Glenn Lynch
GLS 450
March 19th, 2007
GLS450 Research Paper

“The IMF and World Bank’s Poverty Reduction Strategy’s Impact on Uganda”

International Monetary Fund (IMF) and World Bank reforms focusing on reducing poverty within Heavily Indebted Poor Countries (HIPC) have largely remained ineffective despite efforts to aim the new programs at the direct causes of poverty. Although the program names have changed and reflect a more positive attitude toward the real issues strapping the third-world to poor economic performance, the underlying approach still focuses on the same inefficient strategies presented under the more traditional structural adjustment programs. These strategies, including the liberalization and deregulation of the market place and the privatization and decentralization of public programs and government controls, do nothing to weaken the economic grip first-world nations hold over their third-world trading partners and may actually strengthen one of the most crucial enablers of poverty, economic and social inequality.

In 1999, burdened by nearly twenty years of ineffective loan policies generated under the original Structural Adjustment Facility (SAF) and Enhanced Structural Adjustment Facility (ESAF), the World Bank and International Monetary Fund (IMF) restructured their loan programs to developing nations by placing more emphasis on poverty eradication efforts. The new program, entitled Poverty Reduction Growth Facility (PRGF), focuses on four main goals, creating an enabling environment for sustainable economic growth and transformation, promoting good governance and security, directly increasing the ability of the poor to raise their incomes and directly increasing the quality of life of the poor. HIPCs interested in the new program are required to file a Poverty Reduction Strategy Paper (PRSP) with the World Bank and IMF and establish a Poverty Eradication Action Plan (PEAP) at the highest level of government which dedicates up to 56% of the fiscal budget toward strategies outlined within the plan (Shah). To date, forty-one nations have filed a PRSP but only seven are far enough into their plans to report measurable results (Nyamugasira & Rowden). Among these seven, Uganda is perhaps the most ideal model for demonstrating both the most efficient uses of PRGF in terms of measurable growth as well as the shortcomings of the new program. The World Bank’s and IMF’s major challenge has been to show how the new PRGF differentiates from the unsuccessful SAF and ESAF programs.

Traditional Structural Adjustment programs like the SAF and ESAF established agreements between first-world lenders and third-world borrowers specifying that direct foreign aid between them should be used for the establishment of market-based development (Nyamugasira & Rowden). These agreements assumed that capitalist forms of production created the avenues of prosperity within the first-world and that these same modes of production should be used as the model for helping third world nations compete in the global market place. To balance the loan benefits and assure proper payback, the World Bank and IMF asked third-world nations to include three broad strategies in their efforts (Nyamugasira & Rowden). The first strategy involved liberalizing the trade market by removing import tariffs from first-world goods and export products. This was done to increase export profitability and encourage more foreign direct investment in key economic sectors. The second strategy was the reduction of government aid programs and were aimed at allowing for the privatization of the agricultural, education, health care and sanitation sectors which the Bank and the Fund hoped would encourage better training programs, increase access to technology, reduce corruption and allow governments to spend less money on expensive social programs. The third strategy required product specialization which attempted to tie the natural and manufacturer resources of the third-world country needing aid to global market demands (Nyamugasira & Rowden). In unison, the three strategies were designed to elevate the third world countries’ export markets and use the economic resources gained through the market to grow the internal economy. The relationship was supposed to be mutually beneficial, giving the third-world nations access to global markets while opening new markets for first-world products. Unfortunately, however, this philosophy proved to create favorable conditions for the lending institution and multinational corporations and less than favorable conditions for third-world nations largely because the developing nations lacked the governing and economic ability to establish a large enough domestic market for industrialized products, thereby forcing them into a purely export orientated economy (Robbins).

More often than not, the primary export commodity of the third world nation was used as the main economic engine for foreign aid. In sub-Saharan Africa, for example, multi-national corporations focused on agriculture or mineral exports because these two sectors represented the largest employment segment within the country receiving aid (Robbins). Privatization of key public utilities and the agricultural centers proved disastrous as pricing caps were removed from key services, placing them out of the reach of the country’s poorest members. Crop subsides were removed as part of the government’s efforts to reduce social spending. Coupled with the removal of import tariffs, some agricultural products became too costly to produce as less expensive products were imported for a fraction of the cost (Nyamugasira & Rowden). This contributed to the demise of a large portion of the sustenance based farming communities and smaller private farmers who were unable to sell their now uncompetitive products at the domestic or global levels. Privatization did, however, allow larger conglomerates to come in and buy up land resources and businesses but most of these were foreign corporations rather than local entities which meant the money generated by these corporations rarely benefited the local economy (Shah). To be attractive to foreign investors, various regulations and standards were reduced, the role of the state was minimized and free trade agreements were created that favored the nations responsible for foreign aid (Shah). Caught in unfavorable terms, poor countries had to export even more in order to raise enough money to pay off their debts in a timely manner. Because there were so many nations being asked or forced into the global market place before they were economically and socially stable and told to concentrate on cash crops or products where they had a “comparative advantage,” a vast amount of similar products were being produced on an international scale causing a global price war (Robbins). The resources became even cheaper from the poorer regions; which favored consumers in the West. Governments then needed to further increase exports just to keep their currencies stable and earn foreign exchange credits to help pay off debts. Over time, these inequitable conditions decreased the value of labor, caused capital flows to become more volatile, increased the likelihood of social unrest and forced investors to pull out. When donors kept the exchange rates in their favor, it often meant that the poor nations remained poor, or become even poorer (Robbins).

Traditional Structural Adjustment loans frequently forced an end to government subsidies for production by first tearing down protective trade barriers, allowing first world exporters to dump their products, often with prices artificially lowered, on third world markets (Shah) The domestic producers were then forced to sell their product below production cost. Eventually the third-world production failed and the debtor nations became importers of foreign products with little or nothing to export. The economic and political advantage that first-world nations had over third-world nations made fair negotiation of trade agreements impossible and the economic devastation got worse instead of better when the borrowers defaulted on loans, allowing for more structural adjustments to be enforced (Whirled Bank). Even if they had already paid back the amount of the principle, the poor nations could not pay back the interest. The replacement program for these ineffective structural loan policies promises to focus more on the internal poverty issues within the aid country and less on the economic indicators such as GDP and GNP. Uganda, the first of seven countries to file the PEAP and PRSP papers with the World Bank and the IMF has showed how this new internal focus could reduce some of the poverty barriers, but even these moderate successes have been met with a strong criticism that new programs are nothing more than structural adjustment plans wrapped in a new package under the guise of poverty eradication.

In 2002, one of the poorest countries of the world, Uganda, looked to the World Bank and IMF for help in funding the countries fifteen year strategy for reducing poverty from the 1997 level of fifty-six percent to ten percent by 2017 (Nyamugasira & Rowden). After filing their PEAP/PRSP documents and prioritizing the poverty reduction areas as part of their national budget, Uganda received an estimated $609 million in debt relief for the first ten years of its Poverty Action Fund (PAF) (Nyamugasira & Rowden). As the first country to access debt relief und the HIPC II portion of the PRGF program, Uganda became pivotal to the success of the much publicized World Bank and IMF reforms and in many cases, the successes in Uganda have made it an international flagship for the participatory governance, transparency and economic growth over the last several years. The specifics of Uganda’s PEAP plan call for an eradication of extreme poverty by 2017 by shifting public expenditures and donor assistance into areas with a greater impact on poverty such as rural development, physical infrastructure, direct human development and decentralized governance. Agricultural development was identified as crucial to poverty reduction because the sector accounts for half of GDP and 80% of employment (Nyamugasira & Rowden). Food, most of which is produced in the subsistence sector, accounted for two-thirds of all agricultural production (Nyamugasira & Rowden). Uganda also established specific action plans to reduce AIDS prevalence and increase primary school enrollment, economic growth, gross domestic savings and exports with much success. AIDS rates dropped from the 1990’s level of 18 percent to 6.5 percent in 2005 (Roubini). Poverty declined from the 1997 level of 56% to 38% in 2003. Primary education enrollment increased from 62% in 1992 to 86% for girls and 87% for boys while the gender gap improved significantly. Economic growth averaged about 6.5% over the past ten years and Gross domestic savings increased from 4.7 percent of GDP to 14.5 percent while exports increased from 11.2 percent of GDP to 14.5 percent between 2000 and 2005 (Nyamugasira & Rowden). Statistically, Uganda seemed to be a country on the rebound and well on its way to meeting its PEAP goals. A closer examination, however, reveals that Uganda’s growth is slowing and more troubling still, the growth has been far from equitable for all of Uganda’s citizens.

Although poverty has decreased by 18% over the past decade, Uganda had much ground to make up in comparison to other HIPC nations. Poverty remains indisputably high in rural areas, a major target of the PEAP plan, and in many areas of Northern and Eastern Uganda (Nyamugasira & Rowden). Most of the growth and improvement has occurred in urban centers where trade centers and manufacturing sectors could easily be established. Uganda is still rated as one of the poorest countries in the world with per capita income in 2005 at about US$ 280 (CIA WordFactBook). Most other sub-Saharan countries have per capital income somewhere in the $600 - $700 range (CIA WordFactBook). Life expectancy at birth remains low at around 49 years and population growth at 3.5 percent remains one of the highest in the world. Infant and child (under five) mortality rates are still around 80 138 per 1,000 live births respectively; remaining unchanged from their 1992 levels (CIA WordFactBook). The once dramatic economic growth, which capped around 7% in 2002, has decreased in more recent years to an estimated 4.8% in 2006 (Nyamugasira & Rowden). To reach its 2017 goals, the Ugandan government estimated a need to increase GDP by at least 7% annually in each of the program years. In order to qualify for the debt relief outlined in the PRGF funds, Uganda must meet all of the goals outlined within their PEAP strategy (Nyamugasira & Rowden). At current pace, however, the Non-Governmental study Structural Adjustment Participatory Review Initiative (SAPRI) estimates that over forty percent of Uganda’s loans will reach structuralized payments within the next 5 to 10 years (Nyamugasira & Rowden). Perhaps more troubling is the method by which the funds used under the PRGF was distributed.

The IMF's PRGF currently supports the poverty reduction goals of Ugunada’s PRSP by providing Uganda with an $11 million annual loan to support the elimination of trade protections for its domestic textiles and sugar industries, continuing with the privatization of the Ugandan Commercial Bank, eliminating the surcharges on cigarettes and other tobacco products, maintaining a low level of inflation (Nyamugasira & Rowden). Using the PRGF funds, Uganda eliminated import tariffs on soft drinks, automotive batteries, imported beer and tobacco two years before the IMF deadlines; important taxes that had been reinvested into Uganda’s agriculture industry (Nyamugasira & Rowden). The IMF asserts the tariff removals were necessary to support Uganda’s goal to create an enabling environment for sustainable economic growth (Nyamugasira & Rowden). Sugar, tobacco, cotton and steel were once the prime export commodities as late as the 1970’s. These products have been replaced by coffee, flowers, fish and gold as the primary exports while major imports include capital equipment, vehicles, petroleum, medical supplies and cereal; much of which is used to either support industrial forms of production or supplement the loss of sustenance farming (World Fact Book). The valuation of the export industry reflects either an increase in the demand for luxury items, such as vehicles, or a marked increase in the number of manufacturing industries reliant on oil and transportation. Unfortunately, for Uganda, the net increase has been in the manufacturing sector which pays little dividends beyond an increase in the demand for unskilled labor; hardly an indicator for sustainable economic growth. Since the inception of the PEAP, Uganda has increased the amount of space allocated for Export Processing Zones (EPZ), which are special tax free export zones setup for multi-national corporations, by over 800 hectares; opening the country up to more foreign investment (Essential Action).

Uganda’s second strategy for poverty eradication has met with similar problems tying the solutions back to the same failed policies used under the SAF and ESAF programs. Uganda had hoped to promote good governance and security for its people while carrying out its actions plans. Aided by IMF funding, Uganda was encouraged to decentralize a number of centralized government controls regulating the price and condition of water to local governments and introduce privatization to help infuse technology into the process (Nyamugasira & Rowden). As a result, many local agencies have outsourced or sold outright their public utilities to foreign countries that import their own sources of labor or automate the utility plants to maximize profits. Jobs which could have been created for Ugandans are not fully realized and price caps which were once regulated by the government can be lifted without fear or interference or reappraisal. The ability for the poor to raise their incomes is also impacted by the creation of foreign ownership in both the manufacturing and public works sectors. One seeks to maximize efficiency by reducing jobs while the other looks to exploit the cheapest sources of labor to produce their goods (Essential Action). NGO’s also fear that the lack of quality jobs and the abolishment of sustenance farming, particularly in Northern and Eastern Uganda, will diminish the quality of life rather than increase it. Correlations between increases in population and the age of Ugandan workers support this conclusion. Currently, a full fifty percent of the population is under the age of fourteen, a metric NGO’s say reflect poor life expectancy rates and as a measure to help offset falling salaries (OECD). While the recent economic trends do not support the NGO conclusions, they do not account for the cultural impact of how the policies are impacting the quality of life or the Human Development Index which measures life expectancy, literacy, education, and standard of living for countries worldwide. Uganda ranks 145th out of 177 nations on the HDI index; last among the sub-Saharan nations (OECD). The new loans lack an assessment or corrective strategy to avoid the previous negative social impact of abandoning trade barriers and subsidy cuts which demonstrates how the new loans failed to consider how price increases for clean water (a consequence of the water sector privatization directives of the PRSC) might undermine the health-related poverty-reduction goals of the PRSP (Nyamugasira & Rowden).

The completion of the five year, seven country SAPRI study found other troubling evidence questioning the efficacy of rapid trade liberalization, privatization and deregulation which the World Bank has ignored. Primarily the concern lies in the policies treatment of regulating services, utilities and markets. The IMF and World Bank loans prescribe that Uganda must privatize its key utilities and markets (Essential Action). The documents lay emphasis that regulation "will eventually follow". Yet, close analysis of World Trade Organization (WTO), which Uganda is a member of, rules clearly shows that Uganda will not be permitted to develop adequate regulation as part of their participation within the WTO. The report indicates similar problems for the impact of the US African Growth and Opportunity Act (AGOA) and the European Union's Cotonou Agreement. (Essential Action). Core to the goal of effective regulation is decentralization. From the Uganda experience, accelerating decentralization where there is poorly administrative or technical capacity and regulatory oversight at the district levels may actually produce impediments to poverty reduction. Four of the seven countries of the 5-year SAPRI study, which included important lessons from Uganda's experience, commissioned specific field studies on the impact of privatization as part of SAPRIN series of studies on structural adjustment. The SAPRI studies drew a distinction between the privatization of enterprises involved in production and those delivering basic services, such as water and electricity (Shah). As far as the latter category is concerned, in the three countries where there was a review of the privatization of public utilities, access to affordable quality services did not improve for the societies as a whole and, in some cases, they worsened. Privatization measures exacerbated inequality and failed to contribute to macroeconomic efficiency.

The general outcomes can be summarized as follows: In Uganda, while the privatization of large productive enterprises improved the efficiency and profitability of individual firms, benefits to the wider society have been questionable. The short term financial costs of privatization to the state government, were found to have outweighed the fiscal benefits and the sale of state assets was marred by corruption. No property-owning middle class was created, and a large share of the value of assets sold is now owned by foreigners. Workers laid-off during the privatization process suffered from inadequate compensation and retraining, while those who kept their jobs experienced greater job insecurity and income inequality within the firm. Ultimately, the only way Uganda will become independent of its current donor dependency is to develop its own domestic economy with selective and strategic state support not different than those used successfully by industrialized nations. It must also actively explore, initiate, promote and establish sub-regional and regional trade and commerce options.

Works Cited

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CIA World Fact Book. “Uganda” https://www.cia.gov/cia/publications/factbook/geos/ug.html (March 2007)

Essential Action. “How International Monetary Fund/World Bank Structural Adjustment Programs Have Increased Poverty Around the World.” http://www.50years.org/action/s26/factsheet2.html

Monbiot, George. “A threat to democracy: Basic freedoms to protest are being systematically undermined by anti-terror legislation.” The Guardian. (August 3, 2004.)

Nyamugasira & Rowden “New Strategies. Old Loan Conditions. Uganda Case Study.” Washington DC (April 2004)

Robbins, Richard. Global Problems and the Culture of Capitalism. Allyn and Bacon (1999) 203-228

Roubini, Nouriel. “60 Years of the Bretton Woods Institutions: Strategic Review and Reform Agenda.” New York University (May 2005)

Shah, Anup. “The Heavily In-debt Poor Countries Initiative is Not Working.” http://www.globalissues.org/TradeRelated/Debt/HIPC.asp (2004)

Shah, Anup. “Structural Adjustment – A Major Cause of Poverty” http://www.globalissues.org/TradeRelated/Debt/HIPC.asp (November 2005)

Shiva, Vandana. “Stolen Harvest.” South End Press (2000): 70-71

The Whriled Bank. “Structural Adjustment Program.” http://www.whirledbank.org/development/sap.html. (2003)