metadata: authors: 0: author: Foroutan,Faezeh S.
count: Africa
docna: 0: docna: Trade reform in ten sub-Saharan African
            countries : achievements and failures
docty: Policy Research Working Paper
subtopic: Climate Change and Agriculture,Crops and Crop Management Systems,International Trade and Trade Rules,Competition Policy,Food Security,Inflation,Competitiveness and Competition Policy
teratopic: Poverty Reduction
abstracts: cdata!: One cause of the disappointing
            performance of the tradable goods sector in sub-Saharan
            Africa after several years of adjustment and investment of
            considerable resources is the less-than-exemplary
            implementation of reform, concludes the author. The author
            summarizes the experience of ten sub-Saharan countries with
            trade reform. Trade reform is broadly defined to encompass
            reform of foreign exchange and other measures (such as
            domestic price decontrol) that directly or indirectly affect
            the relative profitability of the tradable goods sector. She
            singles out several factors that explain the different
            implementation records of the countries sampled and
            evaluates the likelihood that reform will be sustained in
            the future. Of the ten countries examined, only a few
            (Ghana, Tanzania, Uganda, and, to a lesser extent, Mali)
            began and sustained trade reform in the 1980s and 1990s. In
            other countries, most liberalization measures adopted were
            later reversed or suspended because of a balance of payments
            crisis or social unrest or both. Compatible macroeconomic
            and exchange rate policies are ranked as most crucial for
            successful trade reform. Incompatible macroeconomic
            policies, for instance, brought about the reversal of trade
            liberalization in Kenya and of foreign exchange market
            liberalization in Nigeria. Experience in the three franc
            zone countries, especially Cote d'Ivoire and Senegal,
            highlights the enormous difficulty of achieving a consistent
            real exchange rate under the constraint of a fixed nominal
            exchange rate. In theory, under certain conditions a
            devaluation's impact on relative prices can be mimicked
            through equivalent tax-plus-subsidy schemes, but experience
            in these countries shows how administrative difficulties and
            price rigidity make it almost impossible to achieve this
            goal in practice. Experience in all countries also
            highlights that early attention to institutional reform,
            consensus building, and domestic market reform is
            indispensable for lasting trade reform. Even among the few
            countries where trade reform has been sustained, none can
            yet boast of the same low levels of protection as now
            prevail in reforming countries elsewhere in the world.
            Sub-Saharan African countries' very distorted trade
            regimes, their weak administrative capacity, and their low
            levels of income all contribute to the relatively slow pace
            of trade liberalization in these countries. The author
            identifies three indicators of the sustainability of reform:
            the change in level and composition of government revenues
            and expenditures; the rate of growth of, and the
            diversification of, exports; and the level of investment,
            especially private investment in productive activities. On
            the basis of these indicators, experience in the sampled
            countries is not promising. Few of them have radically
            changed the structural parameters of their economies. In
            most countries, government revenues are still heavily
            dependent on trade taxes; budget deficits have been
            contained, if at all, chiefly by curtailing government
            spending in priority areas; and little export
            diversification has taken place.
repnme: repnme: Trade reform in ten sub-Saharan African
            countries : achievements and failures
display_title: Trade reform in ten sub-Saharan
            African countries : achievements and failures
listing_relative_url: /research/1993/11/698760/trade-reform-ten-sub-saharan-african-countries-achievements-failures
topicv3: Price Controls m1326085 2107,Agriculture and Food Security m1326205 435,Crop Production m1326627 174,Inflation m1326709 0870F4727ACED1CF8525815C00471347,Trade m1326924 698
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Poverty Reduction
origu: UNKNOWN
no_of_pages: 64
author_keys: 0: author_key: 92745
model_extractions: **Poiticy** Rl SFtARC. WORKING(It I'NcPAiR 122"

# **Summary findings**

**Ollne** ('CiSc of the dlisippoilitiui prci torniiCo.i of ilc tradable gOOdS SeCtOr ill Sub>--S'11aharan Atrlika aJelt s'e eral1 r **years** of adijustmICnlt anld iTIVeS. liSn **oft** Ot ooII1dCrJlL resOULirCCS iS tIlh le:sthan-exlupla! lo illlenIWtitatiIunotf **retforni,** Ctmlcldcs Foroitotn.

ForOLItan sunutiarizes tdi ()xereiet.e 01 teui So1l'Saharan couirntries sithl trade ieform.ii It kld retormi **_is_** broadly dfefirind to enicompass r.form _oI_ flreig, exchanige and other measuires (such as dotiestic price decontrol) that directly or indirectly IffeCi tilt relitivprofitability of tihe tradaible goods Sector. .She sgles out reveral factors that explaiin the differenit inmpleioeniraion records of the countries sampled and evaluates the likelihood that retorm will be sustained in thc ttittife.

Of the tenl **countries** examined, onv _a_ fcw ((,hartL. Tanzania, Uganda. and, to a lesser extent, Mali) _began_ andi sustained trade refornm in rite I 98(0 and I **9'90s** In other countries, miost liberalization uneasutes adoprtd were later reversed or suspLSeudCd **1e6Ca11** of a ialae 1 o tug i **t** payments **crisis** or **soCcial unrest** or both.

Cotnipatible nacrocconjorutic and e'xchlange'ite o iirie are ranked **as** miost crtiuial for sticecssfidl _rrad_ retormi. Incompatible tnacroeceonOtnie po1liiesC tOr **instO ic** brOLIgIlt about the re'versal of trade libeiali a.l ontiOl i Kenya and of foreignt exchange nlarktt libLt )adical ii Nigeria. Experience in the th1r7ee fxtti znte ci especially Cote d'lvoire and Senri -, n! ith ights telc enormousIS diffiCu1lt)' _*f_ ahiCh iinlg _a_ LOtis tlut rea.l liirhili exchange. rate under ti:e cttostr6tt eot a fix1\ed notinll exchange raite. In tiho,r ti nder certain cuutiititon i

> LeVJuiIAIio)I' nrll tn ola)I r L ye ivie e - ll )(i liltti:kcd ho i h eItg t I leut t' , lii\ -li I iT', **If t** l **ittlo** i, 1 t Ilte", I,0ilrtt ic. i !h ;1 .tdrtiJillistr uliOe .litti,i ti Ia ri Iitidii tilL': ir i li: lil; t'f i ne i o clulee tlllhl toi.l ill proti . . isperori in ill eotitrno i i Illi !.ht 0i F itl !eu BIt;titloll to i1it.ii:oll,ll lCi orr, b,iu'iisdi !uil.,ig aolzl Ilh!,lSti' L itirkot r:t,R Ill is nilIdisI,crl;iIhle toi last rt **r** d lg rt **e** t 'ru P yen nll wlu hile fess, coiii ri.s w fre trade itretforin t' Is bee ii ousiflined, noiw i mi vet tboast oi the, satI **e** 1h:l% ler-lot pror ctionl ao s towv praiI ic- retrll t ig citilitties

> else.wl0iere II tit world. Siiu-Siarxartti Afrielit C H;to)liures very dii, rrCd rade regities, helt t:ak aditinistra: is capacir, ind tleirh **1** levvls o! income: ail contribute ro rtlo ri-Ftivcl slow t ace ol trade l hilera! i Zn Ottim Itn trh. coluntriCes.

lF routir l detitiis hriee indi calors of tie. SIu`r-linidhilits )t retwrin i he .tattet in !evel nil'd 'i rl o **t** risetunti rv ,, I , all **Md** 'xpelIJihloirios; rlh rim it g sll o 0 d dii( l i ili iori it, exports; d the lcvel of iri,estittit, eJgeiJIlliv itvltt investenIti1 i! prodn.is jet ii . **(o** 1th hOni ' **t** thets t !C,i'. N r, rinceii ii .iiltplc'd i nt "! (e rot. i _W_ III i. h lle **it,** I) t .tiingeu. ii: ! _hliZtaiii_ ,tri (ltn! p atneiers iii tilit'[ lilout **,('** lirjij .t I 'rInie ijtlt ,7ri >I' I,tl\ i I tlepiLid ti ( ii Ide ra' "s; tl'ii de , ir> hie '( e e t. i! .i **!** ! i' 1 W Cit,n! vl' got tr int-t **p** )tY ill inp 'ui tij **i** nfl e (;!tt!t do tlitin his i ke pJk lc Thispaper--aprodti tof tie U 'Nl)l' \kotlid tank I adid FxpttslA ion l<sup>1</sup> r')l n; .1Ii tn. I roleo uli.le,, I **)i\** ,(11 P Res- uI Department-is based on hackgiotntd pa .r v Gin!Gbrel ti. 1 1 Ia l I!e h [ otlta Ii t ir, hI iltirlii ( 'lihals '- otL o., and john Nash. (.Copies of this rialpei ar1-c Iaailable ire or iI,, t X or Id I ik l sI II Stiree \\\ \:\ -loruon. I )( 2(4 7 Please contact Sheila Faillont roofimNl((-V! . tNxteln'ioil SUIt) 1 **pist ).** N N vetiher I 'ii) _Ie I'o`y Rce.rrch sr rc. .n r_ **\t** _,rkin ri' :i 5 '_ ! **_ii,.i_ 1,** ii:, - 2 ' .:' . _; development ,ssuss. An ,obuoutrz,retb_ s•'rsrri rt **i** rs V 1rl,, 12rr,-. ot n:.Li ,- **0 -** 1.0 -' **_.t iin I_** l 1 l _papers_ **_carn,_** _the n.setnc ofth!_ ot _an_ r) _j Ids_ lot _us e i,;,.i_ ! n r **.** iji **_i ii._** . **_.,1_** :1 _ohiO_ **_1_ - iS** , **_._** 0 _a-it krs' ou-n and_ **_Shb 1id_** _not bf atrirllted h( tohre III - R k l_ **_JI,_** _It .tiCl_ **C** r f I _n , ,_ **_',_ s** _, ,,_ **0** _., ml;_ e I _Oe_ I Prodtiuced by the Poli cv Resea rch Dissentin.t!tion Ltcntcr
# TRADE REFORM IN TEN SUB-SAHARAN AFRICAN COUNTRIES ACHIEVEMENTS AND FAILURES

Faezeh Foroutan (PRDTP, The World Bank) This study as a product of the UNDP/World Bank Trade Expansion Program. The study is based on background papers by Gabriel Castillo, Faezeh Foroutan, Eric Fournairon, Coolibaly Kalomogo and John Nash. **Iho** author is grteful for comments on these papers from many people including Zafar Ahmed, Nisha Agrawal, Elliot Berg, Colin Bruce, Patrick Cerrutti, Pierre DeUd el, Jaime de Melo, Brendan Horton, David Jones, Kazi Matin, Bernard Philippe, Anand Rajaram, Bill Shaw, Klaus Tilmes and John Todd. Any remainig errors or omissions are the sole responsibility of the author. The views expressed here are not necessarily those of the World Bank, UNDP or affiliated organizations.
# TABLE OF CONTENTS

|1. InitilConditons<br>...............<br>..<br>.<br>..<br>.<br>..<br>.<br>..<br>.<br>. 1|
|---|
|2. Trade Polcyand Ote ReformMeamures.9.<br>..<br>....<br>. ..<br>._9_|
|3.ImplnunoofTradePoicyReform<br>.1.............<br>........<br>10|
|<br>3.1<br>Definidonoftradereform...................<br>12|
|3.2_The dsa_.................<br>.<br>.<br>.<br>..<br>.<br>.<br>.<br>.<br>.<br>12<br> <br>|
|3.3<br>teperizace<br>..................<br>..<br>16|
|4.TheCaus cfDiffntial<br>enaoof<br>TradeReform............<br>26|
|4.1<br>Thepolidcaleconomyofreform....................... 26|
|<br>4.2<br>ruecomicsoftrade refomn<br>28...<br>.<br>...<br>28|
|_5._ImpactandSustnabil.ityofReform<br>**2.**|
|<br>_5.1_<br>The structure of government expenditures/revenues .<br>.33|
|<br>_5.2_<br>Exportresponse..............<br>34|
|<br>_5.3_<br>Inv,estmen**t**rend...<br>. ....<br>...<br>_35_|
|Bibliograph)y...............<br>39|
|Table 1 ...<br>...................................<br>41|
|Table 2<br>......<br>44<br>|
|h1&b1e<br>3........<br>.<br>...<br>45|
|Table4<br>...<br>46|
|Table<br>7.......<br>_47_|
|Table6 .48|
|Table7....<br>_50_|
|Table 8 .......<br>.<br>.<br>.<br>.<br>.<br>..<br>.<br>.<br>.<br>.<br>.<br>..<br>.<br>.<br>.<br>.<br>.<br>. 52|
|Table 9<br>_.53_|
|Table 10 .54|
|Table11.....<br>_.55_|
|Table 12<br>.......<br>_56_<br>|
|Table 13 ..<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.57|
Most Shi-Saharan African (SSA) countries are in the middle of structural adjustment prorams, matny of them from five to ten year old. Since the response to these prograzns has not been as rapid nor as deep as had been hoped, many observers have questioned why this is so and what car. be done to improve the respcnse in the future. The current paper addresses ihese concerns by examining in some detail the history of trde policy reforms during the Y 980's in ten countries - Cte d'Ivoire, CMana, Kenya, Madagascar, Mali, Nigeria, Senegal, Tanzania, Uganda, and Zambia.

This study's principal cbjective is to deternine to what extent the design of the trade reform package itself, the degree of commitment by the government to reform, other economic policies concomitantly adopted and the differing initial conditions each played a role in shaping the implementation record of various countries. The study will also examine the response of the economies to the reform package implemented and the future sustainability of the reform measures themselves.

This paper is based on detailed case studies for the ten countries. Each country study begiis with a brief look at the initial conditions, i.e. the trade regimes prevailing just prior to the intioduction of reform. They then examine the set of reform measures proposed, the implementation record of each country, and the outcome of the trade reforms that were actually implemented. The present paper follows a similar structure. The emphasis here is placed on the implementation and sustainability of reform.

The remainder of this paper is divided into six Sections. Section 1 examines the initial conditions in each country just prior to the commencement of reform. Section 2 briefly illustrates the essence of adjustment policies pursued by these countries during the 1980s. Sections 3 and 4 examine the implementation record of each country and discuss the causes for differential implementation. Section _5_ discusses the impact of the reforms undertaken and the likelihood of their future sustainability. Section 6 concludes the paper.
Despite important differences and diverging political orientations and alliances, the ten countries in this study shared strikingly similar experiences in terms of economic policies that they pursued after political independence and in terms of the economic structures and problems that resulted from those policies.

The common feature of these economic policies was tight intervention in and control over all spheres of economic activity by the government. Thus, other than the usual tax and expenditure controls, In these comtries the governments also typically set the exchange rate, import/export quotas and prohibitions, price controls, foreign exchange control and interest rate ceiling. They also tightly regulated Investment and markeagn by private agents, often directiy E.rring private individuals from producing certain goods or 3ervices, or prohibiting them from marketing what they were allowed to produce, such as agricultural crops. They also interfered in labor markets, typically by fixing minimum wages and limiting the ability of firms to fire labor.

These interventionistpolicies, other than generating well-understood microeconomic inefficiencies, were often characterized by internal contradictions and ultimately proved to be unsustainable also on the macro .,evel. For example, in reponse to high rates of inflation caused by the monetization of an unsustainable budget deficit and/or high levels of prices of consumer goods caused by protectionist polic; Os, the government would often resort to widespread price controls, thus inhibiting "with one policy instrument a process it generated with another." [Bevan et al. p. 55].

According to one view, the root cause for the adoption of these interventionist policies is to be traced to the p:.valence of political rather than economic logic in these newly independent countries<sup>2</sup> .

'In the context of -ow level of economic development and very dependent mineral and agricultural primary product export economies, new and insecure ruling groups came to power with liberal dewocratic political structures inherited at the last minute from their former colonial IFor a summary of the initial conditions, particular characteristics, the reform proposals and implementation record of each couutry see Table 1.

2C#ilaghy (1990).
2 masters. From the first, their primary concerns were political -how to stay in power and build a base for themselves and their allies.<sup>3</sup> The consequence of the predominance of political cver economic logic was the emergence of a crony statism characteized by client list networks used to build support, expansion of the state size including a large parastatal sector, and purchase of primary urban support via state welfare services and subsidies. The expansion of the state size was not only congruent with the attainment of urban support for the new insecure political rulers, but also with the logic of state control over all aspects of the economy, including investment and acquisition and allocation of foreign exchange. This structtre of political control was paid for by extractig surplus from the countries' agricultural and mining sectors, typically via the creation of state-owned mining and oil companies or agricultural markvting boards which bought crops at artiflcially low prices.

Another cause for the adoption of interventionist policies was the widespread belief at the time, even among the most well-intentioned politicians and economic policy makers, in the virtues of planned development strategies. These strategies foresaw a major role for the government as a benevolent and neutral agent In the management of the economy and its development, especially via import-substituting industrialization.

Whatever the cause, a large parastatal sector emerged that was weak, inefficient, import-intensive and import-substituting while private investment was mainly directed towards non-productive, commercial and service-oriented business. Any occasional indigenous or foreign private investment in productive activity relied heavily on political connection, protection and particularistic policy making.

It was not until the external shocks of thr 1970s, notably the deterioration in the _tekms_ of trade and the debt crisis of the early 1980s, that the weaknesses of crony statism and interventionist development strategies and their unsustainability on the macro level were fully exposed. As the terms of trade deteriorated and governme revevues shrank, rather than adjusting public expenditure, the governments ran large budget deficits which they financed with a combination of money creation and 3 lbid p. 257. This is what Callaghy call the 'post-colonial syndrome'.
3 external and internal borrowing. In parallel, in response to reduced foreign exchpnge earnings and shrinking reserves, ad hoc entrols over imports proi.ferated. These threatened the viability of the domostic productive activity which suffered from a lack of readily available imported inputs. Similarly, to dampen the impact of inflation, domestic price coniro.s became endemic, straining fiurter the fiutioning of domestic productive activities. This scenario lasted until foreign borrowing dried up and thd deficits became unsustainably large. As the ad hoc measures did nothing but aggravate the situation, 4 the economics leaped from one crisis to another in a process of cumulative contraction.

The above picture is a more or les an accurate description of the events in the ten countries examined here. It was essentially in response to the macroeconomi **c** rises and disequilibria that stailization, structural adjustment and trade reform as an integral part of structural adjustment, were first IntrAduced in the countries examined here. Stabilization and reform were a _sine qua non_ condition for gaining access to additional foreign exchange. All ten countries were forced to swallow Bank/Fund conditionalities after they had suffered a series of crises that had left the governments at the brink of 5 bankruptcy.

By the early 1980s, Ghana, Uganda and Zambia were the countries where the process of decline had rewhed catastrophic proportion. In Ghana, from 1970 to 1983, real per capita income had decreased by 30 percent, real export earnings had dropped by 52 percent, and between 1975 and 1983, GDP had fallen by a fifth. During the same period, real wages had fallen by 86 percent, caloric intake had fallen by one third and infant mortality had risen as a result. In 1981, inflation was over 100 percent and foreign debt was 35 percent of GNP.

In Uganda, once among one of the most prosperous African countries, the process of economic decline coincided with the Amin years, which brought economic and political catastrophe to the country. During this period, GDP fell by 25 percent, the standards of health and education declined to abysmal 4 See Bevan et al., op. cit. chap. 3.

STho figures cited in this section are mostly from individual case studies and from Callaghy, op. cit.
4

**lvels,** lack of Imported spare parts and raw materials and forced nationalizations brought manufacturing production to a standstill. A short-lived economic recovery and political stability at the beginning of the 1980s was terminated with the outbreak of the civil war. The w;r lasted for three years and destroyed the remaining physical and human capital of Uganda that had escaped devastation during the Amin years.

In Zambia, the economic decline began in the mid-l970e when the price of coppe:, which accounted for more than 90 percent of foreign exchange earnings and 40 percent of GDP, began to collape. By the mid-1980s, the country was in a trrible shape. From 1974 to 1984, the per capita income fell by 44 percent, state revenuCs were cut by half and the average growth rate turned negative. By 1985, Imports were _75_ percent below their 1974 level, foreign debt was equal to _195_ percent of GNP and the schedui debt service was 70 percent oi export earning.

Three of the countries in our sample, Cote d'-oire, Mali and Senegal, by virtue of their membership in the French Franc Zone, knew less of the extreme macroeconomic instability that affected the three countries previously discussed. Nonetheless, with the external shocks of the 1970s, they too suffered the consequences of the contradictory and inefficient interventionist policies diccussed earlier. Despite many similarities, the three countries represent also importnt differences in terms of relative performance.

Cote d'Ivoire experienced a remarkable economic growth during the first two decades after independence. This growth spurt was largely driven by expanding exports of coffee and cocoa as well as by macroeconomic and exchange rate stability. Although, as in other SSA countries, agricultural prices were controlled by the government, they were considered to be adequate enough to induce expanding ;:oduction and exports. Also, although the nascent industrial sector was import substituting and protected, the protection was more or les uniform and less discriminatory among sectors than in other countries. Moreover, direct intervention in the industry by the government, such as creation of state enterprises, was more circumscribed in COte d'Ivoire than for example in Senegal. In fact, most of the proceeds from the taxation of agriculture in Cte d'Ivoire was invested in creating infrastructure and projects that were
sei for the finctioning of tho private sector. Thus, betwen 1960 _md_ 1980, the industrial sector gw on avrage 13 percent pe year. Abov all, the macroeconomic picture was stable so that despite **a** nonhaly fixed exchange rate, until the mid 1970s, the roal exchange rate did not appreciate.

In contras **t** o COte d'Ivoire, Senegal's economic performance was poor even by SSA standards. During the _first_ two decades after indepenence, GDP grow oi average 2.2 percent per y"ir whilo the populatongrow 2.9 percent. To a large extent, the differing economicperformances ofCOte d'1voire and _Snegal_ uring the Immediate post-independence ora is to be linked to differing economic policies. From the _dotsoo,_ L2dustrial promotion m Senegal was spearheaded by inefficient public enterprises that were heavily provcted from outside competition. Agriculture was also subjdct to sever' government ievution, especially In the form of output price controls and markedtng monopolies. Moreover, macroecomic imbalances began to take root in Senegal as early as 1966, wheh groundnut 6xports lost their preferential access to the French market<sup>6</sup> .

In Mali, Inappropriate and distortionary public sector resource mobilization and expenditure comblned with poor resource endowment and volatile climatic conditions created serious fmnancial imbalances in the early 1980s. In the first half of the 1980s, real GDP stagnated and per capita income declined at an average rate of 1.7 percent per year. In 1983, exports and import were 30 percent below their level !n 1980 _and_ the government's budget deficit exc.luding grants hit an all time high of 18 percent of GDP.

The macroeconom **i** c nstability began or accelerated in all three countries in the mid-197Cs when aU three fell uvictlm to a short-lived comnmodity boom: a four-fold- increase in the price of coffee, a ttiee-fold increas in the price of cocoa, and a substantial increase in the prices of cotton, groundnut and phosp tej. Viewing the windfall as permanent income, the governments dramatically boosted public7 6 See World Bank (1992), Executive Summary, p. ii.

7TI =unit vale of coo export fiber from Mah inreased from _CFAF_ 230,000 per ton in 1975 to CFAP 382,000 i1977. Accoding to UNCTAD and World Bank etima, Mali's TOT improd by approximaey 30 rwuat betwe 1975 and 1976 (See UNDP, 19S0, Table 1-6 and Table A-8). Tamu of tade of Salop and Cte dtivoir and eal silarly improvod thanks to incre_as in the intaeional price of cooa and coffee, the main
6 pzedihwo, mostiy in the form of investmet In highly controversal ad grWndiosm protects. In CMte I'Ivoir alone, investmet jumped from 15 pecent of GDP u 1975 to 44 porcent two years later. When the boom subaided, all three countries borrowed heavily on intetnational markets in order to sustain their planned expoditures. The increasing macroeconomic disoquilibria together with the inability to adjust the nominal xchoge raes led to a furthor prolifation of trade re-ictioas in order to cope with fallng exort oaingp. Thus, at the beginning of the 1981s, all three countries found themselves with usustainable budget deficfts, huge foreign debts and largely uncompedtive manuf. cturing sectors. On the top of everyting dso, they were saddled by a fixed exchange rate and rigid labor laws that severely iimited their restructuig flsxibility.

Despite the pursuit of Import-substituting and interventionist policla4, Kenya knew todecade of remarkable growth and stability after independence, mainly thanks to prudent mroeconomic policies. The scnario began to change in the second half of the 1970s when the govenment began to treat the widfll from the temporary, though huge, increase in coffee prices as permanent, hence groatly boosting Its expenditure. Thus Kenya, much like Senegal and CCte d'Ivoire, fell victim to a favorable external terms of trade shock. When macroeconomic instability settled in, not only did the inefficiency of past policies at the micro level come to the surface, but distortionary policies began to proliferate. For example, as export earnings and government revenues shrank with the deterioration of the terms of trade, rather than reducing public expenditure, the goverment borrowed heavily in the international markets and introduced a maze of import controls. Thus, at the beginning of the 1980s, when the first adjustment effort was launched, Kenya's government deficit stood at 10 percant of GDP, inflation was running b,h and foreign debt, which had been negligible a decade earlier, k reached almost SO percent of GDP. Nigeria is the only country amor.g the group of ten which had a considerable termi of trade improvement durin the 1970s and early 1980s. Yet, her oil fortumes did nas save her from the general Ivorian exports, **_san_** phosphate and grundnut, **_the_** principal exports of Seegd.
7 zmWso of what Cgby ddifn tde potolonid syndromie". Rather ha mitlgting or aliminsu **key** hact of the syndrome, as some had predicted, the oll bonanza only intensifid .t.'$ The astoundng Increose In **oil** revenues, which roe from $700 million in 1970 to $26 billion fifte ye ltr, ad dh stato control over the oil riche, contributed to a dramatic incres in the **size** of the **stat and** the proliferation of par.statals. The gov&nment, fragile ard torn in op?osing dirctdon by baona strIf, used the oil reource to asure its own survival by creating a masive systr -f ubidies **and** dpeaing boeft to variou socil groups. Under the circumstances, private invetwent wa chneled to Inefficient, Import-subsdtuting activities whose surviwil depoeded on the comple coontl regime over forelp exchange and imports instituted by :'e government whUlJ agriculture greatly contrcted.

This stat of af ltd au long u It did thanks to the oil revenue. The cnnch came hi the early 1980s when the oil glut forced a reduction in oil production and revenues. The initial response of th governm t **ws** to sustain Its expenditure by foreign borrowing. Hoivever, in the absence of rious reform and IMF/Bank backag, thl channel also dried out quickly. Thus, by 1985, when a new regime took office Wan serious consideration was given to structural reform, the Nigerian economy was in the nidst of a severe oCoomic crisis. Ihe GDP in 1985 was 1S percent lower than at the beging of the decade, per capita GDP and consumption were lower than during the early 1970s, govenment and private Investme were lou than half their level at the beginning of the 1980s, and foreign debt service mounted to 70-80 percent of export earnings.

Madagascar's modest growth in the decade following independence, 3percent per annum, came to a scrohlng halt in the mid-1970s when adverse externat circunstances fully exposed the consequences of yeas of ecommic mismanaement which encompassed widespread nationalizations, price controls, and industrialization behind protective barriers. As a result of an even tighter dirigist stance adopted in 1973, the economic decline accelerated and macroeconomic disequilibri **a** ggravated. The budget deficit C8laghy, op. cit., p. 303.
8 gw from 4 pecent of GDP in 1978 to 17 percent in 1982. Ihe external debt service soared to 70 perceat of export **arnirp** In 1980. Between 1973 and 1983, exports and imports declined at an average annual rato of 4.3 percent ad _2.5_ percent, respectively.

In Tanzania, the fill impact of the so-called Basic Industrialization Policy combined with collectivization and several year of neglect of agriculture and tru3sport infrastructure of the socialist regime came to the foreront In the second half of the 1970s when the exteraal terms of trade began to 81r' By the early 1980s, the vatly inefficient parastatal manufacturing sector was in deep recession declinig at an avere rate of _5_ percent during the first half of the 1989s. Agriculture was in no better shape. The exceedingly inefficient public marketing boards tha: purchased crops from farmers and had the monopoly over all aspects of marketing continued to absorb an ever increasing share of world prices to the point that many fanrers were abandoning the collective farms in favor of subsistence modes of production and/or smuggling. As a result, agriculture's rate of growth declined from over 5 percent in the late 1960s to 1.7 percent in the early 19W,0s, i.e far below the rate of population growth. Exports, prevalently composed of agricultural products, fell from 26 percent of GDP in the s.cond part of the 1960s to just over 6 percent in 1985. Imports had a similar precipitous decline falling from over 31 percent of the GDP in the early-1970s to 15 percent in 1985. The macroeconomic picture was even in greater disarray with the government oudget deficit reaching 16 percent of GDP in 1982.

To reobpitulate, all the ten countries analyzed in this study experienced a period of more or less extreme economic hardship and disequilibria that evenually forced them all to the negotiating table with the inteational donors headed by tL3 IMF and the World Bank. In none of the countries did trade policies tr around during a period of relative stability and prosperity simply out of a change in economic philosophy. 'Acceptance and implemnentation of IMF and World Bank-designed programs more ofen followed constraint than conviction and carried less enthusiasm than disenchantment."<sup>9</sup> Thus, the procs of adjustment that followed was painful. Ecowmic conditions had been allowed to get so much

> 9 Fontaine (1992), p. 1.
9 out of hand that the austerity measurei were by nece4sity quite severe and structAral adjustment was super-imposed upon macroconomic austerity. More importantly, the reopqired changes in economic policy appeared to be imposed from outside. Therefore, at least at the beginning, they became subject to barganin, foot draging, and half-hearted implementation rather than being mandatd and managed by domestic docision makers. Only a few countries succeeded in overcoming these initial obstacles and tuning their economic fate around.

# 2. Irde Policy and Other Reform Measures

In the countries under examination, the process of reform normally began with a heavy emphasis on stabilkation at the beginning of the adjustment process followed by exchange rate, trade and other accompanying reform measures. Exchange rate devaluation and reform of the foreign exchange allocation mechanism or6inarily represented the cornerstone of the adjustment effort. In terms of trade policy, the essonce of the reform program included the removal of quanttative restrictions; rationalization of the tariff structure which encompassed both a reduction in the average level and dispersion of tariff rates together with export promotion measures such as the removal of export taxes; foreign exchange retention schemes; an duty drawback or exemption for exporters. Finally, reform in other crucial areas of the economy were designed to enhance one or other fundamental objectives of adjustment or accelerate positive response to the reforms undertaken. For example, some of these measures were the liberalization of domestic markets, the abolition of state marketing monopolies and crop price increases. In general, tho fundamental aim of the trade and exchdnge rate reform was to decrease the bias against tradables, particularly against exportables.

Although the specific means and objectives of trade reform in the economies examined here did not differ from those in other adjusting countries that benefitted from World Bank support, the sequencing of the various meaures differed to some extent from one country to another. In the early recipients of SAL such as C0te d'Ivoire and Kenya, stabilization and trade liberalization were undertaken
10 smultaneousl . Moreover, trade liberalization itself was far reaching and onvisged the removal of QRs, tariff reform and devaluation except in the Franc Zone countries. It apper. exi t that the design of the early SALs was too ambitious. It erroneously assumed that the administrative capacity of the country could handlo the many complex SAL requirements. In addition, not enough attention was given to the removal of QIs, notably the import/foreign exchange licensing regime which in Kenya was not until very recny formally abolished. More fundamentally, in both countries, the incomplete stabilization foiled the liberalizatWon efft. Kenya tightened the restrictiveness of its import liceasing regime and COto d'Ivoire abandoned the export subsidy schome that was to compensate for the lack of the devaluation As the Bank gained more experience with structural adjustment, the design of the SALs improved. Stabilizadon was given greater weight and structural adjustment was targeted to specific sectors. Ihe social impact of adjustment was more carefully taken into consideration and instOtitional reform was given greatr weiht.

A critical examination of the best tdming and sequencing of trade and other reform measures goes beyond the scope of the present study. Indeed, to some extent it is also superfluous as the topic is widely debated in the literature.<sup>10</sup> However, some critical aspects of timing and sequencing for the countries under discussion will be examined in greater detail in Section 4.

# 3. IWMplemetati of Trade Polioy Reor

As part of a more comprehensive structural adjustment reform, the process of trade reform began in the majority of the countries examined here at least **_5-6_** years ago. Assisted by the IMP/World Bank, COto d'Ivoire, Kenya, Mali and Senegal began their first attempts at stabilization/structural adjustment In the late 1970/early 1980s. Ghana, Madagascar and Zambia are the next group of reformers. Teir Bank-assiod structural adjustment reform began around 1983-84. The remaining three countries, namely 10 See for example EEC (1992), Thomas and Nash (1990), and Michaeli, Papageorgiou and Choklsi (1991).
11 Nigeria, Tanzania and Uganda, are among the latest reormer. Thei fur atempt at serious and sustained reform began during 1986-87. Thus, all the sampled countries have had at least _5_ years of experience with structural adjustment and trade reform. In terms of resources, extenal assistance to these countries has bee sgnificant. Between 1980 and 1991, Bank structural adjustment loans/credits (SALs and SECALs) alone, that is not taking into account co-financing, IMF loans, debt rescheduling, and other bilateral assistance, has amounted to $ 6.4 billion (Table 2). As a share of GDP, in 1990 rt disbursement of external assistance from all sources to these countries ranged from a low 0.7 percent in Nigeria to high of 48.2 percnt in Tanzania. In per apita terms, this amounted to a low of $2 in Nigeria to a high of $100 in Senegal.<sup>11</sup> What has been the impact of this generous investment of resources? Have the countries in question implemented the required trade and other accompanying reforms and have these had a 3ignificantly positive impact on their economic performance? Several studies<sup>12</sup> have tried to answer these questions. In the majority of these studies, especially those undertaken within the Bank, extensive use has been made of the ALCID data base to track countries' implementation and a before/after or control group methodology isemployed to analyze the impact of reform on several indicators of economic performance. To avoid repetition of these efforts and to remain within the more modest objectives of this summary paper, a different methodology is employed. In this work, the ranking of countries in terms of implementation ismore subjective. Based on a much smaller sample of countries, the emphasis is placed on what prevented or encouraged implementation. Specifically, the objective in this study is to se whether the experience of the sampled countries offers new insights and general lessons that either confirm or contradic **t** he accepted knowledge about trade policy implementation and its impact. First a brief clarification is needed of the meaning of trade liberalization.

# 11 World Development Report, 1992, Table 20.

12See for example Nash and Thomas (1990), RALs 1, 2 and 3. For the most recent studies focusing ov SSA, **see** for example Nash (1993), EEC (1992), and Elbadawi et al. (1992).
12

# 3.1 Defnition of trade reform

In this paper, trade liberalization is broadly defined to encompass exchange rate, as well as import and export reform.<sup>13</sup> Broadly speaking, exchange rate reform implies both a decrease in the level of overvaluation of a currency, as for example measured by the parallel market premium, and a more automatic and transparent foreign exchange allocation mechanism, such as through Open General Licens!ng (OGL) or an auction. A full liberalization of foreign exchange implies the elimination of any rationing mechanism. In the case of the Franc Zone countries, although their currency is fully con-vertible, because their exchange rate is determined by the ups and downs of the French franc, overvaluation may co-exist with full convertibility. This could be corrected only indirectly through disinflation which properly speaking, is not an indicator of trade policy liberalization.

Export reform is defined as the set of measures that for any given level of import protection mitigate or eliminate the anti-export bias of the trade regime. Other than real currency depreciation, these include the elimination of explicit and implicit taxes on exports such as the abolition of producer prices that differ from border prices; the easing or removal of institutional restrictions to exporting such as export license requirement and marketing board monopolies; or the creation of a free trade situation for exporters such as duty drawbacks on imported inputs or export processing zones. Import reform is defined as the elimination of QRs, reduction in the average level and dispersion of tariffs, including the removal of most duty exemptions except for exporters. These measures reduce the effective rate of protection and generate greater neutrality. Let us now turn to the implementation reco,;d of the sampled countries.

# 3.2. The, dat

Among the countries examined here, the consensus opinion is that Ghana possesses the best implementation record and Zambia, at least until very recently, the worst implementation record. The remaining countries fall somewhere in between, as they have each implemented some measures but have 13 For details see Thomas and Nash (1991).
13 left othlen, at tim quite crucial ones, unimplemented. Clowe to **Ghana's** Implementaion<sup>record are</sup> Mali, Tanzania and Uganda, while Cote d'Ivoire and Kenya are<sup>probably closer to the other end of the</sup> spectrum. Madagascar, Nigeria and Senegal are somewhere in the<sup>middle. This classification of countries'</sup> implementation record is compatible with other recent findings. For example<sup>see the works of Narasimhan</sup> and Pritchett (henceforth N&P, 1993) and Nash (1993) both of which focus on<sup>SSA countries.</sup> N&P estimate the extent of trade liberalization in a number<sup>of SSA countries in the 1980s. The</sup> presence of multiple quantitative barriers to trade, such as import<sup>license requiremerts, foreign exchange</sup> rationing, domestic content laws, state import monopolies and so forth,<sup>make it exceedingly difficult to</sup> construct an ad valorem index of the restrictiveness of tI import<sup>regimes In these countries that is</sup> comparable across countries and over time. Given this fact, N&P<sup>measure the evolution of the</sup> restrictiveness of Import regimes by comparing the gap between<sup>their actual imports and their notional</sup> import demand. They call the gap, expressed as a percentage, the Implied<sup>Import Restrictiveness (IIR)</sup> index. Notional import demand for each country is computed on the<sup>basis of that country's level of</sup> income, real exchange rate and a set of preselected elasticities of<sup>import demand with respect to these</sup> variables. N&P's results are constrained in such a way as<sup>to equate actual and notional imports for the</sup> period 1970-79. bTherefore, all deviations of notional imports are measured not relative to 'free<sup>trade,'</sup> but relative to the level of restrictions in the 1970s.*<sup>14</sup> For the<sup>non-Franc Zone countries for which</sup> N&P compute the above-mentioned IIR index, namely Ghana, Kenya,<sup>Madagascar, Nigeria, Tanzania</sup> and Zambia, the results show that Ghana had Lhe most restrictive import<sup>regime at the beginning of the</sup> 1980s when the real exchange rate was highly overvalued. However,<sup>following the massive real</sup> depreciation of the cedi, Ghana's UR index diminishes to -6.5<sup>during 1986-90. Tanzania is another</sup> overvaluation episode country. The value of the UR index during 1980-86<sup>was 103.3 percent, the second</sup> highest after Ghana. With the very large devaluation of the shilling,<sup>the value of the index in Tanzania</sup> falls to zero in 1988, the last year for which data were available.<sup>In Zambia, the value of the index</sup> 141bid, p. II.
14 dImnis s1gulficantly duriW the reform period but followlng the suspnion of the reform progm in 1987, it rers amost to its level Juring the early 1980s. Similarly, the mt Ixdex for Kenya during the arly and late 1980s is roughly the same. This indicat that Kenya's import regime remained equally rstrctive In both periods. Finally, in Madagascar and Nigeria, both of which had a substuatial real derdation durinS the reform period, the value of the Index approaches zero In the last year of reform tbr which data wero available. This indicates that the resatctiveaiess of their import regimes diminished to the 1970s levd. For the Franc Zone countries, the N&P method is not witable while for othen the id Is not computed.

For a large nmUbe of countries, including those studied here, Nash (1993) computes two sts of indicators of trade reform. The first measures the chage in the level of protection of imports in the thre years after the initation of the structural adjustment program (the 'after' column in Table 3) or in the most recent yuers (the 'recent' column) relative to the three yeas before the program. The level of prtocton is estimated as the tariff equivalent of all restrictions on imports.15 In all of these countries protection against imports is highly escalated. That is, the highest level of protection is accorded to comumer goods produced by the domestic industry which is ordinarily intensive in the use of imported inputs. Therefore, the three measures of imports that are selected exclude non-competing imports, namely food, fuel, and inputs used in the domestic production of final goods. The results of this exercise are quite revealing and, except for Zambia, largely independeat of the definition of imports used. They show that the most dramatic decrease in the level of protection in the post-reform period has occur.ed in Ghana and tt import liberalization has intensified in the most recent years. In clear contrast to Ghana are Kenya and Zambia. In both these countries the level of protection increases for total imported consumer goods in the post reform period. For the other countries, the results point to a substantial degree of 15 or details see ibid, p. 31-32. It should be borne in mind that this overall measure of import restrictiveness includes the tariff equivalent of 'the marginal value of waiting time, bribery, or other costs incurred to purchase' the imported goods that are rationed by a non-price mechanism.
**1S**

liberlizadon In Tanzaia, Nigeria and Madagascar and only modest liberalization in the three Franc Zone

# counrias.

Theao roults are corroborated by a series of inairect indicators of import liberalization.<sup>Usually,</sup> the best test of an economic policy change Is its impact on real economic activity.<sup>Consequently, the</sup> extent to which trde liberalization has effetvely occurrod can be judged<sup>by its impact on import</sup> penetratloL Table 4 reports the extent of the change in import penetration during<sup>the three years after</sup> the adustment progm and during the most recent years in our saunple of countries.<sup>Ihe first two</sup> columns in the ume Table also show the change in the real effectiv **e** xchai<sup>rate (REER) and the black</sup> market premium on the exchange rate. Although the first variable is a policy variable<sup>in the short run,</sup> in thke mium trm, "the sustainabl **e** quilibrium level of the REER is determined, among other things, by trade policy; _ceteris parLbus,_ the more open the regime, the more depreciated<sup>the equilibrium</sup> REEl u16 h reauts in Table 4 once again show thonet contrast between Ghana<sup>on the one hand and</sup> Kenya and Zambia on the other. The real exchange rate depreciates the most in the post reform<sup>era in</sup> Ghana, Nigeria, Tanzania and Madagascar, in that order, and black market premia<sup>decrease sharply in</sup> all four countries as well as in Uganda. Similarly, in all these countries import<sup>penetration shows a</sup> positive and substandal increase in the post reform period. Although the real<sup>exchange rate depreciates</sup> in Kenya and Zambia, the black market premium rises in the post-reform period, thus indicating<sup>that the</sup> real depreciation was not clearly sufficient to suppress excess demand. Moreover,<sup>almost by any measure,</sup> import penetration in Zambia decreases. In Kenya, however, although total imports<sup>as tshare of GDP</sup> fall, the share of various **types** of consumer imports in total imports increasa. This<sup>indicates that the</sup> second episode of import liberalization, before it began to be partially reversed again<sup>in 1992, did have</sup> an impact on the level of competin imports. In the Franc Zone countries, real depreciation<sup>is modest</sup> 161bid, p. 27.
16 in the post-reform period. Except foi some measure of consumer goods imports in Senegal, import penetration decrase at an accelerating pace.

In sum, the recent studies previously discussed support the classification of Ghana as the best and Kenya and Zambia, at least until very recently, as the worst reformer. among the countries examined. What follows Ii a brief summary of the experience of each country with trade and foreign exchange reform.

# 3.3 Ine h **iemce**

In Ghana, although the process of exchange rate and trade reform was a lengthy one, it has been sustained against many odds and has prQduced positive results. The most radical and important reform masure in Ghana was that of the foreign exchange regime. As a result of the measures adopted, by 1992, Ghanaian cedi was transformed from one of the most overvalued currencies in the world in the early 1980s, into a currency with almost completely market determined value. Although foreign exchange transactions on the capital account remain subject to restrictions, the exchange rate is determined by market forces and its allocation is no longer controlled by the government. Similariy, import and export regimes have been considerably rationalized and liberalized. In gradual steps, the government of Ghana rationalized the tariff structure, abolished quantitative restrictions, and radically restructured the Institutions in charge of implementing policy reform. At the same time, bureaucratic impediments to exporting were reduced or eliminated. Although weak administrative capacity continues to hamper the effectiveness of certain export promoting measures, the government took several steps towards reducing the anti-export bias of its import regime. Ihus, exporters became eligible for duty drawback, limited retenion of foreign exchange earnings, and partial corporate income tax refund. Moreover, new institutions were created or the existing ones were strengthened to assist exporters with obtaining vital information and financing. Finally, the government adopted a series of supportive measures, such as increasing cocoa p. A4ucer prices, reforming the cocoa marketing board, and de facto decontrolling
17 domestic consumer and producer prices of most goodsIn conjunction<sup>with sound macroeconomic policies,</sup> all of thes steps uttedy transformed the economic fate of Ghana.

In contrast to Ghana, structural adjustment in Zambia<sup>hardly began and whatever was</sup> implemented was reversed at a later stage. As a result, Zambia's trade<sup>regime at the end of the process</sup> was probably more distorted than before the reform process began.<sup>The reform process in Zambia began</sup> in 1983 with foreign exchange and macroeconomic measures under<sup>the IMF auspices. Ime foreign</sup> exchange reform was to achieve a real devaluation of the currency<sup>and replace the cumbersome and</sup> exceedingly inefficient allocative mechanism with an auction system.<sup>However, from the outset, the</sup> auction was organized and run poorly. It enjoyed little credibility and was ultimately<sup>abandoned in May</sup> 1987. lhe demise of the auction was brought about by thQ unravelling<sup>of the macroeconomic reform</sup> proposal soon after the termination of the Fund Program in 1984.<sup>In the two years that followed, the</sup> budget deficit rose to 14 percent and then 28 percent cf GDP and<sup>inflation rose steadily to over 100</sup> percet in 1990. In parallel with the introduction of the auction, the Zambian<sup>government undertook a</sup> series of trade and other reforms, such as the rationalization of the<sup>tariff structure, the simplification of</sup> licensing and duty drawback procedures for exporters, the decontrol of seve.ral<sup>domestic consumer and</sup> producer prices, and a gradual phasing out of subsidies. Although the majority<sup>of these refoims were</sup> implemented as planned, some crucial measures were never undertaken.<sup>These included the decontrol of</sup> the price of maize, by far the most important crop of the country, and<sup>the demonopolization of the market</sup> for maize. Pursuant to riots that erupted in the wake of the mishandling<sup>of maizt price decontrol and</sup> marketing in May 1987, the reform program was officially terminated. Not on.ly was the<sup>auction</sup> abolished, but price controls were reimposed, the foreign exchange and<sup>import licensing mechanism was</sup> resurrected, the maize subsidy reduction was reversed, and private mills were<sup>nationalized. In 1992, the</sup> process of reform was resumed in Zambia, but it is too early to pronounce<sup>anv judgement either on its</sup> eventual sustainabiity or its impact on the Zambian economy.
18 Kenya's experience with structural adjustment resembles that of Zambia. It is characterized by backtracking twice on some essential features of trade reform in the course of a decade. In Kenya, a first attempt at import liberalization and export promotion at the beginning of the 1980s was interrupted by a crisis in the balance of payments. ITe balanceof-payments crisis was precipitated by the government's failure to reduce its fiscal deficit and adverse external circumstances, notably the second oil shock and drougt. In response to these developments, the Kenyan government enhanced the restrictivenes of the import licensing system and suspended She payment of export compensation. Export compensation, a simplified form of duty drawback, was the only mechanism in Kenya at the time to mitigate the antiexport bias of the Kenyan restrictive trade regime. Although during this period the nominal exchange rate was several times devalued, the real exchange rate did not depreciate and foreign exchange remained rationed.

A second attempt at trade liberalization was launched during the second half of the 1980s. This consisted of a more systematic devaluation of the real exchange rate, the easing of non-tariff barriers on Imports, rationalization and reduction of import duties, and direct promotion of exports through the creadon of manufacturing under bond and export processing zones. Although import liberalization during this period proceeded with greater vigor than in the early 1980s, quantitative restrictions on imports in the form of licensing requirements were never totally removed. Thus, as the macroeconomic picture began once again to deteriorate in the early 1990s, the restrictiveness of the licensing system was tightened and some of the earlier achievements were reversed. When, as a result of these developments, in December 1991 the international donor community withheld new financial assistance to Kenya, the government undertook some timid steps towards the liberalization of the foreign exchange regime. Thus, a limited foreign exchange retention scheme for non-traditional exporters and a foreign exchange bearer certificate were introduced allowing the holders access to foreign exchange at the official exchange rate. However, as the official exchange rate was not sufficiently devalued, the certificates traded at a substantial premium over the official rate. Moreover, the holders of these certificatas still required all
19 othe Import licenses. In the faco of continued macroeconom **i** c nstability and foreip exchange shortges, the government eventually susponded the retention scheme **a** well.

It was not until very rocently, namely in May 1993, that the Kenyan government finally abolished the import licensing requirement and reintroduced a flat 50 percent retention scheme for all exporters. Although the latest reforms clearly are a radical step toward the liberalization of trade and foreign exchango markets in Kenya, their f'ature sustalnability hinges, as in the past, on the ability and willingness of the government to maintain fiscal and monetary discipline and thus assure the continued flow of foreign aid.

In Uganda, the process of trade liberalization began in 1987. After an unimpressive and slow start, the process gained a more promising momentum that has so far proceeded without interruption. In Uganda, the most significant achievesnent of structural reform has been the attainment of a realistic exchange rate and the de facto elimination of the black market premium on foreign exchange. With gradual but sustained steps, the foreign exchange regime in Uganda was radically transformed from a system of arbitrary and administrative rationing to an auction system. Furthermore, the legalization of private foreign exchange bureaus and their access to the auction has limited the premium on the nonofficial market to a narrow margin of 6-8 percent. Concomitantly with foreign exchange reform, the Ugandan government eliminated non-tariff barriers to importing and rationalized the structure of custom duties. Despite these reforms, however, effective protection remains still quite dispersed. This is due to the widespread use of duty exemptions to local manufacturers and public enterprises as well as the use of import bans for certain goods. On the export front, the government elimninated all export taxes, including taxes on coffee, simplified bureaucratic procedures for exporting, and established a dutydrawback system for exporters. Despite these very significant steps, the liberalization process in Uganda remains fragile because of the very weak revenue mobilization capacity of the government and its difficulty in containing public expenditures. Total government revenues in Uganda still do not account for more than 7 percent of GDP, half of which are raised from import taxes. Government expenditure,
20 although not high by the regional standard, is far in excess ow its revenues. This results in periodic exploslons of the budget deficit even after aid receipts are factored in. The solution to these problems could only be achieved with a radical reform of the entire public administration and civil service in the medium- to long-run.

After several episodes of political upheaval, Nigeria's serious reform began in 1986-87. Out of political considerations, Nigeria's trade reform was mostly unprompted by external donors since except for the World Bank and debt rescheduling, no new loans were contracted either with the IMF or other international dowrs. The hallmark of Nigeria's reform was the up-front elimination of quantitative import restrictions including the liberalization of the foreign exchange regime through the establishment of a foreign exchange auction. The auction was designed to liberalize the current account transactions and replaced the administrative allocation of an officially overvalued exchange rate with an automatic and transparent mechanism. However, the government continued to exercise considerable control over the auction's functioning. Although the establishment of the auction brought about a substantial real depreciation of the Nigerian currency, it never succeeded in totally eliminating the parallel market premium. The fundamental explanation for the persistence of the gap between the auction and the parallel market rates hinges on the failure of the government to restore a comprehensive and credible macroeconomic equilibrium. In fact, the budget deficit has remained large throughout the reform period, equal on average to 6-7 percent of GDP while inflation has fluctuated between 7 and 100 percent. Failed stabilization tokather with political opposition to devaluation, finally brought about the reversal of the foreigl exchange regime liberalization in Nigeriz. In late-1992, in an attempt to eliminate the parallel market premium while holding the official exchange rate stable, the government almost completely exhausted Nigeria's foregn exchange reserves in the span of a few months. Consequently, the weekly auctions were suspended for several weeks in February-March 1993. After reopening the auction, the government revalued the naira and began rationing foreign exchange through the financial sector. Thus, of the auction, only the name was left.
21 Similarly, Nigeria displayed a mixed commitment<sup>to import liberalization. Although most of the</sup> qualitative restrictiozs including acess to foreign<sup>exchange were removed early on, the structure of tariffs</sup> remained highly escalated and individual<sup>tariff rates were adjusted frequently in response to complaints</sup> by domestic producer. The frequest changes<sup>raised the average level of protection and undermined</sup> confidence. Moreover, some quantitative<sup>restritions were never removed or new ones introduced, such</sup> as domestic content laws for several industries.<sup>Nigeria's commitment was strong from the outset to</sup> export promotion and diversification away<sup>from paroleum. Most export taxes, prohibitions and licensing</sup> requirements were removed early on in the<sup>process of reform. Exporters became eligible for generous</sup> tar holidays, accelerated depreciation, duty rebates<sup>on inported inputs, and other promotional treatment.</sup> Although agricultural prices were increased and many<sup>inefficier agricultural marketing boards eliminated,</sup> the agricultural sector did not benefit from the<sup>same degree -,' im,port and export liberalization. This</sup> resulted in feeble response from agricultural exports.<sup>In othe.- .elated areas, widespread ex-faccory price</sup> controls were abolished and the subsidy on domestic<sup>petroleum consumnton was reduced. On the whole,</sup> industrial production responded favorably to these reforms.<sup>However, given the ve.y inefficient state of</sup> the industry at the beginning of the reform process<sup>and the srwall share of manufacturing in domestic</sup> production and exports, manufacturing exports still account<sup>for less 1 percent of total Nigerian exports.</sup> In short, Nigeria's government did take important<sup>steps towards the creation if a less distorted and</sup> dirigist economy but its persistent failure to restor<sup>fiscal and monetary stability finally brought about the</sup> reversal of the most important aspect of Nigeria's<sup>trade liberalization process, namely the liberalization</sup> of her fore4in exchange regime.

After several years of hesitation and following change<sup>at the political levei, Tanzania began to</sup> undertake serious trade and foreign exchange liberalization<sup>measures in 1986. The hallmark of Tanzanian</sup> trade reform was the eliaination of the huge<sup>overvaluation of the shilling. The shilling was devalued a</sup> cumulative 1871 percent between the start of<sup>the reform program in 1986 and February 1993. Similarly,</sup> through a series of successime measures, the government<sup>significantly improved the allocation of foreign</sup>
22 echaoe. Those Included the establishment of an Open General Licensing mechanism in 1988, the Introduction of a now export oanings retention mechanism, the abolition of many restrictions on foreign exchange holding and the legalization of the foreign exchage bureaus in 1992. With the increasing Importance of the inter-bank market, the Tanzanian government inends to relinquish its control over the exchange rate, thus unifyi the various rates now existing in the market.

The Tanzanian govanment also abolished most quantitative restrictions and greay simplified the tariff regime. In gradual steps, it lowered the maximum tariff rate from 500 percent prior to reform to 60 perce and the nber of tariff rat were reduced from 20 to 4. Simultaneously, the government **adote** a sories of sctoral reforns in agriculture and industry. In Uriculture, the government increased producer prices of food crops and opened their marketing to the private sctor early on in the reform proces. T3he result wu an impressive 500 percent increase in the production of non-traditional export crops. The govenment alsQ incroased the domestic producer prices of traditional export crops but the price increases fell short of devaluation and domestic inflation such that the producers share of world prices fell to an all time low of approximately 10 percent in 1991/92. Moreover, institutional reform for these crops did not occur until very rcently. These facton together with the dilapidated state of transport nfrastructare impeded a meaningfu export response frorm traditional crops. In Industry, the government took significant mneures to incroase the participation of the private sector and reduce statewned enterprises monopoly. The government also lifted the majority of price controls on industrial products. hese measures reversed the decline of the lndustrial sector and stabilized the share of manufacturing in GDP at around _7.5_ percent. Betwoee 1988 and 1990, the muhcturng output grew by an average of 5 percent per anum, the rate of capacity utilization doubled and manufacturing exports as a share of mamfacturin output tripled.

Among the three Franc Zone countries, COte d'Ivoire, Mali and Senegal, Mali is probably the most advancef, terms of exchange rate and trade reform. A first attempt at macroeconomic stabilization and structural ad3ustment in Mali was launched in 1982. It was supported bv IMP resources and IDA-
23 _ianed tecbniclmi stance. The subsntial progress in reducing<sup>financial imbalanco</sup><sup>**s**lowed in19C5</sup> **and** a your late the Malian economy entered a new crisis<sup>situation. A renewed effort at strucural</sup> adjustment wa lanched in 1988. In spite of political<sup>changes the process has continued uninterr</sup> to thi day. During thib second phase of reform, Important<sup>measures have been implemented. 'Thsm</sup> lnclude the liberalization of cereal marketing; the removal<sup>of price controls, including the price of all</sup> coars grains; the realignment of producer prices for cotton<sup>to world market prices; the abolition of all</sup> export taxes, export monopolies and most import monopolies;<sup>the elimination of non-tariff barriers on</sup> import and the rationalization of the tariff structure; liquidation, restructuring or privatization<sup>of public</sup> entpris; and reduction in the size of the civil service. During this<sup>phase, the principal achievemen</sup> of Mali have bee the restoration of macroeconomic equilibrium<sup>and cost containment. These have</sup> brought about A redl depreciation of the exchange rate. For example,<sup>minimum wage and civil servants'</sup> slaries were **frozen durin** this period, although, to begin with,<sup>Mali was not a high wage country and</sup> labor regulations were far less wldespread and binding<sup>than in other Franc Zone countries17.As a</sup> reult of thae successful deflationary policies, between<sup>1980 and 1989, Mali's real exchange rate</sup> depreciated by 22 percent, compared to a real appreciation<sup>of almost 25 percent in C6te d'Ivoire and</sup> Senegal.8 Moreover, Mali's deflationary policies did<sup>not come at the expense of growth as real GDP</sup> grow at an average annual rgte of 5.6 percent in the second<sup>half of the 1980s.</sup> In contrast to Mali, Cote d'Ivoire fundamentally failed<sup>to pursue macroeconomic</sup> policies that were compatible with a fixed nominal exchange rate and<sup>a falling external terrs of trade. The</sup> deterioration In the extenal terms of trade required a real depreciation<sup>to stimulate the tradable sector.</sup> Given the fixed nominal exchange rate, this could only<sup>result from domestic disinflation.</sup><sup>**The**Ivorian</sup> goverment not only failed to control its fiscal deficit and the<sup>rate of domestic inflation, but its attempt</sup> at reducing high labor cost and reforming the very costly<sup>employment regulation also failed as a result</sup> 17 **e** or xample, minimum wage in Mali is only about one third of that<sup>in C6te d'Ivoire and Senegal.</sup> See Devarn at al. (1988).

1"See Afic Develoment Indicators, 1992.
24 of politcal considerations. An alternative scheme consisting of a generalized subsidy to exports and an equal **tax** on imports, the so-called 'mock devaluation", also collapsed after a short trial under the burden of administrative difficulties, insufficient budget, and a lack of conviction by the government. In the meantime, after twelve years of adjustment effort and an investment of $1380 million by the World Bank in structural adjustment lending alone, COte d'Ivoire's process of economic decline does not show many sip of reversal and her trade regime reains as distorted as ever.

Senegal's experience with reform is probably intermediate between Mali's and Cdte d'Ivoire's. Several positive results have been obtained, especially in the area of financial sector reform and the revival of agriculture, but many wealnesses persist that may jeopardize the sustainability of the achievmens to date. Launched at the beginning of the 1980s, a first attempt at stabilization and structural reform in Senegal failed and the IMF/Bank assistance was suspended. The second round of stabilization/structural reform, began in 1984, has proceeded so far with mixed results. In the area of stabilization, through a severe demand compression, Senegal's government succeeded in greatly improving its fiscal deficit in the second half of the 1980s. The government budget actually reported a small surplus in 1991. Similarly, the rate of inflation fell steadily during the second half of the 1980s. However, fiscal discipline in Senegal appears to be fragile and unsustainable in the long run. Moreover, it has thus far been insufficient to bring about a real depreciation. In fact, the improvement in the fiscal balance has occured mostly as a result of severe cuts in government expenditure in priority areas such ac health, education and maintenance. Improved fiscal balance has not resulted from a comprehensive reform of the tax system that would have structurally and permanently improved the revenues or as a result of a comprehensive civil service reform that would have structurally and permanently reduced the government's wage bill. The tight fiscal and monetary policies and the substantial increase in the real interest rate have compressed private investment thus jeopardizing future growth. More fundamentally, the tight fiscal and monetary policies have failed to bring about a real depreciation of the exchange rate. In fact, the real effective exchange rate in Senegal in 1990 was still 25 percent higher than in 1985, and
25 23 percent hiher than in 1980. Moreover, very<sup>much like COte d'Ivoire, Senegal's nominal wages are</sup> high and labor employment subject to very<sup>burdensome regulations. So far attempts at reducing either</sup> the labor cost or the cost of utilities, also among<sup>the highest in the region, have not been successful.</sup> Thus, Senegalese firms' competitiveness has<sup>not improved. As a result, not only has export response been</sup> far less then anticipated, but the process of import<sup>libeAlization has advanced one step forwards and two</sup> steps back-wards.

One other country, Madagascar, showed a satisfactory<sup>implementation record until 1991, when</sup> social unrest forced the suspension of the adjustment<sup>process. After concentrating on stabilization during</sup> the first half of the 1980s, Madagascar began a<sup>far-reaching program of trade and foreign exchange</sup> reform. Between 1982 and 1989, the exchange rate<sup>was devalued by 40 percent in real terms and an</sup> automatic allocation system replaced the admiristrative<sup>allocation mechanism of the past. The tariff</sup> structure was rationalized and export restrictions<sup>were substantially reduced. In parallel, most agricultural</sup> monopolies were eliminated and export taxes abolished.<sup>However, the economic recovery in the country</sup> remained fragile. The surge in imports and the<sup>stagnation of traditional exports led to a balance-of-</sup> payments crisis. Social unrest and generalized<sup>strikes in the public sector resulted in huge losses in</sup> government revenues. These developments led the<sup>government to suspend the OGL system in 1991.</sup> To summarize, only a few of the ten countries considered<sup>here, notably Ghana, Mali, Tanzania</sup> and Uganda, have implemented policies which have<sup>resulted in any measurable and sustained progress</sup> towards foreign exchange and trade liberalization.<sup>In all the other countries the process of adjustment has</sup> been Interrupted by either a crisis situation in the<sup>balance of payments and/or by social unrest. However,</sup> it should be noted that even in countries where<sup>trade liberalization has progressed considerably and</sup> uninterruptedly, their trade regimes remain far less<sup>liberal than reforming countries in other parts of the</sup> world, such as Chile, Korea, or more recently<sup>Mexico and a number other Latin American countries.</sup> There are several complex reasons for this relatively<sup>modest achievement in terms of liberalization which</sup> are more fully discussed in individual case studies.<sup>However, in a way, the fundamental question is not</sup>
26 why the SSA countries have moved more slowly and achieved less trade liberalization than others but how could it be gueed that whatever progre hus thus f been achieved shall not be reversed in the future.

# 4. The Causes of Dira l i of Tade Refom

What explains the differential ability and/or willingness of the countries to begin and carry forward trade reform? Conceptually, two sets of arguments explain the capacity of a country to initiate and carry tdough a lasting trade reform. One set relates to the political economy of reform and the other to purely economic conditions.

# 4.1 The plitical econoMy of rEo

Considering set one, the political economy arguments, Callaghy (op. cit.) contends that the varied ability of African governments to engage in sustained economic adjustment, including trade reform, is determined by their ability to insulate themselves from the politica **l** ogic that permeated the economic policies of the post-colonial era. The ability to insulae is itself affected by several factors. These include: (a) how the economic crisis is perceived by the political decision maker(s); (b) the d!tgree to which decision makin is influenced by the technocrats; (c) the degree of government autonomy from powerful political forces; (d) the capacity of the state apparatus and the overall level of economic development; and (e) the nature and extent of external influence, support and resource flows, including the market forces of the world economy. 19 According _to_ this argument, the "deeper the socioeconomic 'trough' and the more serious, deeply rooted, and traumatic it is perceived to be, the more likely the rulers will commi **t** o systematic efforts at economic adjustment. 020 Moreover, the more serious the economic crisis is perceived to be, the 19Ibid, pp. 262-66.

201bid, p. 263. Ihis view is also compatible with Rodrik's (1992) notion of political cost-benefit ratio of reform. According to the latter, reform is only undertaken when its political benefits exceed its politic costs and reform's benefits grow with the depth of the economi **c** risis. See also Connolly and de Melo (forthcoming) for an application of this notion to Uruguay.
27 mo the **rlrs are** willing to rely on the advice and the economic logic of the technocratic staff and to insulate themselves from political logic.

Iho degree of autonomy from powerfiu sociopolitical pressure groups is itself influenced by several fators, including sociopolitical 'shredding', i.e. the extent to which the clout and the degree of cohesivens of various sociopolitical groups have been weakened by frequent regime changes<sup>2</sup> l. According to this argument, new centralized military regimes appear to have more autonomy than older athoritarian or democratic regimes. Insulation and autonomy are also fortified by support from the groups that bonefit from reform. A major dilemma in SSA is precisely the difficulty encountered in forming such pro-reform coalitions. Ihe principal beneficiaries of reform, the rural population and foreign busiemen, are either difficult to organize in viable political coalitions or touch political Some of these argumens seem to conform to the experience of the countries examined here. For example, in the cue of the three countries whose economic situation at the beginning of the adjustment process was the worst, namely Ghana, Uganda and Zambia, and who benefitted more or less equally from extrnal development assistance23, economic reform was started and sustained in Ghana and Uganda. Both countries had experienced a great deal of sociopolitical shredding that insulated their regimes from domestic prt.isure groups and greaty enhanced their autoDomy and legitimacy. In contrast, in Zambia, where a singl-party regime had ruled since independence, despite 'a serious economic trough and evaporating copper deposits, the regime perceived the crisis to be temporary, cyclical, and caused almost 21 This view appears to contrast with Elbadawi's (1991) view that political instability is a major Impedimnt to reform. **'he** two views are, however, not truly contrasting, for while it is true that political instability and frequent regime changes preempts any serious commitment to reform during the time it is occrring, it also may increase the insulation of the regime that finally emerges victorious and remains in power, such as in the case of Ghana, Nigeria and Uganda.

22 On this point see also Bienen, op. cit.

23 Official net development assistance from all sources to the three countries in 1989 was respectively equal to 10.3, 8.4 _and_ 8.3 percent of their GNP. See WDR, 1991.
28 excadusively by **extenal** factors. 24 Moreover, again In contrast with the other two countries, the technocratic staff in Zambia not only did not enjoy any degree of autonomy, but the very officials who had opposed the reforms the most and had a great deal of antipathy for the proponents of the reforms (i.e IO/Bank), were put in charge of their implementation. All of this greatly undermined the credibility of reform, preempted any positive xesponse, and in the end, resulted in its demise. Similarly, in Kenya, where **little** political shredding had occurred and where the prospect of elections and transition to a multiparty democracy were impending, the process of reform was twice initiated and reversed, thereby undermining credibility and preempting response by the private sector. In Nigeria, despite the strong Initial legitimacy of the Babangida regime and its commitment to reform, the prospect of retmning to democracy by 1992, lessened the insulation of the regime. In addition, there was little commitment and understanding by the general population of the necessity of reform, 'especially given the perpetual hope of higher **oil** prices.'25 Finally, in Tanzania, serious economic reform became possible only with the resignation of Nyerere in 1986 from the presidency who personified for two decades the socialist ideals In Africa.

# 4.2 The economics of trade refon

Considering the second set of purely economic conditions for the implementation of a sustainable trade reform, although the circumstances of each country are quite unique, several generalizations are still possible.

First, as emphasized in the case studies, because import restrictions are often dictated by balance of paymeat crises which themselves are correlated with inconsistent macroeconomic policies,2<sup>6</sup> lasting trade reform is not possible unless macroeconomic discipline is restored. The experiences of Kenya, Nigeria and Zambia are an excellent illustration of how macroeconomic disequiibria prevented 24Ibid, p. 268.

25Ibid, p. 270.

21On consistent macroeconomic policies see, among others, Moussa (1987) and UNDP-World Bank (forthcoming).
29 meanhgM fordg exChange and trde lealization siullor load to their reversl each time the budgt and the balance of paymen get out of control.<sup>27</sup> A truly taable macroonomic stability, however, requires not a simple suppresion of exediure which In SSA tends to fal on priority development ad rehabilitation/maintenancar **e** a. Rather, t entails a permant and st nctural chang in the level of government revenues as well s in the level of govennt ependiures mad in the composidon of both the sources of revenues and the reas of eedire. Thoory and prienc suggest, for instance, that fisl adjustment uhat fal disproportionately on capital ependiture may lead to a reducdon of private investment,28 or to real exch rat pprociation that countrs atoempts at export promotion.29 The ten cas sudies demonstra that very few cou.o!s have achieved any appreciable progress towards the realization of these goS^.30 Second, the cas studies show tdat a realistic level of exchange rate and a ransparent and auomatc mechanism of foreip exchange allocation remain indispensable for a sustainable and meaningful outward-oriened trade reform. In fact, in the presenc of a totally misaligned exchange rate, when foreip exchange availability Ii the most binding barrier to importing, changes in other impediments to imports convey little or no information as to the true degree of protection and anti-export bias of an eonomy. As for any other carce good, the level and allocation mechanism are of course closay related problem. That is, some rationing mechanism becomes necesary only when the price is not allowed **to** clear the market. However, for any level of exchange rate that is not market clearing, the allocation mechnism plays an Important role either in foiling or assistn import liberalization/export promotion.

27Moreover, although balanc..of-payments consideraions may logically dictate restricing aUl imports uniformly, sy through a uniform surcharge, the presure by various interest groups and social couldeatons, such as not taxing certain food or medicinal imports, inevitably generate many exemptions that ocalteho the structure of protectdon.

28See for example Faini and de Melo (1991).

29Seo Matin (1992b).

30See Secdon _5_ for ils.
30 For ample, for any given level of exhnge rate, an allocadon mecanism that gives prefaerdal acces tW foreip achano to export, e.g. by allowing exporters to rean their export earnings, la not the ume **a** one that gives privileged access to government agencies and loss-making public enterprises. This explains why at the very beginning of the process of trade liberalization, patiuar emphasis was placed in reorming the forin exchange allocation mechanism in parallel with efforts at obtaining a more realstc xuago rat<sup>31</sup> The third condition for the success of trade policy reform is related to its proper timing and supecin in relation to other reform measures. Timing and sequencing of trade reform in relation to macroeconomic stabilization has been widely debated in the literature. However, macroeconomic Instability is only one, albeit an important constraint on trade reform. The experience of the sampled countries sgest that a meningful procuss of import liberalization/export promotion that generates economic frswtd, itself the best guanee of its sustinabity, is not possible unles, in parallel, constraints are removed to the domestic response. Naturally, depending on the cirmstances of each country, the constraints on response are different. For the countries in the region, the most common constrain are price controls, whether of inputs or outputs; marketing controls; lack of proper infrastructure; and burdensome investment codes. In the short run, some of these constraints are hard to remove. However, the experience of the countries considered here suggests that unless such constraints are removed, trade liberalization is very likely to be reversed or remain ineffective. The cases of Senegal (reform reversal) and Tanzania (missed export response) are particularly illuminating.

Fourth, weak administrative capacity, especially of the tax authority, including the customs administration, represents an important constraint on proper implementation of trade reform even when commitment to reorm is tong. For example, in Uganda, the replacement of import bans on several products with high tariffs was reversed following the complaint by domestic producers that weak customs adminiration could not stem the flow of smuggling. Similarly, the removal of minimum import values 3IFor a dotailed account of the experience of SSA countries with foreign exchange market reform soe La Ferrara, Castillo and Nash (1993).
31 (valeurs mercuriala) in Senegal wu reversed as ineffective customs valuadon led to flarant underinvoicing and the loss of revonues. Clearly, strnthg public administration is a complex and timeconsuming process that ofte clashes with the requirement of austerity and budget cuts. However, early ateton to the problem is indipensable if trade reform is to last and produce the desired results.

Fifth, consensus building among private and public agents on the ways and means of reform is essential, even though it may slow the reform process. Civil servants, ospeclally those in the higher echelon, re those whose lives are most affocted by the proposed reforms. They are also the very sme people in charge of the successful implementation of reform. Unlcu they do understand and agree with the objdctivas of reform, effectivo implementation becoma an impossible task. For example, in Ghana, the government spent a good deal of time in building consensus on the necessity of import liberalization, price deregulation and other reform measures. In contrast, in C(te d'Ivoire, the process of consensus building wu gready hampered by continuous Institutional changes and reshuffling of officials in charge of reform implementation. Tnese changes resulted in new official charged with the implementation of policies in whose formulation they had never participated. This undermined continuity and consensus building. In Zambia, trade reform aborted when the government that was never very convinced of the necessity of reform appointed some of the most vocal opponents of reform to implement it.

Sixth, in the context of countries where vast portions of the population live at or below subsistence and where the process of reform began after years of falling standards of living, the risk of policy reversal is very high if insufficient attention is paid to the social impact of reform and to finding ways to lessen its short-run negative impact on the most vulnerable segments of the society. The 1987 riots in Zambia that led to the formal suspension of the reform program and political turmoil in Madagascar in the mid-1991 that derailed the adjustment process are but two examples of neglecting the social costs of adjustment.

In sum, a multiplicity of external and intenal circumstanca combine together to explain the success or failure of trade reform in different countries. Political and external sbocks aside, the case
32 sttui undelirAn tho centrality of compttib'e macroeconomic policies, inuding a realistic exchange raze, coensUS building, administrative reform and early attention to the social impact of reform.

Despite many structural limitations and constraints, there now exists growing evidence that even in SSA, trade liberalization and greater openness have had a _significant_ and positive impact on growth and other indicators of performance.<sup>32</sup> This conclusion is reached both by' comparing the performance of the adjusting countries for the period before and after the adjustment process as well as by comparing 'on-adjusting countries with adjusting countries. The cae studies included-here confirm this general concluson- They suggest that even in countries with the worst implementation record some positive results have been obtained.

However, it is essential to go beyond,the usual analysis of the impact of reform in order to .plore further the nature-of the response to policy changes and the likelihood of their future sustalnability. Although conviction and commitment to reform on the part of policy makers always remains a fundamental condition for the continuation of trade reform, positive response to teform and structural changes in other areas of the economy that sustain the positive response are equally essential in order to enhance commitment and preempt trade reform reversal. Therefore, the analysis here is focused on some indicators of structural change and response that guarantees the sustainability and deepening of trade liberalization. Three fundamental indicators are discussed below. Although they are by no means exhaustive, they are deemed the most essential. These include: a. The level and composition of public expenditure and public revenues and the evolution of the government budget deficit.

b. The share of private and public fixed capital fornation in GDP and the sectoral composition of the investment.

> 3 2 Among the most recent literature see Matin (1992a) and EEC (1992).
33 c. The export response, especially the evolution of the share of non-traditional exports in total exports,

# S. 1 The stucture of government expenditures/revenues

The importance of the level and composition of government revenues and government expenditure as a condition for trade reform sustainability was discussed earlier. In this section the experience of individual countries with fiscal reform is examined.

Data in Tables _5-7_ show the level and composition of government expenditures and revenues in the ten countries examined here. The data reveal that very few of these countries have been able to radically alter the level as well as the composition of their expenditure/revenues. Ghana again emerges as the most successful reformer. Government revenues from a low of 7 percent of GDP in the early 1980s incroased steadily to 15 percent in 1991, the same level as in the early 1970s. Also, compared to their historic values, there has been a shift in Gb aa away from very heavy reliance on trade taxes towards greater emphasis on income taxes- More dramatic changes in Ghana are, however, observable on the expenditure side. Govenment expenditure on defence and other non productive items such as interest payment decreases considerably while other categories of expenditure, such as capital expenditure and expenditure on education and health increase noticeably from their low level at the beginning of the _1980s._ In sharp contrast tc Ghana, are Zambia and Kenya. In both countries declining or stable govermnent revenues together with increasing or stable expenditures are responsible for an ever expanding deficit. For example, during the early 1970s, Kenya's government revenues and expenditures were respectively equal to 17.3 and 20 percent of GDP, with an underlying deficit of less than 3 percent. In contrast, in the second half of 1980s, the revenues grew to only 22 percent of GDP while expenditures grew to over 30 percent, with a resulting deficit of 8.4 percent. Similarly, in Zambia, government revenues declined from 30 percent of GDP in 1970-75 to 20 percent in 1985-90 while government expenditure was practically maintained at around 33 percent of GDP with an increase in the underlying
34 defcit from 3 to 13 percent of ODP'. Moreover, in both countries, taxes on income as percentage of total govme revenues decrased steadily from their historically high valuss during the early 1970s, while reliance on Indirect taxes, including tiade taxes, increased. Similarly, expenditures on such priority areas as education and hoalth declined steadily whereas defence and interest payment absorbed an increasing shar of the government's total expendlture.

The experience of the other countries is intermediate. There are some positive developments mixod with other not so positive ones. On the whole, it appears that the governments either have not been ablo appreciably to curtail their budget deficits or where any improvement was obtained, it has been dthm to the curilment of expenditure, especially in health, education and capital expenditure, rather than as aresult of raising revenues. This observation leads one to be rather pessinisuc about the future sustalnability of trade liberalization in SSA.

S.2 Eirport response Universally, the aim of trade liberalization, including foreign exchange liberalizatk n, has been ot only to stimulate exports, but to diversify exports in order to lessen the economic disruptions that deptidency on a couple of highly volatile commodity exports inevitably generates. Thus, the long-run sustabiability of trade reform must be judged on the basis of its ability to affect the growth of overall exports as well as the composition of total exports. How has trade and other economic reform in the countries,examined here changed the level, growth and composition of their exports?

The data in Tables 8-1I look at the growth and composition of exports from different angles. Table 8 shows the rate of growth of real exports. The data show that on average the rate of growth of real exports accelerates in the post reform period, i.e during 1985-90. The most spectacular gr-owth rate is _that_ of Ghana where after a decade of continuous decline exports increased by almost 14 percent per year during 1985-90 and by 15 percent in 1991. Although less remarkable, export growth in the second ialf of _1980s_ Is substantial even in other countries such as Kenya, Uganda, COte d'lvoire and Nigeria. dnly in Senegal and Zambia did exports show almost no growth in real terms during this period. In the
_35_ ultimate analysis, not only the quantty but the total value of xports is what dotermins the ability of a country to purchase imports. It is therefore importan **t** o consider the evolution of the value of exports in rlatlon to GDP. Ths also is a check on the growth rates in Table 8, u these are from national statlstics and are not very reliable. From the data in Table 9, it is immediately clear that despite an apparently robust real export growth, the price effect has been so negative in some cases that the share of exports in GDP actually decreas. Ihi is for example true for C6te d'Ivoire, Kenya and Uganda. Only in Ghana, Madagascr, Nigeria and Tanzania does real export growth in the post-r-form period, i.e. 1985-90, translate in a growing share of export in GDP. Moreover, except in Nigeria whose share of export Is strongly affected by the ups and downs of oil prica, and in Mali, in no other country does the share of exports in GDP in the late 1980s reach the historically high levels of the 1960s and 1970s.

As an indicator of export diversification, Table 10 reports the share of nfacring in total exports. The data indicate that in the three Franc Zone countries, and to a lesser extent in Kenya and Madagascar, the share of manufacturing in total exports increased systematically over the period considered whereas In all othe countries the share remained either constant or actually decreased slightly. In order to find out to wbat extent the diversification in these countries is real and the result of a genuine increase in manufacUring exports rather than a result caused by a decrease in the price and hence the value of primary comnodity export, Table 11 reports the rate of growth in the dollar value of manufacturing exports over time.<sup>33</sup> In all countries manufacturing exports show positive growth in the second half of the 1980s. However, except for Ghana, this growth rare is smaller than the historically very high growth rates observed in the 1960s and 1970s. Moreover, because of the very small size of the manufacturing sector in the majority of the sampled countries, it will be quite sometimo before manufacuring exports will become a sizable portion of their total exports.

33Data limitation prevented the measurement of the real rate of growth of manufacturing export. The rates of gowth in Table 11 are therefore affected by changes in the intermational price of manufacturing goods as well as by fluctuations in the value of the dol!= C'hv --- cies.
36

**_5.3_** JfiWnve Wmn ted

A good indicator of credibility and hence future sustainabiity of trade reform is investment response, especially by private domestic and foreign agents in productive activities. A detailed analysis of investment response to adjustment must eximine the sectoral composition of private and public investment and evaluate the impact of various incentives ordinarily provided under investment codes. This effort lies well beyond the scope of this paper. However, the representative data on total and private Investment in Tables 12-13 are quite illuminating. Among the countries examined, only four, namely Ghana, Mali, Tanzania and Uganda record rising investment shares in the post-reform period. In Madagascar the slight increase in investment appears to reverse its course in 1991 following the political unrest that put a halt to the adjustment program. In all other countries, investment decreases compared to its pre-reform or historic levels. The sharpest decrease occurs in countries like Cote d'Ivoire, Nigeria and Zambia, where public investment went up and down with their export earnings in the 1970s and early 1980s.34 However, in the countries for which data are available, private investment also shows a declining trend in the post-reform period. For example, this is true for C6te d'Ivoire, Kenya, Nigeria and Zambia. In C6te d'Ivoire, private investment decreases from 17 percent of GDP in 1980 to about 7 percent in 1990. In Kenya, it decreases from 12-13 percent at the beginning of the 1980s to around 10.5 percent in 1990. In Nigeri&, private investment recovers form its very low level in 1984-85, less than 2.5 percent of GDP, but remains still only a small fraction of total investment. These results indicate that the private sector maintained a profound skepticism about the sustainability of adjustment in the majority of the countries examined here.

# _6._ Conlsion

One of the causes of the rather disappointing performance of the tradables goods sector in SSA after several years of adjustment and considerable investment of resources can be traced to less than 341t must be noted that the fall in investment is not necessarily bad if its efficiency is increased. Besides, a good deal of public investment projects that w-' i carried out in the late 1970s in the wake of the commodities boom were in all likelihood little more than a waste of resources.
37 exemplary Implementation of the reform measures themselves. The present study summarized the experience of ten SSA countries with trade reform with the objective of exploring the factors that explain their differential implez~ention record as well as evaluating the likelihood of the sustainabiTity of whatever degree of reform and liberalization has heretofore been achieved.

Of the ten countries examined here only a few, notably Ghana, Tanzania, Uganda, and to a leuer extent Mali, began ad sustained trade reform in the 1980s and 1990s. In all other countries, while some liberalization measures were adopted they were later reversed or suspended due to a balance of payments crisis or social unrest or both.

Aside from political economy factors, the analysis in this paper highlighted the fundamental importance of consistent macroeonomic and exchange rate policies for the successful implementation of trade reform. Kenya and Nigeria offered the most illuminating example of how incompatible macro and especially fiscal policies brought about the reversal of the trade liberalization process in one and foreign exchazte liberalization in the other. The experience of the three Franc Zone countries, especially CMte d'Ivoire-and Senegal, on the other hand, clearly highlighted thQ enormous difficulty of achieving a realistic real exchange rate in the face of a fixed nominal exchange rate constraint. Although in theory under certain conditions the impact of a devaluation on relative prices can be mimicked through equivalent tax-cum-subsidy schemes, the experience of these countries showed how administrative difficulties and price rigidities make the achievement of this goal almost impossible in practice. The experience of the sampled countries also highlighted the importance of early attention to institutional reform and consensus build4g as well to domestic market reform as indispensable for successful and lasting trade reform.

The findings of this paper also demonstrated that even in the few countries were trade reform has been sustained, none can yet boast to have achieved the same low levels of protection as now prevalent in reforming countries elsewhere in the world. The very distorted nature of the trade regimes of the SSA countries, their weak administrative capacities and their very low levels of income are all factors that
38 contrit'uto to explaining why the pace of trade liberalization has been relatively slow in these countries In comparison with other reforming economies. It was pointed out, however, that more than the pace of reform, It was its sustnability in the future that mattered. Three indicators of sustainaility were considered: The chauge in the lave and composition of government revenues and expenditures; the rate of growth and the pace of divrsification of exports; and the level of invatment, especially private inve t.

On the basis of these three indicators, the picture that emerges from the experience of the sampled countries is not very promising. It appears that very few of them have succeeded in radically altering these structural parameters of their economy. In most other countries budget deficits have been contained, If at all, chiefly by curtailing government expenditures on priority areas and little by the way of ex,,ort diversification has taken place.

On the whole, the analysis here showed that besides the enormity of the initial distortions and a very weak adinistrative capacity, there is not a big difference between the SSA countries and other developing countries in terms of the economic problems or appropriate solutions. What the analysis did show was that the process of trade liberalization in SSA is going to remain slow and the achievements fragile for quite sometimes in the future.