From Africa Recovery, Vol.12#3 (December 1998), Watch page

WORLD BANK
Global crisis slows Africa's economic growth

Sub-Saharan Africa's overall economic growth rate in 1998 will likely fall to between 2.1 per cent and 2.4 per cent, down from 3.5 per cent the year before, the World Bank reported in early December. Given the region's rapidly growing population, this means that its per capita gross domestic product (GDP) will turn a negative 0.5 per cent, after several years of positive growth. The Bank estimate is significantly below the 3.7 per cent figure released in early October by the International Monetary Fund, which uses different methods for projecting economic growth.

According to the World Bank's Global Economic Prospects and the Developing Countries, 1998/99, a variety of factors were involved in Africa's slowdown, including a resurgence of armed conflict and the effects of the El Niño weather phenomenon. But the dominant factor was the impact of the global economic crisis that began last year in East Asia, which buffeted Africa's vulnerable economies "through all three of the main transmission channels -- private capital flows, terms of trade, and export market growth," says the report. However, if the Bank's assumptions about trends in the world economy are borne out, then 1999 should bring a resumption of positive growth, at around 3.2 per cent, rising further to 3.8 per cent in 2000 (see graph).

Much of the report is devoted to frankly analyzing the causes of the East Asian crisis and discussing how to better respond to such calamities in the future, including through the adoption of "more flexible macroeconomic policies," a point emphasized in the foreword by Mr. Joseph Stiglitz, the World Bank's Senior Vice-President for Development Economics and Chief Economist. According to the report, the origins of the crisis lay in both "institutional weaknesses in managing domestic financial liberalization and international capital market imperfections." It suggests that the initial international interventions -- which emphasized high interest rates and spending cuts in exchange for financial bail-outs -- actually may have worsened the downturn.

In future, Mr. Stiglitz says, international financial institutions should consider proposing tighter financial controls by governments and, if needed, "interventions designed to stabilize capital flows." In some cases, he adds, it may be necessary to "reverse the excesses of financial sector deregulation." The severe social consequences of the economic downturn -- lost jobs, interrupted education, poorer health and increased poverty -- also point to the importance of social safety nets, the report says. Although this discussion focuses specifically on East Asia, the calls for greater flexibility may influence the nature and pace of the policy reforms the World Bank recommends for other regions as well.

Africa, the report's figures indicate, was less severely affected by this economic turbulence than were most other regions, which are better integrated into global markets and thereby felt the impact of the crisis more directly. As a result, sub-Saharan Africa's growth rate in 1998 will still be the second highest of all major regions in the world, only slightly behind the 2.5 per cent expected for Latin America and the Caribbean.

While the slowdown in Africa's growth is a setback, the Bank adds, the "prospects are not as bleak as the broad regional averages might suggest." Within Africa, South Africa and the largest oil exporters were hit hardest. If they are excluded, overall GDP growth for the rest of sub-Saharan Africa would be 3.8 per cent, the report estimates. The countries of francophone West Africa, which use the CFA franc, maintained close to 5 per cent growth in 1998. "Despite the challenges of adjusting to a less favourable external environment over the next two years or so," notes the report, "the longer term outlook for Africa offers the promise of significant improvement."

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