Political Economy

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

 

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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

 

Africa should seize renewed global interest for prosperity

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This article first appeared in my weekly column with the Business Daily on September 30, 2018

Over the past few months, it has become clear that the world is multipolar and that Africa is seen as a key partner for all the different centres of global power. There has been a notable shift in attention from perceiving Africa as a continent of poverty and aid, to one for trade and investment.

The most talked about power is, of course, China which unveiled a USD 60 billion plan for economic engagement with Africa during FOCAC. Right along China is the USA which is creating the International Development Finance Corporation, an agency that can invest up to USD 60 billion in the developing world. According to the Financial Times, the new agency will spearhead private sector investment through both debt and equity deals, and make profits for the USA. The European Union (EU) is also on the money; reports indicate that the EU is proposing a new Africa-Europe Alliance for Sustainable Investment and Jobs involving a 25 percent hike in the EU Africa budget for 2021-27 to about € 40 billion. Japan will not be left behind. In 2016, Japan’s prime minister, announced that between 2016 and 2018, Japan would invest USD 30 billion in public-private partnerships in Africa. Other countries such as India, Turkey, the UAE, Russia and Brazil also have an eye on the continent with their own Africa-focused economic initiatives.

Chinese President Xi Jinping

(source: https://www.businessdailyafrica.com/analysis/ideas/4259414-4784518-7t12dl/index.html)

So the question is why the mad dash for Africa? Why now? There are several factors informing this renewed attention, the first of which is China. Africa would arguably, not be getting such determined attention particularly from Europe and North America, if China had not made such significant economic inroads into the continent. Old powers fear losing Africa to China, and have been forced to reassess their attitude towards Africa and make themselves relevant again.

A second factor is the fracturing of the Western alliance between Europe and North America; an alliance that has been the core of international power and influence since the Cold War. The UK is breaking away from the EU via Brexit, and the USA is contemplating putting sanctions on the EU and Canada, and moving away from NATO. Going forward it seems that a relationship that was once defined by cooperation and coordination will be increasingly defined by competition. Theresa May hinted at this shift when she stated that she wanted the UK to overtake the USA and become the G7’s biggest investor in Africa by 2022.

Image result for Africa business

(source: https://www.africanexponent.com/post/there-are-numerous-business-opportunities-in-africa-1610)

Thirdly, Africa has a new generation of individuals who are more educated than ever before, want prosperity at home, and have an entrepreneurial ambition and ability the continent has never seen. Africans are approaching investors, making business deals with players all over the world and proving not only that no one knows Africa like Africans, but that there is money to be made here.

Lastly, the world seems to finally understand that it is better for everyone when Africa is doing well. Whether this new focus is informed by an attempt to stem the flow of immigrants into Europe, or in response to sentiments of economic nationalism where publics have grown tired of sending billions to Africa and getting ‘nothing in return’, the impetus to focus on Africa’s economic potential is real.

The question now is: How does Africa leverage this renewed interest in the continent? How does Africa use the multiple offers to its advantage? We do not know when the world will next be so keen on Africa, we have to seize the opportunity at hand.

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

USA should stop worrying about China in Africa and leverage its strengths

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This article first appeared in my weekly column with the Business Daily on September 23, 2018

The Trump administration recently appointed Donald Yamamoto as acting Assistant Secretary of State for Africa. Prior to this appointment the main signal Africa has gotten with regards to US approach to foreign policy in Africa was through statements by former US Secretary of State Rex Tillerson, and his concerns with the growing economic strength of China in Africa. On September 18, the US government, through Tibor Nagy, Assistant Secretary, Bureau of African Affairs, provided clearer direction of the focus areas for the US in Africa going forward. It seems US strategy will be focused on promoting stronger trade and commercial ties, and advancing peace and security. This is good because, rather than focusing on China in Africa, the USA has ample strengths it can leverage in Africa.

If one focuses on the economic engagement potential between Africa and the USA, there is considerable room for both parties to benefit particularly with a focus on private sector development. To be clear, the term private sector here refers both to formal and informal businesses, large players and Micro, Small and Medium Enterprises (MSMEs).

Chinese President Xi Jinping (left) with his US

(source: https://www.businessdailyafrica.com/analysis/ideas/US-should-ditch-China-jitters-and-leverage-on-its-strengths/4259414-4774076-fyi7u3z/index.html)

The first opportunity is in financing options and opportunities in Africa that can be met by US financiers. A key strength of the funding options presented by the USA is that financing opportunities fall along a spectrum of more mission-oriented to more business-oriented financing. A key funding gap Africa has right now is patient and affordable capital for MSME development, a gap which cripples private sector development in Africa. This funding gap can be met by financing options already provided by entities in the USA, particularly impact and angel investors. Business-focused grants and affordable debt can be channeled to develop MSMEs that deliver social and economic value, and strengthens their commercial returns and business activity.

There is also opportunity for more bottom-line oriented financing for more established and large players in Africa. But the reality is that without the development of MSMEs, the pipeline of viable projects for mainstream investors will continue to be narrow. The USA has a blend of financing options that can be leveraged for MSME development and the creation of a pipeline of deeper financing options for everyone. This blend of financing can be more effectively coordinated and leveraged for private sector development to the benefit of both US and African players.

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(source: https://www.investigaction.net/fr/Le-conflit-entre-la-Coree-du-Nord/)

The second opportunity the USA presents Africa is a focus on environmental, social and governance (ESG) issues. While parties from other parts of the world may be more willing to be lax on ESG issues, the fact that US businesses view these are core concerns is important. While the centrality of healthy ESG practices from US business may be due to legal compliance issues and high ESG expectations at home, African businesses financed with this approach are likely to be stronger business entities going forward. Thus, the focus on ESG performance is a strength US financiers can use to support the growth of holistically sustainable businesses in Africa. African businesses benefit by ensuring they not only meet legal ESG requirements, but actually develop a brand of being responsible businesses that support the development of their continent.

The two points elucidated above are only the surface of the economic opportunities that exist between Africa and the USA. Thus, rather than being concerned with what other entities are doing in Africa, the USA ought clearly see it can be an important partner for private sector development in Africa and leverage this strength going forward.

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

TV Interview: 8% VAT on Fuel in Kenya

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On September 18, I was part of a panel that discussed the 8% VAT on fuel that has since been effected.

TV Interview: The Chinese in Kenya

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On September 15, I sat down with Citizen TV to discuss dynamics between Chinese and Kenyans.

Parallels between small business in the USA and Kenya

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This article first appeared in my weekly column with the Business Daily on September 16, 2018

I recently came back from traveling in the USA after a long time of not having been there. What struck me was the robust presence of small business. Often sitting in Africa, you only here about massive US corporations, and their achievements. However, while I was there it struck me that there are similarities between small business in the USA and here in Kenya.

First, definitions are required so that the terms being used are clear. In the USA, a small business is one that, depending on industry, has a maximum of 250 employees or a maximum of 1,500 employees. Some say a ballpark definition for small business is one with 500 employees or less. However, Kristie Arslan who worked with the Small Business and Entrepreneurship Council in the USA, makes the point that 95 percent of small businesses have fewer than 10 employees. Here in Kenya there are three categories that can be defined as small business namely, micro (less than 10 employees), small (10 to 49 employees and medium (50 and 99 employees). These constitute the Micro, Small and Medium Enterprise (MSME) segment of the economy.

Image result for small business USA

(source: https://www.nerdwallet.com/blog/small-business/small-business-grants-for-women/)

One key point of similarity is that small business in both countries lead in employing people. In the USA, small businesses employ 53 percent of the workforce; in Kenya 83 percent of employed Kenyans sat in the informal sector (which constitutes mainly of MSMEs) in 2017. Further, in both the USA and Kenya, small businesses generate the most jobs. In the USA, Arslan argues that small businesses account for 64 percent of net new jobs created. In Kenya the informal sector, was responsible for creating 89 percent of new jobs in 2016.

The final point of similarity between small business in the USA and Kenya is financial constraints. Whether it was the global financial crisis or the interest rate cap, lenders seem to have a similar attitude to small business, particularly when they are operating in a difficult environment. In the USA, after the global financial crisis, small business access to credit was severely constrained. Fundera points out that small business loans fell more sharply during the crisis relative to the peak—both in absolute and proportional terms—than large business loans, and access has remained relatively constrained during the recovery.

Image result for small business Kenya

(source: https://informationcradle.com/kenya/directory/small-business-in-kenya/)

This is exactly what has happened in Kenya when the interest rate cap was introduced. The Central Bank of Kenya report on the cap stated that the number of loan accounts declined significantly between October 2016 and June 2017, and there was lower access to credit by small borrowers. This trend continues and is not without consequence. It is estimated that reduced lending to the MSMEs due to the cap, contributed to a 1.4 percent decline in the growth of GDP in 2017. Clearly small business in both countries are marginalized due to attitudes of lenders, despite the fact that they are the segment of the economy that employ the most people and create the most of the jobs.

However, despite the challenges small businesses face, they aren’t going anywhere. It seems the determination of the entrepreneurial spirit in both countries is alive and well.

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