Beyond the Financial Crisis: What Will Save West Africa?

Published on 20th April 2010

When the financial crisis unfolded in major developed economies in 2008, some believed that West Africa would be spared because it is not deeply integrated into the global financial system.  

When the financial crisis metastasized into the global economic downturn, however, it began to affect countries large and small all around the world. It was no longer only the United States or Europe. Companies, citizens, and governments in West Africa began to feel the effects of the global financial downturn through lower remittances, increased cost of capital for business, and growing fiscal pressures. 

In West Africa, remittances – both intra-regional and international – constitute a significant share of investment flows and play a huge role in sustaining development, especially in rural areas. The International Fund for Agricultural Development  estimates that 66% of migrants in Ghana send money to rural areas back home. Remittances account for 25% of GDP in Liberia, 13% of GDP in Mali, and 12% of GDP in Sierra Leone. Even a 10% decline – and estimates suggest that in some countries it has been higher – is significant enough. 

Credit is prohibitively expensive for small business, well into double digit rates, reaching as high as 30% in countries like Ghana. Unstable energy supplies make costs of doing business exorbitant and contribute greatly to the inability of local producers to compete against Chinese manufacturers. Electricity outages factor into production plans and rolling blackouts as well as multiple generators are a norm. As such, the region finds itself with an astonishingly weak manufacturing capacity, primarily exporting natural resources and importing everything else. 

Although on the international level trade sustains local economies, intra-regional trade is quite challenged, despite commitments on the national level and between countries’ leaders. According to the leaders of political parties in Nigeria and business leaders from Sierra Leone and Ghana, it is sometimes easier to export a product to Europe and import it back to a neighboring West African country than to bring it across the border. 

There have been many statements on the importance of growing intra-regional trade, many agreements, but the implementation is still lacking. Increasing calls for establishing a common currency to facilitate trade are somewhat misguided – although common currency can reduce transaction costs, its absence is not the major reason for lacking trade.  West Africa is facing the challenge of moving from promises and statements on the importance of trade to action in terms of policy development and, most importantly, enforcement. Looking at the impact of the financial crisis on West Africa, it is clear that lack of systemic integration in the global financial and economic system has been both a blessing and a curse.  

On the positive note, lack of integration meant that West African economies were not hit immediately by large financial collapses or economic downturns, as others around the world have been. They did not have to scramble their resources. They have had more time to adjust their strategy and respond to the economic downturn, learning from others. In fact, in its recent report the International Monetary Fund has lauded African states for their prudent macroeconomic policies and praised countries’ management of the current crisis, noting that many leaders have certainly learned from past mistakes. 

On the negative note, however, lack of integration has exposed the dire situation in regards to the development of West African states. Poverty is still widespread and the region is the only one in the world not expected to meet the majority of socio-economic development targets set by the Millennium Development Goals. Most importantly, lack of integration into the global economy exposed a fact that worries business people across the region – West African states have not been able to fully capitalize on economic growth opportunities of the past several decades. Citizens find themselves without much-needed jobs, companies find themselves without much-needed investments, and governments find themselves without much needed revenues.  This is the reality, despite a rather sounds GDP growth of some countries over the past years. 

On the list of the world’s most competitive economies produced by the World Economic Forum, the top West African performer is Gambia at 81st place. Senegal is 92nd, Nigeria is 99th. The rest of West African economies are even further down the list, occupying the bottom of the index.  

The challenge is simple and nothing that leaders in the region have not heard before: increase the competitiveness of local economies. Meeting that challenge will translate into a more sound economic foundation, jobs, poverty alleviation, and improved socio-economic conditions. Moreover, it will translate into democratic stability as it will allow citizens in the region to feel the real benefits of democratic and market reforms. It will help to turn electoral promises into concrete outcomes.  

These are the issues that former and current ministers, heads of chambers of commerce and political parties, and academia representatives from 10 West African states discussed at a recent event organized by the Institute of Economic Affairs (IEA). Bringing more than 50 people together at a three day forum, IEA sought to strengthen regional cooperation in the areas of democratic and economic reform.   

Conversations about problems, however important they may be, are largely useless if they don’t lead to concrete action plans and reform priorities. In this regard, the event participants also discussed ways in which the private and public sectors can work together to identify issues that are holding them back and actually resolve them. 

Vice President of the Republic of Ghana John Dramani Mahama, opening the IEA forum, said it best when outlining the challenge facing governments in the region. In his words, governments should stop paying lip service to the need to support the private sector and actually do it. This includes providing infrastructure support where it is needed, effective regulations and enforcement, as well as key services and access to financing. 

The private sector, however, should not sit back and wait for government assistance. It must become more proactive in promoting reform. This requires much more than demanding changes or filing complaints; the private sector must assume the leadership role in developing a list of policy priorities and solutions and becoming an advocate for change. 

As countries in West Africa deal with the fall out of the global financial crisis, they will undoubtedly see that the maturity of democracy and market economy is judged by its resilience in the face of challenges. Crises oftentimes present opportunities for sweeping reforms. It is the right time for West Africa to take advantage of those opportunities. It is the right time for West Africa to drastically improve its competitiveness rankings. It is the right time for West Africa to move forward in building democracies that deliver. 

By Aleksandr Shkolnikov.

Aleksandr Shkolnikov Ph.D., is Director of Policy Reform at the Center for International Private Enterprise (CIPE), which works to strengthen democracy around the globe through private enterprise and market-oriented reform.

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