Business, Finance & Economics

The perils of ignoring Africa's economy


LAUSANNE, Switzerland — When the global financial crisis emerged last fall, many analysts expected Africa to escape relatively unscathed. Africa was so disconnected from world financial networks, the reasoning went, that it would only be marginally affected.

It hasn’t worked out that way.

“We didn’t take into account the economic impact on Africa. It has been huge,” said Michael Keating, executive director of the Africa Progress Panel, an initiative of former U.N. secretary general Kofi Annan.

The problem is that much of Africa’s economy is overly dependent on exporting raw materials, and the global market for nearly everything has dropped precipitously. Virtually the only commodities that haven’t been affected, Keating said, are cocoa and gold.

Unlike other economies, Africa doesn’t have other options. Apart from commodities, much of Africa is dependent on the money that Africans abroad send home. African workers abroad have often been the first to lose their jobs in the crisis. Since an African worker may support up to 20 people or more in his or her extended family, the loss of a job can be catastrophic.

Worse, with most of the developed world pumping billions into emergency stimulus packages, the future looks uncertain for development aid money, which up until now has been one of the few constants that many African governments counted on.

Robert Fisher, a former U.S. Trade Representative economist who is now managing director of international consultants Hills & Company, notes that U.S. aid to Africa is still on track to double by next year.

“The question,” Hills said, “is what comes after that?”

U.S. President Barack Obama may want to continue development aid, Fisher said, but political pressure could keep him from doing it. Fisher was a panelist at a seminar hosted by the German Marshall Fund of the United States and the Evian Group, a network of international business, government and opinion leaders, in Lausanne. The key message emerging from the two-day conference is that the world is moving into a new development era with new technologies, a new geography and new institutions.

With the U.S. and Europe facing enough problems of their own, it’s natural to ask if anyone should care about a continent that is receiving roughly half the world’s overseas development aid and still looks like a basket case.

Italy, which hosted this week's G8 summit, has indicated that it plans to reduce its foreign aid. Prime Minister Silvio Berlusconi has said that he has enough problems at home.

But Michael Keating warns that the reasons for not wanting to see Africa’s economic gains rolled back are not only humanitarian — security is an issue. Piracy off the coast of Somalia shows what happens when you get a failed state. Sudan provided a rear base for Osama bin Laden before U.S. pressure forced him to relocate to Afghanistan.

But more than that, current estimates show that by 2040 Africa could have a population equal to China's and India's combined. If Africa can’t get itself on track, you are likely not only to see new famines, but also an uncontrollable surge of illegal immigration to Europe and the U.S., with predictably destabilizing effects.

The major light on the horizon from an African viewpoint seems to be China, which is emerging on the continent as a major game changer. “The West sees Africa as a risk,” Mills Soko, director of South Africa’s Mthente Research and Consulting Services, told the Evian Group. “China sees Africa as an opportunity.”

Not everyone is so enthusiastic about China's involvement. Bright Simons, research director for Ghana’s IMANI Centre for Policy & Education, said China is placing too high an emphasis on infrastructure with little technology transfer, while the West is focusing on improving civil government, an area where help is most needed. “The Chinese are repeating the development policies of 30 years ago,” Simons said.

Regardless of who is right, there is a general consensus that Africa needs a new approach. One suggestion emerging from the Evian Group discussion is that Africa should abandon the European-U.S. development model that places heavy emphasis on exports, and concentrate instead on developing its own internal markets. At the moment it is cheaper for housewives in West Africa to buy a chicken imported from Brazil than it is to buy one raised locally. Part of that is due to the enormous subsidies for farmers that you find in the U.S. and Europe. Cheap food is great, but it doesn’t make being a local farmer in Africa very profitable. African overregulation and tariff barriers are also a factor.

Despite the dangers of overregulation, another recommendation emerging from the discussion is that some government oversight is needed to keep the free market on track. The key issue here is to opt for pragmatism and economic realism rather than ideology. What Africa may need more than money is technical advice on how to deal with market realities. The trend of the future seems to be more public-private partnerships, in which government, development organizations and the private sector need to learn how to combine their forces and work together.

The irony is that with the financial crisis nudging much of the world towards protectionism, many Africans still believe in the free market dream. “Africa may end up being the last region in the world that still truly believes in global capitalism,” Mills Soko said during the Evian Group discussions. “Africa is open for business.”

More on the economy in Africa:

Remittances a lifeline to Somalis

In Nigeria, all bets are off

Even as gold prices rise, miners struggle