What priorities should (South) African leaders take in to the London Summit?
The gathering overall economy has induced major economic problems for African countries. This column highlights several key priorities for (South) African representatives to take in to the London Summit, including maintaining usage of finance, open markets and redoubling African economic reform efforts.
As the global financial meltdown deepens, so high-level attempts to contain its fallout intensify, and therefore interest in the London Summit, convened by British Prime Minister Gordon Brown for April 2nd, 2009, is quite high. The agenda is extensive and potentially far-reaching, albeit opaque to those in a roundabout way involved with international financial markets as either participants or regulators.
The complete African continent, with the exceptions of South Africa that is a G20 Finance member and the chairs of the brand new Partnership for Africa’s Development and the African Union Commission, isn’t represented at what could total the most significant economic governance forum for another few decades. The gathering overall economy has major economic implications for African countries, a few of that have just escaped from decades of macroeconomic dislocations characterised by chronic indebtedness to foreign lenders. The successful reformers specifically now end up staring back to the abyss through no fault of their own.
The impacts on Africa really depend on the span of the crisis in developed countries, especially the united states, and the time it requires to unwind the financial sector’s liabilities. The crisis has morphed from developed country financial systems into emerging market sovereign debt predicaments connected with an historic collapse in world trade. Emerging markets growth drivers have evaporated, dispelling hopeful notions that “decoupling” had occurred. Impacts on Africa specifically could be traced through, inter alia three channels:
- Direct financial contagion, specifically capital flight from emerging markets including trade finance; and associated macroeconomic dislocations (weakened exchange rates; increased domestic interest levels and increased debt payments). Increased inflows of official development assistance will never be forthcoming because so many developed countries are scrabbling to recapitalise banking systems and offer domestic fiscal shock therapy. Decreasing inflows of private capital compound the problem. Therefore, already vulnerable fiscal revenues will probably come under great stress in lots of African countries.
- Reduced remittances from African diasporas resident in the developed world. In recent decades these financial inflows have alternately cushioned the ill-effects of macroeconomic mismanagement or underpinned positive structural transformation stories. This will exacerbate forex shortages, dampen domestic growth prospects through reduced consumption, and heighten revenue pressures.
- Reduced prices and volumes of major commodity exports. This will certainly reduce economic growth over the continent, even though some countries will reap the benefits of lower commodity prices and therefore less pressure to improve interest levels to curtail inflation. Furthermore, the dramatic trade declines occurring around the world could impact severely on many African countries which depend on import taxes (tariffs) to sustain government revenues.
Broader impacts depend on the united states in question’s balance of payments position, forex reserves, and fiscal position. With regards to these criteria the African situation is problematic (Kamara 2009). 1 Furthermore, as developed countries, especially the united states, take measures to rebalance their economic growth through reducing consumption so that you can increase savings, the resultant fall in global demand could ensure more serious impacts on Africa.
It really is pertinent to ask if the medium-term priorities identified in the Washington summit declaration distract from the primary business of stabilising financial systems and economies, and how realistic medium term regulatory and international lender (IFI) reform options are. Similarly, concerns over the potential pro-cyclicality of implementing tighter financial regulations during a severe crisis are pertinent. 2
Because the crisis will impact on emerging and African economies, G20 leaders have recognised that sufficient resources to contain its impacts should be offered via the multilateral lending institutions (the World Bank and International Monetary Fund) for well-managed economies on non-punitive terms to enable relatively smooth adjustment. However, it isn’t clear from what extent this would connect with African economies; media reportage shows that only “systemically significant” (G20?) developing countries could have usage of such financing. 3 In an environment of globalised financial capital where many countries face risks they didn’t have a submit creating, yet are acutely susceptible to the fallout, this seems iniquitous. Under such conditions the likely imposition of conditionalities to emergency lending for all those economies that aren’t “well-managed” aggravates the sense of injustice. Some Africans therefore suggest that regional development banks ought to be recapitalised so as to fill the gap, nonetheless it is not clear who do this since money in your community are severely constrained; or whether these banks have the mandate to plug liquidity shortfalls – the African Development Bank (AfDB) for example includes a project finance mandate. Due to the actual fact that the World Bank takes approx 2 yrs to disburse project funds it really is clear that the IMF using its quicker disbursement procedures is better-placed to aid with liquidity shortfalls. Hence those African states looking for assistance is going to be obliged to carefully turn to the IMF – unless China opens its credit taps to them. 4
In this light possibly the crisis is (ironically) an historic possibility to prosecute the medium-term reform agenda arranged at the Washington summit. From an African perspective the established voting patterns governing both IMF and World Bank ought to be changed to more accurately reflect underlying global economic realities; yet in that scenario Africans must put their faith in China, India, and other rapidly growing emerging markets to represent their interests since a realignment should be predicated on relative economic weight – and Africa is thin indeed. An integral problem in this respect may be the fact that the countries which dominate IMF decision-making usually do not in fact utilize its facilities. This creates a legitimacy problem, and renders the problem of conditionalities particularly problematic especially in situations where (African) countries aren’t directly in charge of those crisis conditions (Goldstein 2008). 5
The precarious economy of African countries could easily get considerably worse if protection is ratcheted up. That scenario depends subsequently on two related issues: how lousy will the recession be (depth; duration), and how will countries react to it? The former is difficult to predict and the main topic of much angst. The latter raises the spectre of increased protectionism in the context of a constipated multilateral trading system characterised by a stalled Doha Round. These conditions are frustrated by the interconnectedness of national economies and trade flows via financial markets and extensive manufacturing supply-chains, which includes prompted the unprecedented collapse in global trade flows witnessed within the last two quarters and fuelled inter alia by tightening trade finance. That is a matter of direct concern to African countries, given their vulnerabilities in the international trading system.
However, the Washington Declaration and subsequent process didn’t set up a working group on trade, a lacunae that should be urgently addressed. That group could take up several measures proposed by Baldwin (2009) at the London summit:
- Leaders should reaffirm the Washington Declaration’s standstill on introducing protectionist measures;
- Monitoring systems, especially in the WTO, ought to be strengthened;
- The major trading powers should think about introducing “tough love” measures to make sure pledges are enforced, such as former US President Reagan’s “super 301” legislation which threatened retaliation against foreign trading powers that introduced measures prejudicial to US exports.
Furthermore, there exists a lively debate regarding the priority to be accorded to concluding the Doha Round. One view is that the round is a distraction from attending to the crisis and therefore ought to be moved down the priority list; this logic is reinforced by the actual fact that the round is politically blocked. Others, including myself, argue that to take action will be dangerous and would encourage governments to pursue protectionist measures using the breathing space afforded under current rules, instead of future rules and incentive structures that might be more constraining under a Doha round outcome – however “lite”. Concluding the Doha round in whatever form is in Africa’s interests, so that you can constrain protectionism at least but moreover to keep the integrity of the multilateral trading system.
To conclude, several key priorities for (South) African representatives to take in to the London Summit could be identified:
- Maintain usage of finance, both short-term liquidity and project finance.
- Expand the sources of the multilateral development banks and the IMF, including regional development banks, for this function.
- Similarly, encourage donor nations to peg their ODA payments to Africa at current levels.
- Address conditionalities in light of the most obvious fact that the crisis-induced problems African economies face weren’t of their own making.
- Keep up with the open global economy by exhorting developed countries specifically but also major emerging markets never to resort to protectionist measures. Linked to this suggest that the G20 leaders set up a working group on trade.
- Offer to redouble African economic reform efforts. This will extend to building sensible regional economic integration oriented towards trade facilitation and regional resource mobilisation, 6 as opposed to the haphazard patterns which currently characterise several processes.
The last point is an integral commitment for African delegates to table. Way too many African countries have already been through decades of painful structural reform which includes only recently begun to bear fruit; my concern is that those gains may be overturned rashly in a gathering rush to refute “northern” economic models.
1 In line with the African Development Bank approximately 40 African countries have current account and fiscal deficits, whilst exchange rates over the continent are weak.
2 That is a concern in Africa where 9 countries are implementing Basel 2 commitments.
3 Financial Times, October 28th, 2008, “Reforms usually do not mean cash without strings”. Interestingly this report argues that South Africa isn’t qualified to receive this package
4 That could probably depend on if the country concerned is a substantial repository of resources the Chinese government desires because of its industrial development. However, anecdotal evidence shows that Chinese companies could be sharply curtailing their resource investments in Africa.
5 Morris Goldstein argues for the resurrection of the Compensatory Financing Facility, an IMF lending window effectively retired in 1998 towards “a far more complicated and hardly-used successor”. This facility explicitly recognised that if a country suffered temporary shortfalls in export revenues due to factors beyond its control, then IMF conditionalities wouldn’t normally apply, including judgements concerning which countries have “good” policies.
6 For instance creating regional bond markets and/or stock exchanges is politically difficult and unlikely to attain the required economies of scale. Also, regional development banks might not be well-placed to impose conditionalities on the funds member states access, due to their being politically embedded in your community.
Baldwin, R (2009) “Trade and the Crisis”, presentation to the conference FINANCIAL MELTDOWN and G20 Summitry: Decoding (South) African Positions, hosted by the South African Institute of International Affairs, March 2-3.
Kamara, A (2009) “Sustaining African Usage of Finance”, presentation to the conference FINANCIAL MELTDOWN and G20 Summitry: Decoding (South) African Positions, hosted by the South African Institute of International Affairs, March 2-3.
Goldstein, M (2008) “Dig in to the IMF’s tool box to tackle the crisis”, post on the Financial Times’ Economists Forum, November 11th.