The writer is a professor of economics and public policy at Oxford’s Blavatnik School of Government
African economies were beginning to catch up with the rest of the world. Four well-led countries — Ethiopia, Ghana, Rwanda and Senegal — were recreating in Africa the processes that transformed the east Asian economies of Taiwan, South Korea, Hong Kong and Singapore. But the pandemic is wrecking this African success story.
Two in three jobs in sub-Saharan Africa are in the informal sector. There are no economies of scale or specialisation. Small is not beautiful, it is unproductive. Africa needs more companies capable of organising a workforce into specialised, collaborative teams, disciplined by competition. Yet even the firms that Africa has are bleeding from the economic impact of coronavirus.
This shock is not predominantly a result of Africa’s health crisis. The causes are the sharp downturns in advanced economies. Commodity prices have dropped and Africa is a major net exporter.
Ghana and Senegal are losing oil revenues that would have financed infrastructure. The slump in global tourism is a heavy blow for Rwanda, whose economic development strategy focused on tourism and conferences. By 2019 it had become the second most-visited country in Africa for these purposes. Now this business has collapsed.
Senegal and Ethiopia are major recipients of remittances from citizens working abroad. Normally, these rise during a domestic crisis, but in this global emergency Africa’s diaspora are losing their jobs. This also hits the most desperate places such as Yemen.
Finally, the retreat of international capital to safety is hitting hardest the countries that were most promising for investors. Ghana was attracting US pension fund money and major companies such as Volkswagen and Bosch. All four shocks are eroding Africa’s scarce organisational capital and are likely to persist for the medium term.
Why is this our problem and not just Africa’s? Because Africa’s shocks are forms of transfer. The fall in commodity prices, which has reduced incomes in Africa, has softened the impact of Covid-19 on the commodity-importing economies of the EU and China.
Similarly, the collapse of tourism is a transfer of demand. The people no longer buying Africa’s tourist services are spending their money closer to home. The capital no longer flowing into Africa is a transfer of finance. It is now available for domestic spending in OECD countries and China. These effects are inadvertent, but they are damaging and indefensible. They urgently need to be offset.
A restaurant in Dakar closed for the pandemic. Tourism had been one of Senegal’s growth sectors © John Wessels/AFP/Getty
In OECD countries and China, governments are rightly allocating enormous resources to protect companies against insolvency, an operation financed by cheap public borrowing. Help for Africa could come from development finance institutions such as the UK’s CDC Group, the World Bank’s International Finance Corporation, Germany’s state-owned KfW, the European Investment Bank and China’s Asian Infrastructure Investment Bank. They could jointly commit to channel public money to the many African firms with which they are connected.
In parallel, the Bank for International Settlements could match the European Bank for Reconstruction and Development’s Vienna Initiative, under which international banks agreed not to pull money out of eastern Europe during the post-2008 financial crisis. This would buy time for the Development Committee that oversees the IMF and World Bank to task these two agencies with devising more substantial responses. Fortunately, options are already under discussion.
As in OECD countries, African governments need to be able to borrow cheaply on capital markets. Currently, they are in a position similar to Italy during the eurozone crisis, facing high interest rates because of a perceived risk of default. In a severe macroeconomic shock, most African countries could service debts at the interest rates at which OECD governments now borrow, but not at default-driven rates.
The solution for Italy was the 2012 “whatever it takes” speech of Mario Draghi, the former European Central Bank president. Italy’s sovereign debt yields went down to safer levels. African borrowing needs to be similarly stripped of risk, perhaps through some combination of central bank guarantees, World Bank and IMF lending, and the IMF’s special drawing rights facility. A helpful start would be to prepare country-specific estimates of the impact of the inadvertent transfers on Africa and the world’s more advanced economies. Africa’s crisis is urgent and there will be no winners from prevarication.
Source: Economy - ft.com
