The impact of the global financial crisis on Arab states and sub-saharan Africa: An agenda for growth-inducing collaboration

Abstract

The recent global financial crisis has generated considerable adverse economic repercussions around the world. It has also resulted in acute awareness of the variability of key economic indicators whose correlation with economic growth and population welfare underscores the need to manage risk nationally and internationally. Developing and small economies have proven to be highly vulnerable to economic adversities of a global nature in the absence of coping mechanisms that could take the form of compensation or aid. Arab countries and Sub-Saharan Africa (SSA) share this vulnerability to varying degrees and can be expected to suffer from it in the future but could, it is argued, reduce their respective levels of exposure through enhanced economic collaboration in trade and investment. The episode of the crisis has revealed that for governments and households the variability of income is as important a concern as its level. Therefore, it is expected that future economic policy will pay more attention to reducing economic risk than was the case in the past. The purpose of the present study is to assess the impact of the recent global financial crisis on Arab and SSA countries respectively and to examine the scope for mutually beneficial trade and investment between the two regions. To this end, the investigation will focus on whether the same economic variables were affected and the extent of that impact. The link between exposure to the global economy and performance of the domestic economy will also be studied. Finally, sectors that could be targets for enhanced economic partnership will be discussed. The underlying motivation of the study is multi-faceted. For Arab economies that typically are not members of any regional economic community or risk- mitigating alliance, the medium to long term strategic benefits of reinforced trade with, and investment in, SSA, are substantial. First, they give durable access to Africa-based non-oil natural resources that may serve as input in various industries. Even non-oil producing Arab countries' partnership with SSA provides diversification from traditional highly context-sensitive sources of revenues such as tourism and worker remittances. The young and growing domestic markets of SSA can constitute opportunities for Arab industries. For SSA countries, expansion of economic partners from new geographical regions in addition to Western Europe and North America, opens new prospects of growth and integration into the world economy. This could result in more market access in new higher income countries and opportunities for technological transfer. Furthermore, access to readily available capital from oil-exporting countries seeking to diversify away from oil, coupled with SSA's vast amounts of resources, could spur growth in Africa to considerably higher levels. The study gives insights into the external dimensions of regional integration in Sub-Saharan Africa, a key priority in the region, because it points to the gains from concerted management of external shocks on the one hand (IMF 2011) and collective attraction of foreign direct investment through collective provision of the benefits of geographical diversification on the other hand. The study is organized as follows. The impact of the global financial crisis on Arab countries is examined in the first section. The same exercise is conducted for SSA countries in the second section. In section three, a historical overview of Arab investments in SSA is presented with respect to magnitudes, sectoral distribution and geographical areas of destination. In the same section a mathematical model of optimization of export-based investment is proposed and its implications drawn. The empirical evidence in support of the model is also presented in the same section. A brief conclusion ends the study.