Excellencies, Ladies and Gentlemen,
I would like to thank the Chairman of the African Union Commission, the esteemed Mr. Jean Ping, and the Executive Secretary of the Economic Commission for Africa, my dear friend and colleague, Mr. Abdoulie Janneh, for inviting me to participate in this Joint Annual Meeting. I particularly appreciate the opportunity to contribute to this High-level Panel on the Global Economic and Financial Crisis and Long-term Implications for Africa’s Development. I very much regret that I cannot be with you in person in Cairo.
Economics – and I want to make clear that I am not an economist by training – is something of a beleaguered profession these days. Very few economists anticipated the severity of the economic crisis that the world confronts today. Indeed, until a year or so ago, most thought we had entered a new era of uninterrupted growth and stability, with inflationary pressures the only real worry for policy makers. Not surprisingly, in light of what has transpired over the last year, there is now some soul-searching going on in the profession.
Yet, for years, in the United Nations’ World Economic Situation and Prospects (WESP) – produced by my department in collaboration with UNCTAD, ECA and the other UN Regional Commissions – the United Nations warned of the risks posed by the increasingly unsustainable imbalances in the global economy. Those risks have now become realities, with devastating consequences for countries and communities across the world, most of whom have been completely innocent in causing the crisis.
I am not here to score points against conventional economic wisdom. So much, including millions of lives and billions of livelihoods, is at stake.
Before the crisis hit, much of Africa had enjoyed a half decade of very strong growth, at an average rate of around 5.5 per cent from 2002 to 2008, building on better macroeconomic management and fewer conflicts in the region – and buoyed by high commodity prices and a robust world economy.
Through no fault of the region or its policy makers, this period has come to a sudden halt. Per capita incomes will decline this year, setting back efforts to reduce poverty and hunger, and to meet the other MDGs. Indeed, only the Democratic Republic of Congo is expected to register per capita growth of at least 3 per cent, considered the minimum growth rate for achieving significant poverty reduction in Africa.
According to the latest UN forecast, world gross product will decline by 2.6 per cent in 2009, a sharp fall from the positive 2.1 per cent growth estimated for 2008. If the major economies’ fiscal stimulus packages gain traction, the global credit crunch subsides and commodity prices stabilize, 2010 may see a mild recovery. Yet, a visible recovery next year remains a highly uncertain prospect. And the risks of a prolonged recession are still high. Moreover, whenever recovery does happen, it is likely to be weak and easily stalled.
To understand the full implications of the crisis for Africa’s development, we need to look at the channels of transmission.
While private capital inflows, including FDI, to some countries in Africa have dropped sharply, and external financing costs have surged, this is not a principal channel of contagion. The decline in remittances as the job market deteriorates in host countries is also bad news for a number of low- and middle-income countries, where these amount, in some cases, to more than 20 per cent of GDP. For instance, in Kenya, East Africa’s biggest economy, remittances declined by about 15 per cent in January to April 2009 from the same period last year.
A more significant channel is the dramatic collapse in global trade, with the rise of protectionism – in both trade and investment – and the contraction in trade finance as further constraining factors. Meanwhile, imports of developing countries are falling, putting additional pressure on low-income countries that export primary commodities, especially those in Africa.
Aid flows may be another significant transmission channel. Many donors target annual aid flows as a share of GNI, so the value of aid will fall with national incomes, even if the share does not. Although donors have reiterated their commitments, they also face pressure to shift fiscal priorities to finance domestic stimulus and bail-out packages instead.
Given the reliance of many African countries on tariffs and aid flows for government revenues, this meeting’s focus on enhancing the effectiveness of fiscal policy for domestic resource mobilization is very timely. Did the boom conditions between 2003 and 2007 establish a better balance between external and domestic resource mobilisation, or did it perpetuate an unhealthy and fragile imbalance?
With the expected decline in per capita income, there will also be higher unemployment, and many people in the region will fall back into the informal economy. At least 12 to 16 million more Africans will fall into extreme poverty.
Many countries in Africa are still suffering from the speculative rise in food prices during the first half of 2008. The economic crisis may add to food insecurity by reducing food production. Many African countries have become net food importers and a number now have foreign exchange reserves worth less than three months of imports. This is a worrying state of affairs.
The global financial crisis is also likely to cause debt crises in many vulnerable countries, especially in Africa. At a time when one of the world’s largest corporations – bigger on various measures than many African countries – is writing down and restructuring its debt, a strong case can – and should – be made to allow for a temporary moratorium on debt payments by poor countries, so they can free up resources for critical imports.
The United Nations system is committed to monitoring and analyzing the impact of the global economic and financial crisis, especially on the most vulnerable, as well as the effectiveness of the actions taken in response. We are also working hard to help shape and mobilize the policy response.
From the perspective of the United Nations, let me highlight the need for policy measures in four areas.
First, more fiscal stimulus and closer international coordination of the stimulus packages are needed. It is essential to avoid protectionist measures and unfair trading practices in those packages and to provide more long-term development lending and ODA.
Second, donors should accelerate delivery on their commitments to ensure that the poorest countries also have sufficient space for countercyclical policy measures which can promote more equitable and stable growth. A stronger fiscal basis, together with more reliable aid flows, should facilitate stepping up much needed long-term investments in agriculture and infrastructure, as well as education, health, nutrition, water supply and sanitation. Such investments are the only sure way to build resilience against future shocks.
Third, African governments should take this opportunity to reinforce regional collaboration and intra-regional trade, including by strengthening regional agro-industrial value chains, as recommended in ECA’s most recent Economic Report. The ‘green revolution’ of the 1970s and 1980s focused on just a few food crops – rice, wheat and maize. What Africa needs today is an African ‘green revolution’ which focuses on the major African food staples and strengthens the entire production chain. In addition, capacity-building programmes for inter-regional electricity access and renewable energy supply in Africa should be reinforced. All this will help create more sustained growth and strengthen resilience against external shocks, through economic diversification.
Fourth, deep reform of the international financial system is needed. This must include systemic reforms of financial regulation, tax cooperation, international debt restructuring mechanisms and a new global reserve system, along with greater coherence between the multilateral trading system and the international financial architecture.
Achieving this will require, in turn, more legitimate and representative institutions of global governance, which are essential for tackling the many other common challenges we face, including climate change.
I am keen to discuss these ideas with you. And I am confident that this meeting will help shape the way forward for Africa’s economic recovery. I know it will also make an important input to the Conference on the World Financial and Economic Crisis and its Impact on Development, to be convened by the United Nations in New York, on 24 to 26 June.
African ministers responsible for the health of their economies have a strong vested interest and responsibility in the efforts now underway to give stronger voice on economic and financial matters to the vast majority of countries, through the United Nations. With your active participation and support, we can achieve important breakthroughs on crucial processes, such as expanding your fiscal resources through international tax cooperation and improving the prospects for debt sustainability, in the face of these difficult times.