Macro policy is not made in a political vacuum. The political economy context, both internal and external, in which macro policy is formulated, has a strong bearing on the resultant macro policy and hence the macroeconomic environment that private economic agents do face.
Macro Policy making in Africa has been primarily driven by the influence of the World Bank and International Monetary Fund (IMF) (International Financial Institutions, IFIs henceforth) for the last three decades. This is complemented by the political and intellectual support of IMF to the bank. The macro policy that emerged from the IFIs, termed as ‘Structural Adjustment Programs [SAPs]; and ‘Poverty Reduction Strategy Papers [PRSPs], was, and still is, effectively implemented in the continent. This is mediated through aid conditionality.
This has taken the form of – conservative monetary and fiscal policy combined with market liberalization and less state intervention. This macro stance and its macro policy content remain fundamentally unchanged today.
This externally driven macroeconomic policy stance is compounded by the political economy of policy making internally. It is imperative to see the implications of the amalgamation of these internal and external factors to understand the implication of the political economy of macro policy making in Africa on private sector development.
Internally, in the last four decade saw about four political regimes that characterized the political and policy landscape of Africa These are: State Controls, Adverse Redistribution, Inter-temporally Unsustainable Spending (IUS), and State Breakdown; also presented is the complementary Syndrome-free category. The African Economic Research Consortium (AERC) study on 27 African countries noted that the quality of economic policy pursued by each of these regimes has a powerful effect on whether countries seize the growth opportunities implied by global technologies and markets and by their own initial conditions.According to Prof. Augustin K. Fosu,
Deputy Director, United Nations University in Helsinki, Finland, the evidence that the syndromes noted reduce growth is strong: for example researches found that avoiding the syndromes is simultaneously a necessary condition for attaining sustainable growth in sub-Saharan Africa (SSA) and a nearly-sufficient condition for preventing growth collapse. Indeed, being syndrome-free may add as much as 2.5 per centage points per year to per capita growth. As private economic agents are the drivers of such growth, they thus are vulnerable to this political economy of policy making.
The AERC study underlined that at the time of independence, in many African countries, strong central governments were perceived as the optimal mechanism for nation building. In many instances, these efforts appear to have actually succeeded in preventing state breakdown in terms of open rebellion. Unfortunately, however, the strategies adopted then also resulted in the various anti-growth syndromes of controls, adverse redistribution and inter-temporally unsustainable spending. Thus without the appropriate checks and balances, the executive was free to carry out policies unencumbered. This situation resulted in elite political instability (EPI), which has been deleterious to growth in Africa. In its severe form, furthermore, EPI could constitute state failure, a phenomenon that tends to be the most growth-inhibiting syndrome.
What is also transpired in this AERC study is that the relationship between the type of political system and the choice of policy regime is found to be empirically significant. According to Dr. Robert H. Bates, Professor of Political Science and Economics at Harvard University, based on AERC 27 countries case studies, the political forces that underpin the choice of control regimes seem to appear to arise from three sources. One is ideology. High levels of government intervention occur when governments find principled reasons for overriding the allocations generated by markets. A second is the power of organized interests- interest groups constitutes the primary means by which political preferences shape policy choices. Regional inequality constitutes the third -it generates incentives to adopt policies designed to overcome the economic impact of disparate endowments and to create political institutions with the power to elicit the transfer of resources. These forces, according to Prof. Bates, have shaped the political conduct and economic performance of governments in post- independence Africa. This is compounded by tendencies of state failures with their associated cost for growth in some conflict-prone African countries.
The amalgamation of the external and the internal impetus has led the macroeconomic policy making in African quite complex. It is instructive to ask the implication of this for growth in general and the private sector development in particular.
As studies shows if we go to one extreme of a tendency to state failure, the immediate costs are the destruction of life and property and the loss of income. The longer term result from the loss of capital and the reluctance, because of insecurity; to invest in the economy is to stifle growth and private sector development. In short, the poverty of the state, the prospects of wealth from predation, and the prospect of losing office form the conditions under which growth and development would come, including private sector development, could be undermined. On the other hand, in a situation where these tendencies are avoided and yet competitive democracy and democratic institutions are missing, private sector operators may suffer from risk of uncertainty related to the political order.
According some studies African economies may well face more risk than other countries (for instance because of their reliance on rain fed agriculture in a situation where growing seasons are extremely short and the presence of weak institutions of market). In addition, the scope for risk-coping is often lower than elsewhere: low population density makes it difficult to rely on insurance or credit. Governments have increased the risk exposure of private sector economic agents while at the same time undermining institutions which support risk-coping.
Notwithstanding this features that affected the private sector in Africa, recent political reforms have rendered Africa’s governments less opportunistic: private investors rated them as less likely to repudiate debts or to expropriate investments. But they appear to have had less impact upon the management of the macro-economy. In the face of prospective political defeat, the evidence suggests, governments in competitive systems tend to spend more, to borrow more, to print money, and to postpone needed revaluations of their currencies than do those not facing political competition. This will compound the risk private agents’ face in Africa that we noted above. As aptly remarked by Prof. Bates, the empirical results nonetheless pose a challenge to those who seek in political reform the remedy for Africa’s economic malaise. In general, however, one needs to know to what extent growth is reduced by governance-based risk or by governance-related restrictions on risk-coping by private agents. However, on these questions there is as yet no evidence and further research is needed.
Another aspect of the political economy of Africa, which is relevant for private sector development, is what a researcher named Emery has rightly termed the culture ‘from road blocks to red tape’. According to this view the African political system is stifling for private sector operators not only for the simple financial gain (say through corruption) but most importantly and primarily the political elite wants to control the private sector for its potential political imperative. This stifling regulation and red tape on the private sector is a legacy of the colonial system because the colonizers were imposing similar institutions of regulation and control and, thus, structured the continent’s economy for extraction of resource and stifle potential political resistance in all places except in settler colonies.
The post-independence political elite basically inherited this system and using it to date to advance its interest. Relating this to current reality, businessmen in Africa are “subjected to a maze of administrative control as this serves an important political function, albeit indirectly”. This function is to subject any business to arbitrary and punitive enforcement at times entirely by legal means at virtually any time, so that even a successful business in an unregulated sector is always exposed to political action,
by subtle and indirect means. African governments are reluctant to do away with them because they have proven politically useful – in short as Emery noted “A successful businessman who is not somehow beholden to the political establishment for his success is a potential political threat. If he’s an active member of the opposition or developing his own power base by virtue of his economic clout, then he is perhaps a real political threat”.
This is not a major problem for foreign private sector operators, however. Given the political clout of their source government (a case in point being the Chinese government for many fragile and undemocratic states) they would actually serve as the state’s patronage whether willingly or unknowingly. Thus, a true and fundamental change on African investment climate requires changing such deep political parameters, which are the amalgamation of the external and internal political environment catalyzed by the recent politics of emerging economies such as China, India and Brazil in Africa. This change should be in such a way that African firms are free of such political control and all have legally and politically binding level playing ground.
What is the implication of this for formulating enabling macro policy that could enhance private investment and private sector development in Africa? There are two major issues that can be drawn from the above analysis for policy. First, given the dominant role of IFIs in shaping macro policy in the continent, regional institutions such as the Economic Commission for Africa (ECA), African Development Bank (AfDB) as well as each country’s elite institutions may need to push for realistic, down to earth macro analytical framework which reflects the structure and political-economy of the continent. This will contribute towards having an informed policy making, an informed and democratic-developmental state, and intelligent engagement of such state with the private sector (both foreign and domestic) though innovative public private partnerships (PPPs). Second, the lesson from the political economy of policy making in the continent is that competitive democracy and fragile states (as well as those in the middle) have problems in getting a private sector friendly [macro] policy since that could be overridden by the ruling elite’s interest for power and control.
It is difficult to prescribe what to do for all countries in the continent in generic terms. However, one important thing is that influencing macro policy making in each country need to be informed by the specific country’s political economy and structural conditions. The overall focus of such influence, however, need to be in building functional institutions which would be responsible to draw private investment friendly policies and regulations and a level playing field for all business in a country in question. International and continental organization (as well as development partners) could be important in realizing this by being agents of restraint in building and maintaining such institutions.
In the next issue of this Magazine I will attempt to highlight the effect of macroeconomic policy formulated this way and its effect on private investment in the continent.
- This short article is an extract from a larger and detailed study about private sector in Africa by Governance and Public Administration Division of UN-ECA under the directorship of Dr. Sam Cho on Promoting Economic and Corporate Governance to Improve Private Investment in Africa. Readers are advised to consult the main document for further information and references.