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Two scenarios for Africa

By Patrick Smith
Posted on Friday, 21 November 2008 13:39

The impact of the credit crisis could potentially vary between having a positive impact on African economies or else creating a freeze on finance that prolongs the global recession.

THE HIGH ROAD

¦ MORE LIQUIDITY, MORE CREDIT: International economic coordination boosts confidence enough to stop the world living through another Great Depression. Financial restructuring continues: liquidity levels start to recover, boosting bond and equities markets, helping those African economies most strongly tied to the international financial system.

¦ COMMODITY PRICES IMPROVE: A lighter than expected recession in the West and the continued urbanisation underway in Asia create enough demand to halt the commodity price slide.

¦ INTERNATIONAL GOVERNANCE REFORM: Stronger cooperation between leading Western economies develops after the new US administration returns to multilateralism. The Group of 8 key economies is expanded to become the Group of 15, including India, China, Brazil, Saudi Arabia and South Africa.

¦ AFRICAN OUTLOOK BRIGHTER: Better macroeconomic management means that Africa’s downturn lasts barely 6 months. Africa attracts global capital seeking better yields than available in the moribund West. This gives a fillip to shaky systems in bigger economies like Kenya, Nigeria and South Africa.

THE LOW ROAD

¦ RACE TO THE BOTTOM: Failure of Western liquidity plans sparks a new crisis of confidence. Prolonged and painful recession ensues.

¦ COMMODITY AND TRADE CRASH: Commodity prices tumble, as Western and Asian demand collapses. China works off its huge inventories. Trade deficits and foreign debt levels are driven up across Africa. Growing protectionism hurts African processed goods.

¦ INTERNATIONAL COOPERATION BREAKDOWN: The World Bank, the IMF and the African Development Bank run out of money and political will to help fix the crisis. Lack of short-term credit and long-term finance halts Africa’s big infrastructure projects. Already weakened by these developments, Africa’s equity markets nose-dive and its banks start to fail.

¦ POLITICAL MELTDOWN: Petty nationalism and racism rise in the West; foreign workers (including many of the remittance-sending African diaspora) are summarily sacked. Growth of aggressive ethno-nationalist political parties spreads to Africa where mass urban unemployment and failing government finances fuel ruling-class paranoia. The putchists and the warlords start to plot.

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