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.

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)

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)

Paul Kinuthia (on the right) – Photo Credit: Business Daily

Paul Kinuthia started a small cosmetics business in the Kariobangi Light Industries (in Nairobi) 20 years ago with a start-up capital of 3000 KSh (less than 40 USD). He sold it to L’Oreal last week for over KSh 3 billion (about USD 35 million). Here’s the story on Forbes and on Business Daily.

Of course extreme success stories like Paul Kinuthia’s do not happen on a daily basis in Kariobangi. But, as I’ve said before, there is large diversity and growth potential in places like Kariobangi, although we like to call them “informal economy” or “survival clusters”. An excerpt from the Forbes article:

Kinuthia has a remarkable story. In 1995, he started off manufacturing shampoos and conditioners from a makeshift apartment in Nairobi with start-up capital of Ksh 3,000 ($40). He made these products manually using plastic drums and a huge mixing stick and heating oils, delivering his products by handcart to local salons and hairdressers. In the beginning, commercial banks refused to fund his venture while mainstream salons, beauty parlours and large retail outlets refused to stock his product because it was too native.

As the demand for his products grew, Kinuthia moved the business into bigger premises in downtown Nairobi and expanded his product range to include hair gels and pomades. While the bigger, sophisticated salons and supermarkets snubbed his products, they were very popular with street side local hairdressers because of their availability and significantly lower prices in comparison to the products on the shelves of the big retail outlets. As the products became more popular with local hairdressers, Kinuthia ploughed back his profits into moving into an even bigger place, financing growth, increasing his production capacity and extending his product range. In 1996, he incorporated a limited liability company and went on to produce body lotions and hair treatments. The new company set up better operational strategies, laying emphasis on quality and improving its packaging. By the late 90s, the company’s products were commercially available across Kenya’s mainstream retail and wholesale chains and were already commanding a sizable market share. By 2001, the company was already exporting its products to neighbouring TanzaniaUganda and Rwanda.

But despite the huge success of his business, Paul Kinuthia maintained one common characteristic of Kariobangi entrepreneurs – he doesn’t like questions from strangers. When Forbes called him for an interview, his secretary kindly relplied “Mr Kinuthia is not available”. I know the feeling very well.

More here

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

Harvard Professor E.O Wilson sparked an interesting debate on the Wall Street Journal on the role of mathematics in scientific thinking. A small excerpt:

For many young people who aspire to be scientists, the great bugbear is mathematics. Without advanced math, how can you do serious work in the sciences? Well, I have a professional secret to share: Many of the most successful scientists in the world today are mathematically no more than semiliterate.

The most important skill is the ability to form concepts, not math:

Fortunately, exceptional mathematical fluency is required in only a few disciplines, such as particle physics, astrophysics and information theory. Far more important throughout the rest of science is the ability to form concepts, during which the researcher conjures images and processes by intuition.

.. Pioneers in science only rarely make discoveries by extracting ideas from pure mathematics. (..) Real progress comes in the field writing notes, at the office amid a litter of doodled paper, in the hallway struggling to explain something to a friend, or eating lunch alone.

The question here is an important one: does our ability to form complex concepts develop before or after mathematical modeling? Prof. Wilson seems to suggest that great ideas come first (while eating lunch or in the hallway etc.) and then mathematical models give structure to your thinking. But most scholars have an opposite view. Paul Krugman, for example, says that his ability to develop good ideas comes after mathematical models, not before:

mathematical grinding served an essential function (…) of clarifying my thought. In the economic geography stuff, for example, I started with some vague ideas; it wasn’t until I’d managed to write down full models that the ideas came clear. After the math I was able to express most of those ideas in plain English, but it really took the math to get there, and you still can’t quite get it all without the equations.

Over at The Slate, Math professors Edward Frenkel suggests not to be math-phobic as well. He says: “Don’t listen to E.O Wilson”:

It would be fine if Wilson restricted the article to his personal experience, a career path that is obsolete for a modern student of biology. We could then discuss the real question, which is how to improve our math education and to eradicate the fear of mathematics that he is talking about. Instead, trading on that fear, Wilson gives a misinformed advice to the next generation, and in particular to future scientists, to eschew mathematics. This is not just misguided and counterproductive; coming from a leading scientist like him, it is a disgrace. Don’t follow this advice—it’s a self-extinguishing strategy.

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