Domestic and External Factors on African Macroeconomic Formulation

Domestic and External Factors on African Macroeconomic Formulation

Growth, productivity and employment are the most common economic variables to reduce extreme poverty and break poverty trap. Report from World Bank in 2007 revealed that one percent in GDP growth results to 1.3% poverty decline in low-income countries. Moreover, development in the productive capacity leads to reduction in sustainable poverty. With improvement in the economic growth, many people have been removed from poverty during the past few decades in many developing countries. However, poverty continues to be worsening in the 33% of the world's least developing African countries. (African Economic Research Consortium 2008). While there are many factors influencing growth, management of macroeconomic is very crucial to economic growth. Appropriate macroeconomic policies are critical for wealth creation, sustainable economic expansion and employment generating investment. Recent improvement in the economic performances of some African countries was underpinned by the improvement in macroeconomic management. However, inefficient macroeconomic policies are the features of many African countries leading to the substantial growth disparities in the African continent.

The role of productivity in accelerating growth within an economy has been widely recognized by the neo-classical economic theory. The economic growth of a country is the sum of the "growth of capital accumulation, growth of labor and the growth of productivity or efficiency." (Akinlo, 2006 P. 62). According to neo-classical paradigm, a shift in production of a country could only be realized by the improvement in productivity. General situation in the African developing countries is the existence of low supply of agricultural products, foreign exchange constraints and persistence of inflation. African countries generally experience increase in the price of goods and services due to the autonomous increase in money supply. In the last few decades, impact of domestic and external factors on the formulation of macroeconomic policies of African countries has received great attention. Macroeconomics is a branch of economics dealing with the structure, performances and decision making of the whole economy. To understand the strategy the national economy functions, macroeconomics uses variables are Gross Domestic Product (GDP), price indices and unemployment rates.

In a free market economy, government intervenes in the economy by using different macro-economic policies to achieve economic objectives and achieve high economic performances. Likewise, other advanced countries such as USA, Britain, Canada, France and other developed countries, African governments also intervene in the national economy using different policies to stabilize the whole economy. Unlike other free economy in Europe and North America, there are domestic and international factors having impacts on the macroeconomic formulation of African economies.

The objective of this paper assesses and evaluates the impact of domestic and international factors on the ability of African states to act autonomously in macroeconomic policy formulation.

The rest of the paper is structured as follows:

The paper demonstrates a clear understanding of the meaning and purposes of macroeconomic policy.

The paper examines the national accounting framework.

The paper also assesses the effects of changes in the world economy and Aid policies over the past 10 years.

Meaning and Purpose of Macroeconomic Policy

Macroeconomic policy is a government economic policy to achieve national economic growth, internal balance and external balance within an economy. Several objectives a government attempts to achieve by implementing macroeconomic policies. Some of the major objectives of macroeconomic policy are as follows:

Sustained economic growth

Low inflation and stable prices.

High level of employment

Rise in average living standards of the people.

Sustainable balance of payment position.

Sound government finances.

While African government attempts to implement sound macroeconomic objectives, there are several domestic and external factors having impact on the successful macroeconomic policy formulation in African economies.

Impact of Domestic and External factors on Macroeconomic Policy Formulation in Africa

There are domestic and external factors that hinder the proper functioning of African economies at macro level. These factors have inhibited the capital formulation, and have limited the African governments to carry out the proper macroeconomic policies. High level of indebtedness has been the major constraints inhibiting proper macroeconomic policies of African governments. Since 1980s, African debt has grown tremendously and increased from $93 billions in 1980 to $281 billions in 1991. In 1993, the African total debts increased to $285.4 billions. Magnitude of African debt crisis becomes clear when relating the debts to the key economic variables. For example, the debt-GDP ratio equaled to 73.3% for North African countries...

(Appendix 1 reveals the African total debts between 2006 and 2010). In the entire African economy, the total value goods and services are far less than adequate collateral for present and future debts. IMF has been the primary lender of many African countries, and to disburse loans to African countries, IMF specifies to African countries to satisfy series of mandatory macroeconomic conditions. Part of the conditions is the devaluation of currency and structural adjustment program (SAP) introduced by the International Monetary Fund (IMF). While IMF intends to use SAP to reverse the African economic problems, however, SAP has not been able to address current African economic problems. One of the major conditions of SAP is devaluation of African currency; however, emphasis on devaluation relatively causes economic uncertainty in the African economy. To implement Enhanced Structural Adjustment Facility (ESAF), IMF always requires the African countries to adopt restrictive monetary policy during downtowns. The restrictive IMF policy often limits African countries to conduct effective macroeconomic policy leading to the general economic instability in the region.
Njuguna (2008) argues that bad government policy is often the major impact affecting the effective formulation macroeconomic policy in Africa. Several regulatory policies implemented by many of the African government distort economic growth. While the hard and soft regimes are quite common in Africa, however, the hard regimes such as Congo Brazzaville and Tanzania in 1973-1985, implemented economic policies such as nationalization of banks and nationalization of other businesses, and virtually, all private economic activities were subject to regulations. On the other hand, soft control regimes in Africa regulate some part of the economy with some part of the economy being nationalized. Typically, between 1960 and 2000, 35% of African economy was dominated by the two regulatory systems.

On the other hand, report from Trade and Development Board (2010) reveals that the present global financial crisis is one of the external factors affecting the macroeconomic policies of the African countries. The global financial crisis is triggered by the decline of the housing prices in the United States in the second quarter of 2007. The current crisis poses significant challenges on African countries because it has led to the significant reduction in the African economic growth. While many African countries have already formulated the Millennium Development Goals (MDGs) with target by the 2015, the current global financial crisis has jeopardized African MDGs target, and pose significant challenges to African macroeconomic policy formulation. Before the global financial crisis, conventional macroeconomic policies for African countries are the implementation of austerity measures. However, the current financial crisis has affected macroeconomic policy approach of the African countries. Since 2008, many African countries have been forced to implement high procyclical fiscal policy by cutting spending and increase taxation despite the unprecedented economic recession.

"Several African countries either felt the consequences of the crisis because of their close regional ties to economies suffering from the downturn or were particularly vulnerable due to an already precarious economic environment before the crisis." (Chauvin et al. 2011 P. 29).

On the other hand, Ndela and Nkala (2003) argue that that low level of human capital, weak administrative, legal and institutional framework have been the major domestic impacts affecting the effective formulation of macroeconomic policies in Africa. These factors coupled with the external shocks have resulted in the decline of the African term of trade, and fluctuation of the economic growth. Typically, issue such as economic growth has posed a greatest challenge to the African macroeconomic policies. For example, South Africa has experienced the decline in the economic growth in the last four decades.

"With growth falling from an average of 4.9% per annum for the period 1960 to 1975,

2.3% during the period 1976 to 1989, and to 1.3% during the 1990s. Gross domestic product (GDP) growth, averaged 2.6% a year from 1995 to the third quarter of 2001, while average annual real GDP growth was about 1.4% per annum between 1988 and 2002." (Ndela et al. 2003 P. 28).

Moreover, trade shock has contributed to the significant impact on the macroeconomic fluctuations. While trade shock is responsible to the poor performances in the development of the Sub-Saharan Africa countries, with large degree of openness, African countries are largely being affected by the external shocks. The external shocks have resulted in the fluctuation of the prices of primary commodities exported to other countries and capital goods imported from advanced countries.

Volatility of exchange rates and volatility of interest rates are among the important external factors affecting the macroeconomic policies of African economies. Typically, fluctuation in the exchange rate affects the ability of the African…