Archives for category: International trade

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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I was slightly depressed after reading the highlights of the 2013 Kenya Economic Survey (pdf). Almost all topics we discuss in this blog, like employment, wages, industrial development and balance of trade, do not look good. Here are some highlights of the highlights:

Industrial development: not really happening

The manufacturing Sector decelerated from an  expansion 3.4 per cent in 2011 to a growth rate of  3.1 per cent in 2012. The slower growth was due to high cost of production, stiff competition from imported goods, high cost of credit and political uncertainty due to the 2013 General  Elections

Employment: 90 percent of new jobs are informal. Wages are falling

  • The labour market recorded 659.4 thousand new jobs in 2012, 89.7 percent of them were in the informal sector representing an increase of 5.5 per cent.
  • Real average wages declined by 4.8 per cent due to inflation.
  • The creation of new jobs in the “modern sector” declined from 74.2 thousands in 2011 to 68.0 thousand in 2012.

 International trade: a growing deficit

  • Kenya’s trade balance worsened further by 8.7 per cent in 2012 compared to 46.7 per cent in 2011
  • The current account deteriorated to a deficit of KSh359.5 billion in 2012 from a deficit of 340.2 billion in 2011.

There are not only bad news in the report, for example there has been increased job creation in the construction sector, ICT industries as well as the education and health activities. And inflation has gone down, which is very good news for the lower income population. But that’s not enough for sustained economic growth over the long term.

Tourism has gone down too by the way. More here

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.

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

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)

Just like I did last year, this morning I played around with data on imports and exports from the Kenya Bureau of Statistics. Understanding the trends of international trade in Kenya is extremely important – as I have said a hundred times in this blog, the imbalance between imports and exports is one of the major weaknesses of the Kenyan economy and one of the root causes for macroeconomic volatility. So, what is Kenya exporting to the outside world? What are the major export destinations?  How about imports?  Are they still growing faster than the exports?

Let me say in advance that here I am showing some basic figures. If you want to know more about imports and exports for specific commodities (tea, fruits, flowers, etc) in specific months you can find very detailed data here. So, let’s  take a look at imports first  (Click on the images to enlarge).

Kenya - Major origin of imports in 2011-2012

Kenya - Imports by broad economic category

The two graphs show two very interesting trends. First, India has officially outgrown China and the UAE as the major importer to Kenya. The value of imports from the UAE has decreased because the Kenyan Shilling has gained strength and therefore its oil bill has gone down significantly. When it comes to China and India, I would like to see an analysis of the political economy behind these trends.   Which African countries are “going Indian” and why? And is this trend relevant only for trade or also in terms of foreign direct investments? A recent article on The Star explained the trend in these terms:

Analysts say India has managed to clinch the lion’s share of Kenya’s import volumes because of, among others, the prevailing cordial foreign policy between the two countries since Kenya gained independence, relatively cheaper goods, quality, and proximity of its ports to Kenya.

The main imports from India include textiles, petroleum products obtained from bituminous minerals (other than crude), medical equipment and drugs, pharmaceuticals, flat-rolled iron and non-alloy steel products, electrical goods, food-processing machinery, special purpose motor vehicles and trucks among others.

“There are quite a number of factors why Kenya is importing more from India. For instance, you will realise that many products on sale in Kenyan retail stores – such as textiles (garments) – come from India. They are cheaper and as we know, Kenyan consumers are sensitive to price, making these a top choice,” said Tiberius Barasa, the executive director of the Centre for Policy Research, a governance and public policy analysis think-tank.

If you know of any paper on this issue please leave it in the comment section.

The second trend is that imports in the broad economic categories have gone up substantially between 2011 and 2012, but we cannot say the same about exports, which remained stagnant over the two-years period. What I find more worrying is that exports to the East African region have decreased (look at Uganda and Tanzania) or increased slightly (Rwanda).

The East African has an interesting analysis on the stagnation of Kenyan exports over the last decade. At the regional level, Kenya is growing as a major importer, but definitely not as an exporter:

Kenya’s standing as East Africa’s trade giant is under threat from neighbouring nations with fresh data showing the growth rate of its exports to the region has been declining over the past eight years.

…The study shows that Kenya’s contribution to total intra-EAC exports declined from 78.3 per cent in 2005 to 57.2 per cent in 2010, although its contribution to total intra-EAC trade increased from 7.5 per cent in 2005 to 16.7 per cent in 2010 on the back of increased imports.

Comparatively, Tanzania and Uganda’s contributions to total intra-EAC trade increased sharply from 6.6 and 4.2 per cent in 2005 to 20.67 and 19.2 per cent respectively in 2010, taking up the share that Kenya lost. On imports, however, Tanzania and Uganda have lost ground.

Tanzania’s contribution to intra-EAC imports declined from 22.4 per cent in 2005 to 18.9 in 2010 while Uganda’s dipped from 70.1 per cent in 2005 to 36.9 per cent in 2010.

Kenya - Exports by broad economic category in 2012

Kenya - major export destinations in 2011-2012

Ethiopia currently has the largest area – one million hectares – of commercially untapped bamboo in East Africa, making it attractive to investment partners from the bamboo industry. However, the Ministry of Agriculture and Rural Development told IPS that they were unwilling to disclose any figures on the bamboo economy, but added that there had been no formal bamboo economy in Ethiopia until 2012.

I tried to get some more stats on the bamboo market and I found this interesting FAO report (pdf)

Export of bamboo products in 2000 (million US$)

  Africa Asia Europe North and Central America Oceania South America Total
Bamboo products 29 1554 739 120 8 5 2455
Market share % 1.2 63.3 30.0 4.9 0.4 0.2 100.0

 Main importers of bamboo products in 2000 (million US$)

USA UK Netherlands Germany France Japan Hong Kong Others  Total
Bamboo imports 899 125 106 169 169 349 163 475 2455
Market share % 36.6 5 4.3 6.9 6.9 14.2 6.6 19.3 100.0

Why is bamboo a good market?

… In comparison to soft wood trees that can take 30 years to reach maturity, bamboo is a fully mature resource after three years, making it commercially and environmentally sustainable. Sub-Saharan Africa has three million hectares of bamboo forest, around four percent of the continent’s total forest cover.

More here

The Port of Dar Es Salaam, the second largest in East Africa after Mombasa, is one of the least efficient on the planet, hindering trade and economic expansion not just for Tanzania but also for neighboring landlocked countries. The cumulative delays at anchorage and dwell time can exceed 20 days, while international standards are around 3-4 days. In addition, official and non-official payments are high and prevalent.

Here’s Jack Morisset with Moret and Regolo in a World Bank Policy Note.

Today, about 90 percent of Tanzanian trade transits through the Port of Dar es Salaam. This port is also a hub for the international trade of East African landlocked countries such as Zambia, Uganda, DRC, Rwanda and Burundi with the rest of the world. But to what extent is the port of Dar Es Salaam efficient in moving goods in and out the country?

The performance of the Port of Dar es Salaam has varied over time. As a result of privatization in the 1990s, the port became one of the most efficient in Sub-Saharan Africa, but its performance deteriorated gradually up to mid-2000s and efficiency is now low despite renewed efforts of the port authorities to implement reforms

Is the Port of Mombasa much better? Here’s a nice comparison:

Indicators

Waiting time at anchorage

Cargo dwell time

Cost/price for shipping companies

Cost/price for shippers

Total cost

Days

Days

UDS per TEU

UDS per TEU

USD per Ton

Dar Es Salaam

Export

None

6

118.2

263.0

29.9

Import

10

10

118.2

366.8

38.1

Import transit

10

17

118.2

320.0

34.4

Mombasa

Export

0

4

128.9

150.0

21.9

Import

0

4

128.9

150.0

21.9

Import transit

0

9

128.9

150.0

20.5

 More here

Over at Foreign Policy:

One living legacy [of colonialism] is a crazy quilt of trade preferences and protection buttressed by a mix of geopolitics, nostalgia, and rich-country interest group protectionism — distortions that undermine growth in export-oriented agriculture and make it tough for women in some of the poorest countries in the world to sew their way out of poverty.

Now consider West Africa’s Benin, one of the poorest countries in the world (GDP per person in terms of purchasing power: $1,700). Benin’s meager trade and living standards are held back by agricultural and industrial tariffs averaging 14 and 12 percent respectively. And it’s pretty much the same throughout the poorer corners of the world. In Cameroon (GDP per capita: $2,300), farmers hide behind agriculture tariffs averaging 22 percent, while manufactured goods are hit with 12 percent import levies. The parallel figures for Burundi (GDP per capita: $600) are 20 percent and 11 percent; for Gambia (GDP per capita: $1,900) 17 percent and 16 percent.

I wouldn’t blame it entirely on colonialism: inside the countries there are interest groups and lobbies that prefer to keep things the way they are. The worst part is that high tariffs are rarely part of an actual industrial policy. So what happens is that they impose a net loss on the economy without trying to incentive domestic production.

When it comes to regional trade, however, non-tariff barriers are the number-one problem:

Arguably, the greater barriers to intra-continental trade (especially in Africa) are bureaucratic and logistical. To carry goods from Kigali, Rwanda to Mombasa, Kenya, trucks “have to negotiate 47 roadblocks and weigh stations,” the African Development Bank reported in 2012. At the time, the Bank also noted, there was usually a 36-hour wait at the South African border for trucks to cross the Limpopo River into Zimbabwe. It was much the same story getting through customs from Burkina Faso into Ghana, from Mali into Senegal — actually, from just about anywhere to anywhere in Africa. 

More here

Interesting new paper by Bruce Blonigen from the University of Oregon:

Industrial policies (IPs) include such varying practices as production subsidies, export subsidies, and import protection, and are commonly used by countries to promote targeted sectors. However, such policies can have significant impacts on sectors other than those targeted by the IPs, particularly when the target sector produces goods that are key inputs to downstream sectors. Surprisingly, there has been little systematic analysis of how IPs in targeted sectors affect other sectors of the economy. Using a new hand-collected database of steel-sector IP use in major steel-producing countries from 1975 through 2000, this paper examines whether steel-sector IPs have a significant impact on the export competitiveness of the country’s other manufacturing sectors, particularly those that are significant downstream users of steel. I find that a one-standard-deviation increase in IP presence leads to a 3.6% decline in export competitiveness for an average downstream manufacturing sector. But this effect can be as high as 50% decline for sectors that use steel as an input most intensively. These general negative effects of IPs are primarily due to export subsidies and non-tariff barriers, particularly in less-developed countries.

The Kenyan government provides some support to the few steel industries in the country; as far as I know, it is mostly in the form of cheaper (or free) electricity and water. But that of course does little against growing international competition, especially from India and China. So the sector has stagnated: most firms have not expanded in any significant way, some have ceased their operations. (More info on this document, PDF).

The steel sector was (and still is) considered crucial for industrialization in China, so the government has protected it with heavy tariffs and subsidies. If I was the next President of Kenya, I would work day and night to find a market-friendly way to support innovation in this sector. I would definitely not let it collapse.

HT Circle Bastiat