Month: August 2018

Kickstarting Intra-African trade for SME’s and Entrepreneurs

This is the moment for the African continent. A free trade area for Africa is going to be like a flood. A flood that is going to lift all the boats. It is not about South Africa. It is more about all of us. All countries of Africa participating – big and small. Cyril Ramaphosa, President of South Africa

On March 21st, 2018, 44 African heads of state gathered in Kigali signed an agreement called the African Continental Free Trade Area (CFTA). The CFTA is big and ambitious. It seeks to create a single continental market for goods and services, as well as free movement of capital and people. Its primary goal is to boost intra-African trade and spur industrialisation by fostering a more competitive industrial sector, increased economic activity between African states and giving African companies a large market in which they can scale and become globally competitive (see figure 1 below).

Figure 1: Source UNCTAD http://unctad.org/en/PublicationsLibrary/presspb2018d4_en.pdf

In global trade Africa is a commodities exporter, selling raw materials and agricultural goods, while importing finished manufactured goods. Making the continent susceptible to swings in global commodity prices and perennially large trade deficits. Meanwhile intra-African trade is frustratingly small in comparison to Africa’s international trade (see Figure 2). The CFTA is potentially a first step towards rectifying that.

Figure 2: Source https://www.brookings.edu/blog/africa-in-focus/2018/03/29/figures-of-the-week-africas-intra-and-extra-regional-trade/

My goal in this post is not to talk about the big policy actions needed to make the CFTA a reality. Such as comprehensive ratification, regulatory alignment and the need for connecting infrastructure. That is well covered by the AU itself and numerous other commentators, institutions and policy documents. Instead I want to talk about policies actions that governments can to take to enable African SME’s and entrepreneurs to take advantage of a pan-African free trade area. SME’s are the lifeblood of the African economy, they are one of the continents biggest employers and sources of wealth. And entrepreneurs and investors willing to take risks are critically important to the continents future growth. If SME’s and entrepreneurs can succeed then Africa will succeed, and if the CFTA is to be a success it must serve not only big business but SME’s and entrepreneurs as well.

1-   Creating awareness and links

Trade does not happen in a vacuum. People and businesses must be aware of the opportunities and how to take advantage of them. The first policy initiative that the AU and African governments should take is an awareness and education campaign targeting SME’s and entrepreneurs across the continent. Explaining what the CFTA is, which countries are a part of it and the key steps they need to take to be able to take advantage of it.

Secondly it is not enough to know there are opportunities in other markets. You must be in a position to take advantage of them, you need to have knowledge of and develop relationships in those markets. African governments are in a unique position to facilitate this. With embassies around the continent they can be clearing houses for information and networking hubs. Doing research on local regulations, market conditions building a database of local businesses which can be made available to businesses and entrepreneurs in their home countries. They can organise networking opportunities allowing businesses and entrepreneurs to connect both in the real world and virtually online for those unable to travel. Crucially this can work both ways not just to the benefit of the home country of the embassy but for those who are looking for opportunities in the other direction. European countries such as Germany and Holland provide similar services globally to businesses, African governments can start by doing so on the continent.

Creating awareness and links within and between African business communities is crucial to improving intra-African trade. The CFTA is of little good if people are not aware of it and if they have no entry points, networking opportunities and access to information in other African markets. African governments can fill this gap.

2-   Allow tech to move the money

Anyone who has travelled across Africa or done any cross-border business on the continent knows how much of a pain it can be to move money between countries. The laws vary, some countries have foreign exchange controls, others have currencies that can be difficult to convert, and the relative value of these currencies is always changing. All of these are significant barriers to intra-African trade especially for SME’s who unlike their larger corporate counterparts do not have legal and finance departments to navigate through the mess.

What’s needed is a simple way for business to acquire foreign currencies as and when needed. Thankfully the Fintech (financial technology) sector is already growing across the continent and can fill this gap. African governments should allow Fintech services to enter the currency market and allow SME’s and traders to buy and sell other African currencies and transfer payments to their suppliers and customers in whatever country they may be in. Many African countries now have mobile payments, mobile banking and mobile lending, there is no reason why these services should not be allowed to operate across countries.

The second area where Fintech can make a difference is in trade finance. Much of global trade is done on credit. Companies will borrow or access lines of credit, usually from banks, to buy goods and transport them to another market and repay the loan when the goods are delivered and paid for. Few SME’s or traders will have access to lines of credit with banks, but many do use mobile banking and lending for exactly this purpose. To fund the purchase of goods and pay it back when they are sold. If fintech firms were allowed to play this role on a continental level it could give SME’s and traders, the ability to fund cross-border business where traditional banks would regard the amounts of money being lent as too small and SME’s and traders too risky.

Fintech could play valuable role in intra-African trade. Providing SME’s and traders the means to fund their activities and the ability to conduct business in foreign currencies with reliable platforms with which to pay people. Trade needs money and a reliable means of payment. Fintech could play that role for the businesses and traders who are not on the radar of banks. What is needed is for African governments to come up with the right regulatory framework giving Fintech services the ability to operate across borders and mobile networks and the protect their customers from unscrupulous lenders.

Trade for all

Intra-African trade has the potential to be a game changer on the continent. Giving African investors, entrepreneurs, businesses and the wider economy access to new markets and new growth. More importantly it could change lives, not just through new jobs and opportunities, but through simple trade. In 2017 Nigeria experienced a tomato shortage, Kenya experienced a maize shortage both countries resorted to importing these foodstuffs from markets like Mexico and Europe. However, around the continent there were tomatoes and maize in plentiful supply in other countries. With a continental free trade area, these all to frequent shortages and price spikes need not happen. Retailers in Kenya or Nigeria noticing that their local suppliers are unable to meet demand and prices are going up could buy from other suppliers around the continent with little difference in price and consumers wouldn’t have to deal with the shock to their wallets.

There has been a lot hype and hope around the CFTA. However, it still has some way to go, only 3 countries having fully ratified the treaty, 22 are needed for it to come into effect. In the meantime, African governments need to ensure that it is not just a treaty for big business but is one that SME’s and entrepreneurs can also take advantage of. If that is done, it will help provide a shot in the arm to intra-African trade and make it so that all African’s can have a stake in and benefit from a new pan-African economy.

 

Africanising Development

Development is about more than money, or machines or good policies – it is about real people and the lives they lead – Paul Kagame, President of Rwanda

Development in Africa is largely determined outside the continent. The ideas of modernisation and socialism that dominated post-independence thinking and policy were western in origin and backed by the ideological agendas of the cold war superpowers. The triumph of neoliberalism in the 1980s and 1990s in the west pushed developmental liberalism upon the continent, embodied in the policies of free markets and Structural Adjustment programs. Recently the millennium development goals (MDG’s) and sustainable development goals (SDG’s) did not originate on the continent but rather in the meeting rooms of think-tank’s and multilateral institutions such as the UN, World Bank and OECD.

When Asia embarked on its extraordinary development journey it did so not only by adopting the ideas of others but also by localising them. Focusing on what they saw as the appropriate goals and focus of development. As the world moves into an ever more uncertain 21st century Africa remains in thrall to foreign ideas of development. If the continent is to move forward, if Africa’s development story is to be successful, then we must develop African centred ideas of development and the policies to pursue them. To do that we have go back to the start, ask ourselves what and who development is for and what our priorities are, on that we can build development policies that are for Africa, and made by Africans.

A brief history of development

In the 1960’s as most African nations were gaining independence, one key aim was socio-economic development. With the aim of bringing African economies and standards of living up to 20th century standards. At this time the primary thinking in the development world (aid donors and development institution) and in governments was modernisation theory. The theory holds that modernisation is a prerequisite for development, and that developing countries must evolve from traditional to modernised societies in order to develop. This entails the transmission of capital (aid and FDI) and the replication of economic, social, political and legal values and institutions from the developed world to the developing world. Thus policy makers attempted to copy the modern institutions of the west and rapidly industrialise. This was not very successful as the failed development policies and strategies of the 1960’s and 1970’s show. Merely copying modernity did not replicate it, as it fails to account for the conditions that led to that modernity and the fact that the same conditions that existed in the developed world did not exist in Africa.

In the 1980’s and 1990’s in line with the rise of free market neoliberalism, and the end of the Cold War, liberalisation democratic political reform because the focus of development, driven by the nations of the West. The idea was that African economies had failed to grow because they did not have free markets and the liberal democrat institutions to ensure that those markets functioned fairly. Thus Africa was subjected to a series of market liberalisation structural adjustment programs where aid and debt assistance was made conditional on downsizing the governments role in the economy, privatising services and state companies and opening up countries to international trade. This again obviously did not work, many would argue that it took away the little government protection and safety nets that African’s had and subjected them to whims of international markets and allowed a rich few to get even richer by buying up cheap state owned companies under the guise of privatisation.

Thus in the 2000s recognising the failure of market liberalisation and modernisation before it the MDG’s emerged. The UN, OECD and World Bank had been working on a set of ideas and goals to reduce global poverty, and they combined their efforts to come up with 8 key development goals with which to pursue this goal. While there has been some progress under the MDG’s and later the SDG’s they still bear the hallmarks of the two previous development initiatives. They are driven by donors and international development institutions and have little local ownership by the countries they are intended for.

Thus the story of development theory and policy in Africa over the last 50 odd years has been essentially foreign, with abrupt shifts in thinking and focus when political and ideological views shift in western capitals and development institutions. What this has meant is that as African’s we have had little ownership of our own development. It has been something defined elsewhere and either thrust upon us or unthinkingly adopted without taking into account the views, history, culture and aspirations of the people it is intended for. Thus to Africanise development we must break this pattern, we must start thinking of development as something that comes from within rather than, an act of copying those who have gone before or accepting ideas without question.

Who is development for?

In all the talk one hears about industrialisation, jobs, infrastructure and even development, what one rarely hears is the voice of the people for whom it is all supposedly intended. At the core of development must be the people and their needs and wants. Africa’s development policies should not start in think tanks, ministry meeting rooms or development bank boardrooms, but with Africans. We must start with broad conversations both within and across nations by asking ourselves, what is it that we as Africans want? What future do we imagine for our children, what are the key challenges facing Africans as individuals and as communities. There are a number of ways of doing this (which I suggested in previous post) from town halls, to online comments and hangouts, to kgotlas and barazzas. These questions would serve to ground Africa’s development in the aspirations and needs of its people. If development is meant to better the lives of citizens then their concerns must be at it its centre, and then only way to ensure that is by asking them.

What is development for?

Development is about numbers. Or at least one could be forgiven for thinking so. The MDG’s and SDG’s are replete with goals and targets. Politicians and policy makers are always quoting GDP growth numbers, job numbers, kilometres of roads or railways built. You could be forgiven for thinking that development is a statistical exercise. This misses the fundamental point of development. It is, or at least should be, about the people, their quality of life and their dignity. If development continues to be about the numbers or the shiny new roads and railways rather than how they positively impact the lives of the people, then those numbers will continue to be largely meaningless. Those numbers must be rooted in what they mean for people. Are the jobs that have been providing a viable income, are the roads and railways built opening opportunities for ordinary citizens, is increased food production putting more food on tables and is GDP growth being felt at all levels of society.

Numbers are great, they can help measure progress and expose problem areas. But they are not what development is for, and when using those numbers, we must be careful to ensure that they are rooted in reality, the reality that development is about improving people’s lives.

What are the priorities?

At the core of economics is a simple concept, scarcity. How best are goods, services, labour and resources used and distributed within society when it is not possible to provide for everyone’s needs and wants. Development policy is similar, it is impossible to do everything at the same time and this necessitates choices. Do you invest more money in education or healthcare, which region do you build roads in first, which industries do you choose to promote etc. The East Asian tigers chose to prioritise traditional industrialisation, while a country like Costa Rica has chosen to prioritise environmental sustainability, healthcare and education alongside economic growth. The question is what are Africa’s priorities, what is our development focus. Over the last decade the priority has been the SDG’s, closing the infrastructure gap, industrialisation, jobs, intra-African trade, agriculture and energy provision. The problem is when everything is the priority nothing gets properly done, it is simply an impossible task to do everything well at once. Thus, policy makers have to prioritise, pick a development focus and do it well. That focus should be informed by the previous questions of what people actually want out of development.

Africanising development

Africanising development is not about discarding all ideas and theories of development if they do not come from an African source. Rather it is about grounding the continent’s development policy in the aspirations of its people, taking ownership of it. The three questions of who is development for, what is development for, and what are our development priorities would help better define development in African terms, ground it in the aspirations and needs of its people and better focus the efforts of governments and policymakers. For too long development in Africa has been about what other nations, institutions and experts think is best for Africa, rather than what African’s think is the best path for themselves. Africanising development means taking responsibility and ownership of the future of our continent and to do that we need to approach it from the bottom up, give all African’s a stake in it by making them active participants and owners of their continents future.

Give the People Money: Ending African Poverty with a Basic Minimum Income

“In this new century, millions of people in the world’s poorest countries remain imprisoned, enslaved and in chains. They are trapped in the prison of poverty. It is time to set them free… Overcoming poverty is not a gesture of charity. It is the protection of a fundamental human right, the right to dignity and a decent life” – Nelson Mandela

In my first post I outlined what I see as the goal of development. Which is to give everyone ability to live their lives with dignity. Which means an adequate and improving quality of life, economic opportunity and security, physical security and good governance. The antithesis of this is poverty, and ending poverty is Africa’s core developmental challenge.

Poverty, as defined by Professors Lilian Chenwi and Danwood Chirwa is ‘a state in which a person is unable to live a long, healthy and creative life, nor to enjoy a decent life worthy of self-respect and respect of others’ [1]. The simpler definition is having to live on less than US$ 1.9 a day. According to the World Bank approximately 43% or 330 million African are living in poverty.

Poverty is hard, grinding and often degrading. It manifests its itself in hunger and malnutrition, poor health, lack of education, and social and political discrimination. Poverty is often self-perpetuating, with those born into it often remaining in it because of the lack of opportunities and resources. Poverty is insecure as those living in it are most likely to be victims of violence and conflict. Poverty is the worst and most degrading form of underdevelopment, consigning its victims to unnecessarily harsh lives and wasting their potential. If nothing else, then Africa’s development must be defined by how it pulls its people out of poverty and allows them lead fulfilling lives and reach and exceed their potential.

To end poverty, we have to empower the people living in it. Those living in poverty are not there by choice, it is an accident of birth and circumstance. They lack the resources and the opportunity to climb out of poverty. The solution is thus simple, to provide Africa’s most underserved citizens with these resources and opportunity and we can do that by giving them money. By ensuring that every person living in poverty has a Basic Minimum Income (BMI), which they can use as they see fit to improve their lives. There is growing evidence from Africa that this works. That a BMI not only enables people to improve their circumstances but also to invest in their futures and it has positive impacts on health, education and security. If Africa is serious about ending poverty, then we have to seriously consider the option of a BMI.

Basic Minimum Income – the concept and evidence

The concept

A BMI is a relatively simple idea. It is a cash transfer that gives everyone in society who needs it enough money to live on. A BMI aimed specifically at relieving poverty would have 4 key characteristics that separate it from traditional welfare programs:

  • all members of society living below the poverty line are eligible to receive it,
  • the BMI is unconditional, you do not have to work, or go for any training to receive it,
  • it is enough to cover the basic needs of those who receive it,
  • It is guaranteed for as long as they are under the poverty line.

At its core the BMI is about guaranteeing a minimum standard of living throughout society through cash transfers to all those who for whatever reason are below the poverty. By its nature it is not discriminatory as it is available to all, neither does it subject the poor to the humiliations and bureaucratic nightmares of means testing, forced job hunts or training that are the hallmarks of modern day welfare systems.

The evidence

A BMI or some variant has or is being tried in various places across Africa, most notably South Africa, Namibia and Kenya, and the results show that not only does a BMI reduce poverty it also has significant impacts on the health, education, security and quality of life of those who receive it.

In South Africa the Social Security Agency (SASSA) distributes what are called social grants. Which are cash payments given to the most vulnerable groups in society and there are seven types of grant that the agency gives out.

Research done on the impacts of the social grant system has shown a number of significant impacts. First that social grant system has been sufficient to lift many households out of poverty (page 37 of this study). Second, the research shows that the grants in particular the child support grants have been crucial in reducing poverty in women headed households and empowering them in their homes and communities. Furthermore, the child support grant has enabled parents to be more positively involved in their children’s education, such as reading to them and helping with school work and ensure that their children were properly nourished and received healthcare. UNICEF studies has further shown that the child support grant has had a positive impact on school attendance and healthcare as well as reducing risky adolescent behaviour such as unprotected sex, drug and alcohol abuse and criminal activity.

In Namibia, in 2008 they piloted one of the worlds first basic income projects called the Basic Income Grant (BIG) in the Otjivero settlement and Omitara town. Both of which were noted for high rates of poverty, insecurity and poor health. The grant was simple, each person would get a monthly unconditional cash grant of 100 Namibian dollars (about US$7). With the grants for those under 21 going to their primary care giver, which was usually their mother. The report on the impacts of BIG shows details its positive impacts which are notable not only for being positive but also for how many areas of people’s lives it impacted.

  • Severe poverty was reduced by 54% and food poverty was reduced by 56% in one year.
  • There was a 36.5% drop in crime in crime in the areas where BIG was trialled.
  • Just six months after BIG was introduced child malnutrition dropped by 52%.
  • Drop-out and non-attendance rates at schools went from 30-40% to 5% after the introduction of BIG as parents were now able to pay school fees.
  • In contradiction to the arguments that a basic income would discourage work employment actually rose by 9% after the introduction of BIG.
  • BIG also helped people start and grow their own small businesses, as the extra income was used by people to start and/or invest in their own businesses as well increasing demand in the area as people now had some money to spend.
  • BIG also allowed people to save and invest in their futures. 40% of those who received the grant saved it. 31% used some of the money to fix their homes, 9% invested in livestock and 11% paid back debts.

Unfortunately, in 2010 due to politics the program was ended and essentially forgotten. What stands out is that it was able to achieve so much in reducing poverty and improving living standards over such a short period of time.

In Kenya a U.S. based charity called Give Directly which champions unconditional universal income cash transfers, trialled them in a village in Western Kenya between 2011 and 2012. With recipients receiving around US$ 274 over the course of the year, and the results are very similar to those in Namibia:

  • The transfers significantly reduced hunger, 30% overall and 42% for children.
  • The transfers enabled the recipients to invest in livestock and their own small businesses. With income from livestock increasing by 48% and income from self-employment increasing by 38%.
  • The transfers increased consumption and thus economic activity in the village.
  • The transfers led to increases in the psychological well-being of the recipients and their families.
  • Notably (again), despite the assertions of many critics the transfers did not increase spending on alcohol, tobacco or gambling.

The examples in South Africa, Namibia and Kenya show remarkably positive impacts not just in poverty reduction but in improving healthcare, education, the well-being of children, women’s empowerment, employment, security, small business start-ups and growth, and long-term savings and investment. Furthermore, the predictions that “they would just spend it on booze and gambling and entrench laziness” were also shown to wrong. These results show two things first that poverty is not a result of being lazy or bad, rather it is a result of being stuck in a poverty trap, where the lack of resources (namely money) prevents people from being able to live with dignity and plan for the future. Secondly, the impoverished are not stupid, given the resources and the opportunity they can and will make the right choices for them, their families and their communities.

How can we do this in Africa?

If the evidence shows that a BMI is an effective and empowering tool for poverty reduction in Africa the question then becomes, how can we do it? The usual response is that we can’t. That African nations do not have resources to fund such a program given the high levels of poverty on the continent and that governments have to invest in a number of areas such as infrastructure, education, healthcare, security etc. which over the medium to long-term will reduce poverty. My response to this is threefold, first, that poverty is an issue now and every single day for hundreds of millions of Africans. Secondly that short-term significant decreases in poverty will not increase economic growth but make it more sustainable over the long-term and third if we get creative we can find the money for BMI.

Finding the money

One idea for funding a BMI is called a negative income tax. The idea is that a progressive income tax system be implemented where people earning below a certain income threshold receive a payment from the government rather than paying tax to the government. This is offset by those who earn above the threshold who pay progressively higher taxes depending on their income. However, this requires a broad and deep income tax system which due to the lack of formal employment on the continent many African countries do not possess.

My personal preference is not to tax the income of Africans, but to tax the profits of those making money off of Africa, through more efficient and increased resource and foreign profit taxes. In a previous post I discussed how through reforming its tax systems, African countries could get more tax revenues from the extraction of natural resources and the profits made by foreign corporations in Africa. For too long Africans have not benefited from the wealth of their land that helps fuel the global economy and the profits made in Africa by global corporations are spirited away to the benefit of shareholders in New York or London. If African nations taxed those profits and resource extraction properly, much if not all of the money needed to fund a BMI could be found, governments would be able to continue to fund all the other things they use ordinary tax revenue for and the people of Africa would finally see the benefits of the fruit of their land. Furthermore, as the examples show a BMI would itself increase the tax revenue of governments. With disposable incomes people would be able to buy goods and services, save, invest and start businesses all of which are taxed by governments around the continent. And as people rise out of poverty, and their incomes grow and become more secure they can be gradually taken off the BMI, which would over time reduce the size of the payments that governments would have to make.

Africa will rise when we end poverty

The English writer Eli Khamarov once said that “poverty is like punishment for a crime you didn’t commit”. The hundreds of millions of Africans living in poverty are the victims of this cruelty, and through no fault of their own they have, as Nelson Mandela put it, been deprived of “a fundamental human right, the right to dignity and a decent life”. Since independence African leaders and policy makers have unfortunately made choices and implemented policies which have failed to break and, in some cases, caused and entrenched the cycle of poverty on the continent. However, Africa need not be defined by its poverty, Africa does not have to be the basket case of the world. There are still options and policies, like BMI, that our leaders and policy makers could make that could end poverty in Africa.

Some may ask, why this policy? East Asia and the West pursued the traditional poverty eradication path of industrialisation and this is what Africa is trying. However, there are two key issues of pursuing poverty eradication through economic growth and industrialisation. First, industrialisation takes time, even the quick industrialisation of East Asia took at least 3 decades. Secondly industrialisation is a painful and unequal process. In both East Asia and the West industrialisation has been accompanied by highly unequal distribution of wealth, terrible labour conditions and it hasn’t pulled everyone out of poverty, hence the need for social safety nets. And to this day there remains pockets of citizens in the worlds most industrialised economy who live in relative poverty. In addition, a BMI does not mean you must abandon a nations aspiration for industrialisation or socio-economic growth, rather I believe it would speed it up. It would help push people out of poverty now rather than in 30 years. It would ensure that no one is left behind by a changing economy. And importantly to the process of industrialisation would create a significant number of people with disposable income who will be able to buy locally produced goods and services.

The evidence shows that when empowered, when given the resources and the opportunity Africans living in poverty can and will rise. The solutions to the unfulfilled potential of our continent lies not in SDG’s, or debt fuelled infrastructure or the benevolence of the developed world, but in giving our people the tools to fulfil and surpass their own potential. To do that we must invest in them, we must address our central developmental challenge of poverty by ending it. To do so we have to be creative and brave. Exploring and implementing policies like a basic minimum income is a way to do so. Ending poverty in Africa will turbocharge economic and social growth, and it will also allow hundreds of millions of Africans to live lives of dignity, and if nothing else, that is development.

[1] The Protection of Economic, Social and Cultural Rights in Africa (2016), edited by Danwood Mzikenge Chirwa, Lilian Chenwi, p.12-13