Opportunity in the Midst of Despair: How should Africa respond to the global credit crisis?

In November last year, as the pervasive effects of the global financial crisis continued to cripple the world’s advanced economies, predictions from the G-20 summit in Washington, D.C., suggested that more than 80 percent of the future growth of the global economy will depend on emerging market countries. Similarly, while the International Monetary Fund (IMF) has forecast that developing countries will grow by 3.3 percent this year, expectations are that the advanced economies will shrink by close to 2 percent.

Several factors have served to mitigate the effect of the global financial crisis on African economies. First, “the poor integration of Africa’s financial structures in the global financial system has shielded the continent” from the full effects of the shock. Similarly, many African countries have benefited from the accompanying fall in food prices, with three quarters of African countries being net food importers. In addition, many of the continent’s energy-scarce countries have benefited from the decline in oil prices that has accompanied the crisis.

This is not to say that Africa is immune from the effects of the financial crisis. Prices for commodity exports, the primary source of export revenue for the majority of African countries, have declined significantly amid a sharp decline in global industrial production. In South Africa, for example, the decline in export revenues has been greater than the corresponding reduction in import prices, further widening the country’s already substantial current account deficit. This has been accompanied more generally by a sharp slowdown in world trade, with estimates from the World Trade Organisation (WTO) indicating that world trade growth fell by 4 percent in 2008.

Furthermore, the crisis is likely to lead to a substantial decline in international funding flows to African countries, both in the form of private investment and donor funding. The impact of debt defaults throughout the global financial system has seen banks tighten their lending policies and investors tighten their belts. This reality has particularly important implications for emerging markets, which are typically perceived by investors to be risky destinations, even in economic boom times. Another long-term effect that is likely to affect funding flows into Africa is an anticipated long-term reduction in remittances from Africans living abroad, which currently amount to an estimated $10 billion annually.

So how can Africa avoid the worst effects of the crisis and perhaps even turn it into an advantage in the context of the anticipated movements of capital into emerging economies?

Many of the potential solutions relate to African countries ‘getting their houses in order’. In general terms, African countries will need to improve their investment risk ratings in order to attract critical investment from abroad. Allied to this is the need for African states to demonstrate a greater commitment to good governance. Moreover, reducing the costs and constraints associated with doing business in African countries will raise their profile as less expensive, less risky and more profitable business destinations.

Expanding trade with other developing countries represents another potential panacea for African economies. According to Supachai Panitchpakdi, secretary-general of the United Nations Conference on Trade and Development (UNCTAD) and a former director-general of the WTO: “The timing, therefore, is right to explore how greater South-South co-operation can help developing countries to cope with the crisis”. Within this context, South Africa has already engaged in discussions with trade representatives from Brazil and India regarding potential ways to boost their mutual trade. In explaining these efforts, Brazil’s foreign minister, Celso Amorim, has stated that: “We want to study mechanisms that will somehow permit our trade to continue to flow in a way that is not affected by what happens in the financial markets”.

Global trade statistics suggest that trade between developing countries as a share of both total world trade and global commerce is already on the increase. The challenge for the African continent in confronting the debilitating effects of the current global financial crisis is to increase its share within this south-south trade nexus.

Neil Balchin

Researcher and Consultant

Mthente Research and Consulting Services