ABSTRACT
Given the importance of economic volatility on any development trajectory, the single most important policy challenge is to stabilize or negate the effects of any variations on African economies. Government policy responses to volatility create an unavoidable dynamic between the private and public sector as each anticipates how the other will respond to their actions in the local market and world economy. If this interaction is positive and based on credibility and predictability, then governments could potentially achieve their development policy objectives in a less costly way as they could depend on the private sector to undertake certain functions (e.g. intra-year grain storage of a sufficient quantity to moderate seasonal price rises), and traders would have strong incentives to perform lest the public sector be compelled to enter the market if pre-established trigger conditions were met. In contrast, if the government’s actions are unpredictable, then the private sector will be less likely to perform functions like seasonal storage for agro-products, thereby raising the magnitude of any price rises, causing the government to undertake more storage itself, with a greater associated burden on the treasury. Issues of “credible commitment” thus arise, whereby the willingness of governments to adhere to “rules-based” targets for entering the market would determine the extent to which they could rely on the private sector to perform socially useful functions at no cost to the treasury. To the extent that governments can induce the private sector to perform these roles within clearly specified bounds, this would free up the budget to invest in productivity-enhancing public goods and services that have the greatest impacts on development and poverty reduction. This chapter seeks to chart a number of policy actions for African governments to manage their natural resources in the face of volatility to ensure a “stabilized” development path.
