Financial Crisis is Delaying African Development Goals

Education needs to be made available to more African children

Many development analysts assumed in relation to the last G20 summit in Pittsburgh that it might not forget about Africa in its talks on the financial crisis. Developing nations on the continent are being especially hard hit at a time when things were starting to look up.

Africa’s developing countries are suffering even more from the financial crisis: not only are they having to make do with less development aid funding, but the amount of money that emigrants are able to send back to support their families at home is much smaller.

The economic crisis will make it harder to reach development aid goals

The crisis is threatening the hard-won progress made in Africa’s developing countries at a time when the situation was starting to improve. African national economies were showing an average growth of 5 to 6 percent in recent years. Kenya, for example, has seen the development of a middle class that invests in its own economy. Outside money, including from newly industrialized countries such as China, Brazil and India, had considerably upped the level of foreign investment. The International Monetary Fund (IMF) estimates that foreign investment and credit for Africa increased to $53 billion (40 billion Euros) – five times the amount in 2000. But Donald Kaberuka, president of the African Development Bank, warns that the crisis could unravel this progress.

“We have to distinguish between the financial crisis and the economic crisis,” Kaberuka said. “Until now, (the financial crisis) has not hit a single African bank, but it has affected national economies. For 2009, we’re expecting an average maximum economic growth rate of 4 to 4.5 percent, no more. And it could well turn out to be smaller. We have to mobilize inner-African capital. We have very rich and very poor countries in Africa. On the regional level, the African Development Bank has already managed to mobilize capital, but not for the continent as a whole.”

Fears of a setback

Ad Melkert is a UN under secretary-general and an associate administrator of the UN Development Program (UNDP). He also fears that Africa will suffer a setback.

“This is all happening after a considerable number of African countries have, over the past few years, experienced significant economic growth and an increase in jobs and investment,” Melkert said. “Now, there’s a reversal. That means when the international community – the G20 – meets in April in London for its financial summit, they have to work out an international agenda there. They have to ensure that they factor in Africa, because this is an international financial crisis that is having effects worldwide.”

Growth rate of 3.4 % expected for sub-Saharan Africa

International institutions such as the Organization for Economic Cooperation and Development (OECD) are calling for multilateral risk management for the financial markets. In Davos, some major actors called for the creation of global economic council. The inclusion of developing countries in such bodies will be decisive, says Melkert. The UNDP representative is hoping for a clear statement from the G20, as otherwise, the UN’s development goals will be in danger of failure.

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“The crisis has created a totally new starting position,” he said. “It really does mean a setback, even for really successful countries like China, for example. We’ll have to really go the extra mile now if we’re to reach our development goals.”

Despite the crisis, some industrialized countries as Spain and Germany have committed themselves to raising development aid bit by bit to reach 0.7 percent of their gross domestic product. Melkert advises other wealthy nations to also maintain their development aid goals.

“There’s no alternative to investing in development goals,” he said. “I hope that the G20 summit will help, I hope that the new American administration under Obama will support the Millennium goals even more. I hope that the Europeans keep their promises and invest more in development policies each year. And I hope that the growing middle classes in Africa, Brazil or in India pay their taxes and use this tax money to fight poverty.”

Poverty remains a major challenge

Although the global fight against poverty has made progress, the percentage of poor people in Africa hasn’t gone down at all, due to the continent’s fast-growing population. With a poverty rate of around 50 percent, the share of extreme poverty in the total population hasn’t changed, and Melkert fears it could even get worse.

“We have to be really ambitious here and take the problem of poverty really seriously,” he said. “With this financial crisis, more people will be forced into poverty than in years past.”

There are worries that more Africans will slip into poverty

The IMF has revised its growth projection downwards and has forecast an economic growth rate of just 3.4 percent for sub-Saharan Africa. But all African governments have to take political responsibility, says Melkert. He points to examples from Latin America, saying Africa should learn to also create effective social security systems and incentives for development.

“Good systems have been established in Latin America,” he says. “There, families get money if they send their children to school or get them vaccinated. Africa should follow this example. The World Bank, the UN or bilateral donors could financially support such a system. That would help the poorest people to have a minimal income to buy food, send their children to school or care for their health.”

He advises the international community to be patient and take a long-term view when it comes to supporting development goals – despite the global financial crisis.

“You don’t make development progress from one year to the next – it’s a question of 10 or 20 years,” Melkert said.

NGOs and Microfinance in Africa: the Awakening Experience of ‘Rwanda Works’

Interesting interview that Josh Ruxin–founder of the new NGO Rwanda Works, Professor at Columbia University, and Director of the Millennium Global Village Project in Rwanda, just had with BigThink.

In the interview, Ruxin describes his current work in Rwanda helping to promote access to healthcare and sustainability, as well as his profound insights into the policies that actually work to advance international development. Among the many current practices that Ruxin explains are simply not working, include the widely-praised spread of microfinance loans, which Ruxin believes are not nearly the “panacea” many believe them to be, and are not actually creating any significant progress in much of the developing world–particularly not sub-Saharan Africa: http://bigthink.com/joshruxin/the-case-against-microfinance-loans

Ruxin also discusses the urgency of developing sustainable agriculture in the developing world as a way to solve an array of problems, and describes some of the creative new approaches to affordably promoting sustainability in Rwanda and surrounding countries that currently being refined to meet these challenges: http://bigthink.com/joshruxin/the-key-to-developing-rwanda

Ruxin also examines how an increase in women’s reproductive rights is one of the key issues in international development and why government officials investing in foreign aid should provide far more funding for family planning: http://bigthink.com/joshruxin/the-link-between-womens-rights-and-economic-success

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Spanish version here below:

ONGs y microfinanzas en Africa: la experiencia reveladora de ‘Rwanda Works’

Interesante entrevista (en inglés) que Josh Ruxin ha concedido a BigThink.  Josh Ruxin es el fundador de la nueva ONG Rwanda Works, Profesor de la Universidad de Columbia, y director del Proyecto de la Aldea Global del Milenio, en Rwanda.

En la entrevista, Ruxin describe su trabajo actual en Rwanda para ayudar a promover el acceso a la asistencia sanitaria y la sostenibilidad, así como sus reflexiones lúcidas sobre las políticas que funcionan realmente para promover el desarrollo internacional. Entre las muchas prácticas actuales que Ruxin considera simplemente inoperantes, incluye la propagación del muy encumbrado sistema de microcréditos. Ruxin los juzga de tal forma que cree que no son ni la “panacea” que muchos quisieran, y no son, puesto que no representan en realidad un avance significativo en la mayor parte de el mundo en desarrollo – en particular, para África subsahariana: http://bigthink.com/joshruxin/the-case-against-microfinance-loans

Ruxin también razona sobre la urgencia en desarrollar la agricultura sostenible en el mundo en desarrollo como una manera de resolver una serie de problemas, y describe algunos de los enfoques nuevos y creativos para promover la sostenibilidad asequible en Rwanda y países vecinos que actualmente se está perfeccionando para enfrentar estos desafíos: http://bigthink.com/joshruxin/the-key-to-developing-rwanda

Asimismo Ruxin examina cómo un aumento en los derechos reproductivos de las mujeres es una de las cuestiones clave en el desarrollo internacional y por qué los funcionarios de la administración que desean invertir en ayuda al desarrollo han de proporcionar muchos más fondos para la planificación familiar: http://bigthink.com/joshruxin/the-link-between-womens-rights-and-economic-success

The impact of the global financial crisis on African development (& 2)

The potential recovery from the financial crisis is very limited

In light of the potentially weakening effects, it is crucial both for African and world leaders and policy makers to discuss the possible responses to diminish the impact of crises on the continent.

One way of responding successfully to the crisis is to give priority to building African markets. In particular, policies to strengthen the African markets and institutions necessary to promote growth and ensure that African economies are more resistant to external shocks. There is also a need for tighter regulation of African financial markets. Moreover, creating a more conducive business environment to reduce costs and limitations associated with doing business in African economies to raise their profile as a business destination less expensive, less risky and more profitable, helping to attract more Foreign capital flows and investment in the context of a capital market has become considerably more risk averse following the onset of the financial crisis. The reforms that encourage foreign direct investment and portfolio flows and the measures that raise the level of confidence in financial systems in Africa can have an equally positive impact.

Sub-Saharan Africa is dropping behind in infrastructure

Source: Preliminary results AICD 2008. African Perspectives and Recommendations to the G20. Committee of African Finance Ministers and Central Bank Governors. 21/03/09

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The expansion of trade with other developing countries represents another potential means to ease the severity of the negative effects of the crisis on African economies. Global trade statistics suggest that trade between developing countries as percentage of total world trade, and therefore world trade has been increasing for quite some time. In fact, trade in goods among developing countries grew at an average annual rate of 13 % between 1995 and 2007 and in 2007, represented a fifth of total world trade flows. It is vital for Africa to increase their share of this link between South-South trade to offset some effects of the anticipated decline in demand for their commodity exports. Along with this is the need to increase intra-regional trade flows and trade in Africa in order to reduce the dependence of African economies in overseas markets. [3]

Similarly, measures to improve South-South economic cooperation, particularly in terms of investment, financial flows and joint efforts to stabilize foreign exchange rates and debt, should be investigated. In particular, South-South several measures to address potentially available for African countries to tackle the worst effects of the global financial crisis. First, the increased funding of regional development banks could offset the anticipated slowdown in international aid and donor funding for African economies. Secondly, regional stimulus packages could be implemented to help sustain the market and sustain economic growth. Similarly, regional agreements could be used that are specifically designed to mitigate the impact of financial shocks through, for example, the provision of international financial liquidity through swaps. Finally, African countries burdened by high debt levels, measures to diversify foreign exchange reserves could be adopted whereby the purchase of other developing countries “that debt.

Globally, according to the World Trade Organization Director General Pascal Lamy said reaching a global trade deal that represent a relatively simple way to alleviate the effects of the crisis. The promise of such a comprehensive agreement “is particularly attractive to African economies, which are perhaps amongst the most threatened by the prospect of increased protectionism arising from the crisis. Specifically, the new national protectionist measures, mainly in the form benign appearance, the political crisis linked to the encouragement of the government and relief campaigns, the exchange rate devaluations, antidumping and countervailing duties and ‘buy local policies that discriminate against foreign firms and workers can suppress the export sectors in Africa even more. It is therefore essential for African politicians to push for a global agreement that keeps opening up markets and prevent a flood of new crisis linked to protectionist measures.

Furthermore, following the emergence of the global financial crisis, it is clear that there is an urgent need to reform the multilateral financial architecture, particularly in terms of ensuring greater representation of African countries in international financial institutions. Despite the financial crisis that originated in Africa, the continent has been excessively exposed to its effects. This has led to strident calls for a more inclusive multilateral governance that provides a greater voice “to African countries in international financial institutions. Countries is important for developing countries, and Africa in particular, to play a role most important of these institutions and the economic crisis management.

Domestic fiscal and monetary policy responses should also be explored by African countries with the capacity to implement them. For example, in African countries with relatively large foreign exchange reserves may be possible to use these reserves to cushion the worst effects of crisis and decline to fund any capital flows. Alternatively, African countries that operate under systems of fixed exchange rate may have some leeway to adopt more flexible exchange rate regimes in order to “allow the nominal exchange rate to absorb some of the impact of external shock and reduce the actual effects in the national economy. “In terms of fiscal stimulus options, the expansionary fiscal policies such as reducing taxes or increasing government spending may help boost demand and employment in African economies. The usual argument against the expansionary fiscal policy – that it crowds out private sector investment – is unlikely to apply, given the climate of reduced appetite for credit and a drastically reduced risk among investors.

Finally, while Africa is certainly feeling the effects of the global economic slowdown, the impact of what is likely to deteriorate further, the credit crunch in the world’s most advanced economies may actually create opportunities in terms movement of capital into emerging economies. For example, sovereign wealth funds before investing in the financial systems of the United States and Europe are now increasingly looking to the developing world to possible locations for investment. However, for this to happen in Africa, the continent’s countries have to implement measures to improve its ratings on investment risk.

Africa is facing a large and growing economic gap

The fact that many African countries are relatively detached from the global financial system has softened the continent from some of the consequences of the global financial crisis. However, the initial view proposed by many commentators that Africa would be “spared” from the effects of the financial crisis that originated in several advanced economies in the world has proven to be unfounded. Prices and demand for African exports of commodities have dropped significantly amid a sharp decline in world industrial output. Moreover, the climate of declining credit arising from the crisis is likely to lead to a substantial decrease in international financial flows to African countries in the form of private investment and capital flows, trade credit, financing donors and remittances from Africans in the diaspora. These factors have led to predictions of sharp fall in growth in sub-Saharan Africa.

It is evident that African countries and their leaders should try to take initiative and economic policy measures and reforms to mitigate the effects of the crisis on African economies. These should include interventions to strengthen the African markets and institutions, expand “South-South trade and economic cooperation, including increase or intra-regional trade to reduce dependence on overseas markets, and implement expansionary monetary and fiscal policies to boost demand and employment. In addition, globally, African leaders must push for reform of global financial architecture to include greater representation of African interests in the forum of the international financial institutions. Furthermore, it is extremely important that the continent supports efforts to conclude a global trade deal that maintains the openness of markets and the safeguards against the proliferation of new crises linked to protectionist measures.

Related Posts: The impact of the financial crisis on African development (Part 1)

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[1] South-South  trade  could  soften  impact  of financial crisis for vulnerable economies. UNCTAD.  2009.

[2] Impact of the crisis on African Economies. Sustaining growth and poverty reduction, African Perspectives and Recommendations to the G20, by The Committee of African Finance Ministers and Central Bank Governors. 21 March 2009

[3] World Bank to Help Mitigate Impact of Global Financial Crisis on Africa’s Development.  19 November 2008

[4] International Monetary Fund. 2009. What the Global Financial Crisis Means for Sub-Saharan Africa. Speech by Takatoshi Kato, Deputy Managing Director, IMF, 12th AU Summt, Addis Ababa, Ethiopia, 3 February 2009.

The impact of the financial crisis on African development (1)

Because of the existing overall crisis, the projected growth for 2009 should move down to the lowest rate of decrease in 60 years. In 2008, the drop in demand resulting from the financial crisis together with synchronized crashes in manufacturing and industrial production, credit problems in traffic finance and consumer reliance caused a fall by 4 % in the growth of global trade.

Initially, many analysts believed that the world’s emerging economies, mainly those in Africa, would rather be protected from the effects of the crisis that came from the advanced industrialized countries. However, in the developing world the impact of financial instability and uncertainty in industrialized countries are beginning to take hold. Access to emerging markets for trade and investment is unlikely to diminish. In fact, UNCTAD estimates that exports of developing countries could decline by 9.2 % in 2009 [1]. The fall in commodity prices that went along with the downturn is particularly troublesome to African economies, many of which are greatly dependent on fresh commodities and raw material exports as the main source of export income. Moreover, the market for trade finance has seriously declined over the past six months; the crisis has aggravated the lack of liquidity to finance trade credit. Emerging economies are also expected to experience ongoing financial contamination, particularly in the form of capital flight and capital flows.

Even though these potentially weakening effects, the G20 predictions suggest that over 80 % of potential world economic growth depends on emerging market countries. In the same way, while the International Monetary Fund (IMF) has predicted that developing countries will increase by 3.3 % in 2009, it is expected that advanced economies will decline by 2 % roughly [2].

GDP Growth by Country Group

In this context, measuring the impact of the crisis on African economies and the accessibility and adequacy of measures to alleviate the effects of crises on the continent, are decisively imperative considerations for prospect growth scenario in Africa.

The Impact

The impact of the global financial crisis is expected to differ among African countries in line with their exposure to international financial system, its production and export structure and its aptitude to employ policy instruments to lessen the adverse effects. Overall, the short term in many African countries can be mitigated by the fact that most countries on the continent are relatively detached from the global financial system. Moreover, emerging banking systems in many African countries are generally characterized by simple structure, conservatism, the rules of prudent financial management, foreign exchange controls and a very limited exposure to subprime loans and the Credit default swaps, has protected the continent’s financial structures of all the effects of the crisis. In fact, Benedicte Christensen, deputy director of IMF’s Africa Department, went so far as to state in late 2008 that “there is no systemic risk that we see in any African country in terms of banking.” [4]

This does not mean that Africa is immune to the effects of the crisis. It is in the medium and long term effects of the crisis on African economies will be realized. The slowdown in global growth linked to the crisis could drive millions of Africans in the line of poverty. This possibility was highlighted in the report of the IMF, World Economic Outlook April 2008, which stated that a fall in world growth of just one % could result in a decrease of 0.5 percentage points of gross domestic product of Africa. Already, the IMF predicts that growth in sub-Saharan Africa will be reduced from about 5.25 % in 2008 to about 3.25 % in 2009. [4]

The slowdown in global growth, together with a sharp drop in world industrial production, has reduced the demand for African exports, reflected especially in the downward spiral of prices and demand for commodity exports. This is alarming given the fact that exports of commodities represent the main source of export earnings of most African countries. Moreover, the fall in export earnings is likely to have negative repercussions in terms of reduced government revenues, thus. Worsening already precarious budgetary situation in many African countries.

Prices of commodities for sub-Saharan Africa

The global credit crunch following the crisis has also caused a huge reduction in the flow of private investment and bank financing, thereby reducing capital inflows and a restriction on the availability of trade finance. This is likely to be reflected in a substantial decrease in international financial flows to African countries, most prominently in the form of reduced foreign direct investment, portfolio flows and remittances from the Diaspora living in the developed world. Regarding the latter, a long-term reduction of remittances from Africans living abroad is likely to be particularly difficult to feel, as these funding streams currently contribute an estimated $ 10 billion annually across the continent .

The effects of reduced foreign investment in Africa to countries that are funding large current account deficits could be especially devastating. For example, South Africa depends to a large extent, at least in the short term, on private capital flows to finance its large current account deficit – equivalent to about 8 % of the country’s total GDP. The projected reduction in capital flows means that South Africa will be responsible for their substantial current account deficit. Other African countries operated relatively large current account deficits, such as Uganda and Tanzania are likely to be similarly affected. These problems may be compounded by the prospect of expanding the deficit caused by the crisis itself. In fact, the IMF has forecast the current account deficit of the entire sub-Saharan African region will expand by more than 4 % of GDP to reach 6.75 % of GDP in 2009.

Saharan Africa: the current versus pre-crisis growth forecasts, 2009

The projected decline in private capital flows can also have a long-term impact on investment in infrastructure projects in African states, many of whom may face funding shortfalls. Since many African capital markets are small, even the relatively limited withdrawal of foreign investment can have a significant potential impact.

Furthermore, African countries may face increased pressure for debt repayment as international institutions and Western banks, not only to strengthen their lending policies, but try to shore up its reserves. Along with this there is the possibility that the global financial crisis will result in a slowdown of foreign aid and development funding to African countries due to the global credit crunch.

Spanish version over here.

Related Posts: The impact of the global financial crisis on African development (Part 2)

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[1] South-South  trade  could  soften  impact  of financial crisis for vulnerable economies. UNCTAD.  2009.

[2] Impact of the crisis on African Economies. Sustaining growth and poverty reduction, African Perspectives and Recommendations to the G20, by The Committee of African Finance Ministers and Central Bank Governors. 21 March 2009

[3] World Bank to Help Mitigate Impact of Global Financial Crisis on Africa’s Development.  19 November 2008

[4] International Monetary Fund. 2009. What the Global Financial Crisis Means for Sub-Saharan Africa. Speech by Takatoshi Kato, Deputy Managing Director, IMF, 12th AU Summt, Addis Ababa, Ethiopia, 3 February 2009.

Africa’s Economy at the Crisis Crossroads

The United Nations Conference on Trade and Development (UNCTAD) published on June 25 the “Economic Development in Africa 2009” [1]. It is focused on the promotion of economic integration in the region, which should become a key factor for boosting and diversifying economic growth, expand markets and attract more foreign investment, especially in the context of current global financial crisis.

Regarding the effects of the financial crisis in the African region, it was noted that the main channels are through the fall in exports, reduction of investment flows and lower revenue collected by governments. In this regard, according to the projections of the African Economic Outlook (AEO) in May, it is pointed that the region could grow 2.8% in 2009, much less than the growth rates of 5.1% in 2008 and 6% in 2007.

The impact of the global financial crisis would already be reflected in exports and reduction in prices of raw materials. A study of the organization ActionAid, says that the financial crisis will cause African economies lose up to 49 billion dollars during 2009 due to the drop in international aid since the fall of exports, among others. The report said that countries that liberalized their markets and that were large enough to attract significant investments will be most affected by the financial crisis, starting with South Africa that could see a drop around 20%. However, they also state that Africa is now better prepared to face the crisis than it was 10 years ago.

[1] Economic Development in Africa 2009. Strengthening Regional Economic Integration for Africa’s Development. UN. June 2009.

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[1] Economic Development in Africa 2009. Strengthening Regional Economic Integration for Africa’s Development. UN. June 2009.

Bongo Kicks the Bucket: Calm, Luxury and Consternation

President Omar Bongo of Gabon died  on Monday in a  a hospital in Barcelona, Spain, where he was reportedly being treated for cancer. He was 73.

The man was endowed with a prodigious memory, a real political intelligence and cynicism enough to ensure him the necessary longevity to become a true dictator. He has hold forty-one years.

With Bongo, Gabon turned into a strategic oil emirate for France and a stalwart heavyweight pillar of the “Franceafrique“. So, when crude prices quadrupled in 1973, Omar Bongo converted to both Islam and finance.
Money flowed like water. He had therefore the intelligence to protect the money of unhealthy lusts  by diversifying his investments. That is, putting the money aside, I mean at HIS side.

In 1975, he founded three banks:
* The Bank of Gabon and Luxembourg (BGL) in Libreville
* The International Bank (Siba) in Luxembourg
* The French Intercontinental Bank (Fiba) in Paris, the largest one.

The latter will be THE Bongo’s bank and will be chaired by one of his trusted men, Pierre Houdray, until 2000.

Let us continue…

The Head of State had a personal account and a sub-account in which his stepfather, Congolese President Denis Sassou Nguesso, had a proxy. Those accounts were fueled by (partly public) ELF French oil company by at least $40 million per year. FIBA served as a nest egg to the clan of Libreville: family, relatives, counselors and so.

This opulence is reflected in the Bongo’s real estate assets. For several years, NGOs Sherpa and Transparency International lead a court battle against the money diversion by African heads of state.They had inventoried these dictators’ “ill-gotten gains”, including their real estate in Ile-de-France (Paris region). The President of Gabon and his family figure prominently.

But the Fiba is also the tank which Omar Bongo draws from to “help” his french political friends. The ritual is immutable: when he stops in Paris, at the  Hotel Meurice, it is compulsoty to seek an audience and get the approval from the boss. A phone call to Pierre Houdray and the case is resolved.

Afterwards, one just need to report to headquarters, (avenue Georges-V in Paris) to take delivery of the grant, in cash. Bongo has actively supported Gircard d’Estaign and Jacques Chirac in the 70s, but François Mitterrand’s election in 1981, as well.

According to the men of Elf, including Andre Tarallo, the “Mr. Africa” of ELF Group, all political parties have benefited from this assistance (you know… France & Gabon, brothers in arms), with the exception of the far right National Front.

During the 90s, the proliferation of laws on the financing of political life, the system becomes more complex. More opaque too, using the resources of many tax havens (Liechtenstein, the Caribbean, Bank of New York …) which earned him the wrath of money laundering committee  from the US Congress.

The engineers of power will also be advised to take care of the ethnic balance within the country. For the time being, his family, including his children Ali and Pascaline (candidates for the succession), stand ready to defend the heritage (there’s a big money involved), even at the cost of a war of succession.

Concerns, as in old families plenty of secrets, are left to heirs. Hence, Pascaline’s Missi Dominici would be better-advised to turn into philosophers. (Ali, Pascaline, you must also be aware of the harassment and intimidation that threaten those Gabonese who dare to oppose the corrupt practices encountered there. You know of course that the massive misappropriations of state revenues contribute towards impoverishing the citizens of Gabon and prevent the emergence of normal democratic institutions.)

And Mr Sarkozy would also be well advised not to forget that “the worries of Gabon are also those of France.” Same old stuff…