Africa Matters is a blog that follows the news and offers analysis of African affairs. Our aim is to delve deeper into the issues of African politics and development. We don’t presume to be experts, and we don’t presume to have all the answers—we are just trying to ask the right questions.

Wednesday, October 15

Banking crisis redux

David Roodman, at CGD, has some interesting data to add to the discussion about what effect will the current financial turmoil have on Africa.  I posted the other day that, as yet, African banks, specifically, seem largely removed from the chaos, as they were not highly involved in the mortgage-backed securities at the heart of the problem.  Still, I wrote, there might be a less direct impact, as living costs rise and foreign aid disbursements fall.

Roodman, for one, thinks the impact on aid flows might be significant, given the lessons of history.  Looking at four past financial crises—in Norway, Sweden, and Finland in 1991, and in Japan in 1990—he sees a precipitous drop-off of aid thereafter.  (Though Japan's "banking crisis" didn't occur until 1997, well after its foreign assistance had begun to fall, Roodman looks at the 1990 real estate bubble burst as the turning point.)

In all four cases, giving declined significantly, from a 10% drop in Norway to a 62% drop in Finland.  Though aid recovered somewhat in each country, Japan and Finland have both yet to see aid levels reach what they were pre-crisis.

CGD has a whole series on the various implications of the current crisis for the developing world.  Michael Clemens, for instance, takes a different view from many, arguing that the impact of the recent tumult might be negligible in terms of development.  Looking at examples like Mexico in 1982 and 1994, and Thailand and Indonesia in 1997, he points out that poverty rates and per capita income levels were back where they started within a few years.

Clemens concludes:
The point is that in the long march of development, some financial crises amount to rounding error relative to the real economy, and the real economy affects welfare. A more important question is why Thailand has managed to reduce poverty by so much more than Cambodia or Guinea. Nothing that happened to South Korea in the Asian Financial Crisis came within a light-year of producing as much poverty, even transitorily, as North Korea has managed to produce sustainably. Now, as ever, the big forces shaping the lives of the poor are not in the headlines.