Tuesday, March 10, 2009

A fiscal stimulus may have mild effects in Africa

The Chief Economist of the Africa Region at the World Bank, Shanta Devarajan, recently posted an article in his blog on the global financial and economic crisis where he raised this timely question: A fiscal stimulus for Africa?

He contended that low-income African countries would benefit from a fiscal stimulus if they can fund it through external resources to avoid crowding out private investment or inflating the economy. But he pointed out that the expenditure patterns (spending on employment intensive sectors, infrastructure projects,etc.) are as important as the stimulus size to obtain great gains in growth and poverty reduction.

Here is my comment on the article:

"The effects of a fiscal stimulus on Africa's economic performance may be offset by the deterioration of the trade balance. In most African countries, the propensity to import is high( import shares of GDP are large)and net exports will further decrease with the declining prices of commodities. Unfortunalety, most African governments will find it necessary to increase spending in order to maintain current poverty rates and more importantly to avoid social discontent and political unrest. For that reason and also because there are long term economic gains if the money is spent wisely as you suggest, a fiscal stimulus seems to be an attractive policy for Africa at this time especially if external funds can be secured ."