Development economics

Economic Growth in Africa not due to Serendipity

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Africans are so used to us and our continent being portrayed negatively that we latch onto any positive story about us in international media. Whether it’s about idyllic holiday destinations, masais playing cricket or mobile money transfer systems, we welcome the positivity. And perhaps because we’re used to a narrative that seems bent on painting us as the irredeemable basket case of the world, we accept ‘positive’ portrayals without question. We leave ourselves open to falsely generous narratives and fail to critique them or their rigour, accuracy and nuance. We’re just relieved someone is saying something nice about us.

We seem too easily disarmed at a positive storyline to the extent that we’re beginning to enable a pernicious narrative on the continent. A narrative which, on the surface seems generous and kind, but when further unpacked, actually emboldens the notion that Africans are inherently incompetent and incapable.

Image result for Africa(source: http://www.supercoloring.com/silhouettes/africa-map)

I first came across this narrative a few years ago when the Africa rising commentary was gaining traction. Look at Africa, it said, it’s actually not doing badly. Lots of economic growth, growing middle class, maybe we can make money here after all, it said. But the core reason behind Africa’s rise was not us or our intelligence, it was population growth. The main argument was that Africa’s population is the fastest growing in the world and soon one in four people on the planet will be African. And that’s why we should be noticed, according to this narrative.

It was as though our rise was being linked to some serendipitous stroke of demographic luck rather than to the ingenuity, determination, intelligence and grit of millions of Africans. I’ve seen Africans retweet the ‘Africa rising population story’ with pride. They want the world to know we matter. But the problem is that people look at Africa’s growing markets as the main motivator for engagement with us. Many do not seem to care about our ability to adapt, solve problems and turn problems into opportunity. Anyone who lives in Kenya, or any country in Africa, knows that many of us are problem solvers. With a low number of formal jobs, millions wake up every day with plans on how to generate income and hopefully wealth for themselves and those who depend on them. With limited financing options for their ideas and basically no government social security net, most Africans know they must figure out how to get money on the table on a daily basis by themselves.

Image result for population growth Africa

(source: https://www.economist.com/middle-east-and-africa/2014/08/23/can-it-survive-such-speedy-growth)

The mental math, emotional calculations, soft skills, negotiation capability, ingenuity and problem solving skills demanded on some days can be substantial. But these qualities seem ignored. We rarely hear of the knowledge and skills systems Africans are building and using to drive economic growth. Instead, the narrative that is gaining traction is the population growth story, and how it’s the reason behind the rise of Africa.

The subtle nature of this narrative, clothed in complimentary language, actually erases the agency of Africans in the growth of the continent. And that is saddening. But this is not the first time Africa has been underestimated. Let them continue. We’re working.

Anzetse Were is  development economist; anzetsew@gmail.com

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Dynamics of China-Kenya Trade Relations

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This article first appeared in China Daily on June 1, 2018

A few weeks ago it was revealed that Kenya refused to sign a free trade agreement that China has been negotiating with the East African Community (EAC) since 2016. The core motivation for the rejection seems to be seated in intent to protect Kenya’s nascent manufacturing sector from being dominated by China’s massive and efficient manufacturing sector.

This development highlights the concerns Kenya has with the balance of trade between the two countries. According to The East African newspaper, China accounts for less than 2 percent of Kenya’s exports yet 25 percent of Kenya’s import bill is from China. In 2017, Kenya exported goods worth USD 99.76 million to China but imported goods worth USD 3.37 billion resulting in trade deficit of USD 3.2 billion. Between January and May 2017 alone, Kenya was importing an average of goods worth USD 348.9 million from China per month.

Image result for CHina Kenya

(source: https://hivisasa.com/posts/why-china-remains-best-bet-for-kenya-in-global-trade)

The trade deficit has made Kenya, and many other African countries in a similar position, very uncomfortable. Clearly, the trade deficit path is unwise and presents an additional financial problem the country has to address. There are also concerns by some that such massive trade deficits compromise Kenya’s ability to negotiate trade terms. Sino-phobic narratives will argue that this is a deliberate effort by China to put countries such as Kenya in a position where they cannot protect the country’s interests in trade matters.

However, it ought to be considered that the trade deficit exists between Kenya and China, not necessarily because China is pursuing this deliberately, but because China is better at producing what Kenya wants than Kenya is at producing what China wants. The trade deficit is arguably the result of market supply and demand dynamics. Top products imported from China include machinery, railway stock, iron and steel, vehicles and plastics; these compose more than 50 percent of imports from China. The truth is that Kenya largely doesn’t manufacture these and thus imports them from China.

Sadly with China, Kenya is sticking to the usual yet unwise path of exporting raw materials and importing manufactured goods; a reality that reflects the weakness of manufacturing capacity in Kenya and Africa as a whole. And sadly, even in the export of raw produce such as fish where there is growing demand in China, Kenya is not exploiting the opportunity. Kenya fish output dropped by 10.2 percent in 2016, compromising the country’s ability to exploit demand for fish in China.

The trade dynamics between Kenya and China accentuate the importance for Kenya to shift current behaviour to one that strengthens the country’s position. The first step is to enforce local content laws to limit the importation of goods in public projects and rather, procure goods manufactured locally. The good news is that there seems to be indication that for the next phase of the development of the Standard Gauge Railway, local purchases will not be lower than 40 percent of total procurement. These types of provisions are important because they provide a market for Kenyan manufactured goods thereby boosting manufacturing activity, but they also highlight the extent to which local manufacturers can (or cannot) meet large orders consistently which provides valuable lessons on what the country needs to do to improve industrial capacity.

Secondly, Kenya needs to take advantage of the off-shoring of manufacturing capacity from China to other parts of the world. Partly informed by rising wages, China has been increasingly automating and off-shoring manufacturing; and Africa is benefitting from the latter to a certain extent. A report by McKinsey last year indicated that 31 percent of Chinese firms in Africa are in manufacturing and they already handle about 12 percent of industrial production in Africa with annual revenues of about USD 60 billion; revenues in manufacturing outstrip that of any other sector listed. If Chinese private sector are domesticating manufacturing capacity from China, then indigenous Kenyan firms can do the same. The constraints preventing this ought to be analysed and addressed.

Image result for CHina Kenya

(source: http://studies.aljazeera.net/en/reports/2014/05/2014522115544892973.html)

Thirdly, Kenya needs to develop a trade strategy for China. The government needs to audit products with growing Chinese demand and seek to build Kenyan capacity to better exploit market opportunities presented by China. Kenyan producers ought to better leverage opportunities such as the China International Import Expo and work with the Chinese Embassy to exploit opportunities and tap into supplying the domestic market in China, thereby increasing the country’s exports to China.

Finally, Kenya should focus on revenue streams coming from China and strengthen these. Tourism is a massive opportunity for Kenya; hotel bed-nights of Chinese tourists to Kenya have increased 45.8 percent in 2017 compared to 2016, preceded only by Germany, UK, and USA. Government and private sector can be more deliberate in better understanding the needs of Chinese tourists and more aggressively market Kenya as a tourist destination in China.

In short, given Kenya’s concerns with the growing trade deficit to China, the government and private sector ought to become more proactive in meeting market demand in China. The concern should provide impetus for the country to do the hard work of building manufacturing capacity as well as better understanding the Chinese market and leveraging diplomatic and private sector ties to achieve clearly defined trade strategies and goals.

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

 

Manage Risks Raised by Oil Exports

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This article first appeared in my weekly column with the Business Daily on June 10, 2018

Last week Kenya became the first country in East Africa to export oil. Media reports indicate that the crude oil was transported in the Early Oil Pilot Scheme and will be kept in Mombasa as the country looks for viable international markets. While Kenyans may be jubilant at the prospect of earning revenue from oil, and hope that those proceeds will lead to prosperity and an improvement in their quality of life, key risks have to managed.

First is the Presource Curse. We are all familiar with the resource curse where natural resources such as oil lead to conflict, facilitate corruption and generate an immense income divide with most citizens failing to benefit from the process of natural wealth. The presource curse, as the IMF points out, indicates that on average after major oil discoveries, growth underperforms post-discovery forecasts. The presource curse is especially pronounced in countries with weaker political institutions. These countries not only fail to meet growth forecasts, their average growth rate is lower than before a discovery.

Image result for oil africa

(source: http://www.littlegatepublishing.com/2014/01/tullowoil/)

IMF points out that an oil discovery should increase output, and hence growth; oil discoveries are worth 0.52 percentage point a year in higher growth over the first five years. Kenya has only transported the oil to port, whether a buyer has been found is unclear and raises questions as to whether the country has the expertise to consistently find good quality buyers as well as ensure consistent supply. In the presource curse, countries are tripped up by the steps needed to turn discoveries into dollars. Time will tell whether Kenya will buck this trend.

The second risk is to manage profligate spending linked to an anticipation of oil-related revenue. Ghana is an example of a country that went on a borrowing spree based on overly optimistic revenue projections linked to generous oil barrel prices. When the commodity slump emerged, Ghana found itself unable to generate the revenue projected and service new debt obligations. Kenya has to manage this dynamic carefully because, as the IMF points out, if oil prices fall enough, Kenya may see projects cancelled and miss out on anticipated investment, taxes, and jobs. And even if prices go higher, Kenya may only get a share of the increased profits through taxes. Overly rosy expectations may lead to overly optimistic borrowing and risk over-exposure for both the lender and borrower. Thus, there is a need to manage exactly what oil can deliver in terms of revenue.

Tullow Crude Oil

(source: https://www.businessdailyafrica.com/analysis/ideas/Manage-risks-raised-by-oil-exports/4259414-4604952-pw40k2/index.html)

Finally, is the global tide away from fossil fuels; Kenya faces a conundrum. As the IMF points out, if there is no progress in combating climate change, poor countries are likely to be disproportionately harmed by the floods, droughts, and other weather-related problems. But if global actions to address climate change are successful, poorer countries that are rich in fossil fuels will likely face a steep fall in the value of their coal, gas, and oil deposits leading to a massive reduction in the value of their natural wealth.

In short, let Kenya be realistic that as a latecomer to the oil game, there are important risks to manage. And if we fail to manage these risks, the oil-related jubilance will fade very quickly.

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

 

 

 

 

Podcast: The Cost of Corruption in Kenya

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The last few weeks have been jarring for Kenyans as we found out that we’d had yet another maize scandal, and this time we lost KES 2 billion at the National Cereals and Produce Board (NCPB) to 21 people. We also found out that we lost KES 9 billion to 10 companies that were irregularly awarded National Youth Service (NYS) tenders. That’s a total of KES 11 billionA few days ago, it also came to light that we had lost between KES 70 – 95 billion at the Kenya Pipeline Corporation (KPC). This scandal is still unfolding.

I join Brenda Wambui of the ‘Otherwise?’ podcast to talk about the cost of corruption on our economy. What does this looting do to our country?

No Justification for Planned Tax Rise

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This article first appeared in my weekly column with the Business Daily on June 3, 2018

The National Treasury tabled the Income Tax Bill 2018 which, among other actions, has the general thrust of taxing individuals and companies at higher rates than previously was the case. The focus here will be on the opposite ends of the financial spectrum: large companies with taxable income of more than KES 500 million and Micro and Small Enterprise (MSE) most of whom have fewer than 5 employees and generally operate informally, outside what government considers to be the tax net.

Treasury’s rationale for the new taxes and tax hikes is simple: government needs to raise more money in order to plug the fiscal deficit and reduce borrowing in the spirit of fiscal consolidation. But the core question should be: Are these tax hikes justified? With regards to the Corporate Tax, while it can be argued that large companies can afford to pay the 35 percent, the core question is, why? What will corporations get in exchange for the additional amount charged? Rather than approaching the income tax bill from a perspective of service enhancement, government is motivated by more aggressive revenue generation. Given the reality of high costs of doing business in Kenya, the proposed increases simply add another stone on an already heavy load. Perhaps if costs such as electricity, land and transport were more manageable, the effect of added costs in the form additional taxes would be less pronounced.

Image result for tax (source: http://pinnaclepac.com/review-of-your-tax-return-by-the-canada-revenue-agency/)

The proposed presumptive tax on the informal sector, of 15 percent payable by individuals with incomes below KES 5 million applying for single business permits, is unfair and short sighted. At the moment, government provides basically no services to MSEs to support their productivity, profitability and growth. Most MSEs operate in dilapidated shacks with no electricity, water and sanitation, and often next to open sewage and piles of garbage. Government, at both national and county level, seem unable to invest in supporting MSEs, yet here is government introducing a punitive new tax. The question MSMEs will have is, again, why? What will MSEs get in return for paying this new tax? The presumptive tax may motivate informal MSMEs to go further underground because they know they are the new tax target, and since most operate at a subsistence level, any additional cost will truly pinch. Thus, rather than creating an enabling environment for MSEs, government introduces a tax that will make it even riskier for MSEs to conduct business in an already difficult environment.

However, the strongest argument against the tax hikes is corruption and the flagrant lack of fiscal accountability. This Bill is being tabled in the context of one of the largest cases of the mismanagement of public funds Kenya has seen in recent years. Ergo, Kenyans will wonder whether these new tax hikes will improve service provision, or whether the money will be used to buy public officials new properties and cars after being diverted into personal accounts.

Image result for corruption

(source: https://www.coe.int/en/web/greco/-/council-of-europe-anti-corruption-body-to-carry-out-urgent-evaluations-of-new-legislation-concerning-the-judiciary-in-romania-and-poland)

Unless government demonstrates that it is a responsible custodian of public funds, tax rates can continue to be escalated without translating into tangible benefits. Rather than scrutinise its own failings, government is being intellectually lazy and increasing tax on an already stretched private sector. Perhaps with some self-reflection and tough action within government itself, government would find it can live within its current means and need not saddle private sector with additional taxes.

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

Risks to manage in the African Free Trade Area

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This article first appeared in my weekly column with the Business Daily on May 27, 2018

The Africa Continental Free Trade Area (AfCTA) seeks to integrate African economies and pull together a market with a consumer spending power of USD 1.4 trillion by 2020 and increase intra-African trade by USD 35 billion by 2022. While some countries may have issues with the AfCTA, most African governments are behind it and momentum will continue to build to make it a reality. AfCTA is viewed as a game changer that will allow the free movement of goods and services across the continent, allowing African businesses to tap deeper into the sizeable and growing African markets. However, there are a few risks that ought to be managed going forward.

Delegates during the African Continental Free Trade Area Business Forum in Kigali, Rwanda, in March. FILE PHOTO | NMG

(source: https://www.businessdailyafrica.com/analysis/columnists/Risks-manage-African-Free-Trade-Area-/4259356-4582538-46rg8n/index.html)

The first risk is to do with the financing of infrastructure that will interconnect the continent. Africa has an annual infrastructure financing deficit of about USD 93 billion. An obvious next step will be the business of raising funds to build the infrastructure Africa needs because without infrastructure, AfCTA will remain a good idea with no lived benefits on the ground. Given concerns with rising debt levels of African countries, coupled with queries on the management of public funds, there is a risk that AfCTA can facilitate a debt binge to finance infrastructure in a context of poor institutional controls and capacity to ensure infrastructure projects are efficiently financed and developed. African governments have to manage this by ensuring infrastructure plans are financed responsibly, that money reaches the infrastructure projects and the projects are completed in a timely manner. Without these controls, the sheer scale of financing that can be attracted to finance infrastructure in the context of AfCTA may trigger debt distress in many African countries.

The second risk is that given Africa’s underdeveloped manufacturing and propensity to export raw commodities; without coordinated policy change, AfCTA may entrench and enable this dynamic. A cynic will point out that given where Africa is now, AfCTA may do more harm than good. By opening up Africa’s borders and markets, AfCTA will make it easier than ever to extract even larger amounts of raw materials from even more of the continent. AfCTA can also open African markets even further to others and unintentionally facilitate the dumping of manufactured goods into Africa by other countries. Is Africa able to process all its oil, gold, coltan, titanium, copper, agricultural produce etc? If not, to whom is AfCTA really opening up Africa? And who will actually capture market share in Africa via AfCTA?

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(source: http://www.decode.co.za/home/clients/)

This leads to the final point which is that the implementation of AfCTA must be correlated with focused and coordinated action across Africa to industrialise. Let African industries and manufacturers get the attention required to catalyse their development. The African Development Bank has just released a report on strategies, policies, institutions and financing required to industrialise Africa. Let governments draw from such documents as they develop and implement their industrialisation policies and strategies. In doing so, Africa will be in a much stronger position to leverage AfCTA and ensure African companies capture market share in a manner that propels wealth creation and development in Africa.

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

The China Debt Question

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This article first appeared in my weekly column with the Business Daily on May 20, 2018

There has been clear concern voiced over the sustainability of Kenya’s fiscal path over the past five years. Total debt has risen from KES 1.7 trillion in 2013 to about 4 trillion in 2017. The good news is that there seems to be indication that plans for fiscal consolidation are underway, although these will only be confirmed when the 2018/19 Budget is read.

Embedded in concerns with Kenya’s fiscal path, is a narrative that raises red flags on Chinese debt. If you look at the accrual of public debt owed to China, this stood at 63 billion in 2013 and rose to 479 billion in 2017; China owns about 66 percent of Kenya’s bilateral debt. This has led to alarm about Kenya’s ‘over-exposure’ to Chinese debt. Indeed, there is an emerging commentary that argues that China is saddling Africa with unsustainable debt and seeks to use indebtedness to further its geopolitical control over the continent.

 Kenya's President Uhuru Kenyatta (left) and Chinese President Xi Jinping  prepare to inspect Chinese honour guards during a welcoming ceremony outside the Great Hall of the People in Beijing on August 19, 2013. AFP PHOTO

(source: https://www.businessdailyafrica.com/analysis/columnists/4259356-4571188-tw2sm7/index.html)

While I agree that there should be concern with debt levels, I think the ‘danger’ of Chinese debt has dubious motives. In fact it is fair to ask if all the hue and cry over debt owed to China would be as pronounced if the debt belonged to another part of the world. The focus on Kenya’s and indeed Africa’s, rising debt needs to be approached in an intellectually honest manner that demonstrates, firstly, that the appetite for debt is coming from Kenya. China is not saddling Kenya with debt, the Kenyan government wants the debt. The Kenyan government has prioritised infrastructure and gone through expansionary fiscal policy to finance this priority. Thus, it is hard to conceive that given the financing demands of infrastructure development, the government would turn down credit lines that can finance this priority.

Secondly, if you look at the portfolio of China’s debt to Kenya, it is focused on infrastructure indicating that perhaps the Kenyan government feels it has found a partner that is willing to invest in its focus on building railways, roads, electricity transmission lines, dams etc. Bear in mind that China is still a developing country with a 2017 GDP per capita of USD8,643, and ranked 75th in the world. However, the Chinese view is that despite this, it will continue to provide sizable development loans to Kenya of which almost half are concessional loans or preferential credit lines with a 2 percent interest rate and 20-year maturity period.

Image result for China Africa

(source: https://www.diplomaticourier.com/2017/04/29/africa-chinas-human-rights-concerns-dont-apply/)

The point is that, once you find a partner that seems to understand where you are coming from and supports your vision, it is likely that the partnership will grow. Further, if other parts of the world are not offering similar debt packages in terms of scale and conditions, they really are not in a position to criticise. So why do some seem surprised by burgeoning credit lines from China?

Finally, beyond debt sustainability, the core problem with rising debt is less related to from whom Kenya is getting debt, but more about how that debt is spent. The first problem is the question of the management of public finances. If debt does not end up in projects that drive growth and rather is diverted to private pockets, then the country is in serious problems. Debt only makes sense when it is economically productive and thus mismanagement of public monies comprises the ability of debt to inform economic development. Second is the issues of absorption of funds. Government at both national and county level have clear problems with absorbing development financing, and debt sits in that docket. So securing all this debt and failing to ensure it is used correctly and that the funding is absorbed in intended projects is the real problem.

It is important that the country have a sober conversation about debt, because no matter where the debt comes from, if it is mismanaged, Kenya will be in hot water regardless.

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