Category: Economic Development

Bad policy is bad business: Reforming the African Business Environment

African economic policy does not have much wiggle room at the moment. The two policy levers that are most commonly used, tax policy (new taxes or tax breaks) and fiscal policy (spending money on things) cannot be used. We have no money so we can’t give tax breaks and we have reached our credit limits so we cannot borrow or spend more. There is no commodities boom to fill our coffers and there is no China riding to the rescue with loans and aid.

So, what can we do? How do we drive the investment and job creation our continent desperately needs without using tax policy or spending?

I think African policy makers have been lazy, or at the very unimaginative and inattentive. Economic policy encompasses a large universe of policies, laws and regulations that govern how the economy functions, how different entities interact with each other, what they are allowed to and what they aren’t, and even how they fail. How all of this is applied, how responsive regulatory structures are to a changing world and how often it changes, all contribute not just to economic policy but to the business environment. Creating a conducive business environment for MSMEs and large businesses is critical to having businesses that invest and create the jobs that we need.

I define a conducive business environment as one that gives businesses, investors and entrepreneurs a stable and secure operating environment, which puts the onus on them to grow rather than government to subsidize the economy. An environment that doesn’t let failure be a death sentence but an opportunity to bounce back. Creating this environment on the continent would help take our private sector from being resilient to being dynamic.

Predictability and stability

Businesses and investors think about today, tomorrow, next year, three years from now and a decade from now. In other words, businesses have plans. They plan to grow, and that growth needs investment, expansion and people (jobs) to make it happen.

The thing that businesses and investors crave is predictability and stability of the business environment. If a business or investor can understand what their operating environment will look like, they can make and implement their growth plans, invest in expansion and employment. Whether you are a motorcycle rider who wants to grow your income or big business making billions, the ability to plan for the future is critical.

African governments are notoriously bad at providing predictability and stability. Policy and regulatory changes seemingly come out nowhere, policies are suddenly reversed without warning, or changes are promised and soon forgotten about. A great example of this tax policy in East Africa. A recent IMF report showed that countries in the East African Community (EAC) have, since 1988 made an average of 13 changes to tax policy and law every year, that’s 1,845 changes since 1988. When on top of this you add unforeseen charges to other policies, laws and regulations it makes the African operating environment an ever-changing mess.

What governments need to do is simple, make multiyear (e.g. 3 year+) plans and communicate those plans as I have written about it before, good communication is good policy. Clearly articulating the intent of policy, what it is going to do, how it is going to work and when it will happen, may seem like policy 101 but it’s astounding how many times this has not happened. If you as a business or investor know what’s coming you can plan for it, integrate into your plans so that when it happens it’s not disruptive but wholly expected.

Connect the dots.

Policy, legislation and regulation do not exist in isolation. What happens in one sector, ministry or agency can have significant impacts on another. For example, if governments want to domesticate value chains and export more their trade policy, industrial policy, employment policy, financial sector policy must speak to each other in order to be truly effective.

Unfortunately, the situation we get most of the time is that policy in one area is made in isolation from another despite them being mutually reinforcing. Thus, businesses and investors are confronted by, at best disjointed, at worst contradictory policy that isn’t worth the paper it’s written on. For business and investors this creates confusion and uncertainty.

What is required is the for the policy development process to be inclusive of others in the public sector and those in the private sector who could have influence over it. For instance, if a government wants people to consume locally produced bread it must talk to the wheat farmers to understand how to increase production, to millers to understand how to increase wheat flour production, to bakeries to understand how to increase production of bread that people actually want. Then it must align the policy of the agriculture ministry, the ministry of industry, and the ministry of finance to make sure the interventions needed at the various stages of the value chain are aligned and mutually reinforcing. If not, the government will buy fertilizer for wheat farmers that isn’t suitable for them, the millers may have access to loans for expansion but no wheat to actually produce with and the bakeries will use the tax breaks on domestically produced bread to sell unfinished imported bread that just needs a few minutes in the oven.

While the example may seem preposterous, it’s an all too familiar tale on the continent. If governments don’t connect the dots, the impact of policy is like swimming upstream, lots of effort expended for very limited outcome.

Better bankruptcies

Walt Disney, Henry Ford, Heinz, Marvel, American Airlines, and General Motors. These entrepreneurs and companies have two things in common, they are immensely successful, and, at some point they had all declared bankruptcy.

One of America’s greatest innovations is bankruptcy protection. Instead treating bankruptcy as a shameful thing that killed the business and stained the reputation of its owners. In America bankruptcy is a chance for a reset or to start again. Companies that go bankrupt get protection, space and time to sort out their issues and emerge leaner and meaner. People who declare bankruptcy have the chance to have their debts discharged and to start again.

In Africa, we still treat bankruptcy like Europe did a century ago, as a disaster. People who go bankrupt are saddled with odious debts, companies that go bankrupt are broken up, sold off by creditors. It’s time to change this thinking, as America shows giving people and companies a second chance fosters innovation, it encourages entrepreneurs to take bold leaps and it enables people and businesses to bounce back from adversity quickly and effectively. African businesses experience a lot of headwinds, many of them stemming from forces (and regions) outside their control, changing insolvency and bankruptcy laws to be more American, may be the catalyst that enables African businesses to grow in the good times and innovate in the bad.

Bad policy is bad business.

It is incredibly frustrating watching African governments repeatedly miss the opportunity to drive growth without having to spend money or give tax breaks. There is so much that could be done to give the private sector the predictability and stability it craves to enable planning, investment and growth. To link relevant policy areas and reinforce the growth prospects of key sectors of the economy through mutually supporting government action. Or to simply help businesses understand what you are trying to do, and work with that in mind.

Instead, we have fostered uncertainty, and an adversarial relationship between governments and the private sector, which, in turn leaves the private sector surviving rather than thriving, and when businesses cannot survive, they are picked apart like a   with a carcass as part of the bankruptcy process.

Today the reality is, that while Africa would like to and needs to spend money and use tax policy to drive key development goals, we don’t have the fiscal room. The only way to create that room is for the private sector to grow and pay more taxes, and though it may seem like it, this is not a chicken and egg situation. How policy is crafted, communicated, and implemented has a real and significant influence on how companies grow and where investors decide to put their money.

We must do better at creating the environments in which businesses thrive and investors want to come to. Otherwise, an underperforming private sector will continue to stagnate, and our policy makers will be wasting air, money and perfectly good paper on strategies and plans that will fail.

2023 from an African policy perspective: opportunities amidst global headwinds and risks.

There is an old joke about Russian history, that every chapter ends with the sentence “and then it got worse.” Its an apt joke when thinking back on 2022 and looking ahead to 2023. In large part because Russia making things worse has been a feature of the last 12 months and will continue to be so in 2023.

From an African perspective, 2022 was a tough year. Just as the world was opening up and getting control of the Coronavirus, Russia invaded Ukraine sparking off a geopolitical and energy crisis, stoking already rising inflation to alarming levels. This prompted western central banks to respond by raising interest rates and the value of the dollar soared, hurting Africa by increasing the cost of all imports, fuel and food included.

And then it got worse.

2023 will be another tough year in many respects. Inflation, energy turmoil, China’s economy will not prop up the global economic growth and, geopolitical competition between the US, China, and Russia will continue play out in Africa.

Thus, policy makers on the continent must navigate these global headwinds. However, as I have written about before, there is opportunity in crisis and if policy makers on the continent are brave enough and imaginative enough, a bleak global picture can be turned into one of green shoots for Africa.

The Economy – growth can be found

The economic challenge facing Africa this year is not to be envied. Inflation will continue to be a significant problem across most economies continuing to make food, fuel, electricity and other necessities more expensive straining households and businesses alike. Debt crises already in progress in Ghana and Zambia are likely to spread to other countries on the continent who have over borrowed and spent irresponsibly. Sluggish global growth (or recessions) will drag down growth on the continent. Add to this Africa’s two largest economies, Nigeria, and South Africa, will be focused on two general elections.

Thus, policy makers have two goals. First, to navigate a tough economic environment. This must involve blunting inflation through a combination of short-term interventions that protect citizens and business from the worst impact and long term strategies to fix structural issues that make Africa vulnerable to imported inflation (you can read a more detailed analysis here). Second is the debt problem, like Zambia, countries at risk of debt crises must proactively engage their creditors, and bond holders to get ahead of crises and maintain confidence in their economies and if possible, get some debt forgiven or terms changed to make their payback less burdensome. In addition long term debt frameworks should be put in place to end the cycle of debt accumulation, crises, begging, and forgiveness, otherwise, in another decade we will be back in the same place. Finally, the need to cut unnecessary spending and combat corruption is obvious but I will not spill any more ink on the subject.

The second economic imperative is to find growth, and this is where imagination and boldness is needed. If growth is not going to be driven by the global economy, borrowing or government spending we must find it with innovative policy home, domestically and regionally, and there are a number of strategies that can be employed.

  • On the regional front, this is the perfect opportunity to double down on the African Continental Free Trade Agreement (AfCFTA), to build continental trade links that can be alternative source of growth. If this is aligned with the strategic investments in areas like warehousing  intra-African trade could be significantly stimulated.
  • An area of untapped potential is tax reform. Our complex, badly policed tax systems leak revenue and offer opportunity for corruption. Reforming our tax systems and moving towards an African multinational tax consensus could unlock revenues for governments and unleash the potential of African business.
  • Reforming domestic credit policies to unlock lending to MSME’s and small farmers could unlock the significant potential of Africa’s small businesses and small farmers that could drive employment, business growth and agricultural productivity.
  • Finally, International capital markets will be distorted for some time with many unwilling to invest in Africa. It will thus be important to put in place policies that encourage domestic investors (e.g., pension funds, mutual funds, etc) to engage with and invest in African businesses and commodities.

Global economic conditions will be unfavourable for some time. However, I firmly believe that should not hold Africa back. With intelligent and creative economic policy, Africa can stoke growth in its domestic and regional economies.

Geopolitics – wary opportunity

This is a subject I have written on previously. The world is changing, the USA is more focused on competition with China and containing Russia, and this great power competition will be played out on the continent as well. The EU and Britain are concerned with solving domestic issues such as immigration and energy access and this will shape their approach to Africa. And there is rise of regional powers (India, Japan, Brazil, turkey, Australia, Saudi Arabia etc.)  who will all be interested in expanding their relationships with the continent.

From a geopolitical perspective, Africa first must be wary. During the cold war we became a playground for superpower competition and that cannot be allowed to happen again, African interests must come first, adventurism must be resisted.

However, this also opens opportunities. If we can understand the interests and goals of various geopolitical players, we can use that to our advantage where interests are aligned. For example:

  • As the US and West seeks to diversify its supply chains and sources of raw materials outside of China, Africa could use this to attract investment into alternative industrial supply chains in Africa, and better deals for raw materials especially the rare earths, cobalt, and lithium critical for electronics.
  • Deeper engagement with the middle powers and attracting their investment could give Africa an alternative source of investment outside of China and USA and dilute their influence.
  • Strategically leveraging the fifty-four votes at the UN and other global bodies could be used to put African voices in strategic places (the UN security council, G20, COP, IMF etc.) to help shape the global agenda.
  • Critical issues, like immigration in Europe or the need to offset carbon emission in the middle east or Australia can be used to leverage investment in critical areas on the continent. E.g., immigration can be stopped with job creation, or carbon emissions could be offset by green energy in Africa. Where can the funding for that come from?

2023 – tough but doable

2023 will be a tough year not just for Africa but the world. This is should not be an excuse for a lack of progress and development on the continent. We must use our own agency and through policy. With intelligent, forward looking and sometimes creative policy, we can achieve positive results despite an unfavourable global environment. In crisis and adversity there is opportunity, it is time for Africa to start taking advantage of those opportunities and 2023 is the perfect time to do so.

After the crisis: driving Africa’s post-Coronavirus recovery

Right now, and understandably so, African governments are focused on dealing with the immediate health crisis presented by Covid-19. Preventing the spread of the disease among African populations and treating those who are already sick, are the priority of government right now. However, eventually, this crisis will pass, public health authorities will eventually manage to control the spread of the disease and effective treatment measures (or vaccines) will be developed. When the crisis is over its negative economic impact will become clear, and African governments will need effective strategies that to foster economic recovery in the short term and a medium to long term strategy to fix the fragilities in African economies exposed by the crisis.

The economic impact of the crisis

For Africa, this crisis will have many effects on the economy.

  • For oil and commodity-exporting countries, the fall in prices will drastically cut their tax revenue as well as related incomes within the economy.
  • Disruptions to trade will hit manufacturers and projects on the continent as they cannot get enough of the components or raw materials they need. Similarly, retailers who import goods to sell may run out of stock. Combined this will drive inflation and possibly force manufacturers or projects to shut down.
  • Disruptions to trade will also hurt those economies such as Kenya, Ethiopia, SA, and Ghana who export agricultural goods and produce, where the majority of the population is involved in agriculture, falling prices and exports will hurt incomes of both businesses and households.
  • The tourist industry, which is a top income earner in several African economies will be severely hurt by the travel restrictions and quarantines on the primary tourist markets in the USA and Europe. Across the continent’s tourist destinations, hotels, conferencing destinations, resorts, parks etc, will be bleeding money and jobs. While the continent’s airlines will be suffering massive losses as passenger numbers plummet.
  • A global economic downturn will shift investor sentiment, international investors will be warier of investing in Africa and we are already seeing the impact as stock markets across the continent register large falls as international investors withdraw their funding.
  • In China (which is now Africa’s largest trading partner and investor) the government will be more focused on economic recovery at home. Meaning that some of the expected Chinese investment on the continent will likely be delayed.

Short term response – kickstarting the economy

For all African economies, the combination of a global economic slowdown and the economic impacts described earlier will decrease both private sector activity and public sector revenues and spending. In an environment where most African governments were already struggling with large debts and deficits, what can we do kickstart the economy once the crisis is over.

Forget spending focus on tax

The first impulse of much African government will be to spend, to use the government’s ability to spend large amounts of money to create demand within the economy. Frankly, this won’t work in Africa at least over the short term. This is because African governments are incredibly inefficient (and often corrupt) so it not only takes a while for governments to spend money it also means that the not all the money intended for a specific purpose necessarily reaches it. Secondly, the money has to be found, which for many governments on the continent is a problem.

A short-term policy response intended to kickstart the economy must be something that is quick and has an immediate impact on the bottom lines of businesses and people’s pockets and the best tool for that at the moment is taxes and credit. For businesses, the key is helping them preserve cash flow so they can make it through the worst and drive a recovery.

  • There are a lot of taxes and fees that are levied on the short term (monthly, weekly, or daily) income of businesses (especially SME’s) such as turnover taxes, or licenses. Governments should consider waiving these for short term (3 to 6 months), that will enable businesses to preserve cash flow.
  • Statutory payments to public social safety net schemes e.g. health insurance, social security etc. which are usually paid by businesses on behalf of employees could be waived for the short term which would make it cheaper for businesses to retain people in employment.
  • Work with banks and the wider financial sector to come up with solutions (e.g. invoice discounting backed by government bonds) that would ensure that all pending government bills are paid quickly. This would put money in the pockets of companies that business with the government quickly, which will help ensure there is cash flowing through the system.

For individuals and households, the highest impact thing government can do to put money in pockets and help demand recover is again taxes, specifically VAT, which is often levied on (almost) everything. If VAT can be waived, for the short term, on critical items that people commonly buy (food items, data and mobile phone credit, soap, water, electricity) it will give people some extra money which they can spend on other things, and help drive the recovery of aggregate demand within the economy.

Long term response – long term growth and resilience

The crisis has exposed some key fragilities in African economies. But, as the Americans like to say, never let a good crisis go to waste, in other words in crisis there is an opportunity. Africa can use the opportunity of this crisis to build in greater resilience and the foundations of long term growth into its economy.

Trade

Africa can take advantage of the fragility that has been exposed in global supply chains. Companies both in Africa and globally will be looking to diversify their supply chains so that in future they are not as widely disrupted by a crisis in a particular part of the world (namely China).

With its significant labour pool, government focus on industrialization and improving infrastructure Africa offers a potentially attractive location for diversified supply chains.

For African companies specifically, governments would do well to focus on those goods and products whose production and distribution has been disrupted and encourage their production in Africa. Taking advantage of the soon to be active Africa Continental Free Trade Area, African based supply chains could prove to be more resilient for African producers and consumers than those based abroad. Investing these would not only foster resilience but create jobs and income as well.

FDI

As happened after the global financial crisis Central Banks in the developed world have responded by cutting interest rates, as a result, yields on government bonds are close to zero or in negative yield territory. This will likely be the case for some time after the crisis has passed as Central Bank’s try to fuel a quick recovery. As a result, investors from these markets will be looking for higher yields from their capital, which they cannot get at home. This will give them a greater appetite for risk with the payoff being higher returns, Africa will present multiple opportunities for these investors to try and take advantage of with their greater risk appetites. If we identified the right project’s and opportunities (such as privatisations or stock market flotations) that would benefit from these flows, and package them right we can direct this money to places where it will have a long term positive impact.

Domestic investment

International capital markets will be distorted for some time after this crisis, by central bank and government stimulus policies. It will thus be important to put in place policies that encourage domestic investors (e.g. pension funds, mutual funds, etc) to engage with and invest in African businesses and commodities.

Structural reform

Crises offer governments the opportunity to address issues that would otherwise be politically impossible to address. For instance, a public health crisis emphasises the need for Universal Health Care, an expensive proposition which government are not usually brave enough to attempt. However, a health crisis offers the opportunity for a fundamental reshaping of the health sector. The same goes for government finances, its hard to take away MP’s perks, the cars of senior civil servants, cancel the vanity project of politicians. However, a public health and economic crisis can serve as a valid reason to cut the fat that will not elicit too many questions or a fightback.

Conclusion

Just as we cannot afford to be lax in how they respond to the crisis, African governments cannot be lax in how they deal with its economic consequences. Otherwise, an economic crisis will follow swiftly on the heels of the public health on. If we do not have a strategy to deal with it we may end up with an economic crisis that disrupts more lives than the Coronavirus.

As I have suggested in this article there are tools that the government can use over the short term to put more money in the hands of businesses and individuals. This can help spark a recovery. Over the medium, to long term, there are a number of policies that government can pursue to equip Africa economies with the tools they need to weather future crises as well as lay the foundations for a more robust African economy.

Crises suck, we have to ensure they don’t last longer than is necessary.

Which Way for Africa? Development Policy in a changing world

Global political-economic realities are shifting. China’s economic growth has slowed to its lowest levels in 26 years. And in the rest of Asia key economies such as India and Japan are also facing lower than expected growth. Germany, Europe’s biggest economy is cutting growth forecasts as the EU struggles to find growth and grapples with Brexit. In South America, the two largest economies of Brazil and Argentina are struggling with a recession and debt respectively. And while the US economy is riding high at the moment it is beset by recession fears, and dominated by nationalist sentiment. Politically, the geopolitical certainties that have defined the post-cold war world (a strong and engaged USA, a non-aggressive China, a stable Europe, powerful multilateral institutions, and global norms that are respected and adhered to) are crumbling. All of this implies that the global economy and geopolitics that will be less stable, less cooperative and more competitive, right at the time when the global challenges of climate change, inequality and poverty require cooperation and consensus.

These dynamics have significant implications for African policymakers and leaders. As Africa is confronted by a changing world, we need to change our approach to and strategies for our development. We must ask ourselves what these changes mean for Africa, and how can we, as African’s take advantage of the oppurtunites and mitigate the risks.

What does this all mean for Africa

For Africa, these shifting global dynamics have three significant consequences.

  1. The path to development exploited by the Asian tigers is likely closed. This path relied on increasingly open global trade and capital flows to drive export-led development and Foreign Direct Investment. Globalisation is under pressure from an increasingly protectionist developed world that is seeking to protect its own stressed working and middle classes by restricting trade (or engaging in trade wars) and the decline in the influence of global norms and institutions that had sought to broaden the reach of global markets. This means that development strategies based on the Asian model of export-led growth driving industrialisation, employment and growth are less likely to succeed.
  2. The increased geopolitical competition will see Africa become a stage for global power competition, as they search for access to new markets, resources and diplomatic allies. This dynamic is already in full swing if one looks at the competing Africa strategies of the USA and China and a new focus on Africa from the EU and Russia.
  3. The traditional multilateral forums and institutions, like the UN, World Bank and IMF that helped drive development and have in large part defined development economics and policies since the 1950s, are losing influence and relevance. This means (hopefully in my view) that there will be more space for innovative approaches to development.

A shifting approach

A changing world requires a changing approach to the world from Africa, including our approach to development.

More space for new thinking

As stated earlier, the global multilateral institutions that have defined development thinking for decades are losing their influence and thus relevance. Beyond this, the great powers (namely the USA, China, EU and Russia) are primarily focused on domestic issues like faltering growth, fractious populist politics, inequality, and geopolitical competition in the Middle East and Pacific. What this gives Africa is the ideological and intellectual space to redefine development. Rather, than follow the lead of the World Bank or try to copy the Asian tigers, we have the opportunity to Africanise development (something I have previously talked about here). To decide what matters to us, how African’s envision their future and how we are going to get there.

Internal markets

As globalisation falters and countries become more protective around issues of trade, immigration and capital flows, we cannot rely on global trade and FDI to drive our development, something that African countries currently spend a lot of time trying to attract. Furthermore, outside of Asia, there are no significant high growth markets where we can build demand for African goods. What this means for us is that we can focus more attention on our own internal markets. On policies that foster intra-African trade, promote the growth of SME’s, enhance Agriculture, investing in science and technology and face up to the challenges of climate change together.

Focusing on our own markets and fostering growth that isn’t dependent on western capital looking for returns or Chinese demand for raw materials, will likely prove to more sustainable over the long term. It won’t be instantaneous and no one should expect miracles in the short term, but African markets are one of the last underdeveloped markets with high growth potential if we do not take advantage of our own markets someone else will.

Engaging smartly with competing powers

As the world shifts from being a unipolar dominated by the west/USA to one where there are competing world powers and interests, African leaders would do well to learn from the lessons of the cold war, and not latch themselves to one side or the other for better or worse. Rather, we need to understand and engage with the West and East strategically and cooperatively, acknowledging our own relative weakness in terms of economic, political and military power and having very clear achievable strategic goals. Using, smart consistent engagement with world powers to get the capital we need to help fund development.

A whole new world

A changing world can be seen as a problem or an opportunity. For Africa, I see it as an opportunity. One where we can reshape the development of the continent to one that happens on our own terms with the benefits accruing at home. However, it will be a problem if we do not change our approach to engaging with the world and development in a new global context. We may find ourselves at the mercy of global powers, with wasted investment in development strategies that are not applicable anymore. For the opportunity to become reality will require a coherent vision and then the boldness and imagination to execute it from our policymakers. Something, I have no doubt the continent possesses, the trick will be to harness it.

Africanising credit – Financing SME’s

Agriculture and SME’s (small and medium enterprises) are the backbone of Africa’s economy and societies. SME’s make up to 90% of all businesses in sub-Saharan Africa[1]. In Ghana approximately 92% of all local businesses are SME’s, providing up to 85% of manufacturing jobs in the country and contributing about 70% to the country’s GDP. In Nigeria, 37 million SMEs employ about 60 million people and account for about 48% of the country’s GDP. In South Africa, there are more than 2.2 million SMEs, about 1.5 million of them in the informal sector. As much as governments around the continent are looking to industrialise through attracting investment in large scale manufacturing, we cannot develop without our SME’s. SME’s provide the livelihoods for a significant number African’s and if they succeed, African economies and development will succeed.

However, SME’s also face an incredibly tough time. In South Africa, the Department of Small Business Development estimates that between 70%-80% of SME’s do not make it past their first year. In Kenya, the National Bureau of statistics found that at least 46% of Micro Small and Medium enterprises do not make it past their first year. What is preventing them from succeeding? Among the multitude of factors (some covered previously on this blog), one of the biggest is credit. The London Stock Exchange estimates that African SME’s face a funding gap of at least $140 billion African businesses find it incredibly hard to access credit, and credit is the fuel of the modern economy. Without credit, there is no safety net for businesses and farmers when things get a little tough. Without credit, it’s hard to fund growth and innovation. Without credit most businesses and farmers are limited to subsistence, to just surviving, because to develop we need those businesses to thrive.

Thus, the policy question becomes what can be done to ensure more credit gets to the SME’s. If the financial sector is not fit for purpose, how do we move beyond traditional definitions of collateral and banking to kickstart credit to these key sectors? The answer for many governments around the continent and development finance institutions (DFI’s) has been to try some sort of SME financing scheme such as giving banks money or guarantees to lend money to SME’s. However, this hasn’t worked, thus what’s needed is a new approach, based on evidence that takes advantage of new trends and technologies and thinks beyond banks. If so, the continent may be able to turbocharge their economies by enabling businesses that actually exist rather than those they hope will be created.

Understanding SME’s financing needs

Knowing that there is a problem and understanding the nature of that problem are two different things. Judging by their rhetoric, African governments understand the importance of SME’s to their economies and are more than willing to make commitments to improve their lot. However, before making promises to SME’s and formulating policies on the basis of those promises it is necessary to understand SME’s needs.

Thus, the first thing that African governments must do as they attempt to unlock the financing problem that SME’s face is to talk to SME’s. Understand whether the majority SME’s need financing to fund their day to day operations (working capital financing), credit to invest and grow their businesses, or trade financing to help fulfil orders or ensure that they have sufficient levels of stock. Secondly, governments need to understand how much money different types of SME’s actually require. Understanding the financing needs of SME’s will enable governments to design or enable solutions that SME’s actually need. Third, is for governments to understand the participants in the SME sector. Such as the nature of formal and informal player, the challenges facing SME’s in different sectors such as manufacturing, agriculture or the arts, the region of the country they are in etc. If the rhetoric of African governments is to become reality and SME’s are really going to be empowered African governments would do well to make a good faith effort to understand them properly first.

Beyond banking

As stated earlier many of the efforts to jumpstart SME financing have involved banks, with governments and DFI’s providing lines of credit or guarantees specifically earmarked for onward lending to SME’s. Around the continent there exist a plethora of government-owned development banks, private banks, and funds whose sole purpose is to lend to SME’s and start-ups. What’s clear is that traditional funding models (a bank loan) are not necessarily meeting the needs of African SME’s a report by the London Stock Exchange Group has placed the funding gap for African SMEs at more than $140bn. The report goes on to point out that among the key hurdles to SME’s accessing finance are:

  • Onerous credit checks from banks (especially foreign banks) restrict SME participation as SMEs often lack the track record and meaningful data inputs required.
  • Credit Bureaus (where defaulters are blacklisted) have, rather than de-risking credit, turned into a negative reinforcement tool as smaller companies run the risk of being ‘blacklisted’ if a single loan repayment is delayed.
  • Prohibitive collateral requirements: lenders seek high levels of collateral to mitigate the high risk associated with lending to SMEs

It may be time to think beyond bank loans when we ask how we can provide African SME’s with viable sustainable credit options. Across the continent, digital and mobile-based lenders are helping to fill the credit gap with innovative and ever-changing credit risk models allows them to better understand credit risk. Allowing them to lend to small business owners, traders and farmers to access short term credit. Often referred to as short term credit, this type of lending allows businesses to meet short-term funding gaps. For example, if an agricultural produce trader wants to stock for the day or week, they are limited to buying only what they can afford at that particular moment in time. However, with access to short term credit they can borrow, buy more produce, sell more produce and at the end of the day after paying the loan back they have made more money. This is not an abstract example it happens every day, especially in Kenya where mobile lending is now common. If banks are not willing to fill this gap, what policymakers and regulatory bodies such as central banks need to do is think about how we can we enable digital lenders to better meet the needs of SME’s. What regulations, consumer protections and standards do we need to put in place that will allow this industry to grow sustainably? Not just lending small traders but also possibly to larger SME’s enabling them to meet their own short-term finance needs.

Secondly, governments should start thinking about investing rather than trying to push banks to give out loans. In a previous post urging a rethink of industrialisation policy on the continent, I talked about the U.S. Governments Small Business Investment Company (SBIC) program to facilitate the flow of long-term capital to America’s small businesses. The SBIC either directly invests or facilitates private capital investment into Small businesses. Crucially these investments are long term giving small business the opportunity, capital and time to grow. Though it has lost money on some investments its investments in companies like Apple, FedEx, and Whole foods outweigh any losses made through the profits, jobs, Intellectual property and innovation that have brought trillions of dollars’ worth of wealth to the US economy. African governments must show the same willingness to invest in African businesses as the private sector (banks and investors) have not done so yet and we cannot sit around hoping it will. Public agencies with a clear mandate to invest or encourage investment in SME’s which show potential for growth will have hits and misses, not every investment is a success. But every investment like this is a positive bet in the future of your country and its citizens, it’s a sign to others that there is a path for them too, but most of all it puts public money where it could do real good not locked in a bank vault.

Making things just a little easier

Teddy Roosevelt once said that “Nothing in the world is worth having or worth doing unless it means effort, pain, difficulty.” The same applies to running an SME in Africa. Business is not for the faint-hearted, nor should it be, but neither should it be filled with potentially moveable obstacles that make It nearly impossible to succeed. Africa’s SME sector is astounding. It has survived natural disasters and the disaster that has been government policy and ignorance of small businesses. If SME’s are to not just survive but thrive it will require governments to adopt policies that make things just a little easier for them outside of the easing of access to credit.

The first of those policies is a tax. Africa’s tax systems tend to be overly complex and burdensome. With businesses often having to pay multiple taxes, that they can ill afford. Simplifying tax systems to be coherent and so simple, so that they can be understood and paid easily should be a priority. If not, many SME’s will either avoid paying taxes or struggle under the burden of being law abiding citizens.

Second, trust. A public register where key information about companies is available to banks, lenders, governments, investors, customers, etc. to have some trust in the credibility and trustworthiness of these companies.

Third would by altering our laws, specifically our employment laws to fit the reality of SME’s and labour in Africa rather than acting as if all employers were large corporations. I have written more extensively on that here.

Finally, is training and networking. Facilitating the training around financing, marketing and tax/regulatory compliance could equip SME’s with tools they need to succeed and enable them to make better use of the funds they do manage to get. Networking is simple, merely using the government’s power to bring people together, to bring SME’s, investors, financiers and potential customers together, and letting them do their thing.

Creating the right environment need not be complex, a few concrete policy actions from the government would act as a stimulus to SME’s and those that may provide credit to them, making things just a little bit easier.

Conclusion

SME’s are the lifeblood of African economies. They provide livelihoods to hundreds of millions around the continent, and alongside agriculture, they are the key that will unlock Africa’s economic potential. To do that they will need access to credit. Thus far efforts to improve credit provision to SME’s on the continent have not been as successful as hoped. This calls for some new thinking; thinking based on a deeper understanding of the challenges facing SME’s. New thinking about how we can move beyond the limitations of banks to harness new technologies and approaches to provide credit to Africa’s SME’s. And to Identify and implement the key policy interventions that governments can make to provide the right environment in which SME’s can thrive.

If we get this right, if we can get SME’s to thrive, then Africa Rising won’t be an old meme but a future reality.

[1] https://www.ifc.org/wps/wcm/connect/REGION__EXT_Content/Regions/Sub-Saharan+Africa/Advisory+Services/SustainableBusiness/SME_Initiatives/

Seizing Africa’s Climate change opportunity

Saving our planet, lifting people out of poverty, advancing economic growth… these are one and the same fight – Ban Ki-moon former UN Secretary-General

On the 8th October the UN Intergovernmental Panel on Climate Change released a report and  its frightening. The report warns that there are only 12 years for global warming to be kept to a maximum of a 1.5C rise set by the Paris accords. Anything beyond that will radically increase the risks of flooding, droughts, and extreme heat. Keeping warming to 1.5C is possible but will require concerted global action, something that has been elusive thus far.

For Africa the situation is dire, the continent will bear the brunt of climate change. As CarbonBrief  points out the heat waves will get hotter, the rainy seasons will become more erratic and droughts more likely. For a continent largely reliant on rain fed agriculture it means yet more cycles of drought and famine. The implications of climate change for Africa, if we do nothing, will further entrench poverty for another generation, and displace millions creating climate refugees.

However, this does not need to happen. Climate change is not a good thing, but as the saying goes ‘you should never let a good crisis go to waste’. Climate change is a crisis for Africa, but it is also an opportunity. Rather, than hold out our proverbial begging bowl for money and technical assistance to foster resilience, which is the strategy of most African governments at climate change summits. We can use climate change as the spark for transformation, as we actively seek to mitigate its effects and minimise the continents contribution to climate change. It can be an opportunity to harness science and technology and equip our farmers with tools to feed the continent in an era of shifting weather patterns. To leapfrog fossil fuel energy and lay the foundation of Africa’s economic and social development on green sustainable energy. And to take up the mantle of leadership where the worlds advanced nations have failed to do so. In previous posts (here and here) I have advocated for a conception of development in Africa with the dignity of all Africans as its core goal. Anybody thinking about development in Africa in the 21st century has to account for climate change, as climate change not only endangers our environment but our development and dignity as well. However, with smart, forward-looking policy it need not be a disaster.

Harnessing science to transform agriculture

Agriculture is the employer and source of livelihood for about 60% of the continent. The impact of climate change on agriculture in Africa will be significant and we are already seeing it. This is only the beginning, as pointed out earlier, the bigger the increase in warming the more pronounced these effects will be. This poses a challenge to African states, farmers and consumers; how can we ensure that we can grow enough to feed a growing continent. A large part of that answer lies in investing in science and technology to empower African farmers. To give them the tools (such as GM crops which I have written about previously) that can handle the changing climatic conditions and boost yields. Using technology to give farmers better knowledge about weather, soil and water conditions so they can improve yields, access to markets so they can get the best prices, and access to storage facilities so that we can cut post-harvest losses.

Investing in science and technology would not only help farmers and feed the continent it could provide the push we need to grow our scientific and technological capabilities on the continent. Industrialisation, development, science and technology are intimately linked and if Africa is to succeed in the 21st century digital and knowledge economy it must develop its STEM capabilities. Confronting the challenges of climate change, such as the ones it poses to agriculture could be the African moonshot, that spurs innovation and industry throughout the economy.

Leapfrogging dirty energy

Leapfrogging is the idea that less developed regions, countries or companies can advance rapidly through the adoption of modern systems without going through intermediary steps. The classic case of this in Africa is mobile phones. Mobile phones allowed most of the continent to skip expensive copper land lines, and the embrace of the technology has revolutionised many aspects of life and the economy. Like phone lines we have the ability to leapfrog fossil fuels. Renewable energy is now getting to a stage where they are almost as cheap and will soon be cheaper than fossil fuels. There are some who would argue that fossil fuels like coal are cheap and readily available, however that is increasingly untrue and African countries have free and broad access to the sun and wind. There are others who argue that developed nations used fossil fuels to industrialise and thus why should Africa be disadvantaged by not using them. But that sounds like a petulant child arguing that they too should be allowed to misbehave because everyone else did, frankly Africa has to be better than that. By investing in green ways of generating energy and innovative (e.g. mini-grids) of getting it to the people who need it, Africa can lay a sustainable foundation for its development. We can leapfrog the dirty fossil fuel generating plants and possibly even the expensive centralised electricity grid systems, most importantly we can develop our economies not at the expense of future generations but with their welfare in mind.

Leading the world

We may be a poor continent but that does not mean that Africa cannot lead on key issues. From the 1960’s onwards African nations led the international and diplomatic fight against apartheid South Africa. Boycotting international events, helping South African exiles and the ANC, getting the apartheid government banned from international fora and sports, sanctioning and boycotting their economy, it took a while eventually the rest of the world caught up and the apartheid system fell. The developed world has displayed a remarkable lack of leadership on the issue of climate change. Australia and the USA have leaders in charge who, despite the mass of evidence, deny climate change. Canada and the EU talk a good game but are yet to make those hard choices that would have a real impact on carbon emissions (like taxing carbon). There is a gap which Africa could fill. With policies, like putting a tax on the carbon emissions content of imports. with actions and putting our money where our mouth is, such as investing in green energy instead of fossil fuels. And smart diplomacy – combining our voice on the global stage to help build consensus, shame others into action and forge constructive engagement with the issue of climate change. Not all global leadership issues require a big wallet, or a big gun, determination and concerted effort can make a difference. This is not just wishful thinking on my part, as the continent in line to bear the biggest impacts of climate change, utilising whatever influence we may have to get global action is effort well spent.

Climate opportunity

The 2018 winners of the Nobel prize for economics were Paul Romer and William Nordhaus. Both won for their work on economic growth over the long term and though they did not work together, the work they did does dovetail. Romer’s work looked at how innovation and new technologies come about, and he found that by investing in innovation (like funding research and development initiatives) you can boost economic growth in the wider economy. Nordhaus’ work looked at the connection between the economy and the environment and the impact of climate change on the economy and wider society. Their work comes together in a rather simple way, to combat climate change, to shift our societies and economies to low-carbon ones, will require innovation, new technologies and new policies. We need to invest in the knowledge and ideas that will combat and mitigate the effects of climate change.  Most importantly what Nordhaus and Romer’s work suggests is that by investing in knowledge and ideas and implementing them you can generate long-term growth. Thus, by combating climate change we could actually stimulate economic growth.

For Africa this is an opportunity to do the right thing for current and future generations, and to lay the foundation for the development that we have been chasing for the last half century. Climate change could be a disaster for Africa, or it could be the thing that forces us to pursue a path that leads to long-term, sustainable growth. It will require us to be innovative with our policies, to rethink our ideas of development and industrialisation and to invest in the ingenuity, knowledge and innovation of African’s from all walks of life. Climate change will be one of the defining issues of the 21st century and Africa faces a choice, we can be a victim, or we can take the initiative, take responsibility and make it the springboard to a sustainable successful future.

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

Avoiding Demographic Doomsday: Redefining Employment in Africa

One of the central challenges facing much of Africa is unemployment, in particular youth unemployment. The African Development Bank estimates (see figure 1) that of Africa’s approximately 420 million young people (aged between 15-35) only one-sixth (16.6% or 70 million) are in formal employment. One-third are partially or vulnerably employed, and half are not employed at all. That means 140 million young African’s are at risk of losing their job at a moment’s notice and 240 million have no job and little prospect of one.

(fig.1. source African Development Bank)

This is a disaster. Half of Africa’s youth, their potential contributions to society and personal dignity and well being, is wasting away. Is it any wonder that these young men and women are risking life and limb on horrific journeys to try and get Europe for the prospect of a better life?

This though, is only half of the story. Africa’s youth population is expected to double to over 850 million by 2050. If the continent cannot find a way to harness the potential of its youth, then the continents demographic dividend could turn into a demographic doomsday. As young unemployed Africans with no stake in the economy and no prospect of a better life turn to dangerous radicalism, extremism or crime as a way out; migration will be the least of our worries.

Thus, the question becomes how do we avoid this demographic doomsday scenario? One answer is to rapidly grow the formal economy and employment via industrialisation. This is the path that much of the continent is trying to pursue. Investing in infrastructure, ease of business reforms, business incentives and trade expansion, all aimed at spurring economic growth and employment. Frankly, it has not been enough. While growth has been positive it has not been at the rate we need, and not nearly enough jobs have been created.

What is needed is a policy for the biggest non-agricultural employer on the continent, the informal sector. The majority of those in informal business (and many with jobs who have a side hustle) depend on the informal sector for their livelihoods.

Alongside agriculture, the informal sector is the foundation of the African economy and its time our policies and laws caught up to that reality. Doing so would help solidify fragile livelihoods as well help drive growth and opportunity in the economy. We can start by changing our laws to redefine employment to include the informal sector and investing in the skills, knowledge and capabilities  of those in the sector.

The Informal Sector in Africa

The informal sector can be broadly defined as activities or enterprises that produces and sells good or services but are not formally registered and do not pay taxes.

The International Labour Organisation (ILO) estimates that the informal sector represents 41% of GDP on the continent and 66% of total employment in Sub-Saharan Africa and 52% in North Africa, and that eight in ten (80%) of young workers end up in the informal sector. These figures tell us an important fact about the reality of employment in Africa, that most people earn their livelihoods through their own ingenuity and drive, hustling, and either working for or running small enterprises, they don’t have an employment contract or get a pay check. Thus, the laws, regulations, and protections of labour and employment laws are irrelevant to them. The second key thing that stands out about Africa’s informal sector is its resilience and adaptability. It has survived the ravages of one party States and dictators, near collapse of the economy in the 1990s, endemic rent-seeking and corruption, changes in weather patterns and the cycles of economic booms and busts.

It is time that government policy focused on enabling, harnessing the sector by integrating it into the wider economy, not at the exclusion of wider policy goals such as industrialisation but as part of it.

Redefining Labour and Employment

The first step to integrating the informal sector and the people in it to the wider economy is through legal definition and recognition. Just as labour and employment legislation across the continent recognises, regulates, and protects people in formal employment; similar legislation for informal sector could provide the people and businesses in it with legal protection and a foundation upon which they can build and grow.

Informal sector legislation and policy would not simply be applying the rules of the formal sector to the informal sector (which would be ignored anyway); rather it should be crafted for the needs of the informal sector and would include the following:

  • A valid legal definition of an informal sector business and job with a simple way of registering it. Registering an informal business should be as easy as getting a SIM card or a mobile money account. The goals are not to tax or regulate the sector but for registration to be a gateway to the enabling and protective elements of the laws and policy.
  • Simplified contracts and small claims courts. A constant risk in the informal sector is that you do not have the protection of the law, if you make an agreement with someone to buy or sell something it is based on their word alone. Providing a simple contract template that all can use gives buyers’ and sellers’ basic rights (such as refunds on non-delivery of goods or services). A small claims court to enforce disputes under these specific contracts quickly (rather than the expensive, laborious and slow normal court system) would engender trust and facilitate business.
  • Banking and credit access. Make it possible for informal enterprises to use their registration to open bank accounts, access credit and use their assets (e.g. a motorbike) as security for loans.
  • Provide access to national health, pension and welfare schemes. Most national health, insurance, pension and welfare schemes are based on a (formal) employee contribution model, where a portion of your salary is contributed to various schemes. On a continent where most people are not in formal employment it means that these schemes are underfunded, and many do not include everyone. Providing a way into these schemes for the informal sector like a simple subscription or yearly fee would be a way to both expand them to the wider population as well as boost their funding
  • Allow informal employees and businesses to organise. Allowing the informal sector to form co-operative societies, unions and associations would open new avenues to credit (through the pooling of savings in co-operatives), better working conditions and more powerful voice to advocate for their interests.

Legal definition and recognition opens the door to the protection and progress of the livelihoods that depend on the informal sector. Laws may be boring, but they are crucial.

Capacity Building

Legal recognition is only half the equation, for the informal sector to move from being a source of subsistence for individuals to a source of growth for the economy. Africa needs to give the people in it the tools, skills and knowledge to create, recognise and take advantage of opportunity.

The first aspect of capacity building is coupled with legal recognition. Changing laws is ineffective if the people they are aimed at are not aware of the changes and how to take advantage of them. Thus, the capacity building exercise would be a public education exercise, focused on making people within the sector aware of the changes and how to take advantage of them.

The second is around skills and knowledge training. Putting together programs that train people on key aspects of business administration, opportunity identification and marketing, crucial skills needed if they are to successfully invest and expand beyond subsistence.

The Informal Economy as an Opportunity

Most policies that African governments have come up with around the informal sector are focused on formalisation and extracting taxes and most policy around employment growth is focused on expanding formal employment. While these goals make sense, they ignore the reality of the crucial role that the informal economy plays in livelihoods and the economy of Africa.

Employment in the informal sector is not wrong or inconvenient, it is normal for Africa. And, for Africa’s development to be truly African it must not only be led by Africans but work for the majority of Africans, many of whom are employed in the informal sector.

Few if any of the development initiatives pursued by governments and institutions across the continent are aimed at furthering this sector. This approach ignores and underserves a sector which has been the foundation of the African economy, which has, since independence proven to be resilient, innovative and frankly, African.

Redefining employment in Africa to recognise and support the informal sector will not hamper or stop industrialisation or the growth of formal employment. Rather it is about understanding that the giving the hundreds of millions of Africans whose lives depend on the informal sector a stake in the economy and the opportunity to grow, is not only good for the economy it is good for people, and if that is not what development policy is about it is what it should be about.

 

Africa’s Development Begins with Agriculture

 

“It is time to change the way we think. Farmers are not the cause of Africa’s poverty; they are a potential solution. They are key to creating the future envisioned by the SDGs.” — Kofi Annan, former UN Secretary General

The development narrative in Africa is dominated by two key strategies. The first is massive infrastructure investment and development and the second is big top down policies broadly seeking to achieve the Sustainable Development Goal’s (SDG’s). Neither of these two strategies are inherently wrong, Africa needs infrastructure to ease and stimulate commerce, trade, industry and to make people’s lives easier. In addition, the SDG’s are laudable and the goals they seek to achieve would undoubtedly make millions of lives better. However, this approach has reinforced a problematic issue in Africa’s economic story, the failure to put agriculture first. Agriculture, in particular small holder farming was and remains the largest economic sector on the continent, thus its development or lack of has a significant impact on the development trajectory of the continent. The policies and strategies adopted by many African governments at independence (and that many governments still profess today) saw smallholder agriculture as secondary to industry and were in many cases hostile to small farmers. In doing so, the core of the African economy and its engine of development was undermined. In Asia the opposite approach was taken came agricultural transformation took place before industrialisation providing the foundation of the Asian miracle. In a previous post on reimagining industrialisation I urged that we start seeing agriculture as industry, which would not only need African countries to step back from the policies that have failed the continent for the last 50 years but enact a set of policies that would empower farmers, improve livelihoods and drive growth and development.

Why agriculture

The primary reason for focusing on agriculture is its importance on the continent. Today much as at independence, agriculture remains central to the African economy accounting for over 60 percent of jobs and a meagre quarter of the continent’s GDP. The poor performance of the sector is illustrated by the fact that 90 per cent of those living in poverty are engaged in farming,[1]. If nothing else agricultural transformation in Africa would not only benefit the most people but also those who most need help.

Agricultural transformation, which we can define as the process by which the sector evolves from being subsistence and farm focused to one that is more productive, commercialised and linked to the non-farm sectors of the economy at the core of economic development. First off increases in productivity also means GDP growth (remember that GDP is the measure of the value of everything produced within an economy). Secondly, as productivity increases so does farmer income, when most of the population is involved in agricultural production these income increases have multiple positive impacts on the wider economy. Increased income means rural populations have more cash to spend and they will most likely spend that income on more local goods and services. Increased demand for local goods and services, as Africa tries to kickstart manufacturing and other industries a local market to sustain those industries is crucial and farmers with increased incomes could provide that mass market. In addition increased agricultural income generates savings, savings are the basis of investment in an economy as it what banks use when they lend money to businesses. Third higher agricultural productivity has benefits for urban populations as well, increased productivity increases the supply of and brings down the price of food, thus bringing down the cost of living. Crucially, this pro-poor developmental stimulus performance of agriculture requires the participation of small farmers, small farmers dominate agriculture in many developing economies and it is their transformation from subsistence to market participation, productivity and income gains that are the precursor to development. This process was what happened in East Asia where the technology of the green revolution combined with supportive government policies and land reform kickstarted rural economic growth, stimulating demand for local non-farm goods and services and providing the basis for industrialisation

What happened to African agriculture?

The lack of transformation in the agricultural sector since independence has had significant impacts on development on the continent. Between 1960 and 2000 agricultural productivity grew at a paltry 0.6 per cent in sub-Saharan Africa compared to 3 percent in developing countries as a whole, this can be seen clearly in the graph below comparing African and Asian agricultural productivity.

So, what happened to African agriculture, in short bad policy. At the core of the African economy at independence and today is agriculture in particular the small-scale farmer. However rather than enacting policies that would have supported farmers, increasing productivity and its associated increases in spending and saving African governments sought to rapidly modernise their economies. In this vision of modernisation, the focus of the economy is industrial, manufacturing and urban. The policies that this view entailed placed a significant burden on the agricultural economy of African countries, where governments not only underpaid farmers for their produce, but sought to extract revenue to fund industrialisation as well as keep the cost of living down for people in urban areas who worked in those industries. The creation of state corporations whose mission was to industrialise African agriculture into large-scale commercial farming not only failed but became avenues for rent seeking and corruption. It was not long until farmers retreated from markets to subsistence farming and parallel markets. As African agriculture was pushed into crisis by bad policy, African economies lost their primary source of growth. Africa’s development failure is rooted in the failure of its agricultural sector whose origins are to be found in the agricultural policies pursued by African governments, thus overturning these policies should be the first step towards reversing that failure.

New policies for agricultural transformation

If past agricultural policy in Africa provides a handbook on what not to do, then what policies should African countries be looking at to make agriculture an engine of growth. These policies must be aimed at assisting farmers in increasing productivity and connecting them to markets so that the wider populace and economy can benefit.

  • Assisting farmers

At the core of agricultural transformation is the farmers who work the land and the first policy should be providing them with the assistance they need. Rather than telling them what to do or grow (as has been done in the past) farmer assistance should be aimed at providing farmers with the skills and tools. At the core of this would be extension services which consists of farmer support through education, support and advisory and these would include:

  • Education and advisory services on the science and technology of farming such as water and irrigation, soil types, what to consider when choosing a crop to plant, what to consider when acquiring fertiliser, certified seed and where to get it.
  • Sustainability strategies on how to maintain your soil, prevent erosion and depletion.
  • Making farmers aware of market opportunities and government programs and services which they can take advantage of.
  • Facilitating the organisation and cooperation of farmers so that they can share knowledge and skills with each other and possibly enable farmers to form cooperatives or commercial groups to gain more favourable trading terms.
  • Deploying agricultural extension officers to rural areas employed by the government who can provide ongoing advice and support to farmers.

Farmer assistance policy would be aimed building the capacities of farmers to take initiative and improve their farms how they see fit, building on the expertise provided through the training and education and the experiences of their fellow farmers. In short it is about enabling farmers to be better farmers rather than old policies which tried to dictate to farmers the right way to farm.

  • rural infrastructure

As mentioned earlier much of the continent is on an infrastructure building binge, however most of that infrastructure is big infrastructure such as powerplants, railways and highways meant to facilitate international trade and industry. However, the rural and agricultural economies also need infrastructure, namely roads and storage facilities. Rural roads will help connect farmers to a higher number of potential markets and cut transport costs for agricultural goods, which will help reduce the cost of food.

Storage is crucial, post-harvest losses (agricultural produce lost between the farm and its final destination) in Africa are significant. The Food and Agriculture Organisation of the UN estimates that “sub-Saharan Africa food losses of about 20 % for cereals, 40%-50% for tubers, fruits and vegetables, 27% for oilseeds, meat and milk, and 33% for fish, that has an expenditure evaluated at US$4 billion per year – enough to feed at least 48 million people, equivalent to the population of Angola, Zimbabwe, Swaziland, Namibia and Malawi all together.”[2] Proper, affordable and widely available storage is key to ending losses and preventing produce from rotting due to a lack of refrigeration or unsuitable storage conditions. Preventing post-harvest loss through the provision of adequate storage facilities is the simplest way to increase productivity and improve farmer incomes. Governments have multiple options available to do this such as building public storage facilities, or incentivising the private sector to invest in storage solutions

  • Embrace science and technology

In the early sixties India was on the brink of famine and in search of a solution. The ministry of agriculture invited a scientist Norman Borlaug who had been working on new high yielding strains of wheat and rice and they soon adopted new 2 “miracle” rice variety. By the 1990s rice yields per hectare had risen threefold and India had gone from near famine to one of the worlds major rice producers and exporters. This is the story of the green revolution, where new technologies and research in agricultural science were successfully transferred to practice boosting productivity particularly in Asia where like India, many countries faced the spectre of mass famine. In 1970 Norman Borlaug was awarded the Nobel Peace Prize for his work in helping to feed the world. Much like Asia in the 1960’s Africa must pursue and embrace agricultural science, with climate change and shifting weather patterns farmers around the continent are facing significant challenges. If productivity is to be maintained and improved for an ever-growing population farmers will need new tools particularly those that science can provide such as drought resistant higher yielding crops. For this to happen African governments have to put more money and effort behind the agricultural research institutes and agricultural departments in African universities to come up with the tools that African farmers can use. If African governments don’t do this someone else will and they will own the rights to those innovations, making African farmers more dependent on foreign companies. New seed varieties, and technologies funded by African governments can be sold to farmers and licensed to African companies at much lower financial cost and without the strings attached to global multinational corporations.

Agriculture as the foundation for development

If Africa’s growth failure lies in policy that marginalised agriculture, the implications of this should be clear to policy makers on a continent whose economies are still agriculturally based. If, as the World Bank puts it, Africa is to claim the 21st century[3] then African governments must realise that industrialisation is not achieved without agriculture but rather with agriculture at its centre. As East Asia’s did, Africa’s agriculture sector holds immense potential not just for growing produce but for value addition (processing and marketing of agricultural products) and stimulating the wider economy. Boosting productivity would boost incomes, savings and quality of life for most of the population and the multiplier effects could spark the very industrialisation that African leaders sought at independence and still seek today. Agriculture can drive Africa’s development, but only with the right policies, policies that place the Africa’s farmers at its centre.

[1] Africa Development Bank Group – p.11-12 https://www.afdb.org/fileadmin/uploads/afdb/Documents/Policy-Documents/Feed_Africa-Strategy-En.pdf

[2] http://www.fao.org/africa/news/detail-news/en/c/445333/

[3] http://siteresources.worldbank.org/INTAFRICA/Resources/complete.pdf