The Economies of sub-Saharan Africa

The economic performance of sub-Saharan Africa has had little success. The African leader’s economic policies have been a failure, involving too much state intervention rather than letting the invisible hands of the market forces control the economy. Although in such little developed countries the government is needed to provide guidance and lead the market in the right way, the policies were too government orientated and depended mainly on state-run industrial enterprises.

This in turn leads to the corruption of civil servants. The countries acted as if they were near developed, enforcing import tariffs and quota controls. Even with so much help from foreign loans and aid from the World Bank and IMF, the total wealth of Africa is only a little more than Belgium. Of the 29 sub-Saharan countries, only 6 were seen to have improved their economy, with Ghana as the model example. Yet, Ghana’s people are still some of the poorest in the world.

Whereas, those in Asia, such as the ‘tiger’ economies, have had a much greater success by far. Take China for example- it is one of the fastest growing economies in the modern world, last year achieving 10% economic growth. The market is slowly opening up and different markets are liberalised, therefore relying on market forces rather than government intervention. The establishment of SEZs in Shenzhen and Guang Zhou has attracted much foreign direct investment. With the opening up of the Insurance market in China, big foreign firms such as AIA, AXA, ING etc. have planned to establish businesses in the emerging market. China’s BOP account is also doing well with increasing exports overseas after many technology markets set up and created new and cheaper technological products.

b) Explain why a lack of investment may be an important explanation of slow economic growth in sub-Saharan Africa.

Economic growth refers to the long-run expansion of the economy’s ability to produce output. This is one of five economic goals, specifically one of the three macro goals (stability and full employment are the other two). Economic growth is made possible by increasing the quantity or quality of the economy’s resources (labour, capital, land, and entrepreneurship). Investment is crucial in order to help a country develop. Investment, according to the circular flow of income, is an injection into the economy. As we can see with China’s example, investment not only creates jobs, it also brings in skills to the economy. When a country’s people are better trained and skilled, this will attract more investment and raise the country’s competitiveness.

Investment encourages the multiplier effect to take place. When investment increases aggregate demand, this in turn leads to economic growth, better efficiency (due to more competition) as well as increased capacity. It also brings in foreign exchange, which is needed to import goods the country does not have. Investment not only encourages the multiplier effect, but also the trickle down effect. The initial effects of growth may not be equally distributed, but generally people in the whole society will benefit. Investment improves the quality of labour and land, two components needed to encourage economic growth.

Companies will only invest in a company where it is politically stable and has a good reputation for investors. Many countries in sub-Saharan Africa do not fulfil this criteria- there are constant wars going on as well as a corrupt government. Without the right policies to encourage foreign direct investment (such as China’s Special Economic Zones), Africa stands little chance. Ultimately, economic growth raises living standards.

c) Evaluate the economic policies which the passage suggests help account for ‘Africa’s

disastrous performance’ in the 1980s.

The economic policies that Africa tried to adopt all required extensive state intervention, such as state marketing boards for agricultural products, over-valued exchange rates, import tariffs and quota controls as well as state run enterprises. Policies that usually involve government intervention do not do well to promote growth. Since mentioned above about the importance of investment to help promote growth in countries, investors do not appreciate high government intervention as it means more restrictions and laws. Investors invest in free-market economies, such as Hong Kong as there are less rules and regulations.

Quota controls and an overvalued currency will disrupt the export performance of a country rather than encourage it. This is because although it makes imports cheaper for the country, the country’s goods will be more expensive for the other countries; therefore they will find they lack foreign exchange to purchase other necessary goods for the country’s benefit. Sometimes it is necessary to import large amounts of goods into the country for everyone’s well being, such as good fertiliser for agriculture. If a quota is set on the amount that can be imported just to protect local industries, then this is not efficient.

State run enterprises do not ensure efficiency. The government does not necessarily know what the public actually demands and needs, therefore they may produce the wrong goods. It is better to have privatised enterprises and industries so people will actually get what they want. When industries are privatised, the motive for the new owner would be profit maximisation, therefore ensuring correct allocation of resources to produce the right goods. With more competition with firms entering the market, this will also make production more efficient as well as lower costs and better quality for consumers, giving them more choice.

Import tariffs in an attempt to protect the local industries also do not ensure economic efficiency. The country may not have the right resources to make that industry grow. This is also not fulfilling the concept of Comparative Advantage, where two countries specialise on what they are most efficient in to ensure good allocation of resources.

The World Bank and IMF have forced the African countries to adopt new free-market policies in order to help structural adjustment become better. By letting market forces determine the market price, this will ensure better efficiency and the countries will begin to earn more to begin starting to pay off their increasing debt.

d) Evaluate the impact of structural adjustment policies in Africa.

Being forced to adapt free market policies in order achieve structural adjustment has had a large impact on Africa. These reforms have been criticised to be too demanding for fragile Africa countries to adopt. Oxfam’s chief executive argued that the high real interest rates needed to pay back the IMF in addition with the removal of import protection kills off the small industries Africa needs to nurture. These policies have made the poor even more poorer.

Social spending and development is cut back in order to make debt repayment the first priority.

It is called Cash Cropping- the countries have to devalue their currency to make their exports more cheaper and attractive, converting much needed domestic food production to cash crops for the foreign market. But all these African countries produce similar goods, and flooding the market with the same cheapened commodities would make these crop prices fall, bring destitution and less income for the farmers who were persuaded to grow them. This leaves national export figures worse than before.

When Cash Cropping fails, service cuts are used, reducing public spending, particularly in essential areas such as food subsidies, health and education. These cuts in the past have reversed the development successes of the 1960s and 1970s, with rising child mortality, school enrolment falling, and more and more people going into absolute poverty, lowering people’s standard of living overall.

While the rich countries have exploited the low prices of African commodities, African countries are suffering. As a result, the value of labour decreases, capital flows become more volatile, there is a down-spiral effect as well as social unrest. The IMF and World Bank are controlled and ‘owned’ by developed nations such as USA, Germany, UK and Japan, therefore they decide what policies Africa should adopt, exploiting them. Yet it cannot all be blamed on these policies- the country’s own political stability and government system is also important. Africa suffers from constant wars and government corruption.

IMF and World Bank have received much criticism, and have accepted that such Structural Adjustment Policies (SAPs) have not worked out. Rather, they now have Poverty Reduction Strategy Papers (PRSPs). Yet, these have not worked out either. What countries like Africa needs most is aid from Non governmental organisations such as Oxfam, who focus on helping people gain self reliance, develop needed skills and empowerment which will help the local people gain self independence.