The effect of the financial crisis on Sub Saharan Africa

This paper analyses the channels through which the economic and financial crisis of 2008-2009 was transmitted to Sub-Saharan Africa, with a focus on countries in situation of fragility. Trade stands out as the main direct channel, even though intra-Africa remittances play a relevant role, given that most migrants in Sub-Saharan Africa cannot afford the cost of migrating to Europe or to the United States and stay close, remaining in the continent. Whether reduced aid flows also act as a crisis transmission channel remains an open question, even though preliminary estimates suggest that, at least in the medium run, OECD countries are likely to lower aid, with potentially very damaging effects. The paper also shows that many African countries in a situation of fragility are characterised by very low resilience and capacity to cope with shocks. It concludes, by highlighting how Sub-Saharan Africa (fragile countries') policymakers' room for manoeuver is limited in periods of crisis because of low fiscal space and limited institutional capacity. It advocates that the right response to the crisis would be to mobilise domestic resources, although this will require functional institutions able to offset the potential trade-offs between adverse short-term shocks and a long-term perspective. © 2010 Production and hosting by Elsevier B.V. on behalf of Africagrowth Institute.