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Management Issues in the 3rd World

Editorial

Third world countries in economic crises are usually compelled to undergo some macro economic reforms as a condition for granting credits.

In most cases, the countries' fortunes have not improved and poverty has increased.

This paper attempts to analyze the effects of the macro economic reforms and suggest measures such third world country can take to improve its lot and hasten, not only the pace of growth and development, but also attract much sought after foreign investments.

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Reforms Beyond Macroeconomic Policies

Contents
Introduction Limits of Macroeconomic reforms in a third world economy.
  1. Devaluations
  2. Increase in interest rates.
  3. Attaining fiscal balance.
  4. Divesting Governments interests from local enterprises.
Recommended measures for development beyond macro economic reforms.
Conclusion

Introduction


A time comes up when a country reaches economic crisis, usually as a result of balance of payment and trade deficits.
As assistance from IMF usually entails macro economic reforms: devaluation of the currencies ostensively to encourage exports by making production costs lower relatively by international comparison and exporting more attractive, with a tight monetary regime to check inflation.
This results in an increase in interest rates and should have the added benefits of making savings and investments more attractive.
The countries are also expected to strive to reach fiscal balance by removing all forms of subsidies. These reforms must take place before credit is extended to the country.

Unfortunately, the IMF usually does not make a distinction between the economies of the developing and the more developed ones in applying the conditions.

Poor record of third world Governments in managing resources and revenues has elicited the call for total divestment of government from all enterprises to the private sector (privatization).
The result : -
  1. Virtually none of those economies ever regain fiscal balance without a massive injection of funds, from the IMF or some lending countries, or an increase in commodity prices, which forms the main thrust for their exports.

  2. Their currencies never return to anything close to their previous values and the devaluations continue, even when trade and fiscal surpluses return or even exceed their previous values, and if the cause turns out to be the restoration of commodity prices, which in most cases, may be the cause of third world trade deficits in the first place.


This topic will therefore highlight the limits of this macroeconomic approach and suggest alternate route lenders and policy makers may take to diversify and modernize a third world economy suffering from such deficits, while, in addition, attracting foreign investment.

Limits of Macroeconomic reforms in a third world economy.

  1. Devaluations This makes exporting very attractive as a result of the higher local currency price incentive of the export market. (This may not be applicable where several other countries share a common currency, such as CFA zone in Francophone West Africa).

    The new incentive to export may however not be supported as a result of inadequate or poor third world production capacity or infrastructure. While more goods head for the export market, the third world local industry's inability to keep up the supply results in scarcity, and the supply chain for the exportable items are stretched, resulting in inflation, thereby eroding whatever comparative advantage the exportable items may possess locally following the devaluation.

    The revenue increase experienced by the devaluation may also be at the expense of local taxes as explained below:
    What gives rise to an overvalued currency may be a misconception of what the real or commercial value of a currency.
    Informal sector operators, usually pay a premium on foreign currencies to evade documentation and the resulting taxation.

    Graft, loopholes in government expenditure and other illegal sources of income from corruption fuel demand for foreign currencies, where the perpetrators attempt to keep their income from public view.


    These eventually constitute an exchange rate in which a premium is paid for foreign currency, parallel to the rate patronized in the formal sector, constituting an implicit tax whenever payment is made for imports.

    The authorities construe this parallel rate to be the real or commercial value of the foreign currency, and ultimately conclude that the local currency is overvalued, and would be an implicit tax on exports, which, they believe, deserve to be encouraged.

    This in turn, now brings in several repercussions:
    Many manufactured goods, ordinarily regarded as consumption items in the more developed economies, may actually be capital items or economic goods, eg motorbikes, vehicles, electric generators mobile handsets, etc,.
    These, in many instances, form the backbone of the informal economy, which provides the greater proportion of employment, services and production in the third world.

    Taxing imports this way reduces economic activities while inflation strains the profit margins expected from exportation.
    Prices eventually adjust to the devaluation, making another round of devaluation necessary, especially when the factor which has brought about the devaluation, usually commodity price shocks, persist.

    The model, where US manufacturers opened outposts in Asian countries to reduce manufacturing costs may no longer be effective for the rest of the developing world for two reasons:
    1. other factors capable of sustaining such low costs, such as labor efficiency, and availability of productivity enhancing infrastructure may be absent, making the exercise of little long term benefit to the country's economy.

    2. as production costs are being lowered for the same mature markets of the more developed economies. The advantage this would afford a third world market is eroded by the currency devaluation which compresses further, the already low third world consumption as a result of poverty, thereby hurting international trade and also compounding the economic and social misery in these economies.

    International lenders should lay more emphasis on the creation of more credible markets to sustain growth, international commerce and longer product life cycles when third world markets expand, which should be of greater benefit to the international economy, particularly those of the developing world.

    Problems these devaluations cause do not end there.
    Provision of healthcare services also become more expensive as equipment and medications in many third world countries, do not involve much of local content.

    While it can be argued that the salaries of many medical personnel may not quickly adjust to devaluation thereby reducing the cost of providing such services, evidence shows that the third world is loosing most of its personnel, to the more advanced economies, or even third world economies with stronger currencies, and therefore, better pay and service conditions for them.

  2. Increase in interest rates. A tight monetary policy results in high interest rates, making long term investment that should sustain the export incentives unattractive.
    Eg., new investment in domestic infrastructure and plantations to replace aged tree crops, for increase in supply of commodities such as cocoa, rubber, or oil palm, which may require up to four years to take effect.
    The increased working capital requirements, coupled with higher borrowing costs adds a significant charge to profits, thereby penalizing local industries.

    For the local citizens, there is very little disposable income to save as the middle class is virtually non existent.
    The devaluations usually exceed the gains in the nominal interest rates increases and the rich are more likely to invest in more stable currency regimes thereby increasing capital flight.

    Provision of medical services is also hindered by high borrowing costs,thereby reducing the efficiency of a work force. (Frequent absenteeism, as a result of illnesses and bereavements among the work force will hardly attract for foreign investors).

  3. Attaining fiscal balance. Subsidy removal:
    Some Governments employ opportunity costs to compute what they see as subsidies especially for commodities like crude oil.

    Nigerian authorities, for example, estimate petroleum subsidies by computing what petroleum prices would be if sold to the local refineries at international market prices.
    This is just as ludicrous as asking local wheat or coffee farmers to sell to local customers, which should include local processing plants at international prices.

    The attraction local production of the commodities should have on value adding local and foreign investment is compromised as the local transfer pricing is equal to the international commodity prices which do not take local wages level and conditions, and in essence, production costs into consideration.

    Local users of the commodity are implicitly overtaxed with its consequences on employment creation and adding of value.

  4. Divesting Governments interests from local enterprises. Why privatization may hurt a third world economy.
    In the more developed economies, knowledge in the sector in which many third world governments operate originated in the private sector: Private individuals invented the telephone, construct electricity generating plants and distribution systems, and sell such to their government agencies which were later privatized in countries like the United Kingdom.

    Third world governments typically operate telecommunications and public electricity generation and distribution enterprises where the skills are acquired by government efforts through the patronage of those private companies In the developed economies.

    They have spent much on training, courses, and many have acquired much experience only in that sector from government efforts. The local private industries are new to most of the services the government enterprises render.
    Credible “core investors” would then be typically foreigners or those who have acquired knowledge and expertise somewhere else.

    Senior managers of Government enterprises are usually changed in preference for the foreign managers of the core investor, when privatized, thereby bringing to waste the human resource investment on the skilled staff when laid off.
    The nation's gross domestic product is also reduced when management passes to foreigners.

    Where the Government enterprise had operated a monopoly, privatization may only substitute Government monopolies with private ones.
    Some other questions regarding privatization usually come to mind, such as:
    • Why would a foreign company pay for usually obsolete state owned equipment only to make fresh investment in modern state of the art ones?

    • Are we not over estimating the effect of privatization? The investor may result to asset stripping to get the hidden values of the investment.

    • If the market was really that good, and the business climate that conducive, then why wouldn't a core investor simply establish a competing industry with modern equipment?

    A case in point is Nigeria's telecom industry.
    The industry attracted over 80 million subscribers within ten years, without the participation of the state owned NITEL, whose privatization has become a national nightmare. Authorities should encourage competition with state owned enterprises, rather than privatization.

    The so called “money loosing state enterprises” might not really be so. We may want to find our if the amount of state subvention is equal to the level of free or unpaid services incurred by state agencies, and how much such unpaid bills affect their working capital requirements.

    In other words,
    • Do the government agencies using these services pay realistic prices for such promptly?

    • Do Government departments even pay for electricity consumption or airline tickets purchased from state owned electricity companies or airlines at all?

    • Do we have to privatize the enterprises before compelling government departments to pay for their services?

Privatizing government enterprises and currency devaluations may therefore bring more income to government which may become available for mismanagement when transactions are not transparent.

It is doubtful if many third world governments with their current posture on public management, can make the best use of such surplus local currency income.

Recommended actions to develop third world economies beyond what can be achieved by the macro economic reforms.

  1. Strengthen and encourage joint ventures, assets and knowledge sharing and capital pooling among the operators of the informal sector.
    This can be organized through groups, cooperatives, and associations with seminars and enlightenment campaigns and operation of government organs equivalent to the Small Business Administration of the United States of America.

  2. Open up all sectors of the economy to commercial activities and competition in spite of the presence of Government enterprises. In that case, modern equipment will be employed in a new enterprise to compete with the government ones, by private investors.

    This makes better sense than, first selling the government enterprise, then expecting the core investor to change modernize them, thereby duplicating capital investment.

  3. Establishment of independent wholesale and retail dealers in downstream sector, and access of Government enterprises to the stock market for bonds and other instruments for borrowing when needed.

    This would require of course, publication and auditing of regular financial statements.

  4. Lenders should insist on transparency in implementing Government budgets. Loopholes result in surplus cash in the economy, which may not be tied to any meaningful commercial activity.

    Regular internal and external audits, and regular publication of financial statements should be institutionalized. This should be available to the public through websites.
    Other credible efforts should be made to improve public accountability and reduce corruption.
    No amount of macro economic reforms can substitute for such efforts in attracting foreign investments and reducing wastage.

  5. Mass literacy, education, training and apprenticeship:- ensuring government expenditure on education becomes effective. This offers prospective investors an efficient workforce , which also pays off on the long run.

  6. Research and development: Government should use its institutions - technical colleges and universities - to organize, utilize and propose the use of research findings in basic operations of governments and to encourage organizations to be more effective, small scale manufacturing, agriculture and animal husbandry, and adding value to raw materials in general.

    There are even international research institutions spread around the third world whose findings, capable of revolutionizing local industries are available for next nothing. Many of these countries still tolerate centuries old traditions in agriculture etc.
    If all the local tertiary institutions did was to adapt research findings to the solution of local problems they would justify their expenditure.

  7. Strengthen a business unit of the Judiciary to promptly adjudicate on business frauds and disagreements. Businesses will not have to go through tortuous legal or judicial processes for solving minor disagreements or prosecuting fraudulent employees.

  8. Comprehensive health care delivery.
    Prospective foreign investors will no doubt be frustrated by the substantial loss of labor man hours due to illnesses and death, most of which are either minor cases or altogether preventable, which comes up as a result of inadequate healthcare delivery systems thereby reducing operating costs for businesses which would have to provide such for workers and their family members.

    Expatriate staff would not have to fly home for the simplest medical case.
    Countries which hope to attract foreign investments must therefore, pay attention to healthcare services as a healthy workforce reduces production and operating costs.

    Some simple steps can be taken to reduce medical incidences that may eventually result in higher costs for its citizens and conjestion in hospitals:
    1. Free tests to be taken at public places like markets, schools and institutions, worship places or large offices, to alert the citizens of their health conditions and to encourage them to seek early assistance:
      1. Free HIV status tests,

      2. Free hepatitis B tests and vaccination

      3. Free Blood pressure and blood sugar tests

      4. Free eye tests to check for potentially dangerous eye diseases.

      5. Tests for early signs of breast cancer or some other forms of tumors.
        The results can follow enlightenments campaigns.

        People would be able to know their limitations concerning nutrition, habits and medications, which will not only preserve lives, but will also reduce expensive medical procedures, and indicate possible courses of action in emergencies or crises.

    2. Making safe water available.
      The residents of some third world countries go through great efforts just to get clean water, especially in the urban areas, with its toll on productivity. It is estimated that a large proportion of diseases plaguing many third world countries can be substantially reduced with the production of clean water,.
      Frequent outbreaks of Cholera for example, will scare away foreign investors even when the most ambitious macro economic reforms are being implemented.

  9. Coordination among various arms of Government. Channeling the use of, for example, excess fruits into production of alcohol, for blending with octane at the refineries may require coordination among three government Ministries (Departments).
    This coordination may also be crucial in reducing government expenditure and the resulting need for higher taxes.

  10. Economic Impact of roads, rural electrification, and other infrastructure should be prioritized. Many third world leaders have sited projects in their home towns or political strongholds, in preference to other less favored areas where the economic or financial benefits to the nation may be much higher.

  11. Countries should seek greater value for projects by comparing costs with some others established elsewhere and account for any variations in cost.

    This is now simpler with the use of the internet. Some third world countries pay extortionate prices for development projects such as roads, water treatment plants, hospitals, schools etc., as they try to meet Millenum Development Goals.

  12. Value for commodities produced. Adding value to commodities at source. Processing cocoa into cocoa cake and butter, for exports, or refining crude oil locally for example, should, in addition to creating employment, bring in more income than exporting the raw cocoa beans.
    This should also attract foreign investments in the raw commodity processing industry, which is crucial to third world development.

  13. Long term strategies and simulation especially in moving beyond single commodity income, strategies to deal with shocks from such single commodity, and impact of present policies towards such.

Conclusion

In summary, many third world economic planners live in deception, thinking they can just tweak macroeconomic policies to achieve development and growth the same way its done in more advanced economies which have seen several years of sustained real investments in several sectors.

Rather than take broad measures which affect the economy as a whole, third world authorities should address specific issues which bring about the macro economic imbalances.
Authorities should for example:-
  1. investigate other ways of stimulating exports, such as reducing production costs through lower interest rates and financing costs, improving infrastructure and making access to export financing easier.

  2. Seek out ways to reduce and eliminate wastes in government expenditure, otherwise, taxes would be raised only to maintain wastage in government spending.

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