Economics 3510 African Economic Development Spring 2010 Recent Development Experience, Continued May

Agenda: Factors Affecting Africa’s Development I.General Factors II.External Factors: III.Internal Factors IV.General Problems of Governance V.Environmental Problems Economic Contraction, Economic Expansion, : Renewed Contraction: 2009

The Recent African Development Experience Bad News: Economic Contraction, 1970s to 1990s – minus 0.9 % per capita per year, – 27 countries with declining GDP pc, Good News: Recent Growth Recovery late 1990s to % per year or about 2.4% % per capita per year, Bad News: 2009:caught in global recession

I.General Factors 1. 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 Y  Low S  Low I  Low K Stock  Low Y…. Economic Contraction  Lower Inco,e  Declining Taxes  Declining Public Expenditure  Worsening Infrastructure, Health, Education  Further Economic Contraction……. Weak Health  Ineffective Work  LowY  Poor Nutrition  Poor 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 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, : Explanation ?

Renewed Economic Expansion, : 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 assistance 4. 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]

Causes: The World Rcecession 2009: Renewed Contraction in Africa Causes: 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, – 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 Historically Common throughout History: Examples: Tulip Bulb Mania Holland 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. China Interacting with World Stock Market Booms everywhere Other Bubbles and Subsequent Crashes – North American Expansion of the 1920s; – Florida Real Estate, 1920s – High Tech Bubble, +/ – 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 Contraction Impacts 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

Source: OECD Development Centre, based on World Bank, 2009 Hard commodities Soft Commodities

Source: OECD Development Centre / African Development Bank, 2009 Real GDP Growth Δ = 6.6% Δ = 4.1% Δ = 3.5% Δ = 4.8% Overall African Growth Rates,

Source: African Economic Outlook, to- 3 % Zero to – 1.9 % Greater than 3 % Increased growth between Growth deceleration Overall African Growth Rate: 2008 near 6% 2009 below 3% African Growth Deceleration,

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 and DAC Secretariat simulations of net ODA for 2008 to 2010

Investment ICTs reaching the poor Mobile Telephony 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