REVI EW
My second issue with the book is the historical context. Regardless which philosophical viewpoint one takes, it is important to look at the trajectories of developing countries up to the 1980s. Consider Senegal, for example: Since independence in 1960, the country pursued a course of rapid industrialization, protecting its nascent industries with tariff and non-tariff barriers. Progress was rapid and by the late 1970s Senegal was the most industrialized country in Francophone Sub-Saharan Africa. However, much of the external debt in developing countries had been accrued at floating interest rates, meaning that the currency risk was borne entirely by the borrowing country. A seismic shock occurred when the global benchmark LIBOR on six-month US dollar deposits reached 18.5 percent in late 1981 during the so-called Volcker shock. Rates did not fall below 9 percent until 1985. For Senegal, the impact was twofold. First, US dollar-denominated floating rate debt required dramatically higher debt service from an economy whose export revenues – groundnuts, phosphates, fish – were priced in commodity markets. The exports were priced in US dollars, but Senegal’s revenues came home as CFA francs. When the US dollar appreciated against the French franc, and therefore against the CFA, Senegal received fewer CFA francs per US dollar of export revenue. The purchasing power gain from US dollar appreciation did not accrue to Senegal but to US dollar holders. The question arises why Senegal did not hold US dollars? Under the monetary agreement between African countries using the CFA franc as a currency and France, Senegal’s central bank was required to deposit 65 percent of its foreign exchange reserves at the French treasury. Export revenues were converted through the French treasury. In other words, there was no mechanism for Senegal to simply accumulate and hold a US dollar reserve position. Second, the Volcker shock triggered a global recession with commodity prices collapsing and Senegal’s exports being less competitive in US dollars than they would have been in CFA franc which was pegged to the French franc and without the possibility to devalue the currency.
“Post-independence African governments were caught between trying to emulate European political systems, for which they lacked resources and attempting to end traditional, aristocratic governance systems – reinforced by low budget colonialism – that proved remarkably durable. After a few years, the result was frustration and, often, rule by centralized civilian despotism or the military, effective across little more than a capital city and its immediate environment.”
Joe Studwell
This double whammy triggered a financial crisis that Senegal tried to escape from with the help of an IMF program. In exchange for access to credit markets, the country had to accept oversight over its fiscal policy, on top of the previous loss of monetary sovereignty through the CFA franc. Senegal was also asked to liberalize the economy, leading to the systematic dismantling of its infant industry as enterprises could not compete with foreign imports. Let’s compare this to South Korea: Under US protection during the Cold War the East Asian country was able to manage its exchange rate and used public funds to create domestic strong industries that were able to earn
US dollars in exports that would be used to service external debt. When the country had to accept the first IMF program in its history in 1997 during the Asian financial crisis it was already one of the leading “Asian Tigers”. This historical context and background is absent from Studwell’s book, which is a serious shortcoming. The book contains additional claims and views about education, geography and other subjects that are debatable. A debate is always good and to be welcomed, but it would be a more profound read had Studwell included more depth and substance rather than opting for the type of broad overview typical of what’s found in an airport bookshop.
49
Powered by FlippingBook