Africa’s Economic Challenges and Relations with Bretton Woods Institutions: Kenya's Dilemma

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CDS Africa

Administrator . Updated July 17, 2024

Introduction

After the 1st World War ended in 1918, the state of the world’s economy slipped into great despair bringing about the beginning of the 2nd World War. During the period, the so-called world superpowers had failed to salvage the economic predicaments that had necessitated the demand for a set of multilateral institutions to rebuild, provide a safety net, and restructure the postwar economy.

With this focus, representatives from 44 nations met at the Mount Washington Hotel, New Hampshire - Bretton Woods for the United Nations Monetary and Financial Conference in July 1944 spearheaded by the United States and the United Kingdom.

The meeting saw the establishment of the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (IBRD) later became the World Bank, and the International Trade Organization (ITO) later replaced by the General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO).  Thus, these institutions are popularly known as the Bretton Woods Institutions.

The Bretton Woods system, despite collapsing in the 1970s, delivered substantial benefits including expanded international trade and investment. It also achieved lower average inflation rates for industrialized nations, except Japan, compared to the subsequent era of floating exchange rates.

Support for African Nations with Financial Aid and Debt Relief

The role of the Bretton Woods Institutions in Africa has sparked considerable debate in International Relations literature, focusing on their impact on political and economic activities. Emerging in the 1960s amid African independence movements, the World Bank and IMF aimed to foster development through financial and technical support.

However, their interventions have yielded mixed results, with criticisms that their policies exacerbated inequality and poverty. Critics argue that African countries should explore alternative development paths, learning from successful models like the Newly Industrialized Countries (NICs).

Today, the IMF has 190 member countries and continues to promote global monetary cooperation.  In tandem, the World in addition to providing temporary financial support to African nations to help with balance-of-payments adjustment, the IMF is becoming more involved in the issue of poverty through the Enhanced Highly Indebted Poor Nations (HIPC) Initiative.

The World Bank lends for medium- to long-term economic adjustment, with an emphasis on structural and financial sector reform, social policy reform, enhanced public sector resource management, poverty reduction, and governance improvement throughout Africa. As a result, the Bank is committing additional resources to conflict prevention, as well as the prevention and management of the HIV/AIDS epidemic.

In addition to its involvement in the Enhanced Highly Indebted Poor Countries (HIPC) Initiative, the World Bank is raising funds for the physical and social infrastructure required for poverty alleviation and sustainable development. Projects vary from urban poverty reduction to rural development, including water and sanitation, natural resource management, post-conflict rehabilitation, education and health.

Balancing Borrowing and Development Goals in Africa

According to the IMF World Economic Outlook Report of April, 2023, Africa’s, public debt as at 2022 had reached USD 1.8 trillion. While this is a fraction of the overall outstanding debt of developing countries, Africa’s debt has increased by 183% since 2010, a rate roughly four times higher than its growth rate of GDP in dollar terms. (United Nations Global Crisis Response Group calculations, 2023).

In recent times, the activities of the IMF and World Bank in Africa have sparked debates over their impact on democratization and economic growth. They advocate economic reforms to alleviate poverty by promoting economic progress, especially in developing African nations. Structural Adjustment Programs (SAPs), implemented since the mid-1980s, tied financial aid to reforms such as privatization and deregulation.

Critics argue that SAPs failed to improve African economies, instead exacerbating internal political and economic issues and perpetuating dependence on external funding. The institutions' emphasis on market-driven policies, under the Washington Consensus, led to reduced state investment, premature deindustrialization, and energy poverty, hindering Africa's development and economic resilience.

Kenya’s Financial Situation and the IMF

Kenya, one of Africa’s renowned countries noted for its vibrant culture and dynamic economy, has faced significant financial challenges over the past few decades. Kenya's economic struggles have been linked to a complex interplay between internal governance issues and external influences, particularly the involvement of the Bretton Woods Institutions—the International Monetary Fund (IMF) and the World Bank.

The Bretton Woods Institutions have been pivotal in shaping Kenya's economic policies through various structural adjustment programs (SAPs). These programs, introduced in the 1980s and 1990s, were intended to stabilize the economy, promote growth, and reduce poverty. However, the conditions attached to these programs often required Kenya to implement significant economic reforms.

Despite receiving financial assistance, Kenya's external debt has continued to rise. Servicing this debt has strained national resources, diverting funds from essential development projects. The gap between the wealthy elite and the impoverished majority has widened, leading to social unrest and political instability. The emphasis on market liberalization has made Kenya's economy highly susceptible to global market fluctuations. Agricultural sectors, in particular, have suffered from volatile commodity prices, impacting the livelihoods of millions of Kenyans.

Conclusion

While the IMF and World Bank have played significant roles in shaping Kenya's economic policies, the results have been mixed, with some positive outcomes overshadowed by long-term challenges.

The onus is on both the Kenyan government and the IMF to collaborate in fostering an economic environment that truly benefits all Kenyans.

African countries must engage with the IMF cautiously, scrutinizing the conditions tied to grants and fully understanding the implications of agreements on their national policies and socio-economic status. It is crucial to develop a clear plan outlining how these loans will be repaid.

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CDS Africa

We lead research, advocacy and initiatives to advance democracy and policies to bring about socio-economic development.

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