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 (firstname.lastname@example.org)
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.
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.
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
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).
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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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 (email@example.com)
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.
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.
Percentage of Pop. with Access to
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).
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.
Primary Commodities as a % Individual Commodities as a %
99.9 Mauritania Iron ore 45.0 Fish 42.0
Source: reconstituted from Table 3 (Oxfam, 1993a, P. 8)
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
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.
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.
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.
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)."
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.