Syndicate content

A fiscal stimulus for Africa?

Shanta Devarajan's picture

There is no question that the global financial and economic crisis is affecting Africa’s economic performance. The IMF’s World Economic Outlook forecasts a GDP growth rate for Africa of 3.5 percent, which is 1.6 percentage points lower than the previous forecast, and 1.9 percentage points below the 2008 growth rate. The growth forecast for primary commodity exporters is even lower; Angola, for instance, is projecting nominal GDP to be 17 percent lower in 2009 compared to 2008.  A growth slowdown in Africa can have serious long-term consequences.
In light of these developments and evidence, and given that the United States, Western Europe and China are all considering a major fiscal expansion (of the order of trillions of dollars), a natural question to ask is: “Should African countries also introduce a fiscal stimulus?” 

The answer is: “It depends.”
Since they lack access to international capital markets, low-income African countries would benefit from a fiscal stimulus only if it can be financed by external resources, such as foreign aid. Absent these resources, an increase in the fiscal deficit will either crowd out private spending or create inflation, neither of which is conducive to growth. Even if there are additional external resources, governments should be prudent about the type of countercyclical policies they pursue. Some countries such as Ghana already have a high fiscal deficit (of about 14 percent of GDP). The challenge facing Ghana is to bring down the deficit, possibly using external assistance to smooth the transition path, so that the economy’s debt situation is manageable and private investment resumes.

Other African countries have much lower fiscal deficits and debts. Assuming it can be financed from abroad, these countries should contemplate a modest fiscal stimulus as a way of shoring up the economy’s growth. But how the fiscal stimulus is spent will be just as important as the size of the stimulus. It is unlikely that tax reductions will yield great gains in growth, as many of the efficiency-reducing taxes have already been reduced (most recently in response to the food price crisis, when some countries eliminated or lowered import tariffs on cereals). So the major gains will come from expenditure increases. Here, governments should look for increasing expenditures that will create jobs in the short run, and leave the economy in a more efficient state in the longer run. One possibility is the often under-funded maintenance of infrastructure such as roads, water pipes and electricity grids, as the Democratic Republic of Congo is doing. Investment in agricultural infrastructure, long neglected in Africa, would also be productive and create off-farm employment. The provision of finance to small- and medium-enterprises, as well as for infrastructure projects would create employment and a more productive economy. Additionally, African governments could use the current situation to undertake some reforms that were elusive in the past, such as utility tariff reform, but are now badly needed, not just to cushion their economies during the crisis, but also to prepare their economies to benefit from the recovery when it comes. Spending to keep basic services to poor people from scaling back—for drinking water, primary education and primary health care, for instance—could be valuable, provided they are not captured by the same interests that kept these resources from getting to poor people in the first place. Finally, targeted safety net programs that will cushion the poor or near-poor from the growth slowdown should be part of the stimulus package—with one caveat: only programs that are known to be reasonably successful at targeting the poor, and whose leakage rates are relatively low—such as Ethiopia’s productive safety nets program--should be scaled up. The opportunity cost of public funds in these times is too high to be wasted on unproductive programs that leak to the non-poor. 

Comments

Submitted by Anonymous on
The effects of a fiscal stimulus on Africa's economic performance may be offset by the deterioration of the trade balance. In most African countries, the propensity to import is high( import shares of GDP are large)and net exports will further decrease with the declining prices of commodities. Unfortunalety, most African governments will find it necessary to increase spending in order to maintain current poverty rates and more importantly to avoid social discontent and political unrest. For that reason and also because there are long term economic gains if the money is spent wisely as you suggest, a fiscal stimulus seems to be an attractive policy for Africa at this time especially if external funds can be secured.

Submitted by GS RADJOU on
Right, if there is a so called African stimulus as to copy the developped world. There would be difference between the english African speaking countries and the French ones. What is the real African stimulus financial package that address people needs (sufferers). Still, do we want a more centralised world or improve participation and multilateralism? What maybe true for power sharing is perhaps true for our finance world?

Submitted by Francis Beddington on
Shanta, heretical thought in this era of gloom and doom excluding SA which is closely integrated into global economy is African growth going to surprise on the upside? In many African economies there are arguments that things are better than anticpated eg with a good agricultural season in places as diverse as Nigeria, Tanzania, Morocco and Malawi; fiscal stimulus packages in Algeria, Angola, Egypt; on going peace dividends in Cote D'Ivoire, Sierra Leone Liberia; oil investment in Ghana, Uganda and rising production in Angola and a rebound in Nigeria. The IMF paper on Africa for the Dar summit looked weak and lacked solid examples and detailed analysis (looked like a rush job). The sum of the parts looks bigger than the whole. With low linkages into global economy and deepnening domestic market I am wondering whether Africa rides out the crisis much better than the rest of the world. I guess not so much "de-coupled" as "never coupled". Francis Francis Beddington Head of Research Insparo Asset Management http://insparo-am.com/

Submitted by Starr Hart_Meekums on
I developed an inward investment strategy for Africa's PSB. My current approach is to present documentation at the London Summit 2009. As a matter of interest I sent the text on vestion direct to your office. No reply as yet. I would like to ask if you read the blog and if so would you kindly review my proposal. Your work to date is valued and I respect your time is taken with major issues. There is a viable solution available. I would like to here your comment on what is currently being done for Pan-African Businesses seeking investment. Thank you, Starr

Submitted by Dayo Olaide on

I wish to disagree with the author. A fiscal stimulus, in my opinion, is over due in many African states where more companies (medium and large manufacturers) have disappeared under prohibitive operating costs hauling many families into unemployment and penury. In the last count Nigeria must have has lost more companies and jobs than some of the developed economies of the North that have suffered job losses since the economic downturn.

Unlike the developed economies however, successive Nigerian governments, like many others in the continent, have not responded decisively! The reason is obvious- until the current meltdown, stimulus was a taboo! Government business was simply running state affairs/machineries and therefore running the market was best left to the private sector; the market. It was a taboo to invest government's money into the market especially as empirical evidence showed government as a bad entrepreneur incapable of doing or running business. That has since changed with America, Europe, Asia, week after week, declaring huge stimulus packages.

In my humble opinion, Africa needs a stimulus package which like the developed economies should aim to boost shore employment and aggregate demand. Unemployment in most African states is double digit and getting worse with the downturn. Demand has also suffered with the downturn as a result of wrong responses. The Naira devaluation for instance has simply reduced household income and contracted aggregate demand and consequently hauling more Nigerians closer to the poverty mark. The most threatened specie is the budding 'middle class' which until 2004/5 - the era of the banking consolidation- had completely disappeared.

A fiscal stimulus is needed most especially in the growth drivers in Africa. I recognise however that many African states, except a few, depend on the extractive sector which responds more to externalities as their growth driver. It means therefore that these economies must target second best sectors and so on with stimulus package.

I agree with author that many African states may not benefit maximally from further tax reduction as a result of the race to the bottom from previous years, increasing expenditure is therefore a more attractive approach. Raising government expenditure has its own demerit, such as increasing the burden on future generation, but under the current situation is necessary. But a dilema exist even here. Most African states have string leakgaes in their public finance system which increases the risks of capturing of the stimulus. Many poverty reduction programmes have failed as a result of capturing by politicians at national and sub-national levels and the system remains porous.

But is that enough reason to not increase government expenditure. No. Instead it simply means that a stimulus package for Africa, like in America and Europe, must include clear plans to block holes and leakages in financial and accountability system. This shuld be done to reduce the proprotion that is stolen to a minimum e.g 1 to 9. Right now the proportion of national budget that is stolen is up to 50% in some places. Doing this increases the probability of success in Africa.

A modest stimulus will not stimulate African economy. To be effective, stimulus must be large, swift and targeted. Targeting in Africa is essential to ensure that the sectors that most need it get it; and that they get a quantum that is needed to get them off and rolling once more. Unfortunately, because some of the job cuts, closures have been on almost forever the size that would be required is not one that the countries could easily mobilise from international market. This is where wisdom is required to achieve the most effective sequencing to ensure the stimulus create and stimulate a multiplier effect in sectors with highest potential impact.

Agricultural sector is essential but will not lift the continent out poverty or cause an economic transformation. It is incorrect to stick with the argument that agriculture will employ the largest number of Africans. In fact less than 3% of the American population are employed in agriculture and they feed the over 260 million people. Neither is there any evidence of any developed economy that survives on agriculture or indeed primary commodity. Africa needs stimulus in its agricultural sector to boost production, achieve food security and boost competition. But for development, it needs stimulus package in ventures that guarantees increasing returns to scale. The answer is in manufacturing; not agriculture. African states dependent on primary products at this time should be more strategic and focus on value adding ventures which will create more jobs and expand their revenue base.

This is my case.

Submitted by Recession on
With the occurrence of global crisis a number of businesses have been put in trouble. There was an apparent loss among big companies; inflation rate and unemployment rate were still on the rise that’s why a lot of emergency program had been done to resolve the ailing economy of the world. Economic stimulus package had been the last resort to sustain the economy and provide additional funds for most business. If the economy of certain nation is growing it will provide additional taxes that will be given to the government which would allow sustainability. Among the conditions for getting one is you have to be employed. Getting payday loans during this recession doesn't seem so bad, does it?

Submitted by Anonymous on
Do you think that the current fiscal stimulus packages are likely to be effective?

Submitted by Anonymous on
African countries, as well as other nations that need aid in development should be well appraised that the OECD countries at one point have to be prudent. As much as these stimulus packages/bailouts are intended to restore economic growth and industry, simply printing money isn't going to do anything good for anyone. Not that isolationism is to be pursued as economic policy - at this point, it's all but impossible - but that said, simply printing more currency so that appears that money exists is really almost a stock split on currency, and devaluing currency, even for the sake of giving economic aid isn't going to benefit anyone anything.

Submitted by Ahiteme Houndonougbo on
I absolutely agree with you that agriculture is not going to lead the economic transformation the continent need. Is manufacturing the answer? probably yes. Government led manufacturing? certainly not. It is clear that successful state run companies on the continent are the exception rather than the rule. Industrial investment disasters in the 80s and 90s are common. Import substitution industrialization failed in most African countries and not only the nascent secondary sector never really took off but this policy destroyed the primary sector in many cases by shifting resources. I agree with Jorge and Shanta that massive stimulus is needed and public spending should be focused on infrastructure (http://africacan.worldbank.org/what-kind-of-fiscal-stimulus-for-africa). In my opinion, this is key not only because it immediately creates job opportunities - though this is a desired relief in the middle of the crisis - but most importantly because it is the only way to lay down the base for a modern economy that attracts private capital flows. Infrastructures such as road, telecommunication, harbor are prerequisite to private investment in these ventures that yield increasing returns on scale and create more jobs as you mentioned. Yes huge stimulus package is needed in Africa, but should be oriented to investment in infrastructure rather than state companies in order to ultimately create opportunities for private investment in the manufacturing sector. I think. Ahiteme

Submitted by Maria on
Although I'm not an expert in economics, I found it interesting what you said Ahiteme, and I agree with you, when you get to the conclusion that investments should be oriented in infrastructure mainly because it is the only way to get the base of modern economy which attracts private capital in the region. In the meantime, guess it would also give the opportunity to the state run companies to develop and like this function in a better (more organized) way. This would be an ideal situation for development in general, but you just can't miss out politics out of the picture. ...

I still think that a serious fiscal policy can stimulate the economy by facilitating new investment, thus greater consumption, jobs and income. We need less taxes and more easy credit to enable the economy. Great post! Congrats.

I agree with you. An effective fiscal policy can contribute to production, that generate jobs, that estimulate consumption and income for the country. Its like a chain effect.

Submitted by Bertran on
However, despite this, in terms of distant vision, the current crisis is for African countries a positive value. In their view, the African financiers can draw lessons from the crisis and strengthen crisis management. In the heavy atmosphere of the African countries have to intensify trade relations with non-Western countries, expanding the range of exports. In addition, the worsening external environment contributes to the process of opening the domestic market of the region.

Submitted by Health on
I believe that a serious fiscal policy can stimulate the economy by facilitating new investments, thus greater consumption, employment and income. We need less taxes and more easy credit to enable the economy.

Submitted by Mark on
While no one can be certain of anything in the current circumstances, I don't believe that African nations should copy a stimulus package that is doomed to fail. There is no evidence that it is having any effect on the real economies of the west and there is no evidence that those who are administering these schemes have a plan for disengaging from the tactic when they need to.

I agree that an effective fiscal policy can contribute to production, that generate jobs and etc, but all that must be done with sustentability and always keep the eyes on the future. Without concern about the future, any action if faded to fail. Very cool article and nice information. Best regards!

Submitted by Anonymous on
I believe that a serious fiscal policy can stimulate the economy by facilitating new investments, thus greater consumption, employment and income. We need less taxes and more easy credit to enable the economy.

Submitted by Ricardo on
Sustentability this is learning the momment. Magniffic comment.

I am totaly agree with you , the crises is for the world and more for the africa the world have to help this area Dania

The African economies are not designed and managed like the US economy and European economies. Systems that work in Western economies are not guaranteed to succeed in African countries. Besides the stimulus program hasn't been proven to be successful even here yet...so to suggest a stimulus for African nations is a big shot in the dark! Yes Sub-Saharan Africa needs help but not that kind of help, the informal sector (which is the largest workforce in Africa) is the foundation of African economies and if something should be done to help african economy: it is projects that boost the informal sector. Whether is micro-financing small entrepreneurs, encouraging technologies transfer, capital for tools and equipment to allow contractors to work faster and efficiently... such endeavours would help these industries. Thanks Hadji www.performanceconsultantsintl.com

Submitted by Sarah Smith on
It is about time that Africa receives the kind of fiscal stimulus package that the other emerging economies have... Sarah

Submitted by Grace on
"The African economies are not designed and managed like the US economy and European economies. Systems that work in Western economies are not guaranteed to succeed in African countries." -- exactly. We have seen the sometimes catastrophic results of ethnocentric approaches to helping other countries... I would agree with Hadji above and prefer an inside-out approach that would include micro-financing and education. Thank you for the article.

Despite the platitudes from Barack Obama, Gordon Brown and Ban Ki Moon about the “disproportionate impact” of the financial crisis on the poor nations of the world, it is Africa that is likely to achieve economic growth this year, even while the rich nations of the world enter recession and Financial Spread Betting . It is little thanks to aid that the people of Africa are finally experiencing meaningful growth; rather, the economic ties between the continent and, not the West, but China, have fueled this movement towards higher incomes and quality of life. Perhaps it’s more and fairer trade, not aid, that Africa needs now. And maybe that’s what we in the West need too in this time of economic chaos.

Submitted by john weeks on
I am astonded by the allegation that a fiscal stimulus in a low income country might cause 'crowding out'. Empirical evidence shows that investment in the low income countries of Africa is not funded through the domestic formal banking sytem. Foreign firms borrow abroad where money is cheaper, and commerical banks show little interest in relatively risky long term investments when they can make money risklessly on government bonds. If you wish empirical evidence of these assertions, I would be pleased to send it. As for the inflationary effect of a domestically funded stimulus, basic monetary theory tells us that the inflationary effect of monetising a deficit depends on the degree of idle resources and the degree of openness of the economy. Some pretension to analytical rigor might be rescued by alleging an unsustainable import effect. The inflation argument is so analytically weak that one is surprised that it ocmes from a trained economist. Finally, were there an inflationary effect, mgiht it not be good economics to assess the trade off between the cost of inflation and the poverty which a stimulus would reduce?

John: Thanks for your comment. You are right that if firms could borrow abroad, there would be no crowding out by the fiscal stimulus. But the problem is that, in the wake of the global credit crunch, firms were unable to borrow from abroad. So domestic credit is the only source of finance. In that case, when the government issues bonds, there is crowding out as this domestic liquidity goes towards the bonds and not to private investment. On the inflationary effect of government borrowing from the central bank, this depends on idle resources and the openness of the economy only upto a point. When inflation gets above a certain point (usually around 50 percent), the demand for money falls so much that the government has to print more and more money to finance a given deficit. This of course leads to even greater inflation, and a spiral ensues. This spiral is independent of the amount of idle resources in the economy (think of all the idle resources in Zimbabwe) and of the openness of the economy (the black market premium rises with the inflation rate).

Submitted by moveis on
This is a really good discussion! It is interesting that it has spanned over a few years and is still relevant. Thanks for the viewpoints – Happy 2010!

Submitted by john weeks on
I wish to thank you for your reply. However, it poses a problem (inflation above 50%) without explaining why one should be concerned about it at this moment. As I show in several papers on my web site (and other researchers have shown), inflation is quite low in the sub-Saharan region except in a few post-conflict countries. The important point is that inflation is not an absolute evil. I trust we have moved beyond that primitve view. The issue is the cost of the various undesirable by-products of expansionary policies, compared to the benefits of these policies. This is the prevailing view in most developed countries, most notably in the United States. In conclusion, I would ask a general question: do you accept the principle that governments should pursue an active fiscal policy, or do you argue for a so-called neutral fiscal policy? By "active fiscal policy" I mean use of the current budget for stabilising output near full potential (countercyclical interventions in face of both deflationary and inflationary pressures), and use of the capital budget to raise the potential growth rate. For those interested in policy discussion of use of active fiscal policy in developing countries, there are several relevant papers on my website (all of which can be download). http://jweeks.org

Add new comment