* Economies do not recover from the blues, there are extra efforts that are put in place to ensure that a country moves out of poverty
* If African countries continue to rely on international institutions without putting in place structures to help them escape poverty, serious problems like stagflation will find a home in our midst
* It’s past the time for us to recognize that an economy is built piece by piece, not just with vision but also with actions
Analysis by Donasius Pathera
Justin Lin, a well-known economist, has advocated for the creation of a facilitating state to help developing countries escape poverty. The facilitating state’s role is to promote the formation of firms, industries, and sectors that, once established, will make effective use of the country’s current comparative advantage.
In many poor countries, this will imply concentrating on labour-and/or resource-intensive types of production and services. Even with increased international capital flows in recent decades, low-cost capital remains scarce, whereas labor and resources are plentiful and less expensive.
Firms in poor countries can compete in domestic and international markets by focusing on labour- and resource-intensive production activities. The facilitating state provides the necessary coordination to remove the barriers to the emergence of these firms and their related industries, and gives them a helping nudge to overcome externalities, but then is able to let them grow and advance organically because of their comparative advantage.
As competitive industries and firms grow, they will claim a larger market share and create the greatest possible economic surplus, in the form of profits and salaries. When the surplus is reinvested, it earns the highest return possible as well, because the industrial structure is optimal for that endowment structure.
This strategy allows the economy to accumulate physical and human capital over time, upgrading the endowment structure as well as the industrial structure and making domestic firms more competitive in more capital-and skill-intensive products over time.
While this comparative advantage-following approach may appear gradual — and thus unsatisfying, given the enormity of the poverty challenge — in reality, progress is accelerated by the availability of technology and industries developed and existing in more advanced countries.
Firms in developing countries can acquire technologies and enter industries appropriate for their endowment structure at each stage of development, rather than having to do frontier innovation themselves. It is evident that most African countries have failed to use comparative advantage and, in most cases, they find it difficult to fight against poverty.
These economies face the hardest part of the pandemic and possibly the Ukraine conflict. If countries fail to use their resources responsibly, such as abundant water for irrigation and hydroelectric power, abuse of natural resources, and ever-increasing green corruption, the chances are high that such a country may face stagflation at this point.
The African Development Bank (AfDB) has warned that Africa risks sliding into stagflation — a cycle of slow growth and high inflation — as it deals with the pandemic’s lingering effects and rising fuel and food prices caused by the Ukraine conflict.
Despite having relatively low death rates in comparison to more developed regions, the CoVID-19 pandemic dealt Africa a severe economic blow. While 2021 was expected to see a continent-wide rebound, with GDP growth of 6.9% after a pandemic-induced contraction of 1.6% in the year 2020, the Bank expects real GDP growth to slow to 4.1% by the end of 2022.
Inflation is expected to rise to 14.5% in 2022, up from 13% in 2021, due to a sharp rise in energy and food prices linked to the Ukraine conflict. As a result of the pandemic, approximately 30 million Africans were pushed into extreme poverty, and 22 million lost their jobs in 2021 alone.
It is clear that vulnerable populations, particularly in urban areas, are bearing the brunt of rising prices, with economic disruptions caused by the war potentially pushing nearly 4 million more people into extreme poverty in 2022 and 2023.
This is confirming the results of the Integrated Household Survey (IHS5) conducted by the National Statistics Office which showed that poverty is increasing in urban areas in Malawi. Because of the pandemic, many African countries’ fiscal space is constrained.
Due to 2021’s growth recovery and debt relief measures, the AfDB expects Africa’s debt-to-GDP ratio to stabilize at around 70%, down from 71.4% in 2020, but remaining above pre-pandemic levels. Global manufacturing activity and global trade were showing signs of economic recovery in the absence of the CoVID-19 pandemic.
World trade volumes increased by an average of 10% year on year at the start of 2017, compared to only 2% at the start of 2016. Industrial production increased by 5%, compared to a 0.3% contraction at the start of 2016.
The 20% increase in oil prices since August 2016 has aided commodity exporting countries. However, the recovery was insufficient to compensate for previous revenue losses and is unlikely to support economic transformation.
Inflationary pressures have also increased as a result of both commodity price movements and domestic factors. According to the IMF, producer price inflation in emerging economies is 17%, which is higher than the global average of 12% year on year.
Given this, some economies were expected to experience an increase in both growth and inflation. Slower demand and higher inflation, or ‘stagflation,’ could be on the horizon for those economies that have not engaged in economic transformation.
With stagflation on the loose, African countries appear to be losing the battle of economic recovery due to poor economic recovery plan implementation and poor public finance management. However, if stagflation is not addressed properly, it may result in a decrease in much-needed productivity-boosting investments.
The accumulation of unwanted external and domestic liabilities as a result of export and revenue losses in the absence of renewed and sustained growth is one of the most serious risks associated with stagflation.
Given the likelihood of high borrowing costs, this would harm the investment climates in Africa’s emerging and developing economies leading to crowding out.
Debt accumulation would also impede these economies’ ability to attract foreign investment to initiate or complete productivity-enhancing investments necessary for economic transformation.
Stagflation may even result in more defaults for countries that have recently increased their sovereign debt issuance significantly.
African economies may attempt to mitigate these risks in a variety of ways. To streamline investment processes, governments could strengthen their institutional frameworks.
This will make it easier for them to facilitate long-term investment rather than speculative flows. Economies with large current account deficits that are also undiversified and have not yet undergone significant transformation should consider temporary measures to reduce imports of non-investment goods.
Without these mitigating measures, slower growth in exports and fiscal revenue, combined with previous borrowing, risk contributing to a poor investment climate. Economic transformation efforts may stall if respective domestic macroeconomies are not stabilized, resulting in slower growth and higher inflation.
Economies do not recover from the blues, there are extra efforts that are put in place to ensure that a country moves out of poverty. If African countries continue to rely on international institutions without putting in place structures to help them escape poverty, serious problems like stagflation will find a home in our midst.
It’s past the time for us to recognize that an economy is built piece by piece, not just with vision but also with actions.