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Chapter 1 The 2010 <strong>European</strong> <strong>Report</strong> on Development A closer look at the impact of these three crises in SSA highlights two contrasting elements: higher than expected resilience to the financial crisis, and widespread <strong>social</strong> effects, especially of the food crisis. The episodes also show that crises could exacerbate the structural weaknesses of SSA countries, inducing long-lasting consequences. Box 1.1: The food and fuel crises had a severe impact on Sub-Saharan Africa A worldwide commodity price boom picked up pace in 2007, with food prices rising more than 45% from the end of 2006. Many prices reached record highs in current dollar terms, including those <strong>for</strong> crude oil, tin, nickel, soybeans, corn and wheat. The surge was led by some major food crops (corn, wheat and edible oil) but then spread to other food items. Since the food prices increases had been passed through to domestic markets in most countries, the <strong>social</strong> impact has been considerable <strong>for</strong> the urban poor. In some countries, the food and fuel crisis increased <strong>social</strong> tensions, even riots in Burkina Faso, Cameroon, Niger and Mozambique. Source: Based on IMF, 2010, Impact of high food and fuel prices on developing countries. IMF: Washington, DC. 1.3.1 RESILIENCE TO THE GLOBAL FINANCIAL CRISIS According to the International Monetary Fund (IMF), “perhaps one of the least noticed aspects of the global downturn has been the resilience of the Sub-Saharan Africa region”. 40 Indeed, despite dire warnings in early 2009 about the negative impact of the global financial crisis on developing countries, the macroeconomic impact so far has been surprisingly modest (box 1.2). In 2009, average GDP growth in SSA was 2.6%. 41 If South Africa, the regional heavyweight and one of the African countries most seriously affected, is excluded, growth would average around 4%, exceeding the population growth of 2.5%. Growth is expected to be close to 5% in 2010 and 5.5% in 2011, thus reverting to the high growth rates be<strong>for</strong>e the crisis. 42 Box 1.2: Why the financial crisis has not been so bad in SSA Four main groups of factors explain the reasons <strong>for</strong> the better-than-expected per<strong>for</strong>mance in SSA: • In contrast to some previous crises, the current financial crisis originated entirely in the developed world, and the transmission channels to SSA were mainly indirect. SSA was mostly affected by the initial and short-lived collapse of world trade, which hindered its exports, as well as by the decline in capital flows and the fall in commodity prices associated with falling global demand. There<strong>for</strong>e, SSA countries most closely integrated with the world economy and capital markets (such as South Africa) saw the biggest shrinkage of GDP in 2009, while raw material exporters were mainly affected through the commodity linkage. • The crisis proved to be much more short-lived than expected due to the high 2009 and 2010 growth in emerging markets, particularly China and India. Their demand <strong>for</strong> commodities - as well as that from other emerging markets - held up strongly, allowing a quick recovery of commodity prices, which kept most of SSA out of recession. • SSA’s resilience can chiefly be attributed to “entering the crisis on a stronger footing”. 43 Indeed, the big improvements in macroeconomic management and re<strong>for</strong>ms be<strong>for</strong>e the crisis helped most SSA countries weather the storm. Obviously, this broad statement hides marked differences in per<strong>for</strong>mance across countries: those with high fiscal and current account deficits were harder hit and are likely to come out of the crisis much slower than others. • Most SSA countries addressed the short-term problems associated with the crisis rather quickly, some with help from the international community. Reserves were drawn down by some $9 billion in 2009, and official lenders increased flows by $4 billion, potentially cushioning the decline in capital flows. 44 Governments also used their fiscal space to stabilise the economy, allowing their budgets to go significantly into deficit. These one-off fiscal deficits will have allowed some countries to “shield pro-poor and pro-growth public spending”, such as health and education. 45 40 IMF 2010a. 41 IMF 2010b. 42 IMF 2010b. 43 AfdB 2010. 44 World Bank 2010c, table B6.1. 45 IMF 2010a. 17
The 2010 <strong>European</strong> <strong>Report</strong> on Development The momentum <strong>for</strong> <strong>social</strong> <strong>protection</strong> in Sub-Saharan Africa SSA resilience to the global financial crisis should not overshadow the fact that the rapid sequence of the three crises put SSA countries under severe stress. The sharp rise in primary commodity prices, especially in staple food prices in 2007 and 2008, had major implications <strong>for</strong> many SSA countries and their people. Because most African countries are net food importers, they were hit hard by the more than doubling of staple food prices in less than a year. Domestic food prices rose substantially. For many farmers growing food crops, this is likely to have raised incomes. But because large parts of the population, including many farmers, are net buyers of food, 46 real incomes have declined. At the same time, the peak in fuel prices made imports unaf<strong>for</strong>dable <strong>for</strong> many oil importers and resulted in high deficits and losses of <strong>for</strong>eign reserves. The financial crisis, the last in the sequence, materialized immediately after the food and fuel crises, particularly hitting the middle-income SSA countries, more integrated in global markets. Africa may have coped well this time, but it remains vulnerable to such serious shocks, not least in food prices. The food crisis highlighted weaknesses in economic structure and in food production and distribution. Food price rises and fluctuations as recently witnessed may well become more common with climate change. While food prices fell during the financial crisis, they are already trending upward as the world economy recovers and weather shocks are disrupting supplies. 47 When such shocks hit households, they can sustain consumption and investments with additional income from working longer hours, from assets, from remittances, from cash or in-kind transfers or from some <strong>for</strong>m of publicly provided safety net or other support system. But the demand <strong>for</strong> these supports can clash with falling revenues and external aid in the global recession. With reduced resources, the depth and the duration of the income shock can be larger, with dire aggregate <strong>social</strong> consequences, particularly <strong>for</strong> the poorest and most vulnerable. 1.3.2 THE SOCIAL CONSEQUENCES OF THE CRISES It is difficult to assess the impact of the three crises separately, but their rapid succession depleted the reserves of countries and families alike, exacerbating their vulnerability to further shocks. Many of the <strong>social</strong> impacts, furthermore, may take time to realize. Empirical evidence on the direct impact of the crises is not readily available, as data on the post-crisis period are only starting to become available. But it is likely that large price shocks, not least in food, will have had important distributional effects, with producers gaining and consumers hit hard. Poverty is likely to have directly increased because of the food crisis, even if partially offset by improving living standards of net food producers among African farmers. 48 World cereal prices doubled between 2006 and 2008, 49 though in most countries, including in Africa, the actual increase was lower. But even with only half this increase, a 4.4 percentage point increase in poverty among net consumers would have followed - <strong>for</strong> about 33 million more poor below the $1.25 per day poverty line in SSA. 50 Conversely, the global crisis and the resulting growth slowdown in Africa are in general expected to have resulted not in large increases in poverty, but in a slower pace of poverty reduction. Some aggregate studies have reported that improvements recorded in the fight against poverty in SSA will slow down. 51 Be<strong>for</strong>e the financial crisis, SSA had been set to reach a poverty rate of 35.9% by 2015 but the latest estimates put this at 38%, implying that 20 million fewer people will be lifted out of poverty by 2015 and many millions more will suffer from hunger and undernourishment. 52 One of mechanism <strong>for</strong> the global crisis to affect poverty is employment, especially in countries more integrated in the world economy. International Labour Organization (ILO) 53 reported considerable job losses in <strong>for</strong>estry and cotton industries in Cameroon. In South Africa <strong>for</strong>mal employment fell from 13.7 million in the second quarter of 2008 to 12.9 million in the third quarter of 2009, while in Nigeria the unemployment rate rose to 19.7% in March 2009, almost 5 percentage points more than in the previous year. 54 Slower growth and the distributional consequences linked to these crises are also having impacts on other welfare indicators, especially <strong>for</strong> children. The nutrition and health consequences are likely to have been high: one recent estimate indicates 30,000 to 50,000 more children under the age of five dying in 2009 than would have occurred without the crises, with significantly higher impacts on girls. 55 A United Nations Children’s Fund study finds that child well-being in Ghana is affected most by a sharp increase 46 World Bank 2008. 47 Moreover, the recent (September 2010) Russian drought and grain export ban has enhanced the threat posed <strong>for</strong> an imminent recurrence of food price crisis. 48 Wodon and Zamam 2010. 49 FAO Price Index (http://faostat.fao.org/). 50 Calculated from Wodon and Zamam using data from Chen et al. 2008, and from World Bank and IMF 2010. 51 World Bank and IMF 2010. 52 The crisis is expected to set back or reverse to alleviate poverty in Africa, as at least 7% annual growth is generally considered necessary <strong>for</strong> outpacing population growth and making significant progress in alleviating the toll of hunger, unemployment, and disease. 53 ILO 2010b. 54 ILO 2010a,b. 55 See Friedman and Schady 2009, who adopt household level data <strong>for</strong> their simulations. 18
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