By Olley Maruma in Harare
If decisive proof was ever needed to show that until African leaders use regional and continental integration to use their natural resources for their own continent’s development, all their 53 countries, as sovereign as they might appear to be, will remain neo-colonies of their former colonisers.
In West Africa, the value of the currencies of almost all the Francophone countries, are underwritten by the French Treasury in Paris. In the Anglophone countries, the value of their currencies is propped up through the American dollar by balance of payments support from the IMF.
In southern Africa, except for Malawi, Mozambique and Zimbabwe, the currencies of the other countries are underwritten under SACU by the South African Treasury through its central bank. As a result, the currencies of the countries that are not part of SACU have become the most unstable since the introduction of Economic Structural Adjustment Programmes in the beginning of the 1990s.
Understanding the importance of a common currency, the European Union introduced the euro in 1999. When the currency first came on board, it was extremely weak against other major currencies such as the American dollar and the Japanese yen. Today it is stronger than both of them.
The question is what would have happened if African leaders had taken regional and continental integration seriously and introduced the afro at the same time as the euro? When it comes to economic and trade relations, why do African leaders from the Cape to Cairo behave as though America and Europe have chained them to an immovable rock the same way Jupiter confined Prometheus to his stagnant place forever?
After all, there is a hackneyed saying among economic pundits that when the American economy sneezes, the rest of the world catches a cold. When will African leaders realise the importance of having preventative medicine? Do African economies always have to breathe the same contaminated air as America? Why are African leasers afraid of creating their own world with its own economic comfort zone underwritten by their own continental currency? African leaders, where are you when your people need bold leadership? When will you stop holding onto to the coattails of your former oppressors? When did they start loving you so much?
When the global credit crisis hit the world in full in October this year, it triggered intense panic among investors throughout the world, throwing equity markets into a tailspin. The ensuing crisis forced unprecedented government and central bank intervention in most industrialised countries, something they had considered anathema in the last two decades. Their central banks tried to save their financial systems by boosting liquidity.
The underlying cause of all this economic turmoil was a massive and unsustainable build-up of toxic debt over the past decade or so, largely fuelled by complete irresponsibility in American financial markets, particularly in lending to the sub-prime mortgage market. Western corporations, financial markets and governments, it seems, had forgotten that real wealth is created by investing in productivity activity that produces goods and jobs, not just providing services, particularly financial services. Abundant liquidity and low interest rates were eagerly dished out, encouraging consumers to spend and borrow without restraint until their incomes could no longer meet their credit card repayments.
At the same time, the financial institutions lending them money were resorting to the creation of financial products which were propped up by selling this stinking heap of toxic debt. When the time came for the balance sheet to be squared up, the result was a massive crash of the world’s stock markets. Liquidity evaporated from the markets as inter-bank lending ground to a halt. Now it is no longer news: the economies of the US, the UK and Europe are shrinking and a global recession is well on its way.
A drop in asset prices in the US, the epicentre of the world financial crisis, will lead to lower asset prices in economies where cross linkages with the global economy are high. This will mean less spending, lower production and less investment in most sectors of the world’s economies, leading to weaker economic growth. In southern Africa, weak activity in key world markets will hit exporters in the commodities market particularly in the mining and manufacturing sectors.
Profitability will dwindle as
export volumes and prices come under pressure. As it is, European retailers are having to sell their products at give away prices just to get rid of what they already have in their stocks.
Through the contagion effect, the subdued performance of key export sectors in South Africa and neighbouring countries will also start to affect the performance of other sectors, such as tourism, construction and engineering.
In the SADC region, South Africa has the biggest economy. That economy relies on financial inflows from various international markets. As a result of the slowdown in the US economy, inflows from the US may diminish. A drop in financial inflows will worsen the country’s current account deficit, which will have a negative effect on the South African economy in general. At present, South Africa needs US$20 billion a year to finance its current account deficit.
So as things stand, China, through what has come to be known as the “decoupling” process, may have to become Africa’s knight in shining armour for a while. Decoupling is the process in which because of developments in big emerging economies, events in the US economy no longer have a big impact on the rest of the word. So, will decoupling by China act as a cushion for Africa’s economies against the financial crisis in the US and most of the developed world?
Despite the disparities in wealth between the north and the south, in the last two decades the growth in global trade flows has consistently outstripped global GDP growth rates. This means that global trade to GDP rates have also been rising rapidly. At present, the US economy is still the biggest importer in the world. Most Asian countries, including China, whose economy is export driven, derive much of their incomes from exports to the US. As the US recession causes a dip in China’s export income, it will reduce the country’s ability to import from resource rich African countries. As it is, in the last few weeks, commodity prices have declined due to reduced demand linked to the world financial crisis. In South Africa, in value terms, mining output led by platinum, constitutes the country’s biggest export earning sector. The price of platinum has fallen by more than 60 percent in the last year. Not surprisingly, China’s demand for raw materials has decreased.
On the positive side, prices of stock market futures on soft commodities such as sugar, soya beans, wheat, maize and coffee have also seen some losses despite the current world food crisis. For African countries that rely on export commodities to China, a reduction in export prices will affect their incomes. A reduction in the price of soft commodities on the other hand, will come as a welcome relief to African countries that rely on food imports.
What distinguishes China’s economy from others is that its GDP growth is substantially driven by domestic investment. This is a lesson that Africa could learn for its own growth. As a result, the Chinese economy will still grow, albeit at slower rates. Africa-Sino trade reached US$72 billion in the first eight months of 2008, a 62 percent increase on the previous year. So China has decoupled the world’s economy to some extent but not nearly enough to cushion African economies completely from the impending US recession.
Analysts are predicting a deep and potentially long lasting recession in the developed world. Indeed, the consensus among economic analysts is that the effects of the current crisis are worse in the EU than in the US. This situation is not encouraging for China-EU and Africa-EU trade prospects. The EU is an important export destination for China and Africa. And despite a rapid increase in Sino-Africa trade, the EU still dominates Africa’s trade and investments.
As the global slowdown continues, the world is likely to see widespread intervention in the developing countries as the next wave of the crisis engulfs them. While the financial crisis has received substantial attention, its effect on world trade has received very little. This is because the effects of such crises on trade take a little longer to be felt. But trade constitutes a significant part of the world economy.
What Africa needs to do is to become inward looking. America built itself into a self-sustaining global economy by being inward looking. In the last 30 years, China has built its economy into that of a superpower by being inward looking. Europe built its strong economic base by plundering the resources of its colonies. Now the tables are turned, or are they? Africa needs its own currency, to lend to its own indigenous corporates and financial institutions to produce and to process its raw materials into finished products, first for the consumption of its own people and then, and only then, for export. Africa must turn the way it does things upside down. Until then we will continue to be despised by the rest of the world for craving other people’s currencies, which we will never have enough of.
(southerntimesafrica)
George W. Bush died today according to a South African TV station. During one of its broadcasts, ETV News ran a moving banner across the screen announcing the death of the former US president.