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Africa: Least integrated but worst hit by the crisis

Shanta Devarajan's picture

Even though it is the least integrated with the global economy, Africa may be the worst hit region by the global economic crisis. Each of the four channels through which the crisis is affecting Africa has a particularly nefarious impact. 

  • Private capital flows, which in 2007 had surged to $53 billion—for the first time exceeding foreign aid to the continent—are declining.  Since last year, African stock markets have fallen by an average of 40 percent, with some such as Nigeria's falling by over 60 percent.  Ghana and Kenya have postponed sovereign bond offerings worth over $800 million, delaying the construction of toll-roads and gas pipelines.  The Democratic Republic of Congo has lowered its expected foreign direct investment by $1.8 billion. These flows were financing much-needed infrastructure and commodity-based investments. More importantly, the surge in capital inflows had raised expectations that African economies had “turned the corner”—only to have those expectations deflated for reasons that are not remotely the fault of Africans.
  • Remittances, which had peaked at about $20 billion a year in 2008, are expected to decline by 4.4 percent this year.  Typically, remittances are counter-cyclical: when your family is having difficulties, you send them more money. But this time the crisis is in the remittance-sending countries. Over 77 percent of Africa's remittances come from the U.S. and Western Europe.  
  • The third channel is foreign aid.  Although donors increased aid to Africa in 2008, they are already $20 billion short of the commitments made in Gleneagles in 2005—commitments made when the global economy was more robust.  Today, fiscal pressures to stimulate the donors' own economies are mounting.  If we draw lessons from the 1990s financial crises in Norway, Sweden and Finland, foreign aid could fall substantially. A cutback in foreign aid could make the difference between life and death for, among others, the two million HIV-positive Africans on anti-retroviral therapies.
  • Fourth, the rapid decline in commodity prices, although a benefit to Africa’s oil importers, is causing a major decline in exports and government revenues in the many commodity exporters. Even those oil exporters who saved their windfall oil revenues in 2008 (Angola, Gabon and Nigeria all used a reference price of oil of about $57 a barrel when the market price was $140) are suffering because their non-oil sector is both very small and highly dependent on government expenditures. Angola's GDP is expected to decline by 23 percent in nominal terms.  Exporters of other commodities, such as Zambia, DRC and South Africa, are experiencing a substantial drop in export revenues and, in some cases, fiscal revenues as well. 

In addition, several African countries entered the global financial crisis with significant macroeconomic imbalances.  Ethiopia's inflation rate in July 2008 was 60 percent; Ghana's fiscal deficit was 14 percent of GDP. South Africa's current account deficit, which was financed largely from private capital flows, was 8 percent of GDP. 

The net result is that Africa's GDP will grow at about 2.4 percent in 2009, about two and a half percentage points slower than in 2008. While 2.4 percent growth is higher than the zero or negative growth being forecast for the United States or Europe, a two- to three-percentage-point drop in growth could have devastating consequences for a low-income region.  

Until 2008, African countries had been experiencing—for the first time in two decades—sustained economic growth equal to that of all developing countries (outside China and India).  Thanks to sound economic policies and rising commodity prices, Africa's growth had been accelerating from 5.7 percent in 2006 to 6.1 percent in 2007 and a projected 6.4 percent in 2008.  Poverty was declining and many human-development indicators—notably the prevalence of HIV/AIDS—were improving. Now the hopes created by this decade-long surge in growth are being dashed. Political and social unrest may follow.

 Furthermore, Africa's recent economic growth was due at least in part to the economic reforms that policymakers undertook during the previous decade.  There is a good chance that political support for these reforms will wane.  That most developed countries are undertaking what look like "reverse reforms"—bank nationalization, deficit-increasing public spending programs—will make it harder to sustain reform momentum in Africa.

 Finally, the global economic crisis could lead to a human crisis in Africa. If Africa experiences a growth deceleration that is typical of the past, we estimate that an additional 700,000 infants will die before their first birthday. 

 Question (asked by someone when I made a presentation along these lines at the World Bank): If all this is true, why was there so little additional aid for Africa in the G-20 communiqué? I’d be interested to hear what you think.

 

Comments

Submitted by L.Dion on
You really believe that Africa, where output gaps will generally be less than 1% of GDP this year, is hit worse than some of the developed and emerging markets which will have output gaps greater than 5% of GDP?

Thanks for your question, L.Dion. Yes, it's possible that a one percent output fall in Africa is worse than a five percent fall in developed countries because the former can have permanent consequences--children being taken out of school, getting less nutrition, and sometimes dying. In developed countries, these output gaps are still considered temporary, and when the economy rebounds, people get re-employed. But in poor countries, the consequences of the downturn are felt for a long time.

I cannot comment on the question whether a 5% drop in GDP in developed nations is better or worse then a mere 1% growth in Africa. It does the raise the issue that existing indicators (such as GDP) are not telling us the full story and that measures of socio-economic vulnerability and resilience are much needed. Any thoughts on how to do this in Africa context?

Submitted by Victor Maloi on
Shanta you keep on avoiding protectionism through agricultural subsidies in developed countries as one of the major issues affecting the advancement of African states. Indeed there will be no need for aid if we were allowed to compete for the markets in the north. Out of the more than $700 billion IMF credit facility, Africa will on get $20 billion accompanied with unthoughtful conditionalities (such as currency devaluations that will consign us into abject poverty while our external loan repayments would more than double). The eventual absorption of the aid/loan will be less than 10%. Access to markets is not a favour considering the fact that the expensive agricultural methods in the north are emitting significant amount of carbon that affects all of us. With ready markets (demand for our produce), Africa can borrow, create jobs, restore agriculture, rekindle our pride and return to economic growth path. Africa has relatively done well in the so called global financial crisis. In my view, accepting the $20 billion, we shall have imported a crisis that not of our making.

Victor, thanks for your comments. I have not discussed agricultural subsidies in developed countries because I'm not sure what we can do about them. Without doubt, they are harmful to African agricultural producers. But saying this repeatedly doesn't seem to have helped. These subsidies are there for political reasons in developed countries. Politicians in these countries are unlikely to reduce these subsidies because they think it harms Africa. That said, I also don't think that eliminating these subsidies will solve all of Africa's problems. For instance, there is no protection for African manufactured exports to Europe; yet these exports are minuscule. There are still many problems within Africa, mainly to do with infrastructure, business regulation and trade facilitation, that need to be addressed if Africa is to expand its trade with the rest of the world. If Africa can do this, I agree with you that it will do a lot more for the continent than aid.

Submitted by Raj on
Hi Shanta, I am in Nairobi right now. Talking to people here, it seems like the financial crisis is something the west and other regions of the world are experienceing. People generally feel unaffected by the crisis here so far. Let me give you an example - there is construction going on as usual in my neighbourhood in Westlands. So many building are mushrooming. And another area Isli is booming with new housing and commerical development. What are some signs I should look out for to know the crisis has hit home? thanks

Submitted by gaspar on
But in Uganda, whose main trading partners are the neighbors, the situation looks very different. Ugandan exports to the region almost doubled in the last year to 500 million dollars, which gives reason to believe that the country's GDP will grow by the end of the year at 6%. Whatever the case, if Uganda and Kenya demonstrate an increase, it will be a happy exception to the general rule: the financial crisis and world recession will lead to great financial losses for African countries.

Submitted by belton on
These are still the main reasons for the continent's failure to march steadily towards prosperity.Biofuel crops are not a threat to food security but a potential boon for Africa where some regions could be as successful as Asian palm oil giants

Excellent post Shantam I couldn't agree more, the lack of the Africa's generally democracy is certainly a contributing factor in my opinion, however it's natural resources if utilized could help boost the economy.

Submitted by Bluestone on
gaspar you make so much sense on this issue. I enjoyed your comments and insights.

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