AfDB Publishes an Analysis on Africa’s Response to the Crisis

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The African Development Bank just published, in the first 2010 edition of the Journal of Globalization and Development, an important article titled “Africa: Africa’s Counter-Cyclical Policy Responses to the Crisis”.

The article is signed by Louis Kasekende, Chief Economist, Leone Ndikumana, Director, Research Department and Zuzana Brixiova, Principal Research Economist.

The African Development Bank places research and knowledge sharing at the heart of its activities. Generating and sharing knowledge are key components in efforts to reduce poverty and foster development on the continent. The AfDB has systematically emphasized the critical role that knowledge is expected to play in the transformation of African economies to ensure sustainable development and poverty reduction.

Highlights of the article

  • The crisis has hit Africa with a lag, interrupting at best, and ending at worst, the impressive growth record of the last ten years. The crisis has also already started to erode the hard-won improvements in macroeconomic positions. Even though most African countries have managed to avoid recession in 2009, the speed of the continent’s recovery and longer-term prospects remain uncertain. Moreover, the human and social cost of the crisis could be devastating: unemployment in Africa could increase by more than 10 percent just in 2009, and the number of the working poor and vulnerable workers could reach unprecedented levels.

  • Well-targeted and globally coordinated policy interventions are needed to reinvigorate the continent’s growth, boost income and employment, and avert a development crisis. On their part, a number of African countries have adopted stimulus packages to soften the damage from a crisis they did not create. At the same time, many, especially low-income and fragile countries with limited fiscal space and international reserves, have lacked resources to implement countercyclical measures.

  • Africa’s rapid growth during 2000-08 came to an abrupt halt in 2009, due to a severe external shock caused by the global financial and economic crisis. At the onset of the crisis in 2008, many economists underestimated its likely impact on Africa, on the premise that advanced and developing countries had decoupled. By early 2009, it became clear that for most countries on the continent the crisis has caused a serious setback. The key question then became how to contain the crisis’ longer-term impact so as to preserve Africa’s recent economic achievements. The global financial and economic crisis hit the continent mostly through real channels, such as deteriorated terms-of-trade, reduced demand for exports, decline in FDI, remittances, tourism, and possibly also aid inflows. The crisis also worked through the financial channel, namely the credit crunch on global financial markets, and especially the limited access to trade credit. The combined effects of these shocks resulted in a sharp decline in Africa’s growth in 2009.

  • It appears that resource-rich countries in sub-Saharan Africa suffered the largest setback. In contrast, resource-poor, land-locked countries have weathered the global downturn relatively well, and are expected to record the highest rates of growth on the continent in 2009.

  • The continent has adopted a variety of measures to cushion the impact of the crisis, including setting up special monitoring units to identify causes and responses to the crisis, fiscal stimulus packages, targeted sectoral assistance, capital and exchange controls, and new regulations in the banking sector. Several middle-income countries have applied expansionary monetary policies such as lowering policy interest rates.

  • Two conclusions pertaining to stimulus policies seem to emerge:
    • There needs to be coordinated global action, with easing measures of African countries being accompanied by a deliberate effort of developed countries to refrain from any protectionist measures and ensure that their demand for African imports picks up; and
    • Domestic measures should aim at easing long-term supply bottlenecks through expenditures for infrastructure and support to private sector development, as was done, for example, in East Africa. In this context, countries could also consider easing regulations and taxation to stimulate entrepreneurship, as was done in some emerging European economies (the Czech Republic, for example). In sum, it is critically important for African countries to stay focused primarily on easing structural supply bottlenecks through financing of infrastructure and private sector development. The African Development Bank has been supporting them in this endeavor.

  • Finally, taking a longer-term perspective, African countries could turn the crisis into an opportunity to restore their economic potentials and bring their economies on high growth paths. In this context, policies should focus on key structural reforms such as enhancing competition in the financial sector, streamlining labor market regulations, developing financial markets and strengthening governance, in order to improve domestic fundamentals, promote private sector development and enhance economic diversification. These reforms need to be accompanied by measures to establish social safety nets for the most vulnerable segments of the population. Prudent responses to the current crisis and increased demand of African constituencies for transparency in public policies heighten the prospects for sustainability of these reforms.

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