Archives for category: Development Economics

A recent report released by the World Economic Forum  says that border administration and infrastructure are the biggest problem to international trade.

Reducing supply chain barriers to trade could increase GDP by nearly 5% and trade by 15%

If every country improved just two key supply chain barriers – border administration and transport and communications infrastructure and related services – even halfway to the world’s best practices, global GDP could increase by US$ 2.6 trillion (4.7%) and exports by US$ 1.6 trillion (14.5%). For comparison, completely eliminating tariffs could increase global GDP by US$ 0.4 trillion (0.7%) and exports by US$ 1.1 trillion (10.1%). The estimates of the impact of barrier reduction are conservative; they reflect improvements in only two of four major supply chain categories.

Why is lowering barriers so effective? The reason is that it eliminates resource waste, whereas abolishing tariffs mainly reallocates resources. Moreover, the gains from reducing barriers are more evenly distributed among nations than the gains from eliminating tariffs.

Of course, reducing supply chain barriers requires investment, while tariff reductions require only the stroke of a pen. However, many barriers can be traced to regulation. Detailed analysis can enable policymakers to prioritize the investments that are most critical and cost-efficient.

Tariffs are of course very important (see figure).

Source: WEF (2013)

Source: WEF (2013)

But removing supply-chain barriers would be even more successful, especially  in Africa (click on the image to enlarge).

Source: WEF (2013

Source: WEF (2013

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Ernst & Young’s recent “Africa Attractiveness Survey” (pdf) shows that 2012 was a rather disappointing year for foreign direct investment in Africa. But digging more into the data leaves some space for optimism. Some excerpts from the report (click to enlarge):

Ernst & Young "Africa Attractiveness Report"

Ernst & Young “Africa Attractiveness Survey”

 At face value, 2012 was a disappointing year, in that it reversed the year-on-year growth we experienced in 2011, and somewhat dampened our expectations of steady growth in FDI projects. Having said that, we do need to put these trends in perspective:

  • Globally, greenfield projects were down by over 15% year on year in 2012, so the background is one of decline across the board.
  • In this context, Africa’s proportional share of global greenfield projects actually grew, continuing a trend that has seen this share grow, in the course of a decade, from 3.5% of the global total in 2003 to 5.6% in 2012.
  • It is also worth noting that the 764 new greenfield projects this year is still higher than the 678 in 2010, and significantly higher than anything that preceded the peak of 2008.

The geographical origin of FDIs in Africa is experiencing major changes:

Investment from developed markets in particular was disappointing.  Although FDI projects from the UK grew, those from the US and France, the other two leading developed market investors in Africa, were considerably down. In contrast, greenfield investments from emerging markets into Africa grew once again in 2012, continuing the trend of the past three years. In the period since 2007, this category of investment from emerging markets into Africa has grown at a healthy compound rate of over 20.7%, in comparison to investment from developed markets, which has grown at only 8.4%.

Intra-African investment has been particularly impressive over this period since 2007, growing at a 32.5% compound rate. (…) This underlines a broader trend of growing confidence and optimism among Africans themselves about the continent’s progress and future.

Other figures in the report show that -as we’ve often said in this blog- manufacturing in Africa has stagnated over the last decade. However several countries could reach a middle income status by 2025

Source: Ernst & Young

Source: Ernst & Young

Source: Ernst & Young

Source: Ernst & Young

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.

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.

 

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.

The state of Lagos in Nigeria decided to embrace de Soto’s “Legalist” idea of development and to start a process of mass formalization of the informal sector. I don’t know if Hernando de Soto will go there in person, but his Peru-based think tank – the Institute of Liberty and Democracy- is involved in the project. From an article in This Day Live:

The Lagos State Government has begun a comprehensive reform process, which it designed to formalise about 90 per cent assets currently locked in the state’s informal sector.

the state government had trained more than 100 enumerators in collaboration with the Institute for Liberty and Democracy (ILD), Peru to assist in data collation and information gathering under the state’s informal sector reform initiative.

.. Raji [Ministry of Commerce and Industry] said the state government was interested in having comprehensive information about the sector, and know why most people choose to operate informally, and, then work out modalities that will help in formulation policies that will encourage their migration to the formal sector.

Giving more recognition to informal operators is undoubtedly a good thing, but I wonder how far this can go. The Legalist school argues that formalizing property rights in the informal sector would trigger a virtuous cycle: business formalization turns “dead capital” (i.e. capital without property rights) into real collateral. Real collateral allows access to formal finance and new markets. Increased access to formal finance encourages business investments. Increased investments … I bet you can guess the rest of the story.

I used to like de Soto’s ideas, and to some extent I still do: as simple as they are, they point to the right direction – informal economies have a large development potential. But I turned more critical when I realized that his simple arguments have transformed into an over-simplification of reality. The equation “business registration=formalization” neglects that most activities in the informal economy are sustained by an infrastructure of (non-formal) regulatory, financial and welfare institutions beyond the reach of official governance. The central question raised in Lagos, “to know why most people choose to operate informally, and, then … encourage their migration to the formal sector” misses the point. The question should be reversed: we should try to understand how informal firms and their institutions work in practice, and to determine how formal institutions can “scale-down” and become appropriate for their needs – definitely not the other way around.

World Bank’s Marcelo Giugale has a new article in the Huffington Post arguing that industrial policy has failed miserably in the past and that the “new industrial policy”, though better than the previous version, is unlikely to work either.

If you are over 50 and grew up in a developing country, fond memories of your family’s car or TV set are surely coming to your mind: it carried a national brand, cost a fortune and broke down all the time.

But industrial policy is back in the agenda:

You’d be surprised. Today, developing countries rich in oil, gas or minerals are desperately looking for policies to diversify their economies, not just because the price of natural resources could unexpectedly tank, but because the business of extraction does not create enough jobs. They have money to invest–think Africa. Even in countries that are doing well, governments are searching for ways to make their industries more high-tech and avoid being trapped half-way up the technological ladder–think Brazil. But everyone wants a new–read, smarter–industrial policy, one that avoids the mistakes of the past. They just might be on to something.

So, will this “new industrial policy”, which sounds less exciting and less revolutionary than its previous version, work? Let’s say that it cannot hurt. If done in the open, private-public collaboration is a win-win. But you are entitled to be skeptic, especially if your government has not been able to deliver simpler services–like a teacher in every class, clean water and a decent police force. That is, if you live almost anywhere in the developing world.

More here (recommended)

UNIDO (the UN office for industrial development) just released the International Handbook of Industrial Statistics with very comprehensive data on manufacturing output around the world. Unfortunately the handbook is available only in print and very costly. I wish they prepared an executive summary or a document with the “highlights” of their findings, but I couldn’t find any of that. The press release is quite interesting:

The new publication shows that the world’s industrialized countries experienced particularly low manufacturing value added (MVA) growth, with some dynamism in North America and East Asia was largely negated by the sustained recession in Europe. MVA of industrialized countries grew at an average rate of just 0.3 per cent in 2012.

..the global economic crisis beginning in 2009 has not only forced huge job cuts in the manufacturing sector of industrialized countries but has also pulled labour productivity down. Net manufacturing output in the world’s eight major industrialized economies (G-8) has fallen by a much higher rate than the number of employees, reflecting the fact that many businesses retain a skeleton workforce even during periods when there are no or few orders for their products.

And on the LDCs:

The Yearbook also highlights MVA growth trends in the least developed countries (LDCs), which are facing different constraints related to external trade. In comparison with African LDCs, Asian LDCs have the advantage of closer proximity to fast-growing economies, and this is reflected by an average MVA growth rate over the last decade of 8.7 per cent per annum for Asian LDCs compared to 5.9 per cent for African LDCs.

(A little bit) More here

The Kenyan Shilling (KSh) reached a 1-year low against the US dollar last week (1 dollar=87KSh), probably because the Presidential Elections are approaching and everybody is worried about it. Bloomberg analysts predict that the value could go down to 89 KSh a dollar on election-day.

What I find interesting is that in December 2007 the Shilling also plummeted just a few weeks before the infamous elections that led to the violence. But the value in 2007 was 63 KSh a dollar, not 87 like last week. Here’s an excerpt from an article written in 2007 in the African Executive:

The Kenya shilling (Ksh.) has hit a nine years low against the US dollar at an average of US$1.00 = Ksh.63.50. The shilling has been gaining strength over the dollar for over two years now. This has come both as a blessing and curse to many Kenyans depending on which side of the divide they hail. For exporters, the strengthening of the shilling against the dollar has wiped out millions of earnings, making them to suffer losses.

So, what puzzles me is not just the “pre-election depreciation” but the long-term trend. Why has the Kenyan Shilling lost so much value in the last 5 years? Why did it appreciate back then? I am asking these questions to myself as well the informed readers of this blog. Take a look at the 5-years trend:

KShUSD 2007 2013

You see that 2011was an “annus horribilis” for the Kenyan Shilling, which lost a quarter of its value in less than a year. But the downward trend goes beyond that.  When it comes to the currency appreciation before 2008, the African Executive gave this explanation:

The shilling has become stronger because of huge inflow from donors, increased remittance by Kenyans in the Diaspora and the weakening of the US dollar.  Other reasons include the buying of 24.99% stake in Equity Bank by Helios Capital Ltd. at an estimated value of Ksh.11 billion, and the take over by 51% of Telkom Kenya by France Telecom, at an estimated value of Ksh.26 billion. Recently, the International Monetary Fund disbursed four billion shillings to the Kenya government. This has further increased the amount of dollars in circulation.

That cannot be the only reason, however, considering that both foreign direct investment and the net inflow of portfolio equity increased between 2008 and 2011. Official development assistance increased as well. Perhaps, another possible  explanation is the one proposed by Wolfgang Fengler, lead economist for Kenya at the World Bank, who wrote that the current account deficit (imports higher than exports) is the structural cause behind the downward trend of the Kenyan currency:

The main reason is that Kenya’s economy is increasingly imbalanced: the country is importing too much and exporting too little. This makes it vulnerable to shocks.  The gap between imports and exports needs to be financed by financial inflows other than export earnings. In 2011, imports have soared (mainly due to higher oil and food costs), while exports remained stagnant. The gap between imports and exports, also called current account deficit, now stands at above 10% of GDP – one of the highest in the world! Today, Kenya’s main exports don’t even earn enough to pay for its oil imports, not to mention other imports beyond oil (figure)!  The money to pay for any additional imports needs to come from somewhere.

I bet there are plenty different explanations that I don’t know about. Feel free to comment if I missed out something.

This 2008 paper by GMU’s Peter Boettke, Chris Coyne and Peter Leeson (pdf) is one of my all-time favorite studies on institutions, path dependence and economic development. If you think that the title of the paper is catchy, wait and read the full abstract:

Research examining the importance of path dependence and culture for institutions and development tells us that “history matters,” but not how history matters. To provide this missing “how,” we provide a framework for understanding institutional “stickiness” based on the regression theorem. The regression theorem maintains that the stickiness, and therefore likely success, of any proposed institutional change is a function of that institution’s status in relationship to indigenous agents in the previous time period. This framework for analyzing institutional stickiness creates the core of what we call the New Development Economics. Historical cases of postwar reconstruction and transition efforts provide evidence for our claim.

The authors divide institutions in three types: foreign-introduced exogenous institutions (FEX), indigenously introduced exogenous institutions (IEX) and indigenously introduced endogenous institutions (IEN). The core argument is that institutions tend to “stick” when they are built upon the “mẻtis” of a society.

 A concept passed down from the ancient Greeks, mẻtis is characterized by local knowledge resulting from practical experience. It includes skills, culture, norms, and conventions, which are shaped by the experiences of the individual. This concept applies to both interactions between people (e.g., interpreting the gestures and actions of others) and the physical environment (e.g., learning to ride a bike). The components of mẻtis cannot be written down neatly as a systematic set of instructions. Instead, knowledge regarding mẻtis is gained only through experience and practice. (…) In fact, mẻtis can be thought of as the glue that gives institutions their stickiness.

I often try to think about how this “mẻtis” looks like in real life, especially in the realm of small enterprise finance. If I think about the Kenyan context, my best guess is that the culture of “chamas” (i.e. self-help groups) is part of the mẻtis and that any new financial, welfare or regulatory institution has a much higher chance of “sticking” if it is built upon them. Kenyan banks understood this many years before me, and they introduced new financial products specifically designed for self-help groups (so-called chama accounts). As far as I know, these accounts have been a big success.

The role of chama groups in the Kenyan society and economy is an intriguing topic, which deserves way more attention. I’ve written about it before here and here. New posts are in the pipeline.