Haddy bah
Word Count: 1989/ PIN: E10278
BLISS OR MISERY, AFRICAN ECONOMY IN THE GLOBAL ECONOMY TRANSITION
Haddy bah
INTRODUCTION The 1929 depression started in the US and it evolved into a global economic crisis. The 2008 recession started in the USA, like a contagion it has now engulfed the whole world. Views are sharply polarized regarding what the impact of the current recession, which is unlikely to ebb in the next few years, would be on Africa’s development and opportunity. Some say Africa’s marginalization is paradoxically a condition that may be more insulating rather than exposing Africa to danger. Others say marginalization is likely to make the recession, as it works itself out through the economic cycles across the globe severe and punishing on Africa. Still others claim the global recession may not have negative impact on the short-term, but is likely to have long-term negative consequences especially in regions of the world where the number of the poor has been growing as in Africa. In the 1929 great depression, China was on a silver standard. Whilst those economies in the Gold standard suffered severely, China, though affected as well, was largely able to maintain a relatively stable currency during the depression. So the big question is, “will African economy be able to follow that of China during the 1929 great depression? This article deals in detail the possible challenges and opportunities for the African economy as a result of the recent ongoing global economic transition.
1
Haddy bah
CHALLENGES FOR AFRICAN ECONOMY IN THE GLOBAL ECONOMY TRANSITION Economic transition had in many instances resulted in marked changes in the distribution of wealth, leading to heightened poverty, particularly among the most vulnerable segments of society. The stresses in the financial markets of the United States that first emerged in the summer of 2007 transformed themselves into a full-blown global financial crisis in the fall of 2008: credit markets froze; stock markets crashed; and a sequence of insolvencies threatened the entire international financial system (World Bank, 2009). Massive liquidity injections by central banks and a variety of stopgap measures by governments proved inadequate to contain the crisis at first. The initially hesitant policy response has become increasingly robust. The United States government introduced a $700 billion rescue package and has taken equity positions in nine major banks and several large regional banks (Edmund, 2008). Various debt and deposit guarantees have also been introduced. At the same time, European governments have announced plans for equity injections and purchases of bank assets worth some $460 billion, along with up to almost $2 trillion in guarantees of bank debt. Markets remain volatile despite the forcefulness of these measures. During the initial phases of this financial crisis in 2007, the effects of the financial turmoil on developing countries were relatively modest. However, as the crisis intensified in 2008 and especially since mid-September, risk aversion (the absence of which had been the hallmark of the preceding boom) has increased, and capital flows to developing countries have seized up. As a result, the currencies of a wide range of developing countries depreciated sharply, and developing-market equity prices have given up almost all of their gains since the beginning of 2008. Initial public equity offerings have disappeared, and risk premiums have increased to
2
Global Initiatives Symposium in Taiwan 2009
more than 700 basis points on sovereign bonds and to more than 1,000 basis points on the debt of developing- country firms (Landler & Mark, 2008). Not much has been heard from Africa about the impact of the global financial crisis that has sent markets tumbling, banks collapsing and homeowners fearing foreclosure. But there is concern on the world's poorest continent that the financial fever and fallout will be contagious. It's becoming clear that many developing countries — African countries — will not be immune to the spillover effects of this global financial crisis (Okonjo-Iweala, 2008). So, particularly poor people within these countries are now in a kind of danger zone. And the danger for them lies in the fact that they're taking a hit from what is call the "Four Fs" — the fuel crisis, food crisis, the fertilizer crisis and now the financial crisis. There is massive rise in the price of the three commodities — fuel, food and fertilizer — over the past year or so that has prompted riots in several African countries, including Senegal. The current global turbulence could certainly have a knock-on effect on the continent. In terms of the liquidity crunch, and in terms of the impact of exports, this could be the medium through which this is transmitted to developing countries — African countries. In the short -term, the key impact of the global recession is the likely reduction in world demand for Africa’s largely agricultural and mineral exports. Even the price of oil has gone down to $48 a barrel. The other key impact is the difficulties the recession induces in controlling macro-economic policy. The up and down swings of the markets and currencies make it harder for countries specially the vulnerable ones to maintain macro-economic stability. Looking beyond these cases, there's also the issue of foreign aid — if donors are feeling the financial pinch, won't they be inclined to reduce aid to Africa? There is fear and uncertainty 3
Bliss or Misery? Contemplating the Engagement of Cultural Forms and Economic Progress
Haddy bah
about that, but the hope is that even though developed countries are struggling right now with their own crisis, that they will not cut back on what they have promised to the developing countries, because a 1 percent reduction in growth could trap 20 million more people into poverty, (Okonjo-Iweala, 2008). The poorer countries do get foreign aid from richer nations, but it cannot be expected that current levels of aid (low as they actually are) can be maintained as donor nations themselves go through financial crisis. As such the Millennium Development Goals to address many concerns such as halving poverty and hunger around the world will be affected. African countries could face increasing pressure for debt repayment. As the crisis gets deeper and the international institutions and western banks that have lent money to Africa need to shore up their reserves more, one way could be to demand debt repayment. This could cause further cuts in social services such as health and education, which have already been reduced due to crises and policies from previous eras (Devarajan, 2008). The region could see a decrease in private investment flows. Such a decrease would compromise the financing of many infrastructure projects on the continent. The tourism industry which is dominated by tourists from western countries and helps to bring in foreign money is threatened by the global economic crisis.
4
Global Initiatives Symposium in Taiwan 2009
OPPORTUNITIES FOR AFRICAN ECONOMY IN THE GLOBAL ECONOMY TRANSITION The chief economist of the World Bank's Africa region (Devarajan, 2008), says that Africa’s banking system is not threatened by the current global financial crisis, but the region could see a decrease in private investment flows. Such a decrease would compromise the financing of many infrastructure projects on the continent. Devarajan proposes, however, that sovereign wealth funds may now turn to Africa as an attractive place to invest, given the upheaval in U.S. and European markets. In recent years, there has been more interest in Africa from Asian countries such as China. As the financial crisis is hitting the Western nations the hardest, Africa may yet enjoy increased trade for a while. The African Governments should seize this opportunity to devise measures for more regional and international integrations and revise their trade policies to attract investors. Secondly, Africa needs trade reform in order for it to succeed in this global economic transition phase. Trade reform in general has reinforced changes induced by other reforms. For example, the initial negative effects on farm profitability of cuts in subsidies and price supports in CEECs and the former Soviet Union (USSR) have been reinforced by trade liberalization, which has increased competition with foreign imports. Trade liberalization also reinforced the reallocation of production activities caused by the abolition of central planning. Planned allocations of resources to the production of certain commodities, often in inappropriate regions, may not be economically sustainable when trade has to be finance by hard currencies and when inputs are accounted for at real costs. The result has to be a major reorganization of production activities across the region. It is important to learn that African entrepreneurs are quite able to export, to break into dynamic markets, to overcome various trade barriers and constraints, so that 5
Bliss or Misery? Contemplating the Engagement of Cultural Forms and Economic Progress
Haddy bah
the message is clear that an effective integration into the world market by African producers is possible. Thirdly, agriculture plays a major role in African economy, therefore with the expected opportunity that there may be more foreign investors showing interest in Africa due to the downfall of European economies, large foreign investments in the food industry and input supply industries can be created to ensure productivity gains and institutional innovations throughout the food chain, with important spill-over effects on domestic companies and on farms, and thereby improving the economic status of the rural households. It will also help greatly in ensuring food security in this region. Moreover, the economic crisis in the developed countries may force many African intellectual immigrants in these countries to return back to Africa due to diminishing job opportunities caused by the economic crisis. The return of these emigrants to Africa may contribute greatly in improving important sectors like education, health, technical and communication, thereby contributing indirectly to the economic development of Africa. Almost an aside, the issue of tax havens is important for many poor countries. Tax havens result in capital moving out of poor countries into havens. An important source of revenue, domestic tax revenues account for just 13% of low income countries’ earnings, whereas it is 36% for the rich countries (Bartlette, 2007). This capital flight is estimated to cost poor countries from $350 billion to $500billion in lost revenue, outweighing foreign aid by almost a factor of 5 (Bartlette, 2007). In an effort to avert the eminent danger that economic crisis may cause on the economy of poor countries, A United Nations- sponsored conference in November, 2008, was conducted to address this issue. If the outcome of this conference is respected by the
6
Global Initiatives Symposium in Taiwan 2009
rich countries, it could reduce, or eliminate the need for foreign aid, could help poor countries like those in Africa pay off debts, and also help them become more independent from the influence of wealthy creditor nations. Finally, this global economy transition phase provides Africa the opportunity to reform and adopt a single African currency. The way to overcome fragmentation and dependence and being caught in falling into periodic financial and stock market crises is for Africa to create a monetary union and an African currency. The latter currency is necessary to create producer user interaction across the continent to make Africans consume what other Africans produce in a large and dependable and independent African economy free from any old or new rising imperial powers and also to secure insulation from the rogue credit crises swings that mirror the episodic business cycle often endemic to the functioning of the world economy now or in the future. China had the Silver standard in 1929– remained largely untouched by the Great depression. It has now a non-convertible Yuan that keeps her affected less though its economy is more integrated today. Africa must learn to go for what would work, establish a unitary currency as part of the grand effort to win its agency to manage its own united macro-economy!
7
Bliss or Misery? Contemplating the Engagement of Cultural Forms and Economic Progress
Haddy bah
CONCLUSION In conclusion, the global economic transition poses both threats and opportunities for African economy. Certainly, there is no need to be over-optimistic with regard to Africa’s potential role in the world economy. Nevertheless, considering some success stories on various levels of the economy, there is also no room for a too pessimistic outlook.
8
Global Initiatives Symposium in Taiwan 2009
REFERENCE Bartlette, W., (2008). Haven Tax, an Important Source of Revenue for Rich Countries. Journal of Economic Change and Restructuring, 42 (2), 24 – 46. Devarajan, S., (2008). Africa and the Global Economic Crisis. http://www.cfr.org/publication/17551/africa_and_the_global_financial_crisis.html Retrieved 0n 2009 - 2- 16. Edmund, L., (September 18, 2008. Vast Bailout by U.S. Proposed Bid to Stem Financial Crisis. The New York Times, 12 -20. Fackler, K., & Martin (2008-10-23). Trouble without Border. The New York Times. http://www.nytimes.com/2008/10/24/business/worldbusiness/24won.html. Retrieved on 2009-218. Landler & Mark (2008). West is in Talks on Credit to Aid Poorer Nations. The New York Times. http://www.nytimes.com/2008/10/24/business/worldbusiness/24emerge.html. retrieved on 2009 2- 17. Torbat, E. (2008). Global Financial Meltdown and the Demise of Neoliberalism. Global Research (Center for Research on Globalization). http://www.globalresearch.ca/index.php?context=va&aid=10549. Retrieved on 2009-2-15. World Bank (2009). Global Economic Prospects: Outlook summary. http://web.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/EXTGBLP ROSPECTS/0,,contentMDK:20656835~menuPK:4357322~pagePK:2904583~piPK:2904598~th eSitePK:612501,00.html . Retrieved on 2009-2-15. 9
Bliss or Misery? Contemplating the Engagement of Cultural Forms and Economic Progress
Haddy bah
Global Initiatives Symposium in Taiwan 2009