Archives for category: Infrastructure

Uhuru and Ruto wrote in the Jubilee Manifesto that they plan to establish a development Bank to “prop up the private players”. Although nobody is talking about it, and although we have no idea if that will happen anytime soon, this could be a huge deal for the future of Kenya. What is a development bank? And is it a good or a bad idea for Kenya?

A traditional definition of a development bank is one which is a national or regional financial institution designed to provide medium-and long-term capital for productive investment, often accompanied by technical assistance, in less-developed areas. Development banks fill a gap left by undeveloped capital markets and the reluctance of commercial banks to offer long-term financing. [full “primer on development banking” here]

We have to keep in mind is that UhuRuto provided no details about how a development bank fits into their grand scheme for economic development in Kenya. For example, we don’t know if the objective is to promote small businesses (like the informal sector or SMEs), whether they want to finance large infrastructural projects, agriculture or large manufacturing industries.  However, the sure thing is that whenever the plan is to increase the government role in the economy, you attract both huge praise and criticism:  that’s the difference between the “industrial policy view” and the “political view”

According to the industrial policy view, development banks do more than just lending to build large infrastructure projects. They also lend to companies that would not undertake projects if it was not for the availability of long-term, subsidized funding of a development bank. Furthermore, development banks may provide firms with capital conditional on operational improvements and performance targets. In such circumstances, we would expect to see the firms who borrow from development banks increasing capital investments and overall profitability after they get a loan.

According to the political view, on the other hand, lending by development banks leads to misallocation of credit for two reasons. First, development banks tend to bailout companies that would otherwise fail (this is the soft-budget constraint hypothesis, e.g. Kornai, 1979). Second, the rent-seeking hypothesis argues that politicians create and maintain state-owned banks not to channel funds to socially efficient uses, but rather to maximize their personal objectives or engage in patronage deals with politically-connected industrialists.

So, whether a development bank is a good idea or not for Kenya entirely depends on your opinion on the current political class: will they be committed-to-development or good-old rent-seekers? For now I want to keep on the optimist side.

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Probably not, the New Structural Economics won’t make it as far as becoming a new consensus in development economics. But the debate triggered by the Chief Economist of the World Bank  Justin Yifu Lin is an interesting one.

The NSE is basically a milder version of economic structuralism, an approach from the ’60s and ’70s that entailed strong state interventions in the economy, import-substitution and protection of domestic industries. The “New Structural Economics” makes a step closer to the  “Washington Consensus”  as it believes that markets are the best mechanism for allocating resources. At the same time, however, it says that governments must play a central role in facilitating industrial upgrading and structural change -not in all sectors of the economy, but only in those where the country has a comparative advantage. In other words, governments must “follow” markets, not “lead” them wherever they hope to succeed.

Lin summarizes the principles of NSE in three points (the ungated older version of the paper is here):

First, an economy’s structure of factor endowments evolves from one level of development to another. Therefore, the optimal industrial structure of a given economy will be different at different levels of development. Each industrial structure requires corresponding infrastructure (both “hard” and “soft”) to facilitate its operations and transactions.

Second, each level of economic development is a point along the continuum from a low-income agrarian economy to a high-income industrialized economy, not a dichotomy of two economic development levels (“poor” versus “rich” or “developing” versus “industrialized”). Industrial upgrading and infrastructure improvement targets in developing countries should not necessarily draw from those that exist in high-income countries.

Third, at each given level of development, the market is the basic mechanism for effective resource allocation. However, economic development as a dynamic process requires industrial upgrading and corresponding improvements in “hard” and “soft” infrastructure at each level. Such upgrading entails large externalities to firms’ transaction costs and returns to capital investment. Thus, in addition to an effective market mechanism, the government should play an active role in facilitating industrial upgrading and infrastructure improvements.

This topic hasn’t “trickled down” yet from academic circles to the blogosphere (or did I miss something?) but several thought-leaders have commented on the issue.

Dani Rodrik, for example, agrees with most arguments but criticizes the idea of following strictly the comparative advantage:

Lin doesn’t want governments to employ “conventional” import substitution strategies to build capital-intensive industries which “are not consistent with the country’s comparative advantage.” But isn’t building industries that defy comparative advantage what Japan and South Korea did, in their time? Isn’t it what China has been doing, and quite successfully, for some time now? According to my calculations, the export bundle of China is that of a country between three and six times richer. If China, with its huge surplus of agricultural labor, were to specialize in the type of products that its factor endowments recommend, would it now be exporting the advanced products that it is?

Anne Krueger criticizes Lin’s excessive focus on industrial expansion for development:

Lin’s NSE seems to equate growth with industrial expansion, ignoring the importance of increased productivity of the large fraction of the labor force (and of land) in rural areas. Failure to invest in agricultural research and development and in rural health and education has been a major weakness of many countries’ development strategies. While strides have been made in reducing discrimination against agriculture, the NSE as exposited by Lin would appear to support the industrial and urban bias that has itself constituted a very large distortion in some countries.

I would like to see some more commentaries on the topic. Hopefully now that the World Bank President has been chosen, there will be more space for some  good-old policy debate.

If you are interested in the book, you can find it here.

Let me start with an anecdote. Two days ago the rainy season began in Kenya (almost a month late) and this morning the roads in the Kariobangi industrial cluster became very muddy. A truck got stuck in one of the roads and it took almost an hour to get it out –all businesses in that road were damaged from a very simple problem.

An entrepreneur came up to me and asked “why did the Italians construct tarmac roads in the Korogocho slum and not the Kariobangi industrial cluster? Nobody cares about small industries in this country”. He was referring to a slum upgrading program financed by the Italian Cooperation to improve the roads in the nearby informal settlement of Korogocho, which was not extended to the Kariobangi Light Industries; he was evidently not happy about it.

I could not come up with a good answer at that moment, but his question reminded me of an excellent paper by Robert Wade, professor of political economy and development at the London School of Economics, which discusses the role of industrial policy in Asia and how donors completely neglected it in Africa.

 I came to Addis in the summer of 2004 with Joe Stiglitz, to participate in what is called a Policy Dialogue. We talked to several groups. At the meeting with aid representatives working in Ethiopia—about 20 of them—we invited each to identify the priorities of their agencies in Ethiopia. They identified more or less the same ones, virtually all in ‘governance’ or the ‘social sectors’ like primary health and primary education. They made virtually no reference to investment in the ‘hardware’ of productive capacities. The closest any of them got was ‘rural roads’, mentioned by just one representative. No-one mentioned aid for agriculture or irrigation or manufacturing or services. When they talked of ‘improving governance’ they were not referring to improving the governance of the processes through which capital accumulation, technological progress, and diversification of production can be directly accelerated, but governance in broader terms related to ‘rule of law’, ‘property rights’, ‘anti-corruption’ and the like. They talked, implicitly, of ‘market-enhancing governance’, not ‘growth-enhancing governance’, as though the former equated to the latter.

… The agendas of the aid donors Joe Stiglitz and I talked to in Addis in 2004 could scarcely be more different from the agenda of America’s large-scale aid for Japan, South Korea and Taiwan in the postwar decades. The comparison is important because the Americans were very serious about accelerating economic development in Northeast Asia. They saw the region as the front-line in the battle against global communism and they wanted economically prospering, militarily strong, and politically stable capitalist allies on the front line. So what did the Americans direct their aid to, when they were deadly serious about accelerating development (as distinct from opening up the economies and claiming that opening was the best route to development)? US aid was targeted explicitly at the development of productive capacities, including lots of assistance for new basic industries (in metals, chemicals, petrochemicals), infrastructure like roads, electricity and water supply, technology institutes, and agriculture (irrigation, improved crop varieties, crop research institutes). US aid even supported large-scale, semi-expropriative land reforms in all three countries, in order to make the rural sector politically stable as well as to raise the productivity of the land.

Yet for the past 25 years the consensus in the donor community has been, implicitly, that the development of productive capacities will result from free markets, provided free market policies are complemented with the development of ‘market-enhancing governance’ capabilities, like those noted above, as well as by investment in primary education, primary health care and the like. The comparison makes one wonder whether the donor community has a collective interest in accelerating development as distinct from reducing poverty and opening up developing economies—which is not the same thing.

Ungated version of the paper here

The Tanzanian government has tried to convince Ugandan businessmen to use the recently completed Central Corridor connecting Kampala to the port in Dar es Salaam via Mutukula (total distance is around 1800 KM) as an alternative route to the highly congested, though shorter, Northern Corridor which connects Kampala to the Kenyan port of Mombasa (around 1300 KM). The problem? Despite all the marketing efforts, very few people are using it.

Even with all those initiatives, there seems to be little activity along this route. Records from TPA [Tanzanian Port Authority] show that out of the 10.1 million tones cargo capacity Dar handles annually, less than 5 per cent of Uganda seaborne traffic is handled at the Dar es Salaam Port.

businessmen complain that the Dar-Kampala route has got over 15 weighbridges compared to Mombasa-Kampala’s 7 weighbridges and this has made it a barrier for easy and fast movement of goods.“Every stop-over means time is wasted and this means losing money. So how are we going to compete,” Mr Sekitto added.

But TPA argues that Tanzania is a very poor country where the issue of road protection cannot be over emphasized. It is for this reason that they say truck drivers have to oblige to the set axle load limits and any violation attracts severe penalties.

“The Tanzanian government put those weighbridges to protect the infrastructure because it has taken years and huge investments to put them up. This will reduce the cost of repairs and also they will last for some time,” Ms Francisca Muindi TPA’s Spokesperson said.

More here