No, External Shocks Are Not Africa’s Biggest Economic Problem

Brookings has started a news series of roundtables on “identifying, managing, and mitigating the major risks to Africa’s development”, billed as “private, high-level”. The first session of this format focussed on “external risks, namely falling commodity prices, China’s economic slowdown, and rising external debt”. This framing follows the long-standing trend to view economic development in Africa primarily through the lens of globalization and Africa’s (often disadvantageous) integration into the world market.

I think that this is the wrong approach. Focussing on “external risks” conveniently limits the agency of African societies and governments in addressing their economic problems. African countries have zero influence on Chinese growth, commodity prices and the health of financial markets. Yes, these trends can be monitored and, to a very limited degree, forecasted. But even in a best case scenario this leaves African economies the sole option of finding the least bad response to adverse conditions, instead of focussing on their opportunities to shape their environment to their advantage.

International institutions have of course aided and abetted this trend. The IMF’s fetishization of GDP growth has pushed African governments to prioritize the exploitation of natural resources over local manufacturing and services. And it has made attracting foreign direct investments much more attractive than broadening the domestic tax base.

It is also disingenuous to lament exposure to China’s economic slowdown, falling commodity prices and an increasing debt burden, given that those countries who are now in trouble because of these trends celebrated financial windfalls in prior years. The commodity supercycle comes and goes, nobody on the continent or abroad should have been surprised by falling prices.

Instead of wasting time and money on “private, high-level” meetings, Africa’s decision makers should start looking at their countries’ domestic potential in earnest. This may necessitate breaking with some of the conventional wisdom espoused by international institutions, though even the IMF is now conceding that abolishing capital controls and lionizing austerity wasn’t the smartest approach.

So far every major economic success story has either involved a country intelligently limiting its interaction with world markets (e.g. China or Korea) or focussing on close regional cooperation (e.g. the European Union) with financing to a large degree being sourced from domestic sources.

What could this look like in the case of African countries? High on the list should be the reintroduction of capital controls, as well as incentives targeted to prevent the outflow of resource rents and corporate profits. This should be done in the context of a concerted push for complete transparency of international financial flows, especially beneficial ownerships of companies and property.

African countries should also demand much better deals in exchange for access to their natural resources and if these are not forthcoming simply leave them in the ground – oil, gas, copper and gold are going nowhere and can always be exploited later under more advantageous terms. Having an “investor friendly mining code” should be an insult, not a praise.

This is of course easier said than done. There are complex and relevant social and political reasons for the status quo and I don’t want to pretend that I have a solution, especially not in the specific context of every single country. But perspective matters – the lens through which one analyses the problem often predicates the range of possible outcomes. African countries have made great strides in many areas over the last two decades. But progress in access to economic opportunity and equality has been lacking, despite adherence to the conventional economic wisdom. It is high time to change the lens.

Planet Money: Nigeria, You Win!

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A really nice and positive podcast on Nigeria’s effort to provide young entrepreneurs with capital to grow their businesses:

The episode is well worth your time, but Chris Blattman has the gist of it:

In 2011 the Nigerian government handed out 60 million dollars to about 1200 entrepreneurs, and three years later there are hundreds more new companies, generating tons of profit, and employing about 7000 new people.

David McKenzie did the incredible study.

24,000 Nigerians applied, the government selected about 6,000 to get some training and advice to develop their plan, the plans were scored, and about 1,200 were funded. They got an average of $50,000 each. Fifty thousand US dollars! Who the hell thought this was a good idea?

All the highest scoring plans got funded automatically, but McKenzie worked with the government to randomize among the runners up.

The results are amazing. Looking just at the people who had no firm to begin with, 54% of the control group have a firm after three years, compared to 93% of those who got the grant. And these firms are bigger. Just 11% of the control group have a firm with at least 10 employees, compared to 34% of those who got the grant. They’re more profitable too.

The Nigerians did a lot of things right for this one, especially when it came to choosing the winners and avoiding graft. The results are amazing and inspiring.

The important implication of findings like these is that while there will always be a minority who will waste the money, the vast majority of humans are a good investment under the right circumstances. And the cost of weeding out the duds (like in social security and development programs that require extensive proof of need and high prescribed standards to meet) is far higher than the cost of just giving away cash and accepting a few failures.

Simon Allison: The new Zimbabwean dollar that isn’t

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He hits the nail on the head:

The last time Zimbabwe was in this kind of position, it did something few economists would recommend: it simply printed more money, with disastrous consequences. The sudden, poorly-managed influx of Zimbabwean dollars into the economy was the direct cause of the economy-wrecking, poverty-inducing, development-stunting hyperinflation that followed. Surely, surely, Zimbabwe would not go down this route again, no matter how severe the cash crunch?

Sure they will.

I think most people will agree that this latest move is just another symptom of the mismanagement that Zimbabwe has experienced at the hands of President Mugabe and his cronies. But I’d be interested in better reporting on the politics behind this step.

Zimbabwe will introduce so-called “bond-notes”. These look deceptively like paper currency and coins, but actually are bonds, secured by a $200 million loan by the African Import Export Bank. In theory, the bearer could therefore go to the bank and/or government and ask for the bond to be exchanged into U.S. currency. But in practice, one can doubt that this would actually work. No one (who isn’t forced to) will recognize these for their nominal worth, especially not outside Zimbabwe, rendering them quite useless to ease the country’s trade and hard currency deficit.

In the best case, they will trade at a discounted value, leading to higher costs for importers. In the worst case, they will tempt the government into a new round of money printing, only this time with the added bonus of skyrocketing debt.

So who came up with this idea and how was the AfrImEx Bank convinced to back the scheme? How will the distribution mechanism work and who is guaranteeing a transparent process (my guess: nobody). Will there be any accountability? And as this is clearly a stopgap measure at best, where are Zimbabwe’s fundamental economic reforms, which have to be linked to a reform of the political system to be effective? I’m not sure that we will get any satisfactory answers to these questions any time soon.

Alex de Waal: How to steal from Africa, all perfectly legally

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Not a new story, but a good overview about the problem with more-or-less legal capital outflows from Africa:

Africa loses at least $50 billion a year — and probably much, much more than that — perfectly lawfully. About 60% of this loss is from aggressive tax avoidance by multinational corporations, which organise their accounts so that they make their profits in tax havens, where they pay little or no tax. Much of the remainder is from organised crime with a smaller amount from corruption. This was the headline finding of the High Level Panel on Illicit Financial Flows from Africa, headed by former South African President Thabo Mbeki, a year ago.

This amount is the same or smaller than international development assistance ($52 billion per year) or remittances ($62 billion). If we take the accumulated stock of these illicit financial flows since 1970 and factor in the returns on this capital, Africa has provided the rest of the world with $1.7 trillion, at a conservative estimate. Africa is a capital exporter.

While this type of aggressive tax avoidance might be legal, strictly speaking, it really highlights the question of power. Off shore tax havens are simply not accessible for “normal” tax payers. They only make sense as an instrument for the rich, super rich and international corporations. The system is rigged in a very fundamental way to the detriment of poor people and countries with low institutional capacity (for whatever reason) to combat these illicit financial flows. Of both categories, Africa unfortunately has more than enough, putting the continent as a whole at a severe disadvantage on a global scale.

China in the Indigenization Trap

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From Brooking’s Africa in Focus blog:

Zimbabwe clamped down with the enforcement of its controversial indigenization law—requiring foreign companies with assets of more than $500,000 to transfer or sell a 51 percent stake to indigenous Zimbabweans this month. The deadline of April 1 had been set earlier in March in accordance with the controversial 2008 indigenization law requiring foreign companies to submit plans for such indigenization or face the risk of closure. […]

According to Chinese statistics, China has been the largest foreign investor in Zimbabwe for years, with total FDI of more than $600 million in 2013. Among all African destinations for Chinese investment, Zimbabwe has ranked among top three in the past three years.According to official Chinese media, currently there are more than 10,000 Chinese nationals living and working in Zimbabwe. Many Chinese companies in Zimbabwe are actively engaged in contractor services, including telecommunications, irrigation, power, and construction. […]

Chinese investment in the diamond mining industry seems to have taken the worst hit. Indeed, the indigenization of diamond mining industry has been interpreted by Chinese analysts as the government’s “nationalization” of the diamond mines. The two Chinese diamond companies, Anjin and Jinan, began their mining operations in Marange in 2012, reportedly with the Zimbabwean partner holding 51 percent of the share. Nevertheless, the Zimbabwean government ordered forced evictions of the companies in February, unless they become a part of the Zimbabwe Consolidated Diamond Company (ZCDC). The ZCDC, founded in 2015, is believed to be the government’s puppet to consolidate the ownership of diamond mines. Anjin has filed a law suit at the Zimbabwean Supreme Court to dispute the government’s decision.

Very interesting look at China’s competing interests (political vs. economical) and perspectives in Zimbabwe, as well as a broader discussion of the indigenization policy of Zimbabwe’s government.

Mozambique’s Billion Dollar Debacle

I’ve already linked to a piece about Mozambique’s debt scandal in last week’s newsletter, but now that the affair is playing out, I think it warrants another look.

Mozambique had to come clean to the IMF last week that it has a higher debt burden than previously known. In total, the government kept loans to the tune of $1.1 billion of the public books, which corresponds to about 8 percent of GDP.

Mozambique had to fess up, because it had to ask its creditors of another, publicly known loan to restructure that debt. Or as Simon Allison writes in the Daily Maverick:

In 2013, Mozambique secured about $850-million from foreign investors to help turn around the struggling tuna industry, even though the revenue forecasts were wildly optimistic. If this sounds fishy – well, it is.

Turns out, most of the money went to the military to pay for six speedboats and three patrol ships, all on order from a French company.

As a consequence, the IMF stopped the disbursement of the second tranche of a $282.9 million loan, because Mozambique’s government had agreed to declare all its obligations as part of the deal.

Now the whole affair is becoming really expensive for Mozambique’s tax payers really fast. The “Tuna Bond” will be restructured to be paid back at a later date, but at a higher interest rate. Combined with a plummeting exchange rate, this will results in millions of dollars in additional costs. Mozambique has also been downgraded by credit rating agencies, increasing the cost of future loans substantially.

Of course the whole affair begs a few questions. For example, why did the government go on such a borrowing spree and who would lend to a country like Mozambique?

The answer is natural gas. In 2011, Mozambique announced the discovery of major offshore natural gas fields and while it wasn’t supposed to come online until 2018, the loans were basically a dividend from the future, from the perspective of Mozambique’s policy makers. I mean, what could possibly go wrong?

Turns out, the world economy can go wrong, with oil and gas prices currently hovering at rock bottom prices. This has also pushed back efforts to bring Mozambique’s gas to market, likely delaying the timetable until after 2020.

What lessons can be learned from this debacle? First of all, is there a reason why countries like Mozambique, which are heavily dependent on development aid and IMF/World Bank support are even allowed to receive non-public loans? The creditors of the $1.1 billion facility are Credit Suisse and Russia’s VTB bank, which could have been obliged by international rules to announce and disclose the deal, shielding Mozambique’s tax payers and international institutions like the IMF from the financial fallout.

Institutions like the IMF should also have taken a much more critical stance towards military spending, especially when financed by borrowing against future natural resource rents. That a French company benefited from the sale may have played a role in muting criticism here. But Mozambique has only very limited naval security needs, which would have been fulfilled by a much smaller investment, which should have been transparent and separate from economic development spending.

Lastly, this is another example for why the rights of creditors need to be pared down in international lending. As it stands now, creditors like banks and hedge funds have little to fear, they almost always get paid out in full, to the detriment of the common citizens of the countries they lend to, no matter how obvious the red flags were when they decided to lend their money to a government without any form of reliable income or economic growth strategy.

Uganda Opts for Tanzania Over Kenya for Important Pipeline

The writing has been on the wall for a few days, but today came the definite announcement: Uganda will partner with Tanzania, not Kenya, to build a pipeline and export its crude oil production.This is devastating news to the Kenyan government, which had hoped to use the same infrastructure to export its own oil production and will cost both Uganda and Kenya a lot of money:

Uganda will lose $300 million every year due to an increase of $4.07 in tariff per barrel, and Kenya will lose $250 million per year due to the increased tariff of $6.96 per barrel.

The reasons for Uganda’s decision are complex. Some concerns voiced about Kenya’s proposal relate to the difficult terrain in the Rift Valley, which can be avoided by passing through Tanzania’s Lake Victoria Basin. But the most important factor seems to have been limited confidence in Kenya’s government.

Kenya’s northern and Eastern provinces are notoriously insecure, due to intercommunal violence and conflicts in South Sudan, southern Ethiopia and in Somalia. Militants linked to Al Shabab regularly stage attacks with high casualty rates in areas that the pipeline will pass through, for example. The pipeline’s financing is still unclear and the designated export port at Lamu is still far away from completion.

In addition, Kenya’s delegation to the final negotiations seems to have inspired little confidence that they are on top of these problems in their Ugandan counterparts:

However, it has also emerged that the Kenyan officials participating in the Kampala talks may not have had all their facts right as they tried to address the concerns raised by Uganda over the northern route for the pipeline.

In contrast, Tanzania can offer an existing port, Tanga, and a very stable political environment. French oil giant Total has offered to finance the construction costs of the pipeline, as well as 40 percent of the planned Ugandan refinery at Hoima, while Tullow oil, the UK company which runs the Ugandan oil fields, seems to prefer the northern route through Kenya because it has interests along that pipeline corridor as well.

For the Kenyan government, this decision is about more than just the pipeline. The pipeline project is linked to a whole slew of infrastructure projects, ranging from a standard gauge railway to a high-capacity power transmission line linking Kenya and Ethiopia. Uganda’s decision will make it even harder to finance these ambitious projects and keep them on schedule.

From Uganda’s perspective, short-term profit seems to have trumped long-term decision making. President Museveni has recently been reelected in a contested election that turned out to be the most expensive in the country’s history, largely due to the plundering of state coffers to finance Museveni’s campaign and his outsized security apparatus. Uganda’s economic and human development performance has been lacking behind neighboring countries in recent years and the frustration among the overwhelmingly young population with the government is palatable. Uganda is broke and Museveni needs a lot of money quickly.

This is not to say that Ugandan worries about the Kenyan government’s reliability are unfounded. President Kenyatta and Vice President Ruto have presided over a disastrous military intervention in neighboring Somalia and have been unable to curb intercommunal violence, especially in the cost area.

From a regional point of view, the decision as both its pros and cons. On the one hand the competition between Tanzania and Kenya has a potential to produce future political rivalry. But as Ken Opalo points out

All else equal, this is probably a net positive development for the future of the East African Community (EAC). It is obviously a big financial and political loss for Kenya (and for that matter, Uganda) but it will dampen the idea of a two-speed EAC — with Kenya, Uganda, and Rwanda in the fast lane and Tanzania and Burundi in the slow lane.

Is the Russian-South African Nuclear Deal at the Heart of the Zuma’s Political Crisis?

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Allister Sparks made some interesting observations in BusinessDay last week:

Last week, all four of SA’s big banks closed Oakbay’s accounts, KPMG announced it would no longer audit the company’s books, and the family’s stock exchange sponsor abandoned them.

This was followed by Atul and Varun Gupta resigning their directorships of Oakbay, and Duduzane Zuma, the president’s son, from his nonexecutive chairmanship of Shiva Uranium, an Oakbay subsidiary.

 

There is something fishy going on here. The critical thing is that Oakbay, and particularly Shiva, a uranium mine in the North West, is central to Zuma’s eagerness to do a deal with Russia to build and operate a series of nuclear plants capable of providing Eskom with 9,600MW of electricity.

 

It is a deal that would make both the Guptas and the Zuma family a fortune, since Duduzane Zuma owns a sizeable slice of Shiva’s shares.

 

But it is a deal two finance ministers, Pravin Gordhan and Nhlanhla Nene, have blocked because they deemed it unaffordable.

Sparks goes on to allege that it was Nene’s resistance to the nuclear deal prompted his sacking, directly contributing to South Africa’s current political crisis.

It is interesting to note that a few hours before firing Nene on that critical night, Zuma had persuaded the Cabinet to approve the 9,600MW deal — in itself an illustration of how he has packed his administration with toadies. He must have been furious when Nene refused to okay it, thus obstructing his grand plan.

I have always thought that investing in nuclear power was the worst idea ever for South Africa’s power sector. There is not a single nuclear power plant in the world that has ever been cost effective. Adjusted for government incentives, research and development and waste disposal, nuclear is way more expensive than large-scale solar or wind power, not to speak of hydro, all of which have substantial potential in South Africa and the wider region.

Is now the time for Vesuvius of Zupta scandals to erupt? via Martin Plaut

A Basic Income for Some Kenyans

Unconditional cash transfers are the New Hot Thing™ in development right now. I’m myself quite a fan of this idea and wish that it would be employed more broadly. Now one of the NGOs at the forefront of this particular movement is taking an even more radical step. In the words of Michael Faye and Paul Niehaus of GiveDirectly in Slate:

We’re planning to provide at least 6,000 Kenyans with a basic income for 10 to 15 years. These recipients are some of the most vulnerable people in the world, living on the U.S. equivalent of less than a dollar. And we’re going to work with leading academic researchers, including Abhijit Banerjee of MIT, to rigorously test the impacts.

An unconditional basic income happens to be another policy that I’m a huge fan of. Based on the limited evidence we have (nobody actually ever tried this on a national level), a basic income can have tremendous impacts on health and education, no matter if in developed or underdeveloped countries.

In the African context, there has been one similar project in Namibia in 2008 which showed promising early results, but which was not accompanied by adequate research and only lasted for a couple of years. Alaska has a very low basic income derived from oil profits and a German initiative doles out one-year basic incomes funded by donations. The idea is picking up steam, though, with Switzerland poised to hold a referendum on a national basic income, which would give all Swiss adults a basic income of about $1,650 per month, no questions asked. If you want a broad overview over the discussion about basic incomes (in industrialized nations), the current episode of popular radio show/podcast Freakonomics has you covered.

I really hope that GiveDirectly’s initiative in Kenya succeeds and produces reliable data on the effect of a guaranteed basic income in the setting of a developing economy (which is a slightly different proposition from a basic income in an industrialized rich country).

What If We Just Gave Poor People a Basic Income for Life? That’s What We’re About to Test. via Ken Opalo

Africa’s Industrialization Challenges

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On Brookings’ Africa in Focus blog, John Page touts his co-authored new book Made in Africa: Learning to Compete in Industry, criticizing the World Bank and other donors for their lack of support for the continent’s manufacturing sector:

In its January 2016 Global Economic Prospects report the World Bank proposes a policy solution to Africa’s continued vulnerability to commodities: “creating the conditions for a more competitive manufacturing sector.” Sadly, while advocating “structural reforms…to alleviate domestic impediments to growth [and] a major improvement in providing electricity,” the Bank is woefully short on specifics. This is hardly surprising. Beyond supporting improvements in the “investment climate”—structural reforms by another name—and pushing its Doing Business agenda, the Bank and the larger donor community have ignored Africa’s industrialization challenge for more than 20 years.

I would go even further. The World Bank and others have actively pushed resource-rich countries to prioritize developing an export economy and mega-projects like Congo’s Inga Dam to the detriment of investing in local value chains.

Sometimes this has been explicit, like when pressuring countries to sign up to a free trade agenda, even though this exposed local businesses to vastly more competitive competition from abroad. At other times, it has been more of a byproduct of how the system works, like how measuring economic success by GDP masks fundamental problems with equitable development.

Page rightly asks African governments to “address the objectives of boosting manufactured exports, supporting industrial agglomerations, and building firm capabilities”. I would add that these technocratic fixes must be accompanied by measures to ensure the equitable redistribution of the benefits garnered by both resource extraction and industrialization to have an actual positive impact on the lives of the majority.

Commodities, industry, and the African Growth Miracle via Africa in Focus