PRINCIPLES AND PRACTICE OF MARKET LIBERALISATION CHARLES MATAYA Adapted from Fons Vannieuwenhuyse IC

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PRINCIPLES AND PRACTICE OF MARKET
LIBERALISATION CHARLES MATAYAAdapted
from Fons Vannieuwenhuyse ICFTU INTERNATIONAL
TRAINING CENTRE OF THE ILO - Turin (Italy)26
November 2003
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OUTLINE

• State Control Before Saps
• Background for agricultural reforms
• Mechanisms of State Control
• Market Liberalisation or Neo liberalism
• International Financial Institutions
• Structural Adjustment Programmes
• The failure of the philosophy
• Major Constraints
• Road Ahead

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STATE CONTROL BEFORE SAPS

• Many developing countries had a firm control of
  economic activities prior to SAPs of early 1980s.
• Reasons
• Price stabilisation A type of agricultural
  policy intervention by which governments seek to
  stabilise prices for several reasons.
• On the production side, the aims are to reduce
  risk, increase marketed supply and stabilise farm
  incomes.
• On the consumption side the objectives are to
  ensure stable wage costs for the non-farm economy
  and protect the urban poor from malnutrition or
  starvation.

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Background for agricultural reforms

• 1970s commodity boom and over-expansion of state
  sector
• Late 1970s, commodity prices fell, triggering
  fiscal deficits
• Fall in commodity prices combined with fixed
  exchange rates and domestic inflation caused
  balance of payment crises
• Early 1980s, SAPs focused on macro-economic
  stabilization
• In mid-1980s, SAPs expanded to include sectoral
  reforms, esp agricultural market liberalization

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Mechanisms of State Control

• Parastatals Organisations such as marketing
  boards, that were wholly-owned by the state , but
  legislatively independent in terms of their
  operating decisions.
• price controls
• price subsidies
• sole buyer and seller of produce
• private sector regulation
• price control for essential goods
• no user fees on public services
• Imposition of taxes and tariffs.

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Market Liberalisation or Neo liberalism

• Neo liberalism A broad shift in thinking
  worldwide towards market solutions to perceived
  public sector deficiencies.
• It encouraged market liberalisation or
  free-market methods and therefore less government
  regulation of the supply and consumption of goods
  and services previously mediated by state control.

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QUESTIONS LINKAGES
IMPLEMENTATION OF REFORMS
MARKET RESPONSE

• Marketing Costs
• Market Integration
• Market Development

SUPPLY RESPONSE

• Smallholder Access
• Productivity

Food Security
Poverty
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The IFIs(International Financial
Institutions)IMF and World Bank
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• The World Bank (WB) and International Monetary
  Fund (IMF) were founded in 1944 in Bretton Woods,
  USA.
• They were created as companion organisations to
  the United Nations.
• The IFIs are meant to contribute to financial
  stability and economic growth, leading to a more
  stable and prosperous global economy.

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Co-operation and overlapIMF World Bank

• There is a lot of co-operation between the IMF
  and the World Bank as there are many areas of
  overlapping responsibilities.
• There are many joint-meetings and missions.(E.g.
  the annual meeting of the boards of governors of
  the IMF and the World Bank)
• The membership of both organisation is the same.

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Joint initiatives

• The IMF and World Bank have jointly launched two
  major initiatives to help poor countries. In
  1996, the IMF and the World Bank introduced the
  Heavily Indebted poor Countries (HIPC) initiative
• reduce the external debt burdens of the most
  heavily indebted poor countries.
• In 1999, the IMF and the World Bank initiated the
  Poverty Reduction Strategy Paper (PRSP) approach
• a country-led strategy for linking national
  policies, donor support, and the development
  outcomes needed to reduce poverty in low-income
  countries.

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Structural Adjustment Programmes (SAPs) as loan
conditions
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• Starting in early 1980s, IMF, WB and regional
  development banks required the application of
  Structural Adjustment Programs (SAPs) as loan
  conditions.
• SAP program for reforming an entire sector or
  economic structure of a country.
• During the 1980s, more than 70 developing
  countries apply SAPs designed by the IFIs on the
  pretext of reducing or avoiding indebtedness.
• During the 1990s, most of former
  centrally-planned economies applied SAPs
  recommended by IFIs, claimed to be necessary
  steps for building a market economy.

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Philosophy

• Reduction of role of the state will lead to
  countries attracting more private investment into
  the economy.
• The liberalisation of trade and investment will
  reduce prices, increase productivity and
  stimulate economic growth.
• Reduction of labour costs will increase job
  creation, and reduce unemployment and poverty.

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The failure of the philosophy

• The IFIs have not succeeded in preventing an
  increase of poverty and inequality.
• In general, there has been slower growth and more
  inequality after the introduction of SAPs in the
  1980s.
• During the 1990s, the number of people living in
  extreme poverty has increased in all regions
  except Asia.
• In most developing/transition countries, real
  wages have fallen.

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I. Gradual transition to structural grain deficit
17

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Cereal Production Index, Sub-Saharan Africa and
selected countries
200
180
160
140
SSA 61
120
Ken -3
100
Malwi 39
80
Zamb 4
60
Zimb -62
40
20
0
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Source FAOStat
19
Cereal Production Index, Sub-Saharan Africa and
selected countries
300
250
200
SSA 61
Mali 78
150
Moz 157
Ugan 112
100
50
0
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Source FAOStat
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Changes in Spatial Marketing Margins After Reform
Source Badiane et al., 1997 Negassa and Jayne,
1996, Delgado and Minot, 1999
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Effect of reforms on fertilizer production and
trade
Exports
Domestic production
Imports
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Conclusions on fertilizer reform Success
depends on criteria

• Reforms have
• Reduced fiscal burden
• Increased competition and lowered cost
• Improved timing of delivery
• Reduced uneconomical production and facilitated
  some regional trade
• Reforms have not
• Stimulated fertilizer use
• Solved underlying problems of credit,
  infrastructure, etc.

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Implications for fertilizer reformNeed to
address other reasons for low fertilizer use in
Africa

• High CIF cost of fertilizer
• low volumes of imports
• High distribution costs
• poor infrastructure
• low population density
• land-locked countries
• Irrigation is rare
• Less than 5 of area
• Lack of credit.

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The main problems of the IFI structural reform
proposals
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Privatisation

• Privatisation of state-owned enterprises is often
  included as part of specific IFI loan
  conditions.
• Privatisation often leads to
• reduced access to services for the poor
• job losses
• decline in working conditions
• All proposed privatisations must be subject to
  consultations and a social impact analysis.
• Government and IFIs must accept to negotiate with
  unions.
• Government and IFIs must accept to examine
  alternatives to privatisation, including IFI
  assistance for improved public services.

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Labour Market Flexibility

• IFI-sponsored reforms often include
• reducing or freezing wages
• eliminating job security provisions
• eliminating limits on working hours
• restricting collective bargaining rights
• All these measures can reduce living standards
  of working people and increase poverty.
• Government and IFIs must recognize good labour
  standards as part and parcel of a
  poverty-reducing development strategy.
• Government and IFIs must agree to promote respect
  of fundamental workers rights, i.e. the ILOs
  core conventions.

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Liberalization of Trade and Capital Flows

• IFI-sponsored reforms often include
• reduction or elimination of import tariffs
• other restrictions on imports and capital
  flows.
• Such reductions can harm domestic agriculture and
  industry and lead to job loss, foreign control of
  assets, rapid outflow of capital.
• Change of trade and investment regime must be
  subject to consultation, social and economic
  impact analysis.

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Market Liberalisation and Deregulation

• Reforms often include
• eliminating price controls
• eliminating price subsidies
• eliminating government as buyer and seller
• reducing private sector regulation
• price increases of essential goods
• imposition of user fees on public services.
• Market liberalisation and deregulation must be
  subject to consultation and an analysis of its
  social impact.
• If they play an important role in reducing
  inequality, price restrictions or subsidies
  should be maintained or replaced by other social
  protection measures.

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Fiscal and Monetary Policy

• In order to reduce the government deficit,
  reforms often includes pressure to
• increase taxes or
• reduce public expenditures
• raise interest rates - try to sustain the value
  of the currency, in order to control inflation.
• The choices made on such issues have profound
  implications for levels of employment and living
  standards.

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Whats wrong here

• The agricultural sector of the developing
  countries - (the most important sector for many
  of them) - is losing ground because of the
  cheap (subsidised) products entering the market,
  produced by developed countries.
• On average, 70 of the workers in developing
  countries work in agriculture.

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Ag Subsidies hurting 3rd World

• The EU exports wheat at two-thirds of its
  production cost, and sugar at only 25. The EU
  subsidises each cow by more than US2 per day
  while 3 billion people in developing countries
  have to survive on less than this amount.
• The US annual subsidies of US 4 billion for its
  cotton production cause a reduction in world
  prices of 26, directly affecting the income of
  the more than 10 million people in West and
  Central Africa dependant on cotton production.

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Failure of Privatisation

• Privatisation exercises in the service sector
  have not always been met with much success.
• There are more than enough examples of
  privatisations gone bad
• For a large number of countries, the water
  privatisations, where large multinationals have
  taken over public services, have been a disaster
  (not only for the workers, but also often for
  both the company and the public)
• The privatisation of the railway system in the UK
  has not worked well.

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Growing Resistance Against IFI Policies

• Many recent meetings of the IMF and WB have been
  met by large demonstrations or other
  condemnations.
• Massive strikes or demonstrations against
  structural adjustment or austerity policies
  recommended by the IFIs took place in many
  developing countries.
• In general, it can be said that the IFIs are
  currently in a crisis of legitimacy, with a large
  part of the world public opinion questioning
  their purposes or even their existence.

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How IFIs Have Reacted to the Crisis of Legitimacy

• The IFIs have adopted new transparency policies,
  releasing project documents and agreements
  previously kept secret.
• The IFIs have increased consultations with unions
  and NGOs.
• The IFIs have accepted to reduce the debt of many
  poor countries and declare poverty reduction
  their overarching goal.
• WB has accepted to promote the Core Labour
  Standards (CLS).

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Basic Demands Made by Global Unions

• Stop requiring SAPs (as presently constituted) as
  loan conditions.
• Accept to provide financing of public services
  and state-run pensions without demanding their
  privatisation.
• Support labour reforms only when they respect ILO
  conventions and require that WB-financed projects
  abide by CLS.
• Extend debt relief to a greater number of
  countries.
• Allow countries to use capital controls and apply
  debt payment moratoria when in difficulty.

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Tendencies for Overgeneralization about Policy
Impacts

• An important role of research is to identify what
  works, what doesnt, and why
• This requires distinguishing between policy
  pronouncements and implementation
• Market reform not monolithic in either design
  ore implementation (e.g., Moz, South Africa,
  Kenya)
• Implementation of reforms highly heterogeneous
• Need to resist overgeneralizations
• Failure to adequate account for differences in
  implementation results in mis-identification of
  policy impacts

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5 MAJOR CONSTRAINTS

• Lack of institutional mechanisms to enforce
  market contracts and facilitate vertical
  coordination
• Infrastructural weaknesses (transport,
  communication, market information, )
• Lack of appropriate technology
• Incomplete market reforms
• Exogenous factors (wars, drought, disease)

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ROAD AHEAD

• Reforms Should Be Fully Implemented
• More Investment In
• Infrastructure
• Research and Extension
• Market Information
• Institutional Innovation
• Traders associations, contract farming, vertical
  linkages
• Contract laws, market conduct regulations, and
  grading standards
• Effective governance and monitoring capacity