Africa's Development Crisis and the Role of External Lending Institutions

Abstract

African countries came out of colonial rule with two major challenges related to achievement of sustainable development and unity in the continent. It decided to pursue unity which was a means to development. However, the prospects of development was inhibited or truncated by the outbreak of inter and intra-state conflicts that followed independence. To rebuild their economies, African countries resorted to borrowing from the Bretton Woods Institutions: the World Bank and the International Monetary Fund (IMF) and other international financial institutions. To this end, long and short-term loans were given to African leaders who either misapplied the facilities or could not cope with the conditionality associated with economic reform policies. It is in this light that this article interrogates the undercurrents of these conditions attached to the loans on Africa, with insights from the Nigerian experience. It unravels how the application of the loans and the reform policies complicated rather than addressing the developmental malaise that bedevilled post-colonial African states for which the loans were sought for in the first instance. The article further questions the rationale behind the acceptance of these loans by African leaders and why it has consistently favoured borrowing as a means of solving the continent’s development challenges. It recommends, among other options, the evolvement of an alternative funding arrangement from within the continent devoid of external loan trappings.

Keywords: Bretton Woods Institutions, World Bank, IMF, Loan, Alternative Funding

Introduction

The Bretton Woods institutions – World Bank and International Monetary Fund (IMF) established in 1944/45 by delegates of 44 nations at a conference in Bretton Woods in New Hampshire, U.S. it started the operationalisation process from March 1947. While the World Bank, formally, International Bank for Reconstruction and Development (IBRD) was established, first to finance economic development, its loans were later extended to finance the reconstruction of the war-ravaged economies of Western Europe and help it recover from the destructions of the World Wars. IMF on the other hand was created as a reaction to the unresolved monetary and exchange rate problems instrumental in initiating and protracting the Great Depression of the 1930s that led to a severe global balance of payment deficit. Its overarching objective was to stabilise world economy at a period when the world was ravaged by wars, economic turbulence, political instability and economic depression. (Ikejiaku, 2008) Apart from financing development projects in Europe and helping European states recover from the devastating effects of the World Wars, the World Bank is equally financing developing projects in developing countries through issuing of loan facilities beginning from the 1940s. It has over the years loaned more than $330 billion (IMF Publication). It is instructive to know that unlike the way the Bank helped Western European states gain some level of self-sufficiency after the war, Nigeria and indeed other African countries were subjected to a refom policy as condition for issuing the loan.. The institutions advised African countries that got its loan facilities to adopt structural adjustment programme as a economic recovery policy to stabilise their economies. SAP, however complicated the already degenerated African economies thereby hindering development for Africa, with attendant security implications. African post-colonial leaders and their successors needed to overcome their development conundrum by pursuing economic recovery programmes that address their development needs. These leaders found themselves in a vicious circle of conflicts aggravated by quest over political dominance, corruption, colonial influence, separatist movements, ethnic and religious disagreements among others. In Nigeria, the misapplication and corruption that followed the oil regime in the country in the 1970s were partly responsible for the country’s post-independence development crisis. Importantly, the oil boom of that era provided a golden opportunity to fix the infrastructural deficit that would have catalised development in Nigeria. this great opportunity was not well utilised and even at present, the issue of corruption and misapplication of public fund remain in the front burner of the national discuss. Not long after this that the resultant effect began to be more noticeable, exposing the nation’s vulnerability and the need to seek for external intervention to save these states from collapsing. The problem was not that affected African states resorted to borrowing from the institutions. It was, however the approach, inherent contradiction and the misapplication of these funds by these leaders that ended up creating more problem for Africa. Many have argued that they are alternatives to borrowing from these institutions to prevent being encircled in the debt web. Diversification of the economy, by developing the agric, manufacturing, mining and tourism sectors presents an option not just for that era but for the future. Although the conditions attached to the loans with regards to economic restructuring as captured in SAP programmes were not favourable to the developing countries of Africa, the leaders accepted and misapplied the loan, creating debt crisis for the coming generations of African. Scholars like Gana, (1990: 92) contends that “IMF and World Bank induced SAP were designed not to bail out Third World economies but to enmesh them further in the global economic crisis. It is surprising that having this in mind, African leaders fully embraced SAP. The stringent economic measures such as currency devaluation privatisation of government corporations, downsizing of labour force, and removal of subsidies (especially on petroleum products) among others helped compound African problems. Continuous acceptance of the loan facilities both at multilateral, bilateral or even domestic levels allows the philosophy of free market and liberal democracy to thrive. Most African states opened their market frontiers prematurely leading to its financial trappings that left the continent perpetually a consumer and import driven continent without solving the development challenges it sought for in the first place. While some analysts consider the policies of the IMF as necessary but not the best rather than a preferred strategy, others find Nigeria’s relationship with the Bretton Wood institutions as akin to a bad marriage (ACTIONAID GHANA, 2010). Nigeria’s resort to these institutions for loan amid other potential alternative funding sources has, thus, raised numerous questions, given the concerns about the impact of the conditionalities on the Nigerian economy. It is against this backdrop that this article interrogates the role of these external lending institutions in Africa’s development peril given its ‘conditionality’ that Africa embraced prematurely. The article also explores alternative sources of resource mobilization for the country and the continent with recommendations on the best approaches to development other that loan-dependent one.

The Development Philosophy of Bretton Woods Institutions

The two international financial institutions - the IMF and World Bank were established towards the end of the World War II at a time it was clear that the war was ending in favour of the allied forces. The aim was to formulate a coordinated strategy for rebuilding the war-torn European states and stabilize the global system of currency exchange rates (Driscoll, 1996). While the IMF was statutorily positioned to focus on monitory policy issues, the World Bank was by default, established to finance the rebuilding of damaged infrastructure caused by the wars. Thus, the banks’ mandate was later expanded to cover the developmental needs of third world countries especially in the 1970s and 80s. On the other hand, the third world countries, being confronted with chronic balance of payment deficit of their history easily fell into the temptation of accepting the institutions’ financial support and its conditions without considering other alternatives to funding their development needs. The premature integration of Africa into the global capitalist system in a widely competitive global market with very little to offer, in terms of commodity products, spell doom for the continent. With market forces being the determinant factor in the global financial system, third world countries fell into the trappings of negotiating from a position of weakness. Hence the institutions are rooted under: trade liberalization, privatisation, removal of restrictions on foreign direct investment, and deregulation of industries as a guiding philosophy. The economic policies were not mere recommendations. The IMF, in conjunction with regional development banks and the World Bank, made policy changes as a condition for granting IMF loans and World Bank investment in associated infrastructure projects such as large dams and water projects. The contractual requirements that had to be agreed to by debtor nations in order to satisfy the various external parties were referred to as "cross-conditionalities" reflecting the fact that both loans and external investments were conditional upon acceptance of a full range of multi-party demands. These policy changes which serve as prerequisite for IMF assistance to developing countries were put together as "structural adjustment program" (SAPs). The introduction of SAP by African states in the 1980s was counter-productive and in practices, it retarded the continent’s ambitious economic programmes.

Did SAP really underdeveloped Africa?

SAP, as an economic policy was implemented in many parts of Africa starting from the 1980s as recommended by the IMF and World Bank. SAP was meant to heal Africa of its debt crisis that led to borrowing. However, with the disappointing results seen from years of its practice in Africa, the policy, rather than helping the continent come out of its developmental peril, ended up in complicating the continent’s already development conundrum, thereby creating more problems that were to be seen in the later years. The result of SAP, exemplified in Nigeria practices, destroyed the economy to the extent that other associated economic malaise including financial and other related crimes took centre stage. Alemika (2013) contends that SAP foisted on the country during the 1980s and 1990s by the IMF and World Bank with the complicity of many developed states destroyed the economy and social progress made in many of the countries after independence from colonial rule. Many of the SAP Policies led to government downsizing or withdrawing the provision of social service as primary duty thereby creating a huge population of deprived and excluded citizens. Hence, aside from direct consequences of SAP on most African economies, the deprived and excluded citizens whose conditions got more complicated by the injuries inflicted on them took to crime. Many resorted to acts of violence directed against their own people and against the state. It is for this that Alemika further posits that the concern about organised crime in West Africa especially drug trafficking which began about the same time SAP was implemented were part of its consequences. Those that lost their jobs, some dropped out of school and many more that got hit by adjusted economy engaged in one crime or the other, making development difficult for Nigeria and indeed Africa.

Origins of Africa’s Debt Crisis

African continent emerged from a very long period in its history characterised by exploitation, discrimination and subjugation by colonial powers. The colonised people were rather seen as subjects, with existence of a ‘master-servant’ relationship; a pattern that many African states still struggle with. At independence, African countries were faced with urgent need to achieve a sustainable development. Hence, this could not be achieved decades after independence owing to two major inter-related problems that confronted the continent. First was the inability of the African leaders to muscle enough political will needed to address certain political and economic problems such as political succession and that of national development. Problems associated with political succession in most instances led to crises and conflicts that threatened the overall development and unity of the continent. This vicious circle of conflict that inflicted severe damages on the continent’s fabrics hindered development and weakened the economies and institutions. Congo, Nigeria, Angola, Mozambique, Namibia, Chad, Rwanda, Sierra Leone among other African states has at various times witnessed conflicts of different magnitudes. Hence, there was urgent need for more resources to finance the development of the continent. In Nigeria, the discovery and exploration of oil in commercial quantity has not translated into overall national development. The oil boom of the 1970s shortly turned glut as seen within Organization of Petroleum Exporting Countries (OPEC) members. Although many saw oil glut as being responsible for financial crisis of that era, the fall in prices of commodity products in other countries, especially, the developed west, no doubt played a significant role in this regard (Toyo, 2002). This was a period most African states were emerging from colonial rule while many were still fighting liberation wars. Though the discovery of oil raised hopes of Africa leaders in their aspiration to achieve sustainable development, their inability to diversify their economies cost the continent dearly. Thus, it is on this premise that most African independent leaders assume that development, as prescribed by the developed world, was essentially a matter of adjustment in the vertical relations between Africa and the wealthy nations of the North. In the name of development, African leaders have been preoccupied with finding access to developed markets and obtaining more loans on better terms, more foreign investment, better prices for African commodities, access to technology, technical assistance, debt cancellations, and net financial flows in favour of Africa. But these do not constitute a feasible development option (Ake, 2001). Additionally, the challenge facing the continent became that of lifting the continent out of poverty and underdevelopment. To achieve this, African leaders’ vulnerability was greatly exploited by lending institutions in solving their balance of payment deficit. Nigeria, for instance was among African countries that could not balance her import-export deficit and needed to borrow from external credit sources and/or decrease its foreign exchange reserves. Consequently, Nigeria got trapped on the institutions’’ loans beginning from late 1970s. As a result, it had to comply with the development options outlined by the institutions with little or no considerations to Nigeria’s domestic interests and realities. Rieffel (2003) identifies the variation of debt peril and affirmed that a country faces debt crisis when it lacks sufficient foreign exchange in terms of import-export in relationship with foreign trade.

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