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Effect of Economic Theory on Policies

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Published: Thu, 19 Oct 2017

Discuss how economic theories influence policy in Africa. What are the implications of inappropriate theories to the search for development on the continent

On gaining independence from European colonial powers, much of the African continent was grossly underdeveloped, in a state of economic of ruin and stagnation. Each country may have been faced with its own set of diverse economic challenges, however most of the countries had inherited similar economic policies and structures from their specific colonial power/s. To try and address issues of economic underdevelopment and stimulate economic growth, Africa political leaders had to develop appropriate policies, which would also improve the economic conditions of their citizens.

Economic policy in African countries was largely informed by theories conceived and implemented in the West, which were implemented and based on the advise of economic experts, including advisors from institutions such as the International monetary Fund. These policies ignored the vast difference in structural and behavioral conditions between Europe, where these policies may have been applicable, and Africa.

The main 2 differing strategies for development endorsed by international advisors where 1) Import Substitution and 2) Trade Liberalization. Policy towards economic growth and industrial development in developing countries evolved from import substitution industrialization to export-orientated industrialization. The ISI was adopted during the early stages of economic development in the 1950s through to the 1960s with the intention to achieve self-sufficiency for nations, while in export-orientated industrialization the state champions international competitiveness of industry and exports as the engines of growth. The common consensus among analysts of development is that export-led growth would be more sustainable than import orientated growth models.

Because of poor existing infrastructure development (transportation), and lack of manufacturing capacity and skilled labour, most of the African countries were dependent on importing for food and other items. Colonial governments did not invest significantly in education thereby leaving a considerable unskilled labour force.

The implementation of an import substitution policy would allow for the production of the commodities in the local market, reduce dependence on imports (which perpetuated Africa’s dependence on the West) and protect the domestic economy from being vulnerable to the global economy. It was believed that such policies would promote industrialization and promote industries from imports until they had reached a level of development when they were able to compete in the global market.

Import substitution required intervention by government, which included nationalisation of key industries and implementation of high tariffs on imports. Moreover, government’s role is critical to ensure saving and investment are undertaken as these are necessary conditions for transition to development and economic growth, as advocated by stages of growth models. These models suggests that savings is an integral part of one of the stages and that developing economies must save a certain portion of their income for continued investment in industries and technological improvement to remain competitive. However, these models assumed that all economies develop in a similar manner.

Critiques of the neo classical approach of import substitution strategies assert that excessive regulations by government give rise to unnecessary bureauticratisation and corruption and this discourages private enterprise.

Zambia

In the early 1950s Zambia adopted import substitution industrialisation aimed to reduce dependence on Western markets. Zambia underwent a period of nationalization, which allowed the government to own majority shareholding in various sectors of the economy, including the copper mining industry which accounted for 90% of its export revenue. In this instance the government was the driver of economic development.

There were reasonable growth rates in the 1960s and 1970s, primarily due to high copper production and prices and increases in maize and the manufacturing output, as well as increases in number of social facilities and physical infrastructure.

In the long run, policies in support of import substitution proved inefficient and uncompetitive due to high input costs, high monopoly prices, reliance on government subsidies, lack of technological advancement; and thus unsustainable. Import restrictions and the bias against exports, which were designed to ensure satisfaction of the local demand, resulted in higher exchange rates and reduced gains from exports. Further, during industrialisation, countries do need to import certain specialized machinery and raw material to support local manufacturing, Zambia could therefore not sustain its restrictions on imports.

Zambia failed to diversify the economy from copper mining, and experienced a number of challenges, resulting in economic decline. The government-led attempt at development was not able to diversify its products range in local manufacturing, and remained dependent only on its copper mining industry for export revenue.

The Zambian government also failed to save during the period of high copper prices to cushion the impact of any fall in copper prices, which lack of saving and investment led to poor economic performance. Instead of accumulating savings, the government increased spending on social and physical infrastructure, imported luxury goods and compensated workers with high wages, especially mine workers. Although

There were other reasons for the poor economic performance which include the decline in copper prices on the world market after 1974 contributed to economic decline causing reduced government expenditure, including import substitution industries, inability to service national debt.

Further intervention by government gave rise to bureaucratisation, corruption and uncertainty, discouraging private investment and foreign trade initiatives. It catered only to small urban market at the neglect of poor majority in the rural areas.

Import substitution industrialization had failed as a mechanism for economic growth.

The new government that came into power thereafter adopted liberal economic policies, including a privatization plan and started borrowing heavily from the likes of the International Monetary Fund and the World Bank to finance development and offset the deficient export earnings, Dr. Bertha Z. Psei-Hwedie. Most of Zambia’s national income was used towards repayment of national debts and not social development. Zambia eventually adopted economic demands imposed the IMF and world Bank.

Zambia continued to suffer poor economic performance, as the privatization of pubic companies was littered with corruption. Zambia was ranked 11th most corrupt country in the world (www.zamnet.zm, 9 June 2002). There had been gross misuse of national resources and funds received through privatization of public companies at times did not reach the intended beneficiaries. Moreover government did not have clear long-term plans and strategies for meaningful economic growth.

Both import substitution industrialisation and export orientation through structural adjustment programmes failed to achieve sustainable development in Zambia. Economic development through exports requires diversification of products, including beneficiated products, and not be dependent on a single product. Dependence on a single product is unsustainable as it leaves the economy vulnerable.

Conclusion on Zambia: Zambia remain one of the poorest in the world as a result of inappropriate economic policies or ill-considered application of such policies.

Uganda

Uganda is said to be one of the most successful examples of economic policy reforms. In the late 1980’s Uganda introduced trade liberalisation which saw the reduction of trade barriers (export tax and considerable reduction in import protection) and opened the economy to global competition. Although import tariffs have increased in recent years.

Much of the agricultural sector was liberalized, mainly coffee marketing, and this has ben associated with increased prices and incomes for producers. A large number of private coffee producers entered the export market. The main aim of the policy reforms were to reduce poverty and promote employment by improving competitiveness of the Ugandan exports, restoring incentives for producers by eliminating controls in the foreign exchange market and abolishing inefficient market monopolies.

Before the 1990’s Uganda had strongly protectionist and highly distorted trade regime, with taxes imposed on the main export (coffee) and high tariffs and restrictions on imports. In addition to the trade reforms, Uganda also received large aid inflows, although research does not make reference to how the aid inflows were used, one can infer that large investments were made to improve physical infrastructure, thereby creating a favourable environment for the exports

The application of a market friendly economic approach recognised the need for government interventions in facilitating conducive market conditions by implementing market friendly policies, including deliberate attempts to eliminate inefficient monopolies, and that opening economies to allow for greater inflows of foreign exchange and improve per capita incomes in countries.

Research indicates that trade liberalisation in Uganda had doubled GDP per capita by the early 2000s, and contributed towards poverty reduction, however trade on its own would not be able to completely eradicate eliminate poverty, unless trade is accompanied by growth and is intended to benefit all citizen, not just a select few.

For Uganda to achieve widespread growth, exporters, with the assistance of government would have to invest in training, education to increase labour activity and possibly food/agro processing and government would also have to implement complementary policies that target the poor in sectors that are marginalized from international trade.

The dawn of the end of colonialism for Africa was poised for meaningful economic growth, especially in view of its abundant supply natural resources, however due to numerous factors, these opportunities were plundered. There existed factors which were not ideal building blocks for economic revolution, including corruption, mismanagement of funds, military coups d’etat, dictatorial regimes, ethnic tensions, the desire by those in power to satisfy personal needs for self-enrichment to the detriment of the poor and unwitting implementation of inappropriate policies on the advice of well-meaning advisors.

A combination of policies should be considered for developing countries, taking into account their unique circumstances, and a fine balance between the policies maintained. As President Mahinda of Sri Lanka asserted “Pragmatisim should be the guiding principle of economic policies.

Economic policies in the African context should involve government intervention. There is rationale in using public resources to support the private sector through export promotion interventions or to subsidize local manufactures to reduce dependence on imports. Most importantly there needs to be political will to implement and sustain radical economic reforms. This includes creating a conducive environment for an active and participatory civil society is integral in informing economic policies.

Economic policies aimed at growth should also attempt to be inclusive and importantly not neglect the majority of the citizens, in particular the poor.

Bibliography:

  1. Acumen magazine – Issue 9, Third quarter 2014, article title : Africa’s Dependency Habit
  2. Morrisn O, Rudaheranwa N, Moller L – Discussion Paper titled “Trade Policy, Economic Performance and Poverty in Uganda”’ www.afrportal.org.
  3. Article – The fact about Africa – ABSA chairman Danie Conje.
  4. Dr Bertha Z. Osei-Hwedie – Development Policy and Economic Change in Zambia: A Re-Assessment (Paper)
  5. Bernard Banda and Joseph Simumba – The Birth, dirth and Survival of Exports in Zambia, November 2013© Zambia Institute for Policy Analysis & Research.
  6. Sunday Times Article, 6 November 2011 “Import substitution: Is it a pragmatic economic policy?”
  7. Rakner, L. 2001. Political and Economic Liberalisation in Zambia 1964 – 1991

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