Monday, 29 September 2008

Is Sub-Saharan Africa threatened by the world financial turmoil?

There have been concerns raised that the world's poor could suffer as a result of the credit problems which are tearing through the US and European financial centres. There are indications that contagion has spread to parts of Sub-Saharan Africa, with one of the major South African insurers suffering large losses and share price falls in recent days. One could also see a scenario where European and US aggregate demand collapses in response to the credit contraction and they stop buying African goods and erect higher trade barriers.

The pessimistic view could see an aggregate demand decline in the West lead to a downturn in China and the rapidly growing developing economies, whose growth is supported by high investment rates but correspondingly low levels of consumption. The decline of the whole world economy would of course badly affect Africa's recent brisk growth. The imbalances between the high consumption West and the high investing developing countries are perhaps the most serious threat facing the world economy today, and the period between the time these developing countries catch up with the West and the time they adopt Western consumption levels is likely to be difficult.

A more optimistic viewpoint would observe the multipolar nature of the world's economy, and significantly that the global credit sources and global demand sources are not precisely identified. A financial crisis in a single country, even one as large as the US, does not necessarily precipitate a global crisis of comparable severity.

My view is that the West will suffer most from the current crisis, but the world economy will also slow. A full judgement would be based on a probabilistic analysis of all possible scenarios.

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