Africa’s outlook

Before the global recession, most of Africa was booming. At last. Can it bounce back?

For almost a full decade prior to the crisis, Africa enjoyed over 5% real growth annually. The novelty was not the pace of economic expansion, but that it was sustained, encompassed many more countries and was accompanied by improved policies. The world’s poorest continent really seemed to have turned the corner. And then the crisis hit. Foreign direct investment, export demand and commodity prices tumbled, setting back oil and mineral exporters, in particular, and causing fiscal and external balances to deteriorate across the region. Remittance flows from immigrants working abroad dried up in some cases, as did credit. According to the just-released 2010 African Economic Outlook (AEO), in 2009 Africa recorded real GDP growth of just 2.5%– more than three percentage points lower than in 2008–and per capita GDP growth stopped. Hardest hit was southern Africa, where growth was slashed, from the average over the three preceding years, by almost 8 percentage points to around -1%. Reasons for this include South Africa’s recession and the fact that most countries in this region rely on mineral exports.

Against this grim backdrop there is some good news: most African countries avoided protectionist measures and managed to implement policy mixes that countered the slowdown in the economic cycle. Prior to the global recession, many countries in the region instituted macroeconomic reforms to reduce public debt, lower inflation and balance fiscal accounts. This allowed them to pursue expansionary fiscal and monetary policy aimed at spurring domestic demand through cash transfers, tax exemptions, subsidies, public works programmes and the easing of access to credit. In short, countercyclical measures helped mitigate the impact of the crisis, at least in the short term, together with the quick resumption of demand from emerging countries like China.


South Africa implemented the strongest countercyclical policy mix in the region thanks to its prudent macroeconomic policies. Fiscal stimulus measures were implemented and cyclical revenue shortfalls were financed by additional debt, creating automatic stabiliser effects. The Central Bank responded to the recession by cutting the repo rate–the discount rate at which it repurchases government securities from commercial banks– by 550 points to 6.5% in order to expand money supply. While results were mixed, especially in terms of protecting jobs, the stimulus certainly helped sustain private consumption and investment, which had been falling. The impact of the crisis would have been much worse without this strong, well co-ordinated and timely fiscal response.

In Botswana, revenue fell dramatically due to the fall in export prices and volumes and the sharp decrease in Southern Africa Customs Union transfers from South Africa. The country avoided procyclicality, however, by not letting fiscal expenditure follow suit. The government let automatic stabilisers work and expenditure expand. The fiscal surpluses recorded in previous years and ample foreign reserves enabled the continuation of the major spending programmes in the 2009/10 budget. As a result, only a few development projects were cut or postponed. On the monetary side, interest rates were aggressively cut.

Looking ahead While it is too early to say how successful these interventions will be, outcomes could be different from what was originally planned. In Africa, countercyclical policies can be less effective because safety nets are poorly developed and, in most cases, growth is driven by export-led sectors and domestic fiscal policies can do little to support external demand. Fiscal policies can also be undermined by weak automatic stabilisers, poor planning and implementation capacity and, in the longer term, a big crowding-out effect against private investment.

What is clear is that the focus should be quickly shifted away from crisis management to longer-term development goals. While macroeconomic soundness proved crucial for absorbing the shocks of the economic slowdown and accelerating recovery, governments should not see macroeconomic stability as a goal in itself. The crisis gives them the opportunity to evaluate the last decade and ask how effective economic policies have been for fostering development and reducing poverty. Unfortunately, evidence shows that instead of promoting production diversification and capitalising on the commodity boom windfall, since 2001 Africa has been increasingly specialising in raw material exports.

The 2010 AEO predicts the gradual but quick recovery of African economies, although the effects of the recession will remain and growth will stay below past highs: average growth is projected at 4.5% in 2010 and 5.2% in 2011. The hope is not only that these countercyclical measures will bear fruit in the long run, but also that they will be adopted by countries that did not have the economic fundamentals in place to implement them once the economic situation stabilises. For those countries that have attained macroeconomic stability, the hope is that they will go further and leverage the new growth cycle to address urgent social issues, such as poverty, youth unemployment and rapid urbanisation. Federica Marzo, Sala Patterson

References
Magashula, Oupa (2010), “African tax administration: A new era”, in OECD Observer No 276-277, December 2009-January 2010

McNair, David (2010), “A new social contract?” in OECD Observer No 276-277, December 2009-January 2010.

 
Owens, Jeffrey and Richard Carey, (2010), “Tax for development”, in OECD Observer No 276-277, December 2009-January 2010.

OECD (2009), “Development aid: The funding challenge”, in OECD Observer No 272, April.

© OECD Observer No. 279, May 2010




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