During the period of the “Great Moderation,” Africa's aggregate economic growth fuelled some optimism that the continent was at last on its way to meeting its Millennium Development Goals (MDG) targets. As with most regions, however, that optimism has given way to pessimism in the wake of the financial crisis.
Diagnosing crisis drivers in Africa
Impacts on the continent can be traced through, inter alia, two broad channels:
- Reduced exports and commodity prices; and
- Declining capital inflows.
We address each in turn, in the process considering the broader macroeconomic impacts, and conclude with some thoughts about what this means for Africa in light of the wider consequences for global trade.
Commodity prices and trade
African economies rely on commodity exports to generate foreign exchange 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 accounts for the bulk (more than 50%) of the manufactures represented in Table 1.
Table 1 Structure of Africa’s exports, 2008
Source: SAIIA’s calculations based on International Trade Centre data, 2009
Commodity receipts boomed through the early part of this millennium, as China’s (and to a lesser extent, India's) economic growth sucked in enormous quantities of raw materials and demand in the traditional developed country export markets – the US and Europe – remained strong (Table 2).
Table 2 Destination of Africa’s exports, 2008
Source: SAIIA’s calculations based on International Trade Centre data, 2009
The commodities boom created some challenges, especially for those countries reliant on imported food and energy, as witnessed in the price spikes in these two commodity groups in 2008. However, since commodities prices had boomed across the board and export receipts also increased in most countries, the effects had been ameliorated to some extent.
The initial impact of the crisis was to reduce demand in the major export markets for African commodity exports, especially in the epicentre economies: the US and EU (Figure 1). Those impacts were differentially experienced since some countries benefited from lower prices for imported energy and food, which decreased inflationary pressures. Furthermore, on aggregate the decline in export volumes experienced by African economies was not as severe as the global average, which probably reflects the fact that African economies do not participate in the manufacturing processing trade and therefore were not subjected to the rapid deceleration in demand as were the Asian economies.
Figure 1 Annual export & import growth by volume (% change), World and Africa, 2003-2009
Source: SAIIA’s calculations based on IMF World Economic Outlook Database, 2009
Nonetheless, declining demand for commodity exports impacted negatively on investment decisions, and therefore economic growth, across 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 country in question’s balance of payments position, foreign exchange reserves, and fiscal position. In relation to the first two criteria, the African situation in general is problematic.1 Furthermore, as developed countries strive to rebalance their economic growth by reducing consumption, the resultant tempering of global demand will impact negatively on Africa.
The financial impacts
Since many countries in the sub-continent rely on import taxes (tariffs) to sustain government revenues, the trade collapse will worsen fiscal positions. This means that sustaining access to financial flows is critical, albeit this faces severe challenges too. The challenges come 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 increase the World Bank’s capacity to underpin extension of trade finance are very important. The public debate on this issue has receded, which we take to be a sign that the problem has moderated.
ODA, however, is very unlikely to increase; the major donor-countries are engaged in financial sector bailouts and refloating their economies. Figure 3 shows that prior to the onset of the crisis such flows had moderated in any event.
Figure 2 Aggregate ODA to Africa, 2002-2007, USD million
Source: SAIIA’s calculations based on OECD Stat database, 2009
This is likely to be compounded by decreasing inflows of private capital, but as of the end of 2008 this had not shown up in official figures (Figure 4). UNCTAD, however, projects that it will be manifest in the 2009 figures; their FDI projections suggest that a number of pipeline projects have been cancelled (UNCTAD 2009). Mostly this concerns resource investments, which has implications for resource exports in the future and, by extension, for macroeconomic imbalances in particular.
Since FDI now accounts for a major proportion of capital formation in Africa this drop is not welcome news. It is therefore likely that those already vulnerable revenues will come under more stress in many African countries in the months ahead.
Figure 3 FDI inflows to sub-Saharan Africa, by value and as a percentage of gross fixed capital formation, 1998-2008
Source: SAIIA’s calculations based on World Investment Report database, 2009
Furthermore, reduced remittances from African diasporas resident in the developed world are likely for the next couple of years (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 foreign exchange shortages, dampen domestic growth prospects through reduced consumption, and further 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 based on World Bank data, 2009
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.
At the policy level, additional impacts are possible too. Since the crisis originated in the developed world, principally the US, many commentators are now questioning the utility of economic management models sourced from those countries. This feeds into what had been a gathering backlash against the so-called “Washington Consensus” set of policy “prescriptions” – practiced particularly by the IMF and earlier by the World Bank – via “structural adjustment” policies (Sally 2007). African observers in particular are wondering why it is that they were obliged to cut budget deficits and pursue monetary orthodoxy yet 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 crisis in the late 1990s when the IMF in particular proffered austerity policies in return for funding, at a time when the economies concerned required economic stimulus – as the Western world is conducting on a massive scale now. The Asian countries’ subsequent reaction fuelled the growth of foreign exchange reserves as insurance against future financial crises, which to some extent underpin the global macroeconomic imbalances that contributed to the current crisis. Consequently African policy makers are taking a keen interest in current discussions in the G20 and the Bretton Woods Institutions concerning reform of IMF conditionalities.
Some observers fear that there will be policy reversals in Africa, potentially undoing decades of hard reform. So far, however, this scenario has not come to pass. 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.
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.
1 Approximately 40 African countries have current account and fiscal deficits, whilst exchange rates across the continent are weak. 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. United Nations: Geneva.