Africa and Global Financial Crisis

On March 20, 2009, Wilson Center on the Hill hosted a forum examining the impact of the current global financial crisis on Africa. Each individual African country faces unique challenges brought on by the current global financial crisis. A group of panelists explored the nuances of the obstacles facing different countries and regions of Africa, suggesting policies and programs the international community could adopt to mitigate the recession's effects and to prevent further economic backslide on the continent. The forum was moderated by Ann Tutwiler, former Managing Director of the Global Development Program at the William and Flora Hewlett Foundation, and featuring panelists Sudhir Shetty, Sector Director of Poverty Reduction and Economic Management (PREM), Africa Section, from the World Bank, and Kathryn Lavelle, Wilson Center Fellow and Associate Professor at Case Western Reserve University.

Moderator Ann Tutwiler opened the program by describing the key economic trends in Africa. She suggested that, although Africa has enjoyed rapid growth in the last decade due to high demand for oil and other commodities, the region's pillars of economic support – trade relations, remittances, foreign aid, and foreign investment – are all threatened by the worldwide recession. In order to attain sustainable long-term growth, the continent must build trade capacity, which requires foreign markets to remain open to African goods, and attract at least $25-40 billion in foreign investment.

In general, Kathryn Lavelle explained, the impact of a global financial crisis corresponds directly to the country's degree of integration in the global economy. Therefore, addressing financial issues cannot take a 'one size fits all' approach. The recession has had the greatest direct impact on the African countries most deeply integrated into the world economy, such as Egypt, Nigeria and Morocco. Lower-income African countries have been less severely impacted because their banks were not holding any of the so-called "toxic assets" that instigated the 2008 and 2009 crises in the US subprime real-estate market, explained Lavelle. Unfortunately, many African countries have suffered because of increases in their marginal rates of credit, and because traditional lines of credit have been cut, further forcing these countries to rely more on official credit sources. This credit crisis will probably diminish trade relations and foreign investment, hitting key commercial sectors such as mining, tourism, and manufacturing. This effect will compound problems created by the drop in commodity prices.

Despite some similarities shared by stock markets of different African nations – such as a lower number of stakeholders and increased politicization in the selling of shares – African countries differ greatly in the structure and nature of their stock markets, said Lavelle, who has conducted comprehensive studies comparing the stock markets of developed and developing countries. Because of this and the unique nature of the financial crisis' impact on Africa, African markets require tailored economic solutions. Among sub-Saharan African countries, South Africa has generally escaped the serious impact of the crisis in the region: the country's stock market is very old, well established, and deeply integrated into the world economy. As a result, Lavelle suggests that South Africa would do well to develop strategies through the ongoing G20 process to structure its integration in the world market while protecting itself and keeping demand high. Other countries, such as Seychelles, should focus instead on alleviating the effects of fluctuating commodity prices. The Central African Republic must overcome difficulties in financing its state bank, as Zambia struggles to privatize its largest copper firm in a competitive world copper market. Countries with significant mining sectors - such as Botswana – have responded to declining mineral prices by holding resources in the ground until prices resurge. Lavelle concluded that the world financial community must ensure access to credit and savings and maintain the existing foreign aid structure during these times of economic vulnerability.

Sudhir Shatti stressed the importance of stimulating economic growth on the continent rather than focusing solely on human development indicators. Since the 1990s, Africa's overall economy has grown considerably, resulting from both economic policy reforms and booming commodity prices. In the early 2000s, the region experienced per capita growth rates of 3 percent, which also brought about improvement in human development indicators for poverty reduction, education, nutrition and health. Countries such as Ghana made huge strides in reducing income poverty, and a multitude of diverse countries - resource-rich and resource-poor, land-locked and coastal - all experienced economic growth over a sustained period of time. In addition to a booming world economy, better economic management, which includes strengthening institutions and good governance, also stimulated economic growth on the continent. As one measure, inflation decreased from 20 percent in 2000 to 10 percent in 2007.

Shatti cautioned that despite African economies' varying degrees of integration with the global market, none can entirely escape the effects of the global economic crisis. Different countries will experience the crisis through a variety of transmission channels, via export markets and foreign aid. Although gold and cocoa markets have performed well recently, metal prices overall have declined by 40 percent from the market's peak in 2008, particularly affecting metal exporting countries such as Tanzania and Kenya. The crisis has greatly impacted oil producers such as Gabon, Angola and Sudan, as well as mineral-rich countries like the Democratic Republic of Congo and Zambia. Despite substantial capital flows in 2007 to African economies large and small, the venture capital investment in the continent has now slowed to a trickle. Countries dependent on remittances from abroad – particularly Kenya and Lesotho – have suffered from the recession in the U.S. and Europe, and countries that previously experienced a surge in foreign direct investment have suffered as well. Foreign aid is crucial as an impetus for economic progress, said Shatti, and for it to continue the U.S. must follow through on its aid commitments to institutions like the African Development Bank.

Shatti anticipates that the IMF and the World Bank will continue to lower estimates for the continent's overall growth rate, which is currently projected at 2.5 percent for 2009. Countries across the continent have also experienced striking increases in account deficits, which has put already impoverished populations in an increasingly vulnerable state. Shatti expressed concern that this may affect infant mortality rates and education.

To ensure that Africa does not regress from its current growth pattern, African countries must procure access to money to maintain balanced budgets, argued Shatti. The International Development Association, a part of the World Bank that helps the world's poorest countries, and other rich-country donors have raised soft money contributions for Africa while the International Bank for Reconstruction and Development has borrowed additional money from markets to give to African countries such as Mauritius, South Africa, and Botswana. The World Bank has worked with international leaders and multilateral organizations to provide support for African countries, and has provided additional assistance through the Infrastructure Crisis and the Trade Financing Facilities.

The World Bank has also discouraged the U.S. and Europe from adopting certain policies detrimental to African economies, said Shatti. For example, public ownership of U.S. and European banks may disadvantage Africa, as will the growing tide of protectionism in developed countries. These trends, if they continue, will keep African countries from further integrating themselves into the global market.

The central question of economic development in Africa is not whether or not African countries should embed themselves in the global economy, but rather in what way they should approach the process of integration, said Lavelle. The best approaches involve financial innovations and regulations that allow African countries to enter the global market without all capital flows having to be funneled through the state. The World Bank created a commendable project in the 1990's developing emerging market funds to allow degrees of private and governmental access to funds, explained Lavelle. She added that African countries could benefit from increased regional economic integration, which requires building infrastructure and addressing tariff issues that restrict the flow of goods within the continent.

Shatti suggested that lower commodity prices may in some ways benefit mineral-rich countries. Because current prices diminish incentives to sell minerals on the global market, countries in the Great Lakes region have the opportunity to focus on the underlying social and political causes of resource-fueled conflicts. Countries can also re-evaluate how to efficiently and productively manage their resources, which they have not achieved to their fullest potential in the past, he added. He also argued that low productivity could be rectified by better governance and economic decision-making at the national level, pointing out that Botswana and Malaysia were able to improve their economies over the last several decades by addressing problems of governance.

Markets for agricultural products present several challenges for African farmers, said Tutwiler. Low food prices yield low profits, which are reduced even further by inefficiencies due to a lack of modern technology. She added however, that a recent global confluence of factors - including speculative prices, droughts, and a seven-year decline in stocks – all contributed to a sharp increase in food prices.

Drafted by Erika Rao, Intern, Africa Program
Edited by Justine Lindemann, Program Assistant, Africa Program
David Klaus, Consulting Director, Wilson Center on the Hill Program