Academic journal article Current Politics and Economics of Africa

The Global Economic Crisis: Impact on Sub-Saharan Africa and Global Policy Responses *

Academic journal article Current Politics and Economics of Africa

The Global Economic Crisis: Impact on Sub-Saharan Africa and Global Policy Responses *

Article excerpt

OVERVIEW

What began as a bursting of the U.S. housing market bubble and a rise in foreclosures has ballooned into a global financial and economic crisis, leading to the most severe global recession since the Great Depression of the 1930s. Starting in September 2008, credit flows froze, lender confidence dropped, and economies around the world dipped toward recession. Having begun in industrialized countries, this financial crisis quickly spread to emerging market and developing economies.

Investors pulled capital from countries, even those with small levels of perceived risk, and caused values of stocks and domestic currencies to plunge. Slumping exports and commodity prices have added to developing countries' woes. The International Monetary Fund (IMF) estimates that the global economy will contract by 1.4% in 2009 [1]

Developing economies may not have played a major role in the onset of the crisis, but they may have less resilient economic systems that can be highly affected by actions in global markets.

Most industrialized countries have been able to finance their own rescue packages by borrowing domestically and in international capital markets, but many emerging market and developing economies have insufficient sources of capital and have turned to help from the IMF, the World Bank, and traditional donors such as the Group of Eight (G-8).

Many analysts were initially optimistic that the impact of the global financial crisis on Sub- Saharan Africa (henceforth, "Africa") [2] would be negligible. African economies are among the least exposed to the global financial system of any world region, and African banks hold few of the "toxic assets" that helped spark the crisis [3]

However, as the financial crisis has deepened into a global economic recession, most now agree that African economies will be strongly affected, due to a contraction in global trade, including reduced demand for African commodity exports, tighter financing conditions overseas, and a drop in foreign direct investment and other capital flows. Additional revenue streams such as tourism and remittances from African workers abroad are also expected to fall, and foreign aid is predicted to decrease, particularly if the crisis persists. The World Bank has warned that most African states are "highly exposed and vulnerable to the effects of the crisis." [4] The IMF estimates that average economic growth in Africa will slow from an average of over 6% per year over the past five years-a historic high-to 1.5% in 2009 [5] The crisis is expected to dampen prospects for reducing African poverty, as at least 7% annual growth is generally considered necessary for outpacing population growth and making significant progress in alleviating the toll of hunger, unemployment, and disease [6] Anticipated negative growth in some countries, including in Africa's largest economy by far, South Africa, may have further ripple effects for smaller neighboring economies who depend on regional powerhouses for trade, remittances, and employment. Unemployment-already high in all African countries-is expected to rise, with potential implications for political stability as well.

Congressional Interest

The impact of the global economic crisis threatens to undermine long-term U.S. foreign policy goals in Africa, including regional stability, increased trade, the alleviation of poverty and hunger, and socioeconomic development. Congress has acted to address the impact of the economic crisis on poor countries, though legislators have not specifically targeted assistance at African countries. The FY2009 Spring Supplemental Appropriations for Overseas Contingency Operations (P.L. 111-32, Title XI, signed into law on June 24, 2009) includes $255.6 million in Economic Support Funds (ESF) for "assistance for vulnerable populations in developing countries severely affected by the global financial crisis," with certain eligibility criteria [8]

BACKGROUND: AFRICAN ECONOMIES

Recent Trends

As a region, Africa experienced strong economic growth between 2000 and 2007, largely driven by high external demand for primary commodities, notably oil and minerals. …

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