Consequences of External Shocks in African-type Economies
African countries are prone to external shocks. The typical economy is small, open and undiversified. That is, it is a price-taker on world markets, international trade constitutes a substantial proportion of GDP, and exports are concentrated upon a few primary commodities such as coffee, cocoa, copper and oil. The world prices of these commodities have been subject to large and unpredictable changes. Such shocks will inevitably give rise to some degree of volatility in the economy, but in much of Africa this has been compounded by government policies. We distinguish between two aspects of policy, the constraints upon private behaviour imposed by the ‘control regime’, and the revenue and expenditure decisions of the government in response to the shock. To see how policies affect the response to a shock in an Africa-type economy, it is first necessary to develop a theory of how shocks would affect the economy in the absence of government.
KeywordsRelative Price Capital Good External Shock Foreign Asset Domestic Investment
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- 1.This paper is based upon ‘The Macroeconomics of External Shocks’ in V. N. Balasubramanyam and S. Lall (eds), Current Issues in Development Economics, Macmillan, 1991.Google Scholar