“Africaand Falling Commodity Prices: No longer the Kiss of Death”, TheEconomist. April 23, 2015.
Thearticle chosen looks at the issue of falling commodity prices and itssignificance to African economies. Falling commodity prices affecteconomies in two major ways. For exporters falling commodity pricesmean reduced incomes causing inflationary pressures and economicrecession. On the other hand, falling commodity prices are a shot inthe arm for importing economies because they lead to positive currentaccount balances, economic growth and increases in disposable incomefor consumers. Africa has inherently been a net exporter ofcommodities because of low economic development and a smallmanufacturing sector.
Thismeans that falling commodity prices smell doom for African economies.However, this article shows that falling commodity prices will notactually lead to a contraction of African economies. In fact, thearticle postulates that a big number of African economies willactually see increased growth in the midst of falling commodityprices. The article continues to note that the IMF predicts that onlySierra Leone and Equatorial Guinea will see economic contractions inthe next two years. For others such as Nigeria there will becontinued growth although the rate of growth will not be as high aspreviously expected (10% instead of 14% for Nigeria). In the sameway, other countries such as Kenya will see increased growth becauseas a net importer of oil and with various oil-hungry rail and energyprojects in progress the country will benefit immensely.
Thearticle notes that this phenomenon can be explained by certainfactors. One is that Africa’s manufacturing sector is graduallygrowing at the same level as the economy. In addition, the tourismand services sectors are growing even faster having averaged 2.6%between 1996 and 2011. The receipts for tourism tripled between 2000and 2012 reducing dependence on commodities. The article also notesthat the use of more mundane fiscal policies is also to explain forthis solid performance of African economies. In conclusion, theauthor claims that African leaders should not be overly confidentbecause the continent is still heavily dependent on commodities andefforts to reduce this dependence should be sought.
Part2: Theory Review and Analysis
Thisarticle implies that when commodity prices fall, Africa is usually introuble. This is true from an economic point of view because whenglobal demand declines prices also tend to fall. In economic theory,it is clear that prices are a function of the interaction betweendemand and supply. Thus for many exporting nations when the price ofcommodities fall there will be a resultant drop in revenue. This doesnot only affect economic development but it also leads to variousmacroeconomic challenges. For instance, because of such a drop therespective countries treasuries and monetary policy authority toadopt various fiscal and monetary policy options to compensate forthis drop. Such efforts may include increased taxation, change ofbank reserve requirements and deficit financing.
Forinstance, considering that the government decides to increasetaxation, there will be an effect on national output because taxationis an added cost to businesses and households. With respect toconsumers, increased taxation means that there will be an increase inconsumer prices. This will lead to a reduction of disposable incomereducing the amount of money that individuals will save. On the otherhand, increased taxation means an increased cost of doing business.This reduces company profits meaning that companies will have less toinvest. A combination of these factors compounded by reducedgovernment spending will result in a decline in the national outputas indicated in the graph below.
However,as we saw in the article a majority of African economies will notexperience a drop in GDP growth. This means that the actual effect ona majority of African economies negates or is not consistent withthis economic theory. This as explained in the articles is because ofa couple of factors. Increased infrastructural development on thebackdrop of reduced commodity prices can have negative or positiveresults. As shown in the article in case the infrastructure projectsdepend on imports of commodities then this is a good sign for therespective economy.
Forinstance, the article uses Kenya as a key example. Because Kenya’sinfrastructure projects are highly dependent on oil, which thecountry is a net importer then this is good news. This is because theactual cost of these projects will significantly drop in comparisonto a situation where these projects were to be undertaken on thebackdrop of high commodity prices. On the other hand, as the articleshows Sierra Leone’s development is seriously hampered by fallingcommodity prices. This is because economic development within thecountry is highly dependent on the receipts of sale of commodities.Thus, falling commodity prices means that the company is receivingless receipts from the sale of these commodities. As a result, thecountry is left to contend with deficit financing which in turnincreases the economy’s interest rates making products moreexpensive. This in turn means that products are not competitive inthe international markets.
Unfortunately,Sierra Leone has also been greatly affected by the Ebola crisis. Thisoutbreak has led to increased public expenditure on healthcare afactor that has drained the little money gained from other sectors.Thus, it could be possible to say that the real situation in SierraLeone is not a function of falling commodity prices per se. Thus, itwould be okay not to analyze Sierra Leone based on economic theoryalone because of the Ebola outbreak.
Thismeans that the only country expected to see economic contractions inthe next two years is Equatorial Guinea. Equatorial Guinea on itspart has seen the inflow of hard currency since the discovery oflarge offshore oil reserves. Due to this, the economy has largelyneglected agriculture especially cocoa farming in favor on anoil-based economy. Unfortunately, the current decrease in commodityprices has seen the country’s GDP growth rate decline. This is onecase of a country that has failed to use oil-revenue to develop othersectors such as the tourism and financial sectors, which are goodsubstitutes for growth. However, the country held a developmentsymposium in 2014, but the effect and or impact are yet to berealized or observed. Thus, if the country fails to diversify theeconomy, there is a high probability that the living conditions ofcitizens will continue to worsen because even with increased incomesfrom oil exports the government has not adequately dealt with theissue of social development focusing instead on infrastructuraldevelopment.
Inother economies, we expect a mix of results because depending on thelevel of dependence on commodities each country will have mixedresults. However, as a whole the African economy will continue togrow gradually even with the continued fall of commodity prices.However, in order to ensure that the African economies experiencedincreased growth there is need for African leaders to understandtheir comparative advantages and invest in manufacturing in order toreduce their dependence on the export of commodities. In addition,African economies can adapt bilateral trade pacts where they canagree on their own terms of exchange for various commodities amongstthemselves without having to rely on the international markets.
Part3: Personal Opinion and Conclusion
myown opinion I feel that African leaders need to adopt stringentpolicies and development plans that will lead to a shift away fromdependence on commodities as key exports or imports. This can beachieved by attracting foreign and domestic investments in themanufacturing and service industries. Industrial products are lessaffected by changes in commodity prices and this will reduce frequenteconomic fluctuations in a majority of African nations.
Inorder to achieve this, it is necessary that African economies adoptdemocracy because with more democratic and corrupt free leaders theissue of corruption that has plagued Africa for decades will beminimized if not eliminated. Once this is done then it will be easierfor African economies to adopt the right policies and ensure thatavailable resources are allocated expeditiously.
Africaand Commodity Prices: No Longer the Kiss of Death. TheEconomist.http://www.economist.com/blogs/freeexchange/2015/04/africa-and-commodity-prices>.30 April 2015. Web