Economics 3510

African Economic DevelopmentSpring 2010

Recent Development Experience, Continued

May 13 2010

Agenda:Factors Affecting Africa’s Development

I. General FactorsII. External Factors:III.Internal FactorsIV. General Problems of GovernanceV. Environmental Problems

Economic Contraction, 1975-1998

Economic Expansion, 1999-2008: Renewed Contraction: 2009

The Recent African Development Experience

Bad News: Economic Contraction, 1970s to 1990s– minus 0.9 % per capita per year, 1975-2000– 27 countries with declining GDP pc, 1975-2000

Good News: Recent Growth Recovery late 1990s to 2008

1999-2007 + 4.7% per year or about 2.4% % per capita per year,

Bad News:2009:caught in global recession

I. General Factors1. A Difficult Geography (as analysed earlier)2. Predisposition to Disease• Malaria• Now, HIV/AIDS

3. Rapid Population Growth (to be examined later)

4. Environmental Problems• Desertification;• Firewood problem in many areas• Soil depletion• Climate change

II. External Factors;To what extent have external factors contributed to Africa’s

development difficulties?

• Reliance on Primary Commodities with weak export performance

• Protectionism vs. some products, esp. Cotton

• New LDC competition (coffee)

• Competition from China for all manufactures

• “Resource (or Oil) Economy Syndrome”

• Debt burdens?

• Falling aid volumes plus high aid dependence (see chart)

III.Internal Factors

“Poverty Traps” and Interacting Vicious Circles

Low YLow SLow ILow K StockLow Y….

Economic ContractionLower Inco,eDeclining TaxesDeclining Public Expenditure Worsening Infrastructure, Health, Education Further Economic Contraction…….

Weak HealthIneffective WorkLowYPoor NutritionPoor Health………

Inappropriate economic policies:• Modern sector Industrial &Urban Bias• Trade protectionism; • Ineffective integrative schemes• Exchange rate dysfunction• Price Controls;

IV. General Problems of Governance

• Political instability•Civil war, •Weak governance and Corruption;

Underlying Origins?

IV. General Problems of Governance• Political instability• Civil war, • Weak governance and Corruption;

Underlying Origins?

– Artificiality of some nation states;

– Traditional view of state as an alien force, inherited from colonial times

– Capture of the state by particular groups

– Insufficient experience in self government in colonial era

– Shortages of trained personnel at Independence

V. Environmental Problems

•Desertification;•Firewood problem in many areas•Soil depletion•Climate change

Explanation of 1975-1998 Economic Contraction:

A Conjuncture of Negative Circumstances

Many things going wrong at the same time;

Interlinked vicious circles

Consequences of the Economic Contraction:

Renewed Economic Expansion, 1999-2008:

Explanation ?

Renewed Economic Expansion, 1999-2008: Explanation: Again, a Conjuncture of Favourable Circumstances

1. Buoyant world economy promoted recovery– primary commodity prices rose

2. Some debt reduction and relief from servicing the debt

3. Increased development assistance4. Direct foreign investment started up (+/- 40 Billion,

2008).5. Reduced conflict in the region? (ambiguous)6. Improving Governance?7. Improved public policy

Result:• Poverty levels decline;• Personal & family incomes rise;• Tax revenues and social expenditures

(health & education) rise• General improvement

But: problems mentioned earlier remain; - some countries are in trouble; - peace and stability are tenuous in a few cases.

2009: Renewed Contraction

Central Causal Factors ??

[Not a home-grown banking-financial problem]

2009: Renewed Contraction in AfricaCauses: The World Rcecession

Source of world recession: A Conjuncture of Circumstances

The “Business Cycle” gone Global Globalized “Bubbles” and Panics Risky Banking Practices: The US and Europe,

especially The “Spark”: The US Sub-Prime Lending

Problem

The “Business Cycle” gone Global

• Global economic expansion: – All economic locomotives at full steam, 2000-2008– China: +/- 10% growth per year, for 20 years

• Result? – Record high oil prices;– Record high raw material and food prices– Stock market exuberance and “bubbles”

everywhere, esp. housing “bubbles”

Booms, Bubbles, Busts and Panics HistoricallyCommon throughout History: Examples: • Tulip Bulb Mania Holland 1636-1637• Scotland’s Darien Company 1690s • South Sea Bubble of 1720 and related Mississippi

Bubble in France, spearheaded by Scotsman John Law;

Recent Bubbles • US Housing Bubble • World Housing Bubble• World Petroleum and Commodity Booms– Generated by rapid world economic expansion,

esp. ChinaInteracting with World Stock Market Booms

everywhere

Other Bubbles and Subsequent Crashes– North American Expansion of the 1920s;– Florida Real Estate, 1920s– High Tech Bubble, +/- 1995 – 2000?

Contraction and Panic• Inevitable investment slowdown after rapid

expansion

• Bubbles Burst!

• Banking crises affect credit flows and business expenditures

• Reduced investment plus Stock market melt-downs reduced consumer expenditure, esp. on durables e.g. cars and housing;

• All factors contribute to economic slowdown reduced demand for primary commodities and oil reduced prices recession for countries (and companies and individuals)

2009: Renewed ContractionImpacts on Africa:

• Not through banking & finance;• Reduced Commodity prices affecting –export prices, –foreign exchange –tax revenues, –social expenditures, –family incomes

• DFI slowdown• Some Aid Cutbacks

Oil Prices 1983-2008

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009(f)

2010(f)

0

50

100

150

200

250

300

350

400PetroleumCopperAluminiumGold

Source: OECD Development Centre, based on World Bank, 2009

2001 2002 2003 2004 2005 2006 2007 2008 2009(f)

2010(f)

0

50

100

150

200

250

300

350

400CocoaCoffee (arabica)Coffee (robusta)TeaCotton

Hard commodities Soft Commodities

Source: OECD Development Centre / African Development Bank, 2009

Real GDP Growth

-6

-4

-2

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008(e) 2009(f) 2010 (f)

Real

GDP G

rowt

h %

Africa (Febr) Total OECD Africa (May)

Δ = 6.6%

Δ = 4.1%

Δ = 3.5%

Δ = 4.8%

Overall African Growth Rates, 2000-2010

Source: African Economic Outlook, 2009

- 2 to- 3 %

Zero to – 1.9 %

Greater than 3 %

Increased growth between 2008-09

Growth deceleration2008 - 2009

Overall African Growth Rate:

2008 near 6%2009 below 3%

African Growth Deceleration, 2009-2009

Source: OECD Development Centre / African Development Bank

*: African Economic Outlook forecasts

…and little room left for manoeuvre

• Many oil exporters did not take advantage of commodity windfalls to improve governance and diversify their economies

• Nevertheless, some oil exporters have performed well in terms of lowering levels of external debt

Taking a clear hit from the oil price fall…

Oil Exporters

Oil Importers

Source: OECD Development Centre / African Development Bank *: African Economic Outlook forecasts

Oil-importing countries have performed well, diversifying their sources of growth over recent years. While lower energy and food prices subsequent to the crisis have helped importers, difficult times lie ahead

Good performers’ strengths:• Sustained and prolonged growth • Prudent macroeconomic policies• More Diversification

Challenges:• Poor capacity in mobilizing domestic

resources• Contain fiscal and current account

deficits• High dependency on ODA• Prioritise poverty reduction • Difficulty adjusting to price shocks

Holding up against the crisis so far……yet challenges rising

• Committed macro management in many countries has brought inflation under control and improved fiscal balances

• The HIPC initiative significantly reduced debt levels in many countries

• The commodity boom helped to improve terms of trade

• Business climate indicators have been improving steadily. reflecting government efforts in nurturing private sector and enterprise

• Political conflicts have declined

Africa today : more resilient to exogenous shocks:

Development Assistance to Africa

DAC members' net ODA 1990 - 2007 and DAC Secretariat simulations of net ODA for 2008 to 2010

Investment ICTs reaching the poor

Mobile Telephony

Europe

Asia and Pacific

Latin America and Caribbean

Middle East

North Africa

Sub-Saharan Africa - Resource Scarce Landlocked

Sub-Saharan Africa - Resource Scarce Coastal

Sub-Saharan Africa - Resource Rich

Africa

0% 20% 40% 60% 80% 100% 120% 140%Annual growth rate in 2008Market penetration in 2008

4 out of 10 Africans have a mobile phone line today, 6 out of 10 by 2012!

Source: Wireless Intelligence (www. wirelessintelligence.com), 08, African Economic Outlook 2009