Economics 3510 African Economic Development Spring 2010

1. Economics 3510African Economic DevelopmentSpring 2010 Recent Development Experience, Continued May 13 2010

2. Agenda: • Factors Affecting Africa’s Development • General Factors • External Factors: • Internal Factors • General Problems of Governance • Environmental Problems • Economic Contraction, 1975-1998 • Economic Expansion, 1999-2008: • Renewed Contraction: 2009

3. The Recent African Development Experience Bad News: Economic Contraction, 1970s to 1990s • minus 0.9 % per capita per year, 1975-2000 • 27 countries with declining GDP pc, 1975-2000 Good News: Recent Growth Recovery late 1990s to 2008 1999-2007+4.7% per year or about 2.4% % per capita per year, Bad News: 2009:caught in global recession

4. General Factors 1. A Difficult Geography (as analysed earlier) 2. Predisposition to Disease • Malaria • Now, HIV/AIDS 3. Rapid Population Growth (to be examined later) 4. Environmental Problems • Desertification; • Firewood problem in many areas • Soil depletion • Climate change

5. External Factors; To what extent have external factors contributed to Africa’s development difficulties? • Reliance on Primary Commodities with weak export performance • Protectionism vs. some products, esp. Cotton • New LDC competition (coffee) • Competition from China for all manufactures • “Resource (or Oil) Economy Syndrome” • Debt burdens? • Falling aid volumes plus high aid dependence (see chart)

6. Internal Factors “Poverty Traps” and Interacting Vicious Circles Low YLowSLowILow K StockLow Y…. Economic ContractionLowerInco,eDecliningTaxesDeclining Public Expenditure Worsening Infrastructure, Health, Education Further Economic Contraction……. Weak HealthIneffectiveWorkLowYPoorNutritionPoor Health……… Inappropriate economic policies: • Modern sector Industrial &Urban Bias • Trade protectionism; • Ineffective integrative schemes • Exchange rate dysfunction • Price Controls;

7. IV. General Problems of Governance • Political instability • Civil war, • Weak governance and Corruption; Underlying Origins?

8. IV. General Problems of Governance • Political instability • Civil war, • Weak governance and Corruption; Underlying Origins? • Artificiality of some nation states; • Traditional view of state as an alien force, inherited from colonial times • Capture of the state by particular groups • Insufficient experience in self government in colonial era • Shortages of trained personnel at Independence

9. V. Environmental Problems • Desertification; • Firewood problem in many areas • Soil depletion • Climate change

10. Explanation of 1975-1998 Economic Contraction: A Conjuncture of Negative Circumstances Many things going wrong at the same time; Interlinked vicious circles Consequences of the Economic Contraction:

11. Renewed Economic Expansion, 1999-2008: Explanation ?

12. Renewed Economic Expansion, 1999-2008: Explanation: Again, a Conjuncture of Favourable Circumstances 1. Buoyant world economy promoted recovery • primary commodity prices rose 2. Some debt reduction and relief from servicing the debt 3. Increased development assistance 4. Direct foreign investment started up (+/- 40 Billion, 2008). 5. Reduced conflict in the region? (ambiguous) 6. Improving Governance? 7. Improved public policy

13. Result: • Poverty levels decline; • Personal & family incomes rise; • Tax revenues and social expenditures (health & education) rise • General improvement But: problems mentioned earlier remain; - some countries are in trouble; - peace and stability are tenuous in a few cases.

14. 2009: Renewed Contraction Central Causal Factors ?? [Not a home-grown banking-financial problem]

15. 2009: Renewed Contraction in AfricaCauses: The World Rcecession Source of world recession: A Conjuncture of Circumstances • The “Business Cycle” gone Global • Globalized “Bubbles” and Panics • Risky Banking Practices: The US and Europe, especially • The “Spark”: The US Sub-Prime Lending Problem

16. The “Business Cycle” gone Global • Global economic expansion: • All economic locomotives at full steam, 2000-2008 • China: +/- 10% growth per year, for 20 years • Result? • Record high oil prices; • Record high raw material and food prices • Stock market exuberance and “bubbles” everywhere, esp. housing “bubbles”

17. Booms, Bubbles, Busts and Panics Historically Common throughout History: Examples: • Tulip Bulb Mania Holland 1636-1637 • Scotland’s Darien Company 1690s • South Sea Bubble of 1720 and related Mississippi Bubble in France, spearheaded by Scotsman John Law;

18. Recent Bubbles • US Housing Bubble • World Housing Bubble • World Petroleum and Commodity Booms • Generated by rapid world economic expansion, esp. China Interacting with World Stock Market Booms everywhere Other Bubbles and Subsequent Crashes • North American Expansion of the 1920s; • Florida Real Estate, 1920s • High Tech Bubble, +/- 1995 – 2000?

19. Contraction and Panic • Inevitable investment slowdown after rapid expansion • Bubbles Burst! • Banking crises affect credit flows and business expenditures • Reduced investment plus Stock market melt-downs  reduced consumer expenditure, esp. on durables e.g. cars and housing; • All factors contribute to economic slowdown  reduced demand for primary commodities and oil  reduced prices recession for countries (and companies and individuals)

20. 2009: Renewed Contraction Impacts on Africa: • Not through banking & finance; • Reduced Commodity prices affecting • export prices, • foreign exchange • tax revenues, • social expenditures, • family incomes • DFI slowdown • Some Aid Cutbacks

22. Oil Prices 1983-2008

24. Hard commodities Soft Commodities Source: OECD Development Centre, based on World Bank, 2009

25. Overall African Growth Rates, 2000-2010 Real GDP Growth Δ = 3.5% Δ = 4.8% Δ = 4.1% Δ = 6.6% Source: OECD Development Centre / African Development Bank, 2009

26. African Growth Deceleration, 2009-2009 Overall African Growth Rate: 2008 near 6% 2009 below 3% Growth deceleration 2008 - 2009 Greater than 3 % - 2 to- 3 % Zero to – 1.9 % Increased growth between 2008-09 Source: African Economic Outlook, 2009

27. Oil Exporters Taking a clear hit from the oil price fall… …and little room left for manoeuvre • Many oil exporters did not take advantage of commodity windfalls to improve governance and diversify their economies • Nevertheless, some oil exporters have performed well in terms of lowering levels of external debt Source: OECD Development Centre / African Development Bank *: African Economic Outlook forecasts

28. Oil Importers Holding up against the crisis so far… …yet challenges rising • Oil-importing countries have performed well, diversifying their sources of growth over recent years. While lower energy and food prices subsequent to the crisis have helped importers, difficult times lie ahead • Good performers’ strengths: • Sustained and prolonged growth • Prudent macroeconomic policies • More Diversification • Challenges: • Poor capacity in mobilizing domestic resources • Contain fiscal and current account deficits • High dependency on ODA • Prioritise poverty reduction • Difficulty adjusting to price shocks Source: OECD Development Centre / African Development Bank *: African Economic Outlook forecasts

29. Africa today : more resilient to exogenous shocks: • Committed macro management in many countries has brought inflation under control and improved fiscal balances • The HIPC initiative significantly reduced debt levels in many countries • The commodity boom helped to improve terms of trade • Business climate indicators have been improving steadily. reflecting government efforts in nurturing private sector and enterprise • Political conflicts have declined

30. Development Assistance to Africa DAC members' net ODA 1990 - 2007 and DAC Secretariat simulations of net ODA for 2008 to 2010

31. ICTs reaching the poor Investment Mobile Telephony 4 out of 10 Africans have a mobile phone line today, 6 out of 10 by 2012! Source: Wireless Intelligence (www. wirelessintelligence.com), 08, African Economic Outlook 2009