The Shifting of the Monsoon: Implications of American Policy for Africa’s Economies

Africa

The Shifting of the Monsoon: Implications of American Policy for Africa’s Economies

Conrad Copeland

by: Conrad Copeland

February 10, 2017

The Shifting of the Monsoon: Implications of American Policy for Africa’s Economies

Africa

There has been much discussion of the potential conflicts, problems, and opportunities facing much of the world with the inauguration of Donald Trump last month.  From trade and military conflict with China, to the collapse of the European Union in a nativist tempest, to the economic undercutting of Latin American countries, particularly Mexico.  One area that much of this discussion has ignored is Africa.  What does the new American administration mean for the continent of Africa, its countries, and its economies.  Its unique economic situation makes the challenges it faces different from much of the rest of the world; and while many of the impacts of the new administration in Washington will likely be indirect in nature, they are no less problematic for policy-makers in African countries.

There are four major areas where potential shifts in American policy will cause negative impacts for African economies: direct changes in trade regimes, indirect trade effects, government debt and aid regimes, and civil society.  Expected shifts in United States trade policy, monetary policy, fiscal policy, and even the administration’s external orientation will all contribute to creating issues for African countries in these areas that will be unique to the continent.  While potentially pessimistic, it is important to highlight trouble points so that preparations can be made if problems arise and the seriousness of the negative impacts can be mitigated.

Direct Effects: A More Protectionist America

As the United States embarks on its journey towards ‘America First’ it can be expected to have a much more protectionist bent.  While the standard bogeymen of cheap Chinese labour and factory relocation to Mexico have already been rolled out, and were even used during the campaign, less orthodox targets have also emerged.

Germany, uniquely, has fallen within the new administration’s sights and has been labelled a currency manipulator that is using the value of the Euro to prop up its manufacturing exports.  The truth to this claim is spurious at best.  While it is a fact that the Euro is valued at less than what an independent Deutschmark would be, the idea that this has been the root cause of Germany’s trade surpluses is not true.  The German edge in manufacturing exports primarily comes from its competitiveness in productivity and strict fiscal restraint which hinders domestic demand, not currency differentials.  In spite of this, Germany and the Euro have become potential targets.

With this shift in rhetoric, the possibility of African economies falling victim to this trade witch-hunt is all too real.  In 2015 the African Growth and Opportunity Act (AGOA) was renewed for a further 10 years.  This act is a piece of American legislation that gives preferential trade treatment for select African economies.  Countries covered by the legislation are exempt from quotas and import duties on certain goods.  While this naturally includes many commodities, it also covers textiles and other goods and has significantly promoted exports from African countries to the United States in new product areas.  Overall these exports are worth over $19 billion to the continent of Africa, or approximately 11% of all exports from countries on the continent – a massive proportion for just one trade partner.

The AGOA could come under serious threat with the new administration.  While it is unlikely that congress will repeal the legislation outright, there is a clause in the act which allows the President to review the eligible countries that are included under the legislation.  The eligibility criteria are vague enough that it gives the President significant scope to freely determine which countries can be included or not.  In particular, the countries must be working towards eliminating barriers to United States trade and investment; not undermining United States national security or foreign policy interests; and not providing support for acts of international terrorism.  Given the new administration’s penchant for transforming the seemingly innocuous into significant national security threats, countries could easily find themselves on the wrong side of the President, and therefore on the outside of AGOA.

This is the largest direct trade threat of the new administration towards African economies.  The increase in protectionism under the new administration could lead to the exclusion of countries that become ‘too successful’, effectively countries that are too competitive relative to domestic American industries.  What makes this all the more dangerous is the relative share of African imports to the US economy as a whole.  The United States imports over $2.19 trillion worth of goods annually; imports from Africa amount to less than 1% of this total.  This makes African economies easy targets for an administration that appears to be continuously seeking to score domestic political points at the expense of other nations.

Indirect Effects: Shifting Trade Winds

The indirect effects of the new American administration’s trade policies could be much more problematic for African economies than even the threat of restricted trade with the United States.  African trade, and indirectly the stability of many African economies, is closely linked with global commodity demand and a potential hit to that demand could produce unfortunate ripple effects for African exports.

Commodities make up over 80% of exports from African countries and these exports are extremely sensitive to price effects.  The sensitivity of African economic growth to changes in commodity prices was made all too clear in 2015 when a slump in commodity prices produced the worst growth for the continent since the 2008 recession.  If the new President’s trade policies produce a globalised trade dispute it could cause a similar hit to commodity prices, producing more years of stagnant growth on the African continent.

More specifically, if the US administration makes good on its repeated threats to restrict trade with China, it could produce a localised trade war with global impacts.  Any restriction on Chinese exports would likely force China to at least temporarily reduce output.  While the Chinese economy could possibly weather such an action – particularly if it was limited enough in scope – it could lead to a weakening of Chinese demand for commodities and African raw materials which would blow a huge hole in many African countries’ current accounts and significantly slow growth on the continent.

Outside of the possibility of a US spat with China, there is scope for American trade and industrial policy to hurt other emerging economies around the world.  This would also adversely impact many African economies since many conduct much of their trade with emerging markets in South America, Asia, and the Middle East.  The economies in these regions are, in turn, highly dependent on global trade.  Any weakening in global trade flows will result in decreased demand for African goods in these regions and will negatively impact African exporters.  The integration of global trade networks has created a situation that has been highly beneficial for African growth, but it also makes it incredibly sensitive to adverse shocks.

Even the perceived threat of a global slowdown due to increased trade frictions could lead to market skittishness in many goods that African countries export.  This global uncertainty could lead investors to shift their expectations and produce price drops even without any actual decreases in the volume of trade.  Such a scenario would produce a similar effect to the price drop of 2015 and doom African short term growth to abysmally low levels.

These indirect threats to African trade flows are arguably even more of a potential problem than any direct trade restrictions placed on African economies.  The disproportionate effect that such outcomes would have for many countries on the continent make it a hostage to global trends and prices and make it extremely sensitive to any shifts in confidence or demand.  As a region, Africa is largely dependent on demand on other continents to fuel its exports with over 85% of those exports leaving the region.  While this makes African trade flows resilient to intra-regional shocks, in an era of potential global shocks emanating from the Americas and Asia it leaves African economies vulnerable.

Devil in Dependency: Economic Risk in Debt and Aid

The economic problems faced by African countries are not just trade based in the coming years, the twin issues of debt and aid are also looming on the horizon.  African countries face two primary risks concerning these aspects of their economies: borrowing is going to become increasingly expensive for African economies; and countries that are dependent on foreign aid, particularly from the United States, may see that aid drying up.

The issue of foreign debt is one that Africa has faced almost continuously for the past several decades.  As home to a large number of heavily indebted countries, the continent has been at the centre of numerous efforts to eliminate debt to developing countries.  The new American administration poses a unique threat to indebted countries in Africa that could potentially lead to a debt crisis of a scale not seen since the 1990s.

The most unfortunate thing about this problem is that it largely stems from domestic American policy arguments, principally the issues the new President has with the Federal Reserve.  During the election campaign, and several times since, the President has lambasted the Chair of the Federal Reserve, Janet Yellen, for being too dovish and keeping rates too low.  He has even gone so far as to claim that Yellen was conspiring to keep rates low for political reasons.  The Federal Reserve board has also faced internal pressure to begin raising rates, with several board members frequently dissenting on rate setting decisions.

Despite these criticisms, Federal Reserve policy has continued to be cautious over the last few years; this can be expected to change in 2017 however.  Late last year the Federal Reserve indicated that it would begin to slowly push rates higher in an attempt to ‘normalise’ policy.  Now with the potential increase in political pressure from the White House, we can expect this policy to continue – or possibly even accelerate.  Those on the Federal Open Market Committee that are against raising rates are likely to come under increasing pressure to relent and increase target rates.

So what does this mean for Africa?  The flow-through effects are what matters.  The likely increases in the US Federal funds rate will potentially cause the US dollar to appreciate; this is a major problem for African countries carrying higher debt loads since much of it is denominated in US dollars.  Since the recession, interest rates have been kept low, allowing countries to borrow very cheaply in US dollars; this combined with a recent push to shift from direct aid to generous loans has significantly increased the US dollar denominated debt burden of many African countries.  In order to make payments on these loans in US dollars, African governments can do one of two things: convert domestic currency denominated government revenues into US dollars, or seek new US dollar denominated loans.  Neither are good options.

With the US dollar appreciating relative to local African currencies, converting those local currencies into US dollars becomes more and more expensive, effectively making the loans more costly for governments than they originally were.  This feeds into the problem with the other option: if governments take new loans they will likely be forced to issue the debt at much higher rates of interest, due in part to the increased US Federal funds rate but also because lenders will be concerned about the solvency of African governments and will demand a higher risk premium.  Taking these new loans to pay off older ones at increased rates of interest will merely delay the issue while saddling these countries with even more onerous debt.  The options facing African governments in terms of their debt is to pay back the loans at increasing prices now, or take new loans at potentially ruinous rates to pay back later.

Foreign aid is a much more direct issue for African economies.  The new American administration has signalled an intention to largely withdraw from the world, particularly in terms of foreign aid.  This policy shift means that we can expect the US aid budget to be slashed, if not eliminated, severely impacting countries in Africa that depend on that money for essential projects.  This could also push other countries to withhold aid funding in anticipation of worse economic times or due to a perceived lack of effectiveness without US money, which alone accounts for almost 17% of all aid money going to the continent.  Much infrastructure and public service funding in many African countries comes from global aid budgets, removing that funding will prevent these projects from going forward and will starve African economies of essential capacity building that is needed for further economic growth.  Without this funding African governments will have to rely increasingly on loans to finance essential projects, exacerbating the already serious debt problem.

The dependency of many African countries on richer economies has long been a problem.  The issues of the cycle of dependency, the effectiveness of aid, and the fairness of many international loan structures have been a reliable source of debate and discussion both within and without the continent.  The coming years will present a new and more immediate challenge on this front by sharpening the problem in a profound and possibly unmanageable way.  It is very likely, given the current policy trajectory, that we will see a serious debt crisis for African economies within the next 3 years.

Governance and Civil Society: Beacon No Longer

For most of the last century the United States presented itself as an example of functioning democracy and freedom to be emulated by other countries.  While it will still likely present itself as this, the direct assistance it once provided will likely no longer be forthcoming and it will likely be viewed less as a beacon of liberal democracy and more as an example to political strongmen.  This will serve to hinder African civil society and leave many fledgling democratic movements to fend for themselves.

The new American administration and the idiosyncrasies of Donald Trump lean towards the authoritarian in its methods.  His administration views the press, opposition, and even government officials as enemies to be combatted.  This is not unlike the modus operandi of many autocratic regimes in Africa.  While the new American administration may not mirror the attitudes and, in particular, the actions of the Obiangs of the continent, many of Africa’s ‘Third-Term Club’ are very much in line with how the new US President seems to engage civil society.

Leaders such as Musaveni and Kagame routinely suppress dissent and twist the institutions of their countries to fit their political will, most notably with term limits on their presidencies.  The United States may now provide an excuse for these authoritarians, who routinely hold elections, and will no longer be a source of shame for them.  This could present a fundamental weakening of governance in Africa when combined with the potential economic strains.  It will make fertile ground for self-justification through pointing to the new US President’s subordination of rights to security and the antagonism towards a perceived ‘other’ – something that is particularly dangerous in countries as multi-ethnic as many of Africa’s are.

In terms of policy the new administration in the United States, with its proposed scale back of aid and seeming indifference to internationalism, will likely disengage from assisting democratic movements in Africa.  Where once US organisations provided money and expertise, there may now be a void as these groups are pressured to scale back activities abroad for domestic political reasons.  While this would definitely be a blow to democratic movements across Africa, it may also provide a major opportunity for African organisations.  American disengagement may open up space for African organisation to take the lead in dealing with political problems on the continent.

Recently, ECOWAS and the African Union have stepped up to the plate many times.  In Côte d’Ivoire, Mali, and most recently The Gambia the organisations have effectively and determinedly dealt with internal conflicts is a way that has brought about relative stability.  In Côte d’Ivoire and The Gambia the results of elections were enforced without the seemingly standard ‘power-sharing’ agreements which allow defeated autocrats to remain in power.  This all bodes well for the possibility of creating an internally policing state system on the continent that is able to contain, manage, and enforce the rule of law and democratic outcomes on its own.

What Is To Be Done?

Much of this assessment will seem to be very pessimistic or alarmist, but this is to emphasize the gravity of the situation and the magnitude of the potential danger ahead.  There is a Swahili proverb that goes as follows: Mwenzako akinyolewa wewe tia maji.  It means, literally, that when one’s friend is being shaved, it is wise to wet one’s head; essentially, when you see a situation happening around it is prudent to prepare yourself.  This is the message here, Africa as a continent and the individual countries as sovereign states must see the potential danger around them with the threats towards Asia, Europe, and the Americas and take measures to prepare to weather any storm that may come.

How this is to be done is the great question.  The intra-African economy should be at the forefront of any proposed plan.  Trade blocs, preferential trade agreements, customs unions, and similar pacts should be encouraged between nations and should be strengthened.  Infrastructure that improves transport between economies on the continent should be prioritised.  This will help in maintaining African goods access to markets and help reduce barriers to trade between countries on the continent.  In an era of potential global splintering and increased regionalisation it is imperative for African countries to recognise their mutual strengths and help one another.

The potential issues with trade do not mean intensifying exports to one or another region outside the continent; this will not be helpful if there are external slumps.  Increasing dependence on commodity-swallowing emerging markets will only over-expose African countries to the potential damage a collapse in demand may cause.  Of course, given the economic realities, commodity exports will not and should not cease, but diversification of markets and the strengthening of intra-African markets will make countries on the continent more robust to extra-continental shocks.  The stronger the continent’s economic ties within itself, the easier it will be able to withstand the buffeting global economic winds.

Similarly, civil society organisations in Africa – particularly well established ones like the African Union and ECOWAS – must continue to act to support democracy, transparency, and good institutions within their member countries.  It is imperative for any country to grow economically for it to have a strong institutional foundation and this is even more pronounced in a world that is becoming increasingly hostile to liberal democracy and transparent institutions.

Many challenges are facing the world in the near future and these challenges are more pronounced for African economies given their current situation.  This is not to say that it cannot be overcome, but it will also not be easy.  African economies and African democracy will face numerous challenges in the coming years but as another Swahili saying says Baada ya dhiki faraja: After hardship comes relief.  Trade conflict presents the possibility of export collapse; but also the opportunity of intra-continental trade strengthening.  Debt burdens present the potential for a massive debt crisis on the continent, something that could be very dangerous for African economies; but continental economic development communities have the opportunity to push their members through and ease the burden.  African civil society faces threats and loss of assistance; but this is an opportunity for local organisations to strengthen themselves and assist their members in building up their institutions.  Baada ya dhiki faraja; it is important to have hope when facing challenges.