Financial Crisis

Despite being pummeled by the global crisis--diamond production and exports contracted by 50 percent in 2009--Botswana was in the enviable position of being able to cushion its people and the economy, thanks to large savings accumulated over the years and access to inexpensive financing. 

But it may have overdone the cushioning.  The fiscal deficit for the 2009/10 budget year is projected at 14 percent of GDP.

Although diamond prices are expected to rebound, production and exports will remain below pre-crisis levels, and another double-digit deficit is expected in 2010/11.  Not even Botswana can maintain double-digit deficits for long without jeopardizing its fiscal sustainability, especially given the specter of a rapid fall in diamond production--and eventual depletion of known reserves--in a few decades. 

At the same time, cutting spending is particularly painful in a country like Botswana where government expenditures are pivotal to economic activity and to sustaining non-mining private sector.

 Some tough choices ahead for one of Africa's best-managed economies.

The impact of the global financial crisis on infant mortality is a topic of great policy importance. However, estimates of the likely impacts of the crisis, cited by international institutions and in the popular press, differ wildly.

This blogpost summarizes the main conclusions from some of my own recent research on this topic, jointly with various colleagues.

These conclusions include:

1. The effect of negative growth on child health, including infant mortality, varies a great deal across countries. In developed countries, such as the US, infant mortality decreases when there are negative economic shocks. In low-income countries, including in India and countries in Sub-Saharan Africa, infant mortality increases in those periods (see Ferreira and Schady 2009 for a discussion). The picture for middle income countries is mixed, but on balance, it is closer to that found in the US. Important exceptions are cases in which the economic contraction was very severe--maybe 15 percent or larger. That was the case in two crises in Peru, and in Indonesia in 1998 (see Paxson and Schady 2005 and Schady and Smitz 2009).

At a recent conference that brought together African Finance and Education ministers, the keynote speaker, Tharman Shanmugaratnam, finance minister (and former education minister) of Singapore gave a beautiful speech about Singapore's experience that contained some potentially difficult and controversial messages for Africa.

1.  There is a virtuous circle of education and growth, but you need to create it.  This means that finance ministers should be concerned about education, and education ministers about economic growth. [At the conference, one participant, when asked a question about education in his country, said "I'm the finance minister, not the education minister."]

2.  Singapore emphasized technical and vocational education by giving it prestige that was almost equal to academic education.  This involved, among other things, a public relations campaign.  As participants at the conference said, in Africa, we also need to deliver on the quality of vocational and technical education.

3.  Singapore's insistence on education being a meritocracy (students advance purely on merit) has led to equity.  For instance, the top 5 percent of the students come from 95 percent of the schools.  But to make this work, the education system needs to be insulated from politics.  As Tharman said, the role of political leaders is to keep politics out of education.

4.  In Singapore, universities charge full fees, and give scholarships to low-income students.  The government encourages private donations to universities, matching them one-for-one.  How many African universities can overcome the political resistance to charging fees?.

In recent months, the external sector in South Africa has strengthened in ways that are somewhat perplexing. The strengthening has partly to do with weak import demand due to the economic slowdown.  But the surprising aspect has been sustained inflows of foreign portfolio investment in South African domestic securities.  Just as the news on the real sector and fiscal balances has gotten worse, somewhat paradoxically foreign investors’ appetite for South African securities has grown. Negative reports on economic performance have been unrelenting -- recession and higher unemployment, biggest declines on record in manufacturing and mining, battering of the automobile industry, and a much-larger-than-anticipated fiscal gap.  Yet, the Rand stood at a 10-month high against the US dollar on June 30, whereas currencies in Brazil, India and Russia had lost much more ground against the greenback. The country issued a 10-year, US$1.5 billion bond on international markets in May, and it was oversubscribed several times over at a modest spread of 368 bp over LIBOR.  By end-June, foreigners had net purchased about US$4.5 billion of bonds and stocks on South African markets.

No doubt, foreigners are attracted by the country's good record on macroeconomic stability, financial sector discipline, and rapidly rising investment in infrastructure, although they may be deterred by its large current account deficit.  But that record has not changed in recent months. So what explains this seeming dichotomy between progressively bad news on economic performance and strengthening interest of foreign portfolio investors?  A penny (or 8 South African cents, which would have been 10 cents in April) for your thoughts.