Diagnosing crisis drivers in Africa
Impacts on the continent could be traced through, inter alia, two broad channels:
- Reduced exports and commodity prices; and
- Declining capital inflows.
We address each subsequently, in the process taking into consideration the broader macroeconomic impacts, and conclude with some thoughts in what this implies for Africa in light of the wider consequences for global trade.
Commodity prices and trade
African economies depend on commodity exports to create forex and fuel domestic economic growth (Table 1). This fits with the continent’s comparative advantage in resource endowments, particularly of mineral and agricultural products; the only manufacturing centre of any significance is South Africa which makes up about the bulk (a lot more than 50%) of the manufactures represented in Table 1.
Table 1 Structure of Africa’s exports, 2008
Source: SAIIA’s calculations predicated on International Trade Centre data, 2009
Commodity receipts boomed through the first part of the millennium, as China’s (also to a smaller extent, India’s) economic growth sucked in enormous levels of recycleables and demand in the original developed country export markets – the united states and Europe – remained strong (Table 2).
Table 2 Destination of Africa’s exports, 2008
Source: SAIIA’s calculations predicated on International Trade Centre data, 2009
The commodities boom created some challenges, specifically for those countries reliant on imported food and energy, as witnessed in the purchase price spikes in both of these commodity groups in 2008. However, since commodities prices had boomed over the board and export receipts also increased generally in most countries, the effects have been ameliorated somewhat.
The original impact of the crisis was to lessen demand in the major export markets for African commodity exports, especially in the epicentre economies: the united states and EU (Figure 1). Those impacts were differentially experienced since some countries benefited from lower charges for imported energy and food, which decreased inflationary pressures. Furthermore, on aggregate the decline in export volumes experienced by African economies had not been as severe as the global average, which probably reflects the actual fact that African economies usually do not take part in the manufacturing processing trade and for that reason were not put through the rapid deceleration popular as were the Asian economies.
Figure 1 Annual export & import growth by volume (% change), World and Africa, 2003-2009
Source: SAIIA’s calculations predicated on IMF World Economic Outlook Database, 2009
Nonetheless, declining demand for commodity exports impacted negatively on investment decisions, and for that reason economic growth, over the continent. This probably explains why import volumes were also heavily hit by the crisis.
Finance and capital flows
Broader macroeconomic impacts on Africa depend on the united states in question’s balance of payments position, forex reserves, and fiscal position. With regards to the first two criteria, the African situation generally is problematic. 1 Furthermore, as developed countries make an effort to rebalance their economic growth by reducing consumption, the resultant tempering of global demand will impact negatively on Africa.
The financial impacts
Because so many countries in the sub-continent depend on import taxes (tariffs) to sustain government revenues, the trade collapse will worsen fiscal positions. Therefore sustaining usage of financial flows is crucial, albeit this faces severe challenges too. The challenges result from at least four sources:
- Trade finance,
- Official development assistance (ODA),
- Foreign direct investment (FDI), and
Concerning trade finance, the commitments made at the G20 Leaders’ summit in London to substantially raise the World Bank’s capacity to underpin extension of trade finance have become important. The general public debate upon this issue has receded, which we take to become a sign that the problem has moderated.
ODA, however, is quite unlikely to improve; the major donor-countries are engaged in financial sector bailouts and refloating their economies. Figure 3 implies that before the onset of the crisis such flows had moderated the point is.
Figure 2 Aggregate ODA to Africa, 2002-2007, USD million
Source: SAIIA’s calculations predicated on OECD Stat database, 2009
This is apt to be compounded by decreasing inflows of private capital, but by the finish of 2008 this hadn’t shown up in official figures (Figure 4). UNCTAD, however, projects that it’ll be manifest in this year’s 2009 figures; their FDI projections claim that several pipeline projects have already been cancelled (UNCTAD 2009). Mostly this concerns resource investments, which includes implications for resource exports later on and, by extension, for macroeconomic imbalances specifically.
Since FDI now makes up about a significant proportion of capital formation in Africa this drop isn’t welcome news. Hence, it is likely that those already vulnerable revenues should come under more stress in lots of African countries in the months ahead.
Figure 3 FDI inflows to sub-Saharan Africa, by value and as a share of gross fixed capital formation, 1998-2008
Source: SAIIA’s calculations predicated on World Investment Report database, 2009
Furthermore, reduced remittances from African diasporas resident in the developed world tend for the next year or two (Table 3; Figure 4). In recent decades these financial inflows have alternately cushioned the ill-effects of macroeconomic mismanagement or underpinned positive structural transformation stories. This will exacerbate forex shortages, dampen domestic growth prospects through reduced consumption, and additional sharpen revenue pressures.
Table 3 Outlook for remittance flows, 2009-11
Source: Ratha et al, 2009.
Figure 4 Remittances flows, 1970-2009, USD billion
Source: SAIIA’s calculations predicated on World Bank data, 2009
Africa and the larger 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 idea that African economies remain built-into the global economy as suppliers of recycleables to manufacturing industries located elsewhere – albeit some new resources of services revenues (remittances and tourism primarily) have contributed to diversification recently. Any major changes to global trade and investment patterns that the crisis may engender are unlikely to substantially transform this structural feature.
At the policy level, additional impacts are possible too. Because the crisis started in the developed world, principally the united states, many commentators are actually questioning the utility of economic management models sourced from those countries. This feeds into what have been a gathering backlash against the so-called “Washington Consensus” group of policy “prescriptions” – practiced particularly by the IMF and earlier by the World Bank – via “structural adjustment” policies (Sally 2007). African observers specifically are wondering why it really is that these were obliged to cut budget deficits and pursue monetary orthodoxy the purveyors of such advice are pursuing macroeconomic policies seemingly at odds with earlier advice.
These concerns resonate with Asian reactions to the Asian financial meltdown in the late 1990s when the IMF specifically proffered austerity policies in substitution for funding, at the same time when the economies concerned required economic stimulus – as the Western world is conducting on an enormous scale now. The Asian countries’ subsequent reaction fuelled the growth of forex reserves as insurance against future financial crises, which somewhat underpin the global macroeconomic imbalances that contributed to the present crisis. Consequently African policy makers are going for a keen interest in current discussions in the G20 and the Bretton Woods Institutions concerning reform of IMF conditionalities.
Some observers fear that you will have policy reversals in Africa, potentially undoing decades of hard reform. Up to now, however, this scenario hasn’t come to pass. As things currently stand, African policy makers in Finance Ministries and Central Banks appear to realise, in the aggregate, that the crisis is actually a temporary liquidity problem requiring extraordinary but temporary policy responses in the countries concerned. Furthermore, there will not seem to be a significant appetite in Africa to reverse reforms, because it is highly unlikely that policy reversals will result in substantial changes within their countries’ economic circumstances.
African policy makers are pursuing a two-pronged strategy:
- Petition the IMF and World Bank to keep capital flows in to the continent on reasonable terms; and
- Looking forward to the developed world’s growth to resume and lift their economies.
And – in the event progress is slow on both fronts – they continue steadily to deepen engagement with China.
1 Approximately 40 African countries have current account and fiscal deficits, whilst exchange rates over the continent are weak. Start to see the African Development Bank presentation at the SAIIA conference on the G20 Leaders’ London Summit, here.
Ratha, D., Mohapatra, S. and Silwal, A. (2009). Migration and remittances trends 2009, Development and Development Brief 11, World Bank, November 3.
Sally, R. (2007) ‘The Political Economy of Trade Liberalization: What Lessons for Reforms Today?’, SAIIA Trade Policy Report 18.
UNCTAD (2009) World Investment Report: Transnationals, Agricultural Production, and Development. US: Geneva.