Month: February 2016

The importance of the informal economy in Africa

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This article first appeared in my weekly column with the Business Daily on February 28, 2016

It is well known that in Africa there exist two types of economies: the formal and the informal. Often the general assumption is that the formal economy is the more important of the two, and often it is the formal sector which gains attention in terms of policy formulation, development strategies and funding inputs. However there exists a sizeable informal economy on which millions of Africans depend and which employs millions of Africans. In fact informal employment comprises 66 percent of non-agricultural employment in Sub-Saharan Africa (82 per cent in Mali and 76 per cent in Tanzania). The Africa Development Bank (AfDB) which uses slightly different delineations estimates that nine out of ten rural and urban workers are informally employed.

(source: http://www.africaresearchinstitute.org/newsite/wp-content/uploads/2016/02/informal-economy.jpeg)

The global research-policy-action network Women in Informal Employment: Globalizing and Organizing (WIEGO) delineates two types of informal employment. The first is informal employment inside the informal sector made up of all employment in informal enterprises including employers, employees, own account workers, contributing family workers and members of co-operatives.

The second, as per WIEGO’s delineations, is informal employment outside the informal sector which includes employees in formal enterprise not covered by social protection, employees in households (e.g. domestic workers) without social protection; and contributing family workers in formal enterprises. In Africa informal employment is a greater source of non-agricultural employment for women than for men: 74 per cent for women and 61 per cent for men in SSA. The percentages of women engaged in own account employment are higher than of men and trade is the most important branch of economic activity, accounting for 43 percent of SSA’s non-agricultural informal employment. The AfDB estimates that the informal sector contributes about 55 per cent of Sub-Saharan Africa’s GDP.

(source: http://pbs.twimg.com/media/B74Zm7sCMAAfKXD.jpg)

Analysts make the point that contrary to most assumptions, informal workers do not operate outside the state, informal workers interact with the state regularly. However the truth of the matter is that most informal workers are poor and most of the working poor are informally employed. Indeed AfDB makes the point that most informal workers are without secure income, employments benefits and social protection. Further, those informally employed tend to have lower education and rates of literacy and tend to work longer than those formally employed. Further, according to the ILO, wages are on average 44 percent lower in the informal sector. This explains why informality often overlaps with poverty. This factor is important to consider as the UNECA asserts that 93 percent of new jobs created in Africa during the 1990s were in the informal sector.

As it stands, most African governments have yet to design strategies to formalise the informal economy and design strategies to make the sector more productive in a poverty alleviating manner. Issues such as taxation and regulation currently act as disincentives for formalisation. Informal businesses are reluctant to be pulled into the tax net and complicated compliance requirements thereof. Further the long, complicated and often bureaucratic requirements for registration as well as licensing and inspection requirements are also barriers faced by the informal sector. Further, the informal sector struggles with raising capital to finance activities, are often unable to fully access or leverage technology and innovation and typically suffer poor infrastructure.

Finally, a conundrum exists for the informal sector because on one hand the sector is an important source of employment, income generation and is an important contributor to GDP growth. It is not clear if formalisation may negatively affect the positive elements of the informal sector. On the other hand poverty incidences are higher in households in the informal sector, employment is more socially insecure and the informality undermines development prospects through loss of revenue and unfair competition to formal firms. What is clear is that it is time for African governments to tackle the sizeable element of informality in their economies and develop creative strategies to magnify the positive while reducing the negatives.

 Anzetse Were is a development economist; anzetsew@gmail.com

 

The problem with the supplementary budget

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This article first appeared in my weekly column with the Business Daily on February 22, 2016

Earlier this month the government drafted a supplementary budget that indicated changes in budget allocations. The general direction of the change was in cutting expenditure significantly. Development expenditure will be cut by over KES 70 billion, recurrent expenditure by KES 23 billion, local borrowing by KES 53.2 billion and tax revenue by almost KES 47 billion. If you look at the structure of the supplementary budget there is one obvious and glaring problem. It is development expenditure that has been most aggressively reduced; by over three times the cut to recurrent expenditure. Treasury’s argument is that as of December 2015 ministries had not spent KES 139.2 billion earmarked for development projects, therefore the cut is justified.

Treasury principal secretary Kamau Thugge. PHOTO | FILE

(source: http://www.businessdailyafrica.com/image/view/-/3059718/medRes/1245956/-/maxw/600/-/iflpelz/-/THUGGE.jpg)

There are two core concerns: firstly with regards to government financing, it is the development docket of expenditure that can be most effectively leveraged to bolster economic growth and, of course, development. Therefore, cutting development expenditure so aggressively means that many potentially economically productive and pro-development projects that had been planned will not be financed. Government is essentially mutilating the ability of its financing to reap development dividends. If government is trying to signal that it is trying to go down the path of austerity, then the strategy is misinformed. What type of austerity so obviously favours recurrent expenditure which finances hefty salaries, benefits, foreign tips at the cost of development financing? What type of austerity is this? One assumes that austerity financing structures look at the items least needed and cuts those first. In such aggressive cutting of development spending is government stating that such financing is not necessary? The prudence of such a move is questionable as it will likely have a negative knock on effect on economic growth because the bulk of the budget will now be financing the recurrent docket which even government admits is non-productive.

Secondly, the fact that KES 139.2 billion of development financing has not been absorbed signals the presence of a serious problem. The response should not be to cut financing but to address the issue. Treasury itself acknowledges the fact that development funds have been left idle reflects an absorption issue and that ministries etc. have not been able to spend as much as anticipated.

I have long stated that Kenya has an absorptive capacity issue because year after year the story is the same; development funds are not used. Although Treasury asserts that mechanisms have been put in place to improve the absorption level; more detail is required here. The core questions Treasury should be asking are: why aren’t development funds being absorbed? What of those factors are due to weaknesses within government and the bureaucracy of releasing funds for example? What factors are due to issues at Ministry or County level? Even my limited experience with county governments has made clear glaring weaknesses with regards to absorptive capacity. Firstly, planning capacity at county level is weak and perhaps this is a reflection of the fact that county governments are still in their infancy, appropriate human capital has not been identified and organisational structures and processes are not robust. But the lack of planning capacity means that either counties cannot effectively identify their needs, or if they can, are unable to develop coherent, pragmatic plans to address development issues. What do counties need to do to identify their development gaps, what technical skillsets are required to address those gaps, and how will those skills sets be identified and utilised so that development goals are realised?

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(source: https://technopreneurship.files.wordpress.com/2007/04/absorptive-capacity.gif)

The bottom line is that the government cannot respond to poor absorptive capacity by slashing development budgets. Instead, government should create a unit to investigate this issue by going to Ministries, Departments and even County governments to identify bottlenecks and from there create a strategy to improve absorptive capacity.

Anzetse Were is a development economist; anzetsew@gmail.com                                  

The implications of the digital revolution for Africa

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This article first appeared in my weekly column with the Business Daily on February 14, 2016

Last week the World Bank released their World Development Report (WDR) that focused on the digital revolution and how it has allowed some to reap digital dividends. These dividends are growth for businesses, job creation for people and better service delivery by government. Further digital technologies have supported development by promoting innovation, efficiency and inclusion.

(source: http://www.worldbank.org/content/dam/photos/780×439/2016/feb/ca-wdr-2016-780.jpg)

However, the report argues that there is a growing digital divide as 60 percent of the world’s population is still offline and 2 billion people do not own a mobile phone. In addition the spread of digital technologies have spread unevenly; men are more likely to be connected than women, those in urban areas are more connected than rural areas and the young are more integrated than the old. In short, young males in urban areas are far better poised to reap digital dividends than old women in rural areas. Further, as digital technologies have spread, there are new risks that mitigate the spread of the benefits. These new risks include the fact that digital technologies are used by autocratic governments to control access to information in a manner deepens control rather than empowerment and inclusion. Digital technologies also create new regulatory uncertainties as new apps and tools are created that cross sectors. For example, should Uber, which is active in Kenya, be regulated as a transport service or as an ICT tool? Further, if the business environment is not open and competitive, digital technologies can create a concentration of market power and monopolies.

The report speaks of analogue components that have to be focused on as the digital revolution continues to unfold to ensure dividends rather than detriments preponderate. These are rules and regulations that promote competition and entry, skills that allow populations to leverage technology rather than be replaced by it, and institutions that are accountable to citizens.

Given this background, there key questions to be asked. The first is that jobs are being automated into extinction and this has two-fold negative implications for countries such as Kenya. The first is Kenya has a serious problem with unemployment, thus automation may exacerbate the unemployment problem. It must be asked whether the jobs created by digital technologies will grow at a rate faster than the job attrition it causes. Secondly, the types of jobs being replaced are low skilled jobs often occupied by the least educated members of society. If such people are to lose their jobs due to digital technologies, their future looks grim as they typically will not have the skills sets required for ‘white collar’ jobs less threatened by digital technologies. The low skilled segment of the population may find themselves competing for fewer jobs without the opportunity to re-skill and take on new roles.

Further, will the rise of digital technologies cause agrarian economies such as Kenya to by-pass industry all together? Advanced economies benefitted from the Industrial Revolution which employed millions of people and created the robust foundation of manufacturing and the export of goods. Africa has been undergoing premature deindustrialisation due to globalisation and trade which have hollowed out industry on the continent as other countries supply finished goods for African consumers. The uptake of digital technologies may exacerbate this as human labour cannot compete with cheaper technologies in terms of cost and efficiency. In fact some western companies have brought production back to automated factories by-passing the need to hunt for cheap labour. Will digital technologies therefore exacerbate the premature industrialisation Africa is already experiencing? The Financial Times surmises that in the absence of industrialisation as a path towards economic development, the best hope for developing and emerging economies is to train workers that are more highly skilled. Is this feasible in Kenya and Africa?

(source: https://centerforfinancialinclusionblog.files.wordpress.com/2012/10/samasource-3.jpg)

Therefore, although there are great benefits to be reaped by the digital revolution, new risks have to be managed. Momentum for the digital revolution is substantial. Therefore, governments ought to create policies that ensure an equitable spread of digital dividends, effort should be made to ensure all levels of private sector reap the benefits, and finally Kenya needs to rethink its education system to ensure labour is being skilled in a manner that functions effectively in the context of a digital economy.

Anzetse Were is a development economist; anzetsew@gmail.com

The potential abyss of county government borrowing in Kenya

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This article first appeared in the Business Daily on February 7, 2016

The National Treasury has expressed concern over counties borrowing money domestically without permission from national government. In the 2014/15 Financial Year four counties borrowed a total of Sh1.9 billion, with Nairobi being the biggest borrower at Sh300 million. Technically, counties are only allowed to borrow from the domestic market to fund capital projects with high economic growth potential in line with the Public Finance Management Act. As a result, Treasury has instructed all bank and non-bank financial institutions to stop lending to counties and start recovery of un-guaranteed loans.

Counties however argue that they are being forced to borrow because government routinely fails to send money in on time to meet their financial obligations. In fact a county official with whom I talked to about this issue said that if government released funds on time, counties would have no need to seek commercial loans to finance their activities. The official further added that the process of government releasing county funds to county accounts is long, cumbersome and bureaucratic and thus counties always find themselves with pending payments they cannot meet thus pushing them to seek loans to meet their obligations. The Treasury argues that there is no need for counties to seek credit because counties have been leaving billions of shillings idle in their reserve fund accounts at the Central Bank of Kenya. The county official asserted that this is not the whole story; for example some counties have activities that need to funded such as arrears in bills left by previous county governments that need to be settled urgently, yet the procedures for applying for funds are so long and laborious that they have to borrow to meet short term costs. However, the real issue here is not the bickering between central and county government, the issue is uncovering the implications for the country in counties racking up debt in an unchecked manner.


(source: http://www.lincoln.ac.nz/Documents/farmdebtjpg.jpg)

Firstly, a real concern is that the rates at which counties are getting access to credit and whether these are sustainable and realistically serviceable. Indeed, if left unchecked county debt could create a scenario where money is siphoned away from required expenditure to meet debt obligations.

Linked to the point above, borrowing by counties does not seem to be informed by the ability of counties to generate independent revenue to not only finance local activities, but debt obligations as well. County revenue generation at county level in Kenya is anemic; in the financial year 2013/2014 county generated revenue accounted for a mere 25 percent of their budgets. Further, counties have been lazy in gunning for the tax option to raise revenue and the resistance they face on this means it may take time for counties to raise significant revenue locally. Yet counties have already started borrowing in a manner not necessarily informed by their revenue generation capacity. Thus, a scenario could unfold where counties have to seek bail outs from central government to meet their debt obligations.

Thirdly, the potential escalation of county government debt in the regions with little transparency is particularly problematic. Until county governments demonstrate a commitment to transparency and anti-corruption, county level indebtedness may not lead to development or economic growth. As a result county governments may find themselves servicing what has been essentially dead debt.

(source: http://www.theeastafrican.co.ke/image/view/-/1722304/medRes/477466/-/maxw/600/-/41bid7/-/county.jpg)

Finally, county government debt accumulation may mean that the government as a whole becomes increasingly leveraged, the extent of which is uncertain. It is crucial that central government keeps track of total government debt divided between central and county governments. A threshold level of debt accrued by county governments has to be determined so that any county level borrowing does not cross an upper limit that could over leverage the country.

 Anzetse Were is a development economist; anzetsew@gmail.com

 

The effect of politics on the economy

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This article first appeared in my weekly column with the Business Daily on January 31, 2016


Politics in Kenya has a ripple effect on the economy. Due the post-election violence that followed 2007 election, the country’s GDP growth fell from a high of 7 per cent to a low of 3 percent. Earnings from tourism halved and according to The Economist, post-election violence led to financial losses in economy of approximately £145 million, around 1% of Kenya’s GDP. Further, studies estimate the post-election violence had long term effects and over the period 2007-2011 per capita GDP was reduced by an average of 86 USD per year, which is massive considering Kenya’s per capita averaged about $980 over that period. Another study suggests that in 2009, per capita GDP in the Kenya was estimated to be about 6 percent lower than if the instability had not happened in the first place.

(source: https://nothingbutmyemotions.files.wordpress.com/2013/02/kenya-pev.jpg)

The World Bank is of the view that political risks to economic growth are ranked equally to growth risks posed by shocks in the global economy such as the debt crisis in the European markets. So what happens in Kenya’s political arena has economic consequences. And the effects are not only related to GDP growth, other economic effects result from politics. The Eurobond debacle that started last year where government was accused of the mismanagement of the proceeds from the Eurobond is bound to make financing for the government more expensive. Yes there are other factors at work such as the recovery of the US economy which will make financing more expensive in general, but it would naïve to assume that the politicization of the Eurobond issue has not negatively affected perceptions of the credit worthiness of the government.

When one has a young economy juxtaposed with a young democracy, there are bound to have a relationship where activity in one affects the other. More mature economies tend to be more resilient to political instability and if politics does have effect it will tend to be more closely associated with changes in policy of economic import. In fact an analyst interviewed on Bloomberg stated that in the USA, the impact of politics on the economy, except when people really mess up, is overrated. This is partly due to the fact, that as studies have shown, economic institutions such as property rights, regulatory institutions, institutions for macroeconomic stabilization, institutions for social insurance, institutions for conflict management are more mature in older economies and these are major sources of economic growth across countries. A young economy has less mature economic institutions with practitioners still figuring out what institutions, regulations, rules, practices and standards can best bolster growth.

(source: http://www.dolfinwise.com.au/wordpress/wp-content/uploads/2013/06/Volatility-in-financial-markets-450×300.jpg)

In terms of democracy and politics, more mature democracies have a longer tradition of arbitration between political parties; they also tend to be defined by ideology which makes economic policy expectations more predictable. Compare this with Kenya which has a culture of personality and tribe driven politics where there is no clear idea of the economic ideology of political parties until that party comes into power. In addition, in Kenya it has often been informally observed that the tribes that constitute a certain political administration may have members that engage in opportunistic behaviour that favour their tribes while ostracizing others; there is bound to be economic fallout from such habits.

The effect on politics on economics is not unique to Kenya however; a study by the Brookings Institution found that political institutions matter greatly for incipient or young democracies, not for consolidated or mature democracies. Why? Well mature democracies have already internalized the effect of political institutions whereas new democracies need the felt presence of political institutions as part of the democratic experience. As a consequence, the impact of politics on economic performance is more visible. With this in mind, it is important that both government and opposition appreciate the import of their role and influence over the economic trajectory of the country.

Anzetse Were is a development economist; anzetsew@gmail.com