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Overview of the Economy

Economic Growth

The natural resources on which Liberia's modern monetary economy was founded included a large amount of agricultural land well suited for the growing of export oriented tree crops, particularly rubber, coffee, cacao, palm oil, and coconuts. In mid1984 the land to population ratio of the subsistence economy did not provide a threat to expansion of the commercial tree crop area. Additionally, forest resources, both for internal needs and for export, were extensive; with proper management they were considered capable of sustained harvesting for a relatively indefinite period.

Of major importance were the country's iron ore deposits. These are a nonrenewable resource, however, and although a cumber of still unexploited deposits remained in 1984, concern existed over depletion of higher grade ore bodies. Other minerals played only a minor role; their value and any from the possible discovery of commercially exploitable hydrocarbons (for which exploration was under way in 1984) could not be counted on to give a significant impetus to economic development in the near future. Untapped hydroelectric resources, however, constituted a factor of considerable importance.

Development of Liberia's modern sector, which has been integrated into the world system, started only in the late 1920s. Much of the long delay stemmed from the ascendancy of the True Whig Party a half century earlier and the negative attitude toward change and the parochial interests of its governing elite. Changes in the world economy associated with the expanding industrial revolution, growing trade competition, and depressed commodity markets virtually destroyed the Liberian plantation economy and outward looking commercial activities

Mistrust of foreign investment (which continued largely unrestricted in adjacent African colonial territories) and the lack of domestic capital, skilled manpower, and leadership to reorganize the economy along modern lines brought economic stagnation that lasted more than 50 years.

The advent of the Firestone Plantations Company in the 1920s introduced an element of modernity. Its enclave operations provided wage employment to many Liberians. Liberian growers were also encouraged to produce rubber commercially. The decade before World War II was a difficult economic period for the company. Its wage outlays were low, and because of depressed world rubber prices, the company was committed to payments under the concession agreement that averaged less than 4 percent of government revenues annually. Overall, Firestone's impact on the development of a broad based modern sector outside the concessions was limited.

Demands for rubber during World War II brought rapid expansion of Liberian output. This was reflected in increased employment and expansion of Liberian commercial rubber production. The company's contribution to government revenues remained low, however, and little stimulus was given to the growth of the national monetary economy. More significant for the latter were the large scale United States wartime and postwar construction projects, which provided some of the basic transportation infrastructure needed to encourage economic development notably the port at Monrovia, local roads, a main paved road to the interior, and Roberts International Airport.

From the early 1950s the modern sector, viewed from the standpoint of total gross domestic product (GDP see Glossary), began to grow rapidly, stimulated by the large investments of international corporations in iron mining and new rubber plantations. After 1951 a new agreement with the Firestone Plantations Company resulted in substantially greater income for the government. After 1954 this was augmented by proceeds from the growing iron ore industry, and during the decade the concession share increased to an annual average of 40 percent of government revenues. The industry became the dominant sector, but iron mining was capital intensive and had few linkages with the national monetary sector. Initially, during the construction period there was substantial employment of indigenous labor, but as projects ended large numbers were let go, such as the 6, 000 who had worked on the iron ore export port at Buchanan. By the mid1960s the industry's regular labor force. consisted of only a few thousand Liberians; in 1981 it was under 9, 000, or less than 5 percent of total wage earners in the modern sector. The growth in revenues during the decade permitted the government to invest in limited productive and social infrastructure, but much of the development accomplished resulted from United States aid projects that were directly administered by American personnel.

As the 1950s progressed, wages earned in the enclave economy were reflected in larger consumer imports and some development of the commercial sector. Concession purchases of foods and timber encouraged a certain amount of growth, including the establishment of several Liberian owned transport enterprises. In 1960 Liberia's GDP was estimated at some $190 million; which was substantially greater than it had been 10 years earlier. But an inordinate part of GDP was attributable to enclave activities, and much of the tatter's contribution was sent out of Liberia. There had been no proportionate induced complementary growth in the national monetary economy or distribution of gains among the non enclave population.

During the 1960s the monetary economy grew in real terms at an estimated annual rate of more than 6 percent. Most of the in vestment in iron ore mining was in place by the middle of the decade, and output increased substantially from 3.1 million long tons in 1960 to 15.2 million long tons in 1965 and to 21.2 million long tons in 1969. Rubber production by the concessions also rose (as did that by Liberian commercial operations), and there was an in crease in output by the timber concessions; these two industries accounted for a major part of agricultural growth. In the late 1960s estimates indicated that the enclave sector was generating about 38 percent of total monetary GDP. In the national monetary economy, manufacturing began to show substantial growth, especially in the latter part of the decade, when the average annual rate was estimated at over 17 percent as large foreign investments brought construction of cement and explosives plants and an oil refinery. The statistically high reported growth rate, however, was mainly the result of the large investment in the refinery rather than a broad expansion of the manufacturing sector. Public sector investment further improved the road infrastructure, which was complemented by three major additions to the still rudimentary national road system that were built by the Federal Republic of Germany (West Germany). One stretch from Greenville to Zwedru opened the country's entire southern region. Electric power generation was greatly increased late in the decade by construction of the Mount Coffee Hydroelectric Plant financed and constructed mainly

In the early 1970s iron ore and rubber production continued to show some increase. The growth in iron ore output was at a substantially slower pace, however, as capacity operations (roughly 23 million long tons) were approached. Nevertheless, Liberia became the world's eleventh largest producer. Terms of trade also improved, and during 1970 74 the overall monetary economy expanded by some 4 percent annually. In 1974 the estimated per capita GDP for the enclave economy was about $2,400 and nearly $900 for the national monetary economy. (In that year traditional sector per capita GDP was under $120.) From 1975 rising oil prices and the effects of a growing world recession on iron ore and rubber exports slowed growth. This trend was offset in the late 1970s by expenditures of the public corporations, whose numbers increased considerably during the decade. Moreover, large government outlays were made in 1978 79 for construction of facilities to accommodate the summit conference meetings of the Organization of African Unity (OAU) held in Monrovia in July 1979 (see Africa, ch. 4). The latter projects, however, added little to productive capacity.

Monetary GDP was estimated to have increased between 1974 and 1979 at a real rate of only about 1 percent. That low rate mirrored an overall image of spreading economic stagnation. Individual sector performance, however, had varied widely. During that period agriculture recorded average annual gains of almost 6 percent; both the concessional and the national monetary sectors contributed. A large decline in rubber production, averaging 4.6 percent a year in 1974 79, was more than offset by the spectacular growth of the forestry concession subsector almost 29 percent during the decade and over 20 percent between 1974 and 1979 and increased output of coffee and cacao by Liberian farmers. Because of lessened demand, however, there was a cutback in iron ore production, which declined at an average rate of over 6 percent a year. Other mining activities also dropped. Growth in manufacturing averaging about 12 percent annually continued in 1970 74 primarily because of government encouragement of investment in import substitution industry. The sector remained relatively small, however, contributing only 9 percent of total GDP at the end of the decade, and after 1974 growth slowed as the development of excess productive capacity reduced investor interest in Liberia. The traditional agricultural economy had expanded at a 5.6 percent annual rate in the early part of the decade, but from the mid 1970s growth averaged only 3.1 percent a figure barely equal to the country's estimated population ) growth rate (see Population Growth and Age and Sex Structure.)

At the time the military government assumed power in 1980, the country's economic situation was rapidly deteriorating. The usual current budget surplus, a considerable part of which was used for public investment projects, had declined by almost 93 percent between 1979 and 1981. There were pressing obligations for imports of rice and oil, as well as large interest and principal payments due on the foreign debt. The developing political instability of the Tolbert period had already resulted in a flight of cap ital; after the coup the flight accelerated. Restrictions had also been placed on government and private offshore credit by foreign commercial institutions. In spite of this, the military government doubled minimum wages for public servants to $200 a month and raised the pay of the military (see Morale and Conditions of Ser vice, ch. 5). Public sector employment was expanded, and the size of the armed forces was also increased.

Large withdrawal of funds by foreign owners depleted the deposit base on which the banking system operated by 40 percent between 1979 and 1981 and brought on a severe liquidity problem. The National Bank of Liberia's external assets declined from $55 million in 1979 to $4 million in 1980, and the bank was unable to make payment on government imports and the debt service. Nor could it cover currency purchases from the United States to meet public sector wages and salaries. Capital flight (largely personal deposits) also greatly affected the commercial banks, reducing their lending base substantially and limiting credit availability to the private sector.

The GDP declined in 1980 by 4.7 percent in constant prices and by 5 percent in 1981. In 1979 81 there was an upturn in iron ore production, stimulated by slightly higher prices, to over 19 million tons, but that was still almost 5 million tons less than in the mid 1970s. Output leveled off in 1981, dropped by 10 percent in 1982, and declined further by 18.4 percent in 1983. The 14.4 mil lion tons produced in 1983 was the lowest level since 1964. In 1980-81 rubber's contribution to GDP was moderately better, but this was mainly because of higher world prices rather than output increases in 1980 production was lower than in 1973. (A drastic overall decline occurred in monetary agriculture's contribution to GDP, however, because of a drop in the production of logs. That drop resulted from a weakened world market and, to a considerable degree, from the uncertainty in the forestry sector caused by government reacquisitions of various Liberian owned forestry concessions after the coup. Declines were also reported in the 1979 81 period in manufacturing output, construction, and utilities. In 1982 GDP was down by another 9.2 percent. Statistical data for 1982 and on the economy thereafter remained generally incomplete in mid 1984.

In mid 1980, faced by a domestically unresolvable economic situation, the military government had sought new external aid. From then through September 1983 the United States, the major donor, provided almost $208 million in economic assistance, of which over $150 million was in the form of grants. Another $34.3 million in military assistance (about $14 million in grants) was also furnished, which helped indirectly to reduce budgetary requirements; part of the aid also benefited the economy in the form of major construction projects (see The Military and the Economy, ch. 5). Of particular significance to the restoration of economic viability were the stabilization programs negotiated with the International Monetary Fund (IMF) the first in September 1980 and arrangements for an IMF standby financing fund. These arrangements, renewed annually thereafter through September 1983, set forth stabilization measures to be carried out by the government as requirements for continued IMF support.

At the end of April 1984, outstanding drawings from the IM F totaled over $204 million. Considerable progress toward stabilization had been made in accordance with the mutually agreed lines recommended by the IMF. These included new tax measures, reduction of budgetary expenditures, some improvement in tax collections particularly of impart duties, which were the single most important domestic revenue source and other steps. In a politically sensitive move, the subsidy on imported rice was discontinued in late 1981. Strong efforts were made to reduce government wage costs. A freeze on new employment was ordered; certain technical and specialized personnel were retained, however. In January 1983 a salary readjustment plan was instituted that cut the salaries of government employees as an alternative to large scale dismissals. The reductions were based on a scale descending from 25 percent for higher paid employees to 16.6 percent for the lowest. The plan was expected to decrease the government's annual wage bill by about $27 million; near the end of 1983 the minister of finance stated that the savings had been substantially greater. During the latter part of 1982 salaried public servants had not been paid regularly because of insufficient funds. They apparently fared better in 1983, but reports in early 1984 indicated new pay delays.

The new revenue measures also affected the traditional sector directly in the reinstitution of the hut, progress, and develop merit tax that had long been levied on rural households until repealed by the military government as a burden on the rural population. At the time of the coup this tax had been $20 per hut. The reinstituted tax amounted to a levy of $10 on the head of the hut, $7 on the spouse, and $3 on each child. According to government spokesmen, the new revenues were to be used mainly to carry out rural development projects.

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