The unequal global financial architecture which is skewed against African and developing countries in favour of developed countries is one of the biggest growth constraints on African economies.
So unfavourable is the current global financial architecture that policies, decisions and events which are triggered in industrial countries, over which African countries have little say, often undermine economic growth in African countries.
Key among these is the fact that the US dollar dominates global finance, to the disadvantage of African and developing country currencies. This means that whatever domestic monetary policy the US decides on, impacts on African economies – almost invariably negatively.
A case in point, when the US decided in 2014 that it will roll-back its programme to stimulate its economy, in a response to the impact of the global and euro zone financial crises, called “tapering”, many African economies were negatively impacted.
Many investors in Africa and emerging markets feared the US Federal Reserve, the country’s central bank, decision would trigger capital flight from these markets, and took their money to what they perceived is “safer” industrial country havens – the US and Europe. This caused herd selling of the currencies of African and emerging markets – and caused their currencies to slide.
Many African countries were forced to raise interest rates to help steady their currencies, which undermined their economic growth rates. In spite of the massive impact US policy decisions on the dollar has on African countries, they have little say over US currency policies.
The Governor of India’s central bank Raghuram Rajan has rightly argued it is unfair that the US can adjust its domestic monetary policy to calibrate the dollar to stimulate local jobs, growth and development, in such a way that it undermines the currencies, trade balances and foreign reserves of African and developing countries. For example, if African and developing countries hold dollar-denominated debt, and their currencies weaken against the dollar, their debt burden rises.
Since the US dollar is the global currency, the US must co-ordinate its monetary policy with African and developing countries also, so that the impact of its policies does not undermine African and developing countries.
African countries must collectively agitate for replacing the US dollar as the sole issuer of the global reserve currency to a bigger basket of currencies. In the longer term African countries will have to diversify the basket of currencies in which they trade.
African economies do not have the policy independence to use monetary and fiscal policies to stimulate their own economies – lest they face a market, investor and Western media backlash.
When the US introduced its “quantitative easing” or “tapering” policy to improve economic growth, it used strategies such as asset purchases and low interest rates.
The Swiss National Bank introduced a policy of unlimited foreign exchange intervention to set a Swiss franc ceiling.
Western-based currency speculators are increasingly using the fluctuations of the dollar to make a profit from African and developing country currencies. Short-term currency speculation, whereby foreign investors move money quickly back and forth between countries with different interest rates, makes it difficult for African countries to implement independent monetary policies.
African countries could collectively introduce “Tobin” taxes.
In 1972, James Tobin, the Nobel-winning Yale economist, argued that currency speculation – money moving internationally to bet on fluctuations in exchange rates – a practice routinely done by investors from developed countries on African and developing country currencies, should be taxed.
Such a “Tobin” tax would discourage investors who are trying to profit from the fluctuations against the US dollar of African and developing country currencies. Such a proposal could be a collective proposal led by the AU. Recently, Yi Gang, the deputy governor of the China central bank, called for a Tobin tax to deter currency speculators.
In the long-term African countries must pursue economic policies that will encourage broad-based long-term investors, not short-term “hot money”.
Africa and other emerging markets must pressure the International Monetary Fund (IMF) and World Bank to improve the governance of global capital markets and ensure that there is stability, and better co-ordination of global monetary policy.
Increasingly individual African and developing country growth prospects depend on rating agencies. Most rating agencies such as Fitch, Moody’s and Standard and Poor come from industrial countries. They are often highly prejudiced against African countries, and often do not have sophisticated or nuanced analysis of African economies – yet their impact on Africa growth are increasingly becoming massive.
Lower credit ratings means African countries will have to borrow at higher costs – because financiers will believe they (African country borrowers) are at greater risk of default. If they give African countries junk status, foreign investors will withdraw and new investors will stay away.
Another crucial external constraint on African growth is that most of the prices of African commodities are set in industrial countries – not where they are produced. This means that African commodity-based economies will forever be vulnerable to commodity price fluctuations often initiated by the industrial countries, undermining their growth.
Clearly, African commodity producers must get involved in securing a “balanced supply and demand in the physical markets”.
It should be the role of the AU to work a joint African strategy to deal with wildly fluctuating commodity prices. Africa needs greater inter-Africa trade and barter, and integration.
The US and Europe-dominated IMF, World Bank and International Finance Corporation (IFC), have dominated development finance since World War II. All three have been criticised for being biased towards Western countries.
When in a financial crisis, African and developing countries are often force-fed economic, political and trade policies, which are often astonishingly inappropriate, in return for funding by these multilateral organisations.
Unless African countries have a greater say in the control over the policies and ideas of the IMF, World Bank and IFC, their economies will remain at risk. African countries must pressure the IMF and World Bank to improve the governance of global capital markets and ensure there is stability, and better co-ordination, of global monetary policy.
But African countries will have to improve their macro-economic management. Most African economies have for example fiscal deficits – when a government’s total expenditures exceed the revenue that it generates (excluding money from borrowings).
African countries also have very high current account deficits – a measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services it exports. Many African countries also have very high debt to gross domestic product levels – which will have to be better managed.
All these weaknesses in the management of their public finances not only undermines growth, it makes African countries systematically vulnerable in an unequal global financial system.