In previous global downturns, sub-Saharan Africa has usually been badly affected -- but not this time around.
The world economy has experienced much dislocation since the onset of the global financial crisis in 2008. Output levels in many advanced economies still remain below pre-crisis levels, while unemployment levels have surged; growth in emerging market economies has slowed, but remains quite high.
But in sub-Saharan Africa, growth for the region as a whole has remained reasonably strong (around 5 percent), except for 2009 -- where the decline in world output and associated shrinking of world trade pushed Africa's growth down to below 3 percent.
Some better than others
Of course, sub-Saharan Africa is a diverse region, and not all economies have fared equally well. The more advanced economies in the region (notably South Africa) have close links to export markets in the advanced economies, and have experienced a sharper slowdown, and weaker recovery, than did the bulk of the region's low-income economies. Countries affected by civil strife (such as Cote d'Ivoire, and now Mali) and by drought have also fared less well than other economies in the region.
So why has most of sub-Saharan Africa continued to record solid growth against the backdrop of such a weak global economy? And can we expect this solid growth performance to continue in the next few years?
First, the economic situation in sub-Saharan Africa has undergone a fundamental change since the beginning of the millennium. As we show in the latest IMF Regional Economic Outlook for Sub-Saharan Africa -- launched yesterday in Lusaka, Zambia -- the region has been growing consistently strongly for more than a decade.
Critical to the region's recent success has been the steady progress and economic resilience of the region's 26 low-income and fragile economies. Average per capita incomes in these countries is still well under $2 per day, but total output has grown by more than 5 percent in every year since 2004. Furthermore, the share of investment in this output has risen steadily -- from 18 percent in 2004 to 23 percent now.
This solid growth record has been supported by several factors, including significantly less civil conflict, the generally favorable commodity price developments benefiting Africa's natural resource exporters; and the extensive debt relief provided to most highly-indebted poor countries. But I would ascribe key importance to sound policy choices by African governments -- both in terms of pursuing appropriate macroeconomic policies and pressing ahead with important reform measures.
Specifically, economic policies in the last decade have been directed firmly toward economic stability and market liberalization. Inflation has been tamed, foreign reserves have risen, and debt burdens have been reduced. Fast-growing export markets in Asia have been tapped. The result has been rising investment -- domestic and foreign -- the deepening of financial sectors, and stronger productivity growth.
Second, sub-Saharan Africa has been partially insulated from the adverse cyclical effects of the Great Recession because of a number of key factors. Commodity prices for African natural resources have remained relatively high to date, sustained by the continued strong growth of major emerging market economies, most notably China. African banking systems have not experienced the severe financial stresses recorded in the advance economies, in good part because they are not heavily dependent on external funding, relying instead on strong domestic deposit bases.
And African policymakers were able to ease budgetary policies to support economic activity during this crisis, instead of being forced to cut outlays because of severe borrowing constraints as occurred in past downturns.
In 2011, output growth in sub-Saharan Africa averaged 5 percent. In 2012, we project that it could be a touch higher, buoyed by one-off surges in natural resource production and recovery from conflict and drought in western Africa. Looking beyond 2012, there is ground for solid confidence that growth rates at this pace can be sustained.
Not that everything is rosy. Unacceptable levels of poverty and poor social conditions still plague the region. Employment growth lags behind most emerging markets, with much of the growth still in agriculture and traditional services. Progress toward the Millennium Development Goals is too slow. And of course, with European finances still uncertain and geopolitical uncertainty troubling oil markets, the world economy could still take another turn for the worse. A resumed global downturn would hit African exports, investment, tourism, remittances, and aid flows to varying degree -- slowing the pace of regional growth for a period but not derailing it over the medium term.
What about new external risks? As discussed in depth in the latest IMF World Economic Outlook, high among the possible global threats is a more sustained deleveraging in the euro area, which could throttle the already hesitant global recovery and, among other things, depress commodity prices. But equally disruptive to world growth would be another surge in oil prices because of rising political tensions.
There would inevitably be adverse consequences for sub-Saharan Africa if either of these adverse shocks were to materialize. Although some oil importers would get relief from lower energy prices in the euro area downward scenario -- and oil exporters would gain in the high oil price scenario -- the general impact on the region in both circumstances would be slower growth, higher unemployment, and, in some cases, strained fiscal accounts.
Mitigating action could nevertheless be taken. Many, if not most, countries have the fiscal space to maintain existing government spending plans even if revenues are reduced by slower growth.
Special fiscal measures -- such as cash grants to poor families or direct food assistance to school children to offset rising food costs -- could help alleviate the impact on the most vulnerable in the event of sharply rising fuel prices. Monetary and exchange rate policies can also be supportive in countries with independent monetary autonomy -- although in some countries, central banks will need to remain focused on reining in elevated inflation rates. Rest assured that the IMF would be standing by with financial support to support member countries experiencing severe stresses.
Meanwhile, ahead of any storm, it is important that countries where growth is still strong take every opportunity to build up their policy buffers now through prudent fiscal policies.
Lastly, but crucially, what about the more distant future? How does sub-Saharan Africa keep up its good growth performance? Mainly, I think, by staying the policy course. That means maintaining prudent macroeconomic policies and improving the business climate further. It also requires broadening the revenue base and modernizing public financial management so that essential spending -- including on infrastructure and public services -- can be financed.
It is also vital that we keep a focus on the young and on inclusive growth. Better education, robust health, and realistic job opportunities are, in the long run, truly the only secure foundations to sustained prosperity.
From iMFdirect blog.