Crises of over-production and under-consumption have been a regular feature of the history of capitalism. The crisis we are living through is another example of capitalism's uneven development. This time it is coupled with a global financial crisis propelled by banks, insurance companies and mortgage companies' over-exposure to the wonderfully named ‘toxic’ assets: pieces of paper which were assets as long as house prices were rising and borrowers were employed, but ‘toxic’ as soon as the speculators who had fuelled the growth of these assets suddenly realised they could be worthless if the housing market bubble burst and the long consumer credit-propelled boom threatened to come to an end. Recessions are normally short-lived as production is adjusted to lower demand until machines eventually need replacing and demand for capital goods gets the business cycle moving on an upward track, optimism about the future increases and the virtuous circle of growth leads to a boom again.
In recent years, economists and the governments they advised believed they had cured boom-and-bust by getting economic agents to make rational expectations about the future on the basis of the fullest information provided to them by governments and other public information providers. Thus, according to their assumptions, only an unpredictable event could disturb expectations. The unpredicted oil price hike and shock of the collapse of the US sub-prime mortgage market were the unpredictable events (shocks or surprises in economists' jargon), that shattered the rational expectations of economic agents, even though some of them had already seen a recession looming, resulting from unsustainable consumer borrowing. Now we are heading for a deep recession that might become a depression, the like of which has not been seen since the 1930s.
The big question here is how these events are going to affect the African economies. Economists are not always very accurate in their prediction, so this economist will only discuss the major factors involved and suggest possible outcomes based on what we know usually happens in a global economic downturn.
There are two distinct views emerging from statements and commentaries by economists in international organisations and institutes. The first is that the African economies are so marginalised in global terms that there will be little effect on African economic performance. The alternative view is that because Africa is so marginal to the world economy, small changes in, for example, capital and aid flows, remittances or commodity earnings, will have a significant effect on the economies of the continent, especially if, through adopting structural adjustment policies, they have become even more exposed to the global economy than before.
The logic of globalisation tells us that those countries which have increasingly integrated into the global economy, carried out liberalisation reforms in finance and trade, for example, will be most affected by the impending recession, especially when they have just suffered from the short-lived but significant oil shock. Although primary commodity prices rose along with the oil price, although not as sharply, these prices have fallen back to levels lower than they were two years ago. The exception has been gold, a commodity for which demand rises in a crisis. Gold prices have fallen, but not by very much and remain 25 per cent higher than they were two years ago.
On the other hand, with regard to the financial crisis itself, fortunately for African economies, in spite of increasing liberalisation, they do not have banking systems that have been involved in trading the new financial instruments that have been a major cause of the crisis in banking. South Africa's Finance Minister, Trevor Manuel, for example, has claimed that South African banks, arguably the most integrated with global finance houses, are well supervised and the banks themselves have stated that they are minimally exposed to the toxic assets of the US sub-prime markets, even though some banks have been exposed to global derivatives markets, with one institution losing US$1.4 billion because of the collapse of Bear Sterns.
With regard to the rest of Africa, the effects are not likely to be uniform. There are several countries for which the world financial crisis is not exactly the top item on the agenda. Zimbabwe and the Democratic Republic of the Congo, for example, have long-standing crises, as do Sudan and Ethiopia. It is also important to remember that we have just been through a period of sharp increases in food prices worldwide. This has adversely affected those African economies that are, as a result of previous failures to generate agricultural food output growth, net food importers and increased levels of poverty in them.
As a result of the high food prices and the high oil prices, African economies will already have suffered a deterioration in their payments balances, ameliorated a little by the increase in some of their primary commodity export prices. However, it is one of the characteristics of commodity markets that spot prices are less important than long-term contract prices, so that the commodity price increases, because of their brevity, would not have made much of an impact on export earnings.
Many African economies are heavily dependent on food aid, import support and government budget support. This is likely to increase as primary product export earnings growth slows down or becomes negative. Foreign investment is also likely to decline following a boom in the last few years. According to a recent issue of the IMF Survey, some countries (Ghana, Kenya, Tanzania, Uganda and Zambia among the more prominent) had experienced an increase in private capital flows as a consequence of improved economic performance, resulting in lower risk ratings and higher yields to private equity investment. However, 90 per cent of those US$50 billion of these private equity inflows into Africa in 2007 went to South Africa. According to the same source, almost two-thirds of direct foreign investment goes to five countries, and nearly half of that goes to Nigeria. Now such foreign inflows are likely to slow down, and at the same time investors short of cash in developed countries are likely to repatriate profits, thus affecting the payments balance and leading to greater dependence on food aid and import support. However, the effects are likely to be concentrated in those more open economies.
African economies are increasingly dependent on remittances from African nationals working in developed countries. Although remittances are, with some exceptions, a relatively small proportion of GDP (around 3 per cent), they have become almost as important as aid and foreign investment as a source of transfers from developed countries to sub-Saharan Africa. Some estimates put remittance flows to SSA as high as US$24 billion in 2007 (Nigeria receiving almost half of this sum), compared with foreign aid flows of around US$40 billion and foreign investment of US$53 billion. The World Bank estimates that remittances will fall in 2009 by between 1.3 and 6.8 per cent and may not start to increase again beyond 2010. One reason for this aside from the recession is the decline in the value of sterling against the US dollar. For example, a Leeds University study estimated that approximately £700 million was remitted from the UK to Zimbabwe in 2007, equivalent to US$1.4 billion then, but only equal to US$1 billion in 2008. So, for the level of remittances to stay at their 2007 level in 2008, Zimbabweans in the UK would have had to increase remittances by 40 per cent in one year, highly unlikely given the crisis in the last third of the year. This reduction in flow will occur in other sub-Saharan African countries that largely receive sterling remittances. Even the euro has seen a decline against the US dollar over the last year of around 14 per cent, so remittances from these sources have to increase sharply to offset the currency decline – again highly unlikely. With increasing unemployment in the US and Europe, less money will be sent home, again affecting the balance of payments and resulting in increasing food aid and import support.
Therefore, we can expect the high growth rates that many countries in sub-Saharan Africa have enjoyed over much of the past decade, to decline sharply. We can expect countries in difficulties to return to the IMF and World Bank for payments support and development assistance. What will be their response? For the last 30 years these organisations have insisted that governments seeking their help should pursue market led policies. They have mirrored the change to market-led policies that characterised developed country government policies with the emphasis on lower taxes, privatisation and tougher social policy, all of these entailing ‘rolling back the state’. Suddenly in the wake of the current crisis, these policies have been put into reverse. The US and UK which pushed for privatisation now rescue private enterprise by bail outs which effectively take them into public ownership. As I write this, the US government is deciding whether or not to bail out the major US car companies. It used to be said that ‘What is good for General Motors is good for America’! Now there is a vote in the US Senate that suggests that politicians of the right are prepared to see General Motors and all their suppliers go to the wall and certainly precipitate a depression. But we also see the US Government, even under Bush, trying to bail out the companies to prevent a depression. It is clear the state has come back to restore order in the system, but not of course to change the system.
So what will the IMF and World Bank do to bail out African economies that suffer from the effects of recession and possibly depression on their economies? Will policies change to allow these countries to chart a more independent and initially protectionist course? Will sub-Saharan Africa be able to disengage from the world economy in a similar way to Latin America during the depression of the 1930s?
At present it looks as though the IMF and World Bank are calling on African economies not to abandon the ‘reform’ policies. This may be partly a combination of inability to supply sufficient resources through African states to alleviate the effects of the recession and an enduring belief that globalising market solutions was the right policy to follow, in spite of it leaving African economies as vulnerable if not more vulnerable than before. These institutions' policies may change as their member governments realise the need for continued government intervention and some direction of investment in their own countries. So the answer to the second of the above questions is possibly ‘yes’, but to a limited degree. The answer to the third question is probably ‘no’ because there is little evidence that African states have the political will, not to mention the institutional framework, to pursue an independent path. This is obviously the case in the country best placed to do so, South Africa. Therefore, there is no reason to believe that unless that country takes the lead in forging a more independent and African-interdependent strategy of disengagement from the global economy, other countries will seize that initiative.
The last great depression of the 1930s ended in a world war. Just as there were ways of preventing the last depression without resorting to war, there are ways of preventing a new great depression taking root. The developed capitalist countries have combined to a greater of lesser degree to try to ward off a depression by rescuing the financial institutions and trying to maintain consumer spending. There is talk of public infrastructure projects to maintain employment and inject a consumption multiplier into the system to keep consumer spending up. There is even talk of a renewed industrial strategy with directed investment by the publicly owned banks. Much hope rests on China to boost demand for capital goods for their investment spending. These policies may help to avoid depression, but they will not avoid recession. Banks are holding cash until they see signs of an upturn, but there will not be signs of an upturn unless the banks release cash. This is Keynes's well known ‘liquidity trap’ with a vengeance.
Unless governments act collectively to inject investment funds into their economies, it will be a long time before the upturn comes. Spending on environmentally-friendly infrastructure in developed and developing countries could be the substitute to war that will regenerate sustainable economies, not just in developed capitalist countries but also in Africa, as well as in countries which have actually been subjected to wars. One thing is for certain. This is not the beginning of the end of capitalism but possibly a new stage in its development. How far that new stage might produce the seeds of some collective action by states, capital and popular movements remains to be seen, but ought to be an important subject of investigation in the near future.