Mitigating global economic collapse

Amidst the world financial crisis, Africa has been discussed in two different lights. On the one hand economists have predicted that Africa will benefit from its isolation. Its markets are out of kilter with the rest of the world and thus will not be affected in the same way. And Africa’s banks have been so conservatively managed that they have almost no exposure to the sub-prime market that has caused such havoc elsewhere in the world. On the other hand, there are worries that the supply of aid money is likely to decline.

Amidst the world financial crisis, Africa has been discussed in two different lights. On the one hand economists have predicted that Africa will benefit from its isolation. Its markets are out of kilter with the rest of the world and thus will not be affected in the same way.

And Africa’s banks have been so conservatively managed that they have almost no exposure to the sub-prime market that has caused such havoc elsewhere in the world. On the other hand, there are worries that the supply of aid money is likely to decline.

The chairman of the African Union, Jakaya Kikwete, who is also president of Tanzania, has said his country and other developing states were “deeply concerned” about the crisis.

Over 50 per cent of Rwanda’s budget is donor money. While admirable efforts are in place to readdress the balance so that Rwanda generates its own GDP, for the time being at least, donor money is vital to the country’s development.

Judging from the recent G8 Summit where it was decided that all that donors of developing countries honor their financial commitments, it seems that for the time being the impact will be marginal.

While large sums are coming in from countries such as Britain and America, relative to their budgets the amounts are marginal and ought to cause little concern. But as Finance Minister James Musoni pointed out this week, we need to be careful to look to the long term.

Two things need to happen for the crisis to lead to a significant reduction in foreign aid. First, the financial crisis has to lead to a major recession in donor countries. Second, the recession leads to such fiscal constraints that foreign aid is cut.

While macroeconomists yet to agree on the first, let’s imagine the worst and ask whether foreign aid has dipped during previous recessions.

Official Development Assistance has been on an upward trend since the mid 70s except for a decline in the mid 90s; the pattern suggests that aid is motivated by largely non-economic factors.

However, unsure of the likely impact, the government of Rwanda has appointed a committee to monitor financial trends. We can be confident that whatever the long term results of the global financial crisis, Rwanda is ready to mitigate the possible effects.

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