[stop-imf] Why IMF and WB fail in Kenya

[Robert Weissman]

| The East African |


Friday, March 15, 2002 
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Why IMF and World Bank fail in Kenya
By K. SAWAI

The years 2000 and 2001 were a very difficult time for Kenya. The 
country underwent a debilitating drought, which necessitated a daily 
power rationing scheme. Unemployment intensified and insecurity 
increased. Agricultural output dropped significantly.

Kenya was also severely wounded by world oil price increases. As a 
result it, for the first time, recorded a negative economic growth, 
-0.3 per cent. Even in such circumstances, the IMF would just not 
relax its attitude on structural reforms.

It continued to force Kenya to implement ever more conditions, which 
included a leaner budget, retrenchment of civil servants and setting 
up an anti-corruption agency.

The World Bank was particularly adamant on privatisation of public 
corporations. Because of the severe demands, Kenya's leadership 
raised its voice and spoke of a "second colonisation".

The 2000-2001 Government budget had already taken IMF funding into 
account. However, the IMF recognises that the structural reform 
process is off-track and will not release funding unless an 
anti-corruption policy is in place.

Roles of IMF and World Bank

The callous IMF behaviour is further demonstrated when it takes no 
notice of the 2001-2002 growth estimates, whose percentage dropped 
from 2 to 1. 

Is it right? Is the IMF's mission to push Kenya until the economy is 
destroyed? Is an anti-corruption policy really the highest priority 
during these difficult times?

In a joint statement by the IMF and the World Bank on September 6, 
2000, after they were criticised for not making clear their roles, 
they defined their roles as follows:

"The Fund's core mandate is to promote international financial 
stability and the macro-economic stability and growth of member 
countries. To that end, the Fund must focus on its core 
responsibilities: monetary, fiscal, exchange rate policies and their 
associated institutional and structural aspects. 

"The core mandate of the World Bank group is to help countries reduce 
poverty, particularly by focusing on the institutional, structural 
and social dimensions of development."

It would be unnatural not to notice a gap between this statement and 
the IMF's attitude to Kenya. The economic reforms that the IMF 
demands of Kenya are basically not different from the previous ones. 

They are based on the assumption that people will behave rationally 
and that their most cherished economic wants will be realised by 
means of demand and supply co-ordinating market prices and wages. 

But that may be expected only when the market mechanism is working at 
a certain level, the economic conditions are good, information is 
communised and the national economy is kept at full employment.

Needless to say, such conditions do not exist in developing 
countries. In many such countries, nothing can be sold by depending 
on the market. It is necessary first to create a market that takes 
cognisance of the uniqueness of the Kenyan situation.

Retrenchment of civil servants or privatisation only create 
widespread unemployment. When economic activity is buoyant, various 
private sectors can absorb the unemployed. But in present-day Kenya, 
job-creation is most sluggish. 

Nothing is produced. Therefore, any policy which only increases 
unemployment should not be tolerated. This, then, calls for 
Government intervention with a policy that creates jobs. 

What kind of private sector will make investment brisk and become an 
economic engine in Kenya's current circumstances? Are there such 
industrial capitalists in Kenya?

The answer seems to be no. Nobody tries to expand investments or take 
risks when there are various pitfalls in a licentious market 
situation. In short, we cannot expect a free market to work when the 
economy is sluggish.

Furthermore, there is no market in which all people can share 
information in the same manner. Prof Stiglitz, the 2001 Nobel 
economics laureate, said as much. Nevertheless, even if reforms based 
on that theory are forced as conditions for aid, not much can be 
expected as an outcome because it will drive Kenya into a terrible 
situation.

If the recovery programme is implemented from a cornered Kenya, the 
costs will escalate and the multilateral agencies will become a 
burden to the bilateral ones. Then is it reasonable to opt for a 
policy supporting the economy by promoting public works, borrowing 
finance, utilising unemployment and arousing a market demand? 

In adverse economic circumstances, it is reasonable so long as the 
financial investment (expenditure) is effective and efficient to 
ensure the benefits correspond to the costs. As I have said, it is 
difficult to try to activate the private sector by depending upon the 
market mechanism when the economy is down.

If so, the role of Government must be reviewed. A smaller government, 
as the IMF demands, can affect the economy. It is now time for the 
Government to intervene. Does increased Government investment 
increase the national burden for Kenya with its huge debt burden?

Expanding the budget

With increased taxes, the national living standard can be improved as 
much in case the investment is for national benefit. Since the people 
will plough back these benefits to the Government, the national 
burden will be unchanged.

Put that way, one must try to resuscitate the economy by expanding 
the budget, increasing production and dealing effectively with 
unemployment. The market mechanism can wait until after economic 
recovery.

The IMF's method of structural reforms based on neo-classical 
economics has repeatedly failed. Its position is thus untenable 
because the Poverty Reduction Strategy Paper (PRSP) will equally 
fail. 

The World Bank is similarly culpable. The market mechanism is not 
strong enough in Kenya. Thus the IMF stance of neo-classical 
economics cannot work effectively. The policies of structural reform, 
globalisation and good governance are all right in principle. 

However, there must be proper discussion on specifics. Otherwise, the 
economy will only continue to deteriorate.

*	Mr Sawai is the regional representative of the Japanese Bank 
for International Co-operation.