GDP

Why Africa’s GDP is Understated

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This article first appeared in my weekly column with the Business Daily on July 29, 2018

Last week Ghana announced that it is recalculating its Gross Domestic Product (GDP) based on measurements from 2013 instead of 2006 to more accurately reflect recent activity in the petroleum, communication technology and construction sectors. The rebasing will likely add 30 to 40  percent to the size of Ghana’s economy. The rebasing of Ghana’s GDP is a reflection of how the size of African economies are often understated. This understatement is informed by three factors.

Firstly, the actual number and size of businesses actively operating in Africa and contributing to GDP is unknown. Most African governments do not have the operational muscle to conduct research and analysis on the number of functioning business in the economy, their size, profits, or turnover. This is partly informed by the fact that the private sector in Africa is dominated by informal businesses, most of whom are Micro and Small Enterprise (MSE) primarily engaging in subsistence business activity. The combination of millions of MSEs operating in informality coupled with the lack of data gathering and statistical capacity in African governments to collect business activity data translates to notable inaccuracies in terms of the actual number and size of operational businesses on the continent.

A trader serves customers at the Makola Market in Accra, Ghana.

(source: https://www.businessdailyafrica.com/analysis/ideas/Why-most-African-countries-understate-the-size-of-GDPs/4259414-4687360-apix2iz/index.html)

Secondly, private sector in African tends to understate business size and profit earnings in order to minimise tax liabilities.  Again, African government capacity is limited as African taxmen do not have the ability to ensure all companies are posting accurate tax returns. Most companies on the continent have two books of accounts they keep: the official audited reports that are submitted to investors, tax authorities and government bodies, and the internal books that reflect what is actually going on in the business. Given limited tax surveillance muscle, it relatively easy to dodge tax penalties and, most African taxmen are happy taxes are being voluntarily submitted and thus often do not bother to ensure if profits and tax liabilities are being accurately reported. The effect is again, an understating of how much money businesses are making on the continent.

Finally, there are incentives for African governments themselves to understate GDP size. Dimitri Sanga, ECA Director for West Africa echoes my view that some African countries purposefully avoid rebasing GDP upwards to reflect current realities in order to avoid graduating from low income to middle income countries. Low income status comes with certain perks such as cheap loans, generous aid packages and charitable trade agreements.

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(source: http://cpparesearch.org/nu-en-pl/domestic-gross-domestic-product/)

In short, evidence seems to indicate that there is more money being made in Africa than is being reported and thus GDPs in Africa are probably higher than what is officially captured. And while some countries will rebase GDP upwards in order to access larger loans and shift debt-to-GDP ratios into favourable terrain, it is up to African governments to determine whether rebasing or deliberately understating GDP is in their national interest.

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

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The Dualism Conundrum

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This article first appeared in my weekly column the Business Daily on August 17, 2015

Kenya, like many other African countries, has a dualism issue in the structure of its economy that informs the patterns of the economic development of the country. Although there are several forms of dualism active in the Kenyan (and African) economy, the article will focus on formal vs. informal dualism.

The formal sector of the economy comprises of activities that are captured in GDP statistics, tend to comply with legal and regulatory requirements (i.e. tax compliance, implementation of labour laws etc), offer jobs that are financially secure and tends to be the wealthier section of the economy. However, the informal sector exists as well.

(source: http://www.businessdailyafrica.com/image/view/-/1237146/medRes/295299/-/maxw/600/-/2fg1i1/-/informal+sector.jpg)

Informal sector activities are typically not captured in official GDP figures, are often not officially registered, are not formally regulated, do not necessarily meet legal operational requirements and are typically not tax compliant. According to the IEA, in Kenya, the informal sector is estimated at 34.3% and accounts for 77% of employment. Over 60% of those working in the informal sector are youth aged between 18-35 years, 50% of which are women. In the East Africa region, the sector is the source of 85% to 90% of all non-farming employment opportunities. According to NORRAG, the informal sector is no longer confined, in terms of practice or as an image, to the road-side mechanic or dress maker, the sector now includes other areas such as ICT and related service enterprises. In fact the informal sector is now present in a wide range of business operations where skills are demanded and where opportunities for productive employment generation are found.

There are multiple implications of this formal vs. informal dualism; firstly the lack of clarity on the precise size of the informal sector translates to a lack of certainty with regards to the size of the Kenyan economy. Do GDP figures capture the informal sector? Although the informal sector is said to contribute about 18% of the GDP, is this a comprehensive figure? Is it understated or overstated? Is the economy is actually bigger or smaller than assumed? To what extent is the informal economy ‘guesstimated’ into official GDP figures? The ambiguity of the size of the informal sector means that Kenya does not really know how big the economy is; this then informs the accuracy of statistics such as the debt-to-GDP ratio that provide useful information on the extent to which the country is leveraged.

(source: http://www.tutor2u.net/blog/images/uploads/shutterstock_81874246.jpg)

This formal vs. informal dualism also inform factors such as the ability of the country to move comprehensively in one direction. Policies and laws pertinent to the economy are mainly implemented and monitored with regards to the formal economy, leaving the informal behind. Other issues include social protection; workers in the informal economy are generally not covered by adequate social protection. This makes informal workers a vulnerable and sizable proportion of the Kenyan population.

Quality assurance is an additional issue. The formal economy tends to comply with established standards and quality norms; this is not necessarily the case in the informal sector. Some may meet industry standards while others do not; this has implications for consumer protection rights. Another issue is productivity; most informal sector players cannot afford analysis that informs them of the productivity of their enterprise. Thus inefficiencies are likely to continue in the informal sector, dragging down the sector’s efficiency.

Skills transfer is an additional issue of importance. While the government may change curricula in Universities and TVETs, this does not truly affect the informal economy as 60% and 73% of informal sector employees (with less than 20 employees) acquire their skills through apprenticeships. So the formal sector is likely to benefit for updates in curriculum while the informal sector does not. There are already implications to this dualism because, for example, apprentices in informal auto mechanics sub-sector have dropped sharply because many of the “older master mechanics” do not have skills to handle the “newer versions of injection engines”, they only know carburettor engines.

(source: http://latestlearnerships.com/wp-content/uploads/2014/02/BMW-Jobs-Careers-Apprenticeships-600×330.jpg)

While there may be efforts being made to formalise the informal sector the reality is that there is limited incentive for the informal sector to do so. Formalisation is often an expensive process with registration fees, lawyer’s fees, social insurance payments for employees and, the big one, tax. Why should informal business owners formalise if the exercise will be expensive with limited benefits accrued?

In terms of a way forward, the informal sector in Kenya should develop Informal Sector Associations, as seen in West Africa, which are tuned into skills updating and allow for an easier track of emerging training needs. Such associations also allow for self-regulation, make it easier for interventions to be implemented and facilitate easier and a more accurate monitoring and analysis of the sector.

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

What the latest economic growth data in Kenya really mean

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This article was first published in the Business Daily on January 11, 2015

Last year’s Q3 gross domestic product (GDP) figures show the economy expanded by 5.5 per cent compared to a revised 6.2 per cent in the same period in 2013. The growth was mainly supported by strong activity in construction, finance and insurance, trade, information and communication, and agriculture and forestry.All sectors recorded positive growth except accommodation and food services (hotels and restaurants) that have consistently been on a decline since last year.

GDP KENYA

But what do these growth figures really mean? Underlying the GDP growth snapshots are some long-term structures that should be analysed and of which Kenyans must be cognisant.The first question is the extent to which all Kenyans are benefiting from growth. The latest UN Human Development Report ranks Kenya 147 out of 187 countries and although there has been a rise in human development since the 1990s, only a small section of the population has gained.To illustrate, the incomes of the richest 20 per cent have risen steadily and now stand at 11 times more than those of the poorest 20 per cent.In fact, a country report by the Africa Development Bank states that the biggest challenge is not raising GDP but ensuring inclusion.There is a widening gap between the rich and poor with the creation of a dual economy where the rich prosper and the poor continue to struggle.This can be attributed to an underdeveloped social security net that does not provide consistent and sufficient income support to the poorest.The core concern with inequitable growth is not just the ideological issues around fairness and justice but the reality that while the poor have a high propensity to consume, they lack the disposable income to engage in many of the spending and profit-making activities that spur investment and growth.

(source: http://buzzkenya.com/wp-content/uploads/2013/12/poverty-in-kenya2.jpg)

As a University of Nairobi analyst said, this creates a vicious cycle in which low growth results in high poverty that in turn abets low growth.Today, each of the 42 million Kenyans would earn Sh189,624 ($2,158) yearly if income was distributed equitably. Sadly, the manner in which GDP growth is currently structured only encourages economic dualism.In addition, the growth structure ensures that the youth are at best fringe beneficiaries of the economic largesse, which elicits the feeling that they are in a no-win situation with the older generation.The International Labour Office (ILO) points out that while young women and men account for 37 per cent of the working-age population, their participation in employment is less than 20 per cent.Due to difficulties in securing jobs, the youth feel the best option is to leave the labour market. This leaves them more vulnerable to chronic unemployment or eking out a living in a tough economy.The result of this skewed system is frustration and dissatisfaction, coupled with security concerns as the jobless youth engage in crime to survive. Their exclusion from mainstream economic activity can create discontent and another “Arab Spring”.

(source: http://nextcity.org/images/made/NairobiForefrontPhoto5_600_398_80.jpg)

Linked to the youth issue is the fact that these relatively healthy GDP figures mask the reality of jobless growth. This is where the economy experiences growth amidst decreasing employment.Indeed, the ILO released a report last year stating little progress is being made in reducing working poverty and vulnerable forms of employment such as informal jobs and undeclared work.Unemployment in Kenya stands at more than 13 per cent, masking the enormity of the labour market challenges where a significant proportion of the population is inactive rather than unemployed. Of the employed, many are engaged in informal jobs.So while GDP figures are important, it is crucial we foster equitable and inclusive growth as well as develop job creation strategies to address the burgeoning chronic unemployment and underemployment.

The consequences of China’s economic slowdown for Africa

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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’.[1] 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.

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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’.[2] 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’.[3],[4] 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.

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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’.[5] 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’.[6] 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’.[7] In short, China’s demand is shifting from copper to cameras.[8] This is a conundrum because a long-term solution is needed to address the short to medium-term consequences of a China slowdown.

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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’.[9] 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.

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[1] Gumede, William  (2014), ‘China’s economic slowdown and the potential impact on African growthOpinion’, http://www.enca.com/opinion/china%E2%80%99s-economic-slowdown-and-potential-impact-african-growth
[2] Minqi Li (2014), ‘Why is China’s Economy Slowing Down?’, http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=11405
[3] Cape Breton Post (2014), ‘5 ways China’s slowdown will ripple across global economy’, http://www.capebretonpost.com/Business/2014-02-11/article-3611600/5-ways-China%26rsquo%3Bs-slowdown-will-ripple-across-global-economy/1
[4] African Arguments (2014), ‘Could China’s slowdown mark the end of Africa’s decade of growth? – By Barbara Njau, Senior Reporter at fDi Magazine, fDi Intelligence’, http://africanarguments.org/2012/08/28/could-china%E2%80%99s-slowdown-mark-the-end-of-africa%E2%80%99s-decade-of-growth-by-barbara-njau-senior-reporter-at-fdi-magazine-fdi-intelligence/
[7] African Arguments (2014), ‘Could China’s slowdown mark the end of Africa’s decade of growth? – By Barbara Njau, Senior Reporter at fDi Magazine, fDi Intelligence’, http://africanarguments.org/2012/08/28/could-china%E2%80%99s-slowdown-mark-the-end-of-africa%E2%80%99s-decade-of-growth-by-barbara-njau-senior-reporter -at-fdi-magazine-fdi-intelligence/
[8] Langi Chiang and Jonathan Standing, ‘From copper to cameras; feeling the heat from China slowdown’, http://www.reuters.com/article/2013/07/24/us-china-economy-idUSBRE96N04N20130724
[9] Creamer, Terrence (2013) ‘African growth ‘resilient’ to China slowdown, but AfDB wary of QE tapering risks’, http://www.engineeringnews.co.za/article/african-growth-resilient-to-china-slowdown-but-afdb-wary-of-qe-tapering-risks-2013-08-07

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