Austerity for Africa

In response to Annelise’s post on Kenya’s public debt, I fail to see the IMF’s justification for practicing austerity for a developing country in the midst of building up infrastructure. I understand Rogoff’s point that countries turn to the IMF as a vendor of last resort once they are in financial crisis, but if the IMF continues to hand out aid this sparingly, it will only be perpetuating the problem; Kenya will be unable to develop and rise out of third-world status.

In light of Collier’s book The Bottom Billion, countries like Kenya are severely underinvested in, resulting in Africa having twice as much public capital as private capital. This should, in theory, result in a high inflow of private capital because returns on capital would be extremely high, but “the perceived risk of investment in the economies of the bottom billion remains high” (Collier, 88). This means Kenya and other African countries are receiving little private investment, so they must rely on public investment and international aid from the IMF; additionally, lack of private capital produces extreme capital flight. “The most capital-scarce region in the world exported its capital” (Collier, 92). This being said, austere measures by the IMF will only worsen Kenya’s situation and even if it results in a positive current account balance, it will be virtually zero.

This does not mean the IMF and other agencies should simply give developing countries large amounts of money; that is possibly worse than austerity. However, if given with conditionally and increased international governance, as Stiglitz suggests, developing countries will become less reliant on public aid in the long run. Part of the IMF’s argument is that other government policies can adjust to fiscal austerity, but when domestic governance is corrupt and of low quality, taking away conditioned aid will only lead to a worse economic situation. I agree with Annelise that the IMF is only thinking in the short-term; they are not considering the repercussions that come from austerity.

The IMF and other international agencies must continue to invest heavily with the aim to increase Kenyan infrastructure further to build a sustainable economy. Once this happens, Kenya and other developing areas will raise their income to a point to where citizens have an incentive not to emigrate, government cannot take advantage of it’s people and it’s economy (or lack thereof), foreign private investment will be attracted, and they will become independent of the IMF’s aid.