South African Finance Minister Admits he was Wrong

Finance minister Trevor Manuel advocated spending cuts, the dismantling of trade barriers and fighting inflation during the past six years, all under the guidance of World Bank economists.

He is still waiting for the payoff. South Africa’s economic growth has topped 4 percent only once since the mid-1990s. A third of the workforce is jobless.

The government has faced a wave of strikes driven by anger at the slow gains in living standards since apartheid ended in 1994.

Now, Manuel and even some World Bank officials say Africa’s largest economy has not gained as expected from the lender’s advice.

Their disappointment has implications for the 100 developing nations. That each year get more than $15 billion in World Bank loans, along with guidance on opening their economies to trade and investment.

“South Africa did everything the World Bank said they should and more, and yet it’s not working,” says Patrick Bond, a professor at Wits University. “They failed in getting growth, employment or redistribution.”

The setbacks in South Africa’s economy take on a new resonance this weekend as Manuel, a former anti-apartheid campaigner in the slums of Cape Town, becomes head of the bank’s development committee at its annual meeting in Washington.

He is, in effect, the chairman of the bank’s board. Manuel takes over at a time when critics from Argentinian President Eduardo Duhalde to development groups in Uganda and protesters on the streets of Washington say that what officials in the US call the “bitter medicine” of reform is not curing the maladies of weak growth and poverty.

Manuel says South Africa needs to boost spending to prime the economic pump – and he has the blessing of the International Monetary Fund (IMF), the World Bank’s sibling lender, which usually advocates belt-tightening to curb budget deficits.

“Developing countries have undertaken many reforms, but the benefits are, in fact, very slim,” says Manuel.

Most economists say keeping inflation low and opening markets help boost growth.

World Bank researchers say nations such as India, Mozambique and Vietnam have benefited from the lender’s guidance.

Still, across Africa, governments followed advice from the bank and the IMF by cutting deficits from 7 percent of gross domestic product (GDP)
in 1992 to 2.6 percent in 2000, Manuel says.

Exports grew by almost half during the 1990s as trade restrictions were dropped and government control over economies was loosened, according to the bank.

For all that, economic growth has stagnated and per capita income has fallen.

Forcing poor countries to lower trade barriers undercuts local businesses, according to the Structural Adjustment Participatory Review Network, an activist group.

Curbing food subsidies means they rely on imports and focusing on inflation first means economies are not given a chance to grow.

Manuel complains that rich governments such as the US and those of the European Union push poor nations to lower trade barriers, yet maintain their own subsidies on food and textile products, making it difficult for the countries to benefit from more trade.

“Are we too stupid or too poor?” Manuel asks.

The World Bank itself says it focused too much in Africa on budget cuts and curbing inflation, and not enough on building other conditions for economic growth.

These include curbing corruption, strengthening rules protecting foreign investors and reining in bureaucracies.

“It’s a fair criticism that the World Bank put too much emphasis on stabilisation and formal trade liberalisation over the past decade,” says David Dollar, a bank economist who has written studies showing that countries that open their economies prosper.

Still, the bank says the countries that have fared the worst during the past decade have been those hardest hit by civil wars and the Aids epidemic, as well as those that failed to control spending.

Uganda, which has been promised $1 billion in loans from the World Bank and got $1.3 billion of its debts cancelled in late 2000, has been held up as an example of how adopting simple measures can turn around a country.

Now the bank is warning that the collapse in coffee prices means Uganda’s debts may spiral out of control again.

Critics blame bank-backed reforms for encouraging Uganda and other countries to rely on export-led agricultural growth.

Manuel embraced fiscal austerity as the way to pull South Africa out of
its 1 percent annual growth in the 1980s.

South Africa cut its budget deficit to 1.4 percent of GDP in 2001 from more than 6 percent in 1996, when it introduced a new economic policy, written with the help of World Bank advisers.

It cut inflation to an annual 1.7 percent in 1999 from as much as 16.6 percent in 1991.

The plan was supposed to help boost economic growth to 6 percent a year by 2000 and create 126 000 jobs in its first year, rising to 400 000 a year by 2000.

Instead growth slowed after 1996, averaging 1.3 percent a year for the decade.

South Africa shed 126,000 jobs in 1996. Last year another million people were added to the unemployment line, while the economy grew 2.2 percent.

“We have undertaken a policy of very substantial macroeconomic reform,” Manuel says. “But the rewards are few.”

[Source: April, 25, 2002]