Monday 25 July 2011

Obama's commitment to Africa

Todd Moss of the Centre for Global Development, a Washington based think tank, alerts us to the fact that Barack Obama is yet to name an Assistant Administrator (AA) for African Affairs at the United States Agency for International Development (USAID):

Nearly 30 months into the term, the White House has yet to name a USAID Assistant Administrator for Africa, the top government official responsible for US development efforts on the continent…The signal the vacancy sends to the outside world about priorities are patently clear — and interpreted as such in Africa.

In an earlier post, Mr Moss concludes thus:

There is simply no way to avoid the conclusion that USAID, development more broadly, and Africa in particular, are not just low on the list of priorities, but not on the list at all.

I am with Todd Moss on this one. To be sure, the Obama administration is probably focussing all its energies on fighting the greatest economic crisis since the Great Depression. The ‘Great Crisis’ notwithstanding, taking a few minutes to ponder on a possible candidate for the AA position is unlikely to cost the US economy one extra job . After all, AAs for Global health and the middle-east have already been filled by the administration.

Just two years into his presidency, George W. Bush launched the President’s Emergency Plan for AIDS Relief or PEPFAR, a $15bn programme that is widely acknowledged as being behind some of the good news emerging from the AIDS war front especially in Africa. All this, by the way, took place in the wake of the 9/11 terror attacks and the ensuing war on terror.

Failure to make such a high-level appointment does say quite a bit about Mr Obama’s commitment to Africa and is surely disappointing to those who expected much from the "son of the soil".

Monday 11 July 2011

If China goes belly-up

Nouriel Roubini, the Cassandra of the mortgage crisis, recently made a prediction about the world’s second largest economy, China:

China’s economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible – most likely after 2013 – China is poised for a sharp slowdown.

Roubini’s thesis is that from 2008 onwards, China’s growth strategy has increasingly been led by fixed investments in large-scale infrastructure projects and real estate, among others. Roubini estimates that fixed investments now constitute 50 per cent of Gross Domestic Product (GDP) with some estimates putting it as high as 70 per cent. Fixed investments-led growth is not such a bad idea if the investments in, say, real estate are conducted by private agents in response to REAL demand for housing which can be fuelled by anything such as an increase in the number of newly weds requiring housing . But the trouble here is that the growth in fixed investments was in large part driven by the Chinese government’s attempt at weathering the global economic slowdown that began in 2008. To this end, the government mandated state banks, flush with savings from Chinese households, to lend to munincipal councils on easy terms so that they could embark on stimulative construction projects, an opportunity the cash-strapped councils did not turn down. If one produces a good in excess of demand, the expectation is that the good’s price will eventually fall. Similarly, Roubini and others claim that there’s presently a construction glut in China which is likely to spark-off a deflationary period (falling prices) in the same manner the housing bubble in the West (US, UK, etc...) burst circa 2007. When this happens, the munincipal governments might witness their sources of revenues drying up making it difficult to service their debts to the State banks setting off a classic banking crisis, which is usually precursor to an economic crisis.

Troubling stories of the unintended consequences of the government’s benign plan to stave off a recession are already beginning to emerge. A recent illuminating piece in the New York Times detailed how one munincipality in China, Wuhan, is saddled with debt after going on an infrastructure construction binge. The trouble here is that the government in Beijing may not be aware of the true extent of the overindebtedness as some of the munincipalities created special purpose vehicles (SPVs) -- a chilling reanactment of the build up to the 2007/2008 financial crisis -- to borrow on the munincipalities behalfs. This from the NYT piece:

In the case of Wuhan, a close look at its finances reveals that the city has borrowed tens of billions of dollars from state-run banks. But the loans seldom go directly to the local government. Instead, the borrowing is done by special investment corporations set up by the city — business entities whose debt shows up nowhere on Wuhan’s official financial balance sheet.

If the likes of Roubini et al are correct in their prognosis, then a likely Chinese slowdown is the last thing that Africa needs. Specifically, a slowdown in Chinese construction might lead to a fall in demand for commodities such as copper and crude, factors expected to drive African growth this decade. For one thing, China is the world’s biggest consumer of refined copper. Further, a Chinese slowdown might deal a blow to the Sino-Africa trade valued at over $120bn  in 2010. There's also other matters of Chinese investment in Africa with a number of projects earmarked for this decade.

Some commentators, however, are of the opinion that the Chinese economy does not face a clear and present danger. If a real estate crisis arises (or is eminent), the planners in Beijing are more than able to steer the ship away from the proverbial iceberg in quite the same way they’ve been successfully steering the economy the last three decades or so. The trouble with this view is that the past is never prologue, and the fact that Chinese munincipalities have created these SPVs right under the noses of the bureaucrats in Beijing casts doubt on Beijing's 'steering' ability. Tough times might indeed be ahead for African economies.

Friday 8 July 2011


My name is Grieve Chelwa and I am a PhD candidate in economics at The University of Cape Town. The blog keeps an eye on Africa in as far as economic matters are concerned. As such, I monitor and report on the latest economic research on Africa or on research relevant to Africa. News stories on Africa are also covered. And since the economic base is the foundation on which the superstructure rests (if i can borrow from Marx), I will once in a while stray into commenting on social and political matters affecting the continent. You can reach me here with comments or suggestions.