5 June 2008

Africa: Lessons From Continent's Economic Downturn


Within 12 months, celebrations of Africa's phenomenal economic growth have turned into gloomy predictions, punctuated by warnings about the possibility of recession in several African states.

For four years until the end of 2007, Africa witnessed high economic growth, with the continent registering 5.7 per cent GDP growth in 2007, but the political and economic elites consumed much of this wealth instead of investing it in areas that matter most.

Kenya was among the best African performers, with economic growth of 6.1 per cent in 2006, followed by 6.6 per cent in 2007. The Kenyan political leadership cited this as a demonstration of their superior economic credentials, but little of this was invested in the country's critical infrastructure. Now, the tide has turned not just for Kenya, but for much of Africa.

A recent report, African Economic Outlook 2008, published jointly by the African Development Bank, the UN Economic Commission for Africa and the Organisation for Economic Cooperation and Development (OECD), predicts that Kenya's GDP will grow by four per cent this year.

Although this report blames much of the slow-down on the political crisis that greeted the disputed presidential elections, it was exacerbated by global factors beyond Kenya's control.

The prediction by the African Economic Outlook 2008 was predicated on the assumption that Kenya would tighten its monetary policy, thereby limiting inflation to " five per cent by the end of June, 2008." The report also assumed that the price of crude oil would not exceed US$90 per barrel, but since early last month it has been hovering around US$130 a barrel.

Moreover, the latest Kenya National Bureau of Statistics figures showing that inflation had climbed to 31.5 per cent in May, following an equally high rate of 26.6 per cent in April, suggests that Kenya's projected economic growth in 2008 has to be revised downwards. African Economic Outlook 2008 suggests that economic growth in Africa is likely to accelerate for net oil importers.

Overall, oil and gas producers, such as Angola, Equatorial Guinea and Libya, have benefited from both higher prices and the increased production of these commodities. For oil importing countries such as Kenya and its East African neighbours, which have not heavily invested in alternative sources of energy, economic growth will weaken considerably.

The high oil bill has increased transport and manufacturing costs, fuelled inflation, disrupted economic plans in various African states and exacerbated food prices. As the African Economic Outlook 2008 further observes, recent increases in the prices of imported food have affected both oil exporters and importers.

Interestingly, the report suggests that prior to 2008, African oil exporting states experienced higher rates of inflation than oil importers. For example, it claims that oil importers limited inflation to an average of 5.5 per cent in 2005 and 6.7 per cent in 2007. However, for oil exporters, inflation averaged 5.4 percent in 2005, rising to 7.5 in 2007.

We need to learn several lessons from this dramatic change of economic fortunes. The first is that we should not expect high levels of economic growth to continue indefinitely. Even countries that export oil, gas and metals, such as gold, zinc and copper, have to recognise that these commodities go through booms and bursts.

The second lesson is that in periods of economic growth, we need to use the windfalls to invest infrastructure and capital equipment. It is such investments that eventually mitigate the pain when the boom is over.

Prof Makinda is the Chair of Security, Terrorism and Counter-Terrorism Studies, Murdoch University, Australia.

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