High Level Seminar N 1 - Financial Crisis and Fragile States-Collapse of Macroeconomic Frameworks

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Declines in employment and growth, low capacity of institutions responsible for managing development programmes resulting in insecurity and economic downturn, the effects of the global financial crisis are resulting in the collapse of macro-economic frameworks in many fragile states.

This observation was made by the Director of the Centre for the Study of African Economies (CSAE), Paul Collier, who is also a professor at the Oxford University. According to him, one of the adverse consequences of the current financial crisis is the increase in violence in certain countries and the collapse of certain economies. Unfortunately, government responses to the crisis are not yet adequate. They are often too weak to place the indicators in the right direction, he said.  

Professor Collier was speaking during a panel discussion held on Tuesday, May 12, 2009, on the sidelines of the 44th AfDB Annual Meetings on “Financial Crisis Analysis and Fragile States”. He also drew attention to risks of capital flights which could pose major problems for countries witnessing violence. He urged fragile states to put in place a budgetary framework capable of generating economic growth rates, explore job-creation possibilities and other strategies capable of boosting growth.

In this regard, Professor Collier believes that one of the most viable options is reconstruction which should, above all, be beneficial to the private sector. This should, in particular, be done in a way that Small and Medium-Scale Enterprises (SMEs) can win contracts. He called for an orientation of development aid. “It is necessary to know the needs of the states in order to better orientate development aid,” he said.  There is a whole chain of fragility resulting from the global financial crisis which, in almost all the fragile states, has also resulted in drastic declines in trade. “The particularity of fragile states resides essentially in the fact that with declines in global trade, there will be declines in terms of trade, and as a result, a deterioration of the macro-economic framework and a fall in foreign direct investments,” the Democratic Republic of Congo (DRC) Finance Minister,  Athanase Matenda Kyelu, said.

Speaking particularly about the DRC, he regretted the country’s macro-economic imbalances, challenges to deal with basic social expenses and local currency depreciations, among others. If adopted strategies to overcome the crisis are not always the same, the consequences are, however, similar, he said.  In Sudan, for example, as underscored by the country’s Finance Minister, Lual Deng, the financial crisis is responsible for the decline in oil prices which has, in turn, created a significant budget deficit. On the contrary,  the Sierra Leonean Finance and Economy Minister, Samula  Kamara, deployed the rise in drogue trafficking. But all of them acknowledged efforts by the African Development Bank (AfDB) Group and those of other development institutions in financing economic recovery strategies.