GLOBAL FINANCIAL CRISIS: AN AFRICAN PERSPECTIVE
By Mohammed Nureldin Hussain, Kupukile Mlambo and Temitope Oshikoya*
Abstract: This paper reviews the expanding financial turmoil that has been
triggered by the Asian crisis. It examines the factors behind the crisis,
its impact on African countries and the main lessons and policy
implications for African countries. The onset of the Asian crisis seems to
have taken everybody by surprise because the Asian countries that were hit
by the crisis had been among the most successful in sustaining high rates
of economic growth, keeping high saving and investment rates and improving
the quality of life of their citizens. However, the emerging consensus is
that the Asian crisis is a hybrid of structural and policy distortions
(macro- and micro-economic) in the affected economies. The impact of the
crisis of African countries was mainly transmitted through declines in
export prices and volumes. The low demand of primary commodities induced
by the crisis and the large depreciation of Asian currencies appear to have
played major roles in depressing commodity prices. With only a few
exceptions, the commodities that suffered large price declines are those
for which Asia constitute an important market (e.g. oil) and/or those
mostly supplied by Asian countries (e.g. copper, timber and rubber).
Africa’s oil-exporting countries, which experienced large deterioration in
their terms of trade, were the most affected. For the continent as a
whole, export proceeds declined by 9.5 percent between 1997 and 1998. This
was the product of a 7 percent decline in export prices and a 2.5 percent
decline in the volume of exports. The paper estimates that the crisis has
caused the growth rate in the region to slide down by 1.2 percentage
points, which indicates a loss of US $ 6.2 billion using aggregate GDP for
1997 as the base. To put this in an order of magnitude, it is about US $ 2
billion higher than the annual average flow of direct foreign investment
(DFI) to the continent in recent years. For the majority of African
countries where the inflow of private capital is small and where debt is
dominant, the traditional risk management policies, such as adoption
realistic exchange rates and reducing government deficits and inflation
rates, should continue to be major policy tools to prevent financial
crisis. However, as the role of private capital increases the design of
macroeconomic policies would need to heed the lessons emerging from Asia.
One basic lesson is that careful sequencing of domestic and external
liberalization is needed. In that, capital flows should be lifted only
after the domestic financial sector has been strengthened with adequate
regulatory and supervisory institutions. This is particularly true because
the Asian crisis has shown that reserves, even at very high levels, can be
quickly depleted given the scale and volatility of short-term capital flows.
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*The authors are in the research division of the African Development Bank.
The views expressed in this abstract (and the paper) are solely those of
the authors and do not necessarily reflect those of the African Development
Bank.
Source: African Development Review, Vol. 11 No. 2 December, 1999
Publishers: Blackwell Publishers Ltd., 108 Cowley Road, Oxford OX4 1JF, UK
and 350 Main Street, Malden, MA 02148 USA
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