Ike Ekweremadu

Being a paper presented at the 40h CPA African Region Conference, Port Harcourt.

The theme of this year’s Conference, ‘Commonwealth at 60- The Challenges and Opportunities” is very apt and a demonstration of our collective resolve to exploit available opportunities by taking stock of our challenges. Therefore, I strongly believe the CPA, Africa Region was most correct in listing the current global economic crisis and its implication for Africa as a critical challenge and subjects for discussion at this Conference. It is a matter of common sense that since the economic crisis cuts across nations, it is only natural that efforts to address it take systemic cooperation and strategizing across nations. And where else could have been best suited in charting a course for the rebound and development of African economies than Nigeria, the most populous nation and key  player on the continent’s and global economy?

As we probably know, the current global economic crisis is the second round of the financial crisis, which began in United States of America (USA) in August, 2007. The crisis has its roots in a banking practice called sub-prime mortgage lending in the USA. It is traceable to a set of complex banking problems that developed over time. The crisis was caused specifically by housing and credit markets mismatch, poor judgement by borrowers and/or the lenders, inability of homeowners to make mortgage payments, speculation and overbuilding during the boom period, risky mortgage products (financial innovations with concealed ed default risk), high personal and corporate debt profiles and inactive/weak central bank policies.

The benign environment then led investors, firms and consumers to expect a bright future and underestimate risk. Housing and other asset prices went up in U.S. as several risky mortgages were approved and sold as being nearly riskless. Therefore, when housing prices fell and sub prime mortgages and securities based on them reduced in value, the stage was set for a crisis. The crisis became contagious and quickly moved across assets, markets and economies in view of global integration and connections among financial institutions.

It is therefore relevant to ask, what does the global economic crisis mean for Africa? What are the channels through which the crisis is spreading and affecting Africa? What strategies can Africa use to counter the effects of this global economic crisis? The aim of this Paper therefore, is to examine the implications of the global economic crisis for African economy.. For a better understanding of the subject matter, relevant concepts are clarified and an overview of past and present global economic crises is presented followed by the implications of the global economic crisis on Africa with emphasis on the Nigerian economy.

Global: This is a synonym of worldwide and relates to the entire world. It means covering or affecting the whole world. It also mean comprehensive. It has been argued that global has replaced international as a way of referring to issues, processes and structure.

Economic Crises: Economic means ‘connected with the economy of a country or an area’ in aspects like production, trade, services, and development of the wealth of the society. Crisis on the other hand refers to a time of difficulty or confusion when problems must be solved or important decisions made. Therefore, economic crisis relates to difficulties that affect the growth and performance of the economy in question; unlike financial crisis which mainly involve financial institutions or assets suddenly losing a large part of their value. Crises will mean different periods of economic crisis.

Relationship between Concepts: An economic phenomenon is global in outlook when it is worldwide in character and wide spread influence. Hence, global economic crisis refer to economic problems, which affect the economies of several countries.

Analytical framework

The global economy is a network of economic linkages. The domestic economy is linked to the economy of the rest of the world through three markets. These are: goods market, factor market and assets market (money and credit market. Economic activities in other parts of the world influence the domestic economy through each of these markets. The extent to which this occurs depend on the level of integration of the domestic economy to the rest of the world.

The most obvious link of the domestic economy with other economies is through exports and imports of goods and services. The rest of the world influences the prices at which trade takes place and the quantities (for some goods) traded in the world markets. Thus, the effects other economies on the domestic economy are essentially through:

– prices and quantities of exports and imports.

– terms of trade (price of exports divided by price of imports)

– purchasing power of exports (terms of trade X export volume)

The terms of trade, measure is one of the most important indicators of external shocks to the economy. An improvement in terms of trade is a good thing but deterioration is adverse.

The factor market of a domestic economy is linked to other economies through two channels: international mobility of labour and international capital movement. The effects of labour movement, whether short-term or long­term/permanent, are through (1) Influence on labour supply in the home country; and (2) Influence on home country’s income through remittances.

The third link between the domestic economy and other economies in the world is through the market for assets, (the money and credit market). In this respect, people decide on where they want to invest their capital or keep their wealth. Some people may choose to hold their wealth abroad despite obstacles legal and physical while others may prefer the local economy. In any event, capital tends to flee from countries with unstable finances, and where the rewards associated with holding assets, (e.g. interest rates and dividends) are relatively low. This linkage between asset markets is perhaps the immediate and strongest of the three linkages. For instance, domestic prices may take sometime to have effect on the economy. Nevertheless, when interest rates, adjusted for exchange rate depreciation, get out of line, there is an immediate, highly visible pressure from capital flight. External reserves will fall or the country’s exchange rate will depreciate.

A financial crisis can metamorphose into a global economic crisis, manifesting in deepening recession, contraction of growth, employment and, hence, aggregate demand in a number of developed countries and some emerging market economies.

Overview of Global Economic Crisis

The world has witnessed several financial and economic crises. Notable among them is the Great depression of 1929-33, regarded as the worst in modern times. It reflected previous excesses and subsequent incompetence. A short list of some major financial crises since 1980 includes:

Latin American debt crisis of 1980s which began in Mexico  U.S. Savings and Loans crisis in 1989-91

Nordic Banking and Economic Crises, 1990-94 ? The 1994-95 Mexican Economic Crisis.  The Asian Financial Crisis in 1997-98

1998 Russian Financial Crisis  1999-2002Argentine Economic Crisis  2008 U.S. Financial Crisis

The U.S. Savings and Loans (S&L) Crisis of the 1980-91 was a massive collapse of the thrift industry. S&Ls financed long-term fixed-rate residential mortgages with savings and time deposits at a restricted interest rate. This mismatch exposed Savings and Loans to considerable interest rate risk when inflation rose in the 1970s and monetary policy was tightened. Savings and Loans experienced enormous losses of net worth in 1979-82, and the early 1980s recession exacerbated the problem. From 1986 to mid-1995 about one-half of all Savings and Loans holding in assets were closed. The resulting slowdown in the finance industry and the real estate market may have contributed to the 1990-91 economic recession in America. However, the recession was short-lived and relatively mild.

The three Nordic countries (Norway, Sweden and Finland) experienced banking and economic crisis in the early 1990s though the timing and severity of the crisis were different but there were important common elements. The crisis in Norway preceded the other two as it was closely linked to international oil price fluctuations while the crisis in Finland took the form of a severe depression (cumulative Gross Domestic Product GDP) fell by 14 percent over 1990 – 94 and the unemployment rate exploded from 3 to 20 per cent over that period).

In the case of the Asian financial crisis, the slowdown in the East Asia region during the crisis had global repercussions. The global economy witnessed slow growth and fall in commodity prices. The drop in oil prices adversely affected the export earnings and economic growth rates of oil- export countries like Nigeria. The financial crisis also affected the other non-oil producing Sub Saharan African (SSA) countries through the declining prices of key non-oil export commodities such as cotton, timber, etc. However, the financial effect of the East Asian financial crisis was effectively limited to South Africa because it was the only country in Sub Sahara Africa with sophisticated financial markets and substantial capital inflows. So, it was the only one fully exposed to contagion from the world financial crisis at the time. In recent years, however, some Sub Sahara Africa countries like Nigeria have liberalised their financial sectors and internationalised the capital markets thus making the economies highly vulnerable to the financial contagion.