Kenya in Broader Context | Geopolitics of “Interest”: US-EU Base Rates, the African Global South, and Africa-China Economic Cooperation
Written on February 16, 2024
By the end of July of 2023, the United States Federal Reserve had raised interest rates from 0.5% at the end of March that same year to 5.5% in a balancing act of keeping demand down while maintaining overall employment levels within the United States economy. Central Banks in Europe followed suit but motivated instead to curb the flight of dollar denominated capital out of their collective economies and into the United States to reap the higher and less risky returns from the Federal Reserve. Taken together, these tighter monetary policies in the United States and Europe led to a sudden and severe contraction in the supply of Dollars and Euros in the regions of the global economy where these currencies, rather than being issued or printed by governments, are earned through deeply unequal trade and unfair loans, and most severely, in Global Southern economies where these currencies are essential for the settlement of importation bills in critical areas such as construction, health and education, as well as the servicing of debts.
Furthermore, the scarcity of Dollars and Euros brought about by the raising of interest rates in the Global North converged with highly consequential political and economic changes and dynamics from the previous years — particularly from around 2019 and onwards.
Firstly, fiscal policies implemented to manage and contain the economic and public health effects of the Covid-19 pandemic — particularly in Africa — had permitted otherwise forbidden small but important shifts away from austerity economics as public spending was significantly boosted to head-off potential collapses in the vast so-called “informal” sectors. While governments did not explicitly state this — concealing the fiscal policies intentions with language directed at formal sector support and sustenance to appease traditional multilateral organizations like the World Bank and IMF, as well as powerful “developmental partners” like the EU and the United States — the informal sectors which employ and provide for the livelihoods of most people, and which service and supply the formal sectors themselves — particularly in agriculture, construction, transport and social care such as children, the ill and the elderly — were the unstated intended beneficiaries of Covid-19 mitigation fiscal policies.
Secondly, various national elections, extending back to 2019, had ushered in new governments led by either former opposition figures or entirely new leaders, most notably, at least in South and Eastern Africa, in Malawi, Zambia and lastly Kenya. Having arrived in government on developmental promises indicating intensions to shift away from exchange rate centered macroeconomic management through central or reserve banks — which had been par for the course since at least the structural adjustment programs of the World Bank and IMF imposed on African and other Global Southern economies — to more fiscally-driven policies targeting overlapping or co-dependent formal and informal sectors. These would be the strategic growth drivers which allowed countries greater flexibility to spend or run deficits without impacting their local financial sectors too adversely since such spending — it was anticipated — would be “productive” rather than “consumptive”.
We must bear in mind that from the perspective of African governments, the overarching policy dimension of poverty and “national underdevelopment” is the perennial inability to spend in a country’s own local currency. In other words, African states are not strapped of money per se but rather international accepted currencies.
What the Covid-19 partial border and internal closures had unwittingly shown in the context of these perennial spending limitations was that even with depressed tax revenues due to the lockdowns and reduced economic activity, countries like Malawi and Zambia could spend in their own local currencies above revenue collection levels without significantly impacting their exchange rate. In a sense, targeted fiscal policy could perhaps be once more decoupled from the exchange rate to allow greater developmental spending flexibility domestically. I must preface once more that this was within the context of lockdowns and partial border closures.
However, with interest rates so high in the Global North by July 2023 — along with all the additional consequences like Dollar and Euro capital flight, higher Dollar and Euro denominated importation bills, and even higher Dollar and Euro denominated debt servicing expenses — these countries then experienced very sharp currency devaluations effectively collapsing both the purchasing power of their people internally, as well as the purchasing power of governments domestically and internationally with respect to development spending and importation/debt servicing expenses, respectively. Put differently, the Global North had successfully “exported” a large chunk of its inflation to the peoples and countries of the Global South through high interest rates. My assessment is that the prevailing state of inflation and monetary policy remains reflective of this ongoing dynamic in which price levels, and their political and electoral consequences in the Global North are being distributed to the most vulnerable people and countries in the Global South including the erosion of whatsoever small gains garnered by electoral victories on the part of former opposition figures entering governments in recent years. My assessment is backed up by the sharper rhetoric at international forums such as the United Nations, at various Europe and Africa Summits since 2022, and at COP 23.
Ironically, countries which appear to have faired better through both the Covid-19 and high interest rates period beginning in the first quarter of 2022 have been Angola, Uganda, Zimbabwe, Tanzania and others — with the common denominator being their thoroughly weathered, longtime political and economic elites who, unlike the newer former opposition figures, have a better grip of how their states and national economies run. This had been the strongest argument against so-called western liberal democracy since 2019 up until South Africa’s case against Israel in relation to Palestine at the International Court of Justice last January.
A final impact that has scarcely been commented has to do with the People’s Republic of China (PRC) and its economic relationships with African political blocs (such as the Southern African Development Community — SADC) and individual countries.
Firstly, the devaluation of local currencies owing to capital flight vis-à-vis Covid-19 and post-electoral policies after 2019 has also increased the purchasing power of the Chinese government’s vast reserves of Dollars and Euros. Moreover, while the cost of Chinese investments in Africa has declined due to Dollar and Euro scarcity, the political incentives for deeper and closer cooperation with the PRC have also risen markedly as desperate governments confronted by young, highly politicized publics as well as disgruntled local economic elites look for ways to remain in office. Chinese investments have become both critical economic and political lifelines including within regional powers like South Africa and its severe energy generation crisis.
Secondly, as Western imports are walled-off behind the de facto trade tariff of high interest rates which make Dollars and Euros unaffordable, the “weaker” Chinese Yuan is not only strengthening the competitiveness of Chinese exports to African countries, but also structuring the various import baskets of goods for the emerging middle classes in African countries, thereby accelerating the consolidation of consumer products as well as the domestic and regional logistics for sustaining them into the future. An important aspect of the industrial policy of the PRC has been the diversification of its manufacturing sectors to enable it to produce goods and services at economically viable levels of quality and quantity which are acceptable to the income differentiated “consumer publics” in the so-called “Emerging Economies” where most humanity resides. This contrasts with the services-driven model in the West or Global North which targets the higher incomes of the peoples of the so-called “Advanced Countries.”
Lastly, if Dollars (including the ones spent by China) and Euros can import larger baskets of goods from the PRC because of the less expensive Yuan, then there is a double benefit for the Chinese economy and government. Not only do they use their vast reserves to deepen their economic and political relationships with African countries and other regions, but they also get those reserves back by way of their exports to Africa aided by the cheaper Yuan. And very importantly from the African perspective, not only do these arrangements reduce exchange rate pressures due to high interest rates in the West, but they also loosen up some ability to spend fiscally, directly or indirectly with Chinese investments, through their local currencies as well. Yuan denominated imports present a venting valve for spending as well as exchanged rate related inflationary pressures.
Africans too — as all human beings — have political, economic and cultural agency: a fact we shockingly must still assert, which eludes a staggering number of northern analysts, in 2024.
I will finish like this: the BRICS platform is also best understood in this way. Rather than seeing it as a coalition of similar economic, political and geographical creeds, BRICS fundamentally is about the expansion of its members capacities to spend “monies” which are excluded from the western dominated financial means of settlement. It is on this basis (of spending and exchanging) that countries which are called poor are poor, and countries which are called rich are rich.
If global finance and logistics can be restructured to include every country and region’s economic and legal means of payment settlements and exchange, the economic framing of the world as divided into rich regions and poor regions, backward countries and advanced countries, unmodern and modern, becomes functionally meaningless. This observation is substantiated by the fact of the Global North itself being able to distribute the effects of its inflation globally almost solely through the international status of their currencies, even as, increasingly we are confronted with evidence of its limits daily.
