Tag: Economy

Managing Africa’s ticking youth time bomb – the case from Kenya

In June 2024 Kenya’s youth, thousands of Gen-Z, did something extraordinary, they had enough. They came out onto the streets demanding the government drop a punitive tax bill, the finance bill, and tackle corruption and waste in government spending instead. In events, that shocked Kenya and the world the police response to the protests was heavy handed and tragic resulting in multiple fatalities, and protestors stormed parliament. Despite calling the out the army, President Ruto had to concede and withdrew the finance bill and later fired his cabinet, but the young protestors have not stopped demanding fundamental changes in the way their government is run.

The events in Kenya are not unique, Africa has seen youth revolts in North Africa (the Arab spring), Nigeria (End SARS) and in South Africa (Fees Must Fall). More importantly, the underlying conditions that led to the protests exist across the continent. A young and growing population, frustrated by economies that offer no jobs, no prospects, run by unresponsive and corrupt governments, with old men in charge. Many of these governments, are heavily indebted, having borrowed irresponsibly when money was cheap, and are now reliant on the IMF and others for support. The conditions of that support require more tax revenue, resulting in punitive taxes that over burden already struggling people.

The Finance Bill in Kenya was the trigger that set off the time bomb of disaffected youth without realistic prospects, who are angry at a government that will not listen and is wastefully corrupt and opulent while they struggle. Where to next, how do we avoid this happening again, in a way those young people don’t loose faith in democracy and turn to more radical and destructive.

Ironically the answer to the ticking time-bomb, lies in the grievances that drove it. African governments need to focus on developing and driving a radical agenda for growth that creates jobs and opportunities. As well as evolving systems of government to be more democratic, more engaging and more accountable.

Radical growth

Africa needs growth and jobs. If we are to ensure that African citizens can have dignified lives, we need to create jobs, livelihoods and incomes. As I wrote in a previous post, with jobs individuals and households have incomes, the ability to pay for housing, healthcare, recreation and invest in the future. In short with jobs come agency and dignity both for people and the nation, and dignity is at the core of any viable definition of development.

African governments must be laser focused on creating the growth and jobs needed if any significant headway is to be made. This means

These are not new ideas, or revolutionary ones. However, doing them well requires African governments to shake off their normal way of doing things which has not worked for the 70 years and focus. Not on what will enrich them as individuals or what will please donors, but what will create jobs and growth.

Engagement – responsive democracy

Our systems of governance are not fit for purpose. Most of them are jerry rigged versions of whatever colonial system had been left to us. Most post-independence leaders were focused on maintaining control of fragile post-colonial states, and thus centralised power. The democratic resurgence of the post-cold war era, focused largely on holding elections, rather than creating democratic systems that engaged with citizens and were responsive to their needs.

It is now critical that Africa create governance systems that engage and involve everyone, especially, young people who feel disenfranchised. At the core of this is three critical things.

  1. African governments must communicate. Not just when they have made decision, but their decision-making process. Tell people what the issue or choice is, the trade offs, and the options. When they intend to do some thing and when it has its impacts. Too much policy and government action on the continent is a surprise. With the rationale a complete mystery and its impacts unexplained. Kenya’s Finance Bill was never properly explained to its populace, the thinking behind it was locked in the heads of the National Treasury’s senior directors. Thus, it is no surprise that Kenyans rejected a bill that was going to make them worse off without it being explained to them why.
  1. African governments must engage with their citizens as a matter of course, in the conception, development and implementation of policy. Thus its time for governments to consider ideas such as participatory budgeting, where people are intimately involved in budget conception and development ensuring that money is spent on citizens priorities.
  1. Strengthening democracy and accountability. It is clear that voting is not enough. That our current systems of democracy, does not properly hold our leaders to account and moreover the incentives inherent in the system are skewed towards people getting into to politics and leadership for the wrong reasons.

A wake-up call

The Gen-z protests in Kenya are both a wake-up call and a reason for hope. A wake up call in that its clear that young African’s do not have unlimited tolerance for hopeless circumstances. African governments must be more engaged and responsive, and most importantly focus on the growth and jobs that our young people desperately want and need.

The protests are also a reason for hope. The young Kenyans who have come out to march and braved police brutality, are not looking to burn the system down. Rather they were looking to make it work, to make it accountable, to reset our governance processes to so that they work to ensure dignity for all rather than wealth for a few.

African governments must be proactive, and respond to their young people, or they may lose patience, and rather than make the system work, choose to tear it all down.

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.

Rethinking African infrastructure: investing in the small for big results

The Africa Development Bank estimates that Africa needs as much as 175 billion US dollars a year by 2025, to close the infrastructure gap, which is cited as a significant constraint on its growth.

The notion of the infrastructure gap has driven African governments to borrow and spend billions on roads, railways airports, dams, and other large, ambitious infrastructure projects. However, this binge of infrastructure is starting to be questioned and rightly so. The continent is dotted with shiny infrastructure projects which are struggling to justify themselves as they have not created the growth, employment, revenues and development promised. Many have been vehicles for corruption and have burdened taxpayers with enormous debts which we are struggling to repay.

Much of this large infrastructure is built on the “build it and they will come” principle. That these huge projects will attract investment, industry and generate economic activity that will ensure that they can pay for itself. It is time to rethink this approach. Does Africa need Infrastructure, yes, however we need to rethink our approach to infrastructure. Investing in “small” infrastructure, that provides immediate benefits to citizens and drives quality of lie and economic development. Rural roads, urban roads, last mile internet and electricity connectivity, pedestrian infrastructure, community healthcare infrastructure, warehousing, and cold storage.

Build it for those that are there.

On May 31st, 2017, President Uhuru Kenyatta opened the first phase of the largest infrastructure project in Kenya’s history, christening it the ‘Madaraka Express’. It was the Chinese built Standard Gauge Railway (SGR) which parallels the old colonial line from Mombasa on Kenya’s coast through the capital Nairobi to Lake Victoria and on into Uganda. President Kenyatta hailed the railway as a developmental gamechanger stating that ‘Large and vibrant towns will grow along its length, new factories and hotels, and service businesses will employ hundreds of thousands of young people. Farmers will earn more as their produce makes its way to buyers faster and cheaper’. Not only has none of this come to pass, but the railway has also been losing money and bleeding the country dry with debt payments. In the 2021-22 financial year the railway reported an operating loss of 31 million US dollars while the country made 209 million dollars of debt payments for the railway.

Across the continent this tale is repeated mega infrastructure projects, justified as the foundation upon which Africa’s future development will be based. Mega railways, airports, ports, dams, and power stations, that will kickstart manufacturing industries, transform large scale agriculture and make the continent more attractive to investors. These projects, by and large have not done so, instead becoming a drain on the public purse, threatening critical services and other development projects as we try to pay back loans.

It is clear from the mess that many of us have gotten ourselves into, that Africa needs to rethink the “build it and they will come philosophy” for how it invests in infrastructure, and the type of infrastructure it invests in.

Thinking small: Rural Roads, warehousing, pedestrians, and the last mile.

What small infrastructure should African governments be investing in. It should be small infrastructure that enhances the productivity and growth of the majority of livelihoods in the economy. It should infrastructure that improves the daily lived experience of citizens. It should be infrastructure that drives the growth of local economies and industries. And there are a number of options that would serve one or more of these objectives.

  1. Rural Roads

Much of the mega-infrastructure investment on the continent has focused on transcontinental highways meant to spur intra-African trade, expressways to beat the traffic menace in cities and superhighways for national prosperity. However, most African countries remain primarily agricultural economies. ‘Agriculture employs approximately 65–70% of the African workforce, supports the livelihoods of 90%of Africa’s population, and accounts for about a quarter of the continent’s GDP’[1]. Enhancing rural transport networks will improve access to markets, particularly for small farmers allowing them to get their produce to market quicker and cheaper. It will reduce the cost of getting goods and services to rural communities and make travel to regional centres easier. All critical to improving opportunities and livelihoods for local communities.

  1. Warehouses

This is a subject I have written about previously, certified warehouses that can properly store agricultural goods, would reduce post-harvest losses. Africa loses approximately 100 million tonnes or $4 billion worth of food to post harvest losses. If not lost that food would reduce the cost of food, improve availability and boost incomes throughout the value chain from farm to fork. Proper storage would save lot of this food. Beyond just improving food supplies, certified storage would improve farmer access to credit and markets as certified storage is the foundation of commodities exchange systems.

Beyond agriculture, certified warehouses with refrigerated facilities would enable the provision of healthcare by enabling the storage of medicines and vaccines that can then be distributed to local facilities or clinics at short notice.

  1. Small urban infrastructure

Infrastructure in African cities is a perennial problem, causing epic traffic, hurting businesses, and creating unfortunate living conditions for many. What this requires isn’t investments in superhighways and expansive public transport systems, but people focused infrastructure. As previously written, “78 per cent of Africa’s population commutes by foot and on bicycles every day,[2]”. Investing in sidewalks, footbridges, cycle lanes, road crossings, footpaths etc. will save lives and make the lives of millions of people easier.

Second investing in “aesthetic” infrastructure such as parks, streetlights, signage, and street markings. This may seem frivolous, but it serves a purpose, people need green spaces for their mental and physical well-being, well-lit and marked streets enhance safety, service delivery and facilitate businesses. Improving the liveability of cities by investing in small urban infrastructure will serve to improve quality of life and the business environment boosting urban economies.

  1. The last mile

The last mile can be broadly defined as the final stage of a network or transportation network before its final destination. It is the fibre cable that brings internet to individual buildings, the electricity line that connects homes to the grid, the telco tower providing cell service and the road leading to your front gate. Investment in the last-mile is about making sure those that would be bypassed by dispassionate cost-benefit analysis. This investment in the last mile does not mean governments must spend billions building power cables and fibre lines. Innovative structures, such as Kenya Universal Service Fund, which uses funds from fees and levies paid by telecommunications companies to fund the building of infrastructure and provision of services in underserved areas. This is why Kenya has 98%[3] of the population covered by a mobile network, which in turn has opened access to mobile money and internet services making Kenya a global digital leader.

Conclusion: building small to enable the big

People often talk about Africa’s fundamentals (large young population that is underserved market), when making the case for large investor attracting infrastructure. However, what they forget, is that those fundamentals will remain theoretical unless those people have livelihoods and growing incomes. Shifting infrastructure investment to serve those people and create those incomes is a much more powerful magnet for investment than any argument based on theoretical potential.

African leaders spend a lot of time talking about the Asian Tigers and the extraordinary economic growth. What they often fail to mention is that those countries, invested in creating domestic demand growth by improving the incomes of their populations. Through land reform, education and strategic investment, they created the domestic demand that provided the base upon which their industries could grow. Investing in people and local economy focused is one of those strategic investments.

For Africa, investing in enabling “small” infrastructure, that improves people’s lives and livelihoods shall do more to boost our economies than massive billion-dollar projects aimed at theoretical investors for potential future growth. Boosting domestic livelihoods, incomes and demands is self-reinforcing, it creates demand which local industries can respond to and that investors want to tap into. Which will, in future, justify infrastructure mega projects that are built to support real economic development.

 

[1] Africa Development Bank, https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/AEB_Volume_8_Issue_3.pdf

[2] UNEP https://www.unep.org/news-and-stories/press-release/better-infrastructure-and-policies-can-protect-billion-african

[3] Kenya National Bureau of Statistics, 2023 Economic Survey, p.303

Solving Africa’s inflation problem

Inflation is back.

Covid has ravaged our economies and scrambled supply chains. Russia invaded Ukraine upended global commodities markets. The impact of these on the global economy is that inflation is back. Prices across the board are rising, and Africa has not escaped this phenomenon, it is causing real pain, as protests across the continent show. However, Africa is in a real bind, our governments don’t have the financial firepower to cushion their citizens easily, and the causes of inflation are beyond our control in the short term.

Much like the coronavirus pandemic there are some tough choices to make. These must be tailored to our context. Outside help will be hard to come by, and for the long term, there are lessons to be learned to ensure that we use the current situation to make sure we never end up here again.

Another crisis fewer options

The current inflationary crisis is problematic because its causes are not native to the continent. Meaning that the tools at our disposal to deal with it in the short term are limited. The primary drivers of inflation are the global supply chain disruptions caused by the pandemic which have not been resolved. Second the war in Ukraine has meant that two of the world’s largest suppliers of oil, gas, wheat, fertilizer, and cooking oil have suddenly stopped shipping those commodities driving the prices of food and energy up all over the world. Africa is a net importer of wheat, fertilizer, oil and gas, and cooking oil, less supply and higher prices will have broad impacts throughout the economy.  Third, the developed world’s response to inflation has been for their central banks to raise interest rates, and the Federal Reserve Bank in the USA has been particularly aggressive. This has strengthened the dollar in relation to African currencies, making buying global commodities or goods in global markets more expensive, while at the same time making dollar denominated debt payments more expensive, meaning our governments have even less money to spend on other priorities.

The causes of the current inflationary crisis are not homegrown and that severely limits the tools available to African Governments to mitigate it. Interest rate rises, the tool most commonly used to fight inflation, is effective when the cause of inflation is too much demand or an overheating economy. That is not the case here, and despite African central banks raising rates it won’t have much impact beyond dampening already weak economies. Governments have tried to use what little fiscal space they have to subsides fuel and other basic commodities. However, this too will have little impact as African governments do not have the financial firepower to do much else beyond cushion the impact of inflation rather than shield people from it.

Short Term fixes

So, what can we do in the short-term? Despite limited options there are a few things that African governments can do ease some of the pressure inflation is putting on their people. First is to look at their tax regimes, many countries levy various combinations of VAT, Excise and import duties on fuel, fertiliser, and basic food commodities. Examining and reducing those in the short term will provide some price relief, though the government may lose some revenue its much simpler and cheaper than providing subsidies.

Second, is to apply subsidies where they will have the most impact, do not subsidize fuel, that’s a losing battle with global commodity markets, rather subsidise commodities like fertilizer to ensure farmers can produce as much food as possible domestically and ease some of the pressure caused by imported food prices. Target support at public transport providers both formal and informal to enable them to keep their prices affordable. We need to spend our little money where it has the biggest impact, not where it generates the best PR.

Third help your private sector strengthen and diversify their supply chains, make your embassies and consulates available to support local companies trying to find cheaper supply alternatives or even bring the power of state to bear through diplomatic ties or credit guarantees to lower the risk and the prices local businesses have to pay for global inputs.

Fourth, governments and central banks must be honest with their people and businesses, explain why what is happening, is happening and how it is being dealt with. Managing expectations or guiding markets can be just as effective as many policy interventions.

These measures won’t stop inflation. However, they will mitigate it. Which is better than simply copying what others are doing and raising interest rates, doling out cathartic subsidies and crossing our fingers hoping for a break.

Long term solutions

I have written previously that the pandemic showed us that we cannot rely on the rest of the world to help in a crisis especially when they too are affected. The inflation-crisis is global and in Washington, London, and Brussels they are far more worried about their own people than what it is doing to the ability of poor Africans to put food on the table. Thus, we must take a step back and look at the structural issues that have landed us in this predicament and aim to fix them so that next time the global economy is thrown into turmoil we are not turned into basket cases

1.    Diversify, diversify diversify

It is critical that Africa learn from and rectify a key mistake. Over reliance on small number of suppliers will hurt when that supply is restricted. It is key that Africa deliberately looks to develop alternative sources of wheat, fertilizer, cooking oils and energy. This needs to be done both domestically, regionally, and internationally. How can we strengthen the domestic production of these goods, can we identify regional suppliers and use the ACFTA or regional economic blocs to access that supply and can we make sure there is regional and ideological diversity among our global suppliers so that if one of them ever faces crisis it is not transmitted wholesale onto the shelves of African shops?

This diversification must also extend to what we consume, President Museveni of Uganda may have sounded insensitive when he told Ugandans to eat cassava instead of bread if the price of bread is too high, but he was not wrong. If we can nudge African consumers to use goods and products that can be grown or made cheaply here, it is the ultimate insulation from supply-side driven inflation that we are experiencing now.

2.    Develop domestic debt markets

A massive problem facing governments with large amounts of foreign loans (e.g., Zambia, Kenya, Ghana etc.) is the weakening of their currencies, locking them into a vicious cycle of a strengthening dollar draining money out of the country as debt payments become more expensive. Strengthening domestic local currency debt markets will ease this pressure in the future, and while every country may not be able to develop a fully fledged bond market, that need not be an issue. African countries can issue debt in other African countries with better developed markets, it may not be ideal, but it would be cheaper for Zambia to issue Rand denominated debt rather than dollar debts.

3.    Tax systems that make sense

As pointed out previously, in many African countries the tax systems are reinforcing rather than mitigating inflation. African governments need to take a step back and look at those tax systems to identify where they do more harm than good (e.g., taxes on basic commodities) but also identifying taxes that can be used as policy levers. Raised or lowered as appropriate when needed.

4.    Africanise monetary policy

By this I mean there must be a recognition that monetary policy in Africa cannot simply copy what happens in Washington or London, or blindly implement what the IMF recommends. It is clear that our fiscal and monetary policies must be better collaborated to ensure that our debt strategies are geared to tap domestic sources as far as possible. That interventions in currency markets are timed and designed to have the least impact on citizens and that interest rates are used when appropriate in reaction to conditions and developments in our markets. To do this we must reassess the African approach to monetary policy, with the questions of what affects our citizens, markets and businesses at the centre.

5.    Fuel

Often the largest contributor to inflation is rising fuel prices. It is not possible to completely get rid of the need for oil and gas but concerted long term action can ensure that demand for oil and gas is reduced. Further reducing African economies exposure to oil price driven inflation.

What parts of our transport systems can we electrify, make more efficient or switch to alternative fuels? How and where do we invest in biofuels and renewables? What’s needed to make our energy systems more efficient? All big questions, but worth answering not only to reduce exposure to price spikes but also to make a contribution to mitigating climate change.

Rebuilding for resilience 

Inflation is painful, and we are all feeling it. From a policy perspective it is tricky to solve when it driven by factors outside of our control like wars in Europe and highly optimised supply chains falling apart. However, our policy cupboard being is not empty. There are things African governments can do in the short term to ease the pain, but it will not be a cure all and they must be honest about that.

In the long term, we must rebuild African economies with resilience in mind. Not just against pandemics but against an increasingly uncertain world where crises and economic shocks are more commonplace. There will be situations in the near future that will increase inflationary pressure globally and on African economies. We must diversify and contextualize our approach to economic policy making to ensure that this rebuilding for resilience is done with the African context, citizens, and businesses at its centre.

Africa will face inflationary crises in the future, lets use this one to make sure we are prepared for them 

 

Making it through the crisis: Africa’s crisis response policy

A few weeks ago I wrote a piece on what Africa can do to kickstart its economy and drive long term growth after the coronavirus crisis has ended. What’s becoming clear is that the crisis will be longer and deeper than many had first thought. This poses the question, what policies do we need to put in place so that when it ends, we are in a position to kickstart a recovery.

African governments do not have the financial firepower or operational capability that developed countries have deployed. But I do not believe that means we are hobbled. As policy responses around the world are showing, what was previously thought impossible, too expensive or too complex is doable. The same applies to Africa. To make it through the crisis we must abandon the art of the possible and attempt the impossible. This crisis presents critical obligations to African policymakers, that we must be bold and creative to save lives, livelihoods and possibly the state itself. This crisis also presents policymakers with an opportunity, to redefine what policy in Africa can do, particularly when health, wealth and well-being of its people are at its centre.

The Nature of the crisis

This crisis is unlike anything Africa has seen before. Its effects are multiple, simultaneous and intense.

First, this crisis will last longer than many of us thought. Until there is a widely available vaccine or cure, we will continue to see outbreaks, travel restrictions, social distancing, quarantines etc. In various parts of the world and Africa as governments try to avoid a second wave. Considering the staggered way in which the virus has spread across the world, it’s estimated that the most severe restrictions will continue for the next 3-6 months and various restrictions could remain in place for up to 18 months until medical solutions are widely available.

Economically the World Bank predicts the continent could lose between $37 billion and $79 billion in output and face a recession of –5.1% (negative 5.1%). Furthermore, agricultural production (the most important sector in terms of output and employment on the continent) could contract by between 2.6% and 7%. This is an economic disaster for the continent. The formal sector will be defined by falls in productivity, revenues and severe job losses. In the informal sector which accounts for 89% of employment on the continent, its traders, farmers, vendors, MSME’s, tradespeople who rely on daily incomes are facing disaster if those incomes are disrupted endangering their ability to afford food and shelter not just for them but also the people who rely on them.

This crisis will also stretch our healthcare systems, in many cases past their breaking points. Endangering, the lives of those with Covid-19 and the lives of those who need medical attention for things other than Covid-19 (expectant mothers, HIV-AIDS patients, cancer patients, malaria patients etc.).

Internationally, help (financial or technical) from the traditional donor/development aid community will not be as forthcoming, as it has been during previous crises, as they try to deal with the crises within their borders. Thus, Africa cannot rely on the international community as we have become accustomed to doing.

With all these effects, in responding to this crisis we have to have a core goal. That we have to keep our people fed, healthy and secure livelihoods as far as is possible. Which means designing and implementing a mechanism to enable people to keep themselves fed and secure. Providing lifelines to the informal and formal sectors, so that people have livelihoods to sustain themselves in the long run. Restructuring how our governments communicate with the public to ensure that the measures taken are as effective as possible and provide a foundation for re-forging our societies.

Keeping people fed and secure

This is probably the biggest headache facing African policymakers in their response to the crisis, and many will default to what they know, distributing foodstuffs. However, what we need in a situation like the current crisis where millions of people who were ok now fall into vulnerability, is a solution that is big, simple and fast. One solution that encapsulates all three is cash transfers. Give vulnerable populations money and trust them to know how best to use it. As I have previously written, cash transfers are effective, and people are rarely irresponsible with them. With innovations like mobile money which has permeated across much of the continent, it is possible to get money where it needs to go and to do it quickly. And, it avoids the mess of corruption and delays associated with government procurement. Finally, it puts money where the economy needs it. In the hands of consumers who buy their food and other essentials from the informal economy, keeping those value chains alive.

How do we pay for this? Simple, print money. The UK is doing this. Those afraid of inflation should note that the money would be replacing depleted economic activity, thus limiting the inflationary impact.

Reinforcing health systems

First, African countries need to devote more resources to public health. For decades we have let public health fall into a state of disrepair and underfunding. Over the short term, this needs to be remedied by immediately ramping up funding, and resourcing over the short term to fund the immediate Covid-19 response. As well as thinking through how to implement public health measures in an African context. Rather than lockdowns, how can we make markets which are critical nodes of the food system sanitary and credibly social distant? How do we make informal settlements where people share multiple spaces as safe as possible?

But it also represents an opportunity to start long term investment in community health. If we want to keep hospitals free to treat Covid-19 we need to deliver care to people in their communities. This means public health communication and education, provision of basic care at a grassroots level and investing in preventative infrastructure (sanitation, water, clean cooking etc). That could over the long-term form the basis of a viable universal healthcare system.

Paying for this will require shifting resources for normal noncritical spending (non-salary and critical operations) to the health systems, delaying or freezing development projects and tapping into capital markets (borrowing) where possible.

A lifeline to the economy

Through no fault of their own, businesses across the continent are suffering as demand falls, export markets go into lockdown, their supply chains are disrupted, and their consumers stay at home. To save jobs, livelihoods and in some cases whole industries. Many governments have already put in place tax holidays and encouraged banks to renegotiate loans with businesses. However, in a recession predicted to be deep, more is needed, and this could consist of several measures such as:

  • The utilisation of domestic private sector capacity by the government as part of the crisis response. Using streamlined public procurement to buy goods and services (e.g. Masks, logistics and transport, beds etc.) that are needed by the government to respond to the crisis. This will help keep some local businesses alive and build local capacity.
  • An SME loan program divided into two tranches. The first tranche would be given now, to keep SME’s alive and the second tranche would be given when the WHO declares the crisis over to enable SME’s to quickly restart their operations. This can be done by the banking sector backed by a guarantee given by the central bank in case of defaults. The guarantee would have 2 conditions: low-interest rates and a 6-12-month grace period before the loan payments start to give SME, breathing room. This would have the effect of giving SME’s working capital and keeping the credit system alive.
  • Safe business programs. Many businesses require social interaction such as open markets, salons & barbershops, restaurants bars and clubs, etc. We should be developing guidelines and rules for safe interactions in these businesses that integrate sanitary measures and social distancing (where possible) to enable these businesses to reopen as early as possible without endangering public health.
  • Utility bill and commercial rent holidays to ease pressure on businesses with reduced cash flows. Utility providers and commercial landlords can be provided with tax credits to offset the reduced revenue. I

Communicating with the public

I have written previously on the need for effective and persistent communications strategies to be built into policy design. This is critically important during a crisis, where not only do the public need to know what is happening, they need to buy into it, trust what their governments are saying and understand that it is being done for the public good. For that to happen governments have to change how they communicate with their publics from talking at them to engaging with them, this means:

  • Be honest. Now is not the time for bluster or false assertions. If governments lie and people die as a result, trust will be fundamentally broken, and people will be unwilling to listen again. Thus, governments must lay out the truth to their people, what this crisis will do to every one’s health, livelihoods and general welfare and why they are implementing exceptional measures.
  • Explain your thinking. Governments will be implementing measures that will affect people’s lives in a multitude of ways. As the heavy hand of government, intervenes in people’s lives in unprecedented ways, the government must explain why, what drove the thinking, and what they are hoping to achieve
  • Accept and respond to criticism. No policy response will be perfect. Being able to acknowledge where something has not gone as planned or was not implemented properly and communicating real action taken to fix it, will build trust and support.
  • Communicate often. This is a constantly evolving crisis; people need to be updated regularly. In times like these, there is no such thing as talking too little.
  • Engage across channels. To reach everyone, you must go where they are, which means going beyond traditional media onto social media, and breaking language barriers. If information is inaccessible, then it may as well not exist.

Communicating, honestly, effectively, and openly will help reshape the relationship that has been characterised by a lack of trust between opaque African governments and populaces that have long been indifferent to whatever pronouncements and declarations those governments make. Rebuilding trust can be the basis for rebuilding the sense of community and society that too many African countries have lost, reinforced by genuine efforts to assist people.

A pan-African response

Though the international community may be pre-occupied, it does not mean the pan-African community cannot respond. Though we may not have the money or the resources that the developed world can deploy, we can cooperate to ease the pain of the crisis. Critical areas of cooperation would be:

  • Sharing data and information on how the pandemic is evolving in each country. providing public health officials and policymakers valuable data on the epidemiology of the virus within similar demographics that can help every country fine-tune their response.
  • Sharing policy responses. What measures have implemented in other African states, how effective have they been, can they be adopted elsewhere.
  • Sharing resources. If the crisis has eased in one country but is ramping up in another, they could provide resources (equipment, personnel, money) to help in that fight.
  • Buy Africa first. Stimulating the African private sector by encouraging African governments to buy what they cannot find at home (e.g. if there is a food shortage) in other African countries before looking abroad.
  • Engage the world as one. While African states do not agree on everything, this crisis will bring us together on various things. One of the most important of those things is Debt. Africa needs debt relief to give it the fiscal space to pay for the virus response and a post-crisis stimulus. Rather than have each African country go to its bilateral and development partners on its own to beg for debt relief or a payment pause. The message will be much more powerful if the continent speaks and negotiates with one voice, increasing its bargaining power and the momentum behind the issue.

Unprecedented crisis – an unprecedented response

This crisis is unlike anything Africa has ever seen before. Even the Ebola crisis of 2014 did not threaten the whole continent and had significant international assistance. It is hampering our health systems, economies and socio-cultural way of doing things on a scale we have never had to deal with.

This is by no means a comprehensive look at the policies that can or should be implemented. The policy interventions I have presented are a few among many that a lot of talented and clever people are thinking of across the continent. What I have tried to lay out in this piece is that this dual health and economic crisis is a threat to us all. And responding to this crisis requires a multi-pronged approach that is big and bold. That will need African governments to get out of their comfort zones and implement measures such as cash transfers which they have termed too expensive or too hard,  shift money from cherished infrastructure and other projects to the health system, invest in the private sector especially SME’s in new ways and talk to the public in a more genuine way.

If we do not respond in a big and bold manner, many African nations will emerge from this crisis hobbled, suffering extended socio-economic aftereffects and much more likely to suffer civil and political unrest. If we can respond with boldness then we could lay the foundations for a genuine recovery after the crisis, a public health system that isn’t an oxymoron, a reset of the relationship between private enterprise the and public good and a  much more positive relationship between the government and its peoples. I’m hopeful that maybe, this time, African leaders and policymakers will recognise this crisis for the threat it is and start thinking big and acting boldly.

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.

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 needs taxes not aid

Revenue collection is the one which can emancipate us from begging, from disturbing friends… if we can get about 22 percent of GDP we should not need to disturb anybody by asking for aid….instead of coming here to bother you, give me this, give me this, I shall come here to greet you, to trade with you. – Yoweri Museveni, President of Uganda

In 2014 Zambia exported 59% of its copper to Switzerland, yet a look at Switzerland’s import and export statistics shows that they barely imported any copper and barely anything from Zambia[1], it is likely that most of this copper ends up going to China or other markets. What’s happening is that mining companies operating in Zambia are taking advantage of transfer pricing. Transfer pricing is where a subsidiary of a multinational company from one jurisdiction sells goods or services to a subsidiary of the same multinational company in another jurisdiction. Multinationals will most often use transfer pricing to shift profits into tax havens and low tax countries such as Switzerland. In the case of Zambia’s copper, mining companies such as Glencore sells copper mined in Zambia by its Zambia based subsidiary to the company’s trading arm incorporated in Switzerland at lower than market prices. The Swiss based trading arm then sells on the copper to the world market at market prices. The results of the transaction will mean that Glencore’s Zambia subsidiary will generate lower profits, minimising the tax payable to the Zambian authorities, while Glencore’s Swiss trading arm will generate the majority of the profits from the sale of copper, making these profits taxable in Switzerland, which as stated earlier is a low tax country. This strategy isn’t illegal, but what it does is minimise the taxes that are paid to the Zambian government and maximise the profits that these companies can make.

What happens to copper profits and taxes in Zambia is neither new nor unique. The UN economic commission for Africa High Level Panel on Illicit Financial Flows[2] estimates that “over the last 50 years, Africa is estimated to have lost over 1 trillion dollars in illicit financial flows, this is roughly equivalent to all of the official development assistance received by Africa over the same timeframe.”  Currently, they estimate Africa is losing more than $50 billion annually which is double the aid that Africa receives per year.

Across the continent African governments are once again getting caught in a debt trap (you can read a previous post on that here)  and are struggling to raise revenue and are having to increase taxes on the poor and working classes. In South Africa the latest budget included a 1% rise in VAT among others, Niger is currently experiencing mass protests against new tax raises on common goods, Kenya , Zambia and other nations across the continent are considering or implementing similar tax hikes. These measures will hit the poor hardest as they will raise the prices of the goods such as fuel, food and clothing that they need the most.

Not only is Africa getting bilked of its taxes, African governments are trying to make up the difference on the backs of the poor. This needs to change, multinational corporations and international investors will be a part of Africa’s growth story and they will (or already are) make fantastic profits from it, it is only fair that Africans get their fair share. And now is the perfect time to enact policies that would give Africa a fair share. Across the world tax evasion is key issue, Europe is cracking down on tech companies that use tax avoidance strategies, and three years ago the G20 vowed to fight tax avoidance[3]. Rather than swimming against the tide, Africa would likely have allies in a quest to implement fair taxes.

Tax revenues and profits where they are made

Recently the EU proposed a new technology tax. For several years EU countries have been trying to deal with a tax avoidance problem, like Zambian copper, big multinationals would base their intellectual property in tax havens and have their European subsidiaries pay “royalties” for use the of it, essentially transferring profits made in Europe to tax havens. The most prolific users of this strategy have been the technology companies and thus the EU has decided to propose a 3% tax on the revenue generated made by these companies in the EU as opposed to profits. The main idea behind this tax is that companies should be taxed in the country’s where revenues and profits are made and not in tax havens, providing a simple solution that African countries should adopt.

Make taxes simpler; the Norwegian example

In the 1970s Norway started exporting oil and gas, in the 40 years since this industry has added over 1.1 trillion dollars to the Norwegian economy, which is almost the size of the combined economies of Sub-Saharan Africa. In 1990 Norway established a sovereign wealth fund to invest its oil revenues today it is now worth over 1 trillion dollars. One of the key tools they have used to benefit from their natural resources is tax, in Norway, companies drilling for North Sea oil pay a 78% tax rate on income, though it includes deductions for losses and investment they are simple and easily implemented and assessed by the government. In addition, Norway taxes entities not specific assets, once again this simplifies the system considerably (you can read more about Norwegian petroleum taxes here).

By contrast if you looked at laws or production sharing contracts around Africa on mining or oil and gas, they are complex, and contain different types of taxes levied on the companies, the mineral, the license etc. This complexity allows these tax systems to be gamed and avoided. African policy makers would do well to look at how Norway taxes the companies that extract its oil and gas and consider a similar system. A system that is simple, easily enforced and taxes the extractives industry on our terms. If we did this Africa could finally be in a position to get significant taxes from the extractives industry and like Norway plough those profits back into the continent.

Expand expertise

This policy is simple, but its subject matter is not. The global tax system and strategies used by multinational corporations are incredibly complex. Companies employ armies of lawyers and accountants to look for loopholes and provisions that will allow them to lower their tax bill, and African countries cannot match up. Thus, on this issue African nations need to come together and the AU or Africa Development Bank (AfDB) provides the perfect venue for doing so, to create an African Tax Centre. This is not a new notion, the AfDB already has the African Natural Resources Center, which was created to help African countries build capacity in natural resource management.   The African Tax Centre could have a similar mission consisting of two goals, first to pool African expertise on taxes and assist national governments in identifying and stopping tax avoidance and second to help train and build the capacity of African revenue collection authorities. Over time as the capacity of African countries to administer and collect taxes increases they will be able to close off the avenues used by multinational corporations to avoid African taxes.

More Taxes less dependency

Taxes are a decidedly unsexy topic and bore most of us senseless. However, they are crucially important, the roads, schools, hospitals and police services that Africa needs must be funded somehow. For too long Africa has relied on aid and debt to provide a substantial portion of this funding, but aid comes with conditionalities set by foreign powers and can only be spent on things they deem important, and debt if not wisely used or with a bit of bad luck can be more burdensome than helpful. The only other option is taxes, but African governments must change their tax focus, today most African countries collect their revenues from those fortunate enough to have formal employment and Value Added Taxes, these taxes place their burden on those who can least afford it, meanwhile global corporations and investors are spiriting away over 50 billion dollars of prospective revenue. It is time for Africa to adopt policies that would end these practices, by taxing profits where they are made, reforming extractives taxes to be simpler and more effective and building the expertise needed to close the loopholes.

Africa is the final frontier of the commercial world. Over the last two decades big multinationals have sought to tap into the African market in technology, telecoms, mining, agriculture, healthcare (the list goes on), which are all very profitable now and will only get more so. The world both needs the resources under Africa’s soil and wants to take advantage of one of the world’s last untapped markets, thus the business case for doing business on the continent will not disappear as some people ominously warn whenever the prospect of higher and more efficient taxes are raised.

If Africa is ever to choose its own development path, if it is to decide its own destiny, it will not be done through depending on the generosity of others, it will be through its own money. If there is one policy Africa should be able to get behind it is that Africa needs taxes not aid.

[1]https://wits.worldbank.org/CountryProfile/en/Country/CHE/Year/2016/TradeFlow/EXPIMP/Partner/all/Product/72-83_Metals

[2] https://www.uneca.org/iff

[3] http://www.oecd.org/tax/g20-finance-ministers-endorse-reforms-to-the-international-tax-system-for-curbing-avoidance-by-multinational-enterprises.htm

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