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Africa: New Economic Crisis on the Way

AfricaFocus Bulletin
Oct 4 2011 (111004)
(Reposted from sources cited below)

Editor's Note

"It is now clear that the world is slipping -- or has already slipped -- into a new economic downturn, and that this will have serious consequences for the developing countries. Indeed, some prominent economists have warned that this time the crisis will be more serious and more prolonged than the 2008-9 Great Recession." - Martin Khor, South Centre

So warns the latest version of the South Centre's Bulletin (October 3), reporting on a conference which took place in Geneva earlier this year. The Bulletin, containing an introduction by South Centre director Martin Khor, selected speeches, and a report on the conference deliberations, provides a structural analysis of the "next economic crisis." The conferees agreed that the crisis would severely affect Africa and other developing regions as well as the developed countries where the new crisis is now most visible. The time to prepare is now, the conferees stressed.

This AfricaFocus Bulletin contains the introductory essay by Martin Khor and the speech by Charles Soludo, former governor of the Central Bank of Nigeria. (Soludo is also co-author, with Thandika Mkandawire, of Our Continent, Our Future, a classic study of African development strategies ( The full South Bulletin is available at (direct URL:

For previous AfricaFocus Bulletins on economic issues, see


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Bracing For A New Global Economic Crisis

By Martin Khor

Martin Khor is the Executive Director of the South Centre

South Bulletin, October 3, 2011 / direct URL:

It is now clear that the world is slipping -- or has already slipped -- into a new economic downturn, and that this will have serious consequences for the developing countries. Indeed, some prominent economists have warned that this time the crisis will be more serious and more prolonged than the 2008-9 Great Recession.

Firstly, a double-dip recession is now likely because of the sovereign debt crisis in the European region and the weakening of the US economy. Secondly, the tools that helped the world quickly recover from the 2008-9 recession (fiscal stimulus and easy monetary policy) are no longer so easily available in the developed countries (or in some countries they are not available at all). Thirdly, the kind of coordination of policy actions among developed countries (and several developing countries as well) that fought the last recession no longer seems to exist, at least in the immediate future.

A new global recession, or at best a downturn with slow growth, could thus be more prolonged that the short 2008-9 recession. The developing countries could thus face serious economic problems. In order not to be caught as helpless victims to the new crisis, they need to take three types of action:

  • They should prepare themselves with policy responses to reduce the impact of the new crisis and the external shocks that may come with it, particularly a sharp fall in exports (including in commodity prices and demand), a reversal of capital flows and a sharp decline in value of their currency.
  • They should review their previous development strategies to see if they are still valid or whether changes are needed to respond to the changed international situation. In particular, developing countries that have relied heavily on exports to lead their growth may now find a decline in demand especially from the developed countries. They need to examine how to rely more on domestic demand and on regional South-South cooperation.
  • They should also take an active part in the discussions on reform of the international financial and monetary system, as well as on the coordination of macro-economic policies of systemically important countries. Developing countries are adversely affected by the dysfunctional global system, and therefore have an interest in its reform. Unfortunately there is an absence of an appropriate system of global economic governance that enables the developing countries to participate fully. Thus, this is also a good time to advocate for establishing such a governance system.

South Centre's Recent Papers

The South Centre has been analysing the global financial and economic situation in the past three years. Its research papers on the global economy provided suggestions on the policy responses required to assist developing countries during the 2008-9 recession; examined how the LDCs were being affected by the economic recession; and warned about how the recovery of 2009 would not be sustainable due to global imbalances among key countries that impede the expansion of global effective demand. The papers examined the export dependence of Asian countries and called for a review of development strategies. And they warned about how the unregulated flows of capital were continuing to cause boom-bust cycles that have devastating effects on developing countries. They predicted that the boom in capital flows and in economic growth could come to an end when the global situation changes. The accuracy of these analyses and predictions has been shown by the recent events.

South Centre conference on Financial Turbulence

The need for developing countries to respond to a new downturn led the South Centre to organise a Conference on "Options for developing countries in the global financial turbulence." It was co-organised with the Third World Network and the Consumers' Association of Penang and held at the International Labour Organisation in Geneva on 25 May. Linked to this conference, the Centre also organised an expert group meeting on financial policy issues on 24 May, and co-organised an NGO strategy meeting on 26 May.

The Conference brought together many experts from the developing countries as well as from international organisations such as UNCTAD and the ILO. Diplomats and policy makers from developing countries and NGOs specialising in financial and economic issues also attended.

The theme and tone of the Conference was set by a presentation on the current global situation by the South Centre's Chief Economist, Dr Yilmaz Akyüz. If the lessons of the last financial crisis are not acted on through coordinated global action, there will be a bigger crisis soon, and an even bigger one after that, he warned.

The world we face in the next 10 years will be different, with the developed countries facing massive public debts, said Y.V. Reddy, former Governor of the Reserve Bank of India. From the developing countries' viewpoint, there will be a lot of uncertainties, and they must prepare themselves to face the uncertain future.

Agreeing with this, the former Governor of Nigeria's Central Bank, Charles Soludo, said the key lesson for the developing countries is that they have to prepare now for the next crisis, which is caused by coordination failure at the global level. When that happens, commodity prices are likely to collapse, and many poor countries may face new debt crises.

Akyüz said that the developed economies face a slowdown in the next few years, with the United States having to respond to their deficits, several European countries in debt crises, and the steam going out of their previous reflationary fiscal and monetary policies.

Asian countries will be able to continue with their economic growth but at a moderate rate as most of them are not so vulnerable to currency or balance of payments problems. However the situation will be less orderly in Latin America and Africa, which are vulnerable to changes in global financial conditions and commodity markets.

Akyüz warned that there may be balance of payments crises in some major developing countries that have significant current account deficits and are thus dependent on the inflow of capital flows, since these flows may reverse.

There is risk of fiscal and sovereign debt crises in some developed countries. And the sluggish growth and high unemployment in the North will increase tension in the trading system, with the higher risk of protectionism.

Systemic reforms are needed in global finance, added Akyüz. There is a lack of multilateral discipline on financial, macro-economic and exchange rate policies of major countries. There is an absence of control of financial markets, capital flows and speculation. And the G20 has failed so far to address these systemic issues.

According to Akyüz, globalization had been oversold to developing countries, which were asked to fully integrate into the global financial markets. The lesson is that developing countries should rethink their integration into the world economy. They should seek strategic integration (in areas and ways that are beneficial) but not full integration.

Three scenarios on the new crisis

Soludo commented that he was intrigued by the scenario outlined by Akyuz and asked what would happen if the systemic problems are not tackled. Akyüz replied that we can then expect another crisis, and without reforms an even bigger crisis after that, and the possibility of conflicts among countries.

In Soludo's view, the financial crisis was triggered by coordination failures at the global level, and there will be more crises if this is not addressed. He gave three scenarios of what could happen:

First, there would be greater global policy coordination, with a world economic council setting rules for finance, disciplining major countries and establishing an independent panel for resolving debt crises.

Second, the present situation continues without global governance, each country sets its own policies, but there is regulation of financial institutions with cross-border effects, and a fund is set up to provide financing to developing countries hit by external shocks.

In the third scenario, there is only talk of reforms but no global action. Each country then tries to protect itself against a future crisis, by building foreign reserves, in a race to the bottom. This may be supplemented by regional financial measures.

Need for South to be Pro-active

Reddy commented that there had been too much of shadow banking in the past without the knowledge of whether the institutions and financial instruments are safe or toxic. The problems of financial institutions being "too big to fail" or "too powerful to regulate" remain.

In developing countries, it is necessary to design a financial system that not only avoids instability but also promotes development. Since the markets do not ensure stability or development, governments have to take charge and they must not give up the space for public policy.

Therefore countries must be allowed to have the policy space. It is important that there be diversity of policies. In the developed countries, the financial institutions were practicing the same model and making the same mistakes, and this led to a failure affecting the system. Those regulators that did not follow this model were able to avoid a crisis.

Up to now, the developing countries had been reactive (only reacting to others' views) in the global debates on finance. Reddy urged researchers and policy makers to examine the realities in developing countries and to be pro-active in voicing their views on global and national policies.

Malaysian researcher and former banker, Lim Mah Hui, made four policy proposals for Asian countries.

First, Asia should not follow the Anglo-Saxon model of finance but bring back the role of the financial sector as serving the real economy. Second, Asian countries should rebalance their economic growth by reducing their export dependence and also reducing income inequalities.

Third, Asian countries should reinvest their savings in the region. The foreign reserves should be invested in the region itself rather than being channelled to the West only to be recycled from there to Asia.

Fourth, in view of the volatility of capital flows, Asian countries should be prepared to make use of capital controls to avoid the adverse effects.

In the rest of this issue of South Bulletin, the presentations of some of the key speakers are published, as well as a detailed report of the sessions of the Conference.

Three Scenarios As South Faces the Next Global Crisis

Dr Charles Soludo, former Governor of the Central Bank of Nigeria and a member of the South Centre Board, told the Conference that developing countries must prepare now for the next financial crisis. He also gave three scenarios of how policy makers will respond to the crisis.

By Charles Soludo

South Bulletin, October 3, 2011 / direct URL:

I want to start exactly where Dr Reddy stopped. But just a few clarifications. The overall focus of this session is on developing countries. But within developing countries you have a huge spectrum. There are the LICUS countries - the Low Income Countries Under Stress. There are the Least Developed Countries. And of course there are the emerging markets. I think when we discuss them in terms of agendas or how this crisis has affected them and the way forward we need to keep this in mind - that they are different. For some of them it could be the difference between day and night.

Let me just summarize by saying that the key lesson for developing countries is to prepare for the next crisis. And therefore the discussions should really be about how do we prepare the LICUS countries, the LDCs, the emerging markets for the next crisis. And that's why I take from what both Reddy and Akyüz said this morning. From all the scenarios on both the capital flows and the commodity prices, this boom can't continue. It will have to end sometime. And who are the ones who are primary commodity exporters? We've said it before, in my country, Nigeria, when the oil price collapses, it may not collapse exactly for the same reasons that it collapsed in the 1970s or early 80s but collapse someday it may. And how do we prepare especially in light of the fact that many of these countries today experiencing boom are actually now involved in pro-cyclical fiscal policies at times of boom and that's when they are also accumulating huge debt and then when they are also involved in expansionary policies which are unsustainable. My focus is really on how do we prepare for the next crisis for developing countries, least developed countries and so on.

If I look at the global financial turbulence and ask what is the root of it, my own summary is that it just starts from the tension that here we have an increasingly globalized world and the problems we are facing, a large chunk of these are global but the solutions have to be by national governments. And this tension will always be there. The fight for autonomy, for the sovereign nature of states versus the problems that happen to be global with cross-border consequences, contagion and so on.

The global financial crisis is simply a consequence of the uncoordinated globalization - as a result of deficiencies in the international institutional arrangements for crisis detection, prevention, management and resolution. We don't yet have it at that level for coordination. And so global coordination failures happen to be at the heart of it. We can get into the immediate causes of the crisis, about the lax monetary policy and the lax financial regulations which are part of booming credit, leveraging and the subprime mortgages and how they spilled over into some other major economies and of course the contagion around the world from financial crisis to global economic crisis. But we have got to keep an eye on the root cause of the problem, namely that we have now a world where you have cross-border spillovers that are very significant but we don't have a coordinated mechanism to ensure orderly transition or where a crisis erupts to ensure an orderly work-out. That's the missing link in the whole globalization process both institutionally and otherwise.

Many of the poor countries have some very nascent capital markets that are just beginning to come up. The crisis led to massive outflows and there was a collapse of many of the stock markets in these very poor countries and they have not recovered. So the wealth effect of the crisis in many of these poor countries will be long lasting and I'm not quite sure how you get them to go back into the capital market and have development as well.

A major point to be made is that for developing countries especially for the poor ones who had absolutely nothing to do with the crisis, they just woke up one morning and faced something like a tsunami coming from somewhere. They had done all the right things they were asked to do and they were making progress. And then they wake up one morning and they see their capital market collapse, and they see the commodity prices collapse temporarily before resuming. They had the first immediate balance of payment shocks and they had to go into distress borrowing, accumulating new debt and so on. Of course they don't have the fiscal space to have the kind of stimulus packages undertaken in much of the Western world. And therefore they have to resort to either external borrowing or going back again to central bank financing of deficits with all the consequences. So these countries are really in a very bad shape. For several of them it will take quite a while for them to get out of this.

There's no shortage of proposals on what to do. Everyone has their own litany of "if only we did this the world would become a great place" -- the G20, the UN, the multilaterals, the NGOs, every institution has got a set of proposals on what needs to be done. And especially in the areas of financial sector regulation and for developing countries the whole question of whether to design or not counter-cyclical macroprudential regulation or guidelines. For developing countries, I urge them to carefully study many of these ideas and see which ones make sense, which ones can be implemented and which ones you can't within the political boundaries.

I said the whole crisis was triggered because of either incomplete or imperfect coordination failures at a global level. I think it's very serious. If the coordination does not take place, we are in for another crisis. Maybe the world needs to go through even a more severe recession to a depression for us to be forced to the new realities that we're in to be able to think out of the box, and to act on them.

I see three scenarios in terms of the next crisis -- what may eventually evolve. One scenario is that the world will either voluntarily or be forced into a more aggressive coordination -- an economic governance coordination -- of the type proposed in the Stiglitz report for a Global Economic Coordination Council or a WTO-type binding commitments and rules in respect of international banking, capital flows and macroeconomic coordination. This will require more active governance of the international system, to coordinate the provision of international public goods including economic and financial stability. This may be a WTO-type mechanism to regulate global finance and applying sanctions when necessary. Within this you can also have the sovereign debt tribunal or independent panel. Without the enforceable sanctions for bad behavior, how can you coordinate and enforce compliance of the systemically important countries?

Number two is to leave things as they are. There may be a listing of international best practices and standards. We just tell them what is good and then let each country take which one it likes and does and leave things as they are. Perhaps again there may be international regulation only for systemically important global financial institutions with cross-border effects. Control and regulate only ones that have cross-border effects, and things will be OK. In addition, some of us believe, that in addition to this if this is the interim step, to design a compensatory contingency financing to be funded by what we call a globalization tax. There ought to be a pool of funds, at the IMF or whatever the institution is, even if we would have created a new one where this pool will be. And this pool will make mandatory transfers for the LDCs and LICUS countries in particular in a form like a Marshall Plan. To pull them up and participate in a world of unequal economic powers but where everyone is required to compete under the same rules. The globalization tax might be taxing capital flows but the tax revenue doesn't get to the individual countries. It gets into a centralized pool. And that is to make globalization work or fairer.

It could also provide international liquidity to countries with sound economic and financial management but are hit by unanticipated external shocks. We can have some thoughts about what this kind of fund or pool would do but I think the world needs a pool that is mandatory in terms of transfers but that does not necessarily depend on the benevolence or kind-heartedness of somebody sitting there in a world where the laxity in the US could bring so much rain in Nigeria or Chad or in Eritrea in one morning, and with no consequences and they just bail themselves out and those other ones can perish. I think we need something -- a mechanism that ought to be in place and that fund would have to be it.

The third scenario is to just continue to muddle through. There will be more talk about reforms and see whatever comes out of it, which is what is going on now mostly. There is a dominant mindset that somehow things will fall in place. I don't know. Maybe they will fall in place or maybe they will fall in pieces.

But if we just adopt Option 3, I think we will be facing a race to the bottom because each country then as a sovereign nation would start preparing for the next crisis by itself and one of the ways they do it is to self-insure. Most developing countries would start accumulating reserves. Because we know what happened the last time in Nigeria, we lost $15 billion in about a month in outflows. When the crisis hit, the hot money had to leave quickly from the capital market - $15 billion in one month. Of course that crashed the exchange rate, that led to liquidity crises in several banks, so on and so forth. So to self-insure, countries accumulate reserves, and this will lead to a race to the bottom as it were. We'll be tightening regulation, mainstream risk management while emphasizing development, rethink the abandonment of development banking, how to make it work, to channel long-term funds, pension funds and so on to development projects. We will mainstream regional cooperation. We have a lot to learn from each other, especially through South-South exchanges. I want to commend the work that the South Centre is doing and I think we need more of this kind of cooperation and of course also skills transfer especially to our policy makers. Build skills, network better because in the end I believe for the LICUS, LDCs and the emerging markets, they have to stand in a united way.

AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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