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Emerging from the Global Crisis: Growth in African Low Income Countries(LICs) – December 17th 2010 event at the Brookings: A Precis. By Lambert Mbom


From L to R: Ben Leo, Dr Suruma, Mwengi, Hugh BredenkampHow did the African low countries fare in the face of the recent financial meltdown was the theme of a recent event at the Brookings Institution. Organized by the Africa Growth Initiative of the Brookings, the framework for the event was a recent paper published by the IMF on the impact of the crisis on low-income countries(LICs) in Africa entitled: Emerging from the Global Crisis: Macroeconomic Challenges Facing Low-income Countries”.

A deductive methodology with a general picture of the situation in Africa preceded a presentation on one of these LICs’ handling of the crisis. Uganda was the case study. It is also worth noting that by way of style, the IMF paper was comparative in its analysis in terms of the past and projections into the future.

Hugh Bredenkamp, IMF’s Deputy Director in Strategy, Policy and Review department and head of the Low-Income Countries Strategy unit, was just the right person to discuss the highlights of the paper. The IMF specialist focused on three questions namely: Why did the dire predictions of the impact of the financial crisis on low-income countries not come home to roost? What predictions for the future from the lessons learnt? What common themes going forward emerge from this crisis?

The gist of Hugh’s presentation was the fact that Africa was able to weather this crisis better than three previous crises chiefly because of strong buffer policies. Unlike before, Africa also registered a comparative v-shaped recovery. During previous crises, the growth trajectory tended to remain extremely depressed if not negative for some years; With this meltdown, LICs have also followed the sort of V-shaped recovery trajectory.

The context of this paper was the sad reality that in the face of the economic downturn, the global focus was on its impact on advanced economies and to some extent emerging markets and very little on the implications for poorer countries. The familiar scenarios of cutting aid budgets, evidence of an already downturn in foreign direct investment and remittances already playing out, warranted the IMFs call for and on behalf of the low-income countries not to be left out.

The unexpected did not befall these countries and Hugh proffered five reasons why this crisis was different for low-income countries namely:
1)The high success of the global stimulus effort.
2) Donors heeded the call and did not cut aid budgets. Many of the multilateral scaled up their financing to shore up most of the deficits.
3) LICs were able to participate in the global stimulus effort or at least run countercyclical policies.
4) Unlike with previous crises, not only was the depth of this less severe but so too was the duration.
5) This success story is largely because these countries were in a very different macroeconomic situation going into the crisis than they were in the face of previous crises. This is a reflection of at least a decade and a half of strong policy efforts in low-income countries to put their economies on sound footing.

Hugh spent some time on what he called strong policy buffers. The indicators of these include fiscal deficits, public debt, inflation, reserves and current accounts. In the face of declining revenues during the crises, government spending increased as a share of GDP in 2009.This meant larger fiscal deficits. In contrast to the pattern in previous crises, LICs did not cut spending very much. Instead of cutting spending during a recession due to declining revenues, most of these LICs were able to take the right countercyclical measures.

For the future, given the effective defense the policy buffers provided the LICs in the face of the crisis, they should be effectively rebuilt to relatively strong positions. Chief indicators of this position would include, declining current accounts, recovering fiscal balances, public debt continuing in an upward trend in the short term but resuming downward path over the medium term. Unlike in advanced economies where fiscal consolidation requires austerity budgets, with the LICs increased spending is crucial and highly recommended.

Even though a homogenous pattern as a one size-fits-all is not an adequate recommendation, some common themes however emerge with respect to the future:
1) Countries need to strengthen their domestic fiscal revenue efforts. This they can achieve by fixing the design of their tax systems and in particular by fixing the tax administration. This will pay off in terms of government revenue markedly.
2) A cautious borrowing strategy to cover up the infrastructure gap and meet some other development needs is crucial. This must be accompanied by mobilizing domestic savings through reforms of domestic financial systems, which could include expansion of access to financial services to a broader population.
3) Reforms in the business sector especially with trade are important. Trade not just regionally between the LICs in Africa but also with the rest of the world holds a great promise for growth.

The second part of the discussion focused on a corroboration of the foregoing analysis. This onus fell on Dr Ezra Suruma, distinguished ministerial fellow at Brookings’ Africa Growth Initiative. As a former minister of finance in Uganda, he fleshed out the macro analysis of the IMF.

Dr Suruma indicated that in the morning of the crisis, their initial reaction was to understand the precise meaning of the crises. While some imagined that the crisis would lead to a realignment of the world economic order, in view of the emerging power of China, Brazil, India to name but these, others viewed it as merely an indication of the impact of the financial crises in the West and its loose credit practices.
Of prime concern then was how the country’s banking sector was going to shore up the effects. The fear was that some capital funds would be transferred to help troubled countries weather the storm and this would affect the LICs.

Dr Suruma affirmed the general tenor of the IMF’s paper namely that the pursuit of good macroeconomic policies provided the requisite cushion effect for LICs to weather the crises.

According to this seasoned public official, the major implications of the crises were the depreciation of the Ugandan Shilling, decrease in Foreign Direct Investment and the depletion of foreign remittances. On the exports, flowers market suffered greatly.

Regional trade especially within the East African trade bloc helped a lot especially compensating for the declining European markets.

With respect to Hugh’s recommendations, Dr Suruma noted that these were no novelties. Uganda like many other countries has been struggling to increase its revenue and had moved from 5% in the 80s to 14%.

Being part of the East African community, there is a yearly attempt at harmonization of the tax codes and there are enormous challenges involved. Lastly, attempts are afoot to extend financial services to the rural areas.
Dr Suruma noted that even though LICs did not suffer as much as they could have in terms of real per capita income, one real challenge still remains namely that the number of people still suffering from poverty has increased and probably as a result of the crisis. He noted that according to the African Development Bank there was an increase of 50 million people living below $1.25 per day in 2009 and an additional 30 million people in 2010 because of the crisis. The poverty puzzle thus remains a great challenge.

Ben Leo of the Center for Global Development then synthesized the previous discussions. First, he delineated a larger scope situating within a larger historical perspective the African LICs response and coping mechanism with the crisis. Historically, the first decade of the new millennium stood out tall relative to the other post independent decades. This very strong performance is verified in three cardinal indicators namely: The GDP per Capita growth was up by about 2% during the 2000s; inflation was at an all time low below 7% as well as fiscal deficits.

Three factors facilitated this economic buoyancy of the 2000s namely: government reforms that greatly enabled institutional capacity, benign macroeconomic environment with the commodities sector showing a steady upward trend in spite of their volatility and lastly, the resolution of conflicts. In the previous decades, over half of the LICs were embroiled in conflicts of some sorts but in the 2000s, none of these had active conflicts.

In the third part of his discourse, Ben Leo fleshed out why the impact of the crisis was less severe on LICs. Firstly, many of these nations moved towards more concessionary external funding.

Then HIPC and multilateral debt relief initiative helped in creating space for the countries to be able to respond adequately.

Thirdly, the relatively low integration of these countries in global financial markets in spite of the presence of many foreign banks in sub-Saharan African countries helped reduce the ripple and spillover effects of the global financial crises.

Lastly, the resilience of the aid budgets was also crucial.

Ben focused the last part of his discourse on questioning some aspects of the paper. He inquired to know why the low-buffer low-income countries did not expand fiscal spending in a counter cyclical way. Yet another intriguing phenomenon reported by the IMF’s paper was the fact that most of the countries that took countercyclical fiscal policies financed 50% of these domestically. He sought to know how much of this was Central Bank financing? Lastly, why is the IMF projecting that those LIC with lower buffers preceding the crisis are going to build those buffers up faster than the other countries? How are these countries going to achieve this and what practical policy lessons can be learnt across all the countries from this?

As always an intensive interaction followed these presentations with
a question and answer session.

Some Africans in a post event chat.

From L to R: Rumana, Moyo, Asmah, Salela, Tien

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