Structural adjustment and the Lomé Convention:
Issues for the Post-Lomé IV negotiations
Issues Paper prepared for the Summit of ACP Heads of State and Government
Libreville, Gabon, 6-7 November 1997
During negotiations for the Lomé IV Convention, structural adjustment was a major issue. The crucial role of implementing economic reforms was acknowledged in the negotiations as shown by the extent to which structural adjustment was incorporated in the overall spirit of the Lomé IV Agreement signed at the end of 1989.
The environment under which the negotiations on structural adjustment will take place in 1998 will be quite different from 1989. In the 1980s, there was still considerable resistance by some developing countries, which were still heavily dominated by the public sector, and generally felt that they were being coerced by the developed countries to pursue policies which often ran against their general political philosophies.
By 1997, the general resistance to economic reforms has substantially declined, as more countries entered into some form of economic reforms, in some cases with impressive rates of economic recovery. This is likely to considerably reduce the gap between EU and ACP and enable them to work on detailed aspects to facilitate maximisation of benefits from this process by careful articulation of the broad EU-ACP co-operation and individual country economic policies.
Most adjustment programmes in ACP states included measures to liberalise domestic and external trade through the removal of price controls, abolition or reduction of tariff and non-tariff barriers; removal of foreign exchange controls and liberalisation of the exchange rate, privatisation of parastatal enterprises; and rationalisation of expenditures including removal of subsidies and civil service reforms. While there is still considerable debate on where structural adjustment programmes in ACP and other developing countries have had positive or negative impact, there is growing evidence that effective implementation of the economic reform programme has had a generally positive impact on various macro-economic indicators. In its seven case studies in Sub-Saharan Africa, the World Bank found a clearly discernible difference between those countries which had vigorously implemented the required structural adjustment measures and those which had not implemented reforms at all or those which had done so half-heartedly (World Bank, 1994). In all of the case studies (Burundi, Côte d’Ivoire, Ghana, Kenya, Nigeria, Senegal and Tanzania) except Côte d’Ivoire, there were higher economic growth rates during the 1986-1991 five-year adjustment period, compared with the previous pre-adjustment period (1981-86). Some of the countries in the study, like Ghana and Nigeria had achieved very impressive growth rates of more than 8%.
Other findings of the study were impressive: Agricultural supply response which increased food, and export crop production, reduced food imports by between 30 and 60% in some of the countries and diversified production of non-traditional exports, and facilitated improvement in the inflows of foreign exchange earnings. There was, however, highly limited growth in investment in virtually all the countries, except Tanzania. There were substantial improvements in the flow of external resources in four out of the seven case studies. It was found that the reforms had contributed to the improvement of the welfare of the poor, although there were segments of the poor, particularly from urban areas, who experienced considerable decline in their welfare situation as a result of economic reform implementation.
Studies by individual researchers also indicate also that there have been impressive economic successes achieved by some of the countries which have implemented reforms. Some of the shinning examples of this are Ghana and Uganda.
Implementation of economic reforms has helped to reduce an anti-export bias in many ACP countries as shown by the higher export growth rates achieved by some of the best performers in SAP implementation. Some of the barriers to investors, both domestic and foreign, have been removed by the financial, administrative and exchange rate reforms.
However, there is no consensus that trade liberalisation measures are always positively associated with high export growth rates or the ability of a country to diversify its exports. In his study Shafaeddin (1994), found no clear and systematic relationship between trade liberalisation and devaluation and export and output growth rates and the extent of export diversification among the least-developed countries. He found that the volume of investment and availability of imports were more strongly associated with export and output growth rates.
By the late 1980s, a large number of least-developed countries had implemented extensive trade liberalisation measures. But of the 19 LDC countries in his study, Shafaeddin found that 8 of them had, by 1987, mean tariff rates of manufactured products that were above the average rate for South Korean manufactured products during the same year, (Shafaeddin, 1994: 3-4). South Korea was then regarded as a highly liberalised economy. The author found that from the same group of countries, nine had lower frequency of non-tariff measures, while in another nine countries, there were either minimal or quantitative trade restrictions. The level of trade liberalisation had improved even further as these countries implemented more adjustment measures. Some of these countries have bound their tariff reduction. By 1987, some countries like Zambia and Sierra Leone had completely eliminated non-tariff barriers on imports into their territories.
As pointed out earlier, structural adjustment started to feature strongly in the 4th Lomé Convention in which support for ACP member states implementing Structural Adjustment Programmes was adopted as one of the principles governing the cooperation between the European Union and the ACP group of countries. One of the arguments advanced to justify this move was that implementation of economic reforms was crucial in the efforts to look for ways and means reduce the debt burden that was increasingly weighing down many ACP member states. The implicit assumption in the Lomé agreement was that implementation of economic reforms was necessary to revive ACP economies and that countries that were undergoing such reforms should be encouraged through financial support.
It is has been generally accepted within the donor community that implementation of structural adjustment by the least-developed countries is usually accompanied by certain social, political and economic problems which would make it difficult for many of these countries to go through the process without financial support to alleviate some of the short-term problems.
The fourth Lomé Convention also included a clause providing support to finance regional activities and the creation of structures that facilitate sectoral policies, particularly in connection with trade development and structural adjustment efforts.
With regard to development finance, the convention further includes an undertaking to mobilise financial resources for purposes of supporting sustainable, effective and growth oriented adjustment programmes, (The Courier, No. 155, 1996:59).
The importance attached to the structural adjustment support programme in Lomé IV is demonstrated by the fact that out of the ECU 14,625 million overall financial protocol allocated for the period 1995 - 2000, a total of 1,400 million (9.1%) was earmarked for use in direct structural adjustment programme assistance to ACP countries.
Out of the ECU 1658 million EIB allocation in the financial protocol for the period 1995 -2000, at least 50% (ECU 829 million) was to be used in ACP countries which were actively supporting and implementing policies aimed at backing investment the private sector, (Courier No. 155, 1996: 12 -13). Such measures have been generally part of the structural adjustment measures in many of the countries implementing economic reforms. Thus, altogether, about 15% of the total financial protocol for the Lomé IV Convention for the period 1995 - 2000 was allocated to economic reform programmes of ACP member states.
The above ECU 829 million from EIB financial resources allocated to support measures aimed at promoting private sector investments was expected to play a major role in ongoing privatisation programmes in many ACP states. Privatisation has been one of the major structural adjustment measures aimed at trimming the overextended public sectors in the ACP economies, and raising the capacity and efficiency of the private sector to take up the economic responsibilities which were previously handled by the public sector. Privatisation has been one of the slow structural adjustment programmes in many of the developing countries, especially in the Sub-Saharan Africa and will need continued support and encouragement from the EU and other donor agencies.
In addition to the above Lomé provisions on structural adjustment in ACP countries, the Lomé relationship has had considerable direct and indirect impacts on economic reforms in the ACP countries. A close look reveals that implementation of various cooperation instruments of the Lomé Convention has substantially influenced the economic process in the ACP countries, and that careful design of these instruments in the future cooperation framework has tremendous potential for assisting ACP countries to undertake reforms. Before structural adjustment became an issue of interest within the Lomé cooperation, the reform process was largely championed by the World Bank and the International Monetary Fund (IMF).
There was then considerable resistance to structural adjustment programmes by a number of developing countries. When the European Union as a group, and many individual European countries, on a bilateral basis, started to support economic reforms in developing countries, resistance to the reform process was weakened considerably as the process started to be regarded as inevitable. Countries which were not implementing economic reforms become fewer and fewer and rather isolated in the international community. Thus inclusion of structural adjustment in the Lomé Convention had the effect of encouraging more ACP countries to adopt the reform process.
The Role of Political Reforms.
The pressure for economic reforms was further intensified by the convention's push for political reforms in terms of good governance, respect for democracy and human rights. It had become clear that economic reforms were closely associated with political reforms so that it was difficult to implement one and ignore the other. Thus, although at first one may not appreciate the connection between the pressure on political reforms, good governance and economic reforms, a closer look at many ACP countries shows that the two processes have tended to go hand in hand, mutually reinforcing each other. The impact of this is reflected in the growth of pro-reform groups in some ACP countries who have been exerting pressure on EU member states to make economic and political reforms conditionalities for receiving EU financial resources within the Lomé Convention.
Stabex and Sysmin: Links with Structural Adjustment Programme.
The two Lomé financing instruments of Stabex and Sysmin were designed to help ACP states to maintain some stability in their foreign exchange earnings as well as to promote sustained social and economic development. By transferring resources to countries experiencing instability in their foreign exchange earnings, the schemes play an important role in creating economic stability, without which implementations of structural adjustment programmes would be seriously impaired. Thus, Stabex and Sysmin have had a crucial but indirect role in the reform process of ACP member states which are heavily dependent on agricultural commodity or mineral exports. In addition to this indirect role, the convention allows countries undertaking structural adjustment focused on restructuring production and export activities to diversify the economy, to use Stabex and Sysmin resources to support the reform measures and policies.
In view of their impact, not only in stabilising the foreign exchange situations of ACP countries, but also in the indirect impact in promoting the capacity of these states to implement their structural adjustment programmes, all member states of the Lomé convention will find it useful to negotiate for increasing resource allocation for these two instruments, which should be redesigned to enable them to promote structural adjustment of ACP economies even more effectively.
The Stabex and Sysmin instruments have also considerable potential to help in the alleviation of the negative effects of structural adjustment programmes on vulnerable groups, particularly the poor and women. This potential has not been much utilised in the existing framework. In some cases, Stabex and Sysmin resources may be taken directly to the farmers or miners who are affected by loss of earnings in the two sectors because the convention does not specifically target the groups within the sectors which are adversely affected. In order for the two instruments to be utilised in alleviating problems directly created by structural adjustment programmes, it is necessary to specifically target a certain proportion of resources allocated to Stabex and Sysmin to the actual groups that are affected instead of allocating them to 'broad' sectors as is the case at the moment. This would make the two instruments more useful in alleviating the social-economic problems of the reform process on specific groups or categories of people.
In conclusion, Stabex and Sysmin instruments have so far helped more in the implementation of the reforms than in the alleviation of the negative social effects of structural adjustment programmes. They have, however, the potential to play an important role in the alleviation of the adverse social effects of economic reforms, if they are more specifically targeted.
Impact of Lomé Trade Preferences on Structural Adjustment Programmes.
One of the weakness of the first three Lomé Conventions was that the design of the ACP countries' preferential access to EU market was based on selected, mainly traditional, commodities,and this tended to discourage diversification of ACP economies in general and industrialisation in particular.
The changes included in Lomé IV, however, made a considerable effort to remove these weaknesses by focusing more on how to develop trade in general rather than just focusing on preferential access. It also expanded the preferential treatment to virtually all products from the ACP and removed some of the qualitative or quota restrictions which used to be applied to some of the products enjoying tariff concessions. These changes became effective when most ACP member states were implementing structural adjustment measures, some of which were aimed at broad diversification of the economies especially through promotion of non-traditional exports. Thus, these changes incorporated in the design of the fourth Lomé Convention were timely and appropriate in terms of achieving some of the aims of the structural adjustment programmes. The fact that there was no dramatic impact of these trade instruments on ACP trade with EU is not necessarily a reflection of their inappropriateness, but most probably an indication that these measures may require more time before their impact can be significantly felt. The negotiations on the future economic relations between EU and ACP should try to retain some of the broad features of the market access and trade preferences incorporated in the current Lomé Convention. The effectiveness of these measures can be expected to be more pronounced in the next decade as economic reforms in these countries take root.
Due to the strong economic relations that exist between Western Europe and the ACP states, the European Union as a multilateral donor institution, and individual EU member states as bilateral donors, have immense impact on the economic situation of the ACP as a whole and on their implementation of economic reforms. In addition, EU member states constitute a major force within many other larger multilateral institutions such as the World Bank and the International Monetary Fund. In this broad sense, it can be argued that EU plays an extremely influential role in shaping the nature and pace of reform implementation.
However, sometimes bilateral actions of EU member states do not strictly agree with the broad strategies and policies being pursued by either the EU, the World Bank, or the IMF. There have been cases where the bilateral aid policies of some of the EU member states have not given priority to the economic reform process underway in their developing country bilateral partners. In such cases, there is a problem that the developing country could ignore economic reforms and focus more on bilateral aid where implementation of structural adjustment is not either a conditionality or a major factor for consideration by the donor. This has, however, not been very common, partly because bilateral aid was not large enough to eliminate the need for multilateral aid in most countries, and partly because some EU countries tend to emphasise both economic and political reforms as factors for consideration in their bilateral aid programmes.
One of the main characteristics of bilateral aid has been its concentration on project aid rather than general programme aid. It is easier to downplay the issue of policy reforms in project aid, and this has been observed in many cases.
To avoid giving conflicting signals about the reform process in the ACP member states, it is essential that EU states strengthen the coordination of multilateral and donor aid policies. While this may be opposed by some donors, such coordination can give the economic reform process the required priority. Greater and sustained reform process in ACP countries will help determine whether these countries will be effectively integrated in an increasingly global economic environment in the 21st century.
The EU's aid policy in the fourth Lomé Convention incorporates a number of features which should have facilitated the economic reform process among the ACP countries. First, most of the resources transferred to ACP member states has been in the form of aid rather than loans. This policy was designed as a way to reduce the debt burden which was recognised as a major constraint in ACP countries reform implementation. Thus, by giving resources in form of grants, Lomé attempted to create an environment that was conducive to reform implementation.
Second, EU aid policies under the current Lomé Convention emphasise infrastructure projects, which generally have more potential to stimulate private sector development, one of the key objectives in structural adjustment programmes. In their study on the relationship between macro-economic adjustment and private investment in developing countries, the authors of a recent study conclude that it is crucial to protect public expenditure on infrastructure during the adjustment process to encourage the recovery of private sector investment and growths (Serven and Solimano, 1991: 95). EU resource transfers to the ACP helped to ameliorate the adverse effects from cuts in public infrastructures thereby reducing the negative effects on gross investment and economic growth. Third, the EU's overall aid programmes moderated the fiscal deficits of the ACP member states. In other words without the EU's aid programme, the fiscal deficits of ACP countries would have been much higher. Large fiscal deficits tend to raise interest rates with consequent adverse effects on the supply of credit to the private sector.
It is therefore interesting to ask why many of ACP countries, especially in sub-Saharan Africa, have not experienced a major upsurge in investment growth and economic growth in spite of relatively favourable aid programme within the Lomé Convention. There are two views on this issue. One is that resources transferred within the Lomé Convention were not large enough to have a significant impact in these economies. The other view is that non-conducive domestic environments made it difficult for many countries to attract significant amounts of domestic or foreign private investment capital.
The answer may lie between these two views. Thus, negotiations for future cooperation will need to focus on how financial resources allocated to least-developed countries can be increased to the level required to have a significant impact on the countries involved. At the same time, the Post-Lomé IV Convention should seek ways and means of improving the ACP domestic environment to make it more conducive for private sector investors and to boost the overall economic growth.
It is, however, worth noting that this slow response in terms of investment flows is not unusual. Commenting on this issue in their study, Serven and Solimano observed that "in practice, the investment response often is unexpectedly slow and weak", which they largely attributed to uncertainty (Serven and Solimano, 1991: 106).
There are other broader issues which are raised with regard to the impact of EU's trade and aid policies under the Lomé Convention. Does the availability of financial aid resources and trade preferences encourage or discourage the recipient countries to implement the necessary reforms to facilitate economic growth and movement from the poverty cycle many ACP countries find themselves in? Again there are two opposing views. The first sees the Lomé aid and trade policies as important tools for Lomé countries without whose cushioning impact many countries would have not been able to implement the reforms carried out so far, due to threatening economic, social and political adverse effects.
The opposing view regards the Lomé relationship as a factor that entrenches complacency among the ACP countries. They see it as reducing the urgency to introduce and implement necessary reforms to make the ACP economies more diversified, with sustainable development of their own, producing globally competitive products which do not depend on preferential trade arrangements. Indeed, the rise in the share of East Asian products in the EU market in the 1980s and 1990s, without enjoying preferential trade like ACP, implies that what matters for purposes of penetrating a given market is the degree of a country's competitiveness. Thus, this critical view regards the Lomé Convention as an instrument that introduces an element of false security and delays critical public sector, fiscal, labour, and other sector reforms.
It is interesting to look at the link between structural adjustment as handled within the Lomé Convention and as managed by the World Bank and IMF. It is clear that there are both similarities and differences in the way the EU handles structural adjustment programmes within the Lomé Convention and the way the World Bank and IMF have handled it. The main difference is that while implementation of SAP's by the World Bank and IMF tended to be regarded as conditionality for the implementing country to obtain credit facilities, the Lomé approach relies much more on initiatives taken by the ACP countries themselves, with the Lomé resources serving a supportive role.
The principles upon which structural support is administered within Lomé were designed to ensure that ACP states own the reform process. These principles emphasise that the primary responsibility to diagnose the problems and to prepare implementation lies with the ACP states concerned; and that Lomé support is designed to suit individual countries, taking into account the unique social, economic and political environment of the country involved. A look at the principles and design of the structural adjustment programme within the Lomé Convention shows that the negotiations had taken into account some of the main criticisms which had been directed at the way the Bretton Woods institutions had introduced the economic reform process in developing countries. The two institutions had been accused of dictating the nature and the pace of the reform process; of using conditionalities which did not show much respect for recipient's sovereignty; of tending to apply a standard reform package sometimes to countries with very different economic, social and political environments; and giving inadequate attention to the possible adverse effects on vulnerable groups (Cornia et al., 1988 ). Most of these concerns seem to have been in the minds of those who negotiated how to incorporate structural adjustment issues in the Lomé IV Convention.
In spite of these differences between the Lomé approach on the one hand, and the World Bank and IMF on the other, there is considerable complementarity in the roles played by the three, with regard to implementation of Structural Adjustment Programmes in developing countries.
First, the Lomé Convention explicitly states that ACP "reforms that are acknowledged and supported at least by the multilateral donors or that are agreed with such donors but not necessarily financially supported by them, shall be treated as having automatically satisfied the requirements for adjustment assistance", (ACP-EU Courier (155): 65).
Second, as argued earlier in this paper, the adoption of structural adjustment in the Lomé Convention helped to reduce the resistance to structural adjustment programmes earlier introduced by the World Bank and IMF, by strengthening the impression that structural adjustment was a global phenomenon which could no longer be ignored.
The third way in which SAPs within Lomé and those within the World Bank and IMF are complementary is that some ACP states that are experiencing social and economic hardships resulting from implementing World Bank and IMF reform programmes could use Lomé financial resources to alleviate the problems. Thus is made possible by the emphasis placed by the Lomé Convention on the need to make provisions for adverse social effects of SAPs: "Both the reform and support programme shall make provision from the outset to deal with the negative social effects that may result from the process of adjustment efforts, in pursuit of the objectives of economic growth and social justice, particular attentions being paid to the most vulnerable groups in the society including the poor the un-employed, women and children". Thus some of the areas which were relatively ignored in the World Bank and IMF structural adjustment programmes are treated as key aspects within the Lomé Convention.
Recognizing this complementarity, it has been argued that economic reforms being undertaken within the Lomé Convention or as part of the World Bank and IMF programmes should be taken into consideration by the WTO in dealing with the least-developed countries, (Whalley, 1989). This would make it possible for the economic reform efforts by the least-developed countries to be recognized as substantative measures to open up their economies. Thus, even if the least-developed countries are negotiating for preferential treatment in the European Union and other economies, without reciprocity, the global community especially in the context of WTO, would recognise the developing countries contributing in the overall liberalisation of the global economy.
One of the key determinants of whether ACP economies will be effectively integrated in the global economy by the end of first decade of the 21st century will be the degree that ongoing reforms are succesful. Thus, during the next decade or so structural adjustment in the developing countries will continue to be a dominant issue in both national and international fora. It is for this reason that the issue will be a major area of discussions between EU and ACP member States in the forthcoming post-Lomé IV negotiations.
The Lomé IV agreement on structural adjustment can be said to have been quite successful. This success is demonstrated by the fact that there has been very limited controversy related to the design in implementation of structural adjustment within the Lomé convention, compared with the controversial handling of the issue by the Bretton Woods institutions. Thus, while Post-Lomé IV negotiations will attempt to improve on the current agreement, there are a number of initiatives or measures in the Lomé IV agreement that could be retained because of the way they have facilitated the implementation of economic reforms within Lomé so far.
These include:
These principles were able to promote participation of the ACP countries in the project design, and implementation, thereby virtually guaranteeing the country's ownership of the project. The principles were also implicitly but effectively sensitive to the sovereignty of ACP countries.
The following are some areas of the current Lomé Convention which should be modified to make them more effective in supporting structural adjustment programmes on ACP countries:
One of the key determinants of whether ACP economies will be effectively integrated in the global economy by the end of first decade of the 21st century will be the degree that on-going economic reforms are successful. Thus, during the next decade or so structural adjustment in the developing countries will continue to be a dominant issue in both national and international fora. It is for this reason that the issue will be a major area of discussion between EU and ACP member states in the forthcoming post-Lomé IV negotiations.
The Lomé IV agreement on structural adjustment can be said to have been quite successful. This success is demonstrated by the fact that there has been very limited controversy related to the design and implementation of structural adjustment within the Lomé convention, compared with the controversial handling of the issue by the Bretton Woods institutions. Thus, while Post-Lomé IV negotiations will attempt to improve on the current agreement, there are a number of initiatives or measures in the Lomé IV agreement that could be retained because of the way they have facilitated the implementation of economic reforms within Lomé so far.
Unlike in the 1980s when many ACP countries were rather suspicious about structural adjustment programmes and were rather uneasy about its inclusion in the Lomé IV negotiations, the attitude is likely to be markedly different in the post Lomé IV negotiations. This is because most ACP member countries have since entered into economic reform programmes and have thus had an opportunity to know more about their advantages and disadvantages. In many of these countries, the reform process has become more or less irreversible. Thus, the ACP countries will approach the negotiations on structural adjustment with a relatively more positive frame of mind. They will have more knowledge of what has worked and what has not worked, and more enthusiasm to produce an agreement that enables them to obtain increased support form EU and to maximise benefits form the reform process.
In order to obtain a post-Lomé agreement that is both conducive to the process of effective economic reforms, and one that minimises the social costs, the ACP is likely to press for:
Cornia, G.A. et. al., 1988. Adjustment with Human Face. Oxford: Clarendon Press.
Serven, L. and A. Solimano. 1991. Adjustment policies and investment performance in LDCs: theory, country experiences, and policy implications. Washington, DC: World Bank.
Shafaeddin, S.M. 1994. "The Impact of Trade Liberalisation on Export and GDP Growth in Least Developed Countries".
Whalley, J. 1989. The Uruguay Round and Beyond. London: Macmillan.
World Bank. 1994. Adjustment in Africa: Lessons from Country Case Studies. Washington DC: World Bank.