Every week, The WorldPost asks an expert to shed light on a topic driving headlines around the world. Today, we speak with Amadou Sy, director of the Africa Growth Initiative at the Brookings Institution.
Many African nations are now concerned that Chinese demand for its oil and other resources could dry up. Chinese resource extraction in Africa, while controversial, has helped fuel economic growth, job creation and investment in African infrastructure. China is the continent’s largest bilateral trading partner -- in 2013, Beijing’s trade with Africa was double that of the U.S.
The Chinese crisis comes at a bad time for many of Africa’s largest economies, already contending with the collapse of oil prices over the past year. Now, experts warn that economic growth may be slowing in Africa’s biggest economies, South Africa and Nigeria.
Amadou Sy, director of the Africa Growth Initiative at the Brookings Institution, explained to The WorldPost why China's economic woes are causing problems in Africa, and how African nations should respond.
Q: What impact has China’s market turmoil and yuan devaluation already had on African economies?
They have had two impacts. First, they have unnerved global financial markets and led to higher short-term volatility in currency, bond and stock markets as well as commodity markets. Second, and more importantly, they have led market participants to reassess the likelihood and severity of a slowdown of the Chinese economy.
These impacts have had ripple effects on African economies, and in particular on countries that are most dependent on exports to China, mainly commodity-producing countries such as South Africa (gold and wine), Angola (oil) and Zambia (copper).
Q: Have they had any positive side effects?
In theory, the yuan devaluation could help African countries like Ethiopia and Kenya that import Chinese goods such as heavy machinery. It could also help African retailers and consumers, as Chinese imports become cheaper. But the scale of the yuan devaluation was really not that large when compared to recent movements in other currencies. In fact, African currencies have been depreciating against the U.S. dollar for a while. For instance, the South African rand has dropped about 12 percent against the U.S. dollar this year.
To me, the major positive side effect is that questions about a Chinese slowdown should push African governments to realize that they need to speed up the implementation of the continent’s agenda of economic transformation, and make their economies more resilient to external shocks. It is like an alarm bell ringing and telling us that the window of opportunity to reform our economies is shrinking.
Q: You wrote that China’s currency devaluation is not the real problem, as the much more troubling question for Africa is whether China’s economic growth is slowing down more permanently.
If this is the case, how big an impact would it have on economic growth in Africa?
A sharper than expected slowdown of China’s economic growth is one of the big external risks to Africa’s growth forecast. Other risks include a further decline in oil prices and a sudden deterioration in global liquidity. Earlier this year, the World Bank put 2015 growth for sub-Saharan Africa (SAA) at about 4 percent. If China’s growth falls below the 6-7 percent range, then one should expect SAA growth to go below 4 percent. The effect of the slowdown will come through fewer exports from Africa to China, but also indirectly through lower commodities prices, which in turn would affect African commodity exporters.
We are working on a model to isolate the impact of external shocks to Africa’s growth, but International Monetary Fund economists Paulo Drummond and Estelle Liu, focusing on the impact of changes in China’s investment growth on sub-Saharan African exports, find that a 1 percentage point decline in China’s investment growth is associated with an average 0.6 percentage point decline in sub-Saharan Africa’s export growth.
Q: Which African countries are most vulnerable to economic slowdown in China?
Countries that export the most to China -- predominantly resource-rich economies such as Zambia -- will bear the brunt of such a shock. Countries that receive a lot of direct investment from China such as Nigeria, South Africa, Ethiopia, Kenya and Uganda, could also experience reduced investment flows.
But ultimately, a more-severe-than-expected Chinese slowdown would be a shock to the global economy, and if the European Union is affected, that would have a negative slowdown on Africa, as the EU is SSA’s largest trading partner (China is the region's largest bilateral partner).
Q: What steps should these countries take to minimize the impact, and do you see any signs they are starting already?
At the moment, African countries are trying to manage the effects of the fall in commodity prices and the strengthening of the U.S. dollar using macroeconomic policies. Governments will have to make difficult choices in the use of the policy tools at their disposal, and these choices require strong political will. These tough policies include exchange rate, fiscal and monetary policies.
For instance, letting your currency depreciate can help absorb the shocks but it may make imports costlier and lead to higher inflation. However, using administrative exchange controls to prevent a depreciation may not work as they can be circumvented. Further, reducing oil subsidies and increasing the value-added tax rate can be painful measures politically, especially in an election year.
At the end of the day, governments will need to take tough measures but think about alleviating the impact on the poorest segment of the population. For instance, removing oil subsidies should be done together with measures that are well-targeted to help the poor.
But what I would insist on is the necessity to accelerate the pace of measures that have a long-term impact. African countries need to redouble their efforts to address the infrastructure gap, especially when it comes to the energy sector.
Of course, public investment needs to be done in the most efficient manner. They need to improve productivity in the agriculture sector, which will alleviate poverty and can spur the agribusiness and manufacturing sectors. At the moment, the services sector is driving most of domestic growth, and it is not clear how sustainable this process is.
All these policies need financing and domestic revenue mobilization should be the priority and countries. But for domestic revenue mobilization to work, taxpayers need to see the value of their money.
This interview has been edited and condensed for clarity.