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Transcript of Liberalisation and poverty in Africa since 1990–Why is the operation of the ‘invisible hand’...
Journal of International Development
J. Int. Dev. 21, 749–756 (2009)
Published online in Wiley InterScience
(www.interscience.wiley.com) DOI: 10.1002/jid.1611
LIBERALISATION AND POVERTY INAFRICA SINCE 1990—WHY IS
THE OPERATION OF THE‘INVISIBLE HAND’ UNEVEN?
PAUL MOSLEY*,y and BLESSING CHIRIPANHURAz
*Department of Economics, University of Sheffield UKzOffice for National Statistics, Newport, Wales, UK
Abstract: The dramatic reduction in poverty in Uganda and Ghana in the 1990s was derived
largely from the liberalisation of the export price received by a labour-intensive peasant export
sector. Other African economies ought to be able to derive inspiration from this manifestation
of the invisible hand, but can they? Several other African peasant export economies
experienced price liberalisation during the structural adjustment period, but without experi-
encing anything like the same positive poverty reduction dynamic. Two reasons are fairly
clear—liberalising countries varied in the extent to which they passed on higher export prices,
and they also varied in the extent to which they impacted on dimensions of governance,
especially the politics of market access, in the rest of the economy. The latter continues to be an
important research frontier for future investigators. Copyright # 2009 John Wiley & Sons, Ltd.
Keywords: Ghana; Uganda; liberalisation; poverty
1 INTRODUCTION
Economic liberalisation or structural adjustment, also known as the ‘Washington
Consensus’, is typically visualised as the relaxation of government control over aspects of
the economy, including both domestic (product and factor) and external (trade and foreign
investment) markets. Such liberalising policy changes were introduced to Africa and the
rest of the world in the 1980s and are still being implemented, often under pressure from
*Correspondence to: Prof. Paul Mosley, Department of Economics, University of Sheffield, UK.E-mail: [email protected] President 1998–2001.zFor an extension of the arguments presented here please see our paper presented at Centre for the Study of AfricanEconomies conference on 21 March 2009 and available on the Centre for African Economies website(www.csae.ac.uk).
Copyright # 2009 John Wiley & Sons, Ltd.
750 P. Mosley and B. Chiripanhura
international financial institutions and donor countries. In the wake of these reforms a large
literature has developed, arguing that liberalisation leads to economic growth (Sachs and
Warner, 1997; Frankel and Romer, 1999), and that growth then leads to poverty reduction
(Dollar and Kraay, 2003); World Bank, 2002). Within Africa, the empirical evidence seems
to confirm that reforms resulted in poverty reduction in the 1990s in Ghana and Uganda
(Besley and Cord, 2007). Yet in other liberalising African countries there is no evidence of
equivalent benefit to the liberalisers from the same reforms.
2 ECONOMIC REFORMS AND POVERTY: THE LITERATURE
The key linkage between economic reforms and poverty is through the impacts of reform
on markets, government policy, and institutional changes. Liberalisation has important
distributional outcomes that have potential to reduce or aggravate poverty. The link
between liberalisation and poverty is through growth (Sachs and Warner, 1997; Frankel
and Romer, 1999), but is strongly contested (Winters et al., 2004). It is generally agreed
that trade liberalisation, through productivity growth, brings about some measure of
growth,1 but the impacts of this on poverty vary from case to case. Dollar and Kraay (2003)
posit that trade is linked to growth through investment, and so its impact on poverty
depends on the poor’s investment behaviour. In this regard, we can say that trade outcomes
depend on how well the poor are equipped to deal with the opportunities and risks posed by
trade liberalisation. It can also be argued that there are positive links between tariff
restrictions, industrial policy and corruption levels and that since corruption reduces
investment, it also reduces growth and causes poverty to increase.
The generally low poverty elasticity of liberalisation may also be due to infrastructural
and transportation bottlenecks which make the effects of liberalisation hard to transmit
from the border to villages (IFAD, 2001). The situation is worse where small farmers are
forced to sell their produce through marketing agencies which do not pass on the benefits of
international trade, even though one can argue that such agencies may also insulate
producers from international trade risks. In Africa, this argument is supported by the idea
that Africa suffers from ‘primary’ instabilities that adversely affect growth and hence
poverty reduction, such as vulnerability to drought, now aggravated by global warming,
and adverse terms of trade
On the basis of the above literature, it is apparent that there is no general rule regarding
the impact of liberalisation on poverty (Winters et al., 2004): it is necessary to decompose
the linkages to understand the impact. The conceptual framework developed by Winters
et al. (2004) provides an appropriate foundation upon which the factors that caused
different outcomes from broadly similar policies can be established.
Within this analytical framework, the impact of liberalisation depends on macro-
economic stability and the productivity response to reform. It is suggested that
liberalisation operates through productivity growth to cause economic growth which in
1Even this linkage varies across countries. Openness may force countries to specialise in sectors that are lessdynamic, thus pushing them onto a low growth path. They argue that growth may in fact be endogenous, andimprovements in health and institutions can bring about growth without trade. Lall (1999) provided one linkthrough which liberalisation may cause poverty growth when he analysed firm responses to reforms in Zimbabwe,Tanzania and Kenya. He concluded that firms in these countries responded to liberalisation by downsizing theiroperations, reducing employment in the process and hence causing growth in poverty.
Copyright # 2009 John Wiley & Sons, Ltd. J. Int. Dev. 21, 749–756 (2009)
DOI: 10.1002/jid
Liberalisation and Poverty in Africa 751
turn results in declining poverty (Winters et al., 2004). Liberalisation also affects
households’ production and consumption decisions. It affects income sources (own-farm
production, self-employment in non-farm activities, wage employment in other
households’ enterprises (farm or non-farm)), as well as remittances and transfers (Singh
et al., 1986; Winters et al., 2004), and households also benefit from increases in the
prices of products that they sell. Households lose if reforms cause product prices to fall.
Welfare is improved by falling prices of goods while price increases reduce welfare.
Further, a household’s investment decisions are influenced by its resource endowments
subject to environmental limitations, including the impact of liberalisation. Overall,
the impact of liberalisation on household welfare is transmitted through prices and
through returns to assets. The extent of the impact, without which the invisible hand is
powerless, depends on several other factors, including infrastructure, transport links,
geography, transaction costs, and restrictions on crop movements between the border and
the farm-gate.
Liberalisation is also linked to poverty through its impact on markets. Where new
markets are created, there is a chance that poverty will be reduced; where markets are
destroyed, there is a chance that households will be plunged into poverty. Generally,
reforms create new opportunities in the economy, and the poverty outcomes of such
opportunities depend on whether or not households have adequate endowments with which
to take advantage of the new opportunities. In addition, reforms expose households to new
and unfamiliar risks which they will not be in a position to insulate themselves against.
In the labour market, we know that the poor may rely heavily on wage income, and that
wage employment is an important exit route out of poverty. Thus, liberalisation that
increases job opportunities and/or wages potentially has poverty-reducing effects. If there
is growth in the labour-intensive sector this may reinforce a decline in poverty. By the same
token, liberalisation that reduces job opportunities may push some households into poverty.
The household human capital stock is critical in determining outcomes, in as much as
policies meant to mitigate adverse labour market effects can be critical.
Lastly, reforms affect government incomes and expenditure patterns. Where trade taxes
constitute a large proportion of total revenue, reforms may result in lower government
revenues. To balance its books, the government may reduce expenditure on services most
beneficial to the poor, thus causing poverty to increase. It is also possible that revenues
actually increase following reform, in which case expenditure on services beneficial to the
poor may increase, thus lowering poverty.
3 WHY IS THE IMPACT OF LIBERALISATION UNEVEN?
While much of the world, particularly in current crisis conditions, appears happy to bury
the ‘Washington consensus’,2 this is by no means the case in Africa, where there has been
considerable convergence on a liberalised model in which the role of the state is
significantly reduced. At the micro level (on which this paper is focussed) and in line with
some literature referred to above, liberalisation has one enormous achievement to its credit,
which is the huge fall in poverty in Ghana and Uganda during the 1990s. There has been
substantial analysis of this happy outcome (Reinikka and Collier, 2001; Besley and Cord,
2007), most of which gives pride of place to measures undertaken in primary commodity
2On developments at the macro level see Adam and O’Connell (2006).
Copyright # 2009 John Wiley & Sons, Ltd. J. Int. Dev. 21, 749–756 (2009)
DOI: 10.1002/jid
752 P. Mosley and B. Chiripanhura
markets, which increased the proportion of the export price for cocoa and coffee,
respectively, which producers received.3
However, embedded within this undoubted achievement is a puzzle. Ghana and Uganda
were by no means alone in pursuing export-market liberalisation policies, and yet they
were alone in deriving a poverty dividend on this scale. Practically the whole of Africa was
pursuing these policies in some form, albeit with different degrees of commitment and
implementation (Mosley et al., 1995), and yet only in Rwanda do we observe anything like
the same reduction in poverty as that experienced by Ghana and Uganda. In Cameroon,
Benin, Togo, Kenya, Tanzania, Ethiopia, Nigeria and Madagascar which also liberalised
significantly, there is no significant reduction in poverty between 1990–2005; and in the
Congo (DRC), Cote d’Ivoire, Zimbabwe and Burundi there appears to have been an
increase in poverty. What went wrong? If the data are trustworthy any answer which can be
derived would have useful implications for anti-poverty policy.
Why, then, did coffee eradicate poverty4 in Uganda but not elsewhere? There are two
possible explanatory stories. The first has to do with the politics of public expenditure and
the labour market, and the second has to do with institutional capacity. The dynamics of the
reform process itself also matter, not only with coffee but with other export crops. Ghana
opted for a gradual liberalisation process (just like Cote d’Ivoire) which allowed
stakeholders time to adjust to regime change, whereas in other countries such as Nigeria the
liberalisation process was more abrupt. Second, Ghana (unlike Cote d’Ivoire, Nigeria and
Cameroon) did not go for outright free market operation: it maintained a marketing board
to oversee quality and trade of cocoa. Although this approach resulted in a lower
percentage of the export price accruing to farmers, it shielded farmers from international
market risks, some of which they were unable to deal with. The gradual process allowed
farmers to learn and grasp new capabilities as well as build assets with which they could
improve their living standards.
The Ghanaian and Ugandan outcomes can also be contrasted with those in countries like
Zimbabwe where liberalisation created opportunities which the majority of the people
could not seize because of lack of resources. Skewed land ownership meant poor people in
the rural economy could not expand production into cash crops (tobacco and cotton) whose
prices had been liberalised. The reforms kept export controls on food crops, mainly maize,
which the majority of the people produced. Further, opposing reforms, notably removal of
input subsidies and access to credit, resulted in falling production and productivity. It is
therefore not surprising that in such economies poverty increased rather than decreased
following liberalisation.
The Ghana/Uganda miracle has sometimes been ascribed to aid-led growth: it has been
suggested that the initial stimulus to demand through aid inflows was simply larger for
Uganda and Ghana, and that this was significant. However, an examination of the ratio of
aid to gross national income in the 1990s (1990–2000) does not support this proposition.
The two countries’ ratios of aid to gross national income (10.1% for Ghana and 15.7% for
Uganda) are not significantly different from those of other African countries. The ratios are
even smaller than those of Zambia (26.4%), Mozambique (42.2%), Tanzania (18.6%),
Rwanda (28.7%) and Malawi (27%). Analysis of aid per capita over the same period also
3Statistical evidence is included in the longer joint paper referred to in the acknowledgements at the beginning ofthis paper.4This is a figure of speech. The allusion is to the large signboards on all the main roads leading out of Kampala,which make this claim.
Copyright # 2009 John Wiley & Sons, Ltd. J. Int. Dev. 21, 749–756 (2009)
DOI: 10.1002/jid
Liberalisation and Poverty in Africa 753
reveals a similar picture. Thus, the reason for an impressive poverty reduction is apparently
not the inflow of aid funds. Below, we argue that this is a question of quality rather quantity
of aid flow.
4 PUBLIC EXPENDITURE AND THE POVERTY DIVIDEND
A major reason why the Ugandan and Ghanaian commodity booms were poverty-reducing
appears to have been that because they were intensive in the use of the labour of low-
income people the benefits went mainly to a large number of smallholders and workers,
rather than to a small number of latifundia. However, every labour market is unique, and it
is possible that the explanation for the ‘Ghana–Uganda effect’ is that these countries had
more active labour markets than their comparators.. This proposition can be tested by
examining three factors likely to be associated with the transition of the poor across the
poverty line: (i) an average measure of labour-intensity, (ii) incentives to an active labour
market (provisionally the real wage is used as an index of this) and (iii) the ‘pro-poor
expenditure’ (PPE5) ratio, as an indicator of the extent to which government expenditure is
focussed on sectors which reduce poverty. On the basis of these measures, labour intensity
(labour per unit of output) in Uganda and Ghana is almost twice that in the other peasant
export economies of Africa. Thus, on the presumption that income from their cotton and
coffee booms was distributed along the same production function as output as a whole, it
generated almost twice the impact on labour absorption and this, following the argument of
Winters (2001), may have contributed to poverty reduction. In addition the PPE ratio,
whether defined inclusively or exclusively of military expenditure,6 is significantly higher,
with a lower variance in Uganda and Ghana than in the other countries considered. It may
be economic liberalisation, especially in an environment of high labour market regulation,
prevents the invisible hand from working by reducing firms’ ability to hire workers, thus
reducing labour intensity and the poverty effects of reform. On the basis of the World
Bank’s rigidity of employment index (high rigidity¼ 100), this argument may be true for
countries like Tanzania (68), Mozambique (56), Rwanda (50) and Burkina Faso (70). On
this measure, Ghana (33) and Uganda (10) had, in the 1990s, relatively more flexible labour
markets which may have increased employment in their formal sectors, and hence the
poverty level in the urban sector.7
5 INSTITUTIONAL CAPACITY AND THE ROLE OF CONFLICT
A further potential contributory factor in Ghana and Uganda is the inclination of their
political elites towards rural areas. Both governing parties in the two countries in the 1990s
had strong rural bases. In Uganda, Yoweri Museveni came to power in 1986 after years of
civil war in which his allies had been guerrillas drawn from the small-farm agricultural
5The ‘PPE ratio’ represents pro-poor expenditure: [primary health and education, plus rural water and infra-structure, plus agricultural research and extension, less in some variants military expenditure] as a share of GNP.6If military expenditure is netted out, ‘pro-poor expenditure’ increased by 148% between 1990 and 2005 in Ghanaand Uganda, and 123% in the other countries listed on page [4] above. (Source: IMF Government ExpenditureStatistics Yearbook)7Teal’s analysis of Ghana (2006), which suggests poverty falling much faster amongst urban workers and self-employed than amongst the cocoa farmers directly affected by liberalisation, is consistent with this view.
Copyright # 2009 John Wiley & Sons, Ltd. J. Int. Dev. 21, 749–756 (2009)
DOI: 10.1002/jid
754 P. Mosley and B. Chiripanhura
areas of the ‘Luwero triangle’ in the centre of Uganda and from his own home area of south
western Uganda. The struggle cemented his links with the rural population which helped
him into power and motivated him, after the first phase of liberalisation analysed here and
by contrast with other African elites, to sustain the pro-rural thrust of policy. In Ghana, the
case is more complex: the PNDC (later NDC) government that ran the country from 1992
to 2000 had a principally urban power base, but inherited a populist pro-consumer
approach from its roots among workers, students and the military and competed hard and
successfully for support in the poor rural North, holding that region at every subsequent
election and even making inroads in the opposition’s heartland in the cocoa-growing areas.
It is not surprising therefore that Ghana’s approach to liberalisation was sensitive to the
interests of several politically valuable pro-poor groups, and that many of the beneficiaries
from liberalisation were smallholder cocoa farmers or poor people working for them
(Varangis and Schreiber, 2001).
Finally, the quality of government and its institutions is critical in determining whether
or not reforms succeed. Two critical variables are government commitment to reforms and
control of corruption. An important dimension of institutional capacity is government’s
ability to substitute other sources of revenue for trade tax income. Ghana and Uganda were
better organised to raise the taxation which was needed to finance expenditure. For
Uganda, Chen et al. (2001) argue that the tax system after the reforms became more
progressive, although perhaps only marginally so. It is also possible that reforms actually
increased revenue collection, implying that the economies might have been operating
beyond the optimum point on the Laffer curve so that lower trade taxes resulted in higher
revenues being collected (Winters et al., 2004). This may also be true for Ghana, given the
assertion of Varangis and Schreiber (2001) that cocoa production declined in the late 1970s
because of excessive export taxation. Growth in the tax to GDP ratio, and the consequent
laying of a base to finance pro-poor support services in agriculture, health, education and
infrastructure beyond what was forthcoming from the aid donors, may be the reason why
pro-poor expenditure did not decline in two countries. The governments of Ghana and
Uganda also provided better protection of property rights; and supported key pro-poor
institutions better such as microfinance, NGOs, and relationships between private
enterprise and the state. To encapsulate this support, an attempt has been made to compute
a PPI (‘pro-poor institutions’) index which seeks to estimate institutional capacity from a
pro-poor viewpoint, and is available from the authors.8
Government efforts to control corruption have played a key role in reform stability and
continuity. The World Bank’s governance indicators are standardised and may not be
suitable for comparison over time within countries (Kaufmann et al., 2006), but they can be
compared across countries with caution. Political stability in African countries during the
1990s was generally low, but it showed improvements in both Ghana and Uganda. This can
be compared with declining stability in Cote d’Ivoire, Kenya and Ethiopia. On rule of law,
Uganda’s performance has been much better than for other countries. For Ghana, the rule of
law measure was below average but stable, and much better than in countries like Kenya,
Zimbabwe and Zambia where there was deterioration. It may follow that the associated
indicator of control of corruption was also better in Ghana and Uganda compared to
comparator countries. The crucial point is that both Ghana and Uganda made significant
governance improvements to create ‘linking social capital’ with the donors, donors,
8The index can be found in Mosley et al. (2009, Chapter 6, Table 6.5).
Copyright # 2009 John Wiley & Sons, Ltd. J. Int. Dev. 21, 749–756 (2009)
DOI: 10.1002/jid
Liberalisation and Poverty in Africa 755
enabling the flow of finance and thus the economy to be more stable than in countries which
did not enjoy these relational advantages.
6 CONCLUSION
The beginnings of a story are therefore that the invisible hand of a freer (liberalised) market
helped to reduce poverty in parts of Africa in the 1990s; but that the invisible hand cannot
work on its own, and therefore only succeeded in doing this in highly specialised
environments. It succeeded in reducing poverty in Ghana and Uganda much more than in
other regions of Africa which also liberalised because in those countries the invisible hand
was hand-in-glove with other vital complementary factors. These are, first, a better
infrastructure than the African average, much of it laid in colonial times and helping to
unify labour markets and diffuse the benefits of liberalisation; second, a unique chemistry
with aid donors, which enabled better advantage to be taken of technical support and
smoothed out the expenditure flow; and third and most important, a political power-
structure which was more sensitive than most to the political merits of a pro-poor
orientation, which in turn was reflected in those two governments’ expenditure patterns.
The gains achieved in Ghana and Uganda are very fragile, and it should not be supposed on
the basis of their undoubted achievements that, as some claim, ‘the corner has been turned
in Africa’ (e.g. Miguel, 2009);—still less that these achievements can be generalised by
returning to the wisdom of Adam Smith.
ACKNOWLEDGEMENTS
The assistance of the ESRC under grant RES156/25/00016 and of two anonymous referees
is acknowledged.
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