Adequacy of poverty reduction policy of IMF and World Bank in the agricultural sector in Africa

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Focus on a particular aspect:

Research Question:

Does the liberalization policy of IMF and World Bank help developing countries in poverty reduction?

– Using the example of agricultural liberalization in Africa -


Thesis Statement:

Developing countries suffer from instable prices, high marketing costs, and lack of fertilizer subsidies or low world market prices for cash crops in the agricultural sector. World Bank and International Monetary Fund (IMF) are both promoter of a liberalization policy which, in some cases, creates these problems, in some just reinforces or fails in reducing them.

Adequacy of poverty reduction policy of IMF and World Bank in the agricultural sector in Africa

Outline

  • 1. Introduction
  • 2. IMF / World Bank
  • 3. Problems of African agriculture
  • 4. Problems of liberalization
  • 5. Discussion on poverty reduction measures in agriculture
  • 6. Conclusion
  • 7. References

Introduction

Economy in Africa is still based on agricultural activities. About 60% of the African population is working in farming. In sub-Saharan Africa even 70% of the people are working in the agricultural sector. Problems in agriculture, like crop failures, are difficult to compensate and can lead to severe food insecurity and hunger crisis. Instable prices, high marketing costs, and lack of fertilizer subsidies and low world market prices for cash crops are contributing to the weakness of this economic sector.

With liberalization – in general, means the “removal of government interference in financial markets, capital markets and of barriers to trade” [1] -, of the agricultural sector, the International Monetary Fund (IMF) and World Bank are working on these problems following the neoclassical model of fully competitive markets which, to them, will achieve optimum welfare without any governmental support. [2] But reality draws a totally different picture, so that it is time to reflect on their activities which are said to decline poverty worldwide.

IMF and World Bank

IMF was founded in post war time of the Second World War and was thought to harmonize the different currency policies which had been blamed to be the reason for the Great Depression. Stable exchange rates were thought to be the key of a growing international trade. With changes in world economy in the 70`s, like the change from fixed to free exchange rates, the IMF abandoned its policy on fixed exchange rates and turned to focus on questions of macroeconomic imbalances in developing countries.[3] In these times, developing countries had to face “severe payment imbalances, high and rising rates of inflation and sharp drops in growth rates” [4] . With the provision of loans, IMF wanted to react to the payment imbalances but soon had to realize that problems were not temporarily but structural determined.

With the IMF, the International Bank for Reconstruction and Development (IBRD) was established providing finance to countries undergoing reconstruction or low income countries undergoing development. As it became clear that developing countries could borrow little under these terms, the new established International Development Association (IDA) began to offer “soft loans” to developing countries financed by industrialized countries. The two institutions became known as the World Bank and now focus on credits for microeconomic and infrastructure investments.

After the debt crisis in the beginning of the 80`s when creditors had to face severe problems because developing countries were not able to pay back interests and credits which they had borrowed to stabilize their own economies, the World Bank decided to link its credits to Structural Adjustment Programs (SAP). These programs combine credits with low interests with imposed conditions of economic structural reforms which include for example the privatization of public enterprises and liberalization of prices and markets.[4]

World Bank and IMF always have been criticized for the conditions linked to their credits and loans which give the impression to push developing countries to adopt to the free market economy.

Problems of African agriculture

In African countries where most of the people´s income depends on food crops, three basic problems have to be kept in mind while looking at liberalization policy´s potential in combating poverty.

Firstly, most smallholder farmers suffer from the lack of money for new investments on inputs like seeds, fertilizer and pesticides to increase yields. But the establishment of a credit scheme turns out to be difficult. In Africa, often there is no private land ownership but community based systems which do not allow any mortgaging of land because living circumstances are too risky.

Secondly, price levels are very low because the purchasing power of the population is not very marked. On one hand low prices enable the poor population to buy cheap food, on the other hand income of farmers remain low and so agricultural development because there is no money left for investment. Very low price levels can be observed in times of harvest when supply exceeds demand while price peaks occur in post-harvest times. The price-variability in African countries is one reason for missing investments which could contribute to the growth of productivity.

Because prices of basic food crops are sometimes even lower than world market prices, the cash crop sector turns out to be much more profitable but price fluctuation also occurs here and does not serve as a reliable source of income.[2]

Problems of liberalization

Liberalization policy in the agricultural sector includes abolishment of state trading enterprises and price influencing interventions like fertilizer subsidies, establishment of markets with private actors and the cut in tariffs. In the agricultural sector of many African countries, the success of IMF and World Bank policy in poverty reduction can be questioned. Till today liberalization did not succeed in meeting these problems adequately looking at the following effects of liberalization.

In general, total liberalization did not strengthen the purchasing power of the population. Food crop prices in sub-Saharan Africa are declining like in Ghana where a downward trend since 1984 is confirmed. In Kenya, for example, where liberalization was just partly been introduced into the maize sector, prices were stabilized with the use of tariffs and buying activities of the food reserve agency in times of surplus. 82% of the smallholders were than able to buy fertilizer.

Low price variability is a sign of successful market functioning because extreme unstable prices are known to decline storage, investment and trading incentives. But due to liberalization, price-variability aggravated in a lot of countries like in Madagascar where price variation increased by 53%. In Tanzania, the state marketing board and so the system of fertilizer credits was abolished with liberalization of the maize production leading to its stagnation.

“The liberal school argues that markets guarantee efficiency.”[2] Maybe this assumption is a little bit too naïve looking at market conditions in Africa which are confirmed as weak. Storage, infrastructure, access to credits, market information are just some of the obstacles traders, producers or collaterals have to face. Marketing costs are high, dominated by transport costs. For example, in Ethiopia, storage is insufficient and of low quality which leads to losses in production. Price variability between areas of surplus and deficit remain high because the minority of the traders can achieve own transport vehicles so that transport remains insufficient too.

Discussion on poverty reduction measures in agriculture

The problems of African agriculture which have been mentioned above cannot be solved with its comprehensive liberalization. With the removal of government interference a lot of potential is given away to combat poverty effectively. The abolishment of the state marketing board and so the system of fertilizer credits in Tanzania, as mentioned above, turned out to be a great mistake. In Malawi, the state marketing board supports farmers in remote areas with fertilizer, seeds or the buying and selling of grain. But IMF and World Bank are aiming at a total displacement of the state marketing board through a private marketing system without even thinking about obtaining the functioning structures.[2]

The use of fertilizer is essential for growth rates in the agricultural sector. With fertilizers productivity increases, more food get on the markets, prices remain low even in times of post-harvest price peaks because storage abilities of the farmers increase with productivity. But the neoclassical model does not allow fertilizer subsidies of the government. The lack of flexibility seems to be the most important weakness of the theory when it comes to practice. When we look at Kenya, as mentioned before, liberalization has partly been introduced but the role of the food reserve agency of the state market board has been obtained, the combination of liberal policy and old functioning structures worked out quite well.

Conclusion

The programs of IMF and World Bank have been confirmed as being not adequate enough to react to problems of the agricultural sector of many African countries to serve as poverty reducing measures. Instead of increasing growth rates, problems of price variability increased and the lack of fertilizer subsidies turned out to be a reducing factor to productivity and purchasing power of the population. With the removal of government interference in agricultural markets, the decline of poverty in developing countries in Africa is not realistic.

References

  1. Stiglitz, J. (2002). Globalization and its discontents. Penguin Books: London, p. 59.
  2. 2.0 2.1 2.2 2.3 Hermanns, U. (2005). Fighting poverty after agricultural liberalization in Africa. NORD-SÜD aktuell, XIX, p. 396. Cite error: Invalid <ref> tag; name "hermanns" defined multiple times with different content Cite error: Invalid <ref> tag; name "hermanns" defined multiple times with different content Cite error: Invalid <ref> tag; name "hermanns" defined multiple times with different content
  3. Browne, R.S. (1994). Alternativen zum Internationalen Währungsfond. In: Cavanagh, J., Arruda, M. & Wysham, D. (1994). Kein Grund zum Feiern: 50 Jahre Weltbank und IWF. Konkret Literatur Verlag: Hamburg.
  4. 4.0 4.1 Krueger, A.O. (1998). Whither the World Bank and IMF?. Journal of Economic Literature, Vol. XXXVI, p. 1988. Cite error: Invalid <ref> tag; name "krueger" defined multiple times with different content

Bibliographie

Krueger, Anne O. (1998). Whither the World Bank and the IMF?. Journal of Economic literature, XXXVI, 1983–2020. http://web.nps.navy.mil/~relooney/3040_525.pdf

This article gives an overview about the history of the two global institutions - IWF and World Bank - its effectiveness and criticism with regard to economic aspects. It was published by a professional journal meaning that information is edited for a special type of readership.

Stiglitz, J. (2002). Globalization and its discontents. New York: W.W. Norton & Company.

Joseph Stiglitz was Chief Economist of the World Bank and his books aims at giving an insight to his work. Based on his experiences, he critizes existing structures of globalization and the policy of the IMF and World Bank which he had to experience himself. It is a non-academic book.

Hermann, U. (2005). Fighting poverty after agricultural liberalization in Africa. NORD-SÜD aktuell, XIX, 396 - 414. http://www.giga-hamburg.de/openaccess/nordsuedaktuell/2005_3-4/giga_nsa_2005_3-4_hermanns.pdf

The magazine is published quarterly and is part of the GIGA German Institute of Global and Area Studies. Because it is a professional journal, information is elaborated for a special type of readership.

Browne, R.S. Alternativen zum Internationalen Währungsfond. In: Cavanagh, J., Arruda, M. & Wysham, D. (1994). Kein Grund zum Feiern: 50 Jahre Weltbank und IWF. Konkret Literatur Verlag: Hamburg.

Source APA Citation Style: http://info.lib.uh.edu/research/help/apaonline.html