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Recession in Africa:

Pouring water on a
drowned mouse

Shati Itminan
ID: 2008-2-10-121
Section: 5

Md. Ashrafuzzaman
ID: 2008-2-10-136
Section: 5
“Recession” or the financial crisis is the most common buzzword in the global arena of
business and trade world today. Since 2008, much of the industrialized countries of the
world entered into a recession which was mainly originated from the rapid increase of the
value of real property like housing in USA. Securitilization and deregulation of real estate
mortgaze also triggered the problem. This incident got sharp by the increase in oil and
food price. As a result, most of the countries of the world suffered a rise in
unemployment, fall in GDP (gross domestic product), slumping commodity prices and
the increasing inequality.

Recession affected almost all the countries of all continents. However, all the countries
were not the worst sufferers. It affected the countries of North America and Europe
badly. It also affected Africa but not in much extent. African economies have been
primarily affected by reduced global demand and lower prices of commodities such as
oil, platinum, nickel, gold, and copper. Several under-developed countries like Nigeria ,
Uganda , Ethiopia faced a problem of not getting sufficient aids from the developed
countries. South Africa was the first country to fall in recession in Africa.

Recession- what is it?

According to the Encyclopedia Britannica, recession or financial crisis is adownward


tend in the business cycle characterized by a decline in production and unemployment,
which in turn causes the income and spending of households to decline. Even though not
all households and business experience actual decline in income, their expectations about
the future becomes less certain during a recession and cause them to delay in making a
large amount of purchase or invesments.[1] There are many reasons for a recession to
start. Something might happen with the stock market or in the business world that scares
consumers, which we all are in some way or another. Something that makes people hangs
on to their money instead of spending it.Reduced spending by the consumer means
companies have to reduce their output. If this happens for long enough it will mean a
reduction of jobs. When people become unemployed, they typically stop spending. The
more jobs are lost, the less the consumers consume. The fewer consumers consume, the
more jobs are lost. It turns into a vicious cycle.

Recession or financial crisis can affect a country’s economy by some ways. It may
increase the inflation rate, raise unemployment level, lower the gross domestic product
(GDP) and make a misconception about the future.

The financial crisis of 2008 also known as the “recession of 2008” affected all the
countries of world more or less. Like all other continents, it also affected the poor
countries of Africa.

Pre recession scenario of Africa:


Africa also known as the “Dark
continent” is the world's poorest
inhabited continent. As of 2006,
approximately 922 million people were
living in Africa in 54 different
countries. From the beginning of the
history, African countries are lagging
behind in economy. Twenty five
countries of Africa have been ranked
lowest amongst the natons of the
world. The decolonization of
Africa was fraught with instability
aggravated by cold war conflict. Since Figure- 1: The GDP of African Countries [2]

mid-20th century the Cold War and increased corruption and despotism have also
contributed to Africa's poor economy. Much of Africa has stagnated and even regressed
in terms of foreign trade,investment, per capita income, and other economic
growth measures. Poverty has had widespread effects, including low life
expectancy, violence, and instability, which in turn have perpetuated the continent's
growth problems. Most of the countries in Africa have the National GDP per capita
below 4000 us dollars. Here the picture shows that only a few countries like Angola,
Sudan, Mauritania, South Africa has GDP over 4000. African countries are also suffering
from high inflation followed by low wage rate and high unemployment rate. However,
recent data suggest some parts of the continent are experiencing faster growth. [3]

Effect of Financial Crisis in Africa: Financial crisis had a multi-lateral effect on the
economy of Africa. It affected Africa in many ways. African countries, specifically those
who strongly rely on the export of their natural resources, are feeling the crunch of the
global economic crisis. African countries were affected in several ways. For example-
reduced GDP, higher inflation and unemployment rate , not getting sufficient aid from
donor countries etc.

Fall in GDP: Although Africa is the poorest continent, Africa showed a promising
improvement in GDP. After a half a decade of strong economic growth, the worldwide
crisis is threatening Africa's economic, political and social perspectives. According to the
report of “African Economic Outlook”, the current global economic downturn has
seriously affected African economies with GDP falling down from a projected 6.6% to
2.3% in 2009 (as of May). The report covers 47 African countries, up from 35 last year.
With a projected growth rate of only 2.3%, and a bias on the downside, many people will
fall back into poverty. [4] The annual percentages of change in GDP are almost 5%. The
fall in GDP is nothing but an effect of the
global financial crisis. The poor countries
magnaged to evade from the effect of low
GDP. However, they all were affected by
the change in GDP. Analysis showed that
the countries that had a comparatively high
GDP, suffered more than the countries
with lower GDP. South Africa experienced
the biggest change of GDP among the
African countries. Figure- 2: Annual % change of GDP [5]
An augment in Inflation: Inflation is the purchasing power of money. Several African
countries are striving to reduce their huge inflation rate. Some of them managed to
diminish the inflation rate. But due to the global financial crisis, almost all countries had
to endure a higher inflation rate in 2008.

Figure- 3: Inflation comparison of African Countries [6]

Based on 16 selected countries, average inflation for Africa increased from 10.3% at the
end of the first quarter of the year to 13.3% at the end of the second quarter. Based on the
data available, average inflation for Africa, based on 16 selected countries, to further
increase from 13.3% at the end of the second quarter to 15.5% by the end of the third
quarter of the year; mainly on account of higher inflationary expectations in South Africa,
Egypt, Ghana, Botswana and Uganda.The upturn in global commodities prices as
investors seek to hedge in the commodities market has led to budget imbalances and
Inflation hikes in most African countries. Most African countries were initially thought of
to be significantly decoupled from the US housing market crisis and the
associated financial market turbulence that started in mid-2007; but as distortions in
terms of trade emerged domestic prices across countries were strained. Specifically,
inflation for Kenya, Egypt and Ghana rose significantly above average trend. Kenya
recorded the highest inflation rate of 29.1% in June. Egypt and Ghana were 20.2% and
18.4% respectively. Essentially, African economies remain overly exposed to global
commodity price volatilities with high dependence on imports; which made domestic
inflation across country to be sensitive to local currency depreciation, global inflation,
and global commodity price upswings. As pressures to these indicators remain high
across countries, we expect average inflation to further increase in the third quarter albeit
marginally.

Zimbabwe, a country of Africa had an “incalculable” inflation rate. It had inflation rate
about 8000% recently, which is worlds highest. Other reports suggest the rate could be at
near 15,000% and the International Monetary Fund had warned it could reach 100,000%
by the end of the year. Zimbabwe’s official exchange rate is almost ZW$30000 = US$1
now. [7]

Rise in Unemployment:

Figure- 4: World’s unemployment Rate [8]

Like USA, Australia and other developed countries, financial crisis caused the high
unemployment rate in the African countries. In Africa the unemployment rate is the
highest in the world. In a period of financial crisis or recession, organization do not
usually take any major and large investments. They also lay off their employees to
maintain the equilibrium rate of cost and demand. So the unemployment rate rises. The
same scenario took place in Africa. Zimbabwe's unemployment rate has spiked to 94
percent, meaning that fewer than half a million people in the country are formally
employed."At close of 2008, only six percent of the population was formally employed,
down from 30 percent in 2003," said a report from the UN's Office for the Coordination
of Humanitarian Affairs (OCHA).Out of the country's 12 million people, only 480,000
have formal jobs, down from 3.6 million in 2003, the report said. Kenya, Zambia,
[9].
Mozambique had unemployment rate of 40%, 50% and 60% respectively Although
being a developed country, South Africa faced the worst unemployment rate ever in
2008-2009. The jobless rate increased to 23.5 percent from 21.9 percent in the previous
three months, Statistics South Africa said in a report released in Pretoria today. The
number of people out of work rose to 4.18 million from 3.87 million.[10]

Passive Effects of Finanacial crisis: Our study revealed that, there may be some passive
effects of financial crisis on Africa. This effects include, health problem, aid problem
etc. The world is in recession. Governments are worried about finding solutions to their
economic woes. This has led to an overlooked big question; what will happen of
providing aid for Africa? While millions of individuals in the West watched their stock
portfolios decline by precipitous amounts, there were millions of others in Africa that had
no idea the world was in an economic flux. This might have been fine if it were not for
the fact that much of the aid coming into Africa arrives from Western states, especially
those who are members of the G-8: The United States, Russia, Germany, France, Britain,
Italy, Canada, and Japan. As the world began to experience a deepening recession,
government bailouts counted in the billions of dollars, and concern over domestic job
loss, there was the beginning murmur of concern about foreign aid. The donor countries
can not provide adequate aid for the African countries. As the African countries are
largely dependent on the aid, economists think that Africa will face a problem of
healthcare, education, social stability etc. [11]
No doubt, Africa is the poorest continent of the world. Almost all of the countries there
lie below the poverty line. This continent has been dogged by the creepy hand of
deficiency for years and the global financial crisis of 2008- 2009 made Africa worser
than before. Africa’s GDP, Inflation, Unemployment all were badly affected by the
recession. Most of the countries became the victim and their economy became shocking
than the past. In a word, the financial crisis made the poor countries of Africa poorer.
Recession in Africa: Pouring water on a drowned mouse- our title focuses this.
Since the economy moves to the waterfall, no one can stop this. Some will profit from it,
many will suffer losses, some great losses, but at least, it will lead to a bright blessed day.
We hope that Africa will be better prepared to handle it and wait for the better days in
future.
References:

1. “Recession” , page: 977, The New Encyclopedia Britannica, Volume – 9, 15th edition.

2. http://en.wikipedia.org/wiki/File:Africa_by_gdp.png

3. http://en.wikipedia.org/wiki/Economy_of_Africa.html

4.http://www.financialnigeria.com/DEVELOPMENT/developmentreport_category_item
_detail.aspx?categoryid=10&item=138

5. http://www.un.org/ecosocdev/geninfo/afrec/vol22no4/gdp-graph.gif

6.http://www.databankgroup.com/privatecontent/File/knowledgebank/Africa%20Inflatio
n%20Update,%20August2008.pdf

7.http://www.databankgroup.com/privatecontent/File/knowledgebank/Africa%20Inflatio
n%20Update,%20August2008 .pdf

8.http://blogs.worldbank.org/files/growth/image/World%20and%20Regional%20Female
%20Youth%20Unemployment%20Rates%20by%20sex,%202006_.JPG

9. http://en.wikipedia.org/wiki/List_of_countries_by_unemployment_rate.htm

10. http://www.bloomberg.com/apps/news?pid=20601116&sid=aoB7RbcZCRfU.htm

11. http://www.scienceinafrica.co.za/2009/february/health%20care%20Africa.htm

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