THE EFFECTS OF NEOCOLONIALISM

WHAT ARE THE EFFECTS OF NEOCOLONIALISM

Here are some of the effects of neocolonialism;

Saying that Africa is currently in an economic crisis is probably a great understatement. Basic infrastructure in most African countries is dilapidated, economic growth is minimal, access to the basics like food, health and education is sparse and expensive, arid areas are encroaching into previously arable land, and so on and so forth. The list is enormous. All this while the continent is deeply entrenched in debt to the developed Western countries, much of which was acquired to fight the economic hardships, but have obviously failed to make any marked improvement in the situation. There are many arguments as to the cause of the current economic crisis in Africa from political instability, to underdeveloped human resources, to the oil crisis of the 1973-4, to increased government spending after the colonial period, to inheritance of poor colonial economic systems and trade practices (which were set to serve as source and sink to the “mother” country rather than serve the people), to the sole dependence on primary industries (i.e. failure to diversify), and many more. All these point are to a great
extent valid, but how the situation has been handled has resulted more to maintaining the status quo or worsening the situation altogether as the rest of the world looked on if not
directly benefited. In my opinion the African debt problem is the biggest hindrance to any possible solutions to the overall economic crisis. This is ironic because the purpose of the loans in the first place was to help alleviate economic hardships in the receiving countries. Most African countries were in debt almost as soon as they gained independence. The amount
of debt has been constantly rising since then. Currently African governments spend huge chunks of their annual revenue just to service loans, money that could go quite a distance
in developing their economies.

The servicing of the external debt consumes national income thus hindering both public and private investments. Additionally, having a large debt overhang erodes the confidence of both foreign and domestic private investors who are usually sensitive to uncertainty. There has been a declining trend of private investment in most African countries from the late 1970s onwards, and this can partly be attributed to this factor. Finally, servicing of debt in the African context is placing an enormous fiscal pressure. Such pressure has an adverse effect on public investment, evident in the declining share of public investment from late 1970s onwards in most African countries and on physical and social infrastructure. African countries are on a net basis transferring resources to the developed countries since 1985. Moreover, even a good part of grants, nearly 35%, goes to experts that come from the donor countries to manage development projects. From this, it is evident that Africa’s wealth is being repatriated to the richer countries in the west, just like it was in the colonial days, but masked under “debt servicing”, and thus my notion of economic colonialism.

Structural Adjustment Programs

Structural Adjustment Programs (SAPs) were prescribed for Africa beginning in the early 1980s when it became apparent that there was a big economic crisis looming over Africa. There were concerns that government spending was careening out of control in many of the countries, which was not reciprocated with huge revenue and thus big budget deficits. A bigger concern was the inability of many of the African economies to service the huge debts that they had incurred. To ensure debt repayment and economic restructuring the IMF/World Bank imposed Structural Adjustment Programs modeled on the neo-liberal ideology that the optimal economic system is achieved by giving free reign to market participants, privatization, free trade, and the shrinking of government intervention in the economy. The Structural Adjustment Programs were a precondition to new loans from the World Bank and renegotiation of current debts.  Many African governments were reluctant to the policies prescribed from the onset but obliged just to maintain support. Over the years it has turned out that the policies have neither alleviated the huge debts nor improved the economies of the developing countries. If anything, poverty in African countries has increased as a direct result of these policies. So what were these policies? The Structural Adjustment Programs prescribed to all African countries, regardless of unique situations can be summarized as follows:
privatization of government enterprises and decreased government spending; liberalization of trade and lifting of import and export restrictions; increased interest rates; liberalization of the money markets and devaluation of currencies; and lastly, market pricing and the removal of price controls and government subsidies. All these measures have negative effects that can arguably far outweigh the intended economic benefit. I will briefly explain the theories of these arguments then give examples, and in the following section highlight Mozambique as a case study on SAPs gone wrong. Privatization of government enterprises is meant to curb huge government budgets and deficits, and to essentially free up money for repayment of loans. It makes sense to privatize government enterprises that are unprofitable and non-productive. However it cannot be done on a large-scale swoop as prescribed by the IMF/World Bank. There are many hindering factors such as the lack of local private capital and entrepreneurs to take over the huge corporations. This opens the gates to foreign investors who ultimately will repatriate profits instead of reinvesting locally to promote growth. Ultimately the result is massive layoffs and pay cuts, and increased repatriation of income. In addition reduced government expenditure robs the citizens of essential services including health and education. Social services, such as health and education cannot be
run with the aim of profit, so privatizing them and/or reducing government spending hurts social welfare in general. It is also important to note that oftentimes unproductive
sectors such as military do not undergo budget cuts. Liberalization of trade is meant to create a market based pricing and have exporters get better prices for their products and make available more affordable alternatives from abroad. However, it also leads to dumping of cheap products from outside such as clothes, food, stationery. This undermines the local industries that produce or those that would have started to produce these products. It is well known that budding industries need nurturing and protection at the early stages. A new fabric manufacturing plant in Tanzania, for example, cannot be expected to be as efficient as established manufacturers in China, and hence cannot compete equally. 

So African infant industries fail to take-off under extensive trade liberalization. This is also very critical with respect to imported food such as rice, wheat, milk, etc. Developed countries which have an excess of these food items reduce their price and export them to Africa to get rid of this excess at any price. If such a situation is not controlled, Africa will never be able
to produce its own food. In addition liberalization of export of raw materials robs local industries of raw materials which can fetch higher prices from more efficient external
competitors. Increased interest rates is meant to encourage savings and investment in the capital market. However this makes capital inaccessible to local and small businesses
which are the mainstay of most growing economies. Also this creates speculative investment especially from external sources which brings quick paper money profits to a
few people while adding nothing to productive capacity. So the industries do not benefit at all.  Liberalization of the money markets, that is lifting of control of foreign exchange
transactions, coupled with unrestricted imports causes increased spending on imports at the expense of local spending, and also contributes to the devaluation of the local
currency. Devaluation of currencies is supposed to increase self-sufficiency by making imported products more expensive and exports cheaper. Another perspective is that exporters get more money for their products while external buyers are more able to afford. African exports. However, this gain is artificial because the local industries still rely a lot on imports such as fuel and machinery thus their production costs increase accordingly and commodities become more expensive locally. Additionally, most of the developed countries that buy African products set quotas on how much can be imported or have fixed prices in foreign currencies to shelter their own producers from foreign competition. (It is ironic that the same protectionist practices being abolished by the SAPs are still practiced by the US and European Union that preach their abolition.) Under these conditions, African products, even when they become cheaper externally, do not necessarily gain new outside markets or earn more foreign exchange. In the long run there may be no real benefits, merely inflated prices. A good example is in Kenya, where The 81 percent devaluation of the Kenyan Shilling in 1993 resulted in an overnight jump of the external debt to 143 percent of GDP, and commodity prices escalated 3 to 4 times in a week. That year for the first time in decades, the price of salt, one of the cheapest staple products, rose.

Market pricing, achieved by removal of price controls and government subsidies are meant to reduce government spending and to promote competition and improve production efficiency. However, the removal of subsidies designed to control the price of basics such as food and milk hurts the poorest of the poor. By devaluing the currency and By devaluing the currency and simultaneously removing price controls, the immediate effect is generally instantaneous hikes in prices of commodities. Basic needs, such as food become unaffordable thus increasing the poverty rate overnight. Also removal of government subsidies coupled with open importation may hurt local production economies which may have to compete
with dumping from foreign countries. Thus farmers end up having depleted revenues and in turn produce less which in turn causes shortages of basic commodities. In summary SAPs are a poor prescription intended to relieve a misdiagnosed problem. SAPs were designed to address the symptoms of the economic problems and not the root causes of the economic crisis.

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