Political Economy

The fracturing of the Western Alliance and implications for Africa

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This article first appeared my weekly column with the Business Daily on December 2, 2018

 

Global geopolitical dynamics have been undergoing significant shifts recently. Of particular interest is the Western Alliance, or the spirit of allied cooperation that had defined the relationship between the USA and Europe for decades. This is changing due to two factors.

The first is Brexit and the fracturing of the European alliance. Through Brexit, divided as the vote was, Britain told the world and Africa that they were unhappy with their relationship with the rest of EU and wanted out. African entities can no longer assume that the approach and priorities of EU strategy in Africa will be done in reference to or coordination with Britain going forward, and vice versa. The bad blood that has emerged between Britain and the EU as a result of Brexit is common knowledge and there are serious questions as to whether there will be any sustainable coordination between Britain and EU in areas such as African policy going forward. What was once a strong European alliance acting in a fairly united manner in Africa, is now a fraught relationship that no longer enjoys the spirit of mutual trust, cooperation and coordination that had defined their relationship for decades.

Image result for brexit

(source: https://www.bbc.com/news/uk-politics-32810887)

The second is dynamic is the souring of relations between the USA and the EU. The EuroAmerican alliance has been one with which the continent has had to contend for a long time. Their joint focus on development, governance, human rights, anti-terrorism and the financing of civil society has been a point of commonality in this alliance. Dynamics have clearly changed since President Trump took over. The Foreign Policy magazine reported that Trump’s views toward the EU have been consistently negative for years and that during the presidential campaign he made several disparaging remarks about the EU. More recently, there has been serious concern in EU capitals that the Trump administration is considering imposing tariffs on EU cars and auto parts. What once seemed to be a stable partnership is being fundamentally challenged and weakened.

Image result for us eu trade war

(source: https://sputniknews.com/business/201707271055926078-trade-war-us-sanctions/)

Africa is watching the weakening of the EuroAmerican alliance with interest particularly in the context of a rising China. Africa’s relationship with China is well known, and both Europe and North America have signaled their concern with strengthening Sino-African relations. But quite frankly, the strongest alliances in the world, both within Europe and between Europe and the USA, are falling apart at a time when China seems bent on consolidating its power and expanding its influence across the globe. Given the concern emanating from Europe and North America with regards to Sino-African relations, the time for the unbuckling of the alliance is not now.

What are the implications of this fracturing of the Western alliance for Africa? Will we see the bickering on Brexit and between the USA and EU result in markedly disjointed foreign policy action in Africa? To what extent does the weakening of the alliance deepen a global leadership vacuum that China seems ready to take up? The bottom line is that while old allies grapple with new problems, they are not in a position to effectively stem the strengthening of Sino-African relations in particular. What this means for Africa is that the world is becoming even more multipolar. Where there was once a monolith, stands a body divided. As usual, it is for Africa to read the signs of the times and leverage changing geopolitical dynamics to its advantage.

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

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USA-China Trade Tensions: Implications for Africa

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This article first appeared in my weekly column with the Business Daily on November 18, 2018

The escalating trade war between China and the United States of America (USA) has been at the forefront of global geopolitical tensions recently. While extensive analysis has been produced on the implications of the ‘trade war’ for US and Chinese entities, both public and private, far less attention has been given to the implications for Africa. The truth is that Africa, both government and private sector, view the USA and China as important partners for development and growth. What will a trade war between the two largest economies in the world, who have markedly different styles of economic engagement with Africa, mean for the continent? Simply, the trade war will have both positive and negative implications for Africa.

The US and China are embroiled in a commercial

(source: https://www.businessdailyafrica.com/analysis/ideas/4259414-4857464-8bb8pr/index.html)

In terms of the negatives, there are two key elements the first of which is commodities. African countries that continue to be commodity driven and let that define their exports to China will be hit on the commodity lines that supply Chinese manufacturing that targets US markets. Thus, African countries that provide key inputs to China that then manufacture products for US markets will be hit; particularly those products that are targets of US tariffs. The same applies to African countries supplying the USA with commodities that end up in products that target China. At the moment, the USA’s top exports to China include aircraft (USD 16 billion), machinery (USD 13 billion), vehicles (USD 13 billion), and electrical machinery (USD 12 billion). Thus, African countries need to understand the details of the China-USA trade war and its potential impact on commodity exports to both countries.

Secondly, the trade war will put Africa at the centre of a geopolitical tussle between the two countries. Africa is an important geopolitical element of strategy for both countries and the trade war accentuates this. Thus there is a real risk, that Africa may be caught in the crosswinds of the not only the economic cross fire, but in military interests as well.

But there are positives. Firstly, and ironically, commodity driven African countries, particularly oil producers stand to gain from the trade war. In the wake of the trade war, China will seek to reduce its reliance on oil imports from the USA. Thus, China will likely seek to increase the proportion of oil sourced from Africa.

Image result for africa

(source: https://en.wikipedia.org/wiki/Africa)

Secondly, the trade war, makes Africa even more important to each country. During FOCAC, China committed USD 60 billion to Africa. The USA also established the International Development Finance Corporation with USD 60 billion to invest in the developing world, Africa included. Thus as USA and China seek to secure their interests in the context of a trade war, Africa has actually become a beneficiary of the economic diplomacy of both countries.

Finally, the trade war will make the demographics of Africa feature more prominently in the commercial diplomacy of both countries. As both governments begin to diversify away from each other in terms of exports, Africa is one of the fastest growing markets in the world. Not only is the population in Africa growing, GDP per capita is also growing; so there are more Africans and each African is slowly getting richer. Thus, it is possible that Africa’s position as a key trading partner for both the USA and China will rise in prominence as trade tensions between them rise.

As always, it is for Africa to determine whether the trade war between the USA and China, will be a net positive or negative.

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

Kenya’s fiscal missteps must be corrected

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This article first appeared in my weekly column with the Business Daily on November 4, 2018

Last week the International Monetary Fund raised Kenya’s debt distress warning level from low to moderate. This is partly informed by the rapid increase in debt level as well as Kenya’s breach of debt sustainability measures such as the external debt service to both the export and revenue ratios There are three factors to bear in mind as one assesses Kenya’s public debt and general fiscal path.

The first is that Kenya’s public debt is understated because it is not clear the extent to which official figures factor in debt accrued by county governments. For example, the County Government of Nairobi alone is said to have a debt of KES 57 billion. Bear in mind, county governments tend borrow from commercial banks with high interest rates and shorter loan tenures. At the moment there is no clear documentation available as to the scale and terms of all county government debt. This makes is difficult to systematically ensure that all debt owed by county governments is reflected in official public debt figures. Thus, at this stage, it is safe to surmise that Kenya’s debt distress levels are more onerous than official figures suggest and that national debt figures understate the scale of total public debt owed.

Debt-Rising (2)

(source: https://enterprisetv.tv/rising-africa-debt-distress-risks-economic-recovery-imf-says/)

Secondly, the government has a chronic problem with revenue generation. In late October government cut the revenue projection downward by KES 96 billion for FY 2018/19 and by KES 42 billion for 2019/2020. Revenue targets are only revised downwards when it is clear that the original target cannot be met. The reality is that Treasury continues to accrue debt while clearly knowing government is not generating enough revenue. This alone makes it clear that Kenya’s fiscal path is not sustainable. The irony however is that, the Kenya Revenue Authority just released a report indicating that Kenya may have lost up to KES 270 billion in tax over the past 3 years due to tax exemption provisions. It is in the interest of government to better coordinate expenditure with sustainable revenue generation that does not stifle economic growth. Though slower, developing a shrewder tax regime that actually stimulates business activity would be better in the long term rather than slapping a new VAT on a basic commodity such as fuel, as this increases the cost of doing business and production which have negative effects on profit margins and thus taxes paid.

Image result for small business debt distress Africa

(source: https://www.theeastafricanreview.info/op-eds/2018/09/15/between-the-hammer-of-the-markets-and-the-anvil-of-politics-mr-kenyatta-in-debt-distress/)

Finally, government at both national and county levels continue fail to pay their suppliers; this is leading to fiscal problems. As of July 2018, the government was said to owe SMEs KES 200 billion. The failure to pay for goods and services rendered is not only morally abhorrent, it is crippling the ability of SMEs to remain commercially viable. As a result, SMEs affected are making losses which then translates to lower (if any) tax payments. So again, government behavior is causing problems for itself.

Kenya’s fiscal problems are becoming structural in nature. The concern is that the fiscal structure is unsustainable. One wonders at what stage the seriousness of Kenya’s fiscal missteps will be comprehensively addressed so as to address the negative fiscal momentum currently being generated.

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

The Fallacy of China Debt Trap Diplomacy

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This article first appeared in my weekly column with the Business Daily on October 28, 2018

Last month, the South African Institute of International Affairs published my policy insight on the Chinese Debt Trap. In short, Africa’s growing public debt has sparked a renewed global debate about debt sustainability on the continent. This is largely due to the emergence of China as a major financier of African infrastructure, resulting in a narrative that China is using debt to gain geopolitical leverage by trapping poor countries in unsustainable loans. It essentially argues that African governments are being deliberately lured into debt by the Chinese government through debt trap diplomacy and that China has an ominous plan to mire the continent in debt in order to gain economic and geopolitical control of Africa.

See the source image

(source: http://www.leeabbamonte.com/asia/how-china-is-taking-over-the-world.html)

My counter-argument is simple: The debt trap narrative undermines the decision-making power and agency of African governments. Even worse, the debt trap narrative infantalises African governments, painting them as little more than overgrown children who have to be constantly supervised by other powers if there is any hope of them getting anything right.

More seriously, the debt trap narrative is deeply worrying because it is deeply dangerous. Arguing that African governments are being lured or tricked by China actually begins the process of preventing sovereign African governments from being held accountable for the financial commitments made on behalf of the African people. The narrative gives wiggle room for some governments to become intellectually dishonest and say that they did not know what they were getting into as they signed multi-billion dollar deals with China, rather than stand up and be counted. The narrative, in its determination to paint China as the ‘bad guy’, actually begins to absolve African governments of their fiscal responsibility and obligations. It creates space for some African governments to avoid hard questions from their publics about how debt is used, accounted for and whether the debt has led to economic gains and development.

(source: https://www.panafricanvisions.com/2018/op-ed-african-women-even-politics/)

Last week, the Financial Times (FT) took this argument further, pointing out that the heaviest cost for African countries comes from private lenders, not the Chinese. Nearly a third of African governments’ debt is owed to private creditors, but they account for 55 percent of interest payments. By contrast China, is owed about 20 percent of African nations’ external government debt, and receives just 17 percent of interest payments.

And to be honest even if that number were higher and Africa owed China far more, the responsibility for that rests squarely on the shoulders of the Ministries of Finance/ Treasuries of African governments, not China. African governments have demonstrated tremendous appetite for debt and have not only gone to China looking for it, they have floated sovereign bonds and continue to borrow from their traditional partners.

Frankly, the debt trap narrative seems motivated more by frantic Sinophobia than any genuine concern for the economic and fiscal health of African countries. Africans are worried about growing public debt, period. After all, it is the African people alone who will have to pay back all the debt in question. Thus, let the concerns of the African people about the fiscal accountability of their governments take centre stage in the conversation about public debt on the continent.

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

Important role of MSMEs being recognised

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This article first appeared in my weekly column with the Business Daily on October 21, 2018

Last week the Inaugural Presidential Roundtable for Small and Medium Enterprises (SMEs) was held at Strathmore University with a focus on six sectors linked to the Big Four Agenda: Textiles, Livestock (dairy, beef and leather), Agro processing, Aquaculture, Construction and Trading. While the title of the roundtable headlined SMEs, the roundtable actually brought together micro enterprises as well thus making it a forum for MSMEs. Entrepreneurs discussed key issues and generated recommendations specific to their cluster with cluster representatives selected to share their content with the President.

See the source image

(source: https://www.smefinanceforum.org/post/financing-sme-growth-in-kenya-%E2%80%93-briefing-note)

The importance of this roundtable ought not be dismissed because it is the first time under the new constitution and devolution, that such high level attention has been accorded to the MSME sector. MSMEs are crucial as they constitute at least 80 percent of the private sector in Kenya and are central in generating employment, creating new jobs and contributing to GDP. Thus the focus on MSMEs is welcome, particularly at a time where many Kenyans feel economic growth does not translate to economic security and welfare. This is largely because MSMEs are locked out of financing and support structures that allow them to become more productive, profitable and scale. As a result, often the returns generated are not commensurate to the effort and time invested in business ventures by most MSMEs. For the most part, most low income Kenyans stay confined to subsistence, informal business activity, mainly as micro and small businesses.

The roundtable is important and signals that government has recognized the importance of MSMEs, and has an interest in learning about the sector to address their challenges. It also signals to financiers and business development providers that the MSME sector ought not be neglected if the country is to get on a credible path of economic transformation. One key issue is that, at the moment, MSMEs seem stuck in a vicious cycle where they are shunned by most financiers, and thus do not grow and strengthen financially, and thus remain vulnerable and ‘high risk’ and thus are shunned. Given the return on assets of banks in Kenya where the top 3 Kenyan banks are outperforming global peers in profitability and are among the top 20 in the world, there is room for banks to become more creative and relevant in financing MSMEs. For only then will a transition from micro to small and medium enterprise occur at a scale where a pool of larger businesses emerge that provide a wider and deeper deal pipeline for financiers.

See the source image

(source:https://www.smefinanceforum.org/post/financing-sme-growth-in-kenya-%E2%80%93-briefing-note)

Beyond financing and business development support, another key issue is market access, an area with which many MSMEs struggle, particularly in terms of the physical market spaces in which they operate. Most physical markets in which MSMEs conduct business are congested, dilapidated, have limited to no amenities in terms of electricity, water and sanitation, have poor security and are serviced by poor transport infrastructure. These factors alone discourage customers from visiting these markets, thereby locking MSMEs out of a lucrative consumer base.

Last year, the Central Bank of Kenya made the point that MSMEs were key in the resilience of Kenya’s economy and are crucial in economic recovery and performance. MSMEs have proven their worth. Let them be accorded the seriousness and focus they warrant for in doing so Kenya will more credibly achieve economic transformation and development.

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

How Africa can leverage its youth in three ways

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This article first appeared in my weekly column with the Business Daily on October 14, 2018

Africa is young in three ways: young economy, young political system and a young population. These three variables present Africa with unique challenges and opportunities. Yet Africa lives in a world with many old countries with far more experience. How does Africa leverage her youth?

To be clear, there are key challenges linked to being young and Africa is young in terms of modern political economy structures. On average, African countries, as currently delineated, are about 50 years old or younger. Juxtapose that with at least 400 years of slavery and 200 years of ‘exploration’ and colonialism. It’s a marvel that Africa still functions. The point is that, under the current economic structure, Africa is young in three ways: young economy, young political system and young population. Each variable has its challenges and strengths.

Image result for africa

(source: https://www.business-humanrights.org/regions-countries/africa)

In terms of being a young economy, key challenges of being a young economy is economic immaturity, shallow financial markets, massive informality, cartels, and a poor economic data and knowledge base. These are real challenges that constrain the economic prosperity of the continent. There is often the perception that Africa is ‘inherently economically incompetent’. No. We are just young and the same struggle we are having is what other nations have done to get where they are. But there advantages to being a young economy: We have the opportunity to leapfrog, the opportunity to learn from older countries and leverage economic experience from others to Africa’s gain and we have the chance to create an economic path the world has never seen. Africa has that power.

In terms of being a young political system, there are key challenges: kleptocracy, corruption, and a concentration of political power. This feature is evident in the acrimonious relationship between African governments and their publics. But there are advantages to a young political system namely a young, engaged an invested populace; an opportunity to influence the country’s political path; and an opportunity to craft a political ideology that benefits Africa. So be aware that Africa is crafting its own political identity. And it will be done in a manner that is aware of all the geopolitical interests others have on the continent. It will be Africa front and centre.

Image result for kenya youth

(source: http://chwb.org/others/news/kenya-youth-peace-will-run-year-2015/)

And thirdly, Africa has a young population which is linked with the following challenges: unemployment, idleness and hopelessness, and civil instability. Africa has to leverage its population dividend or be swallowed by it. But a young population has its advantages such as: an energetic and deep labour pool; opportunity to skill up labour appropriately, and a massive young market. Not only is the African population growing in size, it’s growing in GDP per capita. Africa is a young, massive and lucrative market.

It is up to Africa to decide how to leverage our youth in three ways. And I am confident that we will.

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

 

The New Face in Stemming Illicit Financial Flows in Africa

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

Recent action in the banking sector in Kenya ought to be noted where the Central Bank of Kenya (CBK) announced that an unspecified number of banks are under investigation with regards to tracing the recipients of the allegedly irregularly acquired funds linked to the National Youth Service (NYS). Media reports indicate that bank accounts of companies and suspects with money believed to have been questionably acquired via the NYS have been frozen for six months. The CBK ought to be commended for taking this step, which is well within its ambit of authority, largely because it has drawn attention to the local articulation of illicit financial flow involvement. The CBK Governor indicated that regulatory guidelines on handling the proceeds of corruption are clear to all financial institutions making chief executive officers of those that ignored the rules personally liable.

The complexity and weight of what it trying to be done should not be underestimated so it would be prudent to start with definitions. Global Financial Integrity defines illicit financial flows (IFFs) as illegal movements of money or capital from one country to another. GFI classifies this movement as an illicit flow when the funds are illegally earned, transferred, and/or utilized. The first point to note is that this definition is insufficient in the African context.  At least three types of IFFs are present in countries like Kenya. The first is the well-known IFF particularly by private sector which transfer fund to tax havens abroad and use strategies such as transfer pricing to under-declare tax liabilities. The second is to do with the funds irregularly acquired from public coffers, through government-financed projects that are transferred from government accounts to local recipients. The third type of IFF is that linked to government-financed projects that are transferred from government accounts to recipients abroad. I have previously noted that African publics have been relatively disinterested in IFFs because they did not see how stemming IFFs would be of benefit to them.

Image result for Illicit financial flows

(source: https://www.one.org/africa/blog/launch-of-the-high-level-panel-report-on-illicit-financial-flows-in-africa/)

The action taken by the CBK has changed this because it is the first time, at least in living memory, a regulator has put the banking sector on the spot with regards to how they facilitate and profit from IFFs. Thus, the action from the CBK ought to be positively noted as Kenya is in a region surrounded by countries in conflict which often use Kenya as a centre for illegal financial transactions.

An example of local participation in IFFs involves South Sudan. An investigative documentary, The Profiteers, unpacks how leaders of states in conflict profit from war using the financial systems of neighboring countries. The only way elites can profit from the war is if key regional financial hubs such as Kenya continue to allow apparently illegally acquired wealth move through their financial systems to their profit. The facilitation of such IFFs expose the Kenyan financial system to the risk of financing of war and civil instability. Because despite the presence of anti-money laundering money legislation, if the banking sector is lax with regard to any type of IFF, it exposes the entire financial system to the transfer of illegally acquired funds. IFFs are a national and regional security issue.

In 2020, Kenya will be subject to a review by the Financial Action Task Force which will scrutinise the country’s financial sector. Any abuse of Kenya’s financial system will put the integrity of the country’s financial system in question and undermine Kenya’s international reputation and attractiveness to investors.

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