Monday, 4 January 2016

Boom, Doom, Gloom & Africa

"Africa´s Boom is Over", pronounced an article in Foreign Policy on New Year´s eve. One of the conclusions: "Without the commodities boom, the actual failure of Africa’s development has now been laid bare". The gloom echoes recent forecasts by the IMF, notably its Regional Economic Outlook: Sub-Saharan Africa 2015, released last October. An often-used conceit, just as in the IMF´s WEO released the same month, is that of "headwinds" that Africa encounters as raw material prices have crashed and large emerging economies are slowing down. Africa counts 10 net oil exporters and 15 net nonrenewable exporters among its 54 countries. While these 29 countries do not constitute a majority of Africa in terms of country numbers, they command a large majority of Africa´s GDP and population.

While the winds of change connected to the slowdown in the majority of emerging countries (with the notable exception of India) may well imply considerable headwinds, the rebalancing of China in particular may also provide backwinds for Africa. China´s reforms aim at rebalancing the composition of growth in China toward consumption and away from investment. Such reforms are compatible with a rise of the real exchange rate (higher prices for nontraded services relative to tradable manufactures), of inflation-adjusted wages and of the level of domestic absorption in China. Such a process may affect Africa in several ways:

·         The price of energy and industrial commodities drops as a result of both the slowdown and the rebalancing. The biggest winners are those countries with either large energy import needs or relatively fewer commodity exports, such as Kenya and Tanzania (where the fuel share of imports exceeds 25%), and to a lesser extent Ethiopia and Mozambique. Africa’s centre of economic gravity is thus likely to shift from west to east, to the less commodity-dependent economies of Ethiopia, Kenya, Mozambique, Tanzania, and Uganda. Investment finance will follow this shift, reinforced by the peripheral outreach of China´s One Belt One Road initiative that includes East Africa for infrastructure finance[i].
·         Prices for soft commodities should be supported by China´s rebalancing as coffee, tea and protein-based (soya, for example) are consumed and imported more than before. However, the supply elasticity of soft commodities is higher than for exhaustible resources, so the price impact should be contained. Still, higher export volumes (at stable prices) will translate into higher export proceeds and government revenue in African soft-commodity producers.
·         To the extent that rising wages in China lead to higher labour unit cost, external competitiveness in low-end manufactures will be eroded. With incentives for some industries to move offshore, part of this relocation will involve sub-Saharan Africa (such as to the East African  garment-production). China could expand its current presence in sub-Saharan Africa’s pilot special economic zones, or encourage creation of new ones. The relocation of Chinese firms into Africa should lead to increases in factor productivity and shifts in global trade shares from China to Africa. Thus, all of Africa might experience positive effects as countries in the region are able to build domestic industries based on China relocating a portion of its manufacturing base permanently to the region. 

To be sure, the relocation process takes time, and it takes longer for the gains to be realized than the immediate income losses suffered by commodity exporters. But it´s not all doom and gloom in Africa.

[i] China’s new Silk Road Fund is an acknowledgement of this. It seeks to facilitate trade links with a number of frontier and emerging markets through a USD 40 billion infrastructure investment fund. In Africa, the fund is targeting the economies along the eastern seaboard, which suggests a shift away from China’s traditional focus on securing natural resources towards one more focused on exploring the opportunities for establishing a manufacturing hub in the region.