Following independence, Alphabeta recorded an impressive economic growth. However, in recent years, a number of problems have arisen and its economy has shown indications of decline. Important indicators of this decline include:
· A fall in real Gross Domestic Product (GDP) growth from 6% annually in the immediate post-independence period to between 2-3% annually in recent years.
· A deteriorating balance of payments, currently in excess of 15% annually.
· Rising urban unemployment and rural underemployment.
· A decline in per caput food production.
· Declining terms of trade for agriculture.
In addition, high population growth (approximately 4% annually) continues to place stress on the economy in terms of public expenditure, food production, resource conservation and employment prospects. The combination of high population growth rate and low GDP growth rates has resulted in a negative growth in per caput GDP (2 or 3% minus 4%) in recent years. This decline in living standards has been perceptible.
Two major factors have contributed to the decline of Alphabeta's economy: external factors beyond the direct control of government and internal factors involving inappropriate development, trade and pricing policies.
Principal amongst the adverse external factors are declining prices for Alphabeta's major agricultural export commodities and rising costs of imported goods (in part because of increased petroleum prices) which have led to a deteriorating balance of payments. An excessive dependency on agricultural exports has also made the economy vulnerable to world market price fluctuations and seasonality in internal supplies. In an attempt to ameliorate the impact of falling export revenues, Alphabeta borrowed heavily. The debt service ratio now stands at 20% of export earnings. Although the government of Alphabeta could exert little or no influence on commodity prices, policy action to diversify exports could have relieved some of the commodity export dependency and made Alphabeta less vulnerable to world markets.
Internal influences include lack of incentives for agricultural export industries, protection of certain manufacturing industries which has penalised agriculture directly and indirectly, high government expenditure resulting in large budget deficits, over-valuation of the currency and an over-reliance on imported materials and equipment. Protection, for example, has encouraged resources to flow out of agriculture and into the manufacturing sector. Protection of the latter sector has also resulted in higher manufacturing wages. These higher wages were ultimately passed on to other sectors of the economy, including agriculture. As a result, the terms of trade between agriculture and the rest of the economy have deteriorated.
Due to these difficulties, political unrest has become more prevalent and the popularity of the government has declined. In addition, the International Monetary Fund, the World Bank and many bilateral donors are imposing increasingly stringent political and economic conditions on additional assistance. In consequence, policy options are increasingly constrained by domestic political factors and international pressures.
(Hint to instructors: Discuss some of the economic terms used in this section, e.g. GDP, per caput GDP and balance of payments. Make sure participants understand them.)