Volume 2

Volume 2

JOURNAL OF BUSINESS IN DEVELOPING NATIONS

VOLUME 2 (1998)  ARTICLE 1

The Evolution of Iran’s Reactive Measures to US Economic Sanctions

Hooman Estelami, Fordham University (estelami@fordham.edu)

Hooman Estelami is Assistant Professor of Marketing at the Graduate School of Business, Fordham University. The author would like to thank two anonymous JBDN reviewers for their helpful comments and suggestions throughout the review process. Please address correspondences to the author at the Graduate School of Business, Fordham University, 113 West 60th Street, New York, NY 10023.

ABSTRACT

For close to two decades, US foreign policy has aimed at limiting the economic development of post-revolutionary Iran. In recent years, the policy has become more focused by selectively targeting Iran’s oil industry, and limiting the involvement of non-US firms in Iranian petroleum projects. The existing US sanctions have also terminated all US-Iran trade for the first time in Iran’s post-revolutionary history. This paper examines the policy measures taken by Iran in coping with the variety of economic sanctions exercised since the 1979 revolution. Economic data are analyzed to uncover the emerging Iranian strategies. The paper concludes with a discussion of business implications for firms operating in Iran.
 

INTRODUCTION

Perceived by many as the most persistent anti-US government in the Middle East, Iran has undoubtedly been one of the more problematic nations for every US administration since President Carter. While prior to 1979, Iran was considered as America's closest ally in the Persian Gulf, following the Islamic Revolution relations between the two countries have more often been characterized by events such as the taking of hostages, military confrontations in the Persian Gulf, and harsh exchanges of allegations. More recently, economic relations between the two countries have been further strained by a series of trade and investment sanctions, which unless reversed have permanently terminated all economic activity between the two countries.

The multitude of sanctions exercised on Iran in the past two decades have undoubtedly had a profound effect on US-Iran trade. They have also been instrumental in shaping Iran’s international trade policy, and its emerging economic partnerships in the region. This paper will therefore examine the policy measures taken by Iran in coping with economic sanctions initiated by the United States. We will review the history of these sanctions in post-revolutionary Iran, and examine relevant economic data to assess the effectiveness of Iran’s reactive and pro-active policy measures in combating them. The paper concludes with a discussion of business implications for firms operating in Iran..
 

US ECONOMIC SANCTIONS IN POST-REVOLUTIONARY IRAN

In reacting to economic sanctions, Iran has utilized a variety of strategies, which have often evolved as a function of the internal and regional political conditions of the time. These strategies have also been influenced by the nature of the sanctions being exercised by the United States. The measures taken by Iran to cope with US economic sanctions have therefore varied in their prominence in different time periods. Iran’s post-revolutionary years can be meaningfully divided into four distinct time periods:

Revolution and the Iran-Iraq War Years: This period which extends from 1979 to 1988 represents a difficult period for the Iranian economy due to the instabilities experienced following the revolution and the destruction inflicted by the war with neighboring Iraq. It is also a period during which American hostages were taken from the US embassy in Tehran, and is therefore characterized by a state of political and economic isolation, facilitated by a multitude of trade sanctions.

The Post-war Reconstruction Era: This period extends from 1989 to 1992. Iran’s economy focused on recovering local production capabilities lost during the Iran-Iraq war. Attracting international investments and technology, fostering foreign partnerships for developing the country’s infrastructure, and relaxing import restrictions characterize Iran’s major policy decisions. US trade sanctions were also relaxed during this period.

Dual Containment and Trade Sanctions Renewal: Starting in 1993, the Clinton administration exercised a series of restrictive trade measures on Iran. The ‘dual containment’ strategy was initiated in order to curb the economic development of both Iraq and Iran. US trade sanctions were revived and further intensified. During this period, Iran strengthened its regional partnerships through a series of long-term bilateral and trilateral economic agreements.

Iran-Libya Investment Sanctions: In 1996, dual containment took a special focus on Iran, through the implementation of the Iran-Libya Sanctions. The sanctions restrict non-US firms investing in Iran’s oil sector, thereby extending US foreign policy beyond American borders. Although the sanctions created a temporary slowdown in foreign investments in Iran, they have found little international support. Firms in Europe and the Far East have recently challenged the extraterritorial nature of the Iran-Libya sanctions.

In each of these time periods, Iran’s policy measures has evolved around specific themes and objectives. For example, in the years of the Iran-Iraq war, in order to reduce reliance on western suppliers, much emphasis was placed on diversification of international trade routes. However, following the end of the Iran-Iraq war in 1988 (and the instabilities experienced in international oil markets during the mid 1980's), expansion of non-oil exports became a primary objective. Since the early 1990's, and the breakup of neighboring Soviet Union, emphasis has been placed on developing regional economic partnerships, involving not only the former Soviet republics to the immediate north of Iran, but also regional neighbors to the east and west. Such long-term partnerships have also become critical in recent years as a mean for countering US investment sanctions, which specifically target Iran’s oil industry. In the following sections, we will examine the measures adopted by Iran in each of the above time periods, and assess their effectiveness. The business implications of the current sanctions are then discussed.

REVOLUTION AND THE IRAN-IRAQ WAR YEARS (1979-1988)

Up until the 1979 revolution, trade between Iran and the United States was prospering. In 1978, American goods accounted for $4 billion or 21% of all Iranian imports, making the United States Iran's number one trading partner (Direction of Trade Statistics, 1979). However, following the Islamic Revolution of February 1979 - often carrying the slogan 'down with America' - diplomatic relations were bound to suffer, with subsequent effects on trade. In November 1979, militant students overtook the US embassy in Tehran, and the American staff were taken hostage. A total of 52 Americans were held hostage for over a year, due to a long an disorganized negotiation process. The event not only sparked international attention, but also served as a catalyst contributing to a long-term deterioration of US-Iran relations, both politically and economically (Hunter, 1990; Keddie, 1981).

The first formal US economic sanctions against Iran were exercised in April 1980, following the break in diplomatic relations between the two countries. By introducing the 1980 sanctions, President Carter banned all US exports to Iran. Although the US was able to secure support among its allies for the sanctions, the sanctions were short lived and by early 1981, following the Algiers Accord which secured the release of the American hostages (Washington Post, 1981), the sanctions were lifted. A renewed series of sanctions were imposed by the Reagan administration in 1984. The Arms Export Control Act and Export Administration Act of 1984 restricted the permitted list of products which American companies could export to Iran. Export of goods such as certain types of aircraft and vehicles, as well as products with potential military applications was effectively terminated. US oil companies however continued to lift Iranian crude oil for import into the United States.

Economic relations between the two countries suffered further in 1987 and 1988, following the US re-flagging of Kuwaiti oil tankers in the Persian Gulf. During this period, numerous incidents involving US and Iranian naval forces, and the shooting down of an Iranian airliner with over 200 passengers on board by the American Navy increased the level of tension between the two countries. In October 1987, President Reagan issued an executive order banning the import of all goods and services originating in Iran - an amount totaling close to $1 billion. US oil companies were also prohibited from importing Iranian oil into the United States for local consumption. They were however allowed to continue purchasing Iranian oil for their non-US markets through their overseas subsidiaries. Moreover, additional export controls were put in place in 1987 (FFND, 1987; Washington Post, 1987).

The years following the 1979 revolution therefore witnessed a series of sanctions and trade restrictions exercised on Iran by the United States. This contributed to an early realignment of Iran’s trade. For example, the 1980 sanctions, while short in duration, heightened the importance of diversification of Iran’s import supply sources, forcing the administration in Tehran to more aggressively seek new economic partners. However, in diversifying the trade routes, traditional pre-revolution suppliers in Western European (Germany, France, and the UK), and Japan were intentionally avoided. It was believed at that time that the US political influence on Japan and Western Europe will limit their ability to freely conduct trade with Iran -- a critical issue at a time of a vicious war with neighboring Iraq. Plans were therefore developed to reduce the country’s overall dependence on these suppliers, and to forge relationships based primary on politics rather than pure economics (Amuzegar, 1993).

While the United States lost its pre-revolution position as Iran’s top supplier, trade and economic relations with smaller European countries, Eastern Europe, Islamic, and non-aligned nations grew significantly. The implementation of such a plan was further enhanced by an Iranian constitution, which had recently been rewritten. The revised 1979 constitution mandated the government to take tight control of Iran’s international trade. Private sector importers were thereafter required by law to obtain prior authorization from government agencies to proceed with their import activities, and as a result, the influence of the government in determining the sources and nature of Iranian imports grew substantially (Amirahmadi, 1990; Amuzegar, 1993).

Control over international trade was also facilitated by a series of selective bilateral agreements. For example, while the US had traditionally been Iran’s primary supplier of wheat, Australia and New Zealand quickly took on that role. Iran’s other commodity requirements - such as meat, sugar and iron - were met through small European countries such as Sweden, Denmark, Italy, as well as eastern block countries such as the Soviet Union, Yugoslavia, Poland and Romania. During this period, the Iranian government also undertook formal schemes, which attempted to limit the trade imbalance, which existed with some OECD countries. This was achieved by restricting the amount of permitted imports from specific countries - such as Japan, Germany, and the UK - to a predetermined proportion of exports to those countries (Amuzegar, 1993; Kavoosi, 1988).

 

Table 1: Share of Iranian Imports by Source

                                          United       Western
Time Period                               States        Europe       Japan         Other

Pre-revolution (1975-78)                   18.5          48.7         15.8          17.0
Revolution and Iraq War (1979-88)           1.8          47.8         13.0          37.4
Postwar Reconstruction (1989-92)            2.1          52.1         11.4          34.4
Dual Containment (1993-96)                  3.3          45.8          8.3          42.6
Iran-Libya Sanctions (1996)                 0.0          44.9          6.4          48.6

Source: Direction of Trade Statistics, International Monetary Fund, Washington, DC; years 1975-1997.
  

With unprecedented controls gained by the government through the new post-revolutionary constitution, a persistent pattern of diversification in Iran’s international trade has since become evident. As a result, the percentage of Iranian imports supplied by traditional suppliers in the US, Western Europe, and Japan declined substantially. Table 1 outlines the trend. While prior to the revolution, these sources typically accounted for more than 80% of imports, in the years following the revolution they accounted for only about 63% of Iran's total import bill. The share of Iran’s imports supplied by non-traditional suppliers more than doubled in this time period. This trend has continued till today, such that by 1996, following the latest round of trade and investment sanctions, the US share of Iran’s imports was nil, and Japan and Western Europe only accounted for half of Iran’s import bill. Between 1995 and 1996 alone, the volume of imports from Iran’s non-traditional suppliers grew by over 8%, as compared to 2% for its traditional suppliers.

  POST-WAR RECONSTRUCTION ERA (1989-1992)

The period following the end of the Iran-Iraq war fostered a more open foreign trade policy in Tehran. A series of measures aimed at liberalizing trade were implemented, and a new post-war economic plan focusing on the reconstruction of industries damaged during the war was drafted. Iran’s new openness was further supported by a more liberal policy in Washington (Amuzegar, 1993; Hunter, 1990; Mofid, 1990). During the early parts of the Bush administration US trade restrictions on Iran were slightly relaxed. In 1989, following the end of the Iran-Iraq war, the US removed some of its prior trade restrictions, and agreed to release close to $600 mil of Iran's assets frozen in the US. Further relaxations were introduced in late 1991, allowing limited import of Iranian crude oil into the US (MEED, 1990; 1991). During this period, not only were American exporters doing a booming business in Iran, but American oil companies also became Iran's number one customer for crude oil (most of which was shipped to US subsidiaries in Europe). US allies in Europe were also more openly conducting business with Iran, as evident by the trade statistics of Tables 1.

With Iran being the second largest producer of OPEC, and its vast oil and gas reserves, the country had historically been dependent on crude oil export revenues as the primary source of foreign exchange. However, during the war, many of Iran’s oil fields and petrochemical facilities -- highly accessible to neighboring Iraq -- were severely damaged. Dependence on the international oil market and the 1986 collapse of crude oil prices further highlighted Iran’s excessive dependence on oil. Expanding non-oil exports was considered as an appropriate strategy in securing the long-term economic health of the country. Therefore, following the war, expansion of industries with strong export potential became a prime objective (Amuzegar, 1993).

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Table 2: Iran's Export Product Array

Product                    1979-88              1989-92              1993-94

Oil and Gas                 94.9%                89.2%                82.3%
Carpets                      1.8                  3.9                  6.6
Fresh & Dry Fruits           1.0                  2.3                  3.3
Leather Products             0.4                  0.4                  0.5
Copper & Metals              0.2                  0.3                  0.7
Caviar                       0.2                  0.2                  0.2
Textiles                     0.1                  0.1                  0.2
Chemicals                    0.1                  0.2                  0.1

 Source: Country Report - Iran, Economist Intelligence Unit, London; years 1980-1997
  

To promote non-oil exports, production in industries with strong export potential - such as handmade carpets and dried fruits - was supported by various government programs. In this period, foreign exchange and customs restrictions on exporters were relaxed, income taxes for non-oil exporters were reduced, and bureaucratic processes were simplified to improve the flow of exports. Since the end of the Iran-Iraq war in 1988, non-oil exports' share of export revenues has therefore been on a rise, as evident by Table 2.

Carpets have been a notable area of growth. Between 1989 and 1992, Iran's carpet exports - the second largest source of export revenues - experienced a three-fold increase from $345 mil per year to $1.2 billion. Similarly, exports of fresh and dry fruits almost doubled, and refined copper and textile exports grew by almost five times. Moreover, in the early 1990's, trade liberalization measures, and the privatization of state owned businesses helped fuel economic activity and significantly increased production in non-oil industries. The net effect was increased flexibility given to private sector exporters, improved local productivity, and special incentives for export oriented business activities. As a result, while in 1989 non-oil exports accounted for less than $1 billion. in annual exports, within three years the number had more than doubled.
 

DUAL CONTAINMENT AND TRADE SANCTIONS RENEWAL (1993-1995)

In 1993, the "dual containment" policy was initiated by the Clinton administration. According to dual containment both Iran and Iraq are considered threats to US interests in the Middle East. However, with the weakening of Iraq following its defeat in the 1991 Persian Gulf war, there is a unique interest in balancing regional powers by limiting Iran's development through various means such as trade sanctions and political isolation (Business Week, 1993; Washington Times, 1993). To achieve dual containment, the Clinton administration began to persuade Europe and Japan to limit their involvement in Iran. With no formal mechanisms in place to force such a policy on its allies, persuasion was typically achieved through diplomatic discussions (Gause, 1994) .

To slow the momentum of dual containment, during the early and mid 1990's Iran attempted to offer lucrative contracts to American companies, and to improve trade relations with the West. As a result, by 1994, the United States had become Iran’s fifth largest supplier of imports, and American oil companies had become the primary purchaser of its crude oil. However, during this period an emphasis was also placed on developing long-term regional economic partnerships with neighboring countries. For example, a long-term economic cooperation agreement with Russia which had been signed few years earlier made Russia the primary supplier of combat aircraft for Iran's air force, and the suppliers of three diesel powered submarines for the Iranian navy (Defense Daily, 1997). Despite US concerns, Russia also began construction of an $800 mil. nuclear power reactor in southern Iran, and the two countries agreed to set up joint companies to explore and produce Caspian Sea oil.

Iran’s regional partnerships were also facilitated by the breakup of the former Soviet Union, and by the common economic interests shared by its former republics in the region. As a result, Iran assertively developed economic relationships with the republics of the former Soviet Union neighboring it to the north. Many of these relationships were a result of Iran's strategy of wanting to become a regional transit point for gas and oil from Central Asia (Hunter, 1996). Due to unique geographical conditions, much of the oil and gas extracted from Central Asia would be more cost efficiently exported if shipped via Iran through pipelines or swap agreements. As a result, relations with neighbors such as Turkmenistan and Kazakhstan have pivoted primarily on these grounds. One notable agreement is the one reached with Turkmenistan and Turkey for a natural gas pipeline. The 900 mile pipeline will link Iran to Turkey and is to be extended northward to Turkmenistan in order to help export Turkmen gas to Turkey, and eventually to Europe by early next century (Economist, 1996a). Iran and Kazakhstan have also agreed to an oil swap deal, whereby Iranian refineries in the north are supplied with Kazakh oil, in return for shipments of crude oil in the Persian Gulf to Kazakh customers, thereby facilitating Kazakh oil exports through Iranian territory.

During this period, Iran also strengthened its regional partnerships to the east. With the visit by President Rafsanjani to New Delhi in 1995, and the launch of the India-Iran chamber of commerce in that year, economic activity between Iran and India has since increased. The two countries have also formed a joint shipping company, and have finalized plans for a $400 mil. fertilizer project in Iran. Iran has also proposed an extensive pipeline project to both India and Pakistan, which would facilitate the export of Iranian gas using an undersea pipeline passing through Pakistan.

Iran’s relations with its neighbors in the Persian Gulf and with Turkey have also proven to be an effective means for dodging western trade sanctions. These countries have played an instrumental role by becoming re-export centers for Iranian imports. For example, the volume of exports from U.A.E. to Iran between 1978 and 1996 has grown by over five times, most of which consists of re-exports of western-made products. Iran’s relations with Turkey have also pivoted on common regional interests. While both countries share security concerns with their respective Kurdish communities, and although Kurdish intrusions into each others’ territories and internal skirmishes have resulted in diplomatic tension for decades, the common economic interest in the energy resources of the area have often dominated bilateral relations. This was later demonstrated in 1996, where shortly after the announcement of the Iran-Libya sanctions -- to be discussed shortly -- Turkey proceeded to sign a $23 billion. natural gas supply agreement with Iran despite warnings from Washington (Economist, 1996a).

Other countries with which Iran developed closer partnerships during this period include China, Malaysia, and South Africa. China is cooperating with Iran in building Tehran's subway system and is also a key supplier of military hardware, and Malaysia has played a pivotal role in Iran's petroleum industry, by becoming a partner with France's Total in developing two Iranian off-shore oil and gas fields in the Persian Gulf. Relations between Iran and South Africa have also significantly improved in the past few years, as evident by high level visits on both sides. South Africa, which in 1994 began its purchases of Iranian crude for the first time in over a decade, now sources most of its crude oil from Iran.

While the Iranian constitution does not allow production sharing with foreign investors in the oil sector, by the mid-1990's mechanisms for encouraging foreign involvement in petroleum projects were developed as an alternative. In 1995 a buy-back production sharing system was developed by NIOC (National Iranian Oil Company). Under this system, foreign oil companies would be able to invest in an Iranian oil field and recover their investments and associated profits though the sale of the produced oil from the project. In what some analysts consider as an olive branch extended from Iran to the United States, such a contract worth $600 mil. was agreed upon between NIOC and Conoco - a subsidiary of Dupont Corporation - for the development of two offshore oil and gas fields in the Persian Gulf (Project and Trade Finance, 1995). Although the Conoco deal was later canceled, from a symbolic point of view, it could have created a significant shift in US-Iran relations. The deal would have been the first contract awarded by Tehran since the 1979 revolution, involving a foreign entity in both exploration and development of Iranian oil. With Conoco being an American firm, improved economic relations between the two countries was a conceivable outcome.

However, the Conoco deal would have also created a contradiction in US foreign policy of dual containment, at a time when the US was itself persuading its allies to restrict their business dealings with Iran. The Conoco deal not only would have made dual containment hard to sell to American allies, but it also helped raise policy differences between the administration and the Republican dominated congress. These differences further accelerated the momentum of trade sanctions, such that in early 1995 an executive order prohibiting all American companies from any involvement in developing Iran's petroleum industry was issued, and shortly after a total trade ban on Iran went into effect. American companies were prevented by law to conduct any kind of trade with Iran - oil or non-oil - with criminal penalties for violating corporations ranging up to $500,000. Moreover, the export of American goods and services to Iran, and brokering or financing of such trade has since been prohibited (MEED 1995a; 1995b; Oil and Gas Journal, 1995).

  IRAN-LIBYA INVESTMENT SANCTIONS (1996-present)

 In 1996, dual containment took a special focus on Iran, through a round of investment sanctions aimed at halting the development of Iran’s oil industry. With the signing into law of the Iran-Libya Sanctions Act of 1996, non-US firms investing more than $40 mil. in any one year period in Iran’s oil industry were subject to a series of sanctions by the US government. The President is empowered to choose two out of six possible sanctions against violating companies or their parent corporation. Possible sanctions include ineligibility to bid on US government contracts, banning imports into the US, denial of US export licenses, refusal of US Export-Import Bank assistance, refusal of loans over $10 mil in any one year from US lending institutions, and a ban on dealing in US government bonds (Washington Post, 1996). The sanctions were further amplified in mid-1997, by reducing the trigger investment amount from the original $40 mil. to $20 mil. per year.

Considering Iran’s dependence on oil exports, the focus of the Iran-Libya Sanctions seems to be a logical choice. Iran is OPEC’s second largest producer of crude oil with about 9% of the worlds’ oil reserves. With oil revenues being the biggest contributor to exports, the country has historically been highly dependent on oil production as the primary driver of the economy. Therefore appropriate maintenance of the existing oil and gas fields, exploration and development of new fields, and the construction of pipeline networks are essential. To facilitate such developments, Iranian plans call for billions of dollars of foreign investment. This exactly is where the Iran-Libya Sanctions attempt to strike. By prohibiting US firms' involvement in Iran's oil industry, and restricting that of non-US firms to an investment cap of $20 mil. per year, the policy aims to prevent international assistance in developing Iran's oil sector.

In responding to the Iran-Libya Sanctions, Iran has been faced with several strategic options. One possible strategy has been to focus on local development of the technology required in Iran’s oil facilities, and to not engage foreign partners in investment tasks . This would not only help avoid triggering the sanctions, but also be beneficial in the long-run as it will help create a self-sufficient petroleum industry. Clearly, such an approach would require the know-how an infrastructure needed for manufacturing, and service highly sophisticated petroleum and petrochemical projects. A second option - one, which would pose numerous political risks to the Iranian administration - has been to initiate a dialogue with the United States. Such a dialogue could aim at removing the two countries’ differences, and potentially lead to the removal of the sanctions. Finally, a third possible strategy has been to directly confront the United States. This could be achieved by persuading non-American firms to violate the terms of the sanctions. Such a strategy would capitalize on the international reaction to the extraterritorial nature of the Iran-Libya Sanctions.

While Iran has exercised each of the above strategies to some extent, the strategy of choice seems to have been one of direct confrontation. Following the 1996 announcement of the Iran-Libya Sanctions, only two countries expressed support for the policy, and expressions of concern were voiced by countries such as Japan, Canada, Australia, China, and member countries of the European Union (Economist, 1996b). By restricting the annual investment amount of non-American companies in Iran’s oil industry, the sanctions are dictating US policy beyond American borders, and it is no surprise that the European Union has already drafted retaliatory legislation should the Iran-Libya sanctions be exercised on an EU-based company. Support for the existing sanctions has also been limited by the state of Iran’s international debt. Following the end of the 1980-88 war, Iran underwent an economic revival, reflected by a period of rapid industrial development and its highest import bills in history. To facilitate this growth, a substantial amount of borrowing from international sources took place, such that by the early 1990's the country had accumulated close to $30 billion. of international debt. A series of negotiations have since lead to the restructuring this debt, and as a result, Iran has been committed to billions of dollars of annual loan payments till the turn of the decade. For countries such as Germany, France, Italy, Belgium, and Japan, any policy which targets Iran’s oil production capabilities may also lead to difficulties in recovering billions of dollars worth of Iranian loans.

To further motivate non-US firms to invest in Iranian oil, the authorities have been heavily promoting a dozen lucrative oil and gas development projects. Iranian plans call for a 10 percent increase in oil production capacity by the turn of the decade, and a three-fold increase in the next three decades. To achieve such objectives, the government has offered exceptional terms for companies who invest and participate in these projects. This strategy has successfully attracted large European, Russian, and Far Eastern firms in investing in such projects, thereby directly violating the terms of the Iran-Libya Sanctions. For example in 1997 the French company Total agreed to a $2 billion. project to develop an offshore Iranian gas field. Russian and Malaysian firms have since participated as partners in this project (Oil and Gas Journal, 1997). Other direct challenges to the sanctions have been made through a Canadian-Indonesian joint venture also involved in developing an offshore Iranian gas field, and a German bank financing an Iranian oil development project. In all cases the respective governments have strongly warned Washington against any possible actions, and the White House has been hesitant to enforce the sanctions (Amuzegar, 1997).

While a strategy of direct confrontation seems to have been highly effective for Iran, in recent years a coordinated effort to develop the local infrastructure for supporting the needs of the oil sector has also been evident. This is especially important since the development and maintenance of Iran’s oil industry requires roughly $2 billion of annual imports of parts and services. Iran has therefore setup a series of manufacturing companies, which locally manufacture a wide range of parts heavily used in the oil sector, such as special pipes, valves, and gaskets. The technology for manufacturing such products is either developed locally, or obtained through joint ventures with foreign firms. Moreover, for parts, which could not be locally produced, sourcing has been systematically diverted away from the West. In this effort, considerable assistance has been obtained from the Chinese and Eastern Europeans, who now account for the bulk of imported supplies in the oil industry. The Chinese also have the advantage of holding licenses for western technology, and can therefore provide many of the sophisticated equipment required to build modernized petrochemical plants (Petrossian, 1998).

The final strategy, which has been far less successful, both domestically and internationally for Iran, has been one of reconciliation with the West. With close to two decades of tensions between the US and Iran, efforts to reopen lines of communication have become more evident since mid 1997. President Khatami has begun to recreate Iran’s international image, and in this effort, expressions of a potential dialogue with the "people of America" have been voiced. Although this has helped tone down the position of the White House with respect to Iran (Mossavar-Rahmani, 1998), internal differences in Tehran on how to approach the West have plagued such an effort. A direct dialogue with the US administration is considered unacceptable by many in Iran, and is therefore unlikely to materialize in the near future.

BUSINESS IMPLICATIONS AND CONCLUSION

The US economic policy on Iran builds on close to two decades of deep diplomatic tensions between the two countries. The resulting economic sanctions have historically encouraged Iran to develop strategies for diversifying trade routes, finding new economic partners, and reducing dependence on oil export revenues. The effects of Iran’s diversification strategy has indeed been unequivocal. In 1974, seven countries accounted for 70% of Iran's imports and exports. Twenty years later - by 1994 - a total of 14 countries accounted for 70% of Iran’s international trade, and Iran's top seven trading partners accounted for only half of its total imports.

The intensification of trade and investment sanctions since the early 1990's has significantly affected the nature of international competition for Iranian business. The effects of the trade and investment sanctions have however been felt more so by American companies than non-Americans. This is primarily due to the practical difficulty of enforcing US laws beyond US borders, and as a result, in numerous occasions significant business has been lost to non-American firms, immune to the terms of the sanctions. Boeing, Conoco, and BP America are prime examples. In 1993 the US administration turned down a request by Boeing to sell Iran civil aircraft needed for expanding Iran Air’s level of operations. Up until that point, most of Iran Air’s fleet consisted of Boeings, and Iran Air had in the previous year negotiated the purchase of 16 Boeing 737-400's. As a result of the refusal, Boeing lost a $900 mil contract, and Iran Air has since proceeded to purchase from the European aerospace consortium Air Bus. Similarly, in 1993 BP America had negotiated the sale of a chemical fertilizer plant with Iran. The sale was prohibited by the administration on the grounds that the technology may be of a dual purpose nature, resulting in a $100 mil. sales loss to BP America.

The most publicized loss over the economic policy on Iran has been Conoco - a subsidiary of Dupont Corporation . Conoco and the National Iranian Oil company had in early 1995 agreed to a $600 mil. contract for developing two off-shore Iranian oil and gas fields. However, Conoco was forced to withdraw from the contract due to pressure from the administration, and subsequent investment sanctions. This opened the way for France’s Total, which has since commenced work on the project. Total has also proceeded to challenge the latest round of investment sanctions by engaging in a separate $2,000 mil. investment in Iran involving Russian and Malaysian firms.

What is perhaps most disturbing about the current state of the sanctions is that despite their extremeness, they have in practice been unable to achieve their primary objective of halting international involvement in Iran’s oil industry. The Iranian oil industry is in a state of restructuring and development - Iranian oil and gas fields need to be appropriately maintained and developed, and petroleum refining capacity needs to increase in order to keep up with growing local demand. While these projects represent attractive business opportunities, American firms have not been allowed to compete in this market. Meanwhile, violations of the sanctions by firms from Europe and the Far East have remained unchallenged, primarily due to potential retaliatory measures that could result by punishing violating firms. Therefore, while the existing sanctions have locked out American firms from competing in Iran, they clearly represent significant business opportunities for non-American companies operating in Iran’s lucrative oil industry.

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Washington Post (1996) “Clinton Approves Sanctions for Investors in Iran, Libya,” August 6, A:8:1.

Washington Post (1987) “All Imports From Iran Embargoed,” Oct 27.

Washington Post (1981) “Iran, US Conclude Final Hostage pact; Tehran Prepares for Americans’ Release”, Jan 19, A1.

Washington Times (1993) “‘Containment’ in Search of Muscle,” May 25, 1993, F:3:5.

JOURNAL OF BUSINESS IN DEVELOPING NATIONS

VOLUME 2 (1998)  ARTICLE 2

 

In Defense of World Bank and IMF Conditionality in Structural Adjustment Programs

Gerry Nkombo Muuka, Murray State University (gerry.muuka@murraystate.edu)

ABSTRACT

It is an open secret that the two Bretton Woods Institutions (BWIs)—the World Bank and the IMF—are the main architects of structural adjustment programs (SAPs) that are prevalent in much of the developing world. The very nature of "conditionality"—the policy strings that the BWIs attach to SAP loans to developing nations—does affect the operations of companies, whether these are publicly-owned or private. Conditionality imposes on the program-country (one with a BWI-inspired SAP in place) such measures as: the adjustment/devaluation of local currencies and/or floating of hitherto fixed exchange rates; the decontrol of internal price systems as well as external and internal trade flows (trade liberalization); removal of legal restrictions on private entrepreneurship; abolition of state enterprises and monopolies in both production and marketing; reforming of banking policy, including interest rate decontrol; cutting the state budget, including the removal of all consumer subsidies and other social expenditures; and reduction in money supply accompanied by a general public sector wage and salary freeze to control inflation. These measures, invariably, affect the operations of companies, as well as the socio-economic welfare of the nation involved. It is not surprising, therefore, that some of the negative impacts of SAPs have led to heavy criticism of both the IMF and the World Bank. Based in part on the author's attendance and presentations at conferences in Africa, Europe and North America (on structural adjustment programs in Africa), this paper explores some of the major arguments for and against "conditionality". It argues that whichever way one looks at it, some form of conditionality in structural adjustment programs is unavoidable. It concludes that there are some sound arguments to be found on both sides of the conditionality debate, most of which—in and of themselves—will be of interest to managers.
 

 INTRODUCTION

Countries as diverse as Poland, Ghana, Jamaica and Kenya have had to borrow money from the World Bank (hereafter called the Bank) and the International Monetary Fund (hereafter called the Fund) as part of what is now commonly known as structural adjustment programs (SAPs). The overall objectives of these economic reforms include the need to increase an economy's outward orientation (or exports), to reduce both rural and urban poverty, and ultimately to induce, in the economy in question, a high and sustainable rate of economic growth.

Africa has the highest concentration of countries with Bank and Fund-inspired SAPs of any region in the world, with over 40 countries implementing economic reforms as of July 1996. This does not (and should not) come as a surprise.

  

Table 1: Basic Data on Selected Countries in Africa

                                                                                           Percentage of Pop. with Access to
                                                     GNP   Poverty    Life      Health       Safe                         Ext. Debt
                                                   per cap.               Expect.    Care       Water    Sanitation   % GNP
    Country                    Pop.        1995    1981-95   1995      1993      1994-95     1994-95       1995
 

Mozambique

16.2

80

-

47

-

28

23

443.6

Ethiopia

56.4

100

33.8

49

55

27

10

99.9

Tanzania

29.6

120

16.4

51

93

49

86

207.4

Burundi

6.3

160

-

49

80

58

48

110.1

Malawi

9.8

170

-

43

-

54

63

166.8

Chad

6.4

180

-

48

26

29

32

81.4

Rwanda

6.4

180

45.7

46

-

-

-

89.1

Sierra Leone

4.2

180

-

40

-

-

-

159.7

Niger

9.0

220

61.5

47

30

57

15

91.2

Burkina Faso

10.4

230

-

49

-

-

14

55.0

Madagascar

13.7

230

72.3

52

-

32

17

141.7

Uganda

19.2

240

50.0

42

-

42

60

63.7

Guinea-Bissau

1.1

250

87.0

38

-

24

20

353.7

Mali

9.8

250

-

50

-

44

44

131.9

Nigeria

111.3

260

28.9

53

67

43

63

140.5

Kenya

26.7

280

50.2

58

-

-

43

97.7

Togo

4.1

310

-

56

-

67

20

121.2

Gambia,The

1.1

320

-

46

-

61

34

-

Cent. African Rep 

3.3

340

-

48

-

-

-

-

Benin

5.5

370

-

50

42

70

22

81.8

Ghana

17.1

390

-

59

25

56

29

95.1

Zambia

9.0

400

84.6

46

-

47

42

191.3

Angola

10.8

410

-

47

24

32

16

274.9

Mauritania

2.3

460

31.4

51

-

41

64

243.3

Zimbabwe

11.0

540

41.0

57

-

74

58

78.9

Cameroon

13.3

650

-

57

-

41

40

124.4

Cote d’Ivorie

14.0

660

17.7

55

-

82

54

251.7

Congo

2.6

680

-

51

-

60

9

365.8

Lesotho

2.0

770

50.4

61

-

57

35

44.6

Egypt

57.8

790

7.6

63

99

84

-

73.3

Morocco

26.6

1,110

1.1

65

62

59

63

71.0

Algeria

28.0

1,600

1.6

70

-

-

-

83.1

Tunisia

9.0

1,820

3.9

69

90

86

72

57.3

Namibia

1.5

2,000

-

59

-

57

36

-

Botswana

1.5

3,020

34.7

68

-

70

55

16.3

South Africa

41.5

3,160

23.7

64

-

-

46

-

Mauritius

1.1

3,380

-

71

99

100

100

45.9

Gabon

1.1

3,490

-

55

-

67

76

121.6

Source: constructed from various Tables in World Development Report 1997.
  

The continent has the highest poverty levels of any developing region in the world. According to the World Bank (1994), the share of people living in poverty is larger in Africa, and the poor are poorer, than in any other region in the world. Of all the continents, Africa has the most disappointing development record; the fastest de-industrialization; the highest per capita debt; the poorest health standards and statistics; among the most savage civil wars; the lowest life expectancy and the poorest standards of death.

To illustrate some of the assertions we have made in this introduction, Table 1 contains some basic data on 38 selected countries in Africa. Among other things, the table provides a glimpse of poverty levels in Africa (as high as 87% and 84.6% in Guinnea-Bissau and Zambia respectively); life expectancy (averaging 53 years for the 38 countries—ranging from a high of 71 years in Mauritius to a rather disturbing 38 years in Guinea-Bissau); as well as percentages of their populations with access to health care, safe water, and sanitation. Column 9 in Table 1 shows external debt in 1995 as a percentage of individual countrys’ GNP. Of the 34 reporting nations in the table, 18 of them have 100 percent or more debt as a percentage of GNP, with the 18-country average at a very high (poor) 203% of GNP. The average external debt for all 34 reporting nations is 140.4% of GNP: ranging from a low (good percentage) of 16.3% for Botswana (one of the richest nations in Africa) to 444% for Mozambique, perhaps the poorest nation in Africa based on the statistics in Table 1. With these types of statistics it makes sense, in discussing SAPs, to have Africa as the main reference point.

The major vehicle through which developing countries can seek aid and loans from the Bank and the Fund in contemporary structural adjustment programs (or the policy strings attached to loans they seek)—called conditionality—has been a matter of intense debate and controversy in the literature, at seminars, and at conferences and workshops in and involving the developing world.

Conditionality has traditionally included the adjustment/devaluation of local currencies and/or floating of hitherto fixed exchange rates; the decontrol of internal price systems as well as external and internal trade flows (trade liberalization); removal of legal restrictions on private entrepreneurship; abolition of state enterprises and monopolies in both production and marketing; reforming of banking policy, including interest rate decontrol; cutting the state budget, including the removal of all consumer subsidies and other social expenditures; and reduction in money supply accompanied by a general public sector wage and salary freeze to control inflation.
 

PURPOSE OF THE PAPER


Although this paper will be of interest to many audiences (including students and academics, donor and lender agencies, governments and policy makers/implementers), it is targeted at those individuals and corporate heads who either wish to consult for the World Bank and IMF, or who wish to do business in (and for) Africa but have little or no first hand knowledge about the feelings in Africa toward both the IMF and the World Bank (called the Bretton Woods Institutions, BWIs). The paper has two specific objectives in this connection, namely:

(a) To present and discuss some of the major arguments against "conditionality"— the policy strings that the BWIs attach to SAP loans to developing nations.

(b) To present and discuss some of the major defences against the criticisms of conditionality in (a).
 

METHODOLOGY


The reader will be interested to know how information for this paper was gathered. Three different methods inform the paper, namely:

(a) The author's involvement in seminars and conferences: over the past 10 years, the author has had the privilege: (i) to present papers on SAPs at conferences in such places as Zambia (mostly), Scotland (Edinburgh University, November 1992), South Africa (Rand Afrikaans University in Johannesburg, 13 March 1994), and the U.S.A (Kentucky, October and November 1994). (ii) to be a participant and moderator at numerous conferences on SAPs, such as the April 8th and 9th 1994 World Bank organized and funded "Poverty Assessment" seminar at Lilayi Lodge in the Zambian capital of Lusaka.

(b) In 1992 the author organized and directed Zambia's first international conference on the SAP, held on the Copperbelt (city of Kitwe) from 21-23 March. The total attendance of 90 included the Zambian Vice President (at the time Honorable Levy P. Mwanawasa), two government ministers, four Professors, eight Ph.D holders, two Ph.D students, 40 Managing Directors, and representatives from the World Bank, WHO, UNDP/UNIDO, and UNICEF. International resource persons included Professor Anthony (Tonny) Killick from the Overseas Development Institute (ODI) in London, whose conference presentation is referred to in this paper.

(c) And finally, of course, available literature has been reviewed.

In looking at both sides of the "controversial coin" called conditionality, it is hoped (among many other things) that the paper will provide those economists and academics in America, Europe and elsewhere who have never consulted for the Bank and the Fund in Africa (and hope to do so in future) with a preparatory tool box before they travel to Africa. We begin, first, by looking at some of the major criticisms of conditionality.

CRITICISMS OF CONDITIONALITY


At different fora across Africa (at seminars, conferences, university classrooms , in publications and at beer drinking places), the World Bank and the IMF—the main architects of structural adjustment programs—have been criticized by government officials, university academics and students, professionals, the common man and African sympathizers for what they say is the economic and social "misery" that SAPs, through conditionality, have caused them.

Let's look at some of their specific criticisms, before we come back later on to question their legitimacy. From the author's experience, most of the criticisms seem to center around the areas of: recolonization, social costs, the "democratic wave" or political conditionality, the timing and speed of adjustment, attitude changes implicit in SAPs, contradictions between the World Bank and the IMF, "economic fat cows", and the similarity of structural adjustment programs pursued by otherwise different countries in Africa. We discuss each of these, next.

The "recolonization" controversy

Some critics seem to believe that the Bank and Fund so dominate program countries that their officials have become de facto finance ministers in certain countries, a view that reconstructs the name and reconstitutes the role of the IMF to that of the "International Ministry of Finance" (Clark and Allison, 1989, p. 22). By "program country" we mean those countries with World Bank and IMF-backed structural adjustment programs (SAPs).

They assert, for instance, that the bringing of financial and economic pressures to bear on most African economies closely resembles the period before formal colonial rule, in which the colonizing powers where such pressures were, used to allow the colonial powers to take over the running of indigenous economies. They further argue—as Lawrence and Seddon (1990) do— that this time the major world economic powers (notably the G-7) are coordinating the restructuring of the world economy through the media of the Bank and the Fund and under the uncontested tutelage of the United States.

Onimode (1988), on the other hand argues that the strings attached to SAPs most clearly represent the extent of the stifling control of African countries exercised by the Fund and Bank, as well as the greatest threat of "imperialism's recolonization of Africa."

A more aggressive criticism of conditionality is provided by Zeleza (1989, p.35), who laments that "it has been a raw deal for Africa. In exchange for puny loans, which are subsequently over-repaid, the IMF and World Bank, on behalf of their godfathers in the developed capitalist countries, have accorded themselves the right not only to supervise individual projects, but to manage whole economies entirely: approving their annual national budgets, foreign exchange budgets and fiscal and tariff policies; issuing clearance certificates before these countries can negotiate with other foreign agencies; and even posting representatives to their Central Banks and Ministries of Finance and Trade. As during the colonial era, it is Africa's masses who are paying the price with their sweat, tears and blood."

Social costs of adjustment

A number of the critics of SAPs as implemented in Africa argue that the strings attached to loans have worsened the human condition, defined by Shepherd (1990) as a deterioration of the social conditions involving the basic human rights to food, education, employment, shelter, health, clean environment, and security of person.

The need for assessing social costs of adjustment is perhaps self-evident. Any country-specific adjustment process that is not carefully cognizant of serious social costs cannot in fact, in the end, be considered effective. Indeed the contention here is that treating the social dimensions of adjustment as a side issue— as opposed to a core one— dooms the process to failure. Ultimately as Cornia, Jolly and Stewart (1987, p.3) point out, "the call for a more people-sensitive approach to adjustment is more than a matter of economic good sense and political expediency. It rests on the ethic of human solidarity, of concern for others, of human response to human suffering."

Democracy wave: the hard-state, soft-state argument

Increasingly conspicuous on the Bank and Fund conditionality menu in the 1990s is political conditionality, defined as the tying of official aid disbursements to the quality of government (or governance) that aid recipients provide (see Institute of Development Studies (IDS), 1993). In the view of the World Bank, history suggests that political legitimacy and consensus are a precondition for sustainable development.

Why the current "rush" towards political conditionality? It would seem that the unprecedented wave of political conditionality has one major source: the collapse of the Soviet Block and of Communist rule throughout Eastern Europe and the former Soviet Union, which has put an end to the competition between East and West for influence in the third world (IDS, 1993). The uses of aid need no longer be shaped by geopolitical considerations and compromises. It is no longer necessary or possible to support what the IDS (1993) calls nasty authoritarian regimes on the grounds that they are the only feasible alternative to local Communists and/or Soviet, Cuban or Chinese influence.

But there are grounds for caution— especially with regard to Africa— about the possible economic consequences of democratization. Critics such as Killick (1992a) argue for instance that empirical research does not find any robust connection between democracy and high-quality economic policies any more than dictatorship is systematically associated with poor economic results. In other words the question to ask is whether hard-driven adjustment programs in countries run by dictators are more coherent and successful than those undertaken under democratic conditions. The argument against the soft-state criterion (democracy) is that consultation takes time and increases transaction costs. Some people argue that one reason the adjustment program in Ghana has been more successful is because President Jerry Rawlings is more of a dictator than a democratic leader.

"The ten-year itch": timing and speed of adjustment

Yet another criticism emanates from the timing/duration of SAPs versus the stringency of measures expected to promote adjustment and growth. In a nutshell, most measures are short-term, yet adjustment is a long-term process. In this connection, it is argued that the most important limitation of Fund and Bank analytical approaches to Africa's macroeconomic problems is probably neither their market bias nor their unconcern with the politically crucial distributional questions, but rather their inadequate consideration of Africa's limited capacity to adjust (Helleiner, 1983). The traditional conditionality instruments of money and credit restraint, devaluations, and liberalization— all pursued within a fairly short period— cannot be expected to be as effective in the typical African country as elsewhere.

As Helleiner (1983) points out, in Africa the capacity for short-term adjustment is constrained by four major factors: (a) limited economic flexibility and limited short-term responsiveness to price incentives, (b) low and falling levels of per capita income and urban real wages, (c) limited technical and administrative proficiency within governmental economic policy-making institutions, and (d) fragile political support for many of today's governments.

In other words, SAPs in their current form ignore the fact that the production base of post-colonial African states is narrow, and that the bulk of these states rely on one or two export products whose prices are often unstable in the international market for their foreign exchange earnings. Faced with unpredictable export earnings, most African states find it difficult to service debt and at the same time pay for desirable imports, notably oil, medicines and equipment.

In Table 2 we present statistics that lend credence to the claims we have just made—regarding the reliance by most countries in Africa on only one or two export products. Statistics in the two columns on either side of the names of 26 selected African countries in the table almost speak for themselves. For the 26 countries, primary commodities as a percentage of total export earnings averaged 81% in 1992, ranging from 46.2% for Lesotho in Southern Africa to 99.9% for Mauritania in North Africa. The other column shows the countrys’ reliance on one or two export products for foreign exchange. For 19 of the 26 countries, the average dependence on one product for export earnings is 56%, ranging individually from 20% for Zimbabwe (on tobacco) to 98% for Zambia (on copper and copper-related exports). Table 2 also shows that except for Zambia, Niger, Namibia, Zaire (now Congo) and Sierra Leone, most of the countries depend on agricultural commodity exports. The other five countries depend mostly on mineral exports.

Severe behavioral and attitudinal changes implicit in SAPs

In addition to the more technical issues of SAPs argued in the literature, there are also the behavioral and attitudinal changes needed for SAP-success but which, in reality, take a long time to come about. The people of Africa are mostly conservative and slow to adjust. It is easy to fly into an African country and tell people to devalue their currency and then fly away. But there is the problem that the people left behind are the ones who have got to stay alive. They have to make all the painful adjustments. And the more marginal the economy is— as most African economies invariably are— the more the downside risk and resistance to the sort of attitudinal and behavioral changes SAPs take for granted but that are critical for success.

  {C}

Table 2: Commodity Dependency of Selected African Countries, 1992

Primary Commodities as a %                                          Individual Commodities as a %
   of Total Export Earnings            Country                              of Export Earnings

          99.9                                      Mauritania                    Iron ore            45.0       Fish              42.0
          99.7                                      Zambia                        Copper             98.0
          97.9                                      Rwanda                       Coffee              73.0
          97.9                                      Niger                           Uranium            85.0
          95.1                                      Burundi                        Coffee              87.0
          95.0                                      Uganda                        Coffee              87.0
          94.7                                      Somalia                        Live Animals    76.0
          93.4                                      Malawi                         Tobacco          55.0        Tea              20.0
          90.0                                      Ethiopia                        Coffee             66.0
          88.9                                      Burkina Faso                Cotton             48.0
          88.5                                      Sudan                           Cotton             42.0
          84.3                                      Mali                              Live Animals    58.0       Cotton          29.0
          83.3                                      Togo                             Phosphates      47.0
          82.0                                      Guinea Bissau                Cashew Nuts  29.0       Ground Nuts  23.0
          79.0                                      Tanzania                        Coffee            40.0
          76.3                                      Mozambique                  Fish                27.0       Prawns          16.0
          72.0                                      Chad                             Live Animals   58.0       Cotton           29.0
          71.6                                      Senegal                          Fish                32.0
          68.7                                      Zaire                              Copper           58.0      
          68.5                                      Ghana                            Cocoa            59.0
          63.2                                      Sierra Leone                  Diamonds       32.0
          61.5                                      Kenya                            Coffee            30.0
          56.9                                      Zimbabwe                      Tobacco         20.0
          48.0                                      Gambia                          Ground Nuts   45.0
          46.2                                      Lesotho                          Mohari           24.0

Source: reconstituted from Table 3 (Oxfam, 1993a, P. 8)
  {C}

Contradictory effects of SAP measures: conflict between IMF demand-management versus World Bank supply-response measures

The demand-management approach of the Fund (which emphasizes imports-restraint) and the supply-orientation of the Bank (which emphasizes exports) are not always easy to reconcile (Killick, 1992b). There is the danger that Fund-type programs which envisage large reductions in imports will erode export supply responses, to say nothing of the costs imposed by way of foregone output.

Zambia (during much of the 1990s) is a classic example of this contradiction. While market reforms have tended to eliminate price distortions, for example, floatations of the Kwacha (the local currency) have been "popular" not for their success in boosting non-traditional exports as intended, but rather for fueling galloping inflation. It has led to rising input costs in a manufacturing sector still largely (over 60 percent) dependent on imported spares and raw materials. To provide a glimpse of the magnitude of the problem, one has to look at the fact that the Kwacha dropped to K1,350 to a U.S dollar as the first half of 1997 came to a close, quite a decline from the K125 = $1 exchange rate in 1992. Zambian imports of spare parts, oil and intermediate goods are essentials that have not been reduced by devaluations without seriously affecting domestic industrial capacities.

Economic fat cows

In a heated debate on the role and impact of SAPs in Uganda, there is consensus that SAPs have mostly bolstered the fortunes of the Mafutamingi. These are people with ill-gotten property and quick-yielding speculative investments, or what Jamal (1991) calls "that motley group of wheeler-dealers in commerce who nowadays control the distribution of consumer goods in this land-locked East African country."

In the case of Jamaica, IMF doctrine in the 1980s can be likened to having "given more to the rich, less to the poor". The nature of income distribution took the form of the rich investing their windfall not in job creation but simply in speculation or even more simply in foreign bank accounts (George, 1988).

There are other SAP-skeptics who argue that neither the Fund nor the Bank have lived up to their advanced billing as possible saviors of Africa. One such skeptic, Zeleza (1989), claims that on the contrary they have participated in what he describes as "the gory feast of milking Africa dry." To back his claims, he quotes the United Nations as reporting net transfers of close to $1 billion from Africa to the IMF in both 1986 and 1987. He concludes that SAPs have not only aggravated Africa's economic problems, but that they have also entailed severe social costs.

Identity/similarity of SAP programs in Africa

A final major criticism is that most of these countries pursue similar reform programs and face the same Bank and Fund conditionalities. As part of SAP they all aim to reduce imports. If one country's imports are another's exports and the former are cut as part of the demand-management approach, this obviously affects exports. In 1991, for example, Zambia's exports to Zimbabwe were reduced because, as part of its own SAP, Zimbabwe had to reduce its imports in line with its own tight foreign exchange situation. This amounted to a loss of export earnings for Zambia.

Suppose you are a would-be Western consultant for the World Bank or the IMF during these, the last three years of the 20th Century. Assume, too, that you are in the Zimbabwean capital of Harare or the new Nigerian federal capital of Abuja, attending a typical conference on SAPs in Africa. As part of your contribution to the conference, what would you say to the above major and typical criticisms against the Bank and the Fund?

"In defense of conditionality", discussed next, should help you participate meaningfully at such a conference.

IN DEFENSE OF CONDITIONALITY


On "recolonization"

The "recolonization" criticism may be totally misplaced. There simply is no evidence to suggest that either the Bank or the Fund has any imperial interests in any African territory, even without considering that the ending of the cold war has recently began to radically change European and American interests in Africa. It would certainly seem, at the moment, that in geopolitical terms Africa is of very minor interest to the West— certainly not for its territory, although it continues to be vital as a source of raw materials for Western factories and a market for Western goods.

Don't ignore the counter-factual argument

A useful starting point in defense of conditionality is the fact that most of the criticisms leveled against the Bank and the Fund ignore the counter-factual: most African nations embarked on Bank and Fund supported SAPs in the early 1980s because of economic distress. What would have happened in the absence of SAPs? Although counter-factuals are hard to prove, in most African nations it is easy to make educated guesses as to what would have happened, and it is most probable that even if economies have continued to perform poorly under SAPs, they would have performed even poorer without them.
 
Africa needed to Adjust

Not too many people would disagree with the view that Africa's "disarticulated" economies are overdue for fundamental restructuring, and that SAP would probably accelerate the process of rational allocation of productive resources. African countries embarked on SAPs because they found what Edward Jaycox (the long-serving World Bank Vice-President in charge of Africa) calls "their backs to the wall". Jaycox (in The Courier, 1991) says most countries did not introduce SAPs enthusiastically: "They entered into SAPs because they were desperate and when they did so there were no goods on the shelves, no spare parts, no trucks, no batteries and no tires...no drugs in the clinics, no chalk and books in their schools."

Evolution of Policy

According to Avramovic (1989), conditionality has contributed to policy evolution in Africa in at least 4 areas:

(a) Fiscal discipline: many problems facing African nations—in their accounts, domestic inflation, administrative controls, price distortions, and insufficient investment—have their origin in the fiscal imbalance. In countries suffering from hyper-inflation, monetary stabilization may be a precondition for recovery of public revenue and thus for reconstruction of public finances generally. But monetary stabilization will not be possible to sustain unless fiscal discipline is restored. The argument is that conditionality helps to bring about this discipline.

Moreover, both the Bank and the Fund have become more flexible, relying less on simple budgetary aggregates such as total spending or the budget balance and more on the "quality" of fiscal adjustment. Since the economic impact of their fiscal provisions will be much affected by which expenditures are trimmed and what is done with taxes, the Bank and Fund are becoming more insistent on knowing how a government proposes to implement promised reductions in the budget deficit—increasingly urging governments to install social safety-nets and asking what the ODI (1993) calls awkward questions about military spending, a perennial problem in Africa.

(b) Export expansion: export expansion of manufactures now commands universal support. It provides for economies of scale: the larger the market in which one sells, the greater the possibilities of expanding production, perhaps at falling costs, and expanding sales, probably at unchanged prices, thus raising employment, income and profit margins. Further more, rising export earnings will help alleviate the foreign exchange constraint to growth, a critical issue in most African nations. The argument is that conditionality helps to increase the out-ward orientation: devaluation, for instance, aims at making exports more attractive on the world market, thereby providing exporters with some incentive to export more.

(c) Management of public enterprises: public enterprises in infrastructure, goods and services production, and trade represent a large proportion of the total in many developing countries (about 80 percent in Zambia prior to the current, half-way complete privatization program implemented in 1992). Their management and finances have a major effect on public finance and credit in general. Management weaknesses have been frequent in most African state-owned enterprises (SOEs), mostly because of political patronage or insufficient operational autonomy; and finances have frequently been weak because the SOEs have been used as a vehicle for subsidization of consumption, as a source of employment, or as a conduit for irregular transactions. The World Bank, as an investment project lender, has emphasized institutional building at the enterprise and sector levels. African nations have now become increasingly aware of the need to improve and upgrade the operations and management of SOEs, with many now engaging in outright privatization.

(d) Agricultural prices: concerned with the agricultural lag in a number of African nations and their rising food imports, both the Bank and Fund have insisted on improvement of agricultural prices in internal markets. The Bank in particular has normally made its agricultural lending conditional upon price improvements where warranted. The need to provide adequate price incentives in agriculture is now recognized in a very large number, perhaps most, African countries.

Not surprisingly, the World Bank tops the list of Afro-SAP-Optimists. Edward Jaycox— the "Mr. Africa" Vice-President of the World Bank, has the following things to say (see The Courier, 1991):

We take every opportunity to work against what we think are inadequate or inaccurate pictures of reality...in fact I think the situation in Africa looks much better today than it has in a long time. I am not talking here about commodity prices or yet about the results on the ground, but about the fact that the African leadership has taken a grip on its own problems as never before. They are better informed and they use more of their own resources—human resources and knowledge. They have been able to appreciate the problems they face and have managed to get a lot more support externally than they thought feasible a few years ago. So we—meaning the Africans, the donors and everybody working on Africa— have managed to turn a vicious circle of declining performance and declining support into a virtuous one of improving performance and increasing support. That is why Afro-pessimism is wrong.

Jaycox's argument adds a new dimension to the debate about evaluative criteria for the success of adjustment programs: that to the extent conditionality increases and improves Africa's awareness and appreciation of the problems and choices it faces, that in itself is a measure of success. This has some truth in it, as in the shared view of the ODI (1993) several governments have increasingly become persuaded of the importance of financial discipline.

Infrastructural inadequacies

Both the Bank and Fund are aware that the supply response to adjustment in Africa has been slow because of the legacy of deep-seated structural problems. They admit that inadequate infrastructure, poorly developed markets, rudimentary industrial sectors, and severe institutional and managerial weaknesses in the public and private sectors have proved unexpectedly serious as constraints to better performance in Africa. Hence they both are now increasingly aware that technological change, institutional strengthening, infrastructure development, improved education and health standards including reduced population growth, land reform and other major hurdles to economic development have to be addressed if growth and poverty alleviation in Africa are to be achieved.

Conditionality is unavoidable

The Fund and Bank have a right to safeguard the resources transferred to them by member governments. Although conditionality remains controversial and generates resentment from time to time, it is hard to deny that those who provide assistance and loans can legitimately take an active interest in the design of the recipient country's policies. During this author's 1992 meeting in Lusaka (Zambia) with Mr. John Hill (then Resident IMF Representative), he had this to say: "Conditionality is legitimate. You can't expect to borrow and use somebody else's money and not pay back".

Social costs unintentional: the counter-factual argument

Let's once again invoke the counter-factual. Social costs could possibly have been much worse without SAPs, if African economies were allowed to go into what Jaycox loves to call "free fall". One proponent of conditionality, Green (1989, p.31) has this to say:

The extent of human deprivation, social misery, mass poverty, dislocation, violence and death in Africa today is a fact. The failure of adjustment programs— Fund and Bank-backed or otherwise—to achieve a halt to the erosion of the standards of life (and death) of the poor and vulnerable ...is a fact. (But) poverty, vulnerability, inequality and threats to the social fabric in Africa are not a product of the 1970s or 1980s, much less of Bank and Fund prescriptions for adjustment. The challenge to Bank and Fund adjustment programs is often put in a form that suggests that the programs themselves raise inequality and do so with deliberate intent. The last is not the case.

Using the counter-factual, one can argue that in Africa (before European colonization) life on average was short and precarious; food security was frequently lost; diseases were frequently uncontrollable; social equity and equality were notable by their absence; women were subordinated; and that poverty and vulnerability were widespread. Although conditionality does indeed involve social costs, Green (1989) is right in observing that malicious aforethought on the part of both the Bank and the Fund is simply not evident.

Whether on balance Fund and Bank programs have made poor people poorer is unclear and will remain so. This is so because the comparison has to be not with pre-crisis years, but to what would have happened with the crises had there been no internationally backed program. Counter-factuals are, of course, always hard to prove, but the record of "go it alone" rehabilitation and recovery efforts—such as Zambia's after abandoning the IMF-program in May 1987—is not particularly satisfactory. In fact it is discouraging.

On political conditionality

In defending political conditionality it can be argued that the insistence on democratic reforms is premised on three essential, interdependent elements (Moore and Scarritt, 1990). One is the presence of institutions and procedures through which citizens can express effective preferences about alternative policies and leaders. Second is the existence of institutionalized constraints on the exercise of power by the executive. Third is the guarantee of civil liberties to all citizens in their daily lives and in acts of political participation.

The scapegoat argument

In the absence of policy conditions accompanying loans to Africa, the danger is that financial assistance can be—and in some cases has been—used to defer needed action, to buy time in the hope that some favorable turn of events will remove the necessity for unpalatable action. Bank-Fund involvement can help through the provision of advice and technical assistance in the preparation of adjustment measures. Killick (1992b) makes the useful point that they also provide African governments with a useful "scapegoat" upon whom the blame for unpopular measures can be deflected— as has indeed happened in the overwhelming majority of program countries.

There can be no escaping the fact that Africa has an urgent need to adapt its economies to changing global and domestic circumstances. The Bank and Fund should be seen as a force trying to assist this process in usually sensible ways.

Bank-Fund remote-control

The Bank and Fund are highly visible because they are the architects of SAPs that create serious hardships for low-income groups in Africa. But, as has been argued by people like George (1988), "they cannot be held responsible for the circumstances that brought indebted countries to their doorsteps in the first place." Nor can they even be credited with an inordinate amount of power in the world financial system— they simply do not have that kind of money at their disposal, and ultimately they take their orders from outside. The role of the Bank and Fund is that of messenger, watchdog, international alibi and gendarme for those (mostly Western governments, central banks and private banks) who do hold financial power. In this sense, the Bank and Fund are a sort of Godfather figure—they make African governments offers they cannot refuse!.

Donor Fatigue and The Doomsday scenario

In what may appropriately be termed the doomsday scenario, we ought to conclude the list of defenses by pointing out that the Bank, Fund and other lenders and donors may, in the second half of the 1990s, be experiencing "donor fatigue" with respect to Africa. There are, at the moment, three potential catalysts for donor fatigue with Africa in general. First, having provided aid to the continent for so long, the region does not have much to show—in the view of the West—for the millions of dollars so far provided. Second, the break-up of communism in Eastern Europe and the ending of the cold war may lead the West— inspired by kith and kin and geopolitical considerations—to concentrate on Eastern Europe at the expense and possible marginalization of Africa.

One commentator on the cold war (Oxfam, in 1993b) has this to say: "Now that the end of the Cold War has removed (Western) strategic interest in the continent, and the recession has turned economies inward, many in the West would like to abandon it (Africa)."

CONCLUSION


With regard to both the criticisms and defenses of conditionality, we find that there are some sound arguments on both sides. SAPs are criticized, for instance, for worsening the human condition. However, it is not easy to disentangle the impact of policy strings from non-conditionality factors.

The counter-factual argument raises the question of what would have happened to the overall pre-SAP economic and social crises had there been no Bank and Fund programs. We noted that counter-factuals are hard to prove, but the record of third world nations that have attempted "go it alone" recovery efforts is not encouraging.

Despite the wide controversy surrounding conditionality, it can not be denied that the number of countries embarking on Bank-Fund SAPs has risen dramatically in the last 8 years to include, lately, Poland and a host of other former Soviet-block nations— all seeking (and needing) Bank and Fund support towards restructuring their economies.

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JOURNAL OF BUSINESS IN DEVELOPING NATIONS

VOLUME 2 (1998)  ARTICLE 3

 

Impediments to Economic Integration in Africa: The Case of COMESA

Gerry Nkombo Muuka, Murray State University (gerry.muuka@murraystate.edu)

         

Dannie E. Harrison, Murray State University (dannie.harrison@murraystate.edu)

 

 

James P. McCoy, Murray State University (jim.mccoy@murraystate.edu)

 

 

ABSTRACT

 

This paper examines impediments to integration in Africa's largest regional trading block—the Common Market for Eastern and Southern Africa (COMESA). It begins by looking at the aims of this 22-member grouping and then examines two types of constraints to integration: those induced by World Bank and IMF-inspired structural adjustment programs (SAPs), and factors that have nothing or very little to do with SAPs. Our major conclusion is that because of the major SAP and non-SAP impediments, COMESA is still far from living up to its advance billing as savior of economies in Eastern and Southern Africa. Several implications for business emerge in the paper. Once some of the major impediments are removed (or at least reduced) and there is greater integration and exposure of African business to the global economy, companies in COMESA stand to benefit from new ideas, technologies and products. Also, there will be improved economy-wide resource allocations, wider product and service options for consumers, and increased access to cheaper sources of international finance for investment and reinvestment purposes. Companies could also realize tremendous cost economies by centralizing production, instead of maintaining plants in smaller economies of several member states. Threats to business abound as well, emanating largely from the many, diverse and sometimes deep-rooted current impediments to integration.
 

INTRODUCTION


Every continental region has at least one major integration movement: Europe has the European Community (EC); Asia has the Association of South East Asian Nations (ASEAN), and the Asia-Pacific Economic Cooperation (APEC); North America has the North American Free Trade Agreement (NAFTA); Latin America has the Latin American Integration Association (LAIA), and the Andean Common Market (ANCOM); the Caribbean has the Caribbean Community and Common Market or simply the Caribbean Community (CARICOM); the Middle East has the Council of Arab Economic Unity (CAEU); Central America has the Central American Common Market (CACM); and finally Africa has three major ones: the Southern African Development Community (SADC); the Economic Community of West African States (ECOWAS); and the Common Market for Eastern and Southern Africa (COMESA).

These regional blocs or economic groupings have the common goals of economic transformation and development, implicitly including eradication or reduction of poverty in the process. In other words, economic cooperation and integration are not an end in themselves, but rather a means towards sustainable economic development.

This paper focuses upon the experience of one of the three major economic groupings in Africa—the Common Market for Eastern and Southern Africa (COMESA). We specifically address some of the impediments to the achievement of COMESA objectives, especially (but not exclusively) those brought about by World Bank and IMF dictated structural adjustment programs (SAPs).

Why COMESA was chosen

Two reasons make COMESA more appropriate for study in terms of relevance and interest as compared to either SADC or ECOWAS. First, nine of the ten members of SADC are also part of the 22-member COMESA. This introduces interesting questions, not restricted to conflict and harmony of objectives. Second, COMESA is the largest regional grouping in Africa, in terms of the number of member states— it claims 22 members, almost half the total number of countries in Africa. With a combined 1993 population of 290 million, COMESA is also home to about half of Africa's total population (see basic COMESA indicators presented in Table 1).
 

Table 1. Basic Comesa Indicators

  COUNTRY

TOTAL AREA (Km2)

  POP. (Millions 1993)

  PER CAPITA GNP 1993 (USD)

  TOTAL EXPORTS 1993 (Mns USD)

  TOTAL IMPORT 1993 (Mns USD)

 INTRA-COMESA EXPORTS 1993 (Mns USD)

Angola 

Burundi 

Comoros 

Djibouti 

Ethiopia/Eritrea 

Kenya 

Lesotho 

Madagascar 

Malawi 

Mauritius 

Mozambique 

Namibia 

Rwanda 

Seychelles 

Somalia 

Sudan 

Swaziland 

Tanzania 

Uganda 

Zaire 

Zambia 

Zimbabwe

1,246,700

27,834

2,171

22,000

1,221,900

582,646

30,355

581,041

118,484

2,045

801,590

825,000

26,338

280

637,657

2,505,813

17,363

945,087

236,036

2,345,409

752,614

390,580

  10.3

6.0

0.5

0.6

51.9

25.3

1.9

13.9

10.5

1.1

15.1

1.5

7.6

0.1

9.0

26.6

0.9

28.0

18.0

41.2

8.9

10.7

..

180

560

..

100

270

650

220

200

3,030

90

1,820

210

6,280

..

..

1,190

90

180

..

380

520

  3,182

125

54

87

246

1,264

76

253

350

1,303

217

272

94

75

117

350

261

454

134

1,027

1,043

1,374

  2,046

220

90

412

1,158

2,597

64

441

519

1,718

751

158

286

234

205

1,145

103

1,304

380

782

1,119

2,022

  0.00

16.00

0.00

56.00

10.00

234.00

0.00

13.00

30.00

30.64

13.91

1.82

0.00

0.00

1.00

0.00

24.55

54.45

4.00

14.00

109.00

205.00

COMESA in total

13,318,943

289.6

 

 11,068  

15,063

817.36


Source: Comesa Secretariat in Lusaka, Zambia (1996).

In January of 1997 both Lesotho and Mozambique announced their intention to withdraw from COMESA, although consultations are still going on to dissuade them from doing so. Three months later Dr. Mbingu Wamutharika, the Malawian-born COMESA Secretary General, resigned from his post amid controversy and charges of financial mismanagement. These charges, ironically, were brought against him by the Malawian minister of industry and trade. COMESA has had its share of crises.

(c) Africa as a whole has the highest poverty levels of any developing region in the world. According to the World Bank (1994), the share of people living in poverty is larger in Africa, and the poor are poorer, than in any other region in the world. COMESA is home to 10 of the poorest countries in the world: Angola, Burundi, Ethiopia, Malawi, Mozambique, Rwanda, Somalia, Sudan, Zaire and Zambia. (In 1997, Zaire changed its name to the Peoples Republic of Congo. Any reference to Zaire in this paper, therefore, recognizes and respects the new name: we have decided to retain "Zaire" only because it is shorter to use). COMESA also has the most distressing list of countries that have effectively ceased to function as modern nation states: Zaire, Somalia, Burundi, Sudan, Angola, Rwanda and Mozambique.

Thus, given the breadth of its membership and depth of its members' development problems, COMESA was chosen as the focus for this review. The paper begins with background details on COMESA, including its composition, aims and ideals. Performance of the regional grouping in the context of intra-COMESA trade is then discussed before attention shifts to the major non-SAP and SAP-induced impediments to integration.

Background to COMESA

The Common Market for Eastern and Southern Africa (COMESA) was established on 8th December 1994 to replace the Preferential Trade Area (PTA) which had been in existence since December 1981. As of 1997, COMESA had 22 member states, namely: Angola, Burundi, Comoros, Djibouti, Ethiopia, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Rwanda, Seychelles, Somalia, Sudan, Swaziland, Tanzania, Uganda, Zaire, Zambia, and Zimbabwe (see also Table 1, for basic COMESA indicators).

Aims of COMESA

According to the COMESA Brief of 1994, member states have recognized that unless a large enough economic space can be created to attract and give guarantees to domestic, cross-border and foreign direct investment, the transformation of these economies from extreme dependence to self-reliance cannot be realized within the foreseeable future. It has also been recognized that countries with small populations or per capita gross domestic product (GDP) will continue to find it difficult to attract foreign investment unless this is within the context of a wider common market. With these beliefs in mind, member states see the specific objectives of COMESA as: (a) the attainment of sustainable growth and development of member states by promoting a more balanced and harmonious development of its production and marketing structures; (b) the promotion of joint development in all fields of economic activity and the joint adoption of macro-economic policies and programs, thus raising the standard of living of its peoples; and fostering closer relations among its member states; (c) co-operation in the creation of an enabling environment for foreign, cross-border and domestic investment, including the joint promotion of research and adaptation of science and technology for development; (d) co-operation in the promotion of peace, security and stability among the member states in order to enhance economic development in the region; (e) co-operation in strengthening the relations between COMESA and the rest of the world and the adoption of common positions in international fora; and (f) working towards the establishment and realization of the objectives of an African Economic Community.

The COMESA Brief points out that in addition to the above objectives, the member states have agreed to create and maintain: (i) a full free trade area, guaranteeing the free movement of goods and services produced within COMESA and the removal of all tariffs and non-tariff barriers; (ii) a customs union, under which goods and services imported from non-COMESA countries will attract an agreed single tariff; (iii) free movement of capital and investment, supported by the adoption of common investment practices so as to create a more favorable investment climate for the whole region; (iv) gradual establishment of a payments union, based on a COMESA Clearing House and the eventual establishment of a common monetary union with a common currency; and (v) the adoption of a common visa arrangement, leading eventually to free movement of people from member states.

As Traore (1993, p.48) points out, the narrowness of COMESA states' individual markets condemns them to join forces if they are to develop their industries and reap the benefits of economies of scale, attract foreign investors by organizing a frontier-free market with a critical mass of potential consumers and create the jobs their constantly expanding populations demand. This is a recognized and accepted need.

In learning about the progress COMESA has made, and the problems and challenges it faces, the reader should keep in mind that the change in 1994 from PTA to COMESA was in name only, not in the ideals and aims outlined earlier. In other words, assessment of COMESA is really the assessment of PTA.

Performance of COMESA to date

It is logical, before discussing impediments to COMESA integration, to first provide the reader with some evidence that indeed COMESA has not achieved its ultimate targets. What has been its performance against the goals and ideals outlined earlier—especially that of faster economic growth, reduction in both rural and urban poverty, and improved standards of living? We discuss this next, using data and information that, as with the rest of Africa, is generally inadequate and incomplete. Part of the evidence (including the data for Tables 1 to 3) results from interviews held by one of the authors in January 1996 with several officials at COMESA Headquarters (the COMESA Secretariat) in Lusaka, the Zambian capital.

Looking at all the objectives and principles of COMESA as outlined above, it is apparent that they encompass ultimate ideals of a free trade area; customs union; common market; economic union; and total economic integration. The following definitions of these terms are borrowed from, among others, Balassa (1961, p.2) and DeRosa (1995, p.9). In a free trade area, countries eliminate all barriers to imports originating from within the region. A customs union involves free trade among partners, but also the establishment of a common external tariff (CET) with the rest of the world (known commonly as third countries). A common market is a customs union with free factor mobility. An economic union involves the adoption of both common external trade policies and the free movement of primary factors of production as well as goods within the union. Finally, total economic integration involves the joint pursuit of all macroeconomic functions by all member states.

The bulk of the discussion in this paper, though, centers around the mostly similar economic implications of free trade and customs unions.

With regard to the achievements of COMESA, it is fair to say that enough agreements and protocols have been signed by heads of state and their finance ministers to facilitate successful integration. But as argued by Bax Nomvete (former Secretary-General of the PTA/COMESA), successful integration is not measured by the type (technical, administrative or policy) and regularity of meetings at which many resolutions and declarations are adopted. Trade, economic growth and poverty statistics are more appropriate yardsticks.

Many regional trading arrangements among developing countries (COMESA included) have not been marked by any significant gains in exports, output, or other measurable economic benefits (see, among others, Langhammer and Hiemenz, 1990; and de Melo and Panagariya, 1993). The most striking characteristic of many countries in Africa (except the Arab North) has been their unsatisfactory economic performance in terms of economic growth over the past two decades. In the second half of the 1970s, real GDP growth per capita remained practically flat, deteriorating significantly in the period 1982-86 when it declined, on average, by almost 2 percent a year. They have continued to experience negative real GDP growth per capita through 1993 (see Fasano-Filho, 1996, p.129). There is little wonder that poverty—discussed earlier under reasons why we chose to examine COMESA—has continued to be a major problem.

One of the most vital criteria for assessing the success of integration deals with the question of whether a "trade creation" effect within COMESA or simply a "trade diversion" effect away from the rest of the world has occurred. As is well known, trade creation (a positive effect of integration) occurs when a shift in product origin occurs from a higher-resource-cost producer to a lower-resource-cost producer. This positive effect of integration occurs when the elimination of tariffs and other barriers on member countries' products motivates domestic consumers to demand imports from other member country producers rather than higher cost (and previously protected) domestic producers. Trade diversion (a negative effect) implies a shift in product origin from a lower-resource-cost nonmember to a higher resource-cost member producer. This negative effect of integration occurs when the institution of a common external tariff on nonmember countries renders their imports uncompetitive (from a market price perspective) with duty-free member country exports.

Tables 2 and 3, which are flip-sides of the same coin, show total intra-COMESA exports and imports for all 22 members for the 9 years 1985-1993. Intra-COMESA trade (exports and imports) was worth US$460 million in 1985, rising to US$817 million by 1993. The average growth in intra-COMESA trade during the period was 7.8 percent. The two tables show, among other things, two interesting stories about COMESA.

First, two of the 22 members— Kenya and Zimbabwe— enjoy a disproportionate share of exports within COMESA. Over the 9-year period under consideration, the two have accounted for 65 percent of all intra-COMESA exports. In fact, Kenya alone has accounted for 39 percent of all such exports. Yet, as seen in Table 1, the two nations do not even have the largest populations in the region (25.3 million for Kenya, and 10.7 million for Zimbabwe). That position is occupied by Ethiopia (51.9 million) and Zaire/Peoples Republic of Congo (41.2 million).

 

Table 2: Intra-Comesa FOB Exports (Value in Millions USD)

{C}

{C}

{C}

COUNTRY

{C}

{C}

{C}

{C}

1985

{C}

{C}

{C}

{C}

1986

{C}

{C}

{C}

{C}

1987

{C}

{C}

{C}

{C}

1988

{C}

{C}

{C}

{C}

1989

{C}

{C}

{C}

{C}

1990

{C}

{C}

{C}

{C}

1991

{C}

{C}

{C}

{C}

1992

{C}

{C}

{C}

{C}

1993

{C}

{C}

{C}

{C}

Angola  

{C}

{C}

Burundi  

{C}

{C}

Comoros  

{C}

{C}

Djibouti  

{C}

{C}

Ethiopia  

{C}

{C}

Kenya  

{C}

{C}

Lesotho  

{C}

{C}

Madagascar  

{C}

{C}

Malawi  

{C}

{C}

Mauritius  

{C}

{C}

Mozambique  

{C}

{C}

Namibia  

{C}

{C}

Rwanda  

{C}

{C}

Seychelles  

{C}

{C}

Somalia  

{C}

{C}

Sudan  

{C}

{C}

Swaziland  

{C}

{C}

Tanzania  

{C}

{C}

Uganda  

{C}

{C}

Zaire  

{C}

{C}

Zambia  

{C}

{C}

Zimbabwe

{C}

{C}

{C}


{C}

0.00

{C}

{C}

10.31

{C}

{C}

0.41

{C}

{C}

15.62

{C}

{C}

20.51

{C}

{C}

213.15

{C}

{C}

0.00

{C}

{C}

1.35

{C}

{C}

26.78

{C}

{C}

3.66

{C}

{C}

1.30

{C}

{C}

0.00

{C}

{C}

3.87

{C}

{C}

0.10

{C}

{C}

0.41

{C}

{C}

0.28

{C}

{C}

6.31

{C}

{C}

12.90

{C}

{C}

3.94

{C}

{C}

6.60

{C}

{C}

29.70

{C}

{C}

103.10

{C}


{C}

{C}


{C}

0.00

{C}

{C}

10.60

{C}

{C}

0.50

{C}

{C}

14.50

{C}

{C}

26.25

{C}

{C}

261.50

{C}

{C}

0.10

{C}

{C}

2.97

{C}

{C}

23.57

{C}

{C}

3.82

{C}

{C}

5.44

{C}

{C}

0.00

{C}

{C}

4.57

{C}

{C}

0.12

{C}

{C}

1.07

{C}

{C}

0.28

{C}

{C}

5.43

{C}

{C}

11.32

{C}

{C}

1.50

{C}

{C}

6.41

{C}

{C}

36.22

{C}

{C}

113.10

{C}


{C}

{C}


{C}

0.00

{C}

{C}

6.47

{C}

{C}

1.40

{C}

{C}

19.40

{C}

{C}

22.57

{C}

{C}

250.20

{C}

{C}

0.10

{C}

{C}

15.64

{C}

{C}

27.51

{C}

{C}

4.96

{C}

{C}

6.07

{C}

{C}

0.10

{C}

{C}

9.36

{C}

{C}

0.04

{C}

{C}

2.01

{C}

{C}

0.41

{C}

{C}

9.03

{C}

{C}

10.96

{C}

{C}

1.10

{C}

{C}

6.93

{C}

{C}

36.57

{C}

{C}

143.90

{C}


{C}

{C}


{C}

0.00

{C}

{C}

7.51

{C}

{C}

0.40

{C}

{C}

21.00

{C}

{C}

24.49

{C}

{C}

251.70

{C}

{C}

0.10

{C}

{C}

5.39

{C}

{C}

32.06

{C}

{C}

6.06

{C}

{C}

4.91

{C}

{C}

0.09

{C}

{C}

12.40

{C}

{C}

0.06

{C}

{C}

0.53

{C}

{C}

0.29

{C}

{C}

15.79

{C}

{C}

18.75

{C}

{C}

1.57

{C}

{C}

6.46

{C}

{C}

47.44

{C}

{C}

198.40

{C}


{C}

{C}


{C}

0.00

{C}

{C}

5.63

{C}

{C}

0.02

{C}

{C}

21.20

{C}

{C}

27.66

{C}

{C}

227.80

{C}

{C}

0.30

{C}

{C}

15.03

{C}

{C}

28.15

{C}

{C}

9.32

{C}

{C}

5.03

{C}

{C}

0.79

{C}

{C}

12.96

{C}

{C}

0.10

{C}

{C}

0.53

{C}

{C}

0.29

{C}

{C}

23.52

{C}

{C}

15.91

{C}

{C}

1.85

{C}

{C}

10.20

{C}

{C}

56.32

{C}

{C}

196.90

{C}


{C}

{C}


{C}

0.00

{C}

{C}

6.10

{C}

{C}

0.06

{C}

{C}

23.80

{C}

{C}

26.61

{C}

{C}

244.80

{C}

{C}

0.32

{C}

{C}

18.64

{C}

{C}

29.44

{C}

{C}

19.34

{C}

{C}

6.04

{C}

{C}

0.59

{C}

{C}

14.05

{C}

{C}

0.10

{C}

{C}

0.60

{C}

{C}

0.70

{C}

{C}

23.86

{C}

{C}

18.38

{C}

{C}

1.94

{C}

{C}

9.51

{C}

{C}

43.90

{C}

{C}

194.70

{C}


{C}

{C}


{C}

0.00

{C}

{C}

6.66

{C}

{C}

0.06

{C}

{C}

25.90

{C}

{C}

29.27

{C}

{C}

266.20

{C}

{C}

0.32

{C}

{C}

20.48

{C}

{C}

34.71

{C}

{C}

21.28

{C}

{C}

7.55

{C}

{C}

0.70

{C}

{C}

15.99

{C}

{C}

0.10

{C}

{C}

0.67

{C}

{C}

0.70

{C}

{C}

26.33

{C}

{C}

22.15

{C}

{C}

2.14

{C}

{C}

9.88

{C}

{C}

53.39

{C}

{C}

212.90

{C}


{C}

{C}


{C}

0.55

{C}

{C}

8.30

{C}

{C}

0.07

{C}

{C}

27.80

{C}

{C}

32.22

{C}

{C}

283.60

{C}

{C}

0.93

{C}

{C}

11.68

{C}

{C}

30.54

{C}

{C}

27.40

{C}

{C}

11.04

{C}

{C}

0.90

{C}

{C}

0.58

{C}

{C}

0.20

{C}

{C}

0.69

{C}

{C}

0.70

{C}

{C}

31.38

{C}

{C}

56.10

{C}

{C}

3.02

{C}

{C}

8.90

{C}

{C}

59.50

{C}

{C}

200.66

{C}


{C}

{C}


{C}

0.00

{C}

{C}

16.00

{C}

{C}

0.00

{C}

{C}

56.00

{C}

{C}

10.00

{C}

{C}

234.00

{C}

{C}

0.00

{C}

{C}

13.00

{C}

{C}

30.00

{C}

{C}

30.64

{C}

{C}

13.91

{C}

{C}

1.82

{C}

{C}

0.00

{C}

{C}

0.00

{C}

{C}

1.00

{C}

{C}

0.00

{C}

{C}

24.55

{C}

{C}

54.45

{C}

{C}

4.00

{C}

{C}

14.00

{C}

{C}

109.00

{C}

{C}

205.00

{C}


{C}

{C}


{C}

  TOTAL 

{C}


{C}

{C}


{C}

460.31

{C}


{C}

{C}


{C}

529.4

{C}


{C}

{C}


{C}

574.7

{C}


{C}

{C}


{C}

655.4

{C}


{C}

{C}


{C}

659.4

{C}


{C}

{C}


{C}

683.5

{C}


{C}

{C}


{C}

757.4

{C}


{C}

{C}


{C}

796.8

{C}


{C}

{C}


{C}

817.4

{C}


{C}

{C}

{C}

Kenya & Zimbabwe  

{C}

{C}

Share (%)

{C}

{C}

{C}


{C}

  

{C}

{C}

64

{C}


{C}

{C}


{C}

  

{C}

{C}

71

{C}


{C}

{C}


{C}

  

{C}

{C}

69

{C}


{C}

{C}


{C}

  

{C}

{C}

69

{C}


{C}

{C}


{C}

  

{C}

{C}

64

{C}


{C}

{C}


{C}

  

{C}

{C}

64

{C}


{C}

{C}


{C}

  

{C}

{C}

63

{C}


{C}

{C}


{C}

  

{C}

{C}

61

{C}


{C}

{C}


{C}

  

{C}

{C}

54

{C}


{C}

{C}

{C}

Source: Comesa Secretariat, Lusaka, Zambia (1996).

{C}

Secondly, the members of COMESA have experienced very little change (neither significant trade creation or trade diversion) in the structure of their international trade. Statistics contained in Tables 1 through 3 can be used to illustrate this point. First, intra-COMESA trade was estimated at only 5-7 percent of total COMESA world trade in 1985 (see, among others, Hess, 1994, p.19; and Mutharika, 1994). Intra-COMESA trade in 1993 amounted to US$1,634.72 million (Tables 2 and 3). This is only 6.25 percent of the US$26,131 million total trade with the world in 1993 (Table 1), no change against the 1985 percentage figure. The average annual growth in intra-COMESA trade between 1985-93 (Table 3) was 7.8 percent. For a significant net trade creation effect to be revealed, intra-COMESA trade as a proportion of total COMESA world trade (the 6.25 percent above) should have been larger in 1993. It appears that other "external" forces are determining the structure of these countries' international trade.

 

Table 3: Intra-Comesa FOB Imports (Value in Millions USD)

Country


1985


1986


1987


1988


1989


1990


1991


1992


1993

Angola 

Burundi 

Comoros 

Djibouti 

Ethiopia 

Kenya 

Lesotho 

Madagascar 

Malawi 

Mauritius 

Mozambique 

Namibia 

Rwanda 

Seychelles 

Somalia 

Sudan 

Swaziland 

Tanzania 

Uganda 

Zaire 

Zambia 

Zimbabwe

7.70

35.94

3.58

14.71

9.23

14.72

0.30

2.96

16.78

8.65

23.56

0.880

42.19

7.64

7.88

36.58

0.71

28.221

86.59

29.60

60.00

21.98


2.80

31.20

4.14

20.11

11.66

24.08

0.20

5.12

15.63

9.63

47.99

0.70

52.77

2.43

16.78

43.48

0.20

24.49

109.49

51.70

40.89

13.85


 9.20

24.04

3.16

18.03

17.17

42.25

3.30

2.96

19.51

18.21

67.03

1.20

39.49

3.36

25.48

36.40

4.20

33.38

86.09

46.46

46.53

27.28


5.20

28.74

2.49

17.34

12.12

50.03

1.60

3.30

48.84

9.28

64.80

0.50

37.29

2.48

31.26

35.90

3.92

39.83

95.82

35.53

82.97

46.16


 5.48

24.40

3.88

22.24

8.51

56.67

1.70

4.91

31.48

11.83

71.91

0.80

31.08

3.16

32.18

31.13

4.12

33.49

86.72

37.78

108.28

47.66


 5.79

20.98

4.49

21.75

9.73

66.57

2.24

12.02

36.76

29.04

91.36

0.80

36.18

5.36

41.09

38.26

5.26

39.48

100.08

40.83

91.43

50.76


 7.30

26.09

4.99

21.75

9.73

66.57

2.24

12.02

36.76

29.04

91.36

0.80

36.18

5.36

41.09

38.26

5.26

39.48

100.08

40.83

91.43

50.76


 9.47

29.85

4.06

23.64

10.83

61.98

1.52

13.03

63.09

28.48

69.64

3.95

52.33

6.10

35.18

39.24

3.00

42.81

109.55

40.30

86.22

62.50


6.00

20.00

4.000

14.91

339.00

90.00

1.00

16.64

68.91

37.73

71.00

11.00

64.00

8.00

44.91

27.0

1.00

67.00

64.00

20.64

82.45

58.18


TOTAL 


460.3


529.4


574.7


655.4


659.4


683.5


757.5


796.8


817.4


Growth (%)


 


 15


9


14


1


4


11


5


3


Source: Comesa Secretariat, Lusaka, Zambia (1996).

 
Given the large role played by non-COMESA trade in the import/export structures of COMESA countries, one might question the wisdom and effect of these countries pursuing an economic integration scheme. The answer lies in the fact that static trade creation/diversion analysis ignores key dynamic effects of integration which do play a crucial role in motivating the formation of the integration schemes. Specifically, participation in an integration scheme is often viewed as the only means for breaking the shackles of limited domestic markets as well as an unfavorable post-colonial import/export trade structure. Regional market expansion may make possible the furthering of import substitution policies, increase in export stability, increased efficiencies resulting from increased competition, and increased foreign inflows. Over time, these dynamic effects can contribute to economic growth. Unfortunately, COMESA is too young for these effects to be experienced in any meaningful way.

The major conclusion to be drawn from the above analysis is that there has been no increase in intra-COMESA trade creation nor any evidence yet of dynamic benefits as a result of integration. In addition to the other economic statistics cited earlier, this leads us to our next major question: What have been the impediments to achievement of the integration objectives and ideals? This question, addressed next, forms the bulk of this paper. We start by looking at factors that have nothing (or very little) to do with structural adjustment programs (SAPs) that most of these countries have implemented, and later on we look at SAP-induced impediments to integration.

NON-SAP IMPEDIMENTS TO INTEGRATION AND ACHIEVEMENT OF PURPOSES


Initial rigidities

Several factors present at the time most African countries gained their independence can be cited as contributory to the failure of integration thus far. Among these structural deficiencies are dependence on a few (and primary, as opposed to value-added) exports; capital-intensive production; and underdevelopment of human capabilities. We discuss each of these in turn.

Dependence on a few, primary, exports

A major congenital rigidity of most COMESA economies is that their colonial masters encouraged the development and export of a few primary raw material products meant to service factories in Europe, a situation that has changed very little in the 1990s. Oxfam (1993) goes so far as to suggest that overdependence on commodity exports on depression-prone world markets is at the heart of Africa's trade crisis. More than any other developing region, Africa depends on primary commodities—such as coffee, cocoa, cotton and copper—to generate the foreign exchange needed to buy imports. For historical/colonial reasons, Africa's major export markets are also identical, a fact which causes its own problems.

Table 4 shows the extent of commodity export dependency of 15 of COMESA's 22 members. Primary commodities constitute an average of 82.6% of total export earnings for these countries, of which 59.4% are from single commodities. Apart from creating balance of payments problems if production of the single commodities is disrupted, any slump in world commodity prices erodes the ability of COMESA economies to maintain investment in infrastructure, to say nothing about the negative effects on regional integration efforts.

Capital versus labor intensity

Another structural bottleneck of COMESA economies is their reliance more on capital rather than labor-intensive techniques of production, a situation many critics attribute to the nature of the import-substitution-industrialization (ISI) strategy embarked upon after independence for most of these countries. Donges and Heimenz (1991, p.217) point out that import-substitution policies tend to favor: (1) production of relatively capital-intensive products— as typically the industrial structure gets diversified in the vertical direction; (2) the application of capital-intensive technologies—because of relatively low barriers to imports of capital goods; and (3) an inefficient use of capital—owing to the lack of competition in domestic markets. All this happens at the expense of labor-intensity, of which COMESA has a relatively large endowment.

 

Table 4: Commodity Dependency of Selected African Countries, 1992

{C}

{C}

Primary commodities as a % of Total Export Earnings

{C}

{C}


Country

{C}

{C}


Individual Commodities as a % of Total Export Earnings

{C}

{C}


99.9

{C}

{C}


Mauritania

{C}

{C}


(iron ore 45.0/fish 42.0)

{C}

{C}


99.7

{C}

{C}


Zambia

{C}

{C}


(copper 98.0)

{C}

{C}


97.9

{C}

{C}


Rwanda

{C}

{C}


(coffee 73.0)

{C}

{C}


97.9

{C}

{C}


Niger

{C}

{C}


(uranium 85.0)

{C}

{C}


95.1

{C}

{C}


Burundi

{C}

{C}


(coffee 87.0)

{C}

{C}


95.0

{C}

{C}


Uganda

{C}

{C}


(coffee 95.0)

{C}

{C}


95.0

{C}

{C}


Namibia

{C}

{C}


(diamonds 40.0/uranium 24.0)

{C}

{C}


94.7

{C}

{C}


Somalia

{C}

{C}


(live animals 76.0)

{C}

{C}


93.4

{C}

{C}


Malawi

{C}

{C}


(tobacco 55.0/tea 20.0)

{C}

{C}


90.0

{C}

{C}


Ethiopia

{C}

{C}


(coffee 66.0)

{C}

{C}


88.9

{C}

{C}


Burkina Faso

{C}

{C}


(cotton 48.0)

{C}

{C}


88.5

{C}

{C}


Sudan

{C}

{C}


(cotton 42.0)

{C}

{C}


84.3

{C}

{C}


Mali

{C}

{C}


(live animals 58.0/cotton 29.0)

{C}

{C}


83.3

{C}

{C}


Togo

{C}

{C}


(phosphates 47.0)

{C}

{C}


82.0

{C}

{C}


Guinea Bissau

{C}

{C}


(cashew nuts 29.0/groundnuts 23.0)

{C}

{C}


79.3

{C}

{C}


Tanzania

{C}

{C}


(coffee 40.0)

{C}

{C}


76.3

{C}

{C}


Mozambique

{C}

{C}


(fish 27.0/prawns 16.0)

{C}

{C}


72.0

{C}

{C}


Chad

{C}

{C}


(live animals 58.0/cotton 29.0)

{C}

{C}


71.6

{C}

{C}


Senegal

{C}

{C}


(fish 32.0)

{C}

{C}


68.7

{C}

{C}


Zaire

{C}

{C}


(copper 58.0)

{C}

{C}


68.5

{C}

{C}


Ghana

{C}

{C}


(cocoa 59.0)

{C}

{C}


63.2

{C}

{C}


Sierra Leone

{C}

{C}


(diamonds 32.0)

{C}

{C}


61.5

{C}

{C}


Kenya

{C}

{C}


(coffee 30.0)

{C}

{C}


56.9

{C}

{C}


Zimbabwe

{C}

{C}


(tobacco 20.0)

{C}

{C}


48.0

{C}

{C}


Gambia

{C}

{C}


(groundnuts 45.0)

{C}

{C}


46.2

{C}

{C}


Lesotho

{C}

{C}


(mohair 24.0)

{C}

{C}

Source: Reconstituted from Table 3 (Oxfam 1993, P. 8)
 

(c) Underdevelopment of human capabilities

With a 1993 combined population of about 290 million (Table 1), COMESA economies are potentially rich in human resources. Yet as Stewart (1991, p.426) points out, people have been relatively neglected, badly educated and in poor health, with their capacities frequently under-used. The consequence is low labor productivity and lack of competitiveness, despite very low wages. It is easy to flame controversy in a paper like this, but few people would argue that part of the reason for Africa's poor educational record originates in its colonial history, which left the continent with a markedly worse educational structure than any other region in the world. For example, Stewart (1991, p.426) points out that Africa's primary school enrollment ratio in 1965 was less than half that of East Asia and Latin America and only two-thirds that of South Asia, while secondary educational enrollment rates were less than a quarter of those elsewhere. Twenty years later, in 1986, the gap between Africa and the rest of the developing world was still as large as before.

Other Non-SAP Factors

In addition to the structural rigidities discussed above, other non-SAP factors have contributed to non-achievement of integration objectives and ideals. Among these are: parochialism, dependence on the developed West, proliferation of regional groupings, politics, a huge external debt burden, transport problems, lack of information, Africa's economic crisis, dis-equalizing effects of integration, deleterious world economic conditions, bribery and corruption, as well as war, drought and disease. We look at each of these next.

(d) Parochialism

Problems in COMESA stem from failure, on the part of member-state governments, to internalize COMESA agreements in their national administrations and development plans (Nomvete, 1993, p.51). In many of the member states cooperation does not go far beyond the signing of treaties and protocols. Moreover, some governments do not send to meetings those officials who have the appropriate expertise on the issues to be discussed. For example, Bax Nomvete, first Secretary general of the PTA (COMESA), maintains that it is not unusual for an official who is a general economist or administrator to be designated to attend all cooperation meetings, irrespective of whether the topics to be discussed are technical, policy or administrative matters. The result, of course, is that appropriate substantive ministries, whose officials or experts do not attend such meetings, are generally unaware that collective decisions are being taken on topics in their fields of competence. Hence no action is taken to implement the decisions or to set aside funds for the implementation of programs adopted.

(e) Excessive dependency of COMESA states on the developed West

As a result partly of the congenital rigidities discussed earlier, it is no secret that many African nations generally still depend on the West for imports of raw material-supplies and manufactured products, even in cases where products of comparable quality may be available in member states. This runs counter to the rationale for creating bigger markets to facilitate the growth of viable production ventures. High dependence on imported raw materials from the West makes COMESA economies particularly vulnerable to foreign exchange availability—which in Africa is typically in short supply. Secondly, inter-sectoral and intra-sectoral linkages are bound to be weak, because firms buy their requirements from outside COMESA, rather than from within.

There are a number of reasons for the continued dependence on the West. Two of these (cited by Nomvete, 1993) are worth noting. First, the preference for Western imports is attributable to habit, where both consumers and the importers prefer anything "Western." Secondly, many of the imports from the West are tied directly to aid programs which tend to favor imports from the aid-giving country: nearly two thirds of capital and commodity aid and an even higher proportion of technical assistance require imports from the aid-giving country. This happens regardless of the suitability of the products for local conditions. About US$5 billion worth of goods exported by COMESA members to developed countries are re-imported back into the region by other members. And as a SADC Top Companies Report (1994, p.57) notes, tied aid is known to play a role in this distortion.

(f) Proliferation of regional groupings

Why—the logical question can and should be asked—does Eastern and Southern Africa need COMESA, SADC, and the Southern African Customs Union (SACU, whose members are: Botswana, Lesotho, Namibia, South Africa and Swaziland)? With the exception of Botswana, all 9 other members of SADC (Angola, Lesotho, Malawi, Mozambique, Namibia, Swaziland, Tanzania, Zambia and Zimbabwe) are also members of COMESA. Three of the five SACU members are also members of both SADC and COMESA.

Almost half of COMESA members are also members of SADC, whose membership is smaller than COMESA's. This may tend to weaken the integration process. It leads to costly competition (even for attention and resources); conflict; inconsistencies in policy formulation and implementation; unnecessary duplication of functions and efforts; fragmentation of markets and restriction in the growth potential of the sub-region. SADC was formed in 1980 to reduce member countries' dependence on the then apartheid South Africa. Since May 1994 South Africa has had a Nelson Mandela-led black majority government and apartheid is officially over, throwing into serious question SADC's raison d'etre. And as Hess (1994) points out, talk of merging SADC and COMESA has not yielded any results. Bureaucracies have a tendency to be self-perpetuating.

(g) Political obstacles to integration

A sustained political and ideological will to succeed, on the part of individual member governments, is critical to the success of any regional economic grouping. This is an argument that McCoy (1993, p.88) articulates with regard to the Caribbean Community (CARICOM). As with CARICOM, COMESA lacks a viable and stable commitment by member country governments, a complaint echoed by many of those interviewed by one of the authors in January 1996 at the Secretariat in Lusaka. Several different political ideological perspectives also exist, especially with regard to Sudan, Ethiopia, Angola, Burundi (where a July 1996 military coup against majority-Hutu President Ntubantunganya restored former minority-Tutsi President Pierre Buyoya), Mozambique, Rwanda, Zaire and Somalia—the civil war-ravaged members of COMESA. Other member governments—especially Zambia, Malawi, and to some extent Zimbabwe and Kenya—have experienced sweeping shifts in development ideology, leading to changing policies with regard to COMESA. In Zambia, for instance, commitments made by the post 1964 (independence) Kenneth Kaunda administration were either ignored or modified beginning in 1992 by the free market oriented Frederick Chiluba government. In the Peoples Democratic Republic of Congo (the name Zaire assumed when President Laurent Kabila defeated the now late President Mobutu Sese Seko in 1997), there has not yet been enough time for us to discern any clear and coherent policy direction.

As McCoy (1993) correctly argues, "ideological pluralism" has a fragmentary influence on such groupings as COMESA because different governments have different conceptions as to how the goals of COMESA are to be fulfilled. Exporters have also been unable to establish themselves in certain markets within the grouping because of "their failure to comply" with market practices there. A case in point is Zaire, where they are expected to pay a commission (bribes) to agents. It is not surprising, therefore, that COMESA does not have adequate mechanisms to verify and enforce agreed-to policies. No supranational body with any effective enforcement authority within a member country's borders exists.

(h) Africa's debt burden

Africa, generally, has experienced mounting external indebtedness accompanied by very high debt service ratios which have diverted a significant portion of export earnings from development programs (including those that are specifically integration-related) to debt servicing (PTA, 1992, p.5). A debt service ratio measures debt-service payments as a percent of export earnings. Of the 9 countries in the world whose 1996 debt is unsustainable, 5 are in COMESA: Zambia, Mozambique, Burundi, Zaire and Sudan (Financial Mail, 30 June 1996). These countries do not have the capacity to service existing debt from export earnings, capital and aid flows without undue burden on their people.

No one is more succinct about Africa's debt problem than Boutros Boutros Ghali, Africa's first UN Secretary General, when he says that external debt is a millstone around the neck of Africa. For African nations excluding the Arab North, external debt jumped from 29.2 percent of GNP in 1980 to 108.8 percent by 1992 (Oxfam, 1993).

Any attempt at appreciating Africa's debt situation ought to start by recognizing that debt problems are largely a symptom of other sources of economic difficulty (such as political turmoil, failed government and SAP policies, and worse-than-expected terms of trade), and it is these—as one author observes—which make loan repayment burdensome. A shortage of foreign exchange, and of the imports it can buy, is at the heart of many of these difficulties. And as Quarcoo (1990, p.10) observes, the need to divert scarce foreign exchange derived from limited export proceeds to debt service payments means that other critical development needs must be sacrificed. In Zambia there is the unhappy circumstance that a significant portion of the debt between 1985 and 1987 went to providing the salaries and upkeep of technical experts from the source countries, as well as acquiring equipment which never really increased productivity. More recently Profit (June 1994, P. 29) says donor assistance to Zambia reached an all-time high of US$1.3 billion per year from 1992 to 1994, but 98 percent of this was used to pay off foreign debt (a classic case of donors/lenders making payments to a country only to pay themselves)—instead of, for instance, being spent on integration and development related local investment in requisite infrastructure.

(i) Transport problems

The transport infrastructure for intra-COMESA trade (including roads, rail systems, air and some shipping) is not only inadequate, but in many cases non-existent. Burundi, Comoros, Lesotho, Mauritius, Rwanda and Somalia, for instance, have no railway systems. Individual systems may also not always be fully compatible, especially in terms of intermodal transfer of goods. In some cases, parts of the network (especially in war-torn states such as Mozambique, Angola, Zaire and Burundi) need urgent rehabilitation and upgrading.

Interviews we held with the COMESA Secretariat in Lusaka revealed that the COMESA road network consists of approximately 561,000 km of classified roads, of which only 64,000 (11.4%) are tarred. The main transport corridors are essentially focussed in an east-west direction from the ports to the hinterlands, with very few north-south links. The main corridors are: {C}

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Dar-es-Salaamà Kigomaà Bujumburaà Kigali.{C}

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Nacalaà Blantyreà Lusaka.{C}

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Maputoà Bulawayoà Lusaka.{C}

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Maputoà Lubumbashià Lusaka.{C}

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Beiraà Harareà Lusaka.{C}

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The above network has been characterized by high operating costs due primarily to poor road conditions and cumbersome transit operations. This limitation, no doubt, does not help the integration process.

(j) Lack of information

Nomvete (1993, p.53) makes the useful point that lack of information has also hindered the development of intra-COMESA trade. Most African nations are traditionally linked to former colonizing nations and, as a consequence, there is an acute lack of awareness of what other African countries can offer to substitute for the products currently being sourced from the developed countries. Lack of information is also a direct result of inadequate economic infrastructure in COMESA, especially in telecommunications and transportation facilities, directly hindering interaction among COMESA countries. Yet as Brahmbhatt and Dadush (1996) argue, high-quality communications are essential for countries that aim to participate in global production structures (some established by multinational corporations); to respond promptly to rapidly changing market conditions; or to participate in new export markets for long-distance services such as data processing, software programming, and customer support.

(k) Africa's economic crisis

It is no secret that with less than two years to the 21st Century, most African economies are in a near-hopeless situation. Weak and stagnant economies are a major obstacle to integration because of their negative impact on government policies.

The fundamental causes of Africa's structural crisis are quite diverse and complex, and we urge extreme caution about any simple diagnoses and prescriptions with regard to the region's economies.

Some causes are deeply rooted in history— as with the mono-cultural or single-commodity-dependent, primary-export-led economies that colonial masters bequeathed to individual nations at independence; some lie in nature—as with the proneness to drought in recent years; some lie in the external economic environment—as with the oil shocks of the seventies that led to a mounting oil import bill, and the protectionist trade policies of the developed West; some lie in wrong domestic policies—as with the anti-rural bias evident from the lack of support for agricultural development through improper pricing and other incentive policies; and a variety of burdensome African government interventions in commerce, trade and industry with little or no public benefit.

Yet other causes are direct results or exacerbations of the World Bank and IMF's structural adjustment programs, as with the many devaluations of African currencies which, instead of inducing the required supply response from non-traditional exports, has let inflation loose.

Both the causes and extent of Africa's economic crisis are so diverse and complex as to make regional economic integration difficult at best, impossible at worst. As Nomvete (1993) observes, most African nations entered the 1990s poorer than they were in the 1970s. Most of them are faced with mounting economic problems, minimal to negative economic growth rates, low domestic savings and investment, severe foreign exchange scarcity, balance of payments difficulties and a heavy foreign debt burden.

Such a period of economic weakness is not a favorable time to formulate long-term plans to promote intra-sub-regional or regional trade. Nomvete (1993) says that pressures are such that governments will give priority to domestic crisis management and take protective measures against other countries, including the regulation of the domestic economy in sensitive sectors and the imposition of restrictions on imports and on the use of scarce foreign exchange.

(l) Dis-equalizing effect of COMESA integration

Some countries in COMESA (notably Kenya and Zimbabwe, judging from their dominance of intra-COMESA exports reflected in Tables 2 and 3) are economically more advanced than the others. COMESA works on the premise that the benefits of integration will be distributed among member states in an equitable manner. However, the elimination of trade barriers and the adoption of common investment policies do not necessarily lead to such an equitable distribution, but rather support or stimulate the tendency of investments to concentrate on the relatively more advanced economies (Nomvete, 1993).

Various mechanisms directed towards the equitable distribution of benefits become necessary. In COMESA's case, no mechanism has resolved the issue. It is this tendency for the polarization of development in some members of COMESA, especially the inequitable distribution of new activities in the production and research sectors, which may be one of the greatest threats to integration.

(m) Unstable world economic conditions

Exacerbating COMESA's troubled economies (and therefore inhibiting integration) have been a succession of unfavorable world economic conditions. COMESA economies, as well as those of many other developing nations, have suffered as a result of negative developments in the wider world economy. The IMF (1994, p.63) points out for instance that the most adverse effects have come from changes in the terms of trade. Two major recessions in the industrial countries since 1980 depressed demand for developing country output and put downward pressure on commodity prices and, hence, on the commodity export prices of these countries. Negative terms of trade movements, as the IMF observes, also reduce output by increasing the cost of imported intermediate and capital goods, on which all COMESA members are heavily dependent.

(n) War damage, Disease and Drought

We would be remiss, in a paper discussing COMESA integration, not to make reference to the disastrous effects of war, drought, and disease on national and regional economies. The point was made, in the introduction to this paper, that COMESA has the most distressing list of nations (of any African regional grouping) that have effectively ceased to function as modern nation states. Burundi, Rwanda, Mozambique, Sudan, Ethiopia, Somalia, Angola and Zaire face enormous and expensive reconstruction problems from years of civil wars that have left them desperately short of skills and infrastructure that will take a generation to rehabilitate. Likewise there is a massive back-log of unfulfilled social development. They cannot, therefore, be expected to be equal and effective participants in a regional economic grouping.

Disease—from malnutrition to Aids—cannot be ignored either. Many analysts, among them Holman (1993) point out that Aids is already taking a heavy toll on Africa generally. More than half of the world's more than 15 million sufferers are in Africa, many from the skilled urban class on whose shoulders ought to lie squarely the arduous task of rejuvenating African economies through structural reforms, regional integration, and other means. At the micro-level—in various ministries, companies and industries— Aids-related problems come in the form of falling effectiveness, productivity and efficiency due to disability, rising sick leaves and time taken off by employees to care for relatives.

Finally, COMESA has had its share of drought-induced impediments to integration. Several countries have been constant victims of either inadequate rains or drought during the last 10 years. Ethiopia's experience in the mid-80s is by far the worst case. In 1992 Southern Africa experienced its worst drought in living memory, whose effects crippled agriculture, cutting supplies of raw inputs to down-stream industries which in turn rely on agro-based industries for a huge slice of their domestic sales. In Zambia, the 1992 drought precipitated a 39.3 percent drop in agricultural output (see, among others, Price Waterhouse, 1993, p.6). Given that most of Africa's population depends on agriculture for their livelihood, it is not difficult to see how drought affects their standard of living (and death).

(o) Bribery and Corruption

A final impediment to integration is the issue of bribery and corruption in Africa generally. As in many other developing regions, corruption is prevalent at many levels and in different forms—including government (and government ministries) in the awarding and execution of contracts, and at customs check points in many parts of COMESA. A related, and serious, impediment germane to foreign direct investment (FDI) into Africa generally deals with what Grant (1992, p. 27) calls "press images of corruption in Africa." Grant sums up this concern when he says:

Africa receives terrible press in the United States, not only the corporate, but also the public image being one of abject poverty. The image is also one of corrupt governments which, when taken together, very much discourages potential investors.

The foregoing discussion has centered around factors inhibiting COMESA integration that are not directly associated with economic reform programs suggested by the Washington-based Bretton Woods Institutions (BWIs)—the World Bank and the IMF. But, as we shall see next, there are impediments to integration specifically induced by structural adjustment programs (SAPs).
 

SAP-INDUCED IMPEDIMENTS TO THE ACHIEVEMENT OF COMESA AIMS

All COMESA member states are currently implementing, at different stages, structural adjustment programs (SAPs) under World Bank and IMF tutelage. Effective SAPs ideally should assist sub-regional economic integration since their main purpose is to rekindle economic growth by increasing the mobility of production factors (including labor and raw materials) and by decreasing economic discrepancies. But certain aspects of structural adjustment programs as dictated by both the World Bank and IMF (such as the content of conditionality or policy strings attached to loans; and the speed and timetable of the adjustment process) may in fact be a hindrance to integration in COMESA. Conditionality has traditionally included the adjustment (devaluation) of local currencies and/or floating of hitherto fixed exchange rates; the decontrol of internal price systems as well as external and internal trade flows (trade liberalization); abolition of state enterprises and monopolies in both production and marketing; reforming of banking policy, including interest rate decontrol; cutting the state budget, including the removal of all consumer subsidies and other social expenditures; and reduction in money supply accompanied by a general public sector wage and salary freeze to control inflation. We look at some of the SAP-induced factors, next .

The counter-factual argument

It is necessary, first, to point out that the discussion on SAP-induced impediments to COMESA integration is not a wholesome condemnation of the usefulness and relevance of SAPs in Africa, the need for which (but not necessarily the mode of implementation) the authors of this paper explicitly recognize. Neither can we forget the counter-factual argument. Most African nations embarked on World Bank and IMF supported SAPs in the early 1980s because of economic distress. African countries embarked on SAPs because they found what Edward Jaycox (the long-serving World Bank Vice-President in charge of Africa) calls "their backs to the wall." In the Courier (1991), Jaycox says most countries did not introduce SAPs enthusiastically:

They entered into SAPs because they were desperate and when they did so there were no goods on the shelves, no spare parts, no trucks, no batteries and no tires...no drugs in the clinics, no chalk and books in their schools.

What would have happened in the absence of SAPs? In other words, what sort of economic mess were COMESA members in before the onset of World Bank and IMF supported reform efforts, and what sort of mess would COMESA states be in now in the absence of SAPs? Although counter-factuals such as this are hard to prove, in most African nations it is easy to make educated guesses as to what would have happened (because of the many and deep-rooted structural deficiencies discussed earlier), and it is most probable that even if economies have continued to perform poorly under SAPs, they would have performed even poorer without them.

Contradictory effects of SAP measures: conflict between IMF demand-management versus World Bank supply-response measures

Killick (1992, p.8) makes the useful point that the demand-management approach of the IMF (with its emphasis on reducing imports and government expenditure) and the supply-orientation of the World Bank (emphasizing exports or outward-orientation) are not always easy to reconcile. There is the danger, he argues, that IMF-type programs which envisage large reductions in imports will erode export supply responses, to say nothing of the costs imposed by way of foregone output. Cuts in public expenditure almost invariably affect items which are essential for long-term development, notably expenditure on developing human capabilities (health, education, and training), on R&D in priority areas, and on infrastructure, especially in rural areas (Stewart, 1991, p.427). Trade (import and export) liberalization is another major element or policy string attached to procurement of loans from the World Bank and the IMF. But as Stewart points out, current adjustment packages make no special efforts to promote regional trade in their support of undifferentiated import liberalization. Because of the highly competitive nature of products from outside COMESA (especially from Asia), generalized import liberalization can discourage regional trade—which has continued to be low in Africa, accounting for no more than 5 percent of official or documented trade.

It is not surprising that the path of World Bank and IMF-induced economic reforms in such countries as Zambia and Zimbabwe is littered with corporate casualties. Companies have either been thrown out of business by competing imports, recession-induced low demand, or crippled to death by high interest rates brought by liberalization and government attempts to curb inflation. At the high rates (which averaged around 65 percent in Zambia between 1992 and 1995) credit is beyond their reach, and companies cannot invest or reinvest in production, let alone meet their working capital requirements.

If a country like Zambia which is heavily raw-material and input import-dependent sees the opportunity to invest in export-oriented industries that will sell to other COMESA countries, there's a definite SAP-induced impediment to integration if the needed imports to support export production cannot be made under the demand-management approach.

Identity/similarity of SAP programs in the region

As indicated elsewhere in this paper, most of these countries pursue similar reform programs (at the same time) and face the same World Bank and IMF conditionalities. As part of SAP they all aim to reduce imports. If one country's imports are another's exports and the former are cut as part of the demand-management approach, this obviously affects exports. In 1991, for example, Zambia's exports to Zimbabwe were reduced because, as part of its own SAP, Zimbabwe had to reduce its imports in line with its own tight foreign exchange situation. This amounted to a loss of export earnings for Zambia.

Asymmetry of the adjustment process

A far more serious problem at the international level deals with what Woodward (1992, p.148) describes as problems in the global adjustment process, specifically what he calls "the asymmetry of macro-economic adjustment." Woodward reminds us that the process of macro-economic adjustment centers around the pressure on countries such as those in COMESA with balance of payments (BOP) deficits to reduce them, without any equivalent pressure on surplus nations to reduce their surpluses.

If Woodward's useful argument is taken—that one country's BOP deficit is by trade definition another country's BOP surplus, just as one country's imports are another country's exports—then the asymmetry is further compounded by the demand-orientation of IMF programs, requiring adjusting developing countries to reduce demand or imports as part of conditionality. This situation tends to push developing deficit nations into reducing their demand as a means of external adjustment, but surplus nations are under no equivalent pressure to allow an off-setting increase in their demand. When deficit nations represent a large proportion of the world economy— as they currently do—the net effect is to slow down the growth of demand, and thus of income, in the world economy. The above scenario leads to a reduction in the rate of growth of demand for the exports—both primary and manufactured—of countries like those in COMESA that are trying to adjust.
 

PRELIMINARY SUMMARY

This paper has been an attempt to look at the problems and challenges facing one of Africa's largest regional economic groupings, the common market for Eastern and Southern Africa (COMESA). Specifically, we have discussed some of the factors that to date have made it difficult for COMESA to achieve its integration aims and ideals. These aims and ideals include static performance indicators (such as trade creation) as well as dynamic effects over time. African economies in general (and those of COMESA particularly) suffer from too many structural rigidities to allow for free and fair regional markets and smooth integration.

Many of the impediments to integration have nothing to do with the structural adjustment programs (SAPs) dictated by the World Bank and IMF and pursued by states in the region. Among the major non-SAP impediments to COMESA integration are structural rigidities (such as dependence on a few primary exports and underdevelopment of human capabilities); parochialism; dependence on the developed West; proliferation of regional groupings; politics; a huge external debt burden; transport problems; lack of information; Africa's economic crisis; dis-equalizing effects of integration; deleterious world economic conditions; as well as war, drought and disease.

The major SAP-induced impediments seem to originate from the imports side: where all countries are encouraged to export (under the World Bank's outward orientation), but at the same time the demand-management approach of the IMF calls for cut-backs in imports. This is an obvious contradiction given that COMESA countries pursue simultaneous and identical adjustment programs.

Economic integration is a complex process. Africa, unfortunately, has yet to succeed in having a regional grouping that has all three fundamental conditions necessary for the success of economic integration: sustained political commitment, regular growth of national economies, and no major economic sub-regional disparity. As Traore (1993) correctly points out, in the economic sphere most of the countries have in fact stagnated or lost ground over the past decade and now have to apply the painful solution of structural adjustment, the latter bringing its own impediments to integration. COMESA, therefore, is far from living up to its advance billing as savior of economies in Eastern and Southern Africa. Having said that, our firm and unambiguous stand is that COMESA member states must not only continue but also intensify efforts at removing (or, at least, reducing) the many obstacles to integration currently besetting the regional grouping. We say this because, among many other important reasons, a truly regional and hemispheric-wide cooperative arrangement has many benefits to (and for) business. We discuss some of these next, under "major implications for business."
 

MAJOR IMPLICATIONS FOR BUSINESS

What, then, are the immediate and likely long-term implications for business of the circumstances in COMESA that we have discussed in this paper? We believe that in order to be both comprehensive and meaningful, any such discussion (of the implications for business) must address both Opportunities and Threats created. This section addresses both.

Opportunities for Business

Both in theory and in practice, creation of a single market (which is the intent of COMESA) offers significant opportunities because individual-country markets that were formerly highly protected from foreign competition are opened: to both intra-COMESA trade and foreign direct investment (FDI). Both of these (increased intra-COMESA trade and a more enabling environment for foreign businesses via FDI) are uncontestably powerful instruments (though by no means the only ones) towards Africa’s much needed exposure to the world economy. Such enhanced exposure and participation in the global economy has the potential benefit of exposing African business (and business people) to new ideas, technologies, and products; improved resource allocations; heightened competition as a spur to achieving world standards of efficiency (Brahmbhatt and Dadush, 1996, p. 47); wider product and service options for consumers; and the ability to tap cheaper sources of finance internationally.

As Hill (1998, p. 256) argues in the case of the European Union (EU), it is equally true that to fully exploit such opportunities it will pay for non-COMESA firms to set up subsidiaries in COMESA member states. Those firms that do not establish themselves now run the risk of being shut out of COMESA by non-tariff barriers. A second potential opportunity for business arises from what Hettne (1996) refers to as the development strategy implied in regional integration activities. We have in mind (for business in COMESA) what Hettne calls the conscious fostering of complementaries, industrial projects, and joint investments in transport, infrastructure etc. The latter, as we have seen earlier in this paper, is currently inadequate at best. The potential for better and wider technology transfer within and into the region from outside also has to be underscored.

Additional opportunities arise in part from the inherent lower costs of doing business in a single market as opposed to 22 national markets, each with different tariff structures and requirements. When (and if) COMESA becomes more integrated as most of the impediments we have discussed are overcome, then the free movement of goods and services across borders; harmonized product standards; and simplified tax regimes will make it possible for COMESA-based companies to realize potentially enormous cost economies by centralizing production where the mix of factor costs and skills is optimal. Some of this is already happening, as the case of Colgate Palmolive (Zambia Limited) illustrates. Muuka (1998) says the Ndola (Zambia) based multinational decided to rationalize operations by first of all laying off 112 Zambian workers and eight managers (from a total workforce of 170 in Ndola alone). Then it closed down its soap production line and moved several production facilities to Harare, the Zimbabwean capital. Part of the reason for the move was to take advantage of economies of scale, as Harare was seen by the company as more central and more cost effective than other alternative locations.

The South African factor

South Africa’s role in any meaningful economic transformation in much of the southern half of the African continent cannot be overemphasized. As Danso (1995) points out, South Africa’s highly developed manufacturing sector producing such exportable items as food products, transportation equipment, machinery, and textiles together with its financial, technical, and capital assets presents Africa (and especially COMESA, of which it is not yet a member) with the needed springboard for endogenous continental development and eventual integration. The role of South Africa becomes even more critical if Africa is to have a place in the new world trading system under the World Trade Organization, a fact not to be overlooked by both African leaders and Afro-supportive business.

Threats to Business

Along with the emergence of business opportunities created by a multi-country COMESA market will be numerous problems and threats. Some of these are already apparent, emanating largely from the many, deep-rooted and diverse current impediments to integration that we have discussed earlier on in this paper. For one thing, the business environment within COMESA is likely to become much more competitive. Low barriers to trade and investment between COMESA member countries is likely to lead to increased price and quality (not to mention delivery and reliability-based) competition—a benefit for consumers. The implication for indigenous African businesses and for FDI is that to survive in such a tougher, single-market environment, companies will need to take advantage of opportunities offered by the creation of COMESA to rationalize their production and reduce their costs. Otherwise they will be at a definite disadvantage. The stakes are much higher for indigenous businesses in COMESA member states, as they have to compete with non-COMESA and global companies that possess superior product and marketing (not to mention management) strategies.
 

IMPLICATIONS AND FUTURE RESEARCH

As described throughout this paper, COMESA comprises a relatively poor but a very large (in terms of population) market opportunity for domestic as well as multinational businesses. As businesses throughout the world look to expand markets globally, a large integrated market should be highly desirable both as a final market for products as well as a destination for FDI. However, due to the factors described above, COMESA’s integration has not progressed to levels consistent with the aspirations of its founders. While many of these impediments are "Non-Sap induced," it is ironic that SAPs, which are often supported by governments of countries which are home to major multinational businesses, can retard the integration process which would be of benefit to the multinational enterprises! Therefore we encourage multinational businesses to take a long term view as to whether SAPs are universally desirable, especially with their implications for integration movements. In addition, to the extent that business activities in COMESA can nullify some non-SAP impediments –such as transportation, capital versus labor intensity in production, human capital development etc—businesses should include this long term payoff (reduction of impediments and thus enhancement of future business opportunities) in their private decision making process.

We believe one fruitful avenue for future research would be a study of what special opportunities are presented to businesses (both domestic and international) given the "partial fulfillment" or transitional nature of this and other integration movements among developing regions. Dynamic circumstances, and even the existence of impediments (SAP and non-SAP), may actually present unique opportunities. Given the expected continued existence of these impediments and therefore the evolutionary long term nature of the integration process, identification of these opportunities would be worthwhile not only in terms of near term profits, but pursuit of these opportunities may actually lead to a dynamic which reduces impediments and thus facilitates the integration process.
 

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