Global Economic Crisis: Part VIII

The current global crisis on African countries can be mitigated by using fiscal space in these countries prudently, such that, for some countries such a stimulus as low interest rates, and buying back of treasury bills to boost liquidity in the financial system are options  worth considering.

The current global crisis on African countries can be mitigated by using fiscal space in these countries prudently, such that, for some countries such a stimulus as low interest rates, and buying back of treasury bills to boost liquidity in the financial system are options  worth considering.

Fiscal consolidation is yet another measure that would work among others in such a period. All these  measures should be used such that, government spending plans are limited to the medium-term framework, to minimize over stretching of fiscal resources into the known time framework, as at such time most variables that are taken into account in long-term planning are highly uncertain that they render such plans even more uncertain, and thus guess-estimates.

Also structural measures that, focus mainly on the inward looking approach that involve focusing on local economy and especially to sectors that are not exposed to the external environment such agriculture should attract attention of policy makers.

With regard to agriculture, such a situation dictates that, a boost in agricultural production could offset to some extent losses from externally exposed sectors such as tourism and export of primary products.

Mobilization of domestic savings especially where financial systems in place allow for this is a winning card for credit crunch.

One reason why USA economy was hit first is that, US consumers had for many years dis-saved to the extent that, they depended so much on borrowing from financial institutions, which in turn relied heavily on cross-boarder financing whose bubble burst late 2007, and this heralded the current crisis.

As pointed out in previous articles, this financial crisis should be a wake up call (lessons should be learnt) by LDCs in Africa whose financial markets remain rudimentally, shallow and disorganized that, they can hardly be engines for the growth of their public sectors let alone, private sectors and by extension, latch into development. Although development is a process, nevertheless, a country can not grow for decades without latching into a developed state which has been the case with a number of African economies.

If this happens as has been the case, then structural reforms are essential, and financial reforms take precedent. Nevertheless, the current crisis poses both challenges and an opportunity for developing countries to take stock of the developmental state or lack of it, and whether the process of such development can stand structural shock or not.

Recent research findings indicate that, neglect of Africa’s financial systems by policy makers, has cost these economies GDP opportunity cost of up to 4%, which in turn has a multiplier effect so that, if such a cost is spread over a decade it translates into lost GDP of up to 9% Pa.

Such research however point out that, lack of financial development (like many other sectors of these economies) is a void governance issue. It is then argued that growth (spurred by both public and private) investments in financial markets and institutions is influenced by the type of governance in any given economy.

Such systems influence the direction of public policy to this effect, and as a result signal resources to the intended use. The political economy affects the transaction costs and thus profits, and more importantly impact on the operations of the financial markets, like they do for all other markets in a capitalist setting.

The notion that good governance could spur economic growth was recognized by the reknowned Scottish economist Adam Smith as early as 1755 who listed as key factors, the triumvirate of peace, easy taxes, and tolerable administration of justice, and that any missing links in these hold back development for as long any one of them is missing.

That African development whether generally and or specifically of its financial markets has lagged behind those of other regions can be traced to these missing links, more often, the entire triumvirate.

However, many models in political economy assume that, political powers, and or groups in office act strategically, in intertemporal sense when making decisions that have economic consequences that span more than one period which is manifested in poor public policy.

Lack of development of African economies all round (and especially their financial systems) has been blamed on account of their short-termism or adhoc in nature, which is usually due to the divergence of interests between African ruling elite and their populations.

The authoritarian nature of a number of political systems in Sub-Saharan Africa’s political economy has been singled out by most research done in this area as one major reason for this region’s poor performance.

This research further points out that “… in a dictatorships, high level of diversity reduces growth rates by between 3-4% percentage points and double the rate of project failure relative to homogeneity.

Dictatorships tend not to transcend the ethnic group of the dictator, so that the more ethnically fragmented the society, the more narrow based a dictator will be, whereas democratic governments in such societies must be ethnically cross-cutting”.

This situation which is prevalent in a number of African economies has retarded growth, and by extension savings accumulation through distortions in the market forces and through these, the creation of a climate of uncertainty that negates investment planning especially in financial markets.

These researchers wonder whether governments of the nature common in Sub-Saharan Africa can establish a development state that respects budget constraints, allocate resources efficiently and effectively, pursue policies that develop human capital resources, and encourage both public and private sector savings and investments to generate productive employment and promote growth.

Political uncertainty, political corruption, and infringement of civil liberties among such states negate the possibility of developing a viable financial market.

This is premised on the fact that, financial markets more than other markets, thrive under high degree of certainty that is conducive for both saving and investing agents in an economy, and that, these agents must be given assurance and insurance of certainty by the existing political economy.

It is then argued that, the predatory nature of Africa’s nation state which mainly exploits the combination of high levels of illiteracy and ethnicity, absence middle class (to moderate excesses of the political elite) remain major constraints to the development of Africa’s financial markets.

This one area among the many, the government of Rwanda under the leadership of President Paul Kagame will make tremendous impact if only financial structures and systems are properly designed and put in place.

His vision of an all inclusive development of Rwanda, and his zero torrelence to abuse of office by low and mighty, that transcends ethnicity, is uncommon on African continent bedeviled by ethnic interests and regimes held hostage by such interests groups, so much so that, whatever decision are made has to have the consent of the first order interest groups.

This situation should draw the support of all Rwandans and friends of Rwanda, for it is a win-win situation for all. Such creates certainty, conducive for the development of all sorts of financial structures which would then mobilize resources for our development.

Bureaucratic corruption, policy uncertainty, and the predatory behaviour of the state which raises transaction costs for private sector agents leading to low private sector savings, norms in many African settings, are outliers in Rwanda which reinforces the ideal setting necessary for financial development, like that of other sectors of the economy, that last year grew by 11.2% (a record growth Rwanda has ever attained, out growing even the fast growing economies of China and India).

Such growth rates, which is a reflection of prudent economic management policies of sound macro as well as micro, are worth applaud by all stakeholders in our economy, particularly, Rwandese.

Economic growth of double digit figures, permeates all sectors of the economy. And although agro-sectors may have held a lion’s share of this growth, it nevertheless feeds back into all sector of the economy which react by growing exponentially.

Although Rwanda will feel the effects of current global credit crunch, the magnitude may not be so huge as to offset the current gains due to the said prudent economic as well as political governance in place.

The most pressing issue that need to be addressed is liquidity problems experienced by commercial banks which the Central Bank could mitigate through available monetary tools especially reduction in inter-bank rate, which has been reduced world wide to boost liquidity.

Today’s governments are not judged by political rhetoric or royalties to interest groups, but rather to growth rates such governments attain which goes along way to improve the standards of living of their people.

And in a world where economic interests is the key word, The Government of Rwanda has demystified the fact that, a failed state in 1994, can post double digit growth in a period of 15 years, which by economic historical accounts is a record worth being proud of. Growth is not an even, but rather a process if we to eliminate (not reduce) poverty in our amidst.

Going by the recent past growth trends our country has posted, this objective is in sight. As it is true for record corporate performance which will see a vote confidence in the Chief Executive (CEO) by shareholders and perks that goes with this, President Kagame deserves more, for a country is but a multiple of corporations. One of the influential media house The Times Magazine voted President Kagame one of the top 100 most important and influential people in the world on 11th May, 2009.

Such a recognition and appreciation by a panel of world experts speaks volumes for a leader whose performance is of immense importance to the development of our country in particular, and the East African region in general, a region in which he is held with highest regard.

Lessons Learnt

However, the fact that, Africa has been dubbed “by stander’ to the current financial crisis is an understatement of reality as uncertainty shock now gripping world economies are yet to be felt in Africa.

African financial systems will have to undergo reforms aimed at positioning them in a strategic position to enable them serve the development of the broad based economy.

This will call for setting up (under Public Private Partnerships-PPP) of missing financial institutions and markets such as commercial banks, and other financial institutions to address the existing colonial financial systems and structures which were by and large geared towards the provision of finance for export trade in primary products that African post colonial economies perpetuated.

Financial reforms will necessarily take the forms of PPP for three main reasons.

First, the absence of strong private sector means that, these institutions cannot be established by private entrepreneurs especially given stringent capital requirements.

Secondly, and equally important, such financial systems in the early stages of their development face risks which even if the private sectors was developed, it can not be assumed to be capable of taking on costs and risks inherent in such young and highly imperfect financial markets.

Thirdly, the structure of a balanced financial system is such that, it can not be left to private sector to develop as some of the segments necessary for such a market may not be profitable to incentivise such a sector to stake its capital, and yet segments that are crucial for a balanced financial sector.


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