ACCRA – The United States suffers rising job losses. Britain nationalizes its banks. Once high-flying small economies like Ireland, Hungary, and Iceland break down. Even robust China and India are experiencing slower growth, curtailed ambitions, and broken dreams.

Yet, in sub-Saharan Africa, there are few hints of the global financial crisis that is consuming the capitalist world.

In fashionable African cities, residential home prices remain stratospheric. A typical Western-style house in Kampala or Accra, for example, now costs an astonishing two to three times the price of a comparable home in, say, Cleveland or other cities in the American heartland. While home prices are crashing from Madrid to Dublin and Miami to Los Angeles, African prices remain near or at record-high levels.

African banks, meanwhile, are rock-solid compared to their debt-heavy counterparts in the US and Europe. While international bankers went bust by making legions of bad loans, African bankers stuck to earning profits the old-fashioned way: paying very little to depositors, and earning a big “spread” by buying guaranteed government debt, which yielded healthy returns.

Even government deficit spending – long the bane of Africa – seems positively puny compared to the massive debts that the US and some European countries face. The new Obama administration is proposing spending plans that would create a record US deficit of more than one trillion dollars – and this coming on top of the outgoing Bush administration’s record deficit.

And yet there are good reasons to believe that it is just a matter of time before Africa and its peoples experience the ill effects of the global crisis. From Ghana to Kenya, governments are having increased difficulty in raising money for infrastructure projects and selling official debt.

Foreign investment in sub-Saharan Africa, which reached record levels in recent years, is retreating, which is evidence of investor caution, not any underlying lack of optimism about the region. And exports of raw materials to China, India, Europe, and the US – a key factor in Africa’s recent growth surge – may suffer simply because the global slowdown means less consumption everywhere.

All of these factors suggest that an African financial bust is possible. Popular equity investments, such as shares in Safaricom, are already trading at unexpectedly low levels. If real estate prices were to fall dramatically, a chain reaction could occur, taking down big and small investors alike, and over time causing wide suffering to ordinary Africans.

Even assuming stability in real estate prices, the global crisis surely will cause a fall in remittances by Africans working good jobs in Europe, the US, Canada, Australia, and the Middle East.

Remittances are already believed to be falling, which makes sense: immigrants in rich countries are and will be disproportionately hurt by slowing economic activity. Immigration itself may even slow dramatically, depending on the length and depth of the economic slowdown. Fewer Africans working in rich countries will automatically translate into less money circulating in African countries.

The decline in remittances, however, cuts both ways. Remittances have long spurred inflation in many parts of Africa. A Ugandan doctor working in Norway, for instance, cares little about the cost of a beer in Kampala. He is also willing – and able – to pay more than a local doctor for services and, of course, a home in Uganda. Fewer remittances flowing into Uganda could mean less economic activity – or simply lower prices.

The financial meltdown in the US, which incubated the global crisis, is either coming under control or threatening to mutate into a new, more virulent form that could destroy not only America’s paper economy of trading and brokering, but also its real economy of goods and services. President Barack Obama, acting as if the latter scenario remains likely, is betting on large-scale government spending to prop up the real economy. If his administration succeeds, the chances that Africa will remain relatively unscathed will grow.

Even if Obama fails, however, Africans should escape the worst of the global crisis, for both good reasons and bad. The good reasons have to do with African self-reliance and a growing awareness among scholars and policymakers that trade within the region – especially between urban and rural Africa – will ultimately deliver enormous benefits.

Another factor working in Africa’s favor is its private companies’ and consumers’ low dependence on borrowed money. People tend to pay cash for goods and services, however costly. In the US, loans for cars and homes – loans that now aren’t being paid back – are the major factor behind the financial crisis. In Africa, very few people borrow money for such purchases.

Africa’s cash-based economy has in the past constrained development. After all, by allowing people to spend more than they have, borrowed money can fuel growth. But today, Africa’s pay-as-you-go practices are a powerful defense against financial contagion.

Another way of looking at Africa’s paradoxical economic position is to admit that the region’s historical marginalization within the international financial system – so costly in times of global plenty – is proving to be an unexpected benefit when the wealthiest of the world are sick unto death.

Copyright: Project Syndicate, 2009.
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