The global financial crisis and growing discontent in Africa

Issue No. 231/232 (Nov/Dec 2009)

While African economies were initially thought to be immune to the worldwide financial and economic downturn, the crisis is now ripping them apart as more jobs dry up, factories shut down, inflation soars and the cost of living goes up. African governments' response to the crisis has been far from impressive, writes Kwesi W Obeng.

THE Africa Trade Network (ATN) has urged African governments to sit up and address head-on the immediate impacts of the global financial crisis as well as take concrete steps to transform the continent's agrarian and bulk mineral-dependent economy into a more robust, diverse and competitive one or risk being sidelined even further at the international level.

The ATN, a network of civil society groups working on economic justice issues, made the call at its 12th annual strategy meeting held in Accra, Ghana on 11-14 August on the theme 'Africa and the Global Financial and Economic Crises'.

The 'multiple and simultaneous crises - financial, food and fuel - have brought to the fore the fragilities inherent in Africa's economies and their subordination within the international economic order', said a six-page statement adopted at the four-day meeting. The meeting was also attended by other networks of civil society organisations including trade unions, organisations of women, farmers, faith-based groups and NGOs working on finance, trade, investment, economic development, economic justice and climate.

The group also asked African nations to reject outright any solutions that may compound the already precarious well-being of Africans and prioritise domestic resource mobilisation including developing appropriate financing and investment mechanisms that allow the state to play constructive roles in finance, credit and investment.

The ATN said this will strengthen Africa's socio-economic and political stability and resilience to any future worldwide financial and economic downturn as well as enable the continent's 850 million people to play a more active and constructive role at the international level.

Dashed hopes

Initially thought to be immune to the most crippling global financial and economic downturn since World War 2, Africa is turning out to be one of the worst-affected regions in the world since the global economy began to fall apart in 2008.

Africa's limited integration into the global financial architecture was posited as a key reason for which these countries would avoid the worst impacts of both the financial and economic crises. How wrong these analyses have turned out.

From Dakar in the west and Dar es Salaam in the east to Cape Town in the southernmost tip of Africa, the impacts of the financial and economic turmoil are all too obvious: drastically depressed economic activities manifested in the closure of industries, job cuts, falling tax revenues, balance-of-payments difficulties and massive cutbacks in aid and social expenditure. The entire region is plagued with a 'double squeeze' of its trade balances resulting from both lower export volumes and values.

Africa's real GDP growth will plummet from an average of 6% between 2004 and 2008 to 1.75% this year, says the International Monetary Fund (IMF)'s World Economic Outlook report (October 2009) titled 'Sustaining the Recovery'.

The IMF projects that 'poverty could also increase significantly in the sub-Saharan region as real GDP per capita contracts in 2009 - the first decline in a decade - unemployment rises, and the region suffers from a lack of extensive social safety nets'.

Even worse, these nations have significantly limited fiscal space to take the necessary measures to protect both the larger economy and vulnerable groups affected by the downturn. It is no wonder, then, that marginalised groups including women have not received targeted assistance to cope with these crises. The likelihood, therefore, is that policy responses to the financial and general economic recession at the national, regional and even international levels may end up exacerbating inequities.

It couldn't be more disastrous. Coming on the heels of the world food and fuel price shocks, the global financial crisis is driving up the number of African families living in poverty. The World Bank estimates that up to 53 million more people, many of them in Africa, will be driven into extreme poverty in 2009 alone.

Diversification   

These crises bring to the fore yet again the imperative for African countries to transform and diversify their economy. These same crises also throw up new and perhaps unexplored opportunities to build a different, more resilient, better integrated and competitive economy - away from the inherited colonial economy of exporting raw agricultural products and bulk minerals while importing even the most basic of manufactured goods that could easily be produced cheaply on the continent.

'This reflects,' says the ATN, Africa's 'weak or non-existent domestic industrial sector; the narrow, disarticulated base of domestic production; the shallow national and fragmented regional markets; and financial systems and services and other infrastructure geared predominantly to external trade and the needs of and circuits of international capital.'

The depth and scale of these crises' impact on the continent's productive capacity and people also highlight, even if more dramatically, the structural vulnerabilities worsened by three decades of uninterrupted application of discredited neoliberal policies of indiscriminate liberalisation of trade and investment, deregulation and privatisation of the public sector in Africa.

  The triple 'alliance' of financial, fuel and food crises additionally amplify the systemic fragilities of African economies and their subordination within the overriding international economic dogma, neoliberalism.

Already, the scale of the global downturn and the fear it has unleashed has driven most sub-Saharan African countries, including some of the region's high-performing economies such as Botswana, Ghana, Mali, Mozambique, Rwanda, Senegal, Tanzania and Uganda, back into the icy arms of the Bretton Woods establishment and allied institutions.

The structural adjustment programmes of the last three decades opened up developing regions of the world, especially Africa, to exploitation and unnecessarily over-exposed these countries to the weaknesses inherent in the global financial architecture, in which they are significantly minor players.

Africa's response   

True, very few African nations can afford stimulus packages to revive their economies, but African governments' responses to the financial and subsequent economic crises have been lethargic, piecemeal and simply inadequate.

It was against this backdrop that the Africa Trade Network met in Accra. According to the ATN, Africa's response to the global crises must be two-fold. On one level, the depth of the crisis and its impacts on African countries require urgent steps and extra resources to address the financing gaps and determined execution of pragmatic measures to tackle the immediate effects. Several different estimates have been bandied about as the resource gap induced by these crises.

The African Development Bank (AfDB), for example, estimates Africa as a whole faces a resource gap of about $50 billion for this year and another $56 billion for 2010.

The IMF also estimates that a minimum of about $25 billion in additional financing will be needed in 2009 to deal with balance-of-payments shocks in 22 low-income countries where the combined impacts of the financial, food and fuel crises have sharply reduced reserves to below the level corresponding to about three months' import coverage of goods and services.

On the second, long-term level, the ATN recommends African governments adopt and implement proactive measures in the critical areas of trade, finance and production to reorient their economies in pursuit of sustainable and equitable development. The ATN therefore deplored the fact that the IMF has been assigned the responsibility of disbursing funds meant to respond to these crises 'without accompanying reforms to its policy conditionalities'.

Many reports and analysts have expressed worry over the prevailing decision-making structure and mandate of the IMF and other international financial institutions (IFIs) in which Africa and other developing regions are significantly underrepresented. This again enables these financial institutions to re-establish external control over the policy decisions of poorer countries.

Indeed, a new report by the Center for Economic and Policy Research (CEPR) reveals that IMF agreements with 31 countries mostly in Africa will worsen the economic crisis in these nations. CEPR is a Washington DC-based think-tank.

Instruments and strategies

In November 2008, the African ministerial conference on the global financial crisis met in Tunis, Tunisia. Since the Tunis meeting, there have been similar meetings across the region - from Dar es Salaam to Cairo - to develop instruments and strategies that Africa may require to contain the downturn and accelerate Africa's economic transformation.

At the Tunis meeting jointly organised by the AfDB, African Union and the UN Economic Commission for Africa, a Committee of Ten (C-10) made up of finance ministers from Cameroon, Egypt, Nigeria, South Africa, Tanzania as well as central bank governors representing Algeria, Botswana, Kenya, Central African states and West African states was established.

The C-10 has been tasked with monitoring the impact of the financial crisis on African economies and related developments. The group was also charged with developing proposals on how best to contribute to the international deliberations in the context of the G-20.

In a submission to the G-20 meeting of major developed and developing economies in March, the C-10 recommended a review of debt sustainability criteria and that developed countries allocate 0.7% of their stimulus packages to developing countries to ride out the global financial storm. African governments also called for reforms at the IFIs to give developing countries a voice. They also repeated demands for stolen wealth and reform of tax havens.

The AfDB said earlier in the year it had sufficient capital to double lending to about $11 billion a year for the next five years. The regional bank has had 'an unprecedented increase in requests'. In fact, the AfDB projects its total financing to rise to $15 billion in 2009 alone. This is about three times the pre-crisis projection.

Like all mineral-dependent economies on the continent, Botswana, one of Africa's most stable democracies and prosperous nations, has had its huge diamond industry decimated by the global economic downturn. The AfDB has since doled out $1.5 billion to Botswana, making it the country's first loan in 17 years. The loan is also the AfDB's largest ever to one country.

Like Botswana and many other African nations, Ghana, another democracy and emerging economy, has run back into the chilly arms of the IMF for $1.02 billion after a two-year break.

The ATN thus urged African nations to make maximum use of alternative and more diverse sources of finance 'and ensure that these sources are not constrained by the commitments they undertake in multilateral and bilateral negotiations such as the World Trade Organisation [WTO] and Economic Partnership Agreements [EPAs]'.

African countries are at risk of relapsing into yet another debt crisis as their revenues plunge, the ATN cautioned.

The crushing financial crisis, the ATN noted, is 'rooted above all in the policies of financial deregulation originated in the West and imposed on developing countries. These policies have encouraged the pursuit of finance as an end [in] itself, and, combined with extreme forms of bank de-regulation in the West, have given rise to irresponsible financial practices and speculation in capital and currency markets, with attendant violent fluctuations in capital flows, and long-term squeeze on productive investment, particularly in Africa'.

According to the ATN, 'new measures proposed under the Doha Round of WTO negotiations, as well as the proposed terms of the EPAs, will strip African countries of the policy space and policy instruments essential for [African] governments to formulate and implement policies for addressing these crises and the continent's long-term development'.

On the WTO Doha Round, the ATN urged African governments to reject cuts in industrial tariffs that may undercut current and future industries and trigger further job losses on the continent; and reject any further liberalisation of services, domestic regulation disciplines (that limit their ability to regulate services) and the liberalisation of government procurement in services.

Extracting value from mining

The financial crisis and resultant general economic downturn has wreaked havoc particularly on bulk commodity-dependent countries across the region. Against this background, the ATN urged African governments to initiate a new range of policies to promote value-addition as well as enhance public accountability in the negotiation of contracts for the exploitation of minerals.

Current mining contracts disproportionately benefit mining companies. To address this imbalance, a number of African countries including Congo DR, Ghana, Mali and Tanzania embarked on separate initiatives to review and revise existing mining contracts and mining regimes. These review exercises have now either been slowed or completely scrapped as mineral prices decline to their lowest levels in a decade.

Indeed, Zambia, one country which until the financial crisis had introduced a mix of laws to improve its revenue from copper and cobalt mining through the introduction of tax on windfall profits and raised company tax and royalties, has abandoned the policy as the price of copper slumps and mining companies shut their plants and jobs evaporate in the country's copper belt region.

It was thought the southern African country's bold initiative would have ushered in a new wave of significant revision of the mining regime across Africa and possibly the rest of the developing world where local people are stripped of their lands and livelihoods while multinational companies and the small but tight clique of local oligarchs benefit from mining proceeds. Will a significant rebound in the global economy empower Zambia and other commodity-exporting African countries with sufficient strength to re-introduce these new laws to maximise benefits of mining? Just maybe.

The world economy is making a recovery from the recession, says the latest IMF report. But it is also clear that the recovery is sluggish and will not necessarily be painless. The IMF foresees the recovery to be slow at best precisely because the 'policy forces that are driving the current rebound will gradually lose strength, and the real and financial forces remain weak'.

And with growth in leading and influential African economies such as South Africa - GDP growth to fall from 3.1% in 2008 to -2.2% in 2009 - and oil-dependent Nigeria - from 6.0% in 2008 to 2.9% in 2009 - falling so sharply, African governments, regional economic blocs and the African Union cannot afford to be distracted from implementing policies that could enable the continent to decisively address the short-term impacts and chart a more pragmatic course to transform the African economy  in  the  shortest  possible time.                                                       

Kwesi W Obeng is assistant editor of African Agenda, which is published by TWN Africa, the Third World Network's Africa secretariat. This article is reproduced from African Agenda (Vol. 12, No. 3, 2009).

*Third World Resurgence No. 231/232, November-December 2009, pp 12-14