Africa untainted by weak global recovery. (View from the City).
The most striking feature of the world economy over the past year has been its feeble recovery, despite the many monetary and fiscal stimuli employed by a number of countries. Recent studies by leading research institutes, such as the International Monetary Fund (IMF), the Paris-based Organisation for Economic Co-operation and Development (OECD), and the United Nations Department of Economic and Social Affairs (UNDESA) show that global economy still remains in the doldrums.
Horst Kohler, managing director of the IMF, said: "The world is in a state of heightened uncertainty. The economic recovery that started in the major advanced economies has weakened, and while there are still reasons to see a firmer recovery down the road, that road is far from smooth. Many emerging market economies, in particular, are feeling the pain."
The OECD (the club of 30 richest nations) has also cautioned: "Forward looking indicators show that a solid recovery may be rather slow to materialise." The OECD forecast that the global economy is set to grow by between 1.7% to 2.8%, compared with 2% in 2001.
The economic downturn has affected global trade, especially since the September 11 attacks. According to the World Trade Organisation (WTO), the volume of mercantile trade fell last year for the first time in two decades, and growth in 2002 is expected at a paltry 1%. Furthermore, falling non-fuel commodity prices are damaging poorer countries, leading to severe balance of payments difficulties. This in turn, has increased funding requirements for the Heavily Indebted Poor Countries, mostly in sub Saharan Africa.
The unbalanced pattern of economic activity has led to over-dependency upon America as the engine of world growth. Japan - still the world's second-largest economy - is suffering from prolonged deflationary conditions with lower spending, falling output, and steadily declining consumer prices. The IMF expects the economy to contract by 0.5% in 2002. It notes: "Japan appears to be emerging from its third recession in a decade, but there is no guarantee against another similarly bad decade without a determined effort to implement profound bank and corporate restructuring."
The Eurozone remains firmly stuck in a low-growth cycle, with gross domestic product (GDP) growth anticipated at just 0.9%, its weakest performance for 12 years, reflecting the economic weaknesses of Germany, France and Italy.
Even though America's economy is faltering because of lower business investment and consumer spending, its projected 2.2% growth in 2002 still remains vastly superior to Europe. This improved US productivity is reflected in output per worker, underpinned by the high-tech boom of 1990s. An OECD report comments: "US growth was being driven by the remarkable productivity gains due to advances in technology that have made it possible to squeeze more output from the same amount of economic activity."
The near-collapse in equity prices on Wall Street has eroded the purchasing power of people in many wealthy countries over the past two years.
NEW YEAR BLUES
2003 could again see a period of sub-par growth rather than outright global recession. The UNDESA believes that sluggish global activity may persist until mid-2003, as "low investment and slumping stock markets offset consumer enthusiasm and attempts by governments to spend their way out of the downturn." The 2003 world output growth is projected at 2.9% to 3.7%, but still below the robust 4.7% recorded for 2000.
The main risks on the horizon are geopolitical uncertainties and threats of a second Gulf War which could cause oil supply disruptions. The industrialised world, albeit less reliant on fossil fuel compared to the 1970s, could still plunge into deep recession if crude prices are sustained at $40-$50 per barrel for six months or more. Glen Hubbard, economic adviser to President George W. Bush, warned: "Larger (price) increases pose a more substantial risk."
The developing world, especially in China and Southeast Asia, remains more vulnerable to oil shocks because of its ever growing industrial energy usage over the past three decades.
In additon the outbreak of hostilities linked to a possible US-led strike on Iraq can damage business confidence and affect future investment plans of multinationals in the Middle East and North Africa as well as in Muslim countries such as Indonesia and Malaysia.
The notion that Africa is largely semi-detached from the global economy is incorrect. Thanks to increasing market liberalisation across the continent, many countries' prospects are linked with developments in world trade. Africa's exports to the European Union bloc in 2001 were worth $58bn, equivalent to 46% of total exports ($125.7bn), according to Direction of Trade statistics. While exports to America and Asia (including Japan) totalled $22.3bn and $l7bn, respectively.
In contrast with turbulence in Latin America (caused by the Argentinean financial crisis), Africa has remained quite resilient during 2002, with some economies, notably South Africa, Botswana, Mozambique, Senegal, Cameroon, Ghana, Mauritius, Tanzania and Uganda, growing strongly and contributing to the general recovery of SSA's economies. But there are concerns about political-economic vulnerabilities in the principal regional economies of Zimbabwe, Cote d'Ivoire and Kenya.
Based on IMF's estimations, Africa's total output rose by 3.1% last year, equivalent to GDP per capita growth of 0.5%. Most countries have made tangible progress towards macroeconomic stability, in terms of declining inflation and fiscal deficits.
Commodity producing countries have had a mixed year. Oil exporters (led by Nigeria, Algeria and Angola) have enjoyed continuous windfall earnings. Nigerian Forcados crude - similar in quality to Brent blend - is likely to average about $24 per barrel. South Africa, Ghana and Cote d'Ivoire have benefited from higher prices for gold and cocoa, although sustained weakness in coffee and cotton prices have affected, in particular Uganda, Burkina Faso, Mali and Benin. In southern Africa, agricultural production fell sharply because of the recent drought.
GDP growth is projected at 4.2% in 2003, underpinned by rising commodity prices and healthy external demand, as recovery in global trade gathers momentum. World trade volume is expected to rebound to 5.7%-6.1%, representing a marked upturn over 2001/02. Africa's growth is, however, falling short of the 7% target required for sustainable development and combating poverty across various countries.
Developing Africa should increase its openness to trade and attract more foreign direct investment (FDI) in order to boost long-term growth and reduce dependency on foreign aid. Total FDI inflows in 2001 were $17,165m, according to the UN World Investment Report 2002. Major recipients were South Africa ($6,653m), Morocco ($2,658m), Algeria ($l,196m), Angola ($1,119m), and Nigeria ($1,104m).
But inflows to Africa were modest compared with $102.26bn in Asia-Pacific and $85.37bn in Latin America. Higher investments into manufacturing and services industry by multinationals depend on improvements to basic infrastructure and the promotion of enlarged regional markets.
Equally important for sustainable growth is fostering good governance. A recent survey reported in BBC Business News found that corruption is costing Africa (including northern Maghreb countries) more than $148bn per annum. This, in turn, increases cost of goods by 20%, deters private investment and undermines growth. Empirical studies show that developed economic institutions, including the protection of property rights, democratic accountability and effective checks against bureaucratic corruption were positively related with improved economic performances across countries.
In essence, foreign support is vital for putting low-income countries on a path to socio- economic advances. It is commonly overlooked that post 1945, the reconstruction of Western Europe and Japan owed heavily to massive US investments. The international community should provide similar concrete support to the New Partnership for Africa's Development (NEPAD), (see African Business, May 2002). This ambitious developmental strategy calls for increased FDI and official aid, as well as better trade access to lucrative OECD markets. External resources are contingent, however, on strong commitments to economic prudence, democracy and respecting the rule of law.
Most African countries have potential for growth that could be unlocked, assuming sustained political stability and good governance. The IMF has urged rich nations to boost aid to least developed countries (LDCs) - specifically those of Africa and open their markets by phasing out trade-distorting subsidies, particularly on agriculture, textiles and labour-intensive manufactures.
High tariff barriers in the OECD regions force African countries to focus on producing raw materials, basic commodities and hence increase their exposure to volatility in international commodity markets. The Fund notes: "Better access to advanced markets would provide a critical boost to developing economy exports, supporting investment and growth which is essential for successful integration in the world economy and for poverty alleviation."
Structural reforms are not only needed in the Third World. The advanced countries also require better policy frameworks, for example, reform of the Eurozone's inflexible labour markets and strengthening corporate governance in America. While Japan needs to tackle the problems of bad debts of $400bn (representing about 80% of Africa's GDP).
Africa - blessed with immense mineral and energy wealth - has vested interests in the global economy, but it should develop manufacturing industries, thus diversifying exports in order to fully participate in international trade. Increasing private investments and trade expansions are keys to future growth opportunities; however, the developed world should equally offer more technical and financial assistance to less fortunate regions.
A more equitable distribution of economic resources can contribute towards global security. World peace will be a precious gift to businesses worldwide in 2003 and beyond.