Macroeconomic ReformsMacroeconomic Reforms

Session Objectives:

List out inherent weaknesses of macroeconomic reforms

Identify SD requirements for macroeconomic reforms

Session AgendaSession Agenda

Background Economic effects Social effects Environmental

effects Case study Discussions

BackgroundBackground Economic difficulties call

for reforms.

Reforms refer to using polices to achieve financial balances, low inflation, efficiency, and growth.

Policies include fiscal, monetary, trade, FDI, exchange rate, price, privatization, and more recently, institutional measures.

Reforms are part of the economic globalization process, promoted by international economic institutions.

Reform MeasuresReform Measures Cut government spending and devalue currency to achieve financial balances Strengthen tax system to increase public revenue Raise interest rate to fight inflation & capital flight Liberalize trade, FDI & price policies to increase competition, efficiency, & growth Privatize state enterprises and streamline civil service to reduce fiscal burden & impr

ove public administration

, spendingGDP - depreciation of produced capital = NDP NDP - natural resource depletion = EDP1 EDP1 - environmental degradation = EDP2 EDP2 = environmentally adjusted NDP

Economic EffectsEconomic EffectsConditions for achieving desired economic Conditions for achieving desired economic

effectseffects– no shrinking of tax base

(tied to public spending)– no shrinking of international

demand for exports– popular support for effective

tax, price, civil service reforms and privatization

– currency devaluation does not offset the effect of higher interest rate in controlling inflation

– increase in interest rate exceeds currency depreciation but does not stifle investments

– domestic industries are strengthened through competition; no massive unemployment

– sound natural resource base & regulatory framework

Social EffectsSocial Effects Reforms often include governm

ent spending cuts in social sectors, leading to increased poverty

Social safety net, if there is one, often does not reach the poor, nor does it provide a lasting solution

Reforms alter relative prices, thus altering the well-being of different groups

Where there is institutional failure, the poor segments of society are less able to benefit fully from new price signals

Private sector has not been able to absorb surplus labor

Social unrest caused by massive unemployment & poverty

Environmental EffectEnvironmental Effect Removal of subsidy for resourc

e use: less waste

Improved agricultural price: invest in titled land

Well-established sectors (MNCs, private, or parts of the public sector disguised as private) expand their extractive activities in response to new price signals

The rural poor without titled lands react to new price signals by engaging in extensification or resource-intensive activity

Reduced public spending on environmental monitoring & regulation permits increased deterioration

Case Study: Tanzania 1Case Study: Tanzania 1focus on mining sectorfocus on mining sector

Most profound reforms in 1986 Objectives

– achieve and sustain macroeconomic stability– liberalize trade & exchange rate regime– combat poverty & improve people’s welfare– create a strong private sector– improve efficiency in public spending

Case Study: Tanzania 2Case Study: Tanzania 2focus on mining sectorfocus on mining sector

Economic effects Mineral output: share in GDP from 0.5% in 1986 to 1.3%

in 1997 Mineral export: share in total export fluctuated, explained

partly by unrecorded exports & withdrawal of designated banks

Jobs: 1 million in mining though informal employment Lower actual tax collection than the potential

Case Study: Tanzania 3Case Study: Tanzania 3focus on mining sectorfocus on mining sector

Environmental effects Thousands of abandoned mining pits left un-refilled Mining & processing on river-beds: erosion, siltation, pollution

downstream Deforestation and loss of habitats in mining areas Mining taking place in reserves and parks (Mugusu, Ikonongo ,

and Mkomazi Game Reserve) Health effects: lung/respiratory disease due to exposure to graphite

powder and tailings, accidents, mercury contamination, etc. Reduced regulatory capacity of zonal mining offices

Case Study: Tanzania 4Case Study: Tanzania 4focus on mining sectorfocus on mining sector

Social effects Unplanned movement of people: informal villages lacking

basic sanitary, law and order Inadequate medical services to deal with diseases Conflicts between claim holders and mining workers due

to informal contracts and lack of organized union Land-use conflicts between mining and agriculture Anti-social behaviors (rapes, prostitution) Child labor

What needs to be done?What needs to be done?Discussion of the case studyDiscussion of the case study

Return to state control of the mining sector? Limit the number of licenses? Clarify tenure system? Let a few large companies bid for licenses? Formalize the employment of mining workers? Tax mining companies/claim holders to pay for

infrastructure, health care, habitat maintenance? No mining in protected areas? Strengthen the capacity of zonal and tax offices?