Macroeconomic reform and growth in Africa : adjustment in Africa revisited

The 1994 World Bank study,"Adjustment in Africa: reforms, results, and the road ahead,"assessed the extent of, and economic payoffs from, policy reform in 29 countries in sub-Saharan Africa in the mid-1980s and 1990s. Here, the authors update the results of that report with 1992 macroeconomic data and explore some issues in more detail. The conclusions of the earlier report still hold: improved policies are still associated with improved performance, but countries fall short of having sound policies. In fact, the 1991-92 policy stance was not as strong as the 1990-91 stance, reflecting the slow, fragile, and often reversal-prone nature of macroeconomic reform in Africa. Getting the real exchange rate right and reducing the fiscal deficit should be the top priority for restoring growth. Countries that significantly reduced their budget deficits and reduced the black market premium (by devaluing) enjoyed the greatest payoffs from reform. Devaluation of the CFA franc in January 1994 represents a real opportunity for the CFA franc zone countries to restore growth. Many countries have made considerable progress in moving toward competitive real exchange rates. There still remains the challenge of reducing budget deficits in ways consistent with poverty-reducing growth. Hence, the need to reorient public spending to the essential tasks of government, especially providing social services. Reform in two areas will be important to sustaining fiscal reform: implicit subsidies to public enterprises must be cut, and the cost of restructuring the banking sector must not be absorbed by the budget. Policy reforms undertaken so far have paid off in higher growth rates, but the level of growth is still too low to sustain rapid rates of poverty reduction. Increased growth seems to have come more from efficient use of existing capacity than from new investments. Only steady and increased policy reform will convince investors of the credibility of reform and thus of a more favorable investment climate.