Macroeconomic Reforms Session Objectives: l List out inherent weaknesses of macroeconomic reforms l Identify SD requirements for macroeconomic reforms

Session Agenda l Background l Economic effects l Social effects l Environmental effects l Case study l Discussions

Background l Economic difficulties call for reforms. l Reforms refer to using polices to achieve financial balances, low inflation, efficiency, and growth. l Policies include fiscal, monetary, trade, FDI, exchange rate, price, privatization, and more recently, institutional measures. l Reforms are part of the economic globalization process, promoted by international economic institutions.

Reform Measures l Cut government spending and devalue currency to achieve financial balances l Strengthen tax system to increase public revenue l Raise interest rate to fight inflation & capital flight l Liberalize trade, FDI & price policies to increase competition, efficiency, & growth l Privatize state enterprises and streamline civil service to reduce fiscal burden & improve public administration l, spendingGDP - depreciation of produced capital = NDP l NDP - natural resource depletion = EDP1 l EDP1 - environmental degradation = EDP2 l EDP2 = environmentally adjusted NDP

Economic Effects Conditions for achieving desired economic effects –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 Effects l Reforms often include government spending cuts in social sectors, leading to increased poverty l Social safety net, if there is one, often does not reach the poor, nor does it provide a lasting solution l Reforms alter relative prices, thus altering the well-being of different groups l Where there is institutional failure, the poor segments of society are less able to benefit fully from new price signals l Private sector has not been able to absorb surplus labor l Social unrest caused by massive unemployment & poverty

Environmental Effect l Removal of subsidy for resource use: less waste l Improved agricultural price: invest in titled land l Well-established sectors (MNCs, private, or parts of the public sector disguised as private) expand their extractive activities in response to new price signals l The rural poor without titled lands react to new price signals by engaging in extensification or resource-intensive activity l Reduced public spending on environmental monitoring & regulation permits increased deterioration

Case Study: Tanzania 1 focus on mining sector l Most profound reforms in 1986 l 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 2 focus on mining sector Economic effects l Mineral output: share in GDP from 0.5% in 1986 to 1.3% in 1997 l Mineral export: share in total export fluctuated, explained partly by unrecorded exports & withdrawal of designated banks l Jobs: 1 million in mining though informal employment l Lower actual tax collection than the potential

Case Study: Tanzania 3 focus on mining sector Environmental effects l Thousands of abandoned mining pits left un-refilled l Mining & processing on river-beds: erosion, siltation, pollution downstream l Deforestation and loss of habitats in mining areas l Mining taking place in reserves and parks (Mugusu, Ikonongo, and Mkomazi Game Reserve) l Health effects: lung/respiratory disease due to exposure to graphite powder and tailings, accidents, mercury contamination, etc. l Reduced regulatory capacity of zonal mining offices

Case Study: Tanzania 4 focus on mining sector Social effects l Unplanned movement of people: informal villages lacking basic sanitary, law and order l Inadequate medical services to deal with diseases l Conflicts between claim holders and mining workers due to informal contracts and lack of organized union l Land-use conflicts between mining and agriculture l Anti-social behaviors (rapes, prostitution) l Child labor

What needs to be done? Discussion of the case study l Return to state control of the mining sector? l Limit the number of licenses? l Clarify tenure system? l Let a few large companies bid for licenses? l Formalize the employment of mining workers? l Tax mining companies/claim holders to pay for infrastructure, health care, habitat maintenance? l No mining in protected areas? l Strengthen the capacity of zonal and tax offices?