Falling Commodities Prices and Aid Hurt Africa

For the last decade or so, an economic uplifting in Africa has brought millions out of poverty. Democracy spread farther and faster than ever before. In December, the World Bank reported that sub-Saharan Africa's 2008 economic growth was 5.4 percent, equaling Europe and higher than Latin America (Africa finally ceded to Latin America its place as the world's slowest-growing region). Even now, many Africans imagine they will escape the global credit crisis relatively unscathed.

They're in for a rude shock. Recent IMF forecasts predict growth of 3 percent this year, compared to 4 percent in low-income countries. There are three main factors at work. Commodities are Africa's bread and butter and commodity prices have been dropping fast thanks to falling demand due to the global downturn. A second factor is that many African countries are largely aid-dependent, and big Western donors with slumping economies are less likely to want to give. Similarly, declines in foreign direct investment and remittances will hammer African economies. Finally, the specter of economic collapse, while scary for well-to-do countries, can wreak political havoc in unstable ones. As revenues decline, companies and governments are likely to have to scale back development plans, which could infuriate populations who had only recently gained some hope that living standards in Africa could rise. "Most Africans believed they'd be untouched," says Greg Mills of the Brenthurst Foundation, an independent think tank in South Africa. "But they underestimated the scale and the intensity of this crisis."

The first thing to implode has been commodity prices. Excluding gold and cocoa, raw-material prices have dropped across the board. Following a historic five-year boom during which energy prices soared by 320 percent, metals and minerals prices rose by nearly 300 percent and food prices were up by 138 percent, commodities plunged in late 2008. In December the World Bank predicted that real food prices would fall by 26 percent between 2008 and 2010, oil prices by 25 percent and metals prices by 32 percent.

For African countries reliant on oil or metals and minerals, this spelled economic disaster. Botswana's economy is almost wholly dependent on diamonds. De Beers, which has largely financed Botswana's growth, last month shut down its mining operations for several weeks and said it would reduce production by about 50 percent through April. Several large coal-mining projects in Mozambique recently shut down as the bottom fell out of fuel production. In South Africa, annual gold production plummeted 13.6 percent to levels last seen in 1922. A plummeting copper price—down by about 60 percent—has led to mine closures and thousands of job losses in the Copperbelt region of Zambia, where copper accounts for 80 percent of foreign earnings and has been the major driver of economic growth. Few African governments were competent enough to use the good times to spur development. Now, prospects will dim further.

Next to be affected will be the aid-dependent countries like Rwanda and Tanzania (Mozambique, which, aside from being commodity-dependent, gets 20 percent of its GDP from aid, will suffer a double blow). Barack Obama has already retreated from his election-era promise to double the U.S. aid budget in the face of the crisis. Göran Holmqvist, an economist at the Nordic Africa Institute in Uppsala, Sweden, says it's a safe bet that rich Western nations won't honor commitments to double the $40 billion international aid flow to Africa by 2010.

Investment is also shrinking. The Institute of International Finance estimates that investment flows to developing countries, many of which are in Africa, could drop by as much as 80 percent in the next year. Last week the IMF said that if the global crisis deepened, the number of most vulnerable economies could nearly double to just under 40—and the majority of them will be in sub-Saharan Africa, which is expected to grow by just over 3 percent this year, compared with 4 percent for low-income countries overall.

The economic crisis will also heighten an ever-present risk in Africa: political instability. Even before the crisis hit, Kenya was descending into ethnic conflict. A year later, tourism revenues are down by 35 percent, and its prized agriculture industry of high-end coffees, teas and tropical flowers is suffering badly because scared farmers can't or won't return to their home plots for fear of being killed. Other parts of Africa are also at risk. Liberia and Sierra Leone both rely heavily on a demand for rubber that has been steadily dropping over the last several months. When oil prices were $140 a barrel, there were still low levels of violence in Nigeria. Now that they're at $40, the threat of instability goes up. And while the West looks for increased state intervention in times of crisis, in Africa the state is often the problem. The implosion of Zimbabwe's economy is the result of misguided policies; the last thing it needs is stronger guidance from a state led by Robert Mugabe.

All this is compounded by the fact that the continent's single biggest engine for growth, South Africa, is hurtling into a downward spiral. South Africa was the only nation on the continent that was really plugged into world financial markets, and it is now suffering from the fallout. South African businesses, heavily invested across the rest of the continent, help spur growth further abroad—the country generates nearly half of Africa's gross domestic product and it has been estimated that for every 1 percent increase in South Africa's per capita GDP growth sustained over five years, the rest of Africa experiences growth of about half that rate. Now, after more than a decade of economic boom, South African stands on the brink of recession. The economy contracted by 1.8 percent in the last quarter of 2008. Last month, new vehicle sales plunged by 36 percent year-on-year, and car manufacturers asked government for a $1 billion bailout. This week Bank of America Corp.-Merrill Lynch & Co. predicted that South Africa's economy would shrink by 0.6 percent in 2009 as global recession reduces demand for its exports and domestic consumption drops.

Despite all this, there may be some upside to the crisis. A drop in oil and food prices has brought relief to the poorest countries hit by the food crisis last year. Antoinette Sayeh, Africa director for the IMF, also points out that African economies are better prepared for global economic shocks than in the past thanks to some fairly comfortable levels of foreign-exchange reserves. The question now is what Africa is going to do about it. The downturn has called attention to the inadequacies of donor-driven aid and development policies established by the West; after literally hundreds of billions of dollars spent, more Africans live in poverty today than 60 years ago. But the crunch has also highlighted the failures of African governments to develop coherent economic policies. Doing so will be harder in tough economic times. But if ever the time has come, it's now.

Falling Commodities Prices and Aid Hurt Africa | World