The financial bubble bursts — what about Africa?

As I write this, US lawmakers are still haggling about whether or not to approve the $700-million bail-out package, to rescue Wall Street.

Exactly how all of this international financial stuff works is rather beyond me (and from reading newspapers and magazines such as Time, it seems not even seasoned financial reporters understand all of it, let alone the regulators). But basically it seems that top international banks made a whole lot of very risky loans, which were backed up by complicated inter-bank guarantees — and now that many people can’t pay back their loans, the whole system is coming crashing down.

Anyhow, there are a few points that can be made, and questions to be asked, about how all of this is affecting, or going to affect, Africa.

The first point is one that BBC World made, when the US bailout package was first proposed. At the time, the UN was also meeting to discuss measures to reduce global poverty. After lengthy deliberations, the delegates agreed to commit something like $16-billion to fight global poverty and try to meet the millennium development goal of halving the number of people living on just 1-2 US dollars a day. The UN secretary-general hailed that as a great achievement. Well, it does sound like a lot, but in comparison to the proposed $700-million to rescue Wall Street, it’s a pittance.

Another notable feature of the current crash, is that we are seeing a reversal of market liberalisation, as the US government rescues banks, and even effectively nationalises huge private financial institutions (which is what happened when the government took over the home loan organisations Fannie Mae and Freddie Mac). There are huge contrasts here with what might happen should the economy of a developing nation be in the same situation. Firstly, the IMF and World Bank would be there, insisting institutions be allowed to collapse rather than be bailed out, and insisting on market liberalisation rather than the opposite (which is what happened in south-east Asia about a decade ago). Secondly, imagine an African or South American government suddenly deciding to nationalise major privately-owned financial institutions. The US would be decrying it, and imposing blockades and sanctions.

A key question for all of us must be, how will the current crisis impact on Africa. So far it seems that African banks are not in much danger — I think the fairly conservative banking and finance laws in most African countries have protected us to an extent. But there will obviously be other impacts. One I have wondered about is how the economic slump in the US and Europe will affect remittances sent back to Africa by Africans living in these countries. Remittances have been shown to be a major form of income, not only for individuals and families, but for national economies. But if Africans abroad start losing their jobs, or feeling the pinch, these contributions are bound to suffer.

In the long term, the picture may not be so bleak. Writing in South Africa’s Business Day earlier this week, finance expert Michael Power argues that savers in the rest of the world have up to now been financing the US’s over-consumption and credit-fuelled lifestyle, and have not been profiting from it. He says this huge bubble is about to burst, and the US is going to lose its place at the top of the global capitalist market system. He foresees “the end of the world as we know it”, and that the new global financial system that will emerge, will be much friendlier to countries that are rich in natural resources (such as in Africa). But, there is one important condition — these countries will only benefit if they and their economies are well managed.

Let’s hope our politicians and financial leaders are prepared.