This article first appeared in my weekly column with the Business Daily on April 12, 2015
Almost two weeks ago Kenya experienced yet another horrific terrorist attack credited to militant Islamic group Al-Shabaab. The human loss experienced is immeasurable and Kenyans are still reeling in the aftermath of the massacre.
Terrorist attacks do not only cause loss of lives, they also have long-standing effects on the economy. Terrorism here refers to premeditated, politically motivated violence perpetrated against non-combatant targets by sub-national groups or clandestine agents, usually intended to influence an audience. In general, terrorism reduces consumers’ and firms’ expectations for the future and forces governments and the private sector to invest in security measures and redirect investment away from more productive economic uses.
For example, many firms in Kenya spend considerable capital on security costs which is essentially unproductive in that it does not add to their output or improve their product quality. Terror attacks in Kenya have also triggered geopolitical conflict, which is causing further economic disruption by increasing the likelihood of future attacks.
Direct costs of terrorism include the value of assets damaged or destroyed such as plant, equipment, structures and merchandise. Economic activity is disrupted so lost wages and other forms of income are also part of the direct costs of terrorism. The direct costs of the attacks on Westgate for instance were estimated to cost Sh10 billion. In terms of indirect costs, Kenya’s ability to attract FDI has been hit by such attacks. Indeed, analysis reveals that the presence of terrorist risk corresponds to a decline in the net FDI position equal to five per cent of GDP.
This is attributed to the creation of climate of uncertainty that envelopes the country whenever attacks happen. This prevents potential investors from making new capital investment as they are unsure of the economic implications of the attacks and thus overlook Kenya for more stable economies.
Indirect costs of terrorist attacks also affect the transportation industry because demand for air travel declines, passenger fares decline, and the inability of heightened airline security personnel to readily process travelers lead to further declines. Tourism in Kenya has obviously been a casualty with travel advisories discouraging foreign nationals from travelling to the country which is particularly bad as often warnings on non-essential travel attract remove insurance cover. Ironically, the travel advisories may fuel terrorism further. How? Well, by contributing to the collapse of the coastal tourism industry, the travel warnings may simply be increasing the joblessness, idleness, poverty, drug use and overall desperation—all well-known catalysts of terrorism.
Other indirect costs of terrorism could include the pain and suffering of the victims and their relatives as well as the psychological trauma experienced by a stunned nation. Psychological trauma may have negative short-term impact on productivity.
Interestingly in other countries such as the US, the 9/11 attack had a stimulating effect on the economy where monetary and fiscal authorities stimuli were effected to offset the macroeconomic consequences of the attacks.Because of damage accrued, there was a surge in the private sector demand for liquidity which was met by the Federal Reserve cutting short-term interest rates and increasing short-term lending (discounts and repurchases). Further a $40 billion emergency spending package provided a strong fiscal stimulus.
But sadly developing economies such as Kenya often cannot take such action because they do not have ready access to international capital markets and the fiscal authorities cannot redirect already strained expenditure.
Ms Were is a development economist. Email: email@example.com, twitter: @anzetse
The Chinese economy is officially slowing down, ‘In January 2014, figures from China’s National Bureau of Statistics showed that in the quarter October to December 2013, China’s GDP grew at rate of 7.7%. This is the lowest since 1999’. While these GDP growth rates are still spectacular comparatively speaking, most of us are unaccustomed to them. In fact as Africans we’ve banked on roaring GDP rates to feed China’s voracious appetite for African raw materials some of which are then converted into cheap goods sold on global markets. Africa has benefitted from both sides of this spectrum as we are providers of the raw materials and thankful consumers of cheap goods. But what are the implications of the slowdown for Africa? Quite frankly, it seems to be a bit of a mixed bag.
The first consequence is obvious: A smaller appetite for Africa’s raw materials which means lower demand which may eventually cause a dip in commodity prices which then negatively impact African economies. And the slowdown is serious, in fact, ‘China’s manufacturing sector is not only slowing down, it’s contracting’. Sadly, ‘African economies in their present state remain highly dependent on their trade with China and none will be immune to the consequences of reduced demand’ so with, ‘revenues down, (African) exporters are cutting jobs and governments are tightening their spending’., This does not bode well for African governments as they may, ‘have to cut ambitious plans for spending on education and other social programs’. Not good.
The second consequence is that the slowdown will force the Chinese government and investors to take a good look at their economy and regroup. There will likely be a period of introspection and economic restructuring within China and this is both good and bad news for Africa. The good news is that such introspection may reduce the pace of investments made in Africa, thereby giving African governments and companies time to regroup and have a more intelligent strategy when interacting with China. This investment slowdown is also likely to make African government reduce the pace of their ‘look East’ policy and prompt some rebalancing. The bad news however is that with the deceleration, Chinese investors are likely to become pickier than they have been. Africa may find investment propositions tabled scrutinised with China bargaining with more zeal than Africa has been used to. This paradox is one African governments need to get their heads around, and quickly.
The third consequence linked to the point above is that with the slowing in demand for African raw materials and less rambunctious Chinese investment into Africa, African GDP rates may falter in the short to medium term. This does not bode well for African governments who have been desperately trying to sell themselves as the new global investment destination, promising robust returns.
Fourthly however, this slowdown may be good news for the global economy which is good news for Africa. In fact, ‘we should all welcome a slower China. Debt has been piling up to dangerous levels, industry is burdened by excess capacity, and the financial sector has been taking on bigger risks as a result’. And because of the sheer scale of China’s economy, ‘fears have been mounting that China could suffer a financial crisis like the one that tanked Wall Street in 2008. That would threaten the stability of the entire global economy’. Indeed, analysts have long questioned whether China’s model is sustainable thus the slowdown is welcome.
Fifthly, the China slowdown is an indication of a shift of from an, ‘investment-led to a consumer-led’ economic model. The implication for Africa is that this will pressurize African economies to, ‘expand their consumer good exports and manufacturing bases, in order to keep up with shifting demand’. In short, China’s demand is shifting from copper to cameras. This is a conundrum because a long-term solution is needed to address the short to medium-term consequences of a China slowdown.
Africa however has reason to be optimistic despite this deceleration. Firstly, as the African Development Bank Chief Economist stated, the fallout will not be catastrophic for Africa and indeed African economies should be relieved there is a slowdown as , ‘the 7% rate of growth is a more sustainable rate of growth…this level of economic growth will still manage to [sustain] the upward trend in terms of demand for commodities’. Secondly, Africa remains attractive to China as an investment destination. Africa is investment hungry and China still wants to do business. So although the specifics of the dynamics may change, healthy investment and trade will still occur. Finally, it will do African companies and governments a world of good to stop seeking economic solutions from outside. This slowdown ought to prompt African governments to do the much needed work to: a) Ensure investments already made are executed effectively with a positive impact of development and, b) Engage in the effort to promote intra-African trade and investment with renewed rigour as it appears that Africa can rely neither on the West nor East to fuel economic growth and development.