Sustaining trade and exchange rate reform in Africa : lessons for macroeconomic management

It analyzes the mechanisms through which the reversals occur and the steps that might be taken to ensure that policy reforms, once taken, do not unravel. Mechanisms for sustaining economic reform typically involve a combination of enhancing the rewards of constructive changes and increasing the penalties for delay. Over the last two decades, the judgement of economic performance has been assumed by donor agencies, who have sought to reward good performance by providing additional foreign aid and to ensure compliance by attaching conditions to that aid. The performance of African countries casts doubt on the wisdom of this approach. Billions of dollars of foreign assistance and literally thousands of conditions have not produced sustained economic reform. Moreover, they have not left African countries better placed to move forward. This study maintains that the focus must shift from rewards and conditions to economic performance based on government self-restraint. Furthermore, for any government, a key feature of self-restraint is that policy reforms, once implemented, are not reversed. Annexes on conditionality in Ethiopia, pressures on the real exchange rate in the franc zone, and the sequencing of economic reform expand on points made in the text. (Author abstract, modified)