Crisis in the Crisis in the International System International System

and Africa’s and Africa’s DevelopmentDevelopment

Benno NduluBenno Ndulu

Bank of TanzaniaBank of Tanzania

Global Development Paradigms Global Development Paradigms and Changing African Development and Changing African Development

StrategiesStrategies

Changing attitudes towards roles ofChanging attitudes towards roles of• Market, State, and Private sector, and InstitutionsMarket, State, and Private sector, and Institutions

– 1960s -70s –predominant concern with market and coordination 1960s -70s –predominant concern with market and coordination failure - state to proactively mitigatie them - Dirigismefailure - state to proactively mitigatie them - Dirigisme

– 1980s –mid1990s – dominant concern with government failure – 1980s –mid1990s – dominant concern with government failure – liberalization and minimalist state roleliberalization and minimalist state role

– 1990- onset of crisis - state support functioning of markets esp. 1990- onset of crisis - state support functioning of markets esp. in emerging economiesin emerging economies

• Cross border flow s of goods, services and capitalCross border flow s of goods, services and capital– 1960s-1970s - inward looking – import substitution strategies1960s-1970s - inward looking – import substitution strategies– 1980s-onset of crisis – Globalization of production , trade and 1980s-onset of crisis – Globalization of production , trade and

capital - openness and outward oriented straregiescapital - openness and outward oriented straregies

Greater Global Interdependence – Greater Global Interdependence – Influential for Design of Influential for Design of Development StrategiesDevelopment Strategies

• Economies have become much more interdependentEconomies have become much more interdependent– Production in a giant globalized factoryProduction in a giant globalized factory– Trade grown faster than productionTrade grown faster than production– International fin. flows dwarfed national savings & fin International fin. flows dwarfed national savings & fin

intermediationintermediation

• Economic and fin. Actors unconstrained by borders Economic and fin. Actors unconstrained by borders significantly weakening role of nation statessignificantly weakening role of nation states– Multinational have economically dwarfed host statesMultinational have economically dwarfed host states– Home states often powerless to control actions of Home states often powerless to control actions of

multinationals abroadmultinationals abroad

• Contagion has become a powerful tool for Contagion has become a powerful tool for propagating booms and crises across borderspropagating booms and crises across borders– Systemically important economies are most influentialSystemically important economies are most influential– African countries largely victims of crises starting from theseAfrican countries largely victims of crises starting from these

A Decade of Sustained A Decade of Sustained GrowthGrowth

• 15 countries grew at more than 5.3 15 countries grew at more than 5.3 percent over the last decadepercent over the last decade

• 21 countries grew at over 5 percent in 21 countries grew at over 5 percent in the last 5 yearsthe last 5 years

• Recent pressures aside, 2007 Recent pressures aside, 2007 inflation in single digits in 2/3 of SSA inflation in single digits in 2/3 of SSA countries (spirals of 1973 and 1979 countries (spirals of 1973 and 1979 so far avoided)so far avoided)

• Significant build up of international Significant build up of international reserves from the boom in exportsreserves from the boom in exports

African Vulnerabilities to Global African Vulnerabilities to Global Enterdependence Enhanced byEnterdependence Enhanced by

• The extent of exposure of domestic production The extent of exposure of domestic production to external demand in turn dependence on to external demand in turn dependence on primary commodities and natural resources primary commodities and natural resources

• The degree of dependence on foreign savings The degree of dependence on foreign savings for financing investment (FDI and ODA)for financing investment (FDI and ODA)

• The extent of dependence on imports for The extent of dependence on imports for domestic production – primary and domestic production – primary and manufactured productsmanufactured products

• Weaknesses from acting individually as small Weaknesses from acting individually as small countries and markets, when the rest of the countries and markets, when the rest of the world is forming defensive blocs through world is forming defensive blocs through integration.integration.

There is an Upside from the There is an Upside from the GlobalizationGlobalization

• Countries in Asia exploited interdependence Countries in Asia exploited interdependence to record unprecedented growth and Poverty to record unprecedented growth and Poverty ReductionReduction

• African Economies have also benefited African Economies have also benefited greatlygreatly– 15 countries grew at more than 5.3 percent over the last 15 countries grew at more than 5.3 percent over the last

decadedecade– 21 countries grew at over 5 percent in the last 5 years21 countries grew at over 5 percent in the last 5 years– Recent pressures aside, 2007 inflation in single digits in Recent pressures aside, 2007 inflation in single digits in

2/3 of SSA countries (spirals of 1973 and 1979 avoided) 2/3 of SSA countries (spirals of 1973 and 1979 avoided) and Avoided A Spiral in 2008and Avoided A Spiral in 2008

– Significant build up of international reserves from the Significant build up of international reserves from the boom in exportsboom in exports

– More than 2/3 of SSA countries have investment rates More than 2/3 of SSA countries have investment rates exceeding 20% of GDP exceeding 20% of GDP

– FDI rose from $11b in 2000 to $53b in 2007FDI rose from $11b in 2000 to $53b in 2007– Revenue to GDP ratio increasedRevenue to GDP ratio increased

But the Propagation of the But the Propagation of the Crisis Threatens the Gains Crisis Threatens the Gains

MadeMade

• Weakening demand for commodities with Weakening demand for commodities with global recession - vulnerabilitiesglobal recession - vulnerabilities

• Slowdown in capital flows (FDI) and ODA Slowdown in capital flows (FDI) and ODA widen the financing gapwiden the financing gap

• Reduced access to credit Reduced access to credit – sovereign issuancesovereign issuance– Credibility of rating agencies Credibility of rating agencies

• Inflation threatening Growth Inflation threatening Growth • High cost of finance with intensified High cost of finance with intensified

financial risksfinancial risks• Foreign reserves outflow from LICs Foreign reserves outflow from LICs

Main Concerns From the Main Concerns From the CrisisCrisis

• Fall out from the Crisis will setback the steady Fall out from the Crisis will setback the steady progress made in the last decadeprogress made in the last decade– Endanger sustainability of growth (repeat of 1980s Endanger sustainability of growth (repeat of 1980s

and 1990s – post Second oil shock and world and 1990s – post Second oil shock and world recession )recession )

– Undermine macro stability achieved last decade with Undermine macro stability achieved last decade with emergence of resource gap pressuresemergence of resource gap pressures

– Erosion of progress in social well being - education, Erosion of progress in social well being - education, health as countries face large fiscal gapshealth as countries face large fiscal gaps

– Deterioration in the stock of infrastructureDeterioration in the stock of infrastructure

• Push achievement of MDGs further awayPush achievement of MDGs further away

• A threat to social and political stability if A threat to social and political stability if safety nets against vulnerabilities - jobs and safety nets against vulnerabilities - jobs and food – not providedfood – not provided

Major Challenges In the Major Challenges In the Short runShort run

Short term – Weathering the Storm Short term – Weathering the Storm • Protecting jobs mainly in the exporting sectors Protecting jobs mainly in the exporting sectors

and those linked to themand those linked to them

• Ensuring availability of food at affordable prices – Ensuring availability of food at affordable prices – food securityfood security

• Protecting Life- saving programs that have shown Protecting Life- saving programs that have shown results – e.g. HIV/AIDS, malaria , tuberculosisresults – e.g. HIV/AIDS, malaria , tuberculosis

• Sustaining macro stability - balance of payments Sustaining macro stability - balance of payments support and managing resource gap pressuressupport and managing resource gap pressures

• Protecting the banking system from client Protecting the banking system from client distressdistress

Global Responses Global Responses ImportantImportant

• Aware that the recovery of systemically Aware that the recovery of systemically important economies is crucial for revamping important economies is crucial for revamping demand and prices as well as FDIdemand and prices as well as FDI

• Bail out schemes underway will be helpful for Bail out schemes underway will be helpful for recovery of the global economy and to unlock recovery of the global economy and to unlock the financial disintermediation the financial disintermediation

• But these should avoid protectionism which will But these should avoid protectionism which will hurt tradehurt trade

• Preemptive measures should focus on correcting Preemptive measures should focus on correcting regulatory failures - effective surveillance ; regulatory failures - effective surveillance ; strengthening of global regulatory institutions strengthening of global regulatory institutions to oversee systemically important countries and to oversee systemically important countries and players (players (incl hedge funds &r ating agencies incl hedge funds &r ating agencies

Global Responses cont’d----Global Responses cont’d----

• Commit to an early conclusion of an ambitious Commit to an early conclusion of an ambitious and development oriented Doha Round.and development oriented Doha Round.

• Shareholders need to agree to increase Shareholders need to agree to increase financing capacity of the BWIs and regional financing capacity of the BWIs and regional development banks to provide trade finance development banks to provide trade finance facilities.facilities.

• Development Partners encouraged to provide Development Partners encouraged to provide technical, financial and political support to the technical, financial and political support to the Aid for Trade Initiative.Aid for Trade Initiative.

Is De- Globalization an option Is De- Globalization an option for Africa ?for Africa ?

The Answer is NOThe Answer is NO

• Very strong statistical relationship Very strong statistical relationship between African and Trading between African and Trading partners’ growthpartners’ growth

• Africa’s strong natural Resource Africa’s strong natural Resource base makes it world market base makes it world market dependentdependent

• But we can change the terms of But we can change the terms of engagement over timeengagement over time

But African Countries must But African Countries must Build Further Resilience To Build Further Resilience To

ShocksShocks• Diversification of our economies and reduced Diversification of our economies and reduced

reliance on primary commoditiesreliance on primary commodities

• Better integration of our production and Better integration of our production and consumption processes – including adding consumption processes – including adding valuevalue

• Reduction in aid dependence and domestic Reduction in aid dependence and domestic savings mobilizationsavings mobilization

• Diversifying our sources of foreign savings Diversifying our sources of foreign savings building on our recently achieved credit-building on our recently achieved credit-worthinessworthiness

• More effective regional integration to More effective regional integration to enhance the connectedness of our economies enhance the connectedness of our economies and enhance our global influence as a bloc. and enhance our global influence as a bloc.