Global markets are in turmoil and opinions are divided as to what it means for the global economy. We need to start thinking about economic resilience of developing countries and the poorest and most vulnerable people living within them.
The current crisis is primarily driven by fears that China’s growth is slowing and might lead to collapse of the currency and the stock-market. Additional factors include slowing growth in the US and across the West, the low price of oil, and falling demand for exports globally. For some, the current turbulence has all the ingredients of a new global financial crisis, which will be even worse than in 2007-8. For others it is nothing more than a necessary and overdue correction, and things will resume as normal soon enough – more akin to the bursting technology bubble in 2000 than the global meltdown of 2008.
What is clear that the Chinese economy is highly interconnected with many different parts of the global economy. In much the same way as the failure of the US subprime mortgage market led to the credit crunch, there are multiple ways in which changes in Chinese economic conditions – whether a hard landing or a few bumps – could influence the rest of the world.
Africa’s ‘surprising resilience’ to the 2008 crisis
When the global financial crisis erupted in 2008, there was widespread concern that poorer countries, including those in sub-Saharan Africa (SSA), would eventually be hardest hit. As early as October 2008, the IMF revised the expected regional growth rate for 2009 to decline from 5 per cent in October 2008 to 1.3 per cent by October 2009. Based on previous global recessions, such concerns appeared logical (see figure below).
External Economic Shocks and Growth in SSA and the World, 1960-2008
However, by October 2009 the IMF reported African economies as ‘regaining momentum’ (IMF 2009). Francois Bourguinon noted that one of the least noticed aspects of the global downturn was the ‘surprising resilience’ of the sub-Saharan region.
What underpinned this resilience? The explanation is partly because sub-Saharan countries were less exposed to the global credit crunch than had been predicted. While their exports did drop initially, they were buoyed by rapid recovery of China and India. African banks were also less exposed to toxic sub-prime mortgage assets, and therefore less vulnerable to the crisis. Commodity prices were also rising, for oil, copper, coffee and other key African exports; and African stock-markets and currencies also reaped the benefits of panicking investors switching from crashing Western markets. There is also evidence that improvements in macroeconomic management and governance helped some African countries deal with the crisis.
Will an economic downturn in 2016 result in a different story?
If the current instability escalates developing countries are likely to be hit from multiple directions, precisely because of the level of their exposure to the Chinese economy and to falling commodity prices. Asia, Indonesia and the Philippines have some of the highest levels of trade with China, however, the diversity of these countries’ economies may result in a greater level resilience to possible shocks. More problematic are the numerous countries in SSA – including Zambia, Nigeria and Ethiopia, whose exports to China make up a significant proportion of GDP, and where falling volumes will be exacerbated by much lower commodity prices.
African exports to China have been one of the early casualties of the China slow down. According to reports published last week by the Chinese Customs office, African exports to China fell by a worrying 40 per cent last year. Driven by falling demand for African oil, metals and minerals, this has in turn reduced commodity prices. There is also less money going from China to Africa, with direct investment from China into the continent also falling by 40 per cent in the first six months of 2015. This has led to pressure on many African currencies: for instance, the South African Rand fell by 9 per cent to its lowest value since 2008. This is problematic on multiple fronts, not least because it increases the cost of dollar-denominated debts.
There is also the not insignificant matter of developing country stocks making the worst start to the year on record, with $2.5 trillion wiped from the value of equities in the first three weeks of 2016.
What are the development implications of all this? Just as Haiti led to a focus on disaster resilience and Ebola has got the world worried about health system resilience, this period of turbulence is likely to generate a lot of talk about strengthening economic resilience.
Strengthening crisis anticipation: three priorities
It’s clearly too soon to predict anything, but to use the language of resilience thinking, we can certainly anticipate and prepare for some of the implications. At this stage, this means focusing serious analysis and foresight effort around three sets of issues.
First, we need to identify possible shocks, stresses and transmission channels, and map these for different countries. A more detailed understanding of the range of possible of shocks and stresses will help to inform appropriate policy responses. Macro factors include financial and trade flows, currency exchange rates, commodity prices, dollar debts and remittances. Micro factors include reduced access to credit, declining investment in public services, social exclusion, diminishing consumption and under / unemployment. We also need to think about transmission channels by which the shocks and stresses will impact on developing countries, and on the most vulnerable living in those countries.
Second, based on these shocks, stresses and transmission channels, we need to identify conditions and measures that will give developing country economies room for manoeuvre and flexibility. Flexible and diverse economies naturally do better when experiencing volatility and external shocks because they can use a wider range of mechanisms to continuously adjust and grow. This means working now to develop appropriate measures to reduce the impact of shocks in the future, ranging from insuring against such impacts, and to pre-positioning technical and financial support for at-risk countries. There is a particularly important role here for donors, especially development banks, to test and implement appropriate ‘counter-cyclical’ mechanisms to support improved performance against the backdrop of a stalling global economy.
Third, and perhaps most importantly, we need to make sure that we look beyond the economic data to the human face of any crisis that might be unfolding, and deal with the implications accordingly. According to UNDP, previous crises have deplete the assets and hurt the human capital of the most affected people.
Despite resilience of growth, the last global recession combined with other shocks to have a negative impact on key human development indicators. Research led by Naomi Hossain here at IDS on the impact of the financial crisis on poor people in five developing countries revealed a grim picture of how poor people were coping – or not. They were cutting back on the quality and quantities of food, not paying education and health costs, borrowing and selling assets, abandoning children and elderly people, defaulting on credit payments, resorting to crime and engaging in risky work and sexual behaviours. To put it another way, we can’t look only to economics to assess, understand and deal with the failure of global markets. And we need to use this broader interdisciplinary understanding to start pre-emptively scaling up resources and support to the poorest and and most vulnerable. After all, as the lessons of the last crisis show, they will feel the impacts of any future crisis, more deeply and for longer than anyone else.