External risks to Africa’s growth: Falling commodity prices, China’s economic slowdown, and rising external debt
Editor’s note: Improved economic and political governance, together with a favorable global external environment, have set the foundation for Africa’s recent and much-heralded economic growth story. However, these features, although they point to opportunities, do not alone provide a sufficient basis for the type of sustainable and comprehensive development the region and international investors badly need. In too many cases, governments and businesses working in Africa encounter daunting economic, political, and social risks that reduce their ability to make long-term investment decisions and implement development policies. The Brookings Africa Growth Initiative (AGI) addresses this need through a private roundtable series that will convene high-level professionals from both the public and private sector for quarterly, working group sessions to identify, manage, and mitigate the biggest risks to economic development in Africa. In addition to risks, the sessions will also seek to identify key trends in the continent in order to come up with practical and implementable policy recommendations to leverage existing and potential opportunities in the continent.
As Africa continues to face a number of challenges due the “triple threat” of falling commodity prices, China’s economic slowdown, and the rising cost of external debt, these external shocks also provide opportunities in 2016 for implementing innovative, robust policies to accelerate and sustain future growth. In the inaugural Doing Business in Africa: A Risks, Trends, and Opportunities Roundtable, participants from government, civil society, academia, and the private sector explored what these external shocks mean for doing business on the continent and how related policy measures can support new and existing economic opportunities. Since external factors—including GDP growth in G-7 countries and China, oil and non-oil commodity prices, and borrowing costs in international capital markets—account for nearly half of GDP growth fluctuations in sub-Saharan Africa, understanding exactly how these factors influence the economic activities in African countries and what can be done to weather and emerge stronger from these shocks is important to fostering successful businesses and investments in the region. During the roundtable, participants engaged one another on solutions for these challenges, sharing their unique perspectives and opening the discussion to related, medium-terms risks as well. For a more detailed discussion of the conversation, see the related blog.
- The Africa rising narrative is not uniform: It is important to look at what parts of the continent and what sectors are not “rising” in order to develop targeted policy measures to address them. In developing national growth strategies, it is equally important to consider locational advantages within the surrounding region and how regional integration could play into domestic growth. For example, Kenya is surrounded by five landlocked, resource-rich countries. Therefore investing in and establishing efficient ports, railway and road networks, transit airports, ICT capacity and fiber optics will enable Kenya to become a prominent trade and transit hub for the region.
- In response to the short-term external shocks facing Africa, encouraging diversification (especially when commodity prices are low) is key, as is recognizing that China is a strong trade and investment partner to the continent, but at the same time it is not a panacea, especially if a major global slowdown occurs. By reducing vulnerability to external shocks (diversifying economies, exports, and trade partners) and building resilience (foreign reserve buffers), African policymakers and businesses will weather external shocks and have greater protection against them in the future.
- If Chinese financing in Africa continues to blossom and is applied within good institutional environments, it could have widespread, positive benefits for African countries. Working on domestic capacity to absorb investment from China and remaining a competitive in the investment landscape is crucial for African countries.
- There are still a number of longer-term, binding constraints to economic development and growth in African countries: corruption, lack of human capital, power outages, financing physical infrastructure, and low labor productivity, to name a few. Multilateral and bilateral partnerships, namely with China and the U.S., could help on several of these fronts. The U.S. is already trying to boost labor productivity and human capital through Power Africa, Feed the Future, and various health and educational initiatives.
- Development banks are already doing an effective job of expanding economic opportunities across the continent and should continue to build infrastructure that that is not purely export-oriented in order to create jobs locally and serve local populations. Understanding the risks of certain types of debt is important for African policymakers. Commodity-backed debt is not sustainable, for example, and foreign-currency-denominated bonds could be subject to risks in the case of national currency depreciation or devaluation.
- African policymakers should focus on building regulatory frameworks, engaging in institutional development, and prioritizing human capital. Of particular concern is that absolute poverty levels are rising, and marginalized groups may turn to violent extremist groups rather than productive jobs for steady incomes.
- Services and industry are complementary sectors, although structural transformation in Africa has tended see a shift from agriculture to employment and growth in services rather than industry. Some experts are worried about the rise of the services sector’s contribution to GDP in many countries, compared to the relative rise of agriculture or industry because they think there is less value addition in the services sector and hence a lower likelihood that the sector will become an engine of growth. But services can be labor intensive—making good use of the continent’s dynamic labor force—and service sector jobs are adopting technology rapidly, giving workers new skills and improving their productivity. So the shift to services is beneficial to the continent in a number of ways.