STWR - Share The World's Resources

The International Monetary Fund expects production in Sub Saharan Africa to increase by almost six percent in 2006. The growth rate is higher than at any time in the last thirty years, and the performance is not isolated but continues a trend towards accelerating growth. It is, moreover, not solely the poorest economies who are growing rapidly, or oil producers, although both of these groups are benefiting. It is also countries such as South Africa and Kenya for whom the largest economic management problem is not just ending civil conflict, a problem all too common in the continent.

Although it is of secondary importance to the absolute level of economic growth, the stability of economic performance has also been laudable. Growth exceeded three percent in every year from 2000 to 2004, which is the first time in the post independence era that such a five year run has been achieved. Stability in economic performance is a condensed economic expression meaning that people can plan their futures more easily, that their jobs are more secure, and that they face fewer uncertainties in their income, compared with environments where instability rules.

Analysis of stability is a defining aspect of modern financial economics. It is also a critical part of many of the major theories of macroeconomics, where it enters under the assumption that people are not entirely flexible in the way they set prices for labour, goods, money, or currencies. In macroeconomics, stability may be meant in a narrow sense of protection against absolute declines in income, or a wider sense of limited variability in income.

A leading historic source of instability in Sub Saharan Africa has been volatility in primary commodity markets. Many African countries still rely on a single commodity for a non negligible proportion of national income and much of their export earnings. Thus, in Ethiopia, three percent of national production and 37 percent of export earnings are due to coffee. In Burundi, a smaller country with less of a domestic market to buffer against external shocks, the figures are eight percent and 65 percent. Dependence on primary commodity exports has been shown to be linked to an increased risk of civil war, probably because of pressures caused by domestic revenue falls following international commodity price declines. In this respect it represents a typical example of how an instability inducing factor can damage a country.

Unfortunately, many of the agricultural commodity exporters are heavily exposed to instability in the markets for goods imports, particularly petroleum imports. Some commentators have anticipated a slowdown in African growth because of rising oil prices. For Sub Saharan Africa as a whole, the surplus of energy exports over imports is so large that any increase in petroleum prices is likely to boost growth, but for the majority of African countries who are marginal petroleum exporters at most, the point is accurate. Certain land locked countries are additionally exposed to breakages in their trade routes through other countries.

Africa has escaped the most violent effects of unstable investment flows, such as the financial crises which shook Russia and Asia in the 1990s. Africa’s financial characteristics did not lend it to being disturbed: its capital markets are small, it is geographically isolated, it has a low level of investment, and much of its capital has already fled. Living in a financial desert might avoid storms, but it is not a future that Africa is plotting for itself, with many new stock exchanges opening on the continent in recent years, and rapid increases in their capitalisation.

Some of the finest sceptical work in economics has followed economic collapses, and the aftermath of the Russian and Asian financial shocks brought rapid revision of the textbook account of best capital market policy. To abridge the debate, the analysis debunks the ideological assertion that free markets are invariably optimal, by demonstrating that the problems of unrestrained capital flows are so severe that they overwhelm the benefits that short term market optimisation brings. The abstract laissez faire approach is at best misleading and at worst highly damaging to the economies which apply it to capital markets.

Recognition that volatility reduces the validity of free market prescriptions may be considered as an advancement of the economics agenda which emerged in the 1980s, itself a reaction and natural development to the liberal orthodoxy prevailing at that time. The early results of the agenda recognised that whilst markets have a critical role in economics, governments have a demonstrably valuable place in improving economies through provision of education, healthcare, and safety nets. The new ideas which are emerging, such as the emphasis on economic stability, are increasingly sophisticated and provide a rigorous basis for understanding how mindless laissez faire can fail to handle the macroeconomy adequately.

The present stable growth in African economies is exceptional. It would be even more exceptional if it was sustained by an intelligent liberal policy motivated by pragmatism, not dogmatism.

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