Growth in Africa and the impact of the global crisis

Romesh Vaitilingam: Welcome to the International Growth Centre. My name is Romesh Vaitilingam, and today I’m talking to Professor William Lyakurwa, who is Executive Director of the African Economic Research Consortium based in Nairobi. William is over in London for a meeting of the partners of the International Growth Centre, and a big meeting to talk about the impact of the global economic crisis on the countries of Africa and Asia.

Romesh: William, let’s talk a little bit about the International Growth Centre and its potential links with the AERC and potential for making a difference to the African economies. As you know, the theme of it is very much along similar lines of AERC, of taking frontier economic research to use to develop ideas for growth in developing countries. What do you think the ICG can bring to the work of AERC and the work of policy-making in African countries?

Prof. Lyakurwa: Maybe I’ll take this in perspective. The AERC, among its main core activities, particularly in bringing together senior African policy-makers and their counterparts from elsewhere to address issues of policy concern in Africa. One of the key issues has been explaining Africa’s growth performance. I’m not sure whether you’re aware, there has been a major study on the political economy of growth in Africa conducted under the auspices of the AERC, which led to the publication of a two-volume series by the Cambridge University Press. That is the basis.

So, growth, in the context of AERC work, is the centre. Without growth, we cannot see African economies prosper and get the citizenry out of poverty. The work of the Growth Centre is complementary to the work that AERC does in the sense of addressing the same set of concerns: ‘How do we enhance the growth prospects of African countries with a view to addressing the critical issues of poverty in Africa, and bring the African citizenry to participate more effectively in the international arena?’

I see the IGC work and the work of AERC complementary in that sense. I also see the work of the IGC bringing on board expertise, which probably was not made available in the context of AERC, for the AERC researchers to learn from. They have the experience of the South Asia, Southeast Asia and all that, which is not immediately available to the AERC. To the extent that the IGC will be able to nurture that relationship between now the AERC and these economies, there’s a lot of knowledge that exists out there which may not be immediately available to the AERC research network. If it is, there could be synergies to harness in terms of what African countries can learn from their experience of this in terms of one output of research from these countries and how that output of research has been put into good use in terms of changing the policy arena for the countries in question.

Romesh: Let’s close by talking about the impact of the global economic crisis on Africa’s growth performance. You said you prepared these two big volumes looking back over the last few years [the two-volume study on the political economy of growth in Africa, conducted under the auspices of the AERC and published by Cambridge University Press]. But, of course, the crisis has now hit us.

Prof. Lyakurwa: Yes.

Romesh: What’s your perspective on how this is affecting the African economies and how policy-makers are responding?

Prof. Lyakurwa: Well, African countries are affected by the global financial crisis in two ways. The two are not separable, and they could be. One is a few African countries are more integrated into the global financial system than others in terms of their participation in the global financial system. I’m talking of countries like South Africa, Nigeria, Kenya, many of those in Sub-Saharan Africa, where in their extent of participation, in the stock exchange, for example   these are the countries that have more developed stock markets – of foreign participation in their countries, and also vice versa, of nationals participating in other stock exchanges is significantly larger.

There are countries where the stock market is nascent. It’s not so fully developed, so there is really very little foreign participation in those countries. In some cases, the capital controls are still in place, so it’s not attractive for foreigners to participate in the nascent stock market.

These countries have been affected to the extent that foreign participants in the stock market have withdrawn. There is, in some cases, significant withdrawal of capital from the stock markets in these countries. Definitely, that affects the growth prospects for the country. But, as I said, this is to a large extent limited by the extent of the country’s participation in the global financial system.

More importantly, African countries are integrated into the world economy through four main areas. One is the export base is agriculture, and agriculture commodity prices have been affected tremendously by the global financial crisis. That automatically affects the exporting of agricultural products. This is the backbone of the people. About 60 to 90 percent of certain countries’ population depends to a very large extent on agriculture for their livelihood. You can see what happens when commodity prices go down. They’re affected directly. So, there is that direct effect.

The second direct effect is tourism. A large number of African countries depend to a very large extent on earnings from tourism. In some countries, earnings from tourism account for the highest proportion of total foreign exchange earnings. So, in the onset of the global financial crisis, we immediately saw tourist traffic going down; hence, earnings went down. In that case, therefore, we can also see that foreign exchange earnings out of tourism for those countries went down significantly.

The third is direct foreign investment in countries which had opened up. The macro stability was beginning to show good signs as a significant inflow of direct foreign investment. With the onset of the financial crisis, in some cases, even projects that were midstream had to be stopped and their foreign investment withdrawn. The impact is significant because we have projects that in some cases had already started employing a large number of people into the system. When they stopped them, the effect there is significant.

And lastly, is remittances. We have a large number of African exporters who are operating all over the world. They have been remitting resources into their countries, and, in some cases, quite significantly. With the onset of the global financial crisis, of course their pockets are affected. So, there’s much less to remit, and remittances have gone down.

Those four areas have had significant effect on African economies. As I would say, Africa was the last hit by the financial crisis, but might be the last to get out of it.

Romesh: How about, finally, the policy response? How much are the policy-makers in central banks and finance ministries able to deal with these things? How much is it a global issue that Africa needs help?

Prof. Lyakurwa: To a very large extent, the impact of the global financial crisis is global, wherein African governments may not have much leeway out of it. But let me put it this way. To the extent that the sectors that are affected the most also relate very strongly to the wellbeing of the African citizenry, African policy-makers have to address those, what I mean is not a rescue package. You can’t have an African government have a rescue package to affect that, but at least put in place measures to cushion the effects on the citizenry. Agriculture being so central, if African governments just sit and watch when they see agriculture go down, it’s a very significant effect. The downturn, given the current global climate changes, the downturn for agriculture could be quite a long term.

I think, in some cases, some countries are beginning to see that, and they are putting in place measures that address specific sectors of the economy, agriculture being one, tourism, to support in terms of the access to credit even at affordable prices in the interim, so as to get these sectors out of the doldrums. As they pick up, then of course they should be able to compete like any other sector and possibly partake their position in the international financial system, as well as the global environment.

Romesh: William Lyakurwa, many thanks.

Prof. Lyakurwa: Thank you very much, Romesh.