is impossible to implement
or to monitor all implementations.

Despite the above it would be unreasonable to propose that money should be

given without regard to its use by recipients,

The IMF and World Bank: The World Bank and IMF came into existence
following the Bretton Woods conference of 1944. The major objective of the
Bretton Woods conference was to assist any countries, both developed or
developing, facing any imbalances in its economy. This need for an international
monetary system came about due to the depression and recession of 1930/40
which led to a decline in global economic activity (high unemployment levels, low
prices, declining productivity).

The above made it necessary to come up with an international economic system

(ies)

The DCS normally approach these institutions to acquire funds to help them get
around periodic BOP problems or in case of BOP supply to avoid the pervasive
effect in their growth and development pattern.

For LDCS IMF/ World Bank assistance is solicited to correct structural

imbalances that are inherent in their economies.

Structural imbalances in LDCS came about due to:

• Stagnating agricultural sector

• Worsening terms of trade
• Export demand constraints
• Excessive external borrowing _., BOP problems

The above are constrained further by lax fiscal and monetary policies, price
distortions, inefficient public institutions and high rates of protectionism. The
iMF and World Bank therefore put in place structural adjustment programmes
intended to set right the economies of LDCS on a path of growth and
development.
2-A,,•,

By the 1960 and 1970s most LDCS were experiencing severe contractions in
their economies due to:

48
 "' lntema! reasons,_ (i) !SI - Debt problems.
• External reason - (i) increase in oil price
(ii) Food Aid

The above resti!ted In the need to bring in the IMF and World Bank to assist in
solving these problems.

Different Mandates

Although IMF and Worid Bank polices are similar and sornetmes overlap, there
are significant differences in the policies of these two Bn1tton Woods Institutions.

IMF: The !MF is concemed with short term reduction of a country's budget
deficit, BOP deficit and a reduction in inflation. They arf; basically demand side
refonns involving fiscal and monetary restraint In other words they are
stabilization policies commoniy policy to such as devaluation, removal of
subsidies, reduced public expenditure, increased taxation credit squeeze, tariff
reduction and liberalizatocirt Policies last from 3 - 5 years.

World Bank: Too VVorlid Bank is primarily concerned with medium term
impmvements in the structure of the economy by bringing about changes in
relative prices and institutions designed to ensure greater effick.mcy and as much
as possible to forester future payments and stabilization problems. These are
supply side reforms lntended to make the economy more responsive, flexible and
better able to utilize scarce resources and thereby create sustainable kmg term
grovvth. Policy tools used by the Work! Bank includes privatization and the
promotion of
a tree market environment Collectively taken they are intended to
maximize efficiency gains in production and to eliminate structural rigidities in
production.

\Nor!d Bank'"' Lending operations started 1948 financial resources comes from
sale of bonds in private lnterna.tional markets and member subscriptions hard
currency loans m~ IFC/soft loans ··- !DA

Generally Disequilibrium in an Econorny is Reflected By a Rising Debt Problem

and Continuous BOP Crisis

Topic 2: Cmise:& of SAJ»

Both intemal and extema! factors may result in dt1bt and BOP problem~L

internal Reasons

(i} Poor economic po!ic10s ~- Poor po!k;es rnay load to BOP arid debt
problems. For instance concentnation on urban development particularly

49
 import substitution industrialization has negative implications on the
economy. This is due to the reliance on foreign ALO (FA) which when
withdrawn le.ads to economic problems as forex meant for industrial raw
materials wm be channelled to food imports. The net effect of this is
underutilization of installed industrial capacity and minimum linkages
bemeen the agricultural and industrial sector.

Cross com:HUonanty In 1tl80s to date

IMF and World Bank policies sometimes overlap. Accepting IMF condruonalities
is the prerequisite of the World Bank coming in with structural adjustment loans
and policies.

Economic reform is comprised ot· short term macro economic stabHity and
medium term adjustment Cross conditionality is important in achieving a
desirable policy sequencing. Therefore stabilization or the removal of macro-
economically disabling balance or payments and fiscal gaps as well as inflation
has to come before "'adjustment' or creation of conditions for sustainable growth.
For viable economk; reforms to be initiated there is need for institutional changes
to be put in place .
...-----
Activity
---·--""'"···•·-····--- ,,.,_ ________
..........._,

1.. Critically analyze reasons why conditions are imposed by lending

institutions

2. Why should conditionality be replaced by negotiation?

3. Compose contrast the role that !MF and VVor!d Bank play for LDCs and
DCS respectively.

4. Define the tem1 "structural imbalances"

5. "The IMF and World Bank therefore put in place SAPs intended to set
right the economies of LDCS on a path of growth and development.
Critically evaluate this statement.

.,,.,._..~••"'""'~•----••••--w-----•-<.,n..,.,.,,-,u,~••....,.,.,..........,.....,,. ....,, •. ..,_,,.---,..,,"••-----•"---- '

~-- ...

50
 UNITS
BALANCED DEVELOPMENT

Objective: At the end of this unit you should be able to:

• Define balanced development, its significance and main features

• Critique the relevant of balanced development to LDCS.
• Define and analyze the unbalanced Growth Theory, main features and
relevance to LDCS.

Topic 1: Significance of Balanced Development

Balanced development is a type of development brought about by a strategy that

advocates for simultaneous combinations of investments in major sectors of the
economy. It is argued that with the right bundle of investments, both in
qualitative and quantitative terms, it is possible to initiate a development process
that is sustainable and viable.

This theory was advocated mainly by Rosenstein-Rodan (1943), Ragnar Nurk.se

(1953) and Arthur Lewis (1954). Many writers view balanced development
differently. To some, balanced development means investing in a lagging sector
of the national economy or industry so as to ensure that it catches up with others.
To others, balanced growth implies that investment takes place simultaneously in
all sectors of the national economy. Still to others, it implies the balanced
development of the agricultural and industrial sectors of the economy.

Thus, to this extent, balanced development calls for maintaining the balance
between the different consumer and capital good industries. It also calls for
ensuring balance between agriculture and industry and between the domestic
and export sectors of the national economy. Additionally, it requires balance
between social and economic overheads and direct productive investments.

In a nutshell, the theory requires that there should be simultaneous and

harmonious development of different sectors of the economy.

Activity

Balanced development is viewed differently by different writers. Mention at

least four views.

....
~

51
 Main Features: Regarding the main features of the theory. the students of
balanced development strategy assume that the supply of capi1al and manpower
are elastic and therefore argue for a simultaneous expansion of a number of
interrelated sectors of the economies of the LOGS. To this extent, developing
countries and aid agencies are expected to invest in projects in the industrial as
well as in the agricultural, social and physical infrastructure sectors, by so doing,
you will be fostering the balanced development of the various economic sectors
in the LDCS.

As regards the choice of criteria of resource allocation, the balanced growth

school argues that the pattern of resource allocation should be chosen such that,
at every stage of development, the available productive capacity is fully utilized in
all the economic sectors and therefore no surplus or shortages should exist This
strategy largely depends on centrally planned resource allocation as opposed to
dependence on the market.

Advocates of balanced development argue that the low per capita incomes
prevailing in LOGS is due to low levels of productivity which can be attributed to
the absence of linkages and hence, low value added between modem industrial
sector and traditional agricultural sector. Low per capita incomes also imply that
the demand for manufactured goods is low and most of the income is des.tined
for subsistence. This inhibits development in the whole economy.

For Example: For agriculture to be modernized, it needs manufactured inputs

from industry. And for industry to expand and be viable economically on a
modem scale, it needs a reasonable market. Thus, there is need for strong
linkages, between different sectors of the economy.

, Thus, as stated ear1ier, balanced development involves a substantial amount of

planning with little assistance from the market. It entails enacting proper controls
and incentives and accurate technical judgment on combinations of investments
in order to maintain macro-economic balance.

Activity

What are the main features of balanced development?

Topic 2: Relevance to the LDCS

Generally, the explanatory power of the balanced development theory is quite

limited. This is because it is not possible to simultaneously establish many
industries in any one country. This is due to the inadequate availability of capital ...., .. ._
equipment, skilled manpower, finances and complementary inputs in most LDCS.

52
Furthermore, factors of production exist disproportionately in many countries.
So, it would be very impossible to reproduce simftar economic activities in all
areas irrespective of resource availability.

With regard to the operational relevance of balanced development theory for the
LDCS, it should be pointed out that not withstanding its theoretical appeal and
attractiveness in many LDCS, its unrealistic assumption of elastic supplies of
capital and manpower has impeded its successful application.

Firstly, the very existence of the 'Third World' and the slow pace at which foreign
aid is flowing to the LDCS is a testimony of the fact that both capital and skilled
manpower are not as readily available as is assumed by the protagonists of
balanced development.

Secondly, the imperfections inherent in the allocation of grants and loans by aid
donors to the LDCS create acute bottlenecks in the implementation of such a
development strategy. Most bilateral aid donors very often underestimate the
cost advantages of financing projects in backward areas of the LDCS. By this
behaviour, they create a net demand for public physical and social infrastructure
in the already developed areas. Also, the assumption of unlimited supplies of
1abour is unrealistic.

Activity

Critically evaluate the theory of balanced development with reference to LDCS

Topic 3: Balanced Growth and Development

Forward and backward linkages: linkages can be defined as the ability of an

industry, sector or any activity, to create opportunities for others to engage in
economic activities. These could either be backward or forward linkages.

a. Forward Linkages: This involves output provision. When you provide

output for further use in other economic activities.
b. Backward Linkages: This involves input utilization. That is, when you
demand inputs produced from other economic activities.

As already stated, the major constraint to balanced development is limited capital

stock needed for investment in most LDCS. This capital comes from two major
sources:

(i) Domestic Savings - That is, taxes and high profits.

(ii) Foreign Savings - That is, government grants from other countries, loans -~.
and foreign direct investment (FOi).

53
For the purpose of this course, the main theme of balanced development will be
reduced to the relationship between industrial development and agricultural
development. This is because imbalances between agricultural development
and industrial development have serious effects on the whole economy. They
should grow side by side because of the following:

(a} Low agricultural output will necessitate importation of the shortfall. The
implications are that the foreign exchange used to purchase food and
other agricultural raw materials wilt deny the industrial sector ability to
import capital equipment. Furthermore, if agriculture grows at a slow
pace, the purchasing power of consumers is weakened and the market for
manufactured goods is reduced. This is largely because in LDCS, over
70% of the incomes are agricultural based. So, if agriculture stagnates, it
affects the industrial sector.
(b} On the other hand, the inadequate growth of the industrial sector will deny
the agricultural sector fertilizers, pesticides, tools and machinery needed
for expansion. This may necessitate importation of these inputs which
may have serous foreign exchange implications.

Agriculture and Industrial Linkages

(0 The agricultural sector supplies industry with the following:

• Food for industrial workers
• Raw materials
• Market
• Labour
• Finances or investable incomes in terms of surplus generation.

(ii) The industrial sector supplies agriculture with the following:

• Improved farming inputs, - fertifizers, high yield seeds, pesticides, etc.

• Mark.et
• Tools and equipment
• Training ground for skilled labour

Activity

What is the justification for linkages between the agricultural sector and the
industrial sector?

"- ....

54
Topic 4: Unbalanced Growth Theory

Essence: The dissatisfaction with the theoretical underpinnings of the balanced

growth theory gave rise to a new school of thought - that of unbalanc_ed growth.
This theory had an intellectual as wen as a practical appeal. Although many
economists have touched on unbalanced growth in their writings, it was Walt, W.
Rostow and more particularly Albert Hirschman who propounded the theory in a
systematic way.

To Rostow, for an economy to cross the stage of traditional society and achieve
take--off, it is essential for it to increase the rate of productive investment from 5
to 10% or more. This is possible only if investment is undertaken in two or more
sectors of the national economy. This will lead to the development of related
industries. As a result of increased production, profrts will increase and can in
tum be reinvested.

According to Hirschman, the deliberate unbalancing of the economy in

accordance with a pre-designed strategy is the best way to achieve rapid
economic development in the LDCS. He argues that investments in strategically
selected industries or sectors of the economy wm lead to new investment
opportunities. These will pave way for further economic development.
Hirschman regards economic development as a "chain of disequilibria" that must
be kept rather than eliminated.

Activity

Distinguish Albert Hirschmen and Rostow's views of the unbalanced Growth

Theory.

Topic 5: Main Features

According to the theory, there is the need to unbalance the economy with social
overhead capital. That is, those basic services without which primary, secondary
and tertiary productive activities can not function, such overhead capital include
investment in education, public health, transportation, telecommunications and
conventional public utilities like electricity, water and sewerage drainage
schemes, etc.

This is because an increase in social overhead capital is likely to encourage

private investment in the directly productive activities. For example, cheap
supply of electric power may lead to the establishment of small scale industries.
So, the social overhead capital creates a conducive environment for directly
productive activities to develop.
-~

55
It should be noted that, if directly productive activities develop faster, a shortage
of social overhead capital will cause production costs to increase and political
pressure will set in, for example, developing industries without a road net work.

Unlike the balanced development doctrine, unbalanced development recognizes

the problems of inadequate capital. Supply and limited managerial ability, it also
acknowledges the inadequacy of technological innovations and the differences in
the quality of labour in LDCS, that is, not all unemployed people can provide for
quality employable labour.

Secondly, this approach argues for concentrated and sequential development

patterns to achieve economies of scale and significant breakthroughs, it is this
that induces further development on a regional basis.

Relevance of Unbalanced Development Theory to LDCS

To start with, the unbalanced development doctrine provides a mechanism for

breaking through the constraints. It provides an inducement to overcome the
conditioning factors (factors that characterizes LDCS) and thus lifting the
economies of the LDCS from their traditional state underdevelopment by means
of innovation.

The core of Hirschman's analysis of unbalanced development lies in his

arguments for concentrating investment on projects with the highest combined
forward and backward linkages. To him, the development of economic projects
with strong forward and backward linkages is highly desirable. The location of
such projects within a less developed area may provide a stimulus to other firms,
already located in the area. It is evident that many LDCS have used this strategy
in their choice of projects.

An example of an important economic activity which generates both forward and

backward linkages is railway transport. Firstly, it directly stimulates industries
such as iron, steel, and coal and other related industries. (Just look at what has
happened along the line of rail). Secondly, it indirectly opens up new areas for
commercial trade. To this extent, it has a trade-creating effect which results in
profit opportunities for industries.

As concerns the conceptual and operational relevance of the unbalanced

development theory for the LDCS, it should be noted that the theory is a good
attempt (by Hirschman in particular) to map out the path to accelerated economic
development for these countries. It is realistic and relevant to some extent This
is because the various incentives and constraints to development in the LDCS
have been studied in their proper perspective and context.
~ ..... ,.,
Further, Hirschman is neither in favour of overall state planning nor does he
believe everything should be left to the private sector. To this extent, he is in

56
 I

favour of a mixed economy where social overhead capital is provided by the

state and directly productive activities by the private sector. This is a more
realistic set up than that of the balanced development strategy. ·

However, unbalanced development, like the balanced development theory, has

shortcomings. These have prevented its complete acceptance by policy makers
deaUng with the development problems of the LDCS.

Firstly, Hirschman's quantification of the linkage effects is misleading. This is

because his conclusions were based on data related only to advanced countries
where the development of basic facilities including transport, communications,
public services, etc, has reached a high level.

Secondly, although unbalanced development can generate a faster rate of

growth in the LDCS, there is a danger that imbalance beyond a certain point
could lead to negative effects, both from an economic as well as from a social
point of view. Also, there is no guarantee that by concentrating all the resources
in one or two strategic sectors, the LDCS will automatically attract private
investment in other productive sectors.

Thirdly, the proponents of unbalanced growth have paid inadequate attention to

the composition, direction and timing of unbalanced development. For instance,
what is the best degree of imbalance? Where and when will the balance take
place? How much imbalance is needed. in order to accelerate economic growth?
And which are the growing points in the economy?

Fourthly, no effort is made in the theory to analyze the difficulties generally

encountered in LDCS, for example, there are difficulties in procuring technical
personnel, raw materials and basic facilities like electric power. Also, it is difficult
to find adequate domestic and foreign markets for the goods and services
produced. In addition, the lack of factor mobility in the LDCS makes it difficult for
resources to more from one sector to another.

These are some of the problems and shortcomings which made it difficult for the
LDCS to accept unbalanced development its totality as a development strategy.

Conclusion

Notwithstanding the shortcomings indicated above, both 'balanced' and

'unbalanced' development theories have some lessons for LDCS governments.
These theories could guide governments of the LDCS in resource allocation.
They are particularly useful in the formulation and implementation of
development policies. To start with, some aspects and concepts in these theories
are helpful in understanding the general characteristics and development -~
problems of the LOCS e.g. balanced developments recognizes the imbalances in

57
LDC economies and the problems that could arise. Also, both approaches
recognize the need for the creation of excess capacity of social overhead capital
(i.e., road networks, physical infrastructure, communication, education, health,
etc) However, a wholesale application of these theories to LDC economies is
very difficult to undertake. Thus, although these theories have raised some
development issues and problems which are common to many LDCS, the
relevance of these theories from an operational point of view is somewhat
questionable.

Activity

1. What relevance is the theory of unbalanced development to LDCS.

2. The unbalanced development theory has shortcoming. Discuss.

:llo-_~••

58
 UNIT7

URBAN INFORMAL SECTOR

The informal sector is the most viable option for LDC's. According to the World
Bank Appointment Report (World Bank, 1994), 80% of the work force is engaged
in small scale activities. The urban informal sector has its origins in the urban
bias in development strategies. Major focus of development histories in LDC's
has been the Dualistic nature of developing economies.The existence of the
modem urban sector, amounted towards capital intensive large scale production.
Traditional rural subsistence sector amounted towards labour intensive small
scale production. Due to the urban bias on pull migration, colonised an important
factor in the at1alysis of economic dualism characteristic of urban formal and
informal sectors.

Objectives: At the end cf this unit you should be able to:

• Describe and define the concepts such as ISi strategy, informal sector, Rural
Urban migration and Urbanization.
• Distinguish policies in the colonial and post-colonial eras.
• Trace the origins of NGOs.
• Discuss the role of NGOs and development.
• Describe the relationship between NGOs and Government.

Topic 1: Definition of Major Concepts

1) ISi Strategy - A deliberate effort to replace major imports by promoting

the emergence and expansion of industries producing small goods. It
requires the use of protective tariffs and physical quotas to get new
industries started.
2) Informal Sector - Refers to the unorganized, unregulated and non-formal
sector characteristics. The increase in the number of small scale products
and services, facilities, simple technology, little fonnal education, lack of
capital leads to a reduction in productivity.
3) Rural Urban Migration - Massive movement of people from the rural
countryside to the growing cities of Africa, Asia and America,
accompanied by industrialization, not true in African case.
4) Urbanization - A process in which people (demographic aspect), services
(social aspect) and opportunities such as employment are concentrated in
a limited geographical area.

....~,

59
Factors leading to rural urban migration

(i) Economic considerations of relative benefits and costs

(ii) Expected rather than actual - urban rural wages promised on the
introduction of two variables namely.

• Actual urban rural wage differential

• Probability of successfully obtaining employment in the urban
sector

(iii) Probability of getting formal sector urban job ********* related to

urban unemployment rates.
(iv) Migration rates in excess of urban job opportunities ( increase urban
unemployment inevitable outcomes of serial imbalances of economic
opportunities between urban towns and rural areas.

Colonial and Post Colonial Policies

In USA and SA in particular the dualistic process has been strengthened by

both policy and institutional biases.

(F • Fund in areas of greater potential i.e. budgetary allocations goes

towards large scale sub sectors producing for export _.., Negative
impact on small holders) ..

The above was premised on the government policy in the colonial era that
favoured rural urban migration. It viewed as a natural process in which surplus
labour was gradually withdrawn from the rural sector to provide needed
manpower in the industrial sector. It was perceived that labour was being
removed from locations where Its social marginal product was assumed to be low
to a sector where it was positive and rapidly growing due to capital accumulation
and technological growth.

The post colonial policy framework exacerbated the problem by following

exclusively on modernisation theories. Urban wage rates were allowed to grow
at a faster pace than rural wage rates, the above was done at the expense of
improving rural incomes and employment opportunities.

Urbanisation or modernisation lead to a paradox of having 3 migrants for every

new job created this was facilitated by investing in white collar oriented
educational systems.

,.._........

60
 I
i
I
New Informal Polices and their Effect on Male and Female Partfoipants

Two things recognisable at national level-:

• Finn political commitment towards development i.e. hospital, human oriented

1

development.
• Broad goals which indicate clearly pathways of reaching such goals. An
important aspect comprises.

(i) Institutional structures that support local development efforts.

(ii) Allocation of enough funds for this local development initiative.
(iii) Realisation that rural urban areas should be neutral.

Activity

Define the terms ISi strategy, informal sector, Rural-Urban migration and
Urbanization.

Topic 2: NGOs and Development

Since attaining independence, Third world countries have been characterized by

a variety of development approaches.Economic growth theories have sought to
bring development through:

• Modernization
• Import- substitution industrialization
• Anti-poverty and basic needs strategies
• Large-scale mechanized agriculture; and
• The current neo-liberal ideology of structural adjustment.

Despite all these development approaches tried by some third world countries,
the problem of poverty and underdevelopment have proved insurmountable. In
fact it is evident that these problems are even more pronounced today than they
were three decades ago when the current series of development initiatives
began.

• Because of the failure of the old development approaches and apparent

disappointed with performance of the many aid - funded development
projects implemented by state agencies, there grew an optimism in some
development circles that NGO's would be better development role-players to
offer an "alternative development approach" to poverty alleviation and long-
term sustainable development to third world communities.
-~.

61
• Therefore, since the 1980s, there has been a considerable growth in numbers
and influence of NGOs, particularly northern NGOs engaged in poverty -
alleviation and development in the third world.
• The world -wide growth in numbers, influence and importance of the these
NGOs in the 1980s made some authors to suggest that the 1980s be called
the "development decade of NGOs".

(I) Who are these NGOs/PVOs?

Why are they exciting so many people?

(fl) Definition/Characteristics of NGOs

• NGOs can mean any number of things. There is a great diversity of

agencies or organisations that call themselves NGOs. These
organisations include, among others trade unions, savings clubs, street
hawkers associations (Ng'wang'wazi), consumer and farmer co-
operatives, law associations, human rights groups, rotary clubs, civic
organisations, environmental advocacy groups, relief and welfare
organisations, community development organisations, political caucus
groups etc.
• Because of this diversity and different activity such organisations
engage in it becomes difficulty to give a clear definition to the NGO
sector.
• Some attempts have, however, been made to define NGOs.

(i) NGOs may be defined as "Non -governmental autonomous,

non-profit organisations, initiated by private citizens for a stated
relief assistance or development purpose, supported mainly by
voluntary contributions in cash or kind".
(ii) An NGO may also be defined as "any international or national
non-profit organisation involved in development co-operation
activities an recipient and/or donors of aid, which is legally and
statutorily independent of governments or parastatal bodies".
(iii) NGOs may also be defined as "voluntary organisations that
work with and very often on behalf of others. Their work and
activities are focused on issues and people beyond their own
staff and membership".

However you define NGOs, they share a few common characteristics:

(a) As their title denotes, they are non-government i.e. they are initiated by
private citizens. Because they are created and managed by private
individuals NGOs claim autonomy and independence from government
authority, provided that they respect national legislation and
regulations concerning their establishment and management.
- .... ~

62

"
 (b) NGOs are non-profit making organisations. The motivation of these
organisations is purely philanthropic (desire to give the poor) thus
excluding any profit motive. The funds they raise are to be used
essentially for the mandated development purposes.
(c) NGOs operate on a voluntary basis. They volunteer to undertake their
activities. Therefore, none compels or coerce them into doing what
they do. They can decide to stop any of their activity any where any
time.
(d) Most NGOs are registered charities and have a charitable status.
They enjoy many privileges e.g. tax exemptions.
(e) Most NGOs share a common vision. They want to reduce poverty and
advance human development.

NGOs are also categorised as either 'Northern' (intemationaQ or 'southern'.

Northern NGOs refer to those organisations which originate and have their head
offices in the industrialized countries. Southern NGOs on the other hand are
taken to mean those organisations which originate and have their head offices in
the Third World.

Ill Origins of NGOs

NGOs have come a long way they have been in existence prior to the
twentieth century. They have however undergone significant changes
over time to the extent that in their current form NGOs are a relatively new
phenomenon.

• Early Nothem NGOs have their origins in missionary activity, and

emergency needs during and after World War II. e.g the salvation
Army emerged generally as an outgrowth of missionary activities in the
North. During and after VVW II there emerged more secular and
religious organisations such as Oxfam, and CARE etc.
• With the end of emergency needs in Europe after World War II, may
NGOs subsequently sh_ifted to provided relief to victims of drought,
famine, war and other disasters in the developing countries.
• These agencies, however, did not remain exclusively relief focused,
they also broadened their area of activity to include welfare and
consequently more development oriented activities.
• In the developing countries, Northern NGOs have influenced the
growth of indigenous NGOs.

~~

63
 "'

Civil
Society
North

The poor
(Developm
ent)

South
(State)

NGOs and Comparative Advantages

• The greater role of and support for" NGOs in the 1980s and 1990s may be
explained by their own strengths in contrast with the limitations of
governmental and donor agencies' action.
• It is widely believed that NGOs have a comparative advantage in poverty-
alleviation over governmental agencies and official aid agencies. This
comparative advantage is as a result of the great qualities these agencies
have. The current donor optimism in NGOs in largely based on the
assumption that most such agencies do possess some great qualities that
provide a superior organisational basis.
• There are a number of these advantages and these are, among others:

(0 That NGOs work closely with the poorest of the poor in society;
(ii) That NGOS promote local participation in development process;
(iii) That NGOs "empower" societies;
(iv) That NGOs are more flexible and experimental in approach than
conventional development agencies because of their small size;
(v) That NGOs are cost-effective; etc they can do more with too little.

Reaching the poorest of the poor; the mark constitutency of the NGOs is the
poor, perhaps the 'poorest'. NGO projects are said to be better placed in poverty
->),,..
alleviation activities than official projects implemented by governmental and

64

"
donor agencies. Many official projects and programmes meant to feed the
poorer members of the community end up benefiting the local elities, certainly
who are less poor.

NGOs have greater ability to target the poorest. In a number of cases these
agencies have been successful in reaching the poor segments of society whom
official projects have been unable to reach. The secret of their success lies in the
fact that, NGOs, unlike governments and official donor institutions, work closely
with the poor. Their staff are close to the local communities where it is easy to
identify the poor. Further, their proximity to the local communities makes NGO's
offer solutions specific to the local community as they are in a direct contact with
what is happening in the communities they are based.

NGOs and local participation

- beneficiary participation is the central tenet of almost all NGOs

- official projects implemented by governments and donor agencies have
been criticised for adopting a "top-down" approach to development that
excludes the beneficiaries in decision-making about the choice and design
of projects .. This has led to the high rate of failure of such projects
- Unlike official agencies, NGOs have greater ability to involve beneficiary
participation in their development activities. Participation is a feature of
"bottom-up" development strategies where the direction of decision
making is reversed from "top-down". Through participation, the poor are
"empowered" to have greater choice and control over their destinies.
Participation makes development a community- based activity and getting
the community to define their needs
- Participation as encouraged by NGO's has a special relevance to the ·
gender dimensions of development. Participation promotes the cause of
the women in development.

NGOS and Government

If NGOs have comparative advantage over third world governments in poverty

alleviation and community development, should they displace the governments?
What should the relationship between NGOs and government be like?

There are various views on the relationship between NGOs and governments:

Some authors maintain that the relationship between the two can be understood
as one of cooperative conflict or creative tensions, in which the challenge of the
NGOs and their innovative activities can improve government services. The two
need each other. Over-emphasis on the role of one actor would be a recipe for
disaster. For instance, although NGOs are hailed as better providers of
community services than government agencies, NGO's cannot provide essential
-~,

65
large infrastructures such as roads and bridges in rural areas. These services are
provided by governments and other official cooperating partners.

Further, NGOs undertake their activities in certain enclaves. Their mandate is

not national and therefore increasing reliance on them for service detr:verance
may create highly inequitable regional development. But governments have a
national mandate and will try as much as possible to balance their service
delivery.

Related to this, is also that NGO's think of withdrawal in the area of their activity
after a period of time while governmental bureaucracies are permanent

Activity

1. Define and trace the origin of NGOs.

2. What common characteristics do NGOs share?
3. Critique the advantages of NGOs.
4. Compare and contrast NGO's activities and those of Governments. In your opinion,
are NGOs necessary? ·

-:----.·.,.,_

66
 UNITS
FOOD AID

Food aid is that part of foreign aid that is given in the form of food or cash to
purchase food.

Objectives: At the end of this unit you should be able to:

• Trace the beginning of food
• Critically examine the political, economic and humanitarian objectives of food
aid.
• Name and tabulate the types and patterns of food aid and programmes
• Trace the patterns of food aid flow
• Discuss the positive and negative effects of food aid.

Topic 1: Genesis of Food Aid

The first instance of food aid was in 1812 when the USA gave food aid to victims
of an earthquake in Venezuela worth US$50,000. Since then, America has
remained a major force in food aid and used it also for political and economic
objectives in addition to the humanitarian objective.
The Political objective was mainly centred on the containment of the spread of
communism and economically to dispose of surplus food accumulated by the
USA During the world wars USA it continued producing grain at higher levels of
output and used the surplus as food aid to score various objectives. It came to
use this aid successfully after the two world wars.

During the First World War, American farmers continued producing grain while its
allies were producing guns. USA experienced food surpluses and since it was
neutral, it was at liberty to sell food to any country. At this time the United
Kingdom blocked US shipments of food to aggressive nations such as Gennany
and France in Europe. Hoover devised a way to get around this obstacle by
creating the Commission for Relief in Belgium aimed at sending food aid to
Belgium although it was setf sufficient in food. The reason for this was that since
food was in Belgium it would either go east or west towards to France or
Germany respectively. Once a German author speculated that Germany would
have surrendered as early as the autumn of 1916, had it not been for American
wheat After the Second World War, Hoover started exchanging wheat for gold
in the hope that it would check the spread of communism. He was able to reach
this agreement by threatening to withdraw food aid. Food aid was distributed in
such a way that communism was checked. Through the Marsha! Plan, Europe
was made a significant trading partner of the USA. With Europe on its feet, the
remaining dumping ground for USA food was UDC's. Since European currencies
were weak at this time, gold was used in food trade. At this point the USA came
up with the idea of strengthening the political and economic goals of its food aid.
In 1954, US Congress passed Public Law 480 (PL 480) Plan which is now called
-~
Food for Peace (FFP). The stated purpose of PL 480 was that of increasing

67
consumption of USA agricultural commodities in foreign countries, improving US
foreign relations and any other purpose, gainful to the USA. The Congress later
announced one further objective of PL 480 - that of increasing USA agricultural
exports abroad.

One conspicuously absent objective of PL 480 was that of feeding famine or

hunger stricken victims. PL 480 was devised a system of selling American
surplus food for local non-convertible currencies in any country and it had major
titles:

TITLE 1: Provided for the sale of US surplus grain to friendly nations with food
deficits payable in local currency. The counterpart funds created in such friendly
nations through such sales would be used by the USA or by that country with
USA approval.

TITLE 2: Concerned urgent famine relief and donations of friendly nations. Up to

1974, title 2 represented only 115th of all USA food sent abroad. lnfact it was only
in 1966 that the USA included a humanitarian clause in its PL480.

TITLE 3: Concerned the barter of strategic raw materials in exchange for

American food. It enabled the USA to stockpile crucial military raw materials
which were used in building military equipment. The significance of Title 3 started
falling in the 1960's.

TITLE 4: Was included in 1959 to PL480. It concerned the long term food sales
on credit to be paid in US dollars or any other convertible currency with interest
and the duration was over a period of 20 years. VVhile adding a humanitarian
clause, the USA amended Title 1 in 1966 from sale in local currency to the US
dollar. This policy was progressively adopted such that by 1971, it was only
South Vietnam that paid in local currency. The 1970's also saw the
disappearance of Title 4. These changes were as a result of the disappearance
of the huge food crisis due to the emergence of markets in non-communist
countries and UDC's who increased their demand for US grain hence USA's
surplus was reduced. Commercial food sales became the saviour of the USA
economy as the dollar collapsed due to the oil crisis. US industrial base
collapsed and was overtaken by Germany and Japan.,

Food aid has been used as a tool for political and economic gain especially by
the USA. Since the creation of new markets the USA has no food surplus to
dump at concessionary rates. For the many advocates of food aid in the donor
countries and multilateral agencies based in the metropole, food aid serves to
meet the food shortages of UDC's. For the critics of food aid, food aid has not
served humanitarian purposes and in many cases it has proved to be counter
productive to the cause of eradicating hunger.
--:- f..,:.

68
Objectives, Types and Patterns of Food Aid Every year approximately
$100,000,000M worth of food aid is sent to UDC's. In 1980, the Organisation of
Economic Cooperation and Development (CECO) estimated that $2.6M worth of
food was distributed to LDC's. It came from five principal sources namely;
USAID, EEC, Australia, Japan and Canada. The USA contributes 50% of all food
aid followed by the EEC which specialises in grants. Approximately 70% of the
food is sold or given on concessionary terms (Government Food aid) and 30% is
designed to be given free of charge (Project Food Aid)

Objectives of Food Aid: To begin with food aid is widely considered an interim
solution to a country's food deficits pending an increase in its own agricultural
production. One of the dominant objectives of food aid is that it is designed to
meet emergency and nutritional needs of people in food deficit areas. In practice,
however, it has been found that food aid policies of most donor countries are
actually constructed to advance the general foreign, domestic and economic
objective of the donor countries.

The following are some of the most often cited objectives of food aid from the
donor country's point of view:-

1. Humanitarian Principles
2. Surplus food disposal
3. International political leverage
4. International market improvemen~s

1) Humanitarian Principles: This is often cited as the response by taxpayers in

ADC's to the plight of famine and emergency victims in UDC's. Despite the
general consensus of the readiness by taxpayers in ADC's to assist victims of
famines, floods, wars, earthquakes, etc critics like Lappe and Collial, argued
that the intentions of taxpayers or the electorate in ADC's may be very
different from the actual functions or actions of their own government policy.
This means that humanitarian concerns have been the least concern of
western governments in giving food aid.

2) Surplus food disposal: most analysts cite this as the primary objective of
food aid and rendered by ADC governments to UDC's. In the case of the
USA, it is argued that the need to dispose of huge surpluses accumulated
during the 1940's, 1950's and early 1960's was the primary motive of USA
food aid policy. The above coupled with technological innovations and farm
support policies to farmers led to the emergence of food surpluses. The
accrued food surpluses in tum presented a serious dilemma to the USA
government;

(a) The farm lobby did not want these surpluses released on the
domestic market as they would reduce prices -~

69
 (b) Agribusiness corporations were opposed to dumping these
surpluses on the wor1d market for the same reasons.

(c) Storage costs were becoming too much for the government

The solution was to create a secondary foreign (exchange) market in which

all these problems could be solved by food deficits countries obtaining all
these surpluses by using their own currencies, instead of the US dollar. A
similar evolution of food aid policies with respect to the EEC and Japan can
be observed.

3) International Political Leverage: Food aid has also been described as

serving the purpose of keeping recipient countries within the donor's sphere
of influence. The food weapon has been used by the western countries in
their bid to contain the spread of communism, secure military strategic allies
and to prop up democracy governments. A chronology of events/examples
served to illustrate the above point.

(a) In the immediate post World War I when Germany appeared to be

tottering towards communism, the USA stripped massive tons of
food aid to avoid hungry Gennans voting socialist.

(b) In 1943, forty three nations created the United Nations ReUef and
Rehabilitation Administration (UNRRA) to give food aid to war
victims. In Its objectives, it was clearly stated that there would be no
discrimination in the distribution of food aid based on racial,
religious or political considerations. However, under the USA
domination, UNRRA soon came to ignore the founding principles.
Similarly, following the end of the Second World War, enonnous
food aid poured into Europe under the Marshal Plan to prevent
hungry Europeans voting against capitalism.

Most food aid in the 1950's, 1960's and 1970's went to countries
bordering nations considered to be evil: India, South Vietnam
during the Vietnam War, South Korea, Taiwan and Cambodia. Also
Fascist states like Greece and China's Chiang Kai state received
food aid toward to and immediately after the World War II. While 4
million Indians died of starvation.

(c) The withdrawal of food aid can also be a powerful weapon as

happened in the case of Chile when it came under the Socialist
government of Allende. Similarly, in 1974, American food aid to
Bangladesh was halted on the grounds of strong trade ties of
Bangladesh (exported sacks to Cuba, a country the USA had
imposed a trade embargo. Such examples are endless.
-~ .

70
4) International Market Improvements: It has also been found that food aid
can be used to promote exports and gain new markets for donors, agricultural
and other exports. In delivering food aid to some UDC's the government and
the firms of donor countries establish contacts with recipient governments and
. middlemen and thus pave the way for future commercial deals and contacts.
In many agreements, for example, a provision is laid down that either part or
all of the commodities delivered as aid should be transported by ships and
vehicles of the donor countries. In the American case, for example, Congress
in 1957 modified PL480 so that up to 25% of the local currency accepted in
exchange for food could be loaned at very low interest rates to USA
corporations investing in those countries.

These then constitute some of the main objectives of food aid cited in the
literature.

Activity: Questions for Reflection

1. Assess the political, economic and humanitarian objectives of food aid.

2. Critically examine some of the negative effects of food aid.
3. Mention at least 1:wo major types of food aid.

Topic 2: Types of Food Aid Programmes

In broad terms there are generally two types of food aid. These are government
food aid and project food aid.

(A) Government Food Aid: The major objectives of government food

aid is to alleviate both budgetary and food problems of UDC's. It
is usually sold cheaply to recipient governments which are then
free to sell it locally and use the proceeds to supplement its
budget deficit. This type of food aid constitutes about 70% of the
total food aid. Strictly speaking, this should not be called food aid
but rather budgetary support via food aid. It is not for
emergencies or relief but for countries with budget deficits and
food shortages. This type of food aid is beset by a number of
problems and ties arising from both the donor and recipient
countries. A good example of this food aid is food for cash
programs. Under food for cash programs, food aid goes directly to
governments and governments in turn sell this food at
concessionary prices to those who can afford it

Critics of food for cash programmes have argued that strictly speaking
this is not food aid at all but government budgetary support. -.

71
 (B) Project food aid: Constitutes 30% of all food aid and is aimed at
alleviating disasters and famines. It is designed to be distributed
free of charge both to the governments and the people affected.
There are three types of food aid and these are:-

(1) Food For Work Programmes: Food given for constructing

public works or for community development or for
resettlement after a disaster. Its overriding objectives are to
provide labour intensive skills in places of
underemployment and to improve local infrastructure
through construction i.e. Irrigation canals, roads, bridges,
etc. These programmes are generally run in conjunction
with government developmental objectives and
governments also contribute funds which are often three to
four times the value of the food contributed. This type of
programme has the greatest potential for increasing food
production locally and has come to be the most favoured
way of distributing food aid. Multilateral agents such as
WFP and NGO's like CARE, and Catholics Relief Services
have come to prefer it.

(2) _Food for Nutrition Programmes: The major objective of

food for nutrition programmes is to improve local nutritional
standards. This is distributed in various ways which
include:

(i) Food for mother and child which is given to mothers

who are breastfeeding with a view of giving then
nutritious foods thus reducing under nutrition and
malnutrition.
(ii) Food for school programmes which is meant to give
school going boys/girts nutritious foods.

(3) Food for Disaster Relief and Refugees: Out of all food
aid distributed each year this category gets only 10% and
consequently it is often too little, it arrives too late to avert
the disasters, It may be inappropriate to the people's
needs, there may be no transport to the peoples needs,
there may be no transport or storage for it.

Topic 3: Patterns of Food Aid Flows

Food aid flows in recent years have been mainly from the north Atlantic
countries, USA and European Countries, Nordic countries and Japan to UDC's.
Food aid flows through both Bilateral and Multilateral channels.
-
.... ·;,,...

72
The most prominent multilateral organisation involved in food aid operations in
the world is the World Food Programme (WFP) set up in 1963 by FAO. It is
supervised by a 30 nation body which is the committee on food aid policies and
programmes. It usually meets twice annually in Rome to approve projects and to
evolve and coordinate short term and long term food aid policies. The major
objective of the WFP is to stimulate economic and social progress through food
aid in development projects. Less than 20% of its resources are distributed as
relief. Resources come from over 100 countries in form of food for cash or
services such as shipping and storage. The USA is the largest donor of food
followed by The EC and Canada whilst Saudi Arabia is the largest cash donor.
Other UN organisations and programmes that have eluded food aid in their
spheres of activity are UNICEF, UNDP and WHO. Important NGO's and private
voluntary agencies that are involved in food aid include Catholic Relief Services,
CARE, OXFAM and Inters committee of the Red Cross.

The international convention regulating food aid is the Food Aid Convention of
1967. The parties to the convention have undertaken to contribute a given annual
minimum or cash equivalent in aid to developing countries. The following is the
country by country analysis of food aid in brief;

The USA: USA food aid is regulated by PL480 (Food for Peace) promulgated by
Congress in 1954 and subjects to periodic reviews and modifications. Between
1954 and 1972 US agricultural exports classified as food aid constituted about
25% (23.6 billion US$) of its total agricultural trade with other countries.

PL480 has two main forms - concessional sales (70%) and donations (30% of
total value). Although the USA has delivered agricultural and food aid to about a
hundred countries, there is a noticeable high degree of concentration to a few
selected countries. In the period 1954- 1972, the top ten recipients of PL480 aid
accounted for nearly 65% of the total.

Five of the top ten are Asian countries and the other five US military allies. In
terms of per capita figures, the major recipients of US food aid in the sixties were
Israel, South Vietnam, South Korea and Tunisia. Almost all these countries were
also recipients of US military aid. Cereals, especially wheat, have been by far the
most important group of products delivered under Pl480.

The European Community: The European community is a late entrant into food
· aid. It commenced its activities with the first food aid convention of 1967. Within
the framework of this agreement the EC committed itself to supply one million
tonnes of cereals or the cash equivalent to UDC's. In addition to cereals the EC's
food aid includes dairy products: skimmed milk, butter oil and sugar. Food aid in
those products has been implemented solely through community projects. EC
food aid consists of three types of action: (1) emergency action (2) specifically
nutritional action (3) development action. -~

73
Under 1 and 2 food is distributed free of charge. Under 3 which is the most
frequent type, the food received as food aid is sold on the local mark.et and the
counterpart funds realised are used for financing development projects which
must be approved by the community. Regarding recipient countries, member
states of the EC have different preferences.

France for instance prefers countries with a special relationship with the EC, i.e.
mainly former French and British colonies and ACP under the home convention.
The biggest donors to the EC food aid programme are the FRG and France.
However, unlike the USA, members of the EC have constantly directed the main
part or their food aid through multilateral operations (WFP and Red Cross)
Bangladesh, Egypt, Sri Lanka, Vietnam, Pakistan, Lebanon and Jordan.

Nordic Countries: Denmark, Finland, Sweden and Norway; multilateral and

have preference for project type of aid.

Argentina: Gives cereals and works hand in hand witt-1 the WFP.

Australia, Russia, Canada, and Japan.

Russia and other socialist countries

Topic 4: Critique of Food Aid

The critique of food aid is usually based on its motives of the donors (sometimes
recipients) its effectiveness in meeting the needs of the poor people in recipient
countries and its impact on the recipients countries. However, it is vital to
recognise that not all effects of food aid are entirely negative.

Positive Effects

• In many emergency situations food aid will continue to be the fastest way of
preventing death by starvation. The most immediate needs of people who find
themselves suddenly displeased either by war or natural calamities will
include food, medical supplies and shelter.
• Food aid also has a positive impact on recipient countries foreign exchange
positions. By conserving foreign exchange from being spent on commercial
food imports. Food aid also helps recipient countries balance their
government current accounts.
• Finally, food aid also helps to reduce short term political instability.

As a result of the above factors, it is widely recognised that food aid when better
planned can play a vital role in meeting a recipient country's needs.
- ,..
...

74
Negative Effects

As much as food aid can have short term ameliorative effects, there is enonnous
evidence that food aid can also play a negative role in a country's development
process. Some of the negative effects of food aid are as follows:

Government Food Aid

It is more destructive than project food aid and its negative effects include:

1. There is a wide discrepancy between the goals of the donors and

recipients. The quest for economic, political and military advantages and
the need to dispose off domestic food surpluses are among the primary
considerations that drive donors to give food aid. As a result it is not
always the neediest nations that are the main recipients of food aid. For
instance, despite the fact that Africa has the largest population of the
world's poor people, it received not more than 10% of Pl480 assistance in
the 1970's. It was countries like Israel, South Korea and Pakistan and in
Africa: Tunisia and Egypt that were considered of strategic importance
that were the main beneficiaries of US food aid.

• Economic - Getting rid of surpluses without destroying, create new

markets by changing consumer preferences in their consumption
patterns.
• Political - Hinder communist growth by increasing the amount of food
aid to South Korea and Vietnam. To prevent political turmoil in friendly
countries by selling American food cheaply to urban populations. In the
Middle East, Egypt signed the Camp David Agreement in exchange for
wheat.
• Military - USA military operations normally funded via food aid can be
easily used to fund military operations PL480 - title 3 acquired
strategic minerals cheaply.

2. Prevents increased food production in recipient countries, When food aid

is supplied during non-disaster period or long after the disaster it
discourages people from producing food locally and encouraged a spirit of
dependency. Food aid sold cheaply normally dampens the price of local
foods such that farmers find it difficult/unprofitable to grow food locally as it
can't compete with food aid on the local markets, local food production
hence goes down. In addition it alleviated the pressure on UDC's to make
necessary structural adjustments in agricultural production.

3. Food aid may also change consumer preferences or tastes in recipient

countries i.e. from nshima to bread. Such foods are not easy to grow in
UDC's and as such the only alternative is to import them from donor
countries. -~.

75
 4. Food aid may also introduce foods which are inappropriate, for instance
EC butter and powdered milk for disaster relief in remote rural villages
who cant use butter in any way, let alone adults feeding on powdered milk.
The problem here is that of a beggar not being a chooser!

5. Food aid may not even reach the intended people, meaning the rural and
urban poor in most cases, as most UDC governments have sold food aid
to those who can afford it. This leads to urban bias
6. There are also cases where food aid benefits only the well to do leading to
exploitation and negative income distribution consequences.

Project Food Aid

It is better at targeting the poor. There is less political interference due to

multilateral nature of food aid. Project food aid also faces the same problem as
government food aid which includes the following:

(i) preventing or hindering local food production

(ii) changing consumer tastes
(iii) distributing inappropriate foods
(iv) not reaching the urban and rural poor
(v) exacerbating rural class differentiation

In addition project food aid also faces the·following problem;

(vi) later arrival or- not at all in major disasters

Activity

1. What are the objective of Worid Fsod Programme (WFP)?

2. What negatives exist in food aid? Any positives?

:a,.....__;,...

76
 UNIT9
THE NEW INTERNATIONAL ECONOMIC ORDER

Introduction: The NIEO is a product of experts and world leaders concerned

with hunger and focus on improving economic conditions in UNC's where the
majority of the world's hungry live.

Objectives: At the end of this unit you should be able to:

• Critically evaluate the proposal new International Economic Order (NlEO).

• Discuss the facts and principles of the new International Economic System.
• Describe the different schools of thought of the NIEO.
• Examine the different perspectives of the agricultural sector's contribution to
the economic well-being of a given nation.
• Compare and contrast the different strategies fro rural and urban
development.
•
Topic 1: Origin of the New International Economic Order

The NIEO emerged in 1974 at the 6th special session of the United Nations
where third world nations popularly known as the "Group of 77" came together to
oppose the system which was deemed unfair to the developing counties which
were defined as the 141 African, Asian, and Latin American member states of the
UN. They advocated and recommended for the following on the international
arena:

(a) Major reforms in the area of resources, trade and monetary policy and
economic and technical assistance.
(b) Stabilisation of prices at higher levels linking export prices to import prices
(c) Increasing economic and technical assistance based on increasing foreign
aid and preferential tariff treatment in order to foster industrialisation
(d) Strict international code of conduct to govern the operations of
multinational corporations
(e) Expanded voting rights in the IMF as well as an enlarged share of special
drawing rights

The adoption of NlE O was pre-empted by the fact that seventy percent of the
worlds poor people based in UDC's commands no more than 21% of the Gross
World Product and that 80% of the world trade and investment 93% of its
industry and also 100% of its research is controlled by the rich industrialised
countries. Those in favour of the NIEO addressed four basic questions which are:

(a) Is the present international order effective?

77
 (b) Shouki there be need for radical change?
(c) What should be the role of MNC's?
(d) What are the obligations of former colonial powers to the colonies?

In addressing the above questions they concluded that;

(a) the present economic order was not working

(b) radical change is needed
(c) stringent regulations of MNC's is vital
(d) former colonies have an obligation to redress past wrongs

Those opposed the NIEO contend that the current economic order was working
well and if anything it needs to be strengthened and that proposals for a NIEO
were based on false and potentially dangerous premises. They further argued
that:-

(a) The role of MNC's must be strengthened citing the story of NlC's as a
result of free enterprise.
(b) Causes of poverty lie within UDC's themselves and not in the current
international economic order.
(c) Small scale, self reliant development activities at village level and not
conventional economic growth is the prerequisite for economic
development for UDC's.

The opponents of the NIEO were of the opinion that no new international
programmes could cure corruption and inefficiency or create the internal
incentives necessary for promoting growth. In addition they felt that there was no
practical evidence to demonstrate that redistribution and regulation of economic
activity would reduce poverty and narrow the gap between poor and rich
countries in the long run. Despite divergent views held by the opposing sides
there is a general consensus that the gap in wealth between the poor and the
rich countries is large and the World Bank report of 1980 reported that 1 billion
peop)e live in absolute poverty, most of them in UDC's, illiteracy rate for UDC's
exceeding 40% and life expectancy (600 million people). Less than 50 years and
persistent hunger is a common feature. In addition, it is acknowledged that the
NIEO is important to the UOC's as a negotiating framework for resolving
problems such as hunger and poverty, transfer resources from the rich to poor
nations, giving UDC's more voice and power and right historical wrongs.

Activity

Argue for and against the New International Economic Order.

1',,... .... ,

78
Topic 1: The International Economic System (IES): Facts and Principles

For an economic system to produce all goods and services wanted and needed
by people, many factors of production such as labour, capital, technological know
how, resources, energy and education must come together in productive
combinations. Thus economic growth generally depends on capital.

What is capital? Capital is the physical ability to produce goods such as

electricity, steel mills, generating plants, trucks etc. which when combined with
labour produces output - products and services. Financial capital on the other
hand is money used to procure capital goods. From the above it follows that
capital can be created but poor countries have very little capital to start with. Five
basic ways in which UDC's can create more capital are:-

a) investing from domestic savings by reducing consumption in the

short term
b) receiving aid in the form of physical assets or in money form that
can be used to buy capital goods
c} commercial borrowing to buy capital and allow productive capacity
growth without reducing current consumption and repay it out of
future savings, output and/or consumption
d) Export surplus products that can be produced with little capital i.e.
Primary agricultural products using labour intensive means in
exchange for capital.
e) Encourage foreign investments thereby allow savings from other
countries to be used for purchasing capital goods

Since solutions (b) through to (e) require interaction with the aid donors and
international trade opponents of the NIEO feel that the inabilrty of UDC's to
effectively interact on the international arena prompt their advocating for NIEO

Activity

How can capital be created in UDCS?

Topic 2: Schools of Thought of the NIEO

Two basic questions dominate the debate on the NIEO

(a} what needs to be done and by whom in order for UDC/s to develop
economically and end their poverty -,
(b) who is responsible for the current situation

79
 cooperation to be implements. This need is recognized even by ADC's
lenders. For instance, former French president Francois Mltterand was of
the view that "until the international monetary system was re-formed, it
would be impossible to design policies that could effectively combat
hunger.

The above contradictions in the world international economic order call for
a NIEO based on:-
(i) Equal participation by all countries in solving world economic problems in
the interest of all especially of the underprivileged (landlocked)
(ii) The right of countries to adopt socio-economic systems most suitable for
its own development
(iii)The right of countries to national sovereignty over its natural resources
and economic activities (food aid and IMF)
(iv)Effective control of MNC's on the basis of operating under the full
sovereignty of these countries
(v) The right of UDC's for political-economic sovereignty to ensure effective
control of natural resources and economic activities.
(vi)Establishing a just and equitable relationship between prices of raw
materials , primary products and semi-manufactured goods exported by
UDC's and prices of raw materials, manufactured and capital goods and
equipment imported by them in order to improve their terms of trade.

(c) Strong regulations that define the limits for the role of MNC's - Since
multinational corporations are obsessed with the profit motive they tend to
create conditions that exacerbate hunger and poverty. Therefore controls
must be put in place under the auspices of the NIEO in order to curb their
growing ability to market and control the production of products in UDC's.

However opponents of the NIEO hold divergent views from the proponents
of NIEO:-

a) the current economic order is not the source of the serious economic
problems faced by UDC's

(i) considerable effort and progress has been made in reducing the
prevalence of poverty in the last three decades
(ii) The private sector plays a crucial role in mobilising resources taking
into account the fact that the highly developed technological and
management expertise in ADC's could have a positive effect in
UDC's private sector. In addition private markets can provide
capital resources needed for investment.
{iii) Welfare considerations.
-~

81
 b) Third World Nations are Poot but not because of ADC's Plundering
their Resources .

(i) given America's continental size and mechanized agriculture

discrepancies in energy use and food consumption is not
reasonable
(ii} In addition the USA is a net food exporter, therefore the
argument is that the US is generous and not that it is
responsible for world poverty.

c) Developing countries do not have the same needs. Policies that are
beneficial to one category of UDC's may be harmful to others. Poorest
leads to increase in technical assistance, middle income leads to balance
of payment support and favourable terms of trade, high income leads to
access to markets

It was felt that UDC's should instead adopt more outward oriented growth
strategies rather that inward ones. The viability of such strategies are
demonstrated by the success story of UDC's of the NICS where average
annual growth rate was 24 % compared to 14% in the USA or 18% for the
whole ADC's.

Singapore developed through joint ventures with ADC's who provided the
know how, experience and marketing leading to a reduction in the failure
rate from 38% to 7%,. Therefore NIC's manages to transform from partners
to rivals of ADC's under the current economic order.

d) MNC's are Contributing to UDC's Development Process

(i) MNC's political hence cat.\ provide leadership by moving beyond

nationalism and address global problems in a neutral manner
(ii) Longer contact and expe1ience with MNC's gives UDC's a
better understanding of how MNC's operate.

Case Studies

(1) Nestle S.A. successfully participated in a Mexican rural development

and lessons imported were successfully tried in other states of Mexico.
(II) SheU B.P. successfully provided technical assistance to Nigeria by
d~veloping a viable technical assistance programme in rural areas. lt
provided a critical input of capital (financial) and acted as an
intermediary agent of rural development since it is not an agricultural
concern itself.
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. 82

"
 !I'

With respect to the above, opponents of the NIEO feel that even increased
technical assistance may not load socio-economic development if bad
governance and corruption is rampant in UDC's. Thus the choice is not NIEO vs.
the old economic order but a new alternative founded on a new set of values and
principles and human development.

Activity

1. Analyze the different schools of thought of the NIEO.

2. Compare and contrast the divergent views from the opponents and
proponents of the NIEO.

Topic 3; Sectoral Development Approaches

1. Agricultural And Rural Development

Agricultural Development - a process aimed at maximizk1g the sector's

contribution to the economic well~being of a given nation. Agricultural
development has two sides:-

(a) Output side - basically entails commodities produced, their relative quality "
and value
(b) Input side basically entails the use of the factors of production such as
land, labour and technology. *

Three major ways of increasing the sectors contribution to economic

development are by increasing agro-based employment opportunities, increasing
total marketed output/produce and increa~ing the share of agro-exports in order
to earn more foreign exchange.

in the early stages of developrhent the agricultural sector is a very important

sector in terms of economic activities. This is so because of its low capital
intensity, it's the major provider of man's basic needs such as food and raw
materiais and ultimately it caters for the input requirements of industry. As
developing countries experience economic growth the dominant role of the
agricultural sector is supposed to diminish and the modem or industrial sector ls
supposed to emerge as the dominant sector.

However, the sector has certain peculiarities which .tend to limit Its potential to
develop more especially with respect to developing countries. Because of these
peculiarities the sector suffers from low and fluctuating incomes. Some of these
peculiarities include the following:- -~

83
.
,.
 • Uncertainty - production in the agricultural sector is characterized by a
high degree of uncertainty due to it biological nature. As a result the
sector is affected by ptiysical factors such as temperature, soil
condition, and levet of precipitation.
• The limited area of agricultural land- places severe devetopment
constraints on agricultural development. This is basically because the
law of diminishing returns is more pronounced in the agricultural sector
than in the industrial sector.
• Immobility of factors of production - difficult to adjust production at
short notice once planted, the farmer is not in a position to alter supply
in response to demand/price.
• Perishable products - most agricultural products are perishable raising
the problem of storage
• Seasonality - agricultural production is seasonal. This slow and flXed
turnover creates problems of transport, marketing and credit.
• lnetastic demand - demand for agricultural products is inelastic
resulting in increases in income not being translated into noticeable
changes in quantity demanded.
• Organizational difficulties - agricultural activity is scattered over a
wider area. While farming units are smafl. This raises organizational
problems in terms of agricultural extension and community
development.

Despite the above constraints its possible to attain agricultural development

provided good economic policies directed towards small holder farmers and
proper incentive structures based on appropriate technology are put in place.

Rural Development: It is a strategy designed to improve the socio-economic life

of a specific group of people - the rural poor. It entails extending the benefits of
development to the poorest among those who seek a livelihood in rural areas
such as small scale farmers and the landless.

In recent times, emphasis on rural development hps been placed on the most
vulnerable within the poorest of the poor such as rural women and children.

Due to the dominant nature of agriculture in developing countries small holder

sector has been identified as the target group for a growth oriented rural
development strategy. This is due to the following:-

• Small holder farmers have a big potential for development despite

using limited off farm inputs they still manage to produce a sizable
proportion of farm input.
• Small holder farmers are cost effective - require modest amounts of .
financial resources to develop. ·
• In most developing countries, poverty is predominantly a rural
phenomenon - thus this approach is a direct attack on poverty.
-
84
"
"'
"
 ,.
.•
• ~

• Small hokier farmers are. in numerical majority hence need special

attention to improve their lot.

Industrial Development: industrialization refers to those economic activities and

changes brought about by a technology based on inanimate sources of power
and a continuous development of applied scientific research.

Industrialized Country - refers to that country in which the share of

manufacturing constitutes more than 60% of value added ·in commodity
productbn. ·

Activity

1. List three major ways of increasing the agricultural sector's contribution

to economic development. i
2. What negatives affect the agricultural sector's potential to develop?
I
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:
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-~

85

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:::)