Why has the economic crisis in sub-Sahara Africa states persisted for decades after their Independences? What lessons can be drown from successful stories such as Botswana and how can they inverse the crisis?
Many decades after their independences, Sub Saharan African countries (SSAC) still find themselves deep in economic crisis. After years of implementing different types of economic policies, the efforts have proven to be inefficient and costly. When talking about economic crisis in Sub Sahara Africa, many literatures focus on problems that are on the surface such as poverty, famine and low income. However, the deep roots of the economic problems of SSA have various dimensions including ...view middle of the document...
The reasons why many African states have not been able to achieve these requirements is due to increasingly declining terms of trade, the failure on the market side to boost Foreign Direct Investment( FDI) and Gross Domestic Investment( GDI) and finally, the political failure which is surrounded by conflict leading to a decrease in Gross national savings. In order for SSA states to get themselves out of economic crisis, they need to create solid governance that focuses on investing in human capital, improve infrastructure in order to attract FDI, and boost internal production to increase trade by diversifying their export.
In order to understand why Terms of trade is important to the economic development of SSAC, it is important to understand what it is. The Finance states that T.o.T is ‘The ration of the prices of a country’s exports to the prices of its imports defines the net barter terms of trade, which measures the number of units of imports that can be exchanged for a unit of exports’. Many literatures have argued that the macro-economy bad performance in SSAC is due to the increasing deterioration of the terms of trade since mid 1970’s. Why has it deteriorated?
Trade is one of the key elements that links African states to the rest of the world. Since the 1960’s, African states have grown to adopt a traditional manner to trade with the rest of the world which has been carried to this date. African development strategies have been bad at re-allocating factors of production and diversification of commodities, from primary commodities to high value added commodities. The abundance of Natural resources in some parts of SSA has been an incentive to avoid diversification and stick to exportation of row products. This has created a barrier to attain large and profitable markets and affected their prospect of success in the international market
Biotechnology and science have increased substitutes to raw products such as vanilla, sugar, palm oil. The demand for products like copper is challenged by genetic researches that are gradually discovering synthetic substitutes. Due to these facts, the terms of trade of African states has declined substantially over the last 3 decades. Another reason why T.o.T have declined massively is the slow growth of total export profit compare to the rest of the world’s export.
Prices of imports in SSAC are rising much faster than the prices of exports. This for a primary commodities exporters can critically affect the balance of payment. Greenaway ( 2004) used a sample of 14 SSAC from 1980 to 1995, to show that ‘growth is negatively affected by T.o.T volatility’. There are various literatures that focuses on the consequences of declining T.o.T in SSA such as Haddas ( 2011), Lutz ( 1999), Cashin( 2002). They all have linked the high correlation between an increasing deterioration, volatility of T.o.T with a simultaneous depressing of the export revenue and capital inflow for SSAC. This correlation is stronger...