Africa and the Crisis: What's Next?

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Vox has an informative article by two South African economists, Peter Draper and Gilberto Biacuana, highlighting the effects of declining trade flows on African growth. The first half of the piece offers an excellent summary of Sub-Saharan Africa's economic state as a result of the crisis. The authors argue that the crisis has affected Africa mostly through reduced exports and commodity prices, along with declining capital inflows.

Roughly 80 percent of the continent's exports are comprised of minerals, metals, and food products. Over half of these exports are destined for Europe and North America (Asia currently comprises under 25 percent of exports). Looking at the data, the link between China and Africa is more about value than volume: Chinese growth raises the overall price for commodities, which then increases the value of Africa's exports to the United States and Europe. The value of these exports is especially important when considering that they are a large source of government revenue. When the crisis sent the price of commodities downward, the value of Africa's overall exports and a disproportionate share of government revenue went down as well.



The second half of the paper discusses Africa and the bigger picture:

Altogether the cumulative impacts of the crisis on Africa, already arguably the most vulnerable region of the global economy, are serious. The crisis impacts described above reinforce the point that African economies are still integrated into the global economy as suppliers of raw materials to manufacturing industries located elsewhere – albeit some new sources of services revenues (remittances and tourism primarily) have contributed to diversification in recent years. Any major changes to global trade and investment patterns that the crisis may engender are unlikely to substantially transform this structural feature.

As things currently stand, African policy makers in Finance Ministries and Central Banks seem to realise, in the aggregate, that the crisis is essentially a temporary liquidity problem requiring extraordinary but temporary policy responses in the countries concerned. Furthermore, there does not seem to be a major appetite in Africa to reverse reforms, since it is highly unlikely that policy reversals will lead to substantial changes in their countries’ economic circumstances.

The continent's prognosis for growth is dependent on a return to growth in developed countries, further cooperation with the Washington-based development community (including the World Bank), and deeper ties with China:

African policy makers are pursuing a two-pronged strategy:

Petition the IMF and World Bank to maintain capital flows into the continent on reasonable terms and waiting for the developed world’s growth to resume and lift their economies.

And – just in case progress is slow on both fronts – they continue to deepen engagement with China.

The good news is that Africa is becoming increasingly tied to the global economy. One of the advantages of this is that, when faced with a crisis, African economies have a greater diversity of response options. They can now turn to the World Bank/IMF, developed economies, and China. In the future, the list is only likely to grow longer.

The bad news is that, as the paper notes, Africa's growth continues to hinge on commodity exports. As emerging economies continue to catch up with the West, commodity prices are likely to remain high. This will not bode well for Africa's prospects for economic diversification.

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