OECD Observer

Into Africa

©Zohra Bensemra/Reuters

Africa did not cause the economic crisis, but will suffer from it. What are the prospects?

With developing countries now accounting for about 30% of world trade, development policies are about more than lifting people out of poverty and achieving the UN Millennium Development Goals. They have a serious and systemic impact on the welfare of the entire global economy.

Developed countries should be particularly concerned about Africa. Aid and technical support, but above all more trade and investment, would help reverse what is becoming an increasingly worrying economic outlook.

Only a year ago Africa's economic growth prospects seemed historically bright. However, then the OECD warned of an uneven picture, with oil exports, for instance, accounting for a disproportionate amount of growth. Poverty was still widespread, and was not helped by high food prices.

Institutional reform and human capital were also areas in need of attention. But with the economy then looking relatively good, there was widespread optimism about progress.

But with the global crisis, GDP in the OECD countries is now expected to contract sharply in 2009 and be virtually flat in 2010, while growth in emerging economies will slow dramatically. World trade is expected to contract by 13.2% in 2009-its first decline in 60 years. For Africa, this means that growth projections for 2009 have fallen to 2.8% after four consecutive years above 5%, though further downward revisions cannot be excluded.

The hardest hit African economies are those that rely heavily on commodity exports for their income. Oil prices are starting to rise now, but some of that rise may be speculation. Most commodity prices are right back towards their 2005 or 2006 levels, many of them registering declines of 40% or more since early 2008. At the same time, the world downturn and dip in oil prices from last year have led to a slowdown in investment in oil and mineral production, which will affect growth in 2009 and 2010.

African countries that rely on importing oil and other commodities face challenges too, with GDP growth in many of them expected to fall sharply in 2009 and 2010. For many countries in the region, high prices for imported food persist, seriously affecting the poor, particularly in the cities. Meanwhile, inflation has been volatile, as increases in international commodity prices from recent years pass fully through to consumers.

If there is good news, it is that several years of solid expansion and reform were not for nothing. Africa is now better equipped to withstand an economic crisis than it was ten years ago. Wiser macroeconomic policies have strengthened fiscal positions, while debt relief has eased financing constraints. This should help many countries to avoid drastic spending cuts and even run budget deficits.

The business environment has greatly improved both for domestic and foreign operators, as shown by higher scores on the World Bank's "Doing Business" indicator. One reason is Asian and Latin American emerging markets whose growing influence in trade, investment and aid is reducing the continent's vulnerability to the woes of OECD countries.

The trouble is, Asia and Latin America have also been affected by the crisis, and a prolonged downturn could leave a real dent in Africa's economy.

In other words, African countries need donor support more than ever to continue investing in infrastructure and structural reforms. To abandon these efforts would damage confidence and growth prospects, and the price of that would be more poverty.

Indeed, with foreign private capital flows and government revenues drying up, official development assistance (ODA) should not only be maintained, but scaled up and used against the downturn.

 Globally, aid has risen and most donors are so far holding to their promises in the face of the crisis. Africa was not an exception. In 2008, net bilateral ODA from OECD donors to Africa totalled $26 billion, of which $22.5 billion went to sub-Saharan Africa. Bilateral aid to Africa and sub-Saharan Africa, excluding volatile debt relief grants, rose by over 10% in real terms.

The danger in 2009 and 2010 is that ballooning fiscal deficits and fragile political support could trigger a slide in aid levels. Donors must resist this. Also, though developing countries are increasingly important players in world trade, world trade remains essential to development. This makes it doubly urgent for countries to strengthen their efforts to conclude the Doha trade talks in 2009.

Trade finance has become more essential than ever, and fortunately OECD countries and other large economies have pledged to ensure that sufficient funds are available for exporting companies the world over, including in developing countries. Meanwhile, as the latest African Economic Outlook suggests, cash-rich countries, such as China, could set up facilities with regional multilateral agencies, like the African Development Bank, to provide the needed financing. Good governance is essential More trade and aid will have little effect without action on other fronts. Take political governance. Some countries continue to face particularly serious problems, such as the humanitarian catastrophe in the Darfur region of Sudan, the economic collapse in Zimbabwe, and political unrest in Guinea, Guinea-Bissau, Equatorial Guinea, Madagascar and Somalia. There is also embedded corruption in some states. Maintaining political and social stability will be a challenge, particularly if commodity prices spike again in the months ahead.

There are promising signs, though. Increased political awareness among the population has made some governments more accountable. They now convene regular electoral consultations and implement structural reforms in public administration, which have improved governance and increased transparency. In addition, some countries have improved their macroeconomic management and the regulatory environment. Positive signs also come from regional co-operation on governance in the framework of the African Union and in the African Peer Review Mechanism. However, while violent conflicts appear to have subsided, social instability worsened overall in Africa between 2007 and 2008, and many governments responded with tough measures. How this will evolve in the current period of economic stress is a matter of some concern. Meanwhile, the economy presents major challenges to resolve in areas such as infrastructural development and maintenance, communications and investment. Technology offers some respite. Innovative use of information and communication technologies is breaking down long-standing barriers to market development. Four out of ten Africans own a mobile phone, and mobile-banking solutions are quickly scaling up on a continent with low levels of bank users. In Kenya, where only 26% of the population has a bank account, mobile-payment services have attracted over five million users in less than two years.

Such developments are making it possible for businesses to deliver sophisticated services to the continent's population for the first time. In agriculture, IT has brought together farmers and buyers in more transparent online marketplaces. In Senegal, farmers can check market prices in real time on their mobiles to obtain the best prices for their crops. Regional integration is being reinforced as more inland broadband links are built. Pan-African operators are already offering free roaming services across several countries. In fact, Africa is the only region in the world where this innovative business model exists. MA/RJC



See www.africaneconomicoutlook.org and www.oecdobserver.org/africa

See also "Africa emerges", in OECD Observer No 267 May-June and "Make aid work", in OECD Observer No 269 October 2008

Visit www.oecd.org/trade and www.oecd.org/development

©OECD Observer No 273, June 2009