Good boom, bad timing
Asian demand for African agricultural and mineral commodities will not fully
compensate the losses caused by the West's economic slowdown.
11th October 2011
Africa has picked a really bad time to launch its economic boom, says one
finance minister resignedly. In Washington for the World Bank and
International Monetary Fund annual meetings on 23-25 September, he had just
heard the Bank's Chief Economist for Africa,
arajan> Shantayanan Devarajan, talk about the continent's 'robust growth'.
The Bank puts this at about 4.8% on average in 2011, with the IMF projecting
it at 5.2%. Of the world's 15 fastest-growing economies, Devarajan
explained, 10 were from Africa, including Ghana, where the start of oil and
gas export should produce gross domestic product growth of over 13% this
Then the finance minister went to hear Bank President
> Robert Zoellick describe how the economic travails of the United States
and the Eurozone (some US$7.6 trillion wiped off equity markets so far, say
Bank economists) were spreading to developing economies, including Africa's
'frontier markets'. Now a greater risk loomed, he argued: the drop in
markets and confidence could mean that big developing countries - such as
China, India and Brazil - would cut back their investment plans and their
consumers would cut spending.
Sub-Saharan Africa's economic prospects: growth, inflation and trade
Asian demand for agricultural commodities and minerals cannot yet compensate
Africa for the slowdown in Western demand, despite a shift of global
purchasing power from West to East. So a double-dip recession in the USA or
a worsening crisis in the Eurozone triggered by a Greek default would
quickly, if indirectly, weaken African economies. Some 37% of Africa's
non-oil exports go to the European Union. Faltering growth in North America
and Europe will cut export earnings, remittances, private capital flows and
aid to Africa. Economists reckon that a 1% fall in Western growth rates
translates into a similar fall in African economies.
Few economists at the Washington meetings were certain Western economies
would this year repeat the 2008 crash but many advised developing economies
to prepare for more pummelling of markets and state treasuries. Even in
Africa's best-managed economies, with low budget deficits, there is far less
room to manoeuvre now than there was in 2008. African consumer prices rose
on average by 10% in the year to May 2011, up from 7.5% a year earlier. Some
countries are seeing sharper price rises, creating political problems.
For example, Kenya's economy has rebounded quite strongly since the
political crisis of 2007-08 and the global crisis in the same period but the
government has run fiscal deficits of 5-6% a year and now has a debt-to-GDP
ratio of over 50%. With elections next year, the governing coalition parties
want to raise money and don't want the blame for austerity measures. With a
regional drought, spiralling food prices and a plummeting currency,
something will have to give. Some suspect that politicians playing the
foreign exchange markets are pushing down the shilling's value.
Kenya's difficulties are repeated in Ethiopia and Uganda where inflation is
rising and political discontent growing. African finance ministers do not
expect much relief from outside. They recognise that sentiment in rich
Western countries hasmoved against aid and that private capital - which
makes up most flows to Africa - is likely to be more selective. Of the
African fiscal deficits during the 2008 crisis, some 80% were financed from
domestic resources, Shanta Devarajan noted.
At least that helped to develop banking systems and financial sectors, as
well as send governments on a tax collection campaign. The same is happening
now, with tax authorities getting tougher on corporate profits and
royalties, particularly in the oil and mining sectors. Global food prices
are now 26% higher than a year ago and the price of rice - an 'essential
commodity' for many African middle classes and therefore politically
sensitive - went up by 5% in August alone.
Sharply rising food prices have prompted more debate about how
developing-country governments can reduce risk. The World Bank helps
countries to set up financial market insurance and other risk management
strategies, such as crop insurance. Senior officials at the United Nations
Conference on Trade and Development says these are largely ineffectual and
instead want tighter regulation of the role that financial investors and
speculators play in commodity markets, as well as restrictions on banks that
have inside information about commodity market movements.
Prospects for such regulation look poor, given entrenched opposition from
banks and Western governments. French calls for a Financial Transactions Tax
are gathering broader support, though, with Britain and the USA among the
main opponents. In Washington, several African governments, including
Congo-Kinshasa and Liberia, mooted tough tax regimes for mining and oil
companies. The Bank's Vice-President for Africa,
sili> Obiageli Ezekwesili, said the push for more accountability in natural
resource revenue was a basic minimum of reform, which has led to a review of
tax and royalty payments and how countries could maximise 'the value of
their endowment'. The Bank helps countries to set up sovereign wealth funds
to better manage revenue and, in some cases, pays for expert advisors to
assist governments negotiating fiscal terms with international oil and
Amid the gloom, the Bank's Chief Economist Justin Yifu Lin put a positive
spin for Africa. The rapid wage increases in China and India would push
labour-intensive manufacturers to relocate to countries with low wages.
'Labour-abundant countries should grasp that opportunity to diversify their
economies,' he said. 'There are opportunities for African countries to grow
as dynamically as the East Asian countries, not only for a short period of
time - it can be 10, 20 or 30 years.' Coming from a man who was founding
director of the China Centre for Economic Research during a period of
exponential agricultural and industrial growth, Lin's views carry weight.
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Received on Tue Oct 11 2011 - 17:39:20 EDT