In DepthColumnsNever waste a crisis


Posted on Friday, 02 November 2012 12:03

Never waste a crisis

Patrick Smith

After seeing the disarray among Western economies at the International Monetary Fund (IMF) and World Bank meetings in Tokyo, African officials may have recalled the advice coined by Rahm Emanuel, President Barack Obama's former chief of staff: "You don't ever want a crisis to go to waste."

The idea is that bad times allow governments to make radical policy changes as they can catch vested interests off guard. For Africa, this could be the time to invest massively in local manufacturing and services, then consign the old trading post economies to history.

Emanuel was speaking at the height of the 2008 global financial crisis, but his adage may be more relevant still for Africa in 2012 as its trading partners in the West struggle with a double-dip recession. Even if the United States recovery continues apace, European economies look set to stay in the anaemic zone for several years.

That further increases the importance of Asia's economic resilience for Africa. Yet there are clear limits too: Asia's demand for export commodities depends critically on the West's demand for the manufactures. That commercial chain reaction could stymie the better economic story in Africa.

Yet there are signs that this division of labour is at last beginning to break up. Asian markets are growing in size, muscle and independence. The big economies in East and South Asia have launched ambitious fiscal stimulus programmes and are cautiously switching resources from savings to consumption.

Also good on the African ground is the drive to use much of the continent's oil and gas resources to run new power stations. Almost all the latest generation of energy producers – Ghana, Tanzania, Uganda and Mozambique – are calling on contractors and banks to find ways to finance and build electricity generation and transmission projects. Using its access to the Nile waters, Ethiopia is leading the way: with its 6,000MW Renaissance dam project, it will export electricity across the region.

Could Africa be setting itself up for a return to the debt-ridden economies and IMF diktats of the 1980s? The new voices of market rationality say not a chance

Almost 700 million people in Africa have no access to grid electricity. Solar schemes and other alternative energy sources are helping, but massive investment and technical innovation are needed. Technical and political obstacles abound, even when the financing is there: as shown by Nigeria's 12-year electricity privatisation programme.

The next question for the crisis strategy is money. The growing debt markets in Asia and Africa reflect a falling interest in the battered eurozone economies. The more intrepid bankers and African officials regale each other with statistics from the continent's fast-growing debt markets: the yield on Nigerian bonds is lower than Italy's, Zambia's $750m bond issue in September was 15 times oversubscribed.

Africa's second debt rush is just starting. Only 13 out of its 54 countries have foreign currency-denominated instruments: Rwanda, Uganda and Mozambique are next in line among the first timers that will float euro- bonds. Thanks to backing from the African Development Bank and its regional partners, local currency debt instruments are developing fast.

Talk of crises, debt and more debt, suggests a downside. Could this exuberance be 'irrational'? Could Africa be setting itself up for a return to the debt-ridden economies and IMF diktats of the 1980s? The new voices of market rationality say there is not a chance: macro-economic management in Africa is streets ahead of where it was in the late 1970s – even if the fundamental structure of many African economies has changed little.

For apostles of rational borrowing, there is a warning in Ghana's Tema harbour: berthed there is an Argentinian navy tall ship. The New York-based vulture fund NML Capital says the Buenos Aires government owes it $300m on defaulted debt; Ghana's courts sided with it and seized the ship.

The dispute dates back a decade, when Argentina declared a massive sovereign default – despite its competent finance officials and long experience of managing money markets. Now Buenos Aires is fighting off the vulture funds and inadvertently offering lessons to a new generation of borrowing countries●

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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