Economic downturns are also known to worsen inequality. Are we prepared to fend off the potential impacts from decelerating SDG performance?. Photo: UNDP

 

“The outlook for the global economy has darkened,” said The World Bank in its Global Economic Prospects, released in January. The Bank said global growth will decline from 3% in 2018 to 2.9% in 2019 and 2.8% in 2020-21. The IMF, in its World Economic Outlook, forecast global growth will fall to 3.5% in 2019, from 3.7% in 2018. The US economy is predicted to slowdown from 2.7% in 2018, to 2.5% in 2019 and 1.8% in 2020. In the same month, the Chinese government announced that economic growth this year will be 6.6%, well below the average growth rate of above 8% witnessed in the past fifteen years. The doomsayers also predict declining growth rates in Europe, from 1.8% in 2018, to 1.7% in 2019 and 1.6% in 2020.

What does the global economic slowdown mean for African economies? Answer: when the big economies sneeze, Africa catches a cold.

The slowdown will have three impacts: 1) reduced demand for commodities (natural resource exports); 2) decline in capital inflows, Foreign Direct Investment mainly; and 3) lower income from remittances and tourism.

For instance, China is now Africa’s single largest trading partner, importing 86% of the continent’s oil, gas and minerals. The impact of China’s slowdown on Africa was already evident in 2015, when Chinese growth began to taper off. One example is Zambia. A quarter of the country’s copper exports go to China. The decline in demand from China led to production cuts and loss of 6,000 jobs in the Copperbelt. Another example is Congo Republic, where petroleum makes up two-thirds of exports. Over half goes to China. Production decreased by 7% when the Chinese economy slowed.

Just for illustration, 79% of the total foreign exchange earnings in the resource-rich countries come from commodity exports; and 46% of total fiscal revenues come from taxing commodity-related transactions.

While we have known for long that the problem is limited economic diversification, the export baskets remain concentrated along few commodities. The average export concentration index among the commodity-exporting economies is still 0.63 (the index takes a value between 0 and 1, a value of 1 indicating that only a single product is exported).

In countries that depend less on natural resource exports, a fall in remittances, that usually accompany a global slowdown, weakens the capacity of households to weather the storm. In the extreme case, families may even sell their productive assets, land and livestock, making them a lot more vulnerable. A similar impact is expected when incomes from tourism decline. Job losses in the service sector and reduced foreign exchange earnings are typical outcomes.

If foreign investment delines, the unemployment rates will rise in the face of 20 million entrants into the labour market every year. Less skilled and poorer workers are often the first to be laid off when economic downturns kick in. Studies show that this group is also the last to get employed after economies bounce back. Children are also the first victims when crisis hit—they are taken out of school, child labour increases, and their nutritional intake is reduced.

Economic downturns are also known to worsen inequality. Richer households often withstand losses of income by drawing down savings or through bank borrowing. Poor families often lack savings or cannot access financial services easily, thus widening the welfare gap between the two groups.

If global growth continues to slowdown, policymakers may explore external borrowing. However, this is unlikely in many countries where the debt-to-GDP ratio is rising. The ratio went up by 20% since 2012—currently averaging 57% for sub-Saharan Africa. Concessional lending will also be hard to come by given the slowdown among donors.

Most likely, governments will be forced to cut back public expenditure. Often, such cuts fall on the social sector—health, education and social transfers that protect poor households.

The above outlooks may seem unduly pessimistic, but we shouldn’t rule out that more people will fall into poverty or fail to escape poverty if the predicted global slowdowns this year and next were to hold true. The question is: Are we prepared to fend off the potential impacts from decelerating SDG performance?

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