The industrial organization of taxis in Nairobi

May 21, 2013 //
0

I’ve always wondered how thousands of cab drivers organize themselves in a chaotic place like the Nairobi Central Business District. So I did a small research on my own. The sample size is 1, David my awesome cab-driver.

The story is that if you want to be a cab driver anywhere in town you must become a member of the taxi-drivers association in charge of that area. The association where David works controls the Nakumatt Lifestyle area, the Tuskys Supermarket area (that’s where David is always parked) and the street in front of Uchumi supermarket. Membership comes at a cost of 5000 KSh per year (about $60).

For the first three years, you are obliged to rent a car from the association at a fixed cost of 1500KSh per day (about $20) and a variable cost based on mileage. You cannot own the car you use for work. This means that some rental cars are available only at night time, others only during the day time. David prefers the daytime shift but for more than two years he was forced to work at night -all the cars were already taken during the day. Only a couple of months ago he was able to change, but he says that “traffic is horrible” during the day.  So sometimes he works both day and night.

If you’ve been loyal to the association, after three years you become a senior member  and you’re allowed to buy your own car. The cost for a car in Kenya is very high – second hand cars go from KSh 400,000 to 600.000 (about $5000 to $7000). And that is for a 10-years old basic model. You can easily spend KSh 1 million ($12,000) if you want a slightly newer or fancier car. If you own more than one car, you can rent one of them to the association’s junior members.

Owning your car instead of renting it means higher profits, as well as higher risks and maintenance costs. Most people would rather own their vehicle anyway, but only a few are able to obtain a bank loan or borrow from family or friends. David will become a senior member in 6 months and his plan is apply for a loan at Equity bank and buy a Toyota for about KSh 450,00. He says that Toyota cars never break and spare parts are cheaper and easier to find in Nairobi. His main worry is that he’ll get carjacked again.

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Categories Kenya

Mixed links and reads

May 16, 2013 //
0

Long reads:

Categories Miscellaneous

Environmental migration in Africa: observed and predicted

May 15, 2013 //
2

It looks like environmental scientists are not jumping into the Afro-optimist bandwagon. Marchiori, Maystadt, and Schumacher (2012) predict that climate change will force migratory flows from the coastal areas to the mainland in Africa, and East Africa will be particularly affected  (click on the image to enlarge).

Marchiori, Maystadt, and Schumacher (2012)

Marchiori, Maystadt, and Schumacher (2012)

Such a mapping gives an idea of the potential centripetal process induced by environmental migration. While there has been a long tradition of migration to the coastal agglomerations in Africa (Adepoju 2006), coastal areas could experience a significant proportion of their population fleeing toward African mainland due to climate change by 2099. In West Africa, Benin, Ghana, Guinea, Guinea-Bissau, Nigeria and Sierra Leone may be among the most affected countries. In Eastern Africa, Kenya, Madagascar, Mozambique, Tanzania and Uganda may constitute a cluster of sending countries of environmental migrants. In Southern Africa, Angola and Botswana could become important sources of environmental migrants while Congo and Gabon could also be pointed out in Central Africa. Without jumping too quickly to predictive conclusions, such a centripetal pattern of flows could warn about some potential destabilizing effects. On the one hand, massive population movements could speed up the transmission of epidemic diseases such as e.g. malaria (Montalvo and ReynalQuerol, 2007) in areas where the population has not yet developed protective genetic modifications (Boko et al., 2007). On the other hand, the expected move towards mainland Africa where population density has been recognized as a factor enhancing conflict could become a major geopolitical concern; for instance, North-Kivu in Congo, Burundi (Bundervoet, 2009), Rwanda (Andre and Platteau, 1998), and Darfur (Fadul, 2006).

More here (pdf)

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Categories Africa, East Africa

How reliable are employment statistics in Africa?

May 13, 2013 //
0

Last week I wrote a blog post titled “Africa is rising, employment is not” reporting some figures from a new paper by John C. Anyanwu  on the African Statistical Journal. I briefly mentioned in the post that employment stats are not very reliable in Africa because of informality of the labour market. But I kept it a bit vague and some readers put me on the spot: if the data is garbage, why are you blogging about it?

Good question. The reality is that I knew that the data was “not very reliable”, but I didn’t  look in-depth into the issue -so I’ll try to do this now. Look at these national-level definitions taken from the ILO laborista database:

In Kenya, employment data is taken from this question in the national census: 

What was X mainly doing during the last seven days preceding the census night? 1) worked for pay or profit; 2) on leave/sick leave; 3) working on family holding; 4) no work; 5) seeking work; 6) student; 7) retired; 8) disabled; 9) home makers; 10) other

A person is considered employed if over the last week she/he worked “most of the time” for wages, salary, commission, tips, contract or payment in kind

 In Uganda, stats are based on a labour-force survey. You are considered employed if

a) performed “some work” for pay or profit during the reference week; b) were temporarily absent from work during the reference week because of illness or leave, but were definitely going to return; and c) were engaged in production of goods for on use. “Some work” is defined as 1 hour or more during the reference week.

I checked the definitions for a few other countries and they looked rather similar – they tend to include all kinds of casual labour in their employment stats. In Uganda it was quite extreme, if you worked for 1 or 2 hours the week before the interview, you are considered “employed”. When we talk about the importance of “job creation” for development, random casual jobs for one or two hours a week is definitely not what we are talking about. The problem is that when we look at the general graph, it is difficult to make sense of the differences between some countries.

Source: Anyanwu (2013)

Source: Anyanwu (2013)

I’m not an expert of labour markets in each of these countries. But how realistic is it that Burkina Faso, Ethiopia and Central African Republic have relatively high employment rates, while Egypt, Algeria and South Africa are relatively low? Initially I thought that high employment rates could be an indicator of large informal sectors. But that seems like a partial explanation – the reality is that employment statistics are fundamentally unreliable and country-level comparisons cannot be accurate.

A recent paper by Fox and Pimhidzai looks at the problem more in-depth for Africa and particularly for Uganda. Excerpts from the abstract:

 A cursory review of employment data for low-income Sub-Saharan African countries shows both large gaps and improbable variation within countries over time and among countries, suggesting that low quality data are routinely reported by national statistics offices. Unfortunately, policies are formed and projects developed and implemented on the basis of these statistics. Therefore, errors of measurement could be having profound implications on the strategic priorities and policies of a country… [The paper] finds that estimates of employment outcomes are unreliable if the questionnaire did not use screening questions, as labor force participation will be underestimated. Likewise, surveys that use a seven-day recall period underestimate or potentially misrepresent employment outcomes, owing to seasonality and multiple jobs. [...] The paper concludes that there is a knowledge gap about employment outcomes in Sub-Saharan Africa that will continue unless collection techniques improve.

So the lesson of the day is “to always be suspicious about employment stats in Africa”, especially cross-country comparisons. Thanks to  @RachelStrohm and @RowanEmslie among others for questioning the issue.

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Categories Africa

Africa is rising. Employment is not

May 8, 2013 //
8

The African Statistical Journal has an interesting paper by John C. Anyanwu on the driving factors of male employment in African countries. The journal -published by the African Development Bank- is available for free here (pdf). Some interesting facts:

 Fact 1 – There is a substantial variation in male and female employment ratios across African countries. The difference is particularly evident if we compare oil-exporting and North African countries with smaller Sub Saharan African economies. The latter tend to have higher employment ratios for both the male and female population.

 

Source: Anyanwu (2013)

Source: Anyanwu (2013)

Fact 2 – In some African countries, male employment decreased between 1991 and 2010

The author argues that the decline has been particularly intense in some countries such as Niger, Be­nin, Rwanda, Lesotho, Burundi and our beloved Kenya.

Source: Anyanwu (2013)

Source: Anyanwu (2013)

One of these days I’ll have to sit down and try to understand some of these dynamics. For example, Rwanda -the “super star” of the Doing Business Reports - has done so bad in terms of employment, while Zimbabwe – land of the highly criticized indigenisation law - is one of the best performers? I guess there is a number of historical and contextual factors to take into consideration. If you have quick thoughts or further questions please share them in the comment section.

Fact 3 – The data from 1991 and 2009 show an U-shaped correlation between male employment ratio and GDP per capita

 

Source: Anyanwu (2013)

Source: Anyanwu (2013)

 

The paper uses employment data from the ILO and the World Bank –which are probably the most reliable sources currently available – but we should be always highly suspicious when it comes to employment stats in African countries. Informality is too widespread, and employment happens far too often outside the radar of government institutions and statistical agencies. Not long ago, Shanta Devarajan called it the African Statistical Tragedy. Should we therefore discard the arguments in the paper?

Although the stats might not be extremely accurate, I think that the trends could be right, especially if we consider how economic growth is happening in most parts of Africa. As I said in my last post, growth is happening without a structural transformation of the economies towards labour-intensive sectors. In particular, the manufacturing sector, which absorbs large part of the labour force in most emerging economies, is not expanding in most parts of Africa. But more research is definitely needed in this field.

The full paper is here.

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Categories Africa, Development Economics, East Africa, Economic informality, Emerging Markets, Industrial development, Kenya

Structural transformation explained in three graphs

May 6, 2013 //
1

Thanks to Cherokee Gothic, I came across this very interesting paper by Herrendorf, Rogerson and Valentinyi (pdf) about the structural transformation of economies in the process of economic growth. The figures are striking:

Source: "Growth and Structural Transformation" (2013), by Herrendorf, Rogerson and Valentinyi

Source: “Growth and Structural Transformation” (2013), by Herrendorf, Rogerson and Valentinyi

These figures focus on a sample of industrialized countries, mostly EU, US and East Asian powers (Japan and Korea). They show that as GDP per capital grows, (1) employment in the agricultural employment tends to decrease, (2) employment in the services sector increases linearly and (3) employment in the manufacturing sector follows an inverted u pattern: it grows initially but then it tends to decrease as GDP per capita grows. The question that we should ask ourselves is whether African economies will follow the same pattern.

My opinion is that ‘yes’ – over the long term African economies will go through such structural transformation. However, the biggest mistake is to say that during the process one sector is more important than the other. If someone concludes that African governments should focus on services and neglect agriculture because that’s how economic growth happens. Well, he or she hasn’t understood much about the topic. As Di Maio recently argued, industrialization and food security are not competing policy objectives.

At the same time, it is clear that growth in the manufacturing sector is one of the key components missing from the puzzle. Kenya is in the initial part of the graph, moving from low-income to middle-income, but that is happening without any significant growth of employment or value-added in the manufacturing sector. This is what John Page calls “structural deficit” in Africa:

Africa faces a significant structural deficit—the result of two and a half decades of deindustrialisation and increasing dependence on natural resources. Today Africa’s manufacturing sector is smaller, less diversified and less sophisticated than it was in the decade following independence. Agro-industry and tradable services are still in their infancy. As industry lost ground, labour moved from higher to lower productivity employment. Without an acceleration of structural change, the region’s recent growth turnaround runs the risk of not sustaining its momentum into a middle-income status.

 

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Categories Development Economics, Industrial development

East African monetary union, second try

April 30, 2013 //
1

There is an old joke in East Africa that the EAC (East African Community) will succeed only when Tanzanians learn English, Ugandans learn Swahili, and Kenyans learn manners. Fortunately language barriers and old stereotypes are not the main drivers of the current policy agenda. The priority is instead to speed-up economic integration and establish (actually, “re-establish”) a common currency –the East African Shilling – across the 5 EAC countries: Kenya, Uganda, Tanzania, Rwanda and Burundi. Is this is a good idea?

Let’s start with a little theory first –a primer on economic integration as I studied in my undergrads. Look at the figure below (source)

Stages of economic integration

Theory says that there are 5 steps to economic integration: you start with free trade area, which abolishes partially or completely the custom tariffs between member countries. In the second step, a Custom Union is formed when member countries agree to uniform external tariffs towards third countries. The common market adds the free movement of the factors of production, including services, capital and labor. In the fourth step, the economic union introduces a common currency as well as common monetary, fiscal and budgetary policy. Usually this is complemented by the harmonization of tax and welfare policies. Finally, the very last step is the full political integration with the establishment of a common government.

Where is the EAC?

The EAC established a customs union in 2005, a common market in 2010 and now it aims at the fourth step with the establishment of an economic union. I must admit that I am excited about the idea but also very worried. Here’s a list of my concerns:

First, the EAC is only half way through to the third step (common market), and it is jumping already into the fourth (economic union). The truth that everybody knows is that free movement of capital and labour is far from being achieved. Labour cannot move freely because of long-standing legal and regulatory barriers. Goods cannot move freely as well, especially because non-tariff barriers are still a huge burden. Just a silly example, I’ve learnt from personal experience that many bus companies ship packages from Uganda to Kenya, but not the other way around. Reason? I was told it was “a problem at the border with Uganda”. Who knows what that means…

Second, you cannot create a common currency without creating common fiscal and budgetary policies. The EAC governments seem aware of this issue, and in fact they proposed the establishment of an “East African Financial Services Authority”, “East African Surveillance and Enforcement Commission” and the “East African Statistics Bureau”. This all sounds wonderful, but the real issue is whether national governments are willing to give up sovereignty over such important matters. Let me borrow some sentences from an article on Columbia Communique:

Is the wish for closer relationships a good thing? Absolutely. Does it have to be achieved as fast as possible and through the handcuffs of a currency union? Absolutely not. Not only will this process take many years, it will also require full commitment. They can’t have their cake (the currency union) and eat it too (maintain sovereignty in all areas).

Currently the EAC countries have very different import-export mixes, making them vulnerable to changes in world goods prices to different degrees. Without strong fiscal centralization including a counter-cyclical mandate and no adjustment mechanisms such as inflation or devaluation, a currency union can have devastating effects on countries hit hard by an external shock.

My last point is that the EAC has to learn from the experience in the EU: a monetary union must be able to deal with both periods of economic growth as well as periods of crisis and recession. How will the EAC act in case of fiscal mismanagement? What will it do if a country enters a period of financial and economic crisis? Will the regional powerhouse (Kenya) step in and help the “periphery”?  I know that using these terms is quite a stretch in the EAC context. But the region cannot ignore the experiences in other parts of the world. And more importantly, the EAC cannot ignore that it already failed in forming a monetary union in the past – neglecting its own history would be the worst of the mistakes.

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Categories Development Economics, East Africa, Frontier Markets, International trade, Kenya, Monetary Economics

Forget about the capital city – poverty alleviation happens in small towns

April 26, 2013 //
0

I came across this interesting new paper by Christiaensen, De Weerdt and Todo. The argument is that people are more likely to escape poverty when they migrate to secondary towns rather than big cities. Abstract:

 A rather unique panel tracking more than 3,300 individuals from households in rural Kagera, Tanzania during 1991/4-2010 shows that about one in two individuals/households who exited poverty did so by transitioning from agriculture into the rural nonfarm economy or secondary towns. Only one in seven exited poverty by migrating to a large city, although those moving to a city experienced on average faster consumption growth. Further analysis of a much larger cross-country panel of 51 developing countries cannot reject that rural diversification and secondary town development lead to more inclusive growth patterns than metropolitization. Indications are that this follows because more of the poor find their way to the rural nonfarm economy and secondary towns, than to distant cities. The development discourse would benefit from shifting beyond the rural-urban dichotomy and focusing instead more on how best to urbanize and develop the rural nonfarm economy and secondary towns

And from the conclusions:

Agnostic about the pros and cons of urbanization per se, this paper starts from the  observation that the next wave of urban expansion is predicted to be concentrated in large cities (1 million plus) (UN, 2011) and explores whether the nature of the occupational and spatial transformation matters for poverty reduction (as opposed to growth alone). In so doing, the study differentiates itself from most of the literature which usually only applies a sectoral (agriculture versus non-agriculture) or spatial (rural versus urban) lens and draws attention to that the fact that the urbanization pattern may be more important for poverty reduction than urbanization itself.

Full paper here (pdf)

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Categories East Africa, Urban Development

Kenya import policy (and other interesting facts)

April 24, 2013 //
0

Some figures:

Kenya applies the EAC Customs Union’s Common External Tariff (CET), which includes three tariff bands: zero duty for raw materials and inputs; 10 percent for processed or manufactured inputs; and 25 percent for finished products. “Sensitive” products and commodities, comprising 58 tariff lines, have applied ad valorem rates above 25 percent.  This includes a 60 percent rate for most milk products, 50 percent for corn and corn flour, 75 percent for rice, 35 percent for wheat, and 60 percent for wheat flour. For some products and commodities, the tariffs vary across the five EAC member states.

The report touches a number of other issues, including non-tariff barriers, custom procedures at the Port of Mombasa, intellectual property right protection and many other things. An interesting bit on counterfeiting:

According to a survey released by the Kenya Association of Manufacturers (KAM) in April 2012, the Kenyan economy is losing at least $433 million annually due to counterfeiting. The study estimated that the GOK is losing approximately $72 million in potential tax revenue, and that some Kenyan companies could be losing as much as 65 percent to 70 percent of their regional market share due to counterfeiting.

Kenya’s EPZs have served as a conduit for counterfeit and sub-standard goods. These products enter the EPZ ostensibly as sub-assembly or raw materials, but are actually finished products. These counterfeit and sub-standard goods also end up in the Kenyan marketplace without responsible parties paying the necessary taxes. Counterfeit batteries have been particularly problematic.

More here

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Categories International trade, Investment, Kenya

Interesting facts on Somali piracy

April 19, 2013 //
0

I went through a very interesting and very comprehensive new report on Somali piracy by the World Bank (pdf, 12MB).  Some highlights:

Fact 1. Piracy incidents and hijacks have gone down dramatically last year (click to enlarge)

Somali piracy attacksFact 2. Nevertheless, piracy still imposes a high cost on trade

piracy imposes a distortion on trade that has a high absolute cost. When the shortest shipping route between two countries is through piracy-infected waters, the additional cost of trade between them is equivalent to an increase of 0.75 to 1.49 percentage points (with a mean estimate of about 1.1) in total ad valorem trade costs. In absolute terms, the impact is large: since about US$1.62 trillion in global trade traveled along routes affected by piracy in 2010, that year Somali piracy cost the global economy an estimated US$18 billion, with a margin of error of roughly US$6 billion. If piracy continues to disrupt global trade as it has done, similar amounts will be lost every year.

Fact 3. Impact of piracy on tourism

Somali piracy and tourism

I wonder how credible this is. The report says that the argument is difficult to show quantitatively but it is supported by anecdotal evidence

anecdotal evidence does suggest that pirate attacks have suppressed tourism in countries like Kenya and Seychelles, popular cruise-ship destinations (Oceans Beyond Piracy 2010; Mbekeani and Ncube 2011). While those on cruises are not a large fraction of total visitors, they tend to spend substantially more than other tourists

Fact 4 (my favorite). The Somali pirate stock exchange

At the outset of an operation, an instigator provides or gathers from investors the funds needed to launch the operation and identifies a pirate commander to organize the attack. At least 10 instigators are known to be active in Puntland (Lang 2011). Some attacks, however, are launched opportunistically without being prefunded, in which case investors are solicited as necessary to fund ransom negotiation costs

The initial investment can be provided in seed money or goods, such as an engine, skiffs, or weapons. In exchange, the financiers are entitled to a share of the ransom if the operation is successful. Reuters (2009) and Kraska (2010) mentioned a stock exchange in Harardheere, where anyone could invest in pirate operations.

The Wall Street Journal  wrote a story on this as well:

The world’s first pirate stock exchange was established in 2009 in Harardheere, some 250 miles northeast of Mogadishu, Somalia. Open 24 hours a day, the exchange allows investors to profit from ransoms collected on the high seas, which can approach $10 million for successful attacks against Western commercial vessels.

While there are no credible statistics available, reports from various news sources suggest that over 70 entities are listed on the Harardheere exchange. When a pirate operation is successful, it pays investors a share of the profits. According to a former pirate who spoke to Reuters, “The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials. . . . We’ve made piracy a community activity.”

Much more here (pdf)

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Categories Africa, East Africa, International trade
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