In DepthColumnsElephant economies climb the ladder


Posted on Tuesday, 24 September 2013 17:06

Elephant economies climb the ladder

Patrick Smith

After a decade of unprecedented growth, the prognosis for Africa and other developing economies – whether emerging or frontier states – is much rockier. And the rising-star economies are under attack... on two fronts.

Time for a bit of reckless cheerleading to counter all those numerate sceptics out there. Yes, the elephant will scale the ladder, and it will not bring the house crashing down.

By elephant, I mean those countries outside the West that host 88% of the world's people.

Yes, there are reams of financial statistics showing developing economies heading south after a long boom.

If African economies are less able to grow in Asia's slipstream, that will put more reliance on intra-African trade.

But there are plenty of demographic, technological and cultural factors pointing in the opposite direction.

The fashionable new gloom about Africa and other developing economies is overblown.

That does not make the transformation of those economies any easier, but it assuredly remains on the agenda.

After a decade of unprecedented growth, the prognosis for those countries – whether emerging or frontier states – is much rockier, say the number crunchers in Western treasuries and their banker friends.

The rising-star economies are under attack on two fronts.

The first wake-up call comes from the Federal Reserve and Wall Street, sheathed in innocuous-sounding jargon.

Policymakers in developing economies were told in June that they should brace themselves for a tapering of quantitative easing.

That is not a remedy for an intestinal complaint but a warning that the US Federal Reserve will cut its $85bn-a-month bond-buying programme as the green shoots of America's economic recovery start growing.

Effects of the cutback on liquidity are already evident.

Money is tighter, and countries such as Ghana and Nigeria that are floating bonds are not getting the rates of a year ago.

Free- spending investors are becoming more cautious, and portfolio flows are ebbing.

For those African states chasing money to finance transport and energy projects, this is no mere statistical blip.

Crudely put, the economic balance of power looks to be tilting back to the rich world, particularly in the USA's massive domestic market, where consumer demand is growing again.

Yet, in theoretically rich Europe, the crisis persists.

Youth unemployment is averaging 30-55% in Greece, Spain, Portugal and Italy, all of whose economies have shrunk alarmingly since 2008.

On the other battlefront for developing countries the slowdown in the mega-economies of China and India seems to reinforce the sense of a pendulum swinging Westwards and rich-wards.

On that, it is hard to gainsay the number crunchers.

This year, the International Monetary Fund forecasts that China will grow by 7.8% and India by 5.6%, compared to double-digit growth in the decade before the 2008 crisis.

On average, this year African economies are forecast to grow faster than Asian ones.

So how seriously will this emerging market slowdown hold back Africa's prospects?

Undeniably, the days of a soaraway Chinese economy dragging the rest of the developing world along in its wake are over for now.

China is getting older and more middle class. It is also trying to manage a rapidly rising debt burden of about 50% of its gross domestic product.

India – with one of the highest current account and budget deficits in the world – has a different set of more overtly political problems.

Faced with a resurgent West, both Beijing and New Delhi are looking at some sweeping policy adjustments of their own.

This new era of rebalancing East and West offers opportunities and risks for Africa.

If African economies are less able to grow in Asia's slipstream, that will put more reliance on intra-African trade.

That should have been happening anyway, say the wise economists of the African Development Bank. They may now become more influential on policy.

Activist economics will work in Africa. Its economies can, with smarter diplomacy and better infrastructure, pull in Chinese manufacturing investment.

With relentless investment in education and entrepreneurship, Africa can maximise the power of its workforce, the world's most youthful.

And African states are still far from effectively using the continent's reserves of untapped arable land, 60% of the world's total.

There is no question that the emerging market slowdown is upon us, but the ingenuity shown over the past decade does not have to slow down too.

It is time for the thinkers to help push that elephant up the ladder. ●

Patrick Smith

Patrick Smith

Patrick Smith is Editor-in-Chief of The Africa Report. He has edited the political and economic insider newsletter Africa Confidential since 1992 and was associate producer on a documentary about the 2004 coup attempt in Equatorial Guinea commissioned by Britain's Channel 4 television.


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