The effects of global conflict, in particular the dramatic increase in inflation, is being felt across the West. These effects are not restricted to the developed world, however, and it is often less developed economies without fail-safes in place that bear the brunt of rising costs, says Bryan Turner, partner, Spear Capital. In addition, these geopolitical factors are often exacerbated by local issues such as drought or corruption.
Before the war, Ukraine was the world’s largest exporter of sunflower oil, the seventh largest exporter of wheat, and the fourth largest exporter of corn. When the war broke out, however, those exports ground to a halt, sparking fears of a global food crisis. While a recent deal brokered by Turkey allowed exports to resume, global food inflation had already spiked, putting additional pressure on already strained wallets around the globe.
“When Russia invaded Ukraine in February, escalating a conflict that began in 2014, many feared that there would be global consequences. Some felt those consequences immediately – most notably the European countries dependent on Russian gas and oil for energy. As the war dragged on through the Northern Hemisphere spring and summer, the consequences spread further. What’s less well known is that Africa, already buffeted hard by COVID-19 and its attendant impacts, has been particularly hard-hit by the war’s impact. It’s not impossible, however, to mitigate those effects,” said Turner.
Why has Africa been hit so hard by the war?
While inflation has hit many parts of the world and has seen pressure piled on politicians, there is a distinct difference between its effects in developed world economies and in emerging market countries. This is most obvious in the differences between how much households spend on food and transport. In the UK, for example, the average household spent about 13.8% of its income on transport in 2019 (the last year before COVID-19 dramatically shifted commuting patterns). Food costs, meanwhile, account for just under 11% of household income. By comparison, the poorest South Africans spend up to half their household income on food. The figures for public transport can be similarly high. While the impacts of inflation on developed world countries are undoubtedly still high (one need only look at the 2 million UK adults who can’t afford to eat every day to see that), it’s not difficult to see why they might be worse in many African countries. In general, there is less wiggle room for households, fewer luxuries to cut back on, and fewer amenities that people can stand going without. So, when the cost of food and fuel goes up, more people will go hungry. That, in turn, has the potential to foment political discord and instability, especially in countries that aren’t able to provide even the limited social safety net that a country like South Africa can.
How can Africa mitigate such risk in the future?
As the United Nations notes, the war in Ukraine isn’t just a crisis in and of itself. It’s also another layer on top of multiple other crises, including the ongoing supply chain crisis that has its roots in COVID-19 and climate catastrophe. It also underlined how poor infrastructure makes it difficult for surpluses from one country to get to another or even from one part of a country to another. We live in an interconnected world but, in order for that system to work effectively, African countries have to be as resilient as possible. A spike in inflation, for instance, is undoubtedly less worrying when lots of people are in secure, well-paying jobs. Governments, of course, have a role to play in ensuring that this is the case. In particular, they should always strive to make sure that they strike the right balance between regulatory protections and an economically enabling environment. But investors have a role to play too. Even in countries mired in political and socio-economic uncertainty, there are good companies that can create large numbers of jobs while delivering solid returns for investors. Many of them can do so while doing good for the communities around them and the environment. But in order for that to happen, the amount of investment flowing into the continent must keep growing.
What are the opportunities to be found in the current crisis?
There’s no reason that shouldn’t happen either. There are incredible opportunities to be found on the continent. Sure, there are risks, but experienced investment partners know and understand those risks and can mitigate for them. Even if you’re not interested in the feel-good or impact factor, the opportunities are too significant to ignore. The war in Ukraine is, without a doubt, a massive humanitarian crisis with global impacts. There’s also no doubt that every effort should be made to bring it to an end as quickly as possible. But that does not mean ignoring the opportunities it presents. Governments, global organisational bodies, and investors should all be using this time to look for ways to ensure a kind of resilience that means no one is left behind the next time a crisis rolls around. Africa is no exception to that.
Main image credit: Pixabay.com.
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