The shape of the global recovery is on everybody’s mind. But how will it affect sub-Saharan Africa? A key lesson from the past is that global cycles matter for Africa.
For sure, there have been definite idiosyncrasies in sub-Saharan African cycles–as will be discussed more fully in the forthcoming October issue of our Regional Economic Outlook—but the global dimension remains paramount.
Previous global cycles—and I’m talking here about the regular fluctuations in global economic growth that bottomed out in 1975, 1982, and 1991—followed some clear patterns. Typically, the end of an unsustainably high period of global growth coincided with the emergence of production bottlenecks and a burst of inflation triggered by accelerating commodity prices (particularly oil), prompting a tightening of monetary policy. The subsequent downturns were relatively short and growth rates typically bounced back fairly
quickly to previous levels.
By and large, Africa followed this pattern too. But the timing and the strength of the recovery were a bit different. Growth rates stayed high during the first year of the global slowdown, and they tended to bottom out later. The rebound was slower, lagging global growth by a year or two. Critically, when growth did recover, it was generally hesitant and low.
What can the past tell us about the present? It is clear that the initial shock to sub-Saharan Africa has been greater than in the past. This reflects both the magnitude of the global crisis and the deeper integration between the region and the world, both in trade and in financial markets.
Look at the numbers—growth in sub-Saharan Africa will likely decline this year by over 5 percentage points relative to the three years preceding this slowdown, compared to a drop of 2½ percentage points in past cycles.
Given this background, can activity in the region rebound more quickly this time, or will it follow historical patterns? That is the million dollar question. Obviously there is a lot of uncertainty, but I believe that there are some good reasons to expect a more positive outcome this time around.
Better policy environment
My main ground for optimism is that the policy environment is better than in the past. Countries have learned the hard way how to avoid the missteps that dragged down growth in the past.
In previous downturns, countries had very limited room for maneuver on the fiscal and monetary fronts. Excessive spending and poor policy frameworks before the crisis gave rise to unsustainably wide fiscal and external balances. So, as the global recession hit, policymakers often resorted to restrictive polices, such as expenditure rationing, import constraints, foreign exchange controls, and intervention in their domestic economies.
This time was different. Most economies were not saddled by macroeconomic imbalances at the start of the downturn, and policy levers were used more judiciously. Indeed, one of the striking features behind the upswing that preceded the current downturn, was that its underlying foundation was solid.
Better macroeconomic policies, lower public debt levels, a more business-friendly climate, greater political freedom, less conflict, and increased openness to trade all contributed to the improved environment for growth. These factors both enabled advantage to be taken of the strength of world demand and ensured that domestic economies themselves provided sustainable drivers of growth.
This improved environment means that there is a much better prospect that the recovery phase will be more firmly based this time. Provided of course that the improved policy stances of recent years are maintained. External and structural policies must remain open and supportive. The favorable starting point provides room for macroeconomic policies to support growth in the short term, but only attention to medium-term fiscal sustainability will ensure that these gains are maintained in the future.
In my next post, I’ll turn to what the current situation means specifically for fiscal and monetary policy, and other factors within Sub-Saharan Africa’s control.
Filed under: Africa, concessional lending, Economic Crisis, growth, IMF, LICs, Low-income countries, Multilateral Cooperation, recession Tagged: | concessional lending, conflict, food and fuel crisis, political freedom, public debt, recovery