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Emerging Markets

AFRICAN AID: The harder they fall

Without $20 billion in foreign aid, the global economic crisis will lead to a human catastrophe in Africa, writes <b>Shantayanan Devarajan</b>

Without $20 billion in foreign aid, the global economic crisis will lead to a human catastrophe in Africa.

Although the region least integrated with the global economy, Africa may be the worst hit by the global economic crisis.

Four principal channels are undermining Africa’s growth, reversing the hard-won gains of the last two decades: private capital flows, remittances, foreign aid and commodity prices.

Private capital flows, which in 2007 had surged to $53 billion – for the first time exceeding foreign aid to the continent – are declining. Since last year, African stock markets have fallen by an average of 40%, with some, such as Nigeria’s, falling by over 60%. Ghana and Kenya have postponed sovereign bond offerings worth over $800 million, delaying the construction of toll roads and gas pipelines. The Democratic Republic of Congo (DRC) has lowered its expected foreign direct investment by $1.8 billion.

These are but a handful of examples of flows which were to finance much-needed infrastructure and commodity-based investments. More importantly, the recent surge in capital inflows raised expectations that African economies had “turned the corner” – only to have those expectations deflated for reasons that are not remotely the fault of Africans.

Remittances, which had peaked at around $20 billion a year in 2008, are expected to decline by 4.4% this year. Typically, remittances are counter-cyclical: when your family is having difficulties, you send them more money. But this time the crisis is in the remittance-sending countries: over 75% of Africa’s remittances come from the US and western Europe.

The third channel is foreign aid. Although donors increased aid to Africa in 2008, they are already $20 billion short of the commitments made by the G8 in Gleneagles in 2005 – commitments made when the global economy was more robust. Today, fiscal pressures to stimulate the donors’ own economies are mounting.

If we draw lessons from the 1990s’ financial crises in Norway, Sweden and Finland, foreign aid could fall substantially, at a time when the poorest and most vulnerable can ill afford to see the delivery of basic services hampered. A cutback in foreign aid could make the difference between life and death for, among others, the two million HIV-positive Africans on anti-retroviral therapies.

Fourth, the rapid decline in commodity prices, although a benefit to Africa’s oil importers, is causing a major decline in exports and government revenues for many commodity exporters. Even those oil exporters who saved their windfall oil revenues in 2008 (Angola, Gabon and Nigeria all used a reference price of oil of about $57 a barrel when the market price was $140) are suffering because their non-oil sectors are both under-developed and highly dependent on government expenditures. Angola’s GDP is expected to decline by 23% in nominal terms, and exporters of other commodities, such as Zambia, DRC and South Africa, are experiencing a substantial drop in export revenues and, in some cases, fiscal revenues as well.

Add to this bleak picture the fact that several African countries entered the global financial crisis with significant macroeconomic imbalances, and an even gloomier forecast emerges. Ethiopia’s inflation rate in July 2008 was 60%; Ghana’s fiscal deficit was 14% of GDP. South Africa’s current account deficit, which was financed largely from private capital flows, was 8% of GDP. What this translates into is GDP growth on the continent of about 2.4% in 2009, about two and a half percentage points slower than in 2008.

That figure may be higher than the zero or negative growth being forecast for the US or Europe, but a two- to three-percentage-point drop in growth could have devastating consequences for a low-income region.

Until 2008, African countries had been experiencing – for the first time in two decades – sustained economic growth equal to that of all developing countries (outside China and India). Thanks to sound economic policies and rising commodity prices, Africa’s growth had accelerated from 5.7% in 2006 to 6.1% in 2007 and was projected in January 2008 to reach 6.4% in 2008. Poverty was declining, and many human development indicators – notably the prevalence of HIV/Aids – were improving.

This decade-long surge in growth has now come to a halt. In the wake of economic turmoil, political and social unrest may follow.

Furthermore, there is a risk that political support for many of the difficult reforms that policy-makers have adopted over the past decade will wane. That most developed countries are undertaking “reverse reforms” – bank nationalization, deficit-increasing public spending programmes – will make it harder to sustain reform momentum in Africa.

What all of this translates into is that the global economic crisis could lead to a human crisis in Africa. If Africa experiences a growth deceleration that is typical of the past, an estimated additional 700,000 infants will die before their first birthday.

One must also acknowledge that Africa’s decade-long growth was somewhat fragile and not widely shared. Progress towards the Millennium Development Goals (MDGs) was slow and uneven, with almost a third of the countries not expected to meet any of the MDGs by 2015. Agriculture – central to reducing poverty, combatting hunger and malnutrition – has lagged in productivity. The delivery of basic services in health, education, water and sanitation continues to fail poor people. And critically, Africa’s overall investment rate was only 15% of GDP, compared with over 37% and 26% for East and South Asia respectively, due in no small measure to Africa’s huge infrastructure deficit and business regulation that constrain the investment climate.

Perhaps most troubling is the fact that economic growth was accompanied by very little growth in productive employment: over 80% of the labour force continues to work in the informal sector, where productivity is low.

This is further exacerbated by the burgeoning numbers of unemployed youth flowing to the informal sector as the formal sector cannot absorb them. There are currently 200 million Africans between the ages of 12 and 24. Each year, an estimated 7–10 million more enter the labour force, many with no opportunities to use their schooling.

The African Response

As the impact of the global crisis becomes more obvious, African governments are expressing coordinated concern. Most have little or no fiscal space to stimulate demand and fear that aid commitments might not be honoured – especially if the global crisis lasts for several years. There is hesitancy to use up what limited aid there is, such as the World Bank’s International Development Association (IDA) resources.

Their response to date is multifaceted, from reprioritizing expenditures (as in the case of Ethiopia and Senegal, who reprogrammed IDA support, and Cape Verde and Mali, who are replacing blanket subsidies with targeted means-tested ones), to deepening reforms (as in Seychelles, Zambia, and Ghana) to benefit from the eventual recovery; to policy reversals in a few cases, such as Nigeria’s imposition of exchange controls to mitigate its depreciating currency. Others, such as Botswana and Tanzania, are exploring new sources of financing.

The international response

How should Africa’s development partners respond? How much additional foreign aid will it take to prevent the global financial crisis from becoming an economic, social, political and human crisis in Africa? How will additional resources be spent; and what accompanying policies will be implemented to make sure those resources are most effectively leveraged?

In an uncertain period, I propose a specific answer to the question of how much additional aid is needed: at least $20 billion, a figure arrived at using different various methods and avoiding possible double-counting.

How was this calculated? First, the IMF estimates that the balance-of-payments needs of low-income countries will be about $25 billion this year. Inasmuch as most of those countries are in Africa, $20 billion for Africa would seem a reasonable figure.

Second, setting aside balance-of-payments considerations and simply looking at Africa’s infrastructure needs, a recent estimate puts these at $20 billion additional also, factoring in the gap that can be filled by better pricing and efficiency gains. Since it will take more than infrastructure to avert a collapse, we express the need as “at least $20 billion”.

Third, $20 billion is the shortfall in the commitments made at Gleneagles in 2005 by the G8 to double aid to Africa by 2010. In other words, this is not a new need: it is what the world leaders in 2005 thought would be needed for Africa to have a reasonable chance of reaching the MDGs.

If there ever was a time when those additional resources are needed, it is now.

Shantayanan Devarajan is chief economist of the World Bank’s Africa region

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