Category: Policy

Forging social safety nets for Africa

Social safety nets are often seen as luxuries for rich countries. However, as we Kenyans say “2020 has shown us things”. Across Africa, the coronavirus has seen governments across the continent implement a raft of measures to cushion their citizens against the socio-economic impacts of the coronavirus pandemic. For instance, Togo rolled out an expanded digital cash transfer program called Novissi and South Africa has expanded its existing welfare and unemployment benefits system. And these are not isolated policies. Having shown that social safety nets are possible. The question shifts, from can Africa have social safety nets, to what should longer–term African social safety nets, that alleviate poverty and confer dignity look like. 

The need for a social safety net  

 The world of work and employment is changing. Formal employment is less common, and most Africans do not earn a living in formal jobs with regular paychecks. The informal jobs and agricultural work that provides the bulk of jobs on the continent often provide uncertain incomes. Compounding this is the fact that African socialism (also known as the black tax) is becoming harder. Incomes are more and more stressed, and it is becoming harder for individuals to extend support to the family, and the community that has in the past functioned as an unofficial safety for many.  

What is needed is an expansion of the African community spirit of Ubuntu to the core of our formal social contract, with the state through well designed social safety nets, and we can do this by designing and implementing sustainable safety nets.   

Defining a social safety net  

 The start of designing a safety net is defining its purpose. Which should be, in my mind, at its core about putting in place a floor beneath which society says its members cannot fall. It is not intended to replace work, or even disposable income, but rather to ensure that people do not fall into deprivation and desperation.  

The second critical issue is simplicity, which covers two key issues.  

1 – Simplicity of targeting. That the people for whom the safety net is intended are clearly defined, e.g. households that earn less than a clearly defined threshold, or even all adults over the age of 18.  

2 – Simplicity of access. A social safety net does not function if the people it is meant for cannot access it. Thus, unlike countries like the USA or UK, we cannot develop notions of the deserving or undeserving poor, which lock millions out of critical support. Thus, the means of accessing these support systems must be easy to understand, easy to find and easy to navigate.  

The third critical issue is the sustainability of funding. This means identifying and defining a long-term funding mechanism. Not a donor or simple year on year budget allocation that is subject to political changes every year. But a dedicated mechanism like a specific tax, or a percentage of royalties from natural resource extraction, will ensure significant funding over the long term. In addition, a broad, sustained funding mechanism fosters a broad feeling of everyone having skin in the game and creates broad social and political support for a safety that will ensure its long-term acceptability and stability.  

Forging the net  

So, with those critical elements in mind, what does an African social safety net look like. Each country would undoubtedly choose its own unique combinations, there are options on the table that are doable and can be made distinctly African. Not copying western systems but shaping them to our needs. Such as a universal health care system based on the provision of quality primary healthcare, that cushions people from the often crippling costs of healthcare and vastly improves the quality of life. Or a basic minimum income that lifts people out of poverty and gives them a basic level of peace and dignity. Or even community/locally based support systems that are run and funded by communities and directed to the things and people that they consider most pressing with central governments providing additional funding.  

Social safety nets are not a panacea for the socio-economic problems that the continent faces. However, they can be an important piece of the suite of solutions that drive our development. But beyond that social safety nets can reshape the relationship between African citizens and their governments. Moving away from the colonial relationship that, persists in far too many countries of the ruler who sometimes hands out goodies to the ruled masses. To one based on the government genuinely looking out for its people, recognizing their dignity, and placing it at the core of our development.  

Where next for Africa: a new vision for new development policy

As Africa continues to battle the public health crisis and the socio-economic impacts of the COVID-19 pandemic, I have been amazed, befuddled and despondent all at the same time at the responses we have seen. How African medical professions have responded and coordinated with resources and budgets that are tiny in comparison to their international counterparts. How nations like Togo have moved to cushion their citizens and the ingenuity and innovation shown by individuals and companies have all given me hope. The hope that we have the imagination, drive, and generosity to confront and overcome any challenge. However, the police brutality and human rights abuses and in some cases the outright denial of the virus by some has also given me pause for thought and reminded us how easy it is for our demons to take advantage of a crisis.  

Like many, in both my work and my writing I have been preoccupied with, as Dr King once put it “the fierce urgency of now”. How do we stop the virus, protect livelihoods, and reignite our economies? These are all valid concerns that deserve significant thought and effort. However, it strikes me that we also could and should be thinking beyond the pandemic. Crafting a vision for our continent that takes advantage of the extraordinary opportunity before us.  

The global pandemic has broken norms, systems, and preconceptions, which had limited the range of possible actions and policies we were able to pursue. Out of crisis comes opportunity. 70 years ago, Europe used the devastation of a world war to remake itself as a bastion of social democracy and regional cooperation. That required vision. People who recognised that despite the devastation, there was an opportunity to break with the past and reimagine what Europe could be. And went on to sell those visions to politicians, and people to create a shared vision that could be worked towards. Today the member states of the EU may squabble, but they do not plunge into periodic globally destructive wars and their citizens enjoy a near border-less continent with broad strong social safety nets. 

What is our vision for our countries, regions, and continent? What can we rally around, work towards and achieve for us and our children? There is an opportunity to build a better Africa out of this global disaster and we must seize it.  

The system is broken, and the opportunity is open 

The global Coronavirus pandemic has fundamentally broken or changed a number of aspects of global politics, economics, and policy norms that Africa can take advantage of.  

1. Capitalism is being questioned  

Markets are powerful things that can do a lot of good. However, this pandemic has reminded us that when markets are skewed and inequalities exist those will be amplified by crisis, and, more fundamentally that markets cannot do everything. Public goods and services, like public health, cannot be privatised and subjected to market efficiencies without consequence. Markets must have limits. Out of their failure during this crisis, we can remake them, to be fairer and draw boundaries around where the logic of markets ends and the public good takes precedence and we can remake the social contract to have fair markets and strong public services reinforcing each other.  

2. Social safety nets are possible.  

Before the crisis things like basic income, housing for all, or UHC were all dismissed as too expensive, too unwieldy (especially for African governments) and potentially undermining hard work and personal responsibility. In a crisis that was no one’s fault, we have seen governments design and deploy large scale social safety nets like cash transfer programs and rapidly expand public health systems to protect the most vulnerable and deal with the crisis. This is can also be a reality beyond the pandemic, Basic incomes and universal health coverage can be done and will be powerful tools for ending poverty.  

3. We can make things  

The pandemic disrupted global supply chains and across the continent things that were once easy to import suddenly had to be made here. Lo and behold we have discovered that we can make things like Personal Protective Equipment, Ventilators and even our own tests. If we can make things, we must make sure we never end up in a situation where we cannot produce the medicines and medical supplies we need, where we cannot supply our construction industries or stock our shop shelves. In short, there is an opportunity to rethink our industrial policies (as I have previously written about) around industries and businesses that now recognise the need for resilient local supply chains.  

4. Corporate tax is cool again  

With all the government spending that is going on around the world, it will eventually have to be paid for somehow, and there are few better sources of revenue than the multinationals adept at gaming the system. As countries around the world clamp down on tax avoidance and evasion Africa can do the same. Reshaping its tax systems (as I have written about previously here) to tax profits where they are made. An Africa that can replace aid and debt with sustainable revenue is an Africa with her destiny in her own hands.  

5. Global political space 

Global geopolitics, for so long defined and defended by the USA is fragmenting. With the USA becoming more insular, China on the rise but untrusted, a Europe busy trying to hold itself together, Africa has an opportunity. To reject the notion that we are a playground for global power games and redefine ourselves as a leader on issues like climate change, tax and trade that have for so long befuddled others and negatively affected Africa. Even forge a new alliance with emerging and middle powers around the world who do not hold ambitions of domination but of shared prosperity and calm. 

6. We are young and hungry  

Millennials around the world are despondent cohort, our working lives defined by recessions, pandemics and polarising politics. However, in Africa, this is not necessarily the case. I am constantly amazed by the determination and refusal to give up that the continents young people display. Young African’s are inventing, innovating, and breaking barriers in culture, business, science, and politics. Rather than being depressed like our western counterparts we can be Generation Hope. We must harness the hustle, embrace the creativity, and nurture the deep yearning for a better tomorrow. A crisis of the magnitude we are experiencing now opens the door for us to experiment, to leap into the unknown led by a generation of hope.  

That vision thing  

In these opportunities, brought about by an unprecedented crisis, I see the space to construct a new development vision for our continent. A vision anchored in the dignity of our people. A vision that looks to achieve our own moon shots of ending poverty, disease, and desperation, where our fates are decided in our capitals rather than those in foreign lands. And where prosperity Is not built by climbing over the backs of others but through our innovation and drive that allows us to stand on the shoulders of each other.  

My writing usually addresses dry development policy subjects like budgets, trade, and labour policy, but fundamentally development policy is anchored in a vision of a better future. For the last 30 or so years, those visions in Africa have been stunted by uninspiring inhuman aims such as achieving middle–income status or industrialisation. The pandemic allows us to once again centre our development visions on the dreams of our people. Visions that we can identify with, rally around, work towards together and proudly proclaim our individual roles however small in achieving those goals.  

Without an underlying inspiring vision, our development policy is lost. It is misdirected into white elephant projects, filled with other people’s priorities, and spelled out in consultant gobbledygook and buzzwords. The crisis of the pandemic offers an opportunity to reclaim and reframe Africa’s development vision, let us seize it.  

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.

Good communication is good policy

In 2017, in his Jamhuri day (Kenya’s independence day) speech, President Kenyatta of Kenya announced his Big Four Agenda. To enhance the manufacturing sector, to build 500,000 affordable homes, to ensure all Kenyans are food secure and to build and deploy a universal health coverage (UHC) system to ensure all Kenyans have access to affordable health care. Since then technical committees have sat and designed the requisite policies, regulations and actions needed to make this a reality. However, in a recent conversation, I had with someone working on the UHC policy, I was struck when told that without better political support, and funding; UHC in Kenya would remain consigned to the realm of flowery speeches. A policy that could save millions of Kenyans misery and bankruptcy will die a slow death for lack of money and support.

Africa does not lack for good policy. Around the continent, there are reams of policy that could genuinely change people’s lives sitting on shelves in the offices of government departments, think-tanks, civil society groups and universities, all of them gathering dust. In the world of policy, good policy is often stopped by two things political reality and financial constraints. Ambitious policy rarely ever survives the gauntlet that those two constraints pose. In a previous post, I talked about reforms that would enable governments to better implement good and ambitious policy. In this post, I want to take a step back and examine how we can get good policy to the stage of implementation in the first place with proper funding commitment and political support built using effective and persistent communication

 

Embedding core policy support

Policy has to be sold. To the public, to those who will implement it, to experts, to civil society, to the media and even to digital influencers. This selling is done via communication with all those stakeholders. Crucially, this communication has to start before policy gets to the implementation phase. Public opinion has (as Samantha Power once put it) a circular problem. Circular, because public opinion is rarely roused on its own, it is usually provoked by public leadership (e.g. political or other community leaders making something an issue), and public leadership is usually itself provoked by public opinion (e.g. public outrage at a particular issue provoking a political response). Thus, when done properly, communicating policy is a journey. A journey that first builds a base of support for the ideas and goals behind the policy and how it is relevant and beneficial among key stakeholders. A presidential speech or two and some articles in the newspapers are not enough, you need to engage people who will form the core base of support in forums, spaces, and channels where they are comfortable and attentive.

Getting public support

Once you have that critical base of support you then need to sell your policies to the two most important groups of stakeholders; the public and people within government who have to implement it.

Effective broad public communication is not merely a matter of adverts or getting a popular musician or sportsman to tout a particular policy. It is a multi-channel and messenger affair. Rather than telling the public that some policy is good for them, you need to engage people, from the mass media right down to community forums and door to door campaigns. That way you build an understanding of the policy, its goals and benefits at an individual, community and mass level. By successfully selling a policy to the public, you can bypass the political viability problem. When people quote political viability as a problem, they are usually referring to the lack of political support for a particular policy. However, by building public support through smart and inclusive communications, you can create political viability through public pressure. And with political viability and support, you have the ability to get proper funding.

The people within the government are usually forgotten in policy advocacy campaigns, but it is crucial that you get the support of the people who will be implementing the policy. Do they understand it, do they understand the impact it will have on the lives of their fellow citizens, do they see what role they are playing in bringing those positive outcomes to life. If the people implementing the policy don’t buy into its chances of success diminish significantly. The people in government who are implementing the policy need to understand and back the policy because they, they are also the people who have to defend and sell those policies to the public and political policymakers and if they aren’t invested, then the investment of others likely won’t follow.

Communicating Policy Implementation and beyond

Getting support for a policy is not enough though. Communication does not stop at implementation. Rather communication is an essential element of implementation. Stakeholders and the wider public need to know and understand what is happening with a policy that they lent their support to, to get it off the ground. They need to understand what progress is being made, the successes, and achievements of the policy. Beyond keeping people up to date, this allows you to make mistakes, to withstand the inevitable missteps that happen in all complex programs. However, because you have been open and upfront with your stakeholders and the public about those mistakes and clearly communicated solutions for these problems, you will be in a much better position to recover from any issues with an understanding public willing to cut you some slack.

Communicating policy in Africa

African governments can be singularly terrible at communicating policy. Policy generally comes as a surprise, presented as a fait accompli something from on high that is good for development and thus good for you and you better not question it. Which ends up with people being suspicious about those policies, and the people who are charged with implementation see it as just another order they need to carry out (or look like they are carrying out as opposed to being invested in the policy and its success.

Policy does not sell itself, even if it is fantastic. It needs to be communicated to all the people that will be impacted by it. It’s an often-overlooked part of the policy process, especially in Africa. Around the continent, it’s not just Kenya attempting to implement some form of universal health coverage. South Africa is exploring plans, Lagos state is set to make it mandatory, Tanzania has a political commitment to do so. As Africa explores and tries to implement ambitious policies such as these, policymakers and governments need to understand that part of good policy is good communications. That through effective communication they can build broad effective support for their policies and in doing so create the political will that will give them the political and financial ability to actually implement them properly.

Public Service Reform – Making African Governments Work

A key element in development is effective government. Lots of countries around the continent have policies, plans and blueprints coming out of their ears, many of them fantastic. The problem is actually implementing these policies. Furthermore, governments are not just implementing agencies they also provide a range of public services to their citizens. However actually using these services often means navigating a minefield of corruption, bureaucracy and inefficiency that is both demoralising and dehumanising. Effective service delivery is just as important as effective development policy implementation and at the centre of both is the public service and its failings.

This is not a new problem, and over the last three decades, we have seen multiple efforts (usually donor-funded) around the continent aimed at reforming the public service, to be more efficient, effective, relevant and cost less. The problem with many of these efforts is that they are top-down, often designed externally that do not properly consider the people that they are trying to reform or the people in whose name the reforms are being pursued. To effectively reform the African bureaucracies, we have to rethink how we think about public service reform policy.

What is the point?

As with any policy, public service reform must have a goal at its core. Goals that are understandable to the wider public and local in their origin.

Most public service reform efforts are highly technical focusing on cost driven issues around wages, performance tracking and enhancement and efficiency. These things are important, but they are not visible. And when reforms are not visible, they cannot be seen and felt by the public at large, which means the reforms will run into political and institutional resistance. Most studies of public service reform efforts emphasise the need to depoliticise the public service and get political support for reforms. However, while political support is useful it is not a necessary condition for reform. If the reforms are visible, understood and can be felt by the public then political support can be formed from public support rather than the other way round.

With this in mind, it is crucial to ensure that the goals of public service reform are not purely back office, metrics-based ones but goals that have an impact on citizen-facing services. This ensures that you can bypass political resistance and that the reforms are rooted in local concerns.

Reforming bureaucracy is about people

Often, when public service reform is talked about in terms that dehumanise it. It’s about reforming systems, and structures, the target is a faceless bureaucracy, which no one likes. That’s all good and well until you remember that those bureaucrats are people, with concerns and aspirations of their own, families to support and careers they wish to protect. Too often public service reform is something that is done to people rather than with them. If you want your reforms to stick you need to get the buy-in of the people you are trying to reform. The public sector has decades of experience in appearing to comply with or blocking action. If you want compliance and reform, then it requires that reforms be done with the people in public agencies and departments. They must have a voice, feel that their concerns are taken seriously and have the goals of the reforms explained to them. In short, you cannot do public service reform without the buy-in of a key stakeholder, the public servants themselves.

The second area in which public service reform is about people is culture. All organisations and institutions develop a culture, which informs how people view and do their jobs, and the goals of their organisation. The public service has a culture, an ethos. For sustainable public service reform, you need to change that culture and ethos. The first key to that is making the public service something to be proud of. Explain and emphasising the role that public servants play, and its potential to make a positive impact. Working in the public service shouldn’t be something that causes others to roll their eyes or make jokes, it should be something people can be proud of. In doing so you can start to create a new culture of service and excellence, and that is precisely the culture we want in the public service.

Efficiency is fine, results are key, transparency is a must

As stated earlier, often civil service reform efforts focus on efficiency, which is important, but results are key, particularly results that people can feel and see. I know I have made this point previously, however reforming bureaucracy to be more efficient is useless when citizen facing institutions are services are terrible. Thus, efficiency is fine, but visible results are key.

On top of visible results. Public accountability and transparency are key to reform. If the government remains a black box, reforms will never take. In addition, it discourages bad behaviour by making those actors and agencies accountable to the public and their peers.

The best, the brightest… and the youngest

If public service reform has people at its core, the recruiting the right people is critical and recruitment can take advantage of Africa’s young people who are driven to solve problems and build a better future. Taking advantage of our best and brightest, of talented young professionals and university graduates. Recruiting and integrating them into the public, creating a new generation of motivated, professional and skilled public servants who can form the core of a reformed public service.

A great example of this is Liberia. After fourteen years of civil war by the time, Ellen Johnson Sirleaf became president the country was a mess, and the public service was a nearly broken institution. Recognising this, President Johnson started the President’s Young Professionals Program a two-year program “that recruits and places recent Liberian university graduates in important government roles and provides them with training and mentorship as they support the government’s top priorities”. A 2016 report by Princeton University showed that program had been immensely successful, and that “About 90% of the program alumni continue to working government and or are studying abroad on government scholarships. A few fellows have risen to become departmental directors or assistant ministers.” The Liberian example shows that attracting young talent into the public service is not only possible but with the right mentorship and training, they can make a real difference. Around the continent, we produce over 10 million graduates a year, half cannot get a job. While the government cannot employ all of them, the government can hire the best and brightest without nepotism or political consideration but on merit. One feature of public service reform is hiring on the basis of merit, whether it was the introduction of exams in imperial China 2000 years ago or U.S. Civil Service reform in the 1880s. There is no reason we cannot follow suit and recruit the best and brightest of our youth not just to help drive reforms but incubate them for the long-term.

Africanising public service reform

If we want to implement our development programs, we need an effective public service. If we genuinely want public services to be accessible and effective, they do require reform. These reforms must not only cut costs and improve efficiency but improve accountability, transparency, with people, their culture and most importantly results that positively impact the public at its centre. In other words, we need to Africanise public service reform policy itself because after years of trying we have learned that copy-pasting solutions without contextualising them to Africa never works.

Other than a policy aimed at hiring young people, I have tried to stay away from advocating specific policies. This is because while the challenges facing public service reform may be similar in many African countries the local context also makes them wholly different. What’s needed is a policy approach from which solutions can follow. An approach that recognises that public servants are citizens and stakeholders in the process of reform, that the culture of public service needs positive change, that the public needs to see concrete results if they are to support reforms and that transparency is crucial if the reforms are to stick. Despite all the failed attempts at public service reform, I don’t think it’s hopeless, I think we just haven’t tried the right approach yet.

 

Warehousing African development

Amazon has built a trillion dollar business around them, farmers around the world rely on them, modern healthcare would be crippled without them, the manufacturing industry needs them to smooth out production and demand cycles and global trade needs them to work. They aren’t glamorous like railways and airports, nor are they as fulfilling for donors who prefer to build schools or fund feeding programs, but warehousing is critical to modern societies and economies and they will be crucial for the development of African economies.

Warehouses won’t make living conditions or livelihoods better by themselves, but they are a crucial enabler for things that will. What’s needed from African governments isn’t money or infrastructure, but rather the right set of policies that will enable businesses and individuals to build, and use warehouse facilities as they see fit, to the benefit of their businesses, communities, and the wider economy.

More than storage

Most people do not spend much time thinking about warehouses let alone their transformative power. To most of us, warehouses are just storage, inert spaces where goods and commodities are kept either in transit or until they are needed. I thought the same until I learned the role that certified warehouses (warehouses certified by the government or other trusted actor) and storage play in making the world that we live in. Which got me thinking about the role that certified warehouses could play in Africa’s development on several fronts.

Agriculture

The Food and Agriculture Organisation of the UN estimates that sub-Saharan Africa loses about 20 % of its cereals, 40%-50% of its tubers, fruits and vegetables, 27% of its oilseeds, meat, and milk, and 33% of its fish, to post-harvest losses. This is millions of dollars of lost income for African farmers and it is enough food to feed at least 48 million people, equivalent to the population of Angola, Zimbabwe, Swaziland, Namibia, and Malawi all together.[1] A significant contributor to this phenomenon is the lack of adequate and suitable storage for agricultural goods. This forces African farmers to sell whatever produce they can at whatever rates they can get (the much hated farmgate price) or simply to let their produce go to waste if they can’t find a buyer.

Available (within reasonable distance), affordable (reasonably priced) and suitable (the facilities can store perishables goods appropriately), could cut post-harvest losses dramatically, simply by giving farmers somewhere to store their produce. Thus at the most basic level, proper storage ensures adequate food supply and food security. In addition, it could significantly improve farmer incomes as they will be able to store produce and search for the best prices rather than be forced to take whatever is given to them.

However, certified storage can do a lot more than simply bolster food supplies, farm incomes and cut losses. Certified storage can open the door to farmers gaining access to credit, having produce in a certified warehouse is an asset that farmers can use collateral for credit. Smallholder farmers produce almost 70% of food consumed on the continent, an improvement in their productivity would impact on poverty and living standards throughout Africa (something I cover in more detail here).  Providing smallholder farmers with access to credit is essential to unlocking long-term, sustainable gains in African agriculture. Without credit, farmers cannot afford inputs such as quality seed and fertilizer, they cannot purchase or rent tools that increase efficiency and reduce labour costs, they cannot afford training and support services. Certified storage can be the key to unlocking agricultural credit, as financial institutions will have collateral which they can sell if the farmer defaults, and farmers will not be rendered destitute as their primary asset, their land, will not be taken away as collateral. Furthermore, it could allow farmers access to financial instruments that farmers in the west have long had access to such as hedging (locking in a price for the next harvest) and providing themselves with some security.

The third thing certified warehouses can do for African agriculture is enable commodity exchanges, depositing agricultural produce in certified warehouses will allow that produce to be listed on commodity exchanges and traded, enabling farmers to sell their produce to buyers anywhere in their country, region, or even continent, and allowing consumers (through large purchases like millers and supermarkets) a larger selection of producers to buy from and thus a better chance of getting better prices.

Trade

Trade (both domestic and international) relies on finance, specifically trade finance. Formally its where banks and financial institutions provide credit, hedges, guarantees, and increasingly complex structured products to companies and people buying and selling goods across borders. On the informal scale, it’s the trader who borrows a bit of money (usually on a mobile lending platform) which he uses to buy produce or some other goods, which they then take to market and sell at a profit, paying back the loan with interest and keeping their profit margin. Fundamentally, both formal and informal, trade finance relies on trust. A key issue that hampers trade finance and thus trade across the continent is the lack of trust within the African trade ecosystem.

For instance, financial institutions (both big banks and mobile lenders) do not trust warehousing facilities and are thus unwilling to lend with those goods as security. Thus, financial institutions add a significant risk premium (high interest) to their financing which traders are unable to pay, or the few facilities that are trusted can charge exorbitant rates thus raising the cost of trade. Certified warehouses which issue verified receipts of the goods deposited in their warehouse could fill this gap and get rid of this hurdle to trade on the African continent because in the rest of the world this is precisely what certified warehouses do. Like in agriculture, having a place where you can store your goods verified by a trusted actor will kickstart trade by enabling their crucial lubricant, credit.

Healthcare

Markets and economics aren’t the only benefactors of proper warehouses. Pharmaceuticals are volatile things, they are carefully engineered chemical substances which need to be kept at stable temperatures and conditions. They need what’s called a cold chain, which is a series of refrigerated production, storage, and distribution facilities and capabilities. Refrigerated storage is a key link in that chain, as it would allow government and health systems to store medicines, smoothing out distribution chains, making public health campaigns (like vaccination drives) easier and allow health authorities to plan for contingencies, for instance, stocking vital medicines for a possible Ebola breakout. Storage isn’t just about commerce it’s a key enabler for health systems as well.

Warehousing policy

If storage is a key enabler in a number of developmentally key areas the question becomes what’s needed. The first thing that comes to my mind is to stay away from the solution that so many governments on the continent have tried, government-owned and operated storage facilities. Particularly in Africa they have become magnets for corruption and are often neglected to the point that it’s not worth storing anything in them.

The bare minimum that is needed from government is a legally enforceable framework that does two key things. First, it must put in place a trusted regulator who is able to certify warehouses. To be trusted it cannot simply be another government entity it must incorporate stakeholders from the private sector like the stock exchange, trusted multilateral institutions like the AfDB or TDB, independent bodies like central banks and industry associations to ensure that when it does issue a certificate everyone from farmers to banks will trust them. This regulator must have legally enforceable repercussions for those who violate standards and regulations set by the regulatory authority. Trust is not just about having someone in charge whom you have confidence in, it’s the certainty that when the rules are violated, for instance, someone’s goods are stored improperly, that those responsible are in fact held responsible, in this instance all affected parties are compensated.

Second, is that governments must get out of the way and encourage innovation, particularly in agriculture. Where to this day, far too many African governments maintain outdated systems of produce boards whom farmers are compelled to sell to, and control prices and maintain substandard storage facilities.

Third, is to ensure that small farmers are accounted for in any warehousing policy, e.g having a requirement that warehouses devote a certain percentage of their storage space to small farmers, or cater for small farmers at a discounted price (e.g tax-free storage for small farmers)

In an ideal world, African government would go beyond putting in place a trusted regulator and getting out of the way of farmers, they would actively encourage the building the storage facilities. This could take a number of forms that again do not require significant taxpayer investment such as:

  • Making land available to warehouse developers in agricultural areas to ensure that farmers have access to storage facilities.
  • Allow goods in transit held in certified warehouses to be held tax free, to help the free movement of goods, development of commodities markets and encourage trade.
  • Set standards for databases and goods tracking so that all stakeholders will be able to track goods through the certified storage system, thus bringing more trust into the system.
  • Make available guarantees or funding to groups of smallholder farmers enabling them to build their own suitable storage facilities and engage in the market without fear of being taken advantage of.
  • Give tax incentives to developers willing to invest in cold-chain suitable storage facilities that could benefit the health system.
  • Take a holistic view of warehousing aligning it with other development efforts, such as ensuring that rural roads lead to warehouse sites, that electricity, mobile networks, and data cables reach warehouse sites

Conclusion

It may seem odd to focus on something as mundane as warehouses and storage. Unlike other development policies like universal healthcare, infrastructure or police it is not grand and flashy. However, not all of development policy is grand and flashy, often times to make the big things like agricultural reform, universal healthcare or intra-African trade possible, it requires investment in the mundane things, like a policy and regulatory framework for certified warehouses. Proper and certified storage is an enabler for a number of key developmental goals, my hope is that policymakers are aware of this, that if they want the new railways and roads, they are rushing to build across the continent to work and spur a new era of growth and trade they will require humble storage facilities, certifiably trusted and available to all.

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

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

Rethinking Africa’s industrialisation

Industrialisation, it is economic development goal of countries around the continent, it is the key that will unlock the doors to mass employment, better standards of living and higher income of hundreds of millions of Africans. Yet this goal has proved elusive, through decades of state led developmental policy, to structural adjustment and market led to development, industrialisation has been stubbornly evasive. There are several culprits that one could blame for this such as corruption, or foreign intervention on the continent, and there is no doubt that they are factors. One of the key culprits and the one that I would like to focus on is the failure of policy, specifically a failure of imagination. African leaders have been focused on replicating Western and East Asian industrialisation. I believe in doing so they have created fundamentally flawed policy, policy that is not grounded in the realities of African economies and societies but on the experiences of others. I firmly believe that if we re-imagine industrialisation, ask ourselves what we have that we can build on, how to harness it and what we want our countries to look like afterwards, we can develop a clear idea of what African industrialisation is and the right policies to pursue it.

Industrialization

What is industrialisation? It is a word that gets thrown around a lot, and far too often it is used in jargon filled economic or policy reports that render the word meaningless such as this from the UN Economic Commission for Africa (UNECA);

‘The big opportunity for Africa in 2016, as a late-comer to industrialization, is in adopting alternative economic pathways to industrialization. This requires governments to take on-board the drivers, challenges, and trade-offs in pushing for a greening of industrialization’[1]

If we are to go for simpler definition of the word you could look at the dictionary, the Oxford dictionary defines it as ‘The development of industries in a country or region on a wide scale’[2] which is unsatisfyingly vague. Wikipedia’s definition is more detailed stating ‘Industrialisation is the period of social and economic change that transforms a human group from an agrarian society into an industrial society, involving the extensive re-organisation of an economy for the purpose of manufacturing.’[3]

Thus, I imagine when African leaders are talking about industrialisation, they are talking about transformation from an agrarian society and economy to an industrialised one, where most Africans work in factories producing goods for the world. This industrialisation is seen as the quickest and best way to mass employment and poverty reduction which Africa desperately needs. To do this, African leaders are building transport and energy infrastructure to bring down the costs of production and investing significant money and effort in attracting foreign investors to build manufacturing industries. However, there are serious issues with this way of thinking which makes a traditional industrialisation policy for Africa unlikely to be effective.

Impediments to industrialisation

The first issue is global, competition. Africa sees its key competitive advantages lying in two factors, a young and cheap labour force and growing population providing a growing market. This is true, but it is not unique. Nations such as India, Bangladesh, Vietnam, Indonesia etc. all have young and growing populations and unlike Africa they are much better integrated into global trade networks, and already have attracted significant manufacturing industries such as textiles and vehicle assembly, in short, we are competing against other regions who are farther down the road than us. Second, infrastructure is not enough. The cost of production (into which the costs of power, labour and transport are big factors) is a significant element in the thinking of potential investors but they also need legal security, the knowledge that their intellectual property, and contracts will be protected and enforced. They require physical security for their facilities, goods and workers and they need stable regulatory and tax regimes. These additional factors are unfortunately not always the focus of government industrialisation policy. Third, automation. As automation decreases the need for labour in manufacturing industries, cheap African labour becomes less and less of a draw to potential industrial investors.

Thus, African leaders and policy makers face a conundrum. The strategy they are pursuing is subject to competition from better placed nations in other regions, the focus on infrastructure is not enough and technology may take the jobs we are hoping to attract.

Reimagining industrialisation

In the face of this Africa needs to get creative, we need to reimagine industrialisation for Africa and there are several ways we can do this.

  • Agriculture as industry

Farming is the primary source of food and income for Africans and provides up to 60 percent of all jobs on the continent. [4] It is impossible to industrialize without the agricultural sector playing a significant role and it is no accident that China, Japan and South Korea all pursued land and agricultural reform as the first step in their industrialisation. Africa’s agriculture sector holds immense potential not just for growing food but for value addition (processing and marketing of agricultural products). Most agricultural products exported from the continent are exported as raw or lightly processed and this is a problem. Every sack of coffee and tea exported elsewhere to be processed and sold, all the cocoa exported elsewhere to be made into chocolate, all the avocados exported to be made into guacamole, palm oil, etc (this list could go on) is millions of jobs of and billions of dollars of income lost. African governments must make a concerted effort to bring these jobs to Africa, put in place tax incentives, tax penalties, regulations and make available funding to ensure that processing into finished products takes place on the continent. Furthermore, African governments need to help agricultural producers and processors understand the markets they want to serve, what sort of production and logistics chain they will need, what trade and safety regulations do they need to obey.  Creating jobs and income in agriculture will have significant impacts on other industries. All those people with jobs and increased income will want to buy goods and services in other industries which would make Africa an even more attractive investment destination for the industries that we are trying to attract. Agriculture, agricultural processing and marketing can be the foundation of industrialisation on the continent and it is high time governments recognised that and gave it the focus and help it needs.

  1. Don’t be afraid to copy

Many countries such as Japan, China even Germany in the 18th century kickstarted their industrial growth by copying others, not their policies but goods. Japanese cars, and Chinese electronics started out being derided as cheap knock offs, today they are global leaders in their industries. African policy makers should search for commonly imported goods that can be made cheaply on the continent and provide incentives and protection for African businesses to make them on the continent. Why import second-hand American clothes when they can be made in Africa, why import expensive medicine when we can set up generic pharmaceutical manufacturing, why import motorcycles that can just as easily be assembled on the continent. This will take some courage from leaders on the continent as they will face resistance from importers and foreign governments but only by being bold can we achieve industrialisation.

  1. Give African investors and entrepreneurs a leg up

In 1958, the USA created the Small Business Investment Company (SBIC) program to facilitate the flow of long-term capital to America’s small businesses. The SBIC partners with private investors to that finance small businesses.[5] Over the course of it is lifetime the SBIC has provided over $60 billion dollars of funding to small businesses and despite many of them not ending up as success stories, the ones that have succeeded (figure 1) are worth much more than all the money that has been lent out over the course of it is history. The biggest is Apple, back in its early days before it had much private investors apple received a loan from the SBIC which was crucial in allowing it to produce it is first products and get additional investment. Today, Apple is worth over $900 billion[6]. African governments must show the same willingness to invest in African businesses as the private sector has not done so yet and we cannot sit around hoping it will. If only one of these investments is half as successful as Apple it can transform the continent.

Figure 1 (source: http://www.sbia.org/?page=success_stories)

  1. Trade with each other.

Intra-African trade is pitifully low (figure 2). And despite much talk and several initiatives on the subject it remains more expensive and much more of a headache for African countries to trade with each other. This must change, initiatives such as the Continental Free Trade Area[7] and regional trading blocs require leadership and concrete policy from the continent not just lip service. Furthermore, it is important that governments make a concerted effort to link African businesses, and traders with markets across the continent. It is not enough to build infrastructure and sign trade agreements, businesses need to know the regulations of other markets and most importantly link up with whom they can work. African governments have embassies and diplomats across the continent, but they do little work in the commercial realm. They can be tasked with identifying opportunities in export markets as well as providing information to businesses in other countries on opportunities, tax and regulatory information and key contacts at home. Jump starting intra-African trade will require a concerted effort to link African businesses to African markets.

Figure 2 Africa’s intraregional trade as a % of the continent total trade 2002-10

Industrialisation African style.

Industrialisation policy on the continent requires a rethink. African leaders and policy makers must recognise that the world has changed, and we cannot simply copy what Asian countries did 40 years ago or western countries did in the 19th century. Africa must forge its own path to industrialisation and development and doing so will require policy that capitalizes on Africa’s own advantages in agriculture. That is bold and aggressive in kick starting industries such as being willing to copy products and processes. It will require African governments to step up to the plate and fund African businesses that will be at the forefront of indigenous industrialisation. And it will require governments to proactively open up and allow Africans to trade with themselves.

If we want to create the millions of jobs that Africa needs, to move our economies into the next stage of development we must be bold and imaginative. We must re-conceive industrialisation to the African context and remake our policy to pursue it. If not, I fear in another 50 years we will still be wondering when if at all Africa can industrialize.

 

[1] https://www.uneca.org/sites/default/files/PublicationFiles/era2016_executive-summary_en-rev6may.pdf

[2] https://en.oxforddictionaries.com/definition/industrialization

[3] https://en.wikipedia.org/wiki/Industrialisation

[4] https://www.brookings.edu/blog/africa-in-focus/2016/01/22/foresight-africa-2016-banking-on-agriculture-for-africas-future/

[5] https://www.sba.gov/sbic

 

[6] http://money.cnn.com/2017/11/03/investing/apple-market-value-900-billion/index.html

[7] https://au.int/en/ti/cfta/about

Interest rate caps could work and be a good thing

Despite what the IMF, World Bank, Kenya Bankers Association and various private sector organisations say (as well as free market logic), interest caps can be a good thing, if done right they could actually give people access to affordable credit, but that can only happen if governments around Africa stop borrowing as much as they have been.

In August 2016 president Uhuru Kenyatta signed into law legislation that capped the interest rates charged by Kenyan banks to 4% above the Central Bank of Kenya’s (CBK) benchmark rate. This means that if you were to go to a bank in Kenya to apply for a loan today the interest rate charged would not be more than 14%, which is 4% above the CBK’s benchmark rate of 10%.

While it was a drastic step, it was a long one coming. Kenyans had long been frustrated by banks charging exorbitant interest rates often 10 or more percentage points above the CBK benchmark rate. The Donde Bill of 2000 similarly capped interest rates but was neutered by the courts, and another similar law was stopped in 2013 because of heavy lobbying by the banks in parliament. In 2016 the public had, had enough and MPs (with an election around the corner) were listening and the bill was passed, somewhat unexpectedly the president signed the law.

The consequences of the rate cap

The consequences of the law have been significant. First and most significant is that banks have severely cut lending to the private sector, with credit growth falling ominously (Figure 1) meaning that borrowers particularly small businesses have been unable to access credit, meaning that not only can they not invest in further growth they also cannot use credit to supplement working capital [1],  while ordinary households have been unable to get mortgages and car loans. This effect has been cited by people like the IMF, World Bank and the Kenya National Chamber of Commerce and industry as a cause of Kenya’s recent economic slowdown.

Figure 1 – growth of private sector growth in Kenya

Secondly, in response to falling profits from interest rates banks have cut costs, significantly. In 2016 banks in Kenya retrenched over 1000 workers (approx. 1.6% of the financial services workforce in the country), and aggressively pushed digital platforms in order to cut down on more expensive physical infrastructure (bank branches, ATM’s etc)

The third and most important thing is how banks have been making their profits. Instead of lending to people and businesses they have been lending to the government. Banks have shifted their money to buying treasury bills, which are short term loans the government takes to cover its expenses on an ongoing basis, and they are making a lot of money while doing it. The logic is simple, why lend to individuals and private businesses, where you have to spend time and money assessing each applicant for their risk and run the risk that they might not pay you back. Its much easier to lend money to the government and though the interest rates may be lower, the volumes are very large and the government will not default, essentially guaranteeing profit. This is all enabled by a government with a never-ending appetite for more and more money, the Kenya governments debts have soared over the last year and here lies the problem.  The rate cap will never achieve the goals it was meant to – making loans cheaper for ordinary Kenyan business and people – if banks can simply lend to the government and still make huge profits. On the back of this there are increasing calls on the government to repeal the rate capping laws to ‘restore’ private sector credit and boost the economy.

This would, in my view, be the wrong approach, it would simply take Kenya back to the position it was in before. Banks would be charging people and businesses blatantly usurious interest rates for loans while continuing to lend to a government with the financial appetite of a black hole, in the process making enormous profits.

Making rate caps work

Repealing the laws would be a step backwards. The focus should be on making the laws do what they were supposed to do, to which the key is stopping government borrowing so much money. The rate capping law has been a godsend for a government borrowing from every willing lender, the law made the banks much more willing to lend to the government and avoid the effects of the law.

If government appetites for borrowing money could be curbed, then the interest rate caps could work. Eventually the banks will run out of costs to cut, without treasury bills as a source of endless profits, they would have to do what banks are supposed to do, lend. Rather than caving to pressure from banks and international financial institutions (again) the top policy makers at the Kenyan treasury need to start thinking about the people the laws were meant to serve and not the accounting books in front of them.

Rate caps around the continent

Kenya is not the only country on the continent facing the problem of how to improve and increase private sector lending. Across the continent, access to credit is a major hurdle faced by businesses (figure 2)

Figure 2 Percentage of Firms Identifying Access to Finance as a Major Constraint[2]

Without credit small businesses are stuck as they cannot get the funds to operate and grow, Africa may talk glowingly about its entrepreneurial spirit but without a finance industry willing to lend to them the reality will never meet the high hopes. If rate caps can be made to work it would stand as a model that other African countries can follow, it will show that with a simple law you can fundamentally change the dynamic in the financial sector that will force banks to serve their customers, something that free market economics has been unable to do. Giving African households, businesses and entrepreneurs access to affordable could be truly game changing and contribute to solving a range of problems from housing shortages to unemployment to the high rate of failures among SME’s. However, for affordable credit to become available lawmakers and policy makers need to be bold and force the financial industry to serve Africans and that will require policy, regulation and law. For these types of laws to work it will require the government to curb its appetite to spend and borrow as much as it can get away with, something we haven’t yet quite figured out how to do.

 

[1] For many businesses flows of income do not exactly match their spending (e.g. salary must be paid monthly but clients have 60 days to pay you)

[2] https://www.afdb.org/en/news-and-events/afdb-calls-on-credit-providers-to-increase-lending-to-meet-demand-by-african-msmes-17138/

What is Development?

Freedom should not be understood to mean leadership positions or even appointments to top positions. It must be understood as the transformation of the lives ordinary people in the hostels and the ghettos; in the squatter camps; on the farms and in the mine compounds. 

It means constant consultation between leaders and members of their organisations; it demands of us to be in constant touch with the people, to understand their needs, hopes and fears; and to work together with them to improve their conditions. – Nelson Mandela

This is the question at the centre of the African story, at least when it comes to policy, yet we do not seem to have that discussion, leaving it open to be defined by those in power rather than those whose lives its supposed to change. In academia the question as to what development is much debated but it has failed to leave the confines of the ivory tower and development aid industry. Today development is too much like beauty, it’s in the eye of the beholder, every time the government builds a footbridge or a railway it claims development, economists and business leaders look at economic growth figures and call that development, the UN looks at the Human Development Index and Sustainable Development Goals and calls that development. What about the people, those for whom this development is being done, it seems to me that if the vision of development being pursued was one that came from the people, then governments and international development agencies may have more success pursuing it.  A policy shift to people centred development, that actually takes what people want and need into account would in my view make the whole notion of development much more relevant and impactful.

Roads, railways and power.

Most of the continent is busily pursuing the infrastructure gap, which can be summarised as the need for infrastructure (roads, railways, power, water and sewage systems, housing etc.). In Africa the African Development Bank has estimated that Africa needs 95 billion US dollars a year to close its own infrastructure gap[1]. Governments have latched onto this and across the continent there is a massive building program being pursued. Physical infrastructure is perfect politically, its tangible and can (if done properly) make an impact on people’s lives, without the complicated political, administrative and moral issues that come with improving education or fighting corruption. Business and banks love it because they can make significant profits funding roads, railways and power stations while saying they are contributing to ‘development’. Infrastructure is important, there is no doubt about it, a road connecting a rural community to an urban market can radically increase opportunities, electricity has and can change the lives of the poor the world over, but is it development? I don’t think so, I see infrastructure as an enabler, a building block towards development, but not development itself.

GDP growth and jobs

You cannot have a conversation about development without someone bringing up GDP growth numbers. Despite academic attempts to dethrone economic growth as the primary indicator of development it is the standard statistic that people cite. But what does GDP growth actually tell us? GDP is the value of all the goods and services produced in an economy in any given period (usually quarterly or annually). So, when it grows, it means that the country is producing more things and as a whole earning more. However, it doesn’t tell you important details such as who is earning more – are the rich getting richer or is the additional income being spread to the middle and lower income groups. It doesn’t measure standard of living, or the quality of social goods such as healthcare and education. It is just an aggregate, a useful one but without context and additional data it doesn’t tell you whether peoples lives are actually improving. When people point at GDP growth and call it development, take it with a pinch of salt.

Ask the people?

What is missing from the development debate for me is the people, most of whom are still stuck without meaningful employment or prospects of progress, far too many living in poverty. What does development mean to them. I think at its core, development would be the ability to live a life with dignity. A life where our children have a decent education that gives them a chance at a future where families can rely on the health care system and have adequate housing. A job to support you and your families. A police force and courts that are fair and protect society and a government that respects our rights. Thus, to me development is about growing the economy in such a way that provides jobs and income for the majority, building the infrastructure that enables this, investing in social services that improves quality of life and the rule of law and respect for human rights. Development isn’t just about jobs, or growth, or new roads and power stations, to me it’s about uplifting the lives of Africans, and our development policy, whether economic, education, infrastructure or law and order has to have that as its goal. But that’s just me, ideally, we should start by asking the people. Governments around the continent would benefit from broad consultation process to see what their citizens consider development and make their policy on that basis.

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[1]https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Africa%20Econo%20brief%202_Africa%20Econo%20brief%202%20(2).pdf