Pitfalls Of The Liberian Economy:
What Is Liberia's Choice of Economic Management?

By: Sumowuoi Pewu

In 1997, a black American Journalist previously assigned in Southeast Asia and Africa with the Washington Post, wrote a book called "Out Of America." The author, Keith B. Richburg, was dismissed amongst African scholars and in the African American Community as another black man behaving like Uncle Tom's cabin boy, who, according to critics, does not understand history and it's impact on black people. Richburg's crime, of course, was writing about a situation that almost every African is painfully aware, i.e., the staggering failure of Africa, a continent saddled by civil wars, self-inflicted destruction, burdened by unparalleled economic mismanagement and enslaved to more than a quarter century old acquiescence of indigenous dictatorship and authoritarianism.

Despite the controversy, "Out of America" makes a very compelling and vivid case when it asserts that with the advent of independence, many African countries changed their flags, names were Africanized, new national anthems were adopted and sung and new holidays observed. The ubiquitous portrait of the big man replaced the picture of the queen. Country after country, simply passed from a white colonial dictatorship to an indigenous one - resulting in more oppression, more death induced brutality and, an unprecedented scale of mismanagement of the African economy. For the ordinary Africans, nothing really changed.

To attack Richburg's writing on Africa's grim reality misses the point; instead, it simply amounts to an attack on the messenger because we don't like his message. No matter how we all feel individually toward Keith Richburg's writing about Africa's grim and grisly reality and the state of black people, the public brouhaha only skirts the real issue ­ the need for a critical re-evaluation of Africa's colossal failings and for the purposes of our article, the mammoth failure of Liberia.

Liberian Dimension - I have often wondered whether Liberia's current political and economic problems are a direct result of a lack of foresight and vision by it's past and present leaders? For example, why is Liberia's fortune so different from Malaysia, Thailand, South Korea, the Ivory Coast, etc., countries whose gross domestic product per capita adjusted for purchasing power parity (see Penn World Tables ­ The World Bank says this Table measures the GDP per capita adjusted for PPP. These estimates are better than the often cited estimates of dollar incomes based on exchange rate conversions) were about the same with Liberia's in the '60s? Why have some countries joined the high-income club while Liberia stays poor and underdeveloped? Do differences in these countries macro-economic strategies and trade policies play any role in the rise of some countries and the decline of others like Liberia? Are there lessons that were learned long ago by these super-growing newly industrializing countries (NICs) known mostly as "tigers?"

To answer these difficult questions and other unresolved issues, I will examine what seemingly might be a serious macro-economic planning failures inherent in the Liberian economy-failures manifested in structural weaknesses. To achieve this, I will take on a dual objective: First, explain the pitfalls in the economy and then, outline the kinds of corrective policy measures that will avert potential future crises.

What are the Pitfalls of the Liberian Economy? - Like other badly run third world economies, the Liberian economic problems are traced to a set of interrelated problems that are amazingly taught in every day business school; in this case, diversify the economy to avert potential stagnation arising from over-reliance on one or too few primary export products; promote import substitutions through a policy that taxes and restricts imports to protect and subsidize industries serving the domestic economy; encourage direct foreign investments through a variety of policies and measures; and finally, aggressively address financial-sector weaknesses vis-a-vis easy global liquidity conditions.

The foundation of Liberia's economic planning assumes that the country's primary products, i.e., rubber, iron ore, timber and gold were sufficient in gaining Liberia important export market share in sustaining the country's economy, perhaps, forever. Despite the IMF's warning in 1975 to Liberian policy makers amid the prolonged LMC miners' strike that the prices of the country's primary products would decline due to lack of robust demand for iron ore and timber, national planners took no action to reinvest the country's current account surplus at the time in domestic capital formation with the view to broadening the country's exports. Instead, Liberia embarked on cutting its national savings much faster than its domestic investment by increasing imports of foreign goods and services to host the OAU. Borrowing money to support imports needs is a prescription for disaster. Conversely, no attempts were made to restrict imports and encourage domestic production to substitute for some imports as a way of preserving needed official reserve assets.

This attitude, reminds me of a friend, who, until two years ago, worked for IBM in Somers, New York, earning $89,500 as a Software Engineer. After he was laid off, he took a modest job with another firm in New York City for $62,000 and traded his Toyota Camry for a more upscale car, Lexus GS 300. He moved in a more expensive apartment on the trendy West Side of the Big Apple. When I asked how he would pay for his new life style, he calmly replied, "Pewu, I will live on my credit cards until things improve in the future." I was baffled and simply resigned myself to no further comments. The only lingering problem, however, is that this approach mirrors Liberia's planning process. Unlike Liberia, Korea and the other tiger countries, and even Ghana, Uganda, etc., have all learned from their past financial maladies that for a country to sustain economic growth, a healthy dose of market discipline is crucial to long term growth. The engrained Liberian culture of familial and social connections anchoring on crony patriarchal relationship (bigman or "papay" syndrome), can lead to destructive "overshooting" or "undershooting" of the economy.

Diversification of the Economy - Since the 1820s when freed American slaves arrived on Liberian shores, the monetary economy has been burdened by imbalances induced by disparities and active economic mismanagement. Even in the sixties under William V.S. Tubman, when economic growth was phenomenally high, no strong effort was made to diversify the economy through the development of a manufacturing sector that would have accounted for a significant percentage of GDP; nor was there a devised strategy mounted to correct high unemployment estimated at 43.8% in 1980. Planners virtually ignored the development of a financial and service sectors that would have helped absorb unemployment and concomitantly diversified the economy to reduce the country's dependence on exports dominated by depletable natural resources that fluctuated wildly and naturally presents uncertainties in planning.

There is a silver lining in all of this, however. Despite massive destruction of the country's infrastructure coupled with an unparalleled exploitation of its natural resources by various warring factions during the decade of factional warfare, Liberia, nonetheless, still offers options and opportunities that far exceed the many indecipherable problems it presents. The country's natural resources alone, however, will not be adequate to spur economic growth that leverages it's competitive standing as an export oriented economy. To accelerate rapid and long term economic growth, the country must establish a set of norms, principles and practices that will ensure succinct understanding between growth and long term improvement in living standards on the one hand and macroeconomics policies on the other; including restrained monetary and fiscal policies. Fiscal policies should be the corollaries to improvement in public expenditures while monetary policies simultaneously serve as ancillaries to efficient management of the country's resources.

Import Institutions ­ If Liberia is to survive and prosper, its national planners must find ways to increase the country's merchandize exports and simultaneously reduce its overall imports of foreign goods and services. This step by itself, however, will not yield the current account surplus Liberia needs. The country must strive to increase its net national product and encourage Liberians to buy more domestic products. Liberia's domestic economic strategies should aim to develop Liberia's domestic economy through an aggressive education program that emphasizes strong technical and professional manpower training and the upgrading of the current workforce.

Liberia must promote an enabling environment that encourages the growth of new economic activities in manufacturing, agriculture and a service sector of the economy. A critical re-evaluation and restructuring of the domestic sector of the economy to create an agricultural sector that boosts surpluses and growth in rural income should be prioritized. A service sector that generates jobs while simultaneously providing high quality essential services and a manufacturing sector that largely provides substitutes for our current import needs should be considered. Steps must be taken to internationalize the economy by attracting direct foreign investment in manufacturing and the financial sectors of the economy. Lastly, promoting and increasing the emphasis on research and development.

Addressing the Financial Sector Weakness - I am prompted by the recognition that if growth is to be sustained in Liberia, the banking and the financial sector must be guided by a corpus of sound norms, principles, and practices that will enhance market discipline and incentives for sound corporate governance and financial systems in Liberia. Banking and financial crises can have profound repercussions for an economy by manifesting themselves in heightened macroeconomic instability, reduced growth and less frugal allocation of savings and investments.

With the intense integration of the global financial markets, a sound financial sector stability in Liberia can be attained through series of liberalization of this sector to satisfy basic capital adequacy standards and through macroeconomic and structural adjustments that are essential to financial systems stability, while preventing imbalances that trigger distortions in incentives. The lack of deregulation and past consistent political interference has been the Achilles heel for Liberia's failed financial systems. Financial system stability requires an adequate political and social consensus in supporting measures that will establish and maintain stability in the Liberian economy. A robust financial system is less susceptible to risk induced by political and social upheaval and should become more resilient with time.

The Need to Reform the Public Sector ­ In good consciences, we must all ask ourselves at some point in time, is the continuing existence of the Liberia Electricity Corporation (LEC), Liberia Petroleum Refining Corporation (LPRC), Liberia Telecommunication Corporation (LTC), the National Port Authority (NPA), etc., in the interest of the Liberian people and good economic sense? Are they utilizing public expenditures in a more frugal and justifiable manner? How can we evaluate the utilization of marginal public funds to these heretofore-wasteful public corporations? Are these corporations mere instruments for rewarding cronies and nepotistic elements for their loyalty to the "big man" in the Executive Mansion?

The fundamental spirit behind the Liberian Legislature's creation of these entities was to ensure the provision of public goods and services, for example, electricity, telephone, etc., for the Liberian people in the context of affordable prices. It is important to note that these corporations are not in business to make profits but neither are they suppose to be operated at a loss. Despite the Legislative intent, we have seen the wholesale mismanagement of these corporations and the intended benefits that were to accrue to the people have longed being lost to inefficient bureaucracies in the state apparatus. Why is it so difficult for example, to place a phone call from Monrovia to Gardnersville? Why is electricity still a distant possibility for rural Liberia and even worse, many parts of Monrovia? Where are some deliverables? While corrupt individuals have mismanaged these entities to near extinction, the cost of maintaining these unreformed corporations mired in debt is borne by the Liberian public. Liberia must do some cost/benefit analysis with the view to privatizing most of these wasteful entities. These welfare entities are deadweights on public resources and their "marginal excess burden" must be a result of unacceptable corporate welfare.

Finally, I hope by drilling down on these problems, we can learn some important lessons and move in the direction of Korea, Thailand, Malaysia, Ghana, etc. The Lesson here must be, do the math or stay poor.

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