liberalisation and poverty in africa since 1990–why is the operation of the ‘invisible hand’...

Journal of International Development

J. Int. Dev. 21, 749–756 (2009)

Published online in Wiley InterScience

(www.interscience.wiley.com) DOI: 10.1002/jid.1611

LIBERALISATION AND POVERTY INAFRICA SINCE 1990—WHY IS

THE OPERATION OF THE‘INVISIBLE HAND’ UNEVEN?

PAUL MOSLEY*,y and BLESSING CHIRIPANHURAz

*Department of Economics, University of Sheffield UKzOffice for National Statistics, Newport, Wales, UK

Abstract: The dramatic reduction in poverty in Uganda and Ghana in the 1990s was derived

largely from the liberalisation of the export price received by a labour-intensive peasant export

sector. Other African economies ought to be able to derive inspiration from this manifestation

of the invisible hand, but can they? Several other African peasant export economies

experienced price liberalisation during the structural adjustment period, but without experi-

encing anything like the same positive poverty reduction dynamic. Two reasons are fairly

clear—liberalising countries varied in the extent to which they passed on higher export prices,

and they also varied in the extent to which they impacted on dimensions of governance,

especially the politics of market access, in the rest of the economy. The latter continues to be an

important research frontier for future investigators. Copyright # 2009 John Wiley & Sons, Ltd.

Keywords: Ghana; Uganda; liberalisation; poverty

1 INTRODUCTION

Economic liberalisation or structural adjustment, also known as the ‘Washington

Consensus’, is typically visualised as the relaxation of government control over aspects of

the economy, including both domestic (product and factor) and external (trade and foreign

investment) markets. Such liberalising policy changes were introduced to Africa and the

rest of the world in the 1980s and are still being implemented, often under pressure from

*Correspondence to: Prof. Paul Mosley, Department of Economics, University of Sheffield, UK.E-mail: [email protected] President 1998–2001.zFor an extension of the arguments presented here please see our paper presented at Centre for the Study of AfricanEconomies conference on 21 March 2009 and available on the Centre for African Economies website(www.csae.ac.uk).

Copyright # 2009 John Wiley & Sons, Ltd.

750 P. Mosley and B. Chiripanhura

international financial institutions and donor countries. In the wake of these reforms a large

literature has developed, arguing that liberalisation leads to economic growth (Sachs and

Warner, 1997; Frankel and Romer, 1999), and that growth then leads to poverty reduction

(Dollar and Kraay, 2003); World Bank, 2002). Within Africa, the empirical evidence seems

to confirm that reforms resulted in poverty reduction in the 1990s in Ghana and Uganda

(Besley and Cord, 2007). Yet in other liberalising African countries there is no evidence of

equivalent benefit to the liberalisers from the same reforms.

2 ECONOMIC REFORMS AND POVERTY: THE LITERATURE

The key linkage between economic reforms and poverty is through the impacts of reform

on markets, government policy, and institutional changes. Liberalisation has important

distributional outcomes that have potential to reduce or aggravate poverty. The link

between liberalisation and poverty is through growth (Sachs and Warner, 1997; Frankel

and Romer, 1999), but is strongly contested (Winters et al., 2004). It is generally agreed

that trade liberalisation, through productivity growth, brings about some measure of

growth,1 but the impacts of this on poverty vary from case to case. Dollar and Kraay (2003)

posit that trade is linked to growth through investment, and so its impact on poverty

depends on the poor’s investment behaviour. In this regard, we can say that trade outcomes

depend on how well the poor are equipped to deal with the opportunities and risks posed by

trade liberalisation. It can also be argued that there are positive links between tariff

restrictions, industrial policy and corruption levels and that since corruption reduces

investment, it also reduces growth and causes poverty to increase.

The generally low poverty elasticity of liberalisation may also be due to infrastructural

and transportation bottlenecks which make the effects of liberalisation hard to transmit

from the border to villages (IFAD, 2001). The situation is worse where small farmers are

forced to sell their produce through marketing agencies which do not pass on the benefits of

international trade, even though one can argue that such agencies may also insulate

producers from international trade risks. In Africa, this argument is supported by the idea

that Africa suffers from ‘primary’ instabilities that adversely affect growth and hence

poverty reduction, such as vulnerability to drought, now aggravated by global warming,

and adverse terms of trade

On the basis of the above literature, it is apparent that there is no general rule regarding

the impact of liberalisation on poverty (Winters et al., 2004): it is necessary to decompose

the linkages to understand the impact. The conceptual framework developed by Winters

et al. (2004) provides an appropriate foundation upon which the factors that caused

different outcomes from broadly similar policies can be established.

Within this analytical framework, the impact of liberalisation depends on macro-

economic stability and the productivity response to reform. It is suggested that

liberalisation operates through productivity growth to cause economic growth which in

1Even this linkage varies across countries. Openness may force countries to specialise in sectors that are lessdynamic, thus pushing them onto a low growth path. They argue that growth may in fact be endogenous, andimprovements in health and institutions can bring about growth without trade. Lall (1999) provided one linkthrough which liberalisation may cause poverty growth when he analysed firm responses to reforms in Zimbabwe,Tanzania and Kenya. He concluded that firms in these countries responded to liberalisation by downsizing theiroperations, reducing employment in the process and hence causing growth in poverty.

Copyright # 2009 John Wiley & Sons, Ltd. J. Int. Dev. 21, 749–756 (2009)

DOI: 10.1002/jid

Liberalisation and Poverty in Africa 751

turn results in declining poverty (Winters et al., 2004). Liberalisation also affects

households’ production and consumption decisions. It affects income sources (own-farm

production, self-employment in non-farm activities, wage employment in other

households’ enterprises (farm or non-farm)), as well as remittances and transfers (Singh

et al., 1986; Winters et al., 2004), and households also benefit from increases in the

prices of products that they sell. Households lose if reforms cause product prices to fall.

Welfare is improved by falling prices of goods while price increases reduce welfare.

Further, a household’s investment decisions are influenced by its resource endowments

subject to environmental limitations, including the impact of liberalisation. Overall,

the impact of liberalisation on household welfare is transmitted through prices and

through returns to assets. The extent of the impact, without which the invisible hand is

powerless, depends on several other factors, including infrastructure, transport links,

geography, transaction costs, and restrictions on crop movements between the border and

the farm-gate.

Liberalisation is also linked to poverty through its impact on markets. Where new

markets are created, there is a chance that poverty will be reduced; where markets are

destroyed, there is a chance that households will be plunged into poverty. Generally,

reforms create new opportunities in the economy, and the poverty outcomes of such

opportunities depend on whether or not households have adequate endowments with which

to take advantage of the new opportunities. In addition, reforms expose households to new

and unfamiliar risks which they will not be in a position to insulate themselves against.

In the labour market, we know that the poor may rely heavily on wage income, and that

wage employment is an important exit route out of poverty. Thus, liberalisation that

increases job opportunities and/or wages potentially has poverty-reducing effects. If there

is growth in the labour-intensive sector this may reinforce a decline in poverty. By the same

token, liberalisation that reduces job opportunities may push some households into poverty.

The household human capital stock is critical in determining outcomes, in as much as

policies meant to mitigate adverse labour market effects can be critical.

Lastly, reforms affect government incomes and expenditure patterns. Where trade taxes

constitute a large proportion of total revenue, reforms may result in lower government

revenues. To balance its books, the government may reduce expenditure on services most

beneficial to the poor, thus causing poverty to increase. It is also possible that revenues

actually increase following reform, in which case expenditure on services beneficial to the

poor may increase, thus lowering poverty.

3 WHY IS THE IMPACT OF LIBERALISATION UNEVEN?

While much of the world, particularly in current crisis conditions, appears happy to bury

the ‘Washington consensus’,2 this is by no means the case in Africa, where there has been

considerable convergence on a liberalised model in which the role of the state is

significantly reduced. At the micro level (on which this paper is focussed) and in line with

some literature referred to above, liberalisation has one enormous achievement to its credit,

which is the huge fall in poverty in Ghana and Uganda during the 1990s. There has been

substantial analysis of this happy outcome (Reinikka and Collier, 2001; Besley and Cord,

2007), most of which gives pride of place to measures undertaken in primary commodity

2On developments at the macro level see Adam and O’Connell (2006).


DOI: 10.1002/jid


markets, which increased the proportion of the export price for cocoa and coffee,

respectively, which producers received.3

However, embedded within this undoubted achievement is a puzzle. Ghana and Uganda

were by no means alone in pursuing export-market liberalisation policies, and yet they

were alone in deriving a poverty dividend on this scale. Practically the whole of Africa was

pursuing these policies in some form, albeit with different degrees of commitment and

implementation (Mosley et al., 1995), and yet only in Rwanda do we observe anything like

the same reduction in poverty as that experienced by Ghana and Uganda. In Cameroon,

Benin, Togo, Kenya, Tanzania, Ethiopia, Nigeria and Madagascar which also liberalised

significantly, there is no significant reduction in poverty between 1990–2005; and in the

Congo (DRC), Cote d’Ivoire, Zimbabwe and Burundi there appears to have been an

increase in poverty. What went wrong? If the data are trustworthy any answer which can be

derived would have useful implications for anti-poverty policy.

Why, then, did coffee eradicate poverty4 in Uganda but not elsewhere? There are two

possible explanatory stories. The first has to do with the politics of public expenditure and

the labour market, and the second has to do with institutional capacity. The dynamics of the

reform process itself also matter, not only with coffee but with other export crops. Ghana

opted for a gradual liberalisation process (just like Cote d’Ivoire) which allowed

stakeholders time to adjust to regime change, whereas in other countries such as Nigeria the

liberalisation process was more abrupt. Second, Ghana (unlike Cote d’Ivoire, Nigeria and

Cameroon) did not go for outright free market operation: it maintained a marketing board

to oversee quality and trade of cocoa. Although this approach resulted in a lower

percentage of the export price accruing to farmers, it shielded farmers from international

market risks, some of which they were unable to deal with. The gradual process allowed

farmers to learn and grasp new capabilities as well as build assets with which they could

improve their living standards.

The Ghanaian and Ugandan outcomes can also be contrasted with those in countries like

Zimbabwe where liberalisation created opportunities which the majority of the people

could not seize because of lack of resources. Skewed land ownership meant poor people in

the rural economy could not expand production into cash crops (tobacco and cotton) whose

prices had been liberalised. The reforms kept export controls on food crops, mainly maize,

which the majority of the people produced. Further, opposing reforms, notably removal of

input subsidies and access to credit, resulted in falling production and productivity. It is

therefore not surprising that in such economies poverty increased rather than decreased

following liberalisation.

The Ghana/Uganda miracle has sometimes been ascribed to aid-led growth: it has been

suggested that the initial stimulus to demand through aid inflows was simply larger for

Uganda and Ghana, and that this was significant. However, an examination of the ratio of

aid to gross national income in the 1990s (1990–2000) does not support this proposition.

The two countries’ ratios of aid to gross national income (10.1% for Ghana and 15.7% for

Uganda) are not significantly different from those of other African countries. The ratios are

even smaller than those of Zambia (26.4%), Mozambique (42.2%), Tanzania (18.6%),

Rwanda (28.7%) and Malawi (27%). Analysis of aid per capita over the same period also

3Statistical evidence is included in the longer joint paper referred to in the acknowledgements at the beginning ofthis paper.4This is a figure of speech. The allusion is to the large signboards on all the main roads leading out of Kampala,which make this claim.


DOI: 10.1002/jid


reveals a similar picture. Thus, the reason for an impressive poverty reduction is apparently

not the inflow of aid funds. Below, we argue that this is a question of quality rather quantity

of aid flow.

4 PUBLIC EXPENDITURE AND THE POVERTY DIVIDEND

A major reason why the Ugandan and Ghanaian commodity booms were poverty-reducing

appears to have been that because they were intensive in the use of the labour of low-

income people the benefits went mainly to a large number of smallholders and workers,

rather than to a small number of latifundia. However, every labour market is unique, and it

is possible that the explanation for the ‘Ghana–Uganda effect’ is that these countries had

more active labour markets than their comparators.. This proposition can be tested by

examining three factors likely to be associated with the transition of the poor across the

poverty line: (i) an average measure of labour-intensity, (ii) incentives to an active labour

market (provisionally the real wage is used as an index of this) and (iii) the ‘pro-poor

expenditure’ (PPE5) ratio, as an indicator of the extent to which government expenditure is

focussed on sectors which reduce poverty. On the basis of these measures, labour intensity

(labour per unit of output) in Uganda and Ghana is almost twice that in the other peasant

export economies of Africa. Thus, on the presumption that income from their cotton and

coffee booms was distributed along the same production function as output as a whole, it

generated almost twice the impact on labour absorption and this, following the argument of

Winters (2001), may have contributed to poverty reduction. In addition the PPE ratio,

whether defined inclusively or exclusively of military expenditure,6 is significantly higher,

with a lower variance in Uganda and Ghana than in the other countries considered. It may

be economic liberalisation, especially in an environment of high labour market regulation,

prevents the invisible hand from working by reducing firms’ ability to hire workers, thus

reducing labour intensity and the poverty effects of reform. On the basis of the World

Bank’s rigidity of employment index (high rigidity¼ 100), this argument may be true for

countries like Tanzania (68), Mozambique (56), Rwanda (50) and Burkina Faso (70). On

this measure, Ghana (33) and Uganda (10) had, in the 1990s, relatively more flexible labour

markets which may have increased employment in their formal sectors, and hence the

poverty level in the urban sector.7

5 INSTITUTIONAL CAPACITY AND THE ROLE OF CONFLICT

A further potential contributory factor in Ghana and Uganda is the inclination of their

political elites towards rural areas. Both governing parties in the two countries in the 1990s

had strong rural bases. In Uganda, Yoweri Museveni came to power in 1986 after years of

civil war in which his allies had been guerrillas drawn from the small-farm agricultural

5The ‘PPE ratio’ represents pro-poor expenditure: [primary health and education, plus rural water and infra-structure, plus agricultural research and extension, less in some variants military expenditure] as a share of GNP.6If military expenditure is netted out, ‘pro-poor expenditure’ increased by 148% between 1990 and 2005 in Ghanaand Uganda, and 123% in the other countries listed on page [4] above. (Source: IMF Government ExpenditureStatistics Yearbook)7Teal’s analysis of Ghana (2006), which suggests poverty falling much faster amongst urban workers and self-employed than amongst the cocoa farmers directly affected by liberalisation, is consistent with this view.


DOI: 10.1002/jid


areas of the ‘Luwero triangle’ in the centre of Uganda and from his own home area of south

western Uganda. The struggle cemented his links with the rural population which helped

him into power and motivated him, after the first phase of liberalisation analysed here and

by contrast with other African elites, to sustain the pro-rural thrust of policy. In Ghana, the

case is more complex: the PNDC (later NDC) government that ran the country from 1992

to 2000 had a principally urban power base, but inherited a populist pro-consumer

approach from its roots among workers, students and the military and competed hard and

successfully for support in the poor rural North, holding that region at every subsequent

election and even making inroads in the opposition’s heartland in the cocoa-growing areas.

It is not surprising therefore that Ghana’s approach to liberalisation was sensitive to the

interests of several politically valuable pro-poor groups, and that many of the beneficiaries

from liberalisation were smallholder cocoa farmers or poor people working for them

(Varangis and Schreiber, 2001).

Finally, the quality of government and its institutions is critical in determining whether

or not reforms succeed. Two critical variables are government commitment to reforms and

control of corruption. An important dimension of institutional capacity is government’s

ability to substitute other sources of revenue for trade tax income. Ghana and Uganda were

better organised to raise the taxation which was needed to finance expenditure. For

Uganda, Chen et al. (2001) argue that the tax system after the reforms became more

progressive, although perhaps only marginally so. It is also possible that reforms actually

increased revenue collection, implying that the economies might have been operating

beyond the optimum point on the Laffer curve so that lower trade taxes resulted in higher

revenues being collected (Winters et al., 2004). This may also be true for Ghana, given the

assertion of Varangis and Schreiber (2001) that cocoa production declined in the late 1970s

because of excessive export taxation. Growth in the tax to GDP ratio, and the consequent

laying of a base to finance pro-poor support services in agriculture, health, education and

infrastructure beyond what was forthcoming from the aid donors, may be the reason why

pro-poor expenditure did not decline in two countries. The governments of Ghana and

Uganda also provided better protection of property rights; and supported key pro-poor

institutions better such as microfinance, NGOs, and relationships between private

enterprise and the state. To encapsulate this support, an attempt has been made to compute

a PPI (‘pro-poor institutions’) index which seeks to estimate institutional capacity from a

pro-poor viewpoint, and is available from the authors.8

Government efforts to control corruption have played a key role in reform stability and

continuity. The World Bank’s governance indicators are standardised and may not be

suitable for comparison over time within countries (Kaufmann et al., 2006), but they can be

compared across countries with caution. Political stability in African countries during the

1990s was generally low, but it showed improvements in both Ghana and Uganda. This can

be compared with declining stability in Cote d’Ivoire, Kenya and Ethiopia. On rule of law,

Uganda’s performance has been much better than for other countries. For Ghana, the rule of

law measure was below average but stable, and much better than in countries like Kenya,

Zimbabwe and Zambia where there was deterioration. It may follow that the associated

indicator of control of corruption was also better in Ghana and Uganda compared to

comparator countries. The crucial point is that both Ghana and Uganda made significant

governance improvements to create ‘linking social capital’ with the donors, donors,

8The index can be found in Mosley et al. (2009, Chapter 6, Table 6.5).


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enabling the flow of finance and thus the economy to be more stable than in countries which

did not enjoy these relational advantages.

6 CONCLUSION

The beginnings of a story are therefore that the invisible hand of a freer (liberalised) market

helped to reduce poverty in parts of Africa in the 1990s; but that the invisible hand cannot

work on its own, and therefore only succeeded in doing this in highly specialised

environments. It succeeded in reducing poverty in Ghana and Uganda much more than in

other regions of Africa which also liberalised because in those countries the invisible hand

was hand-in-glove with other vital complementary factors. These are, first, a better

infrastructure than the African average, much of it laid in colonial times and helping to

unify labour markets and diffuse the benefits of liberalisation; second, a unique chemistry

with aid donors, which enabled better advantage to be taken of technical support and

smoothed out the expenditure flow; and third and most important, a political power-

structure which was more sensitive than most to the political merits of a pro-poor

orientation, which in turn was reflected in those two governments’ expenditure patterns.

The gains achieved in Ghana and Uganda are very fragile, and it should not be supposed on

the basis of their undoubted achievements that, as some claim, ‘the corner has been turned

in Africa’ (e.g. Miguel, 2009);—still less that these achievements can be generalised by

returning to the wisdom of Adam Smith.

ACKNOWLEDGEMENTS

The assistance of the ESRC under grant RES156/25/00016 and of two anonymous referees

is acknowledged.

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