economic growth

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.

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(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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The Three Economic Paths for Kenya in 2018

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This article first appeared in my weekly with the Business Daily on January 1, 2018

For the better part of 2017, Kenya was in the throes of politicking, elections and political tension. As the new year starts, there are questions as to what direction the country will take in 2018. It seems there are three paths the country could take, each with different economic results.

The first is that heightened political and related tribal tension, will continue unabated. The country may see a parallel swearing ceremony from opposition and continued reluctance for dialogue from the ruling party. Civil unrest will continue as per 2017 which will likely result in dampened business prospects for the country. The combative back and forth from both sides of the political divide will lead to the continuation of jitters that create anxiety in both domestic and foreign investors. This will lead to subpar investment into the country and the related knock-on effects of suspended investment decisions. Domestic businesses, particularly SMEs with limited financial buffers, will continue to struggle as political tensions stifle purchasing appetite, the flow of money and robust business activity. The ‘wait and see’ attitude of investors will extend into 2018 and the consequences of political uncertainty and tensions will continue to exert negative effects on economic growth.

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(source: https://upload.wikimedia.org/wikipedia/commons/thumb/4/49/Flag_of_Kenya.svg/2000px-Flag_of_Kenya.svg.png)

The second scenario is one where the ruling administration will respond to political upheaval with a heavy hand marked by aggressive armed action while the opposition party and its followers continue with determined political mass action and resistance. The economic consequences will depend on how hard-nosed the clamp down on political protests will be, and how determined opposition supporters will be in sustained resistance. It is possible that a tense calm will settle over the country as people deal with the reality of having to get on with life, as well as fatigue from what feels like years of political conflict. Thus in this case, there will be an overall but artificial calm, punctuated by recurrent sparks of protest and unrest. Some investments in resilient sectors and geographical areas may get the green light to cautiously proceed while others will remain suspended, waiting for a clearer political outcome. Thus some sectors or geographical areas will see a resumption of business activity and investment, while others will continue to be left out.

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(source: https://softkenya.com/kenya/wp-content/uploads/2011/09/Cash-crop-economy-in-Kenya.jpg)

The final scenario is one where the ruling party and opposition seek to engage in authentic dialogue and conflict resolution resulting in the restoration of genuine peace and calm in the country. Both national and county government will be able to execute their mandate without having to engage in a political juggling act. Investors and businesses will likely fully engage in economic activity, seeking to catch up from all the opportunities that were lost in 2017.

So which of these three scenarios will pan out in 2018? Only time will tell.

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

China taking over manufacturing in Africa?

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This article first appeared in my weekly column with the Business Daily on September 10, 2017

Earlier this year, McKinsey and Company, released a report on Sino-African relations that assessed the activities of Chinese businesses in Africa as well as Sino-African economic partnerships. There are about 10,000 Chinese-owned firms operating in Africa today and about 90 percent of these are privately owned debunking the myth that Chinese business activity in Africa is dominated by State Owned Enterprises and overly influenced by state craft. Of particular interest is understanding how the Chinese presence is informing industrial development, a chronically underdeveloped sector on the continent.

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. Chinese factories are focused on Africa’s domestic markets, 93 percent of revenues come from local or regional sales in Africa.

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(source: https://cdn.static-economist.com/sites/default/files/images/print-edition/20140208_MAP001_0.jpg)

One third of Chinese firms report profit margins of over 20 percent in 2015. In manufacturing this is attributed to ample pricing headroom in Africa; prevailing market prices for manufactured products are so high that Chinese firm earn comfortable profits and their profit levels are higher than those of African firms. Interestingly although manufacturing is capital investment and commitment heavy, 31 percent of firms made investment decisions within a week. 67 percent of firms investments are self-financed and Chinese companies are optimistic about the future of the African market with most firms indicating plans for expansion.

Chinese firms are also generating local employment as 89 percent of employees are African; this figure is 95 percent in the manufacturing sector. 61 percent of firms upskill African employees through professional training and/or apprenticeships, an indication that Africa is poor at educating Africans with skills relevant for employment. In terms of management, 44 percent of managers are African, this figure is 54 percent in the manufacturing sector. Chinese firms contribute to African markets mainly by introducing new products, services, technologies and methods.

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(source: kessbenfm.com/kfm-data/china-in-africa.jpg)

The report is clearly optimistic of Chinese firm activity in Africa, for example more content is focused on detailing the benefits than to delineating the costs; one wonders why. And the costs are significant, there are concerns of Chinese firms engaging in dumping where they sell products in export markets at prices below those in domestic markets. This may be leading to ‘unfair’ capture of export markets from African firms. Breaches of labour regulations are more common among Chinese firms than in other foreign-owned firms. These include inhumane working conditions, work without contracts, exceeding legal limits on work hours and threatening to fire workers who refuse to work in unsafe conditions.

Clearly Chinese firms will continue to make inroads into Africa and the continent will accrue many benefits from this but will also have to vigilantly manage the costs. With regards to industrialisation, it will be interesting to see how African industrial policy will be structured to encourage a stronger indigenous presence in the sector given the ability, innovation, efficiency and commitment of Chinese manufacturing firms, firms which also benefit from African trade deals as they are domicile here. Chinese firms make it clear that there is a lucrative domestic market that indigenous firms have failed to fully tap and thus African firms have a lot to learn from Chinese firms. If trends continue, a situation may emerge where African industrialisation is owned and dominated by Chinese firms. While this is welcome in terms of contributions to Africa’s development, can it then be termed ‘African’ industrialisation?

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

Key themes for Kenya in 2016

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This article first appeared in my column with the Business Daily on November 27, 2016

The year is coming to an end; what have been the key economic themes that defined 2016?

The first, and most obvious was heightened political tension going into an election year. Once the budget was read mid-year, election mode kicked in fully. Sadly this means the economic realities linked to an election year started early. Elections in Kenya tend to be associated with two phenomena: instability and dampened economic growth. Politically charged rallies, demonstrations and related civil instability occurred over the course of the year, all of which negatively informed economic growth. The fact that economic performance still seems tethered to election is a reflection of the immaturity of socio-political and economic institutions in the country.

The main means through which this can be addressed is for major politicians to refrain from tribally oriented, inflammatory and irresponsible comments across the political and related tribal divide. Further, political parties should be aligned to ideology not tribe so that analysts can anticipate what type of administration the winning party would likely espouse. Sadly, this year made it clear that the tribal formula still reigns supreme with regards to political alignment and related electioneering.

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(source: http://rewire.news/wp-content/uploads/2013/08/election-ahead-sign-375×250.jpg)

Secondly, financial mismanagement was a central theme. Over the course of the year and stemming from last year, numerous, large scale cases of allegations of grand corruption in government have been highlighted in the media; and opposition has made it clear that at national level, accusing the national government of corruption will be a major election platform. However, bear in mind financial mismanagement is at both national and county level. Indeed, my experience indicates that there is gross mismanagement of funds at county level headed by individuals aligned to the ruling party as well as opposition.

However, the attention of Kenyans is fixated on national government, and although this is warranted, county governments deserve such scrutiny as well especially because there is no real pressure on the latter to be financially accountable. This is due to a number of factors; firstly the theme has been to ‘go gently’ on county governments and give them the benefit of the doubt so that devolution can take root in the country. Secondly, there are serious capacity constraints with regards to financial expertise at county level which makes embezzlement easier and tracking of financial performance more difficult. The final factor behind the lack of robust monitoring on county spending is linked to the fact that national government is not willing to highlight corruption at county level not only because it will turn attention to an issue that has bedevilled them, but also because they do not want to be seen to be speaking in a manner that can be interpreted as attempting to stifle devolution.

As we go into December and an election year, corruption is likely to gain more attention. Kenyans can expect to hear pledges at both national and county level from aspirants sharing plans on how they can finally kill the beast called corruption. Kenyans should not be distracted by such antics but rather work with local and international partners to create and strengthen institutions that monitor spending.

Image result for corruption Kenya

(source: http://www.monitor.co.ke/wp-content/uploads/2015/03/stock-footage-a-sign-at-the-university-of-nairobi-in-kenya-proclaims-a-corruption-free-zone.jpg)

Finally, a key theme of the year has been the disconnect between GDP growth figures and the lived reality for Kenyans. Major factories have shut down, thousands of jobs have been lost in key sectors and Kenyans feel as though they are not reaping the fruits of economic growth. As I have stated previously this seems largely linked to the neglect of the informal economy and related micro and small enterprise where most Kenyans earn a living; this must change.

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

Infrastructure investment and economic growth

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This article first appeared in my weekly column with the Business Daily on September 18, 2016


There appears to be an on-going assumption that publicly funded infrastructure investment will spur economic and social growth and development in Kenya. In fact, the government is so certain of this that they are getting into substantial debt in order to finance infrastructure projects. Indeed according to the International Budget Partnership, Kenya’s 2016/17 national budget 30.4 percent of total gross expenditure was allocated to energy, infrastructure and ICT. Infrastructure investment in this article refers primarily to investment in energy and transport infrastructure.

There are several arguments that support massive infrastructure investment. The first, no brainer argument is that Kenya’s and indeed Africa’s infrastructure needs are so dire that any investment in the sector is bound to have positive effects. According to the Africa Infrastructure Country Diagnostic, the continent’s infrastructure spending needs stand at about $93 billion per year. Clearly, there is a need for this investment.

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(source: http://kbctv.co.ke/wp-content/uploads/2016/06/construction.jpg)

Additionally, the lack of infrastructure can be argued to be eating into economic growth. Some estimate that the negative effect of poor power supply alone reduces per capita growth by 0.11-0.2 percentage points in Africa. Further, other studies show that infrastructure investment increases the growth potential of an economy by increasing the economy’s productive capacity by lowering production costs or providing opportunities for human capital development for example.

Infrastructure is also tied into social development. According to a report by European Commission, good quality infrastructure is a key ingredient of sustainable development because countries need efficient transport, energy and communications systems. So some argue that not only does infrastructure boost economic growth, it can lead to a better quality of life for citizens as well.

This all sounds very impressive but massive and aggressive infrastructure investment carries sizeable risks. According to the London School of Economics emerging research seems to suggest that the magnitude of infrastructure’s contribution (to growth) display considerable variation across studies. So the notion that infrastructure is directly linked to or even engenders economic growth is not cast in stone.  Indeed recent literature tends to find smaller effects on links between infrastructure investment and economic growth than those reported in the earlier studies. So perhaps estimates that have previously linked infrastructure investment to economic growth and development may be overstating the causal effects.

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(source: http://www.startyourbusinessmag.com/wp-content/uploads/2016/06/economic-growth.jpg)

Further, it is assumed that government is making the right infrastructure investment decisions for Kenya and that the contracts are being given to the right people. The Economist makes the point that even in countries like the USA public investment is wasted on inflated contracts with politically connected suppliers. The same magazine also makes the point that even in countries like the USA whose public financial management is considered to be more transparent with lots of bureaucrats to conduct cost-benefit analyses, identifying the most beneficial investments is hard. These problems are magnified in countries like Kenya where there is limited information on how infrastructure projects were chosen, how the cost benefit analysis was done and how contractors were or will be selected.

Finally, the manner in which the infrastructure plans are implemented will inform if Kenya will truly gain from this investment drive. A study by FONDAD argues that in order for infrastructure investment to truly stand a chance to create economic and social development shifts, they have to be done with great economic scrutiny at the selection stage, integrity in procurement, efficiency in implementation, effective post-completion management to ensure maintenance and efficient operation and, continuing accountability to users.  Does Kenya tick all these boxes?

It is clear that infrastructure investment is a priority for government and the continued emphasis in government spending in this docket will continue. Bear in mind that, as KPMG states, a significant portion of these infrastructure projects are debt financed. It is therefore crucial that Kenyans are cognisant of the need for infrastructure investment but risks associated with aggressive infrastructure investment, and direct the warranted scrutiny at related projects.

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

 

 

 

Interest Rate Capping a Risky Move

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This article first appeared in my weekly column with the Business Daily on August 7, 2016

Kenyans are in the process of debating whether interest rates in Kenya should be capped at 4  percent above the Central Bank of Kenya Rate. The motive behind this push by Members of Parliament is informed by the general feeling that interest rates in Kenya are too high, leading to low access to finance which dampens economic growth; and I broadly agree with this sentiment. However, the move to cap interest rates is gnarled in risks that need to be understood.

The general perception, indeed the populist position, is that lowering interest rates will mean that more Kenyans will be able to access more credit thereby enabling them to make more economically productive investments and drive up GDP growth. This is not what will happen; more on this later. But let’s say that lowered interest rates did lead to more Kenyans being able to qualify for debt and more had access to more money. What would likely happen in this scenario is that the increase in money supply into the economy would place significant upward pressure on inflation. So there is a real risk that the sudden increase in money supply facilitated by lower interest rates would drive inflation upwards. Two things would then happen: first the cost of goods and services for Kenyans would go up and dampen the ability of the money they borrowed to drive forward investments made through the debt. The lower rates would lead to a situation where the money they borrowed would be less profitable than would be the case if inflation had remained stable at current rates. So what Kenyans are risking here is that increased access to money through lower interest rates will drive up inflation which reduces the value of the money they borrowed thereby inhibiting the ability of that money to drive up profits and economic growth.

(source: http://letscrowdsmarter.com/wp-content/uploads/2016/03/Interest-Rates.jpg)

This leads to another point; forcibly low interest rates may drive inflation up so high that Kenya will be in the ludicrous position of the Central Bank of Kenya (CBK) being pressured to raise interest rates to control the inflation caused by lower rates.  So the irony is that rates being lowered will lead to rates later being raised to address the problems caused by rates that were artificially lowered.

This leads to the other risk I alluded to earlier; an increase in money supply due to lower rates is likely not to happen. What will actually happen is a contraction in lending and money supply. Capping interest rates will put banks in the position where an entire segment of the population is disqualified from lending because they pose more risk than the interest rate cap allows. Banks will simply not lend to individuals and businesses whom they think cannot service the debt credibly at that capped ceiling. So what will actually happen if interest rates are capped is reduced lending, not increased lending. So an additional risk is that capping interest rates will reduce access to credit which will make economic growth even more sluggish than is the case with current interest rates.

(source: http://blogs.worldbank.org/psd/files/psd/kenya-smes.jpg)

The elucidation  above is not rooted in a desire to make access to finance more difficult for Kenyans; the explanations merely provide a considered opinion of what will likely happen if interest rates are capped. If Kenyans are of the view that engaging in this gamble is worth it, then so be it. But let us not, as Kenyans, deceive ourselves into thinking that the proposal to cap interest rates is risk free.

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

New Ideas for Africa to boost growth

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This article first appeared in my column with the Business Daily on May 15, 2016

Last week I attended an event organised by the University of Pretoria Gordon Institute of Business Science (GIBS) titled Africa Economic Outlook 2016: Strategic Thinking in Complex Times. The one day conference articulated issues facing the continent and provoked questions that I think ought to be asked. I took great interest in a presentation by GIBS Dean Professor Nicola Kleyn which addressed issues in management as I have seen numerous shortcomings in management in the region. Previous research in which I participated pointed to key gaps in management in East Africa. For example, we found that for senior management, while there was consensus there is competence in hard/technical skills such as finance, HR and operations, important management gaps exist in areas such as ethics and integrity, managing ambiguity, and soft skills.

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(source:http://novatechservices.com/wp-content/uploads/2016/02/ManagementLeadership.jpg)

Kleyn’s presentation provided ideas on how to manage effectively in complex environments such as Kenya where factors such as lack of a functioning legal system or ethnic competition make effective management difficult. She argues that six attributes can enable companies to effectively manage and thrive in complex environments; I will only address the three in this column.  The first attribute is that a spirit of enquiry must be encouraged where organisations encourage a culture of questioning their approach because without such questioning, more effective approaches cannot emerge. Embracing humility is also key, and this particularly resonated with me because in Kenya there seems to exist a ‘big man complex’ where hubris immediately accompanies one’s promotion to a position of power. Kleyn argues that, especially at top level management, a spirit of humility must persist rooted in an openness to learn from junior staff and even those in the field who may not be as technically qualified as management. Such humility again, allows innovations and insights from unexpected corners to percolate thinking in management in a constructive manner.

The third is a willingness to experiment (again and again). Again here I looked back at what my previous research on management gaps had highlighted: the general inability for managers in East Africa to manage in an environment of change. A key element of addressing this is by managers having an openness to experiment (within reason) and try new ideas until the best fit emerges; and a willingness to change the model when the environment changes again…and again.

Why is this important? Well because, management affects productivity. The World Bank acknowledges that although that there are differences in productivity on the Kenyan landscape, more effort is required to boost productivity such that economic growth is more sustainable. Effective management is a key element of making this a reality. The question for Kenya (and Africa) then becomes how thought innovations such as those elucidated above can be adopted by firms. Do we have a culture that accommodates thought disruptions that challenge current management practices?

Another presentation of interest was by Professor Lyal White from GIBS who shared the Dynamic Markets Index 2016 (DMI). The Index broadly seeks to measure competitive performance of countries through the evolution of their institutions or institutional reforms and looked at 144 countries of which 39 were African. Basically the DMI asks, do institutions in countries such as Kenya create a dynamic economy that thrives? The GIBS DMI measures looks at six pillars between 2007 and 2014; the first pillar is Open and Connected which looks at indicators such as trade policies and the movement of people. Second is Red Tape with indicators such as corruption perception. Third is Socio-political Stability with indicators such as civil liberties and political rights. Fourth is the Justice System which looks at indicators such as the time and cost of enforcing contracts and director liability. Fifth is Macroeconomic Management with indicators such as state debt burden and monetary stability. The final is Human Capital with indicators such as demographic energy and skills levels. All these pillars are weighted differently and create a score between zero (worst) and 200 (best). In the DMI Kenya scored 72.45 and was classified as an adynamic market due to factors such as terrorism, high corruption perception, political instability in 2007/08 and poor performance in the justice system; all these resonate with me.

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(source: http://www.travelstart.co.ke/blog/wp-content/uploads/2014/05/Nairobi1.jpg)

Although the DMI has shortcomings such as not factoring the informal economy into the index, having to contend with incomplete data sets and, for Kenya, not factoring in (positive) shifts due to the new constitution, it starkly highlighted country shortcomings. So the question is, how can Kenya and other African countries) consider issues raised by the DMI such as areas in which countries may have regressed?

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