External shocks can have devastating consequences for development, as the recent earthquake in Haiti, the Asian Tsunami of 2004 and other natural disasters in recent times have made clear. But man-made disasters also occur with regular frequency, the most recent financial crisis which broke out in the USA in September 2008 a case in point. There have been more than one hundred financial crises world-wide since the 1970s. Some even think that the stage is being set for another financial bubble to burst in the near future.
There may be little, at least over the short-term, that developing countries, particularly the poorest such as those in Africa can do to reduce their vulnerability to such external shocks. Climate change and a more closely integrated global economy may result in African countries becoming more, not less, vulnerable to external shocks.
But this does not necessarily mean that African economies are more at risk of shocks. Countries and their populations are not passive recipients of what humans and nature may throw at them. Being vulnerable does not consign a country inevitably to the hardships of hazards turned into disasters. The risks from being more vulnerable to external shocks can be reduced — through fostering resilience.
Indeed, the recent global financial crisis have been remarkably, and perhaps unexpectedly well-weathered by African economies in general. Most African countries are now well on their way to recovery, the financial crisis now seemingly a thing of the past. In this article I reflect on the apparent better resilience of African economies, appreciating that it may mark a potentially important historical milestone in Africa's recovery from the 'lost' decades of the 1980s and early 1990s. I will illustrate the nature of vulnerability to external shocks and of resilience drawing on the conceptual frameworks set out in the recent UNU-WIDER book Vulnerability in Developing Countries', which was launched in London last month, as well UNU-WIDER's contribution to the 2009 European Report on Development.
Soon after the crisis erupted in USA's financial markets in September 2008, justifiable concern was expressed that poorer countries, such as those in sub-Saharan Africa (SSA) could eventually be hardest hit. The IMF for instance, kept revising SSA's expected growth rate for 2009 downwards, from 5 per cent in October 2008, to 3.5 per cent in January 2009, to 1.7 per cent in April 2009 and 1.3 per cent by October.
Why was SSA seen as vulnerable? Four reasons, or threats, in particular stand out. First, Africa's good growth in recent years has been to a large extent driven by exports, particularly of commodities demanded by fast growing emerging economies like China and India. Trade was one of the first casualties of the financial crisis: already by the end of 2008 global trade started to contract, and indeed the eventual contraction in global trade was of historic proportions. Second, foreign banks play an important role in SSA, where domestic financial sectors are often seen as underdeveloped. At the beginning of the crisis there was uncertainty to what extent banks in Africa were exposed to (toxic) sub-prime mortgage-backed securities, and to what extent their banking systems would be able to withstand contagion effects. Third, financial flows to SSA have always been volatile in times of uncertainty, with portfolio inflows, FDI and foreign aid to Africa suffering in particular during a global downturn. Reductions in such flows were expected to exert negative pressure on African countries' exchange rates, balance of payments and government finances. And fourth, African countries were seen as vulnerable due to the potentially long-term adverse impacts the crisis could have in the absence of broad social security and countercyclical fiscal programmes. In such circumstances, adverse coping by households, such as children dropping out of school, reductions in health care or engaging in more risky behaviour by households' members could leave permanent development scars.
The 2008-09 global economic crisis was not the first one that SSA was exposed to. During previous crises the four threats did indeed apply and did cause much harm. According to the IMF there were three years prior to 2009, when 10 or more of the 21 advanced economies were simultaneously in recession, namely 1975, 1980, and 1992. These globally synchronised recessions are indicated in Figure 1. As can be seen from this figure these were also years during which SSA growth declined with the exception of the 1980 recession (African growth declined only in 1983). The 1992 recession in particular had a very detrimental impact – it was also accompanied by financial crises in advanced economies — the European Exchange Rate Mechanism (ERM) collapsed and the Nordic countries suffered a severe banking crisis. And during the 1998 crisis it took SSA quite long, compared to the world average, to recover.
Concerns about the impact of the global economic crisis on SSA, and expectations of growth collapsing are thus justified. However by October 2009, only one year after the outbreak of a crisis described as the worst global crisis since the Great Depression, the IMF was reporting signs of global recovery, and described SSA's economies as 'regaining momentum' (IMF 2009). The IMF more recently reported SSA's growth in 2009 to have been better than predicted at 1.6 per cent real GDP growth, and forecasted a strong recovery in 2010 of 4.3 per cent growth in real GDP (IMF 2010). The sense of recovery, and having weathered a significant external shock, is also reflected, not only in the recovery of average growth rates, but by many individual country success stories both in terms of how the crisis was managed and how it was felt in these economies.
What explains this better than expected performance? I wish to argue that it is explained by SSA's being actually less exposed to some of the threats discussed in the previous section, i.e. by being less vulnerable, but also that it is due to improved resilience of SSA economies.
Concerning SSA vulnerability, it can be noted that while Africa's exports did initially suffer a drop due to declining commodity prices and export demand, these trends started to reverse by the end of 2009, buoyed by recovery in China and India (where large stimulus packages were adopted). Second, African banks turned out not to have had as much exposure to toxic assets, and to have been relatively well capitalised and less leveraged (i.e. more resilient!). African countries thus avoided the large scale banking failures seen in the US and some parts of Europe. The reduced vulnerability of African countries to financial shocks emanating in the West may indeed support the recognition, that there is a growing 'decoupling' of growth rates between African and high-income countries.
But less exposure explains only part of the outcome. It also has to be recognized that SSA countries have been more resilient this time around than during previous crises. The resilience has in part been due to improved macro-economic management and in part to better governance overall. The improved macro-economic position of SSA before the onset of the crisis in 2008 is depicted in Figure 2.
(Note: Average subsequent growth for 2007 is the average of IMF's forecasts for 2009 and 2010 growth. Source of data: International Monetary Fund and World Bank Development Indicators Online)
Figure 2 depicts macro-economic balances (current account, fiscal balance and forex reserves) in SSA before the 2008 crisis, and compares these balances with those before the 1992 and 1983 globally synchronised recessions. It also contains average subsequent economic growth. What is clear is that SSA's macro-economic position was much stronger in 2007 than at any time in the past. Indeed, chronic fiscal deficits and negative current account balances which left SSA particularly exposed in the past did not, in 2007, generally pose problems (there was of course variation in individual country situations).
Improvement in governance in SSA, and its role in managing the impacts of the crisis are discussed by Fosu and Naudé in a 2009 UNU-WIDER research paper and UNU policy brief. Here, we note that various measures of governance show improvement in recent years. For instance measures of executive constraint, which deteriorated in the 1970s, have improved substantially. And we note that African countries appear to have made progress with multiparty democracy. The measure of political contestability has risen from an average of about 3.0 in the mid-1970s to equal, by 2007, the world's mean of 6.0.
Improvements in macro-economic management and governance, key ingredients in building better resilience, have also been accompanied in SSA with important declines in overall poverty. In a recent working paper entitled 'African Poverty is Falling...Much Faster than You Think!', Pinkovskiy and Sala-i-Martin (2009) presents empirical evidence that poverty in SSA has been falling so significantly since 1995 to the extent that 'If present trends continue, the poverty Millennium Development Goal of halving the proportion of people with incomes less than one dollar a day will be achieved on time'.
Africa's better resilience, the fact that it weathered the global financial crisis of 2008-09 remarkably well, and falling poverty across the continent, do not justify relaxed vigilance. Africa's development challenges remain formidable, we still need to gauge the eventual impact of the crisis on household and firm level, as Fosu and Naudé (2009) warn, many pitfalls remain to be avoided as the responses of countries to the crisis unwind, and cereal prices still remain above pre-crisis levels. But there is reason for optimism — after all, African countries have succeeded against the odds often in the past.
In conclusion, global population growth, its concentration in urban areas, climate change and the integration of production, consumption and distribution systems through the processes of globalization may all have contributed to a more hazard-prone world. These trends cannot all be rolled back or reversed, at least not quickly. And the world would be a much worse place without the net benefits of globalization and urbanization. But there is no need to be alarmist. Progress in global development requires that countries and households improve their ability to withstand frequent and varied hazards. This can be done, as borne out by the experience of SSA during the past global economic crisis. The continuing challenge facing the international development community is to enhance countries and households' measures to reduce risk, to mitigate the impacts of hazard, and to strengthen the ability of the affected to cope.
About the author
Wim Naudé is senior research fellow at UNU-WIDER. He is co-editor of the book 'Vulnerability in Developing Countries', and contributed to the 2009 European Report on Development.
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WIDER Angle newsletter, March 2010