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Kenya overtakes SA as biggest investor in African countries
Kenya overtook South Africa to become the biggest investor in other African countries in terms of the number of projects in 2015.
Kenya invested in 36 projects last year in other parts of the continent against South Africa’s 33, a new study by financial consulting firm Ernst & Young shows.
It noted that most of Kenya’s intra-Africa investments went into countries within the East African Community (EAC).
The study said Kenya’s global ranking as a source of foreign direct investment (FDI) to the African continent also improved strongly to the seventh position in 2015 from 13th in 2014.
“Activity was largely concentrated in services, with financial and business services together accounting for nearly 78 per cent of FDI projects originating from Kenya,” said the report released Monday.
“Many Kenyan companies are playing the role initially adopted by South Africa’s corporate sector, who were the first to venture outside their home markets,” it adds.
South Africa however beat Kenya in terms of the worth of the projects as it had Sh200 billion compared to Kenya’s Sh100 billion.
In the past decade, Kenyan banks and retail businesses, for example, have ventured into the region including in the volatile South Sudan and Somalia.
“East Africa is the primary destination for Kenyan investors, in line with overall sub-regional integration plans,” said the study.
It further shows that Africa attracted FDI from a diverse and growing group of investors.
In 2015, the US retained its position as the largest investor in the continent, despite a four-per cent fall in FDI projects. Historical investors, including the UK, France, the UAE and India, expressed renewed interest in Africa.
Other notable investors in Africa were Italy and Luxembourg, which became among the largest 15 investors in 2015. Overall, intra-African FDI projects rose 2.8 per cent in 2015, with capital investment up 6.2 per cent.
In terms of inward FDI in 2015, the study shows that Kenya, touted as East Africa’s anchor economy, posted a resurgence with projects standing at 95 compared to 62 the previous year, an increase of 53.2 per cent.
At the same time South Africa had more inward FDI projects numbering 130 in 2015 compared to 120 projects in 2014 , an 8.3-per cent increase.
“Kenya and East Africa is shining bright and even brighter in the comparison with its peers. Kenya is very much the leader in this region and because of a good component of diversification, is maintaining a strong rate of GDP expansion,” Rich Management CEO Aly Khan Satchu said of the report’s findings.
The report however warned that potential investors are wary of downside risks to growth forecasts.
“For example, in Kenya’s case, a large current account deficit and growing debt levels provide the government with less flexibility to fund longer-term growth,” it said.
Across the whole continent on the other hand, inward FDI project numbers increased by seven per cent year on year, from 722 projects in 2014 to 771 projects in 2015.
But the capital value of those projects was down year-on-year to $71.3 billion in 2015 from $88.5 billion in 2014. Even after falling, the 2015 figure was still higher than the average of $68 billion between 2010 to 2014.
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Staying the course, despite a relative economic slow down
According to EY’s Africa attractiveness program 2016: Staying the course, despite a relative slow down, Sub-Saharan Africa remains one of the fastest growing regions in the world. This is reflected in the foreign direct investment (FDI) levels in 2015, where FDI project numbers increased by seven percent.
Although, the capital value of projects was down year-on-year – from US$88.5b in 2014 to US$71.3b in 2015 – this was still higher than the 2010-2014 average of US$68b. Similarly, jobs created were down year-on-year, but, again ahead of the average for 2010-2014.
Ajen Sita, Africa Chief Executive Officer at EY, comments, “Over the past year, global markets have experienced unprecedented volatility. We’ve witnessed the collapse of commodity prices and a number of currencies across Africa, and with reference to the two largest markets, starting with South Africa, we saw GDP growth decline sharply to below one percent and the country averting a credit ratings downgrade; in Nigeria, the slowdown in that economy was impacted further by the decline in the oil price and currency devaluation pressure.”
Sita adds, “The reality is that economic growth across the region is likely to remain slower in coming years than it has been over the past 10 to 15 years, and the main reasons for a relative slowdown are not unique to Africa. In fact, Africa was one of the only two regions in the world in which there was growth in FDI project levels over the past year.”
East Africa closes the FDI gap, with Kenya a big gainer
In 2015, East Africa recorded its highest share of FDI across Africa, achieving 26.3% of total projects. Southern Africa remained the largest investment region on the continent, although projects were down 11.6% from 2014 levels. The West Africa region saw a rebound in FDI projects by 16.2%, and interestingly in 2015, the region became the leading recipient of capital investment on the continent, outpacing Southern Africa.
North Africa experienced 8.5% year-on-year growth in FDI projects. Furthermore, while projects are increasing in North Africa, they are increasing at a much faster rate in Sub-Saharan Africa.
Michael Lalor, EY’s Africa Business Center Leader, adds, “In a context of heightened concerns about economic and political risk across the continent, FDI flows remain robust, and in line with levels we have seen over the past five years. A key factor here is the structural shift in FDI – from a high concentration of source countries and destination markets and sectors, to a far more diverse FDI landscape. As a result, risks and opportunities are being spread much wider, and there is no longer an overdependence on a limited group of investors or sectors to drive FDI performance.”
Historical investors gain strength, new investors emerge
The US retained its position in 2015, as the largest investor in the continent, with 96 investment projects valued at US$6.9b. During 2015, traditional investors such as the UK and France, as well as the UAE and India, also showed renewed interest in Africa.
Investors diversify focus across sectors
Over the past decade, there has been a shift in sector focus in FDI from extractive to consumer-facing industries. Mining and metals, coal, oil and natural gas, which were previously the key sectors attracting major FDI flows, have given way to consumer products and retail (CPR), financial services and technology, media and telecommunications (TMT), accounting for 44.7% of FDI projects in 2015. In 2015, further evidence of sector diversification came through, with business services, automotive, cleantech and life sciences all rising in significance and becoming the likely “next wave” for investors.
Striking a balance between growth, profitability and managing risk
Sita concludes, “Given the growth potential in and relative underdevelopment of many African markets, the primary focus for many companies over the past few years has been on entering new markets, capturing market share and driving revenue growth. A combination of factors – including tightening economic conditions, increasingly well-informed consumers and citizens, intensifying competition, a heightened sense of global geopolitical uncertainty, and shifting priorities from global or regional HQ – is now driving a change in focus toward striking a greater balance between growth, profitability and risk management.”
» Download: Africa Attractiveness Program 2016: Staying the course (PDF, 6.44 MB)
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UK lagging behind ‘Digital Tiger’ economies – says Barclays
A failure to keep up with digital advancements and invest in digital skills could hamper the UK’s ability to compete economically on the world stage, according to new research from Barclays.
The Barclays Digital Development Index benchmarks 10 countries around the world on their readiness to compete in the digital economy. The study, which attributes an overarching ‘digital empowerment’ score to each nation, found that the UK came in just fourth place behind new and emerging ‘digital tiger’ economies Estonia, South Korea and Sweden. When it comes to individuals’ assessment of their own digital skills and confidence, the UK trails major economic rivals India, China and the USA.
The findings are based on a survey of almost 10,000 working adults combined with analysis of policy frameworks and support for the development of digital skills in each country. The research highlights a disconnect between policies to support digital engagement in the UK, which score well overall, and a lack of confidence in digital skills at an individual level among British workers.
Ashok Vaswani, CEO, Barclays UK, said: “The UK can become the world’s pre-eminent powerhouse of tech innovation and compete globally across all sectors and industries, but only if we significantly develop our digital skills and expertise.
“As the UK considers its future outside the European Union, we have to remember that the race to become the most digitally savvy economy is global and not confined to Europe. It is a race that will define how successful and prosperous we are for decades to come.
“The UK’s current strengths are clear: our children are being taught digital skills at school, the government’s policy is coherent and the private and voluntary sectors coordinate well. But the UK’s competitors in this race are developing faster and significant investment in digital skills is the only way for us to win it.”
While the UK ranks in 4th place in terms of support for the development of digital skills, performing well in selected areas of digital skills policy and advanced learning skills, these strengths are offset by relatively low capability and confidence in digital skills on an individual level where the UK ranks in 6th place behind some of its biggest economic rivals China, India and the USA.
Lack of skills posing security threat
The research highlights that UK confidence is particularly low when it comes to protecting data and devices. Workers in the UK are less likely to keep their phones and laptops secure than those in Brazil, South Africa or China, posing a potential risk of data leaks in the coming years as cyber hackers find increasingly sophisticated ways to access data.
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Only 13% of people in the UK use password-generating software to create hard-to-crack passwords, compared to 32% in China and 32% in India
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Only 41% of people in the UK change important passwords regularly, compared to 59% in India
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Only 38% of people in the UK never save or store payment information on online accounts, compared to 58% in South Africa
From consumers to creators
Perhaps the most concerning indicator is the fact that the UK ranks just seventh out of 10 for coding skills and content creation. This is a key indicator of the ability to be a ‘digital creator’ rather than just a ‘digital consumer’, posing questions about what impact this will have on the UK’s readiness to compete in the future digital economy.
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Only 16% of people in the UK would be very comfortable building a website, compared to 39% in Brazil and 37% in India
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Only 11% of people in the UK would be very comfortable creating a mobile app or game,compared to 22% in the USA, 27% in Brazil, or 33% in India
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Only 12% of people in the UK feel very comfortable creating a software programme or game, compared to 23% in the USA or 33% in India
Role of workplace training
The two leading countries in the index are ahead of the UK in the ranking for digital policies. Both Estonia and South Korea are particularly strong on vocational and workplace digital skills, while South Korea leads the way on broadband access policy and digital skills in compulsory education.
With the UK coming in seventh out of 10 for vocational and workplace skills, the research highlights a clear need for more to be done in the workplace to help boost digital skills. Estonia and South Korea, the joint leaders on digital empowerment, are also joint leaders on vocational and workplace skills. Only 38% of UK workers interviewed for the study say that their employer offers training in digital skills; this figure is considerably higher in China, the US (48% in both) and India (67%).
Ashok Vaswani continued: “In the previous century, most of us had to cope with just one big shift in technology in our career or lifetime, and we’ve been able to rely on our early education to get us through. But, now these changes are happening constantly though the evolution of the internet, smartphones, social media, and the advent of new technologies like blockchain, virtual reality, Artificial Intelligence and open data.
“This research shows Britons need to equip themselves with digital skills whether to future proof their career, or keep personal data and devices safe. Businesses also need to do much more to upskill each and every generation of their workforce; we need to create a new culture of lifelong learning. With the referendum sending a clear message that too many parts of the UK do not feel they are sharing in the promise of global prosperity, now is the time to take everyone forward together in the digital age.
“Our call to action is clear: in schools and workplaces across the country, we need to build digital skills and confidence that will turn digital consumers into digital creators.”
From Inclusion to Empowerment: The Barclays Digital Development Index
Executive summary
As technology-led disruption of businesses and industries continues apace, workers in the UK and other developed nations are at risk. Their confidence in their digital skill levels is too low, despite several years of public and private sector efforts to boost them. In emerging markets, meanwhile, skills assessments and confidence levels are much higher than those in many advanced economies.
Rapid technological change means that the digital skills of most countries’ workforces will not keep them competitive in tomorrow’s workplace. Before long, being digitally ‘competent’ or ‘literate’ will not be enough; workers will have to learn more advanced skills that help them become creators – rather than just consumers – of digital content. They will have to become digitally ‘empowered’, and it is up to government, business and other stakeholders to create the conditions for this to happen.
Governments must ensure that the physical infrastructure is in place to enable digital economies to prosper – superfast broadband, for example. They must also ensure that digital learning is a core part of school curricula; that teachers have the skills and equipment to teach children what they need to know; and that they support individuals and companies by providing access to training and practical support.
Business has an important role to play too. In the UK, employers recognise that there is a skills deficit; many, for example, are convinced that productivity would increase if their employees’ digital skill levels were higher. Companies can address this, and improve career prospects, by investing in training and support.
The Barclays Digital Development Index is an effort to shift public debate in the UK and elsewhere from a discussion of basic digital competence towards one of digital empowerment, and to understand how ready the UK workforce is for the digital economy, compared with its rivals.
The index compares the workforce digital skills and attitudes of nations, along with the policies that are in place to improve them. It is based on a self-assessment survey that asked adult workers in 10 countries to evaluate their current digital skills, what they’ll need in the future, and how their employers and governments are helping them to address the gaps.
The objective of the index is to understand how well countries are equipping their workers for the digital economy. It looks at a broad spectrum of countries, including those currently competing with the UK and those likely to be competitors in the years ahead. These countries include perceived digital pioneers such as Estonia and Sweden, major industrial and high-tech giants such as Germany, South Korea and the US, and rapidly digitalising markets such as Brazil, China, India and South Africa.
The index assesses the 10 countries in two pillars of empowerment:
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The Individual Empowerment Index measures workers’ self-assessment of their digital skills in six categories ranging from basic to advanced. It also includes questions about how well their businesses and employers are helping to develop their skills.
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The Digital Empowerment Policy Index assesses national efforts to create a digitally empowered workforce – from getting the infrastructure right to embedding digital skills education in schools and the workplace.
The study’s major findings are as follows:
The international picture
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Estonia and South Korea are joint leaders in digital empowerment. Like most (though not all) developed countries in the index, their positions are based on active and well-organised government and business efforts to improve the teaching of digital skills. Even in these technology leaders, however, workforce confidence in digital skills is lower than among developing-country rivals.
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Workers in emerging markets are more confident about digital skills than those in developed markets. Worker self-assurance in emerging countries is especially high when it comes to basic skills such as web search and evaluation, communication and collaboration, and protecting data and devices. But it also comes through in the more advanced areas of coding, problem-solving and overall attitudes towards learning technology.
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When it comes to digital empowerment policy, developed countries boast stronger frameworks. These countries dominate the upper half of the table in all policy categories. One inference is that where individual confidence in digital skills is lower, stronger policy frameworks are needed to develop skills and build greater confidence.
About the Digital Development Index
Barclays has undertaken a major new initiative this year to uncover the digital skills of the UK workforce in relation to nine international competitors with the launch of the first ever Digital Development Index. Led by Ashok Vaswani, CEO of Barclays UK, the bank is seeking to better understand and highlight the critical need for a more digitally empowered UK, in order to develop and inform responses from government and the private sector that will support the UK in becoming a global leader in the digital revolution. Barclays would like to thank the many contributors from the business, scale-up and charity sectors who have offered their insights and expertise to the debate and who have enriched the report’s exploration of what is needed to foster the continued development of digital skills and confidence.
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Enhancing the effectiveness of external support in building tax capacity in developing countries
This report responds to the February 2016 request from the G20 for the IMF, OECD, United Nations and World Bank Group to:
“…recommend mechanisms to help ensure effective implementation of technical assistance programs, and recommend how countries can contribute funding for tax projects and direct technical assistance, and report back with recommendations at our July meeting.”
The report has been prepared in the framework of the Platform for Collaboration on Tax (the “PCT”), under the responsibility of the Secretariats and Staff of the four mandated organizations. The report reflects a broad consensus among these staff, but should not be regarded as the officially endorsed views of those organizations or of their member countries.
The request arises in the context of increased recognition of the centrality to development of strong tax systems and of the importance of external support in building them, and a correspondingly increased willingness of advanced economies to provide substantially greater financing and other support for this. It recognizes that, while real progress has been made on increasing tax revenues in low income countries over the past two decades, for many countries revenues remain well below levels that are likely needed to achieve the 2030 Sustainable Development Goals, and to secure robust and stable growth. The report also takes as a fundamental premise that it is not just how much revenue is raised that matters for development and growth, but also how it is raised – and that strong tax systems are key for both equity objectives and enhancing state building.
In that context, the report uses the experiences of the international organizations to analyze how support for developing tax capacity can be improved. It does not attempt to reiterate the nature of the challenges faced by developing countries, about which much has been written – but rather focuses on ensuring that the countries have the support needed to overcome them. An indispensable prerequisite to improving tax capacity is enthusiastic country commitment.
While such political commitment must arise within the country and its government and cannot be created by external support, the report assesses ways in which such support can encourage and reinforce that necessary commitment. Given such commitment, the report points to several key enablers to building tax capacity:
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A coherent revenue strategy as part of a development financing plan
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Strong coordination among well-informed and results-oriented providers
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A strong knowledge and evidence base
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Strong regional cooperation and support
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Strengthened participation of developing countries in international rule setting
The report arrives at a number of recommendations for measures to strengthen or achieve those enablers. These are summarized in Appendix 4. The primary ones include: (i) options through which the G20, IOs and other development partners can encourage political support for tax systems development; (ii) the development of country-owned medium-term revenue strategies, or tax reform plans depending on country circumstances; (iii) support to nongovernment stakeholders; (iv) support by development partners to increase managerial, as well as technical, skills in taxation agencies; (v) various approaches to developing better coordination and collaboration among providers, and avoidance of fragmented support and approaches; (vi) intensification of work by PCT partners and others to produce comparable and reliable data; (vii) increased partnerships and support for regional tax organizations; and (viii) support to developing countries to facilitate meaningful participation in international tax policy discussions and institutions.
The agenda going forward would include implementation of 3 to 5 pilot medium-term revenue strategies (MTRSs); support for developing countries to participate effectively in international tax policy discussions and institutions; work by the international organizations (IOs) to measure and report upon the impact of various different interventions; and a follow up report by the IOs within 3 years, to reflect lessons learned from actions hereunder.
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Engage Zimbabwe on import ban: Comesa
The Common Market for Eastern and Southern Africa (Comesa) says it will not intervene in resolving the impasse created by an “import ban” imposed by Zimbabwe, urging member states to engage on bilateral grounds.
Early this month, Zimbabwe promulgated Statutory Instrument (SI) 64 of 2016, which restricts the importation of certain products, in a bid to boost local industries. The regulations stipulate that importation of such products require a permit which is given quarterly and costs $30, but after satisfying the Ministry of Industry and Commerce on why the permits should be issued.
Speaking at the third sensitisation workshop for business reporters in Livingstone yesterday, Comesa Competition Commission director and chief executive officer George Lipimile said Zimbabwe was a peculiar country and SI 64 was a remedy to the recovery of the economy.
“It’s being looked at as a trade matter, it’s an issue of respecting the economic model of each country. Zimbabwe has its own peculiar situation that they are dealing with so that is one way of remedying their economy. I tend to think it’s unlikely that Comesa will get involved. It’s an internal matter so most countries will deal with it bilaterally,” he said.
Government said SI 64 was a temporary move targeted at products coming from anywhere in the world. Industry and Commerce permanent secretary Abigail Shonhiwa said the country was aware of its regional obligations. She said the SI 64 was targeted at commercial entities not individuals as they wanted to curb flooding of imports. He said some products were landing into the country at ridiculous prices giving an example of a wheelbarrow that was brought into Zimbabwe at $1,98.
This, Shonhiwa said, killed the competitiveness of local industries.
Lipimile said Malawi, Swaziland, Seychelles and Kenya have so far signed the Memorandum of Understanding for cooperation with Comesa and that other members would have signed by year end.
“Egypt will sign next week, Zambia, Malawi and Ethiopia are expected to sign by year end. The MoU’s are a document of enforcement we don’t want them to be a decorative document,” he said.
The MoUs are an agreement with individual member states to effectively enforce regional competition law in the country’s respective jurisdictions.
Lipimile said the MoUs can be signed by competition commissions and other agencies in member states.
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tralac’s Daily News Selection
The selection: Thursday, 28 July 2016
Breaking Down Barriers: increasing competition in key sectors is critical for competitiveness (World Bank)
Boosting competition in consumer markets and key input sectors can help African countries grow faster and alleviate poverty, according to a report launched today by the World Bank Group and the African Competition Forum. The report, Breaking down barriers (pdf), finds that reducing the prices of basic food staples by just 10%, as a result of tackling cartels and improving regulations that limit competition in food markets, could lift nearly half a million people in Kenya, South Africa and Zambia alone out of poverty and save households in these countries over US$700 million a year.
At the same time, fundamental market reforms to increase competition in key sectors is critical for competitiveness and economic growth. For example, if countries like Ethiopia, Ghana, Zambia and others were to reform their professional services markets, this could generate nearly half a percentage point in GDP growth from industries which use these services intensively. For a country like Zambia, which had 1.7% GDP growth in 2015, this can be significant. The report also suggests that the impact would be even larger if fundamental reforms were implemented in other services such as electricity, telecommunications, and transport which have higher spillover potential across economies. [Competition Commission of South Africa updates: workshop, 28-29 July, on cartel investigation techniques, latest newsletter (pdf)]
Sixth Global Review of Aid-For-Trade Monitoring Exercise: Promoting Connectivity (WTO)
The Sixth Global Review of Aid for Trade, under the theme “Promoting Connectivity”, will be held at the WTO in mid-2017. The deadline for the submission of completed monitoring formats is 31 October 2016. The M&E exercise for the 6th Global Review will review the status of TFA implementation, explore the demand and response to requests for TFA implementation support and survey where difficulties may be arising. The case story exercise seeks to build on the evidence of impacts of trade facilitation support projects and will explore new approaches being tested by developing countries and their development partners, such as those engaging the private sector.
Tanzania: Article IV report, Selected Issues papers (IMF)
Staff Report for the 2016 Article IV Consultation: Sustaining high growth and implementing the development agenda while preserving fiscal and external sustainability will require a range of deep reforms. Somewhat higher fiscal deficits could be sustained for a few years while keeping a low risk of debt distress. However, creating fiscal space for higher infrastructure investment will necessitate first and foremost sustained efforts to raise additional domestic revenue and streamline current expenditure. Reforms to increase spending efficiency, particularly in the area of public investment, will also be needed. More broadly, the targeted high growth and structural transformation of the Tanzanian economy will require a rekindling of the reform agenda.
Selected Issues Paper 1: Productivity, growth, structural reforms, and macroeconomic policies. While lower gas prices affect the profitability of the [LNG] project, the government can improve the prospect of the investment taking place by completing the implementation of reforms on the policy and regulatory framework and by engaging the investors in negotiations about the project. In particular, the authorities should:
Selected Issues Paper 2: Macro-financial issues. State-owned banks also have relatively high non-performing loan ratios. Where Tanzania stands out is in the sheer number of banks (57), which taken together with the poor performance of a number of these institutions, raises the question of whether some consolidation in the sector is warranted.
South Africa and the BRICS NDB: update (The Hindu)
But NDB officials told The Hindu that South Africa’s role would be initially confined within the boundaries of its neighbourhood. However, expansion of the multilateral lender, with larger African membership, can increase the NDB’s continental reach. NDB funding could help reduce Africa’s infra-funding gap, which stands at an enormous $100 billion a year, throttling the continent’s promising growth prospects. “The office can [initially] look at projects only in South Africa and the region,” says Leslie Maasdorp, NDB’s vice-president and chief financial officer. He pointed to two conditions that would guide the NDB’s funding strategy in Africa at this stage. South Africa, he stressed, must be the economic beneficiary of a funded project; and the economic infrastructure of another country receiving the investment, must be integrated with South Africa. “For example if South African companies invest in a water scheme related to, let us say the Cabora Bassa hydro-project in neighbouring Mozambique, it is possible to do so provided the water is transported to South Africa.” “But funding a project between Mozambique and Zimbabwe would not be possible as this would by-pass South Africa.”
Africa will be the secret victim of Brexit (Business Insider)
According to new research from Barclays, Brexit's economic impact on Africa, and particularly sub-Saharan Africa, could be profound and incredibly damaging to the continent's burgeoning development. In a note by analysts led by Peter Worthington, Barclays argues that the referendum will materially affect growth on the continent, saying: "Post-Brexit, we see growth in sub-Saharan Africa halving to just 1.4% in 2016, the slowest pace in decades, due principally to sharply weaker growth outlooks in sub-Saharan Africa's three biggest economies: Angola, Nigeria, and South Africa, which together account for nearly three fifths of SSA GDP." Barclays identifies seven key reasons SSA growth is at risk from Brexit: [Brexit dents Mauritius’ textile sales]
Zimbabwe: Imports fall 13,3% (The Herald)
Zimbabwe imported $2,51bn worth of goods between January and June this year, representing a 13,3% decline on 2015. The decline in the value of imports comes after Government recently introduced legislation to restrict the importation of certain products. Latest trade statistics show that Zimbabwe imported a total of $2,51bn worth of goods in the first half of the year compared to $2,95bn imported last year. The value of exports over the same period also declined in the first half of this year to $1,126 billion from the $1,233 billion the prior year. [Zimra probes vehicle imports from 2014, Mmatlou Kalaba: Lessons to be learnt from Zimbabwe’s blunt use of an import ban, Influx of cheap imports hurt Zim firms]
Zimbabwe operationalises One Stop Shop Investment Centre (The Chronicle)
Zimbabwe's One Stop Shop Investment Centre will be fully operational on August 1 as the Government intensifies efforts to increase foreign direct investment inflows, a senior official has said. The One Stop Shop (OSS) investment centre is the Zimbabwe Investment Authority’s arm tasked with reducing the time investors take to get their projects approved from 49 days to three days. The crucial concept was launched in 2010 but missed operational deadlines over the years.
Dubai Chamber workshop weighs Kenya investment options (CPI Financial)
Highlighting the recent trends in Dubai’s trade with Kenya, Khan informed that over the past few years Dubai-Kenya trade has increased significantly as the non-oil trade between the two sides was AED936.4m in Q1-2016, making Kenya Dubai’s 49th major trade partner as presently, there are 262 Kenyan companies registered with Dubai Chamber, he said.The event formed part of the Chamber's Africa Global Business Forum series.
Asian Influence: Singapore’s increasing role in Africa (KWM)
The Africa Singapore Business Forum is a biennial event attended by a number of business and government leaders seeking to improve relations between the two regions. The next ASBF is due to be hosted in Singapore this August and aims to discuss the strategic growth of both regions. Whilst opportunities are there, some work still needs to be done with regard to the co-operation frameworks between African jurisdictions and Singapore. One key concern that has been noted is the lack of free trade agreements. In addition, the availability of bank finance can be a barrier for some Singaporean SMEs where projects are not seen as bankable, though with more successful cross border transactions this trend should change. However, despite these difficulties, progress is being made:
Namibia Foreign Policy Review Conference: trade and investment issues
SADC’s grim reality (New Era)
Speaking at a session on the 15-member organisation during the ongoing Namibia Foreign Policy Review Conference yesterday in Windhoek, Paul Kalenga highlighted the dire situation in which SADC finds itself, stressing that should the EU stop its funding, the body in its current state will cease to exist. Kalenga was speaking in his capacity as the technical adviser on trade related facilities of the SADC Secretariat. He however added that all is not gloom, as SADC’s ministers of finances have made tremendous success in finalising the much-anticipated SADC development fund. “I really do not want to say what is on the table but there is a mechanism … to fund SADC. It is like a re-investment arrangement where SADC can reinvest and generate more funds for itself to fund its development programmes,” stated Kalenga.
Extend Namibia's economic zone - Esau (The Namibian)
Fisheries Minister Bernhardt Esau said Namibia should speed up the extension of its Exclusive Economic Zone (EEZ) so as to maximise fish stocks. Esau said this during the ongoing Foreign Policy review conference in Windhoek. Namibia's EEZ comprises 540 000 square kilometres and a 1 572 kilometre of coastline along the South Atlantic. Esau said Namibia will also need to develop strategic diplomatic and investment relationships on shipping, vessel repair and maintenance, and value-addition with the Southern African Development Community countries, the EU, China, Japan and the Nordic countries whose fishing and trans-shipment fleets operate in and around the EEZ.
East African grains lobby calls for cross border trade in staple food (Coastweek)
Governments across the Eastern African region should enact robust policy and legislative frameworks to promote cross border trade in key staples like maize, said executives from East African Grains Council on Monday. “Our region will only be food secure if governments eliminate artificial barriers to cross border trade in grains. In particular, costly permits for traders should be done away with to ease movement of staple food across borders,” remarked the executives. They added that lengthy clearance procedures for trucks at border points eroded the revenue base of grain traders.
West Africa to get three regional accreditation bodies (Graphic Online)
The West Africa Quality System Programme intends to designate three accreditation bodies for conformity assessment institutions in three West African countries. This is part of its phase three of its programme which is funded by the EU. The Ghana Standards Authority organised the two-day training on food safety management for stakeholders to build their capacity on quality management systems. The participants were trained in skills certification, food processing, auditing accounting, requirements of ISO 22000 and the HACCP-tool used to analyse associated hazards in production among other things.
Mauritius: Djibouti Code of Conduct update (GoM)
In the wake of the intensification of the maritime traffic in the Indian Ocean basin, Mauritius is poised to become a strategic maritime and shipping hub, said Mr Premdut Koonjoo, Minister of Ocean Economy, Marine Resources, Fisheries, Shipping and Outer Islands. On that score Government is keen to facilitate vibrant maritime commerce and economic activities at sea given that these initiatives strengthen economic security while at the same time protect maritime domains against ocean-related threats such as piracy, criminal activities, amongst others, he pointed out.
International financial integration of East Asia and Pacific (English)
This paper documents how economies in the East Asia and Pacific region have integrated financially with the rest of the world since the 1990s. First, the region is increasingly more connected with itself and with other economies. Although economies in the North capture the bulk of the region's investments, EAP's connectivity with the South has grown relatively faster. Second, the largest economies in the region (China, Japan, the Republic of Korea, and Singapore) account for most of EAP's cross-border investments. Third, compared with the other South regions, EAP displays a higher level of intraregional and outward investments, reflecting the region's role as a net capital exporter.
South African government staves off critics with IP consultative framework (IPW)
UK supports Namibia’s drive to attract investment (New Era)
Zimbabwe: AfDB avails funds for Gwanda-Beitbridge road rehabilitation (The Chronicle)
SA rejects Zim border passes (NewsDay)
Liberia launches a national export strategy (FPA)
Work towards Visa on Arrival for all Africans instead: Team Africa advises AU (Graphic)
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Boosting competition in African markets can enhance growth and lift at least half a million people out of poverty
Boosting competition in consumer markets and key input sectors can help African countries grow faster and alleviate poverty, according to a report launched on 27 July 2016 by the World Bank Group and the African Competition Forum (ACF).
African countries have much to gain by encouraging open and competitive markets, particularly as a means to spur sustainable economic growth and alleviate poverty. Yet in reality, many markets have low levels of competition. More than 70% of African countries rank in the bottom half of countries globally on the perceived intensity of local competition and on the existence of fundamentals for market-based competition. Monopolies, duopolies, and oligopolies are relatively prevalent compared to other regions. In more than 40% of African countries, a single operator holds over half the market share in telecommunications and transport sectors.
This lack of competition has drastic costs. Retail prices for 10 key consumer goods – white rice, white flour, butter and milk among them – are at least 24% higher in African cities than in other main cities around the world, even after taking into account demand and transport costs. While these higher prices affect all consumers, the poor are hit the hardest.
A new report, Breaking Down Barriers, estimates the gains from tackling anticompetitive practices and reforming policies to enable competition. For instance, reducing the prices of food staples by just 10%, by tackling cartels and improving regulations that limit competition in food markets could lift 500,000 people in Kenya, South Africa, and Zambia out of poverty and save consumers more than $700 million a year.
At the same time, fundamental market reforms to increase competition in key sectors is critical for competitiveness and economic growth. For example, if countries like Ethiopia, Ghana, Zambia and others were to reform their professional services markets, this could generate nearly half a percentage point in GDP growth from industries which use these services intensively. For a country like Zambia, which had 1.7% GDP growth in 2015, this can be significant. The report also suggests that the impact would be even larger if fundamental reforms were implemented in other services such as electricity, telecommunications, and transport which have higher spillover potential across economies.
“Strengthened competition policy in Africa not only encourages sustainable economic growth and competitiveness across the continent by creating firms and industries that are more productive, it directly impacts poverty by encouraging firms to deliver the best deals to consumers – particularly the poor – protecting them from paying higher prices for essential goods and services,” said Anabel Gonzalez, Senior Director of the World Bank Group’s Trade & Competitiveness Global Practice.
Cartels – agreements among competitors to fix prices, limit production or rig bids – are a serious cause of low competition levels in African countries and have been found to affect products in a variety of sectors, including fertilizers, food, pharmaceuticals, construction materials, and construction services. Evidence reveals that consumers pay 49 percent more on average when firms enter into these agreements.
Competition authorities can take additional steps to strengthen their ability to detect and deter cartels. Setting fines and penalties so that they are higher than the expected profits may help to deter anticompetitive behavior. Although the maximum fine imposed on cartels in South Africa is $116 million, on average, fines are only 9% of a companies’ excess profits. This means cartel members lack incentives to change practices as profits often far outweigh fines. Leniency programs – which allow a cartel member to confess, cooperate with an investigation, and provide evidence in exchange for immunity or reduced penalties – and utilizing whistleblowers, informants, and raids, are all effective strategies that are under-utilized in African countries.
Input markets in Africa also face barriers to competition, according to the report, curbing Africa’s competitiveness. In the telecommunications sector for instance, in the 27 African countries studied in Breaking Down Barriers, more than 50% of the mobile market is held by a single firm. Research from Africa has shown that entry of an additional telecom operator leads to a 57% increase in mobile subscriptions, which can have knock-on effects on the economy’s productivity.
The report provides a special focus on competition enforcement and effective market regulatory environments in cement, fertilizer and telecommunications – sectors that are key to construction and agriculture competitiveness, and to the welfare of less well-off households. For example, in the cement sector, it finds that competition law enforcement, removal of non-tariff barriers, and pro-competition rules to enable entry in limestone and clinker production could save African consumers around $2.5 billion each year.
As well as showcasing the benefits of competition in particular sectors, the report highlights Africa’s important progress by creating more effective competition authorities and regulators, and outlines areas of focus to encourage vigorous competition in key markets in the region. The number of African countries and regional blocs like EAC, COMESA and ECOWAS with competition laws has jumped from 13 to 32 in the last 15 years. Competition authorities operate in 25 of those jurisdictions and budgets for those authorities increased by 39% between 2009 and 2014. However, the report suggests that there is room to prioritize resources and use the powers and tools available more effectively to continue raising the relevance of competition policy within the broader development agenda in Africa.
“There have been a notable number of countries adopting competition laws in Africa, and this bodes well for growth and development. However, while the benefits of competition are already clearly observable in Africa, there is still considerable effort required to ensure effective implementation of competition laws and policies across the continent. Collaboration among competition authorities in Africa, bilaterally and through the Africa Competition Forum, and with development partners is key to facilitate capacity building of younger authorities, systematize information on competition challenges and opportunities, and address cross-border competition issues that affect the region,” noted Tembinkosi Bonakele, Chairperson of the African Competition Forum and Commissioner of the South Africa Competition Commission.
“In the past few years, several countries have stepped up their enforcement capacity and implementation of competition laws. For example, Egypt, Kenya, South Africa and Zambia have taken recent actions to block uncompetitive agreements in a variety of sectors,” explains Martha Martinez Licetti, the report’s co-author and Lead Economist for the Trade & Competitiveness Global Practice at the World Bank Group. “Looking to the future, there is a need to prioritize resources and use the powers and tools available to competition authorities more effectively in order to continue raising the relevance of competition policy within the broader development agenda.”
Gains from opening competition in fertilizer, cement and telecommunications markets can be substantial
One strategy for promoting competition is to focus on key sectors that are especially important to the growth of African economies. Breaking Down Barriers highlights three sectors – cement, fertilizer, and telecommunications – that directly affect the competitiveness of African producers but lack a level playing field.
Cement
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The cement sector plays a critical role in the construction of infrastructure and housing;
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Nine pan-regional firms account for the majority of the continent’s cement capacity;
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In 18 countries, one supplier holds more than half the market;
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Cement prices in Africa are, on average, 183% higher than world prices;
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Competition law enforcement, removal of non-tariff barriers, and pro-competition rules could save African consumers from overpaying for cement by $2.5 billion per each year.
Fertilizer
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The fertilizer sector is crucial for agricultural production;
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Only 28% of African countries have the ability to produce their own fertilizers, the rest must import;
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Global export cartels increase the prices of potassium fertilizers in Sub-Saharan Africa by 29%;
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In 58% of the countries studied in Breaking Down Barriers, one supplier controls over half the market.
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Removal of regulatory restrictions that inhibit entry, competitive public procurement of fertilizer, and market intelligence to detect anticompetitive practices will allow African farmers to benefit from competition.
Telecommunications
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Telecommunications shape connectivity within countries and with the global economy, for both families and businesses;
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As of 2015, Sub-Saharan African countries had the highest final prices for mobile broadband services in the world and internet use is 2nd lowest among regions;
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African mobile and wireless markets are highly concentrated. In 27 countries, one player has more than 50 percent market share.
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Monopolies are still present in Africa: 11 in international gateway services and six in wireless internet services.
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Fostering non-distortive state participation and regulating access to key inputs to provide telecom services will benefit African economies.
Regional cooperation is another way authorities can boost competition. Supply chains and business arrangements often cross borders, so the greater reach of regional organizations could help them address issues that go beyond the powers of national authorities.
“There is scope for national and regional competition authorities to increase their impact by taking a regional perspective. This report brings home the importance of strong cooperation between agencies involved in implementing competition policy, says Klaus Tilmes, Director of the Trade & Competitiveness Global Practice at the World Bank Group. “We hope this analysis will raise awareness of the achievements made in Africa, stimulate debate on how to address the remaining challenges, and reinforce the case for strengthening competition policy across the region.”
» Download: Breaking Down Barriers: Unlocking Africa’s Potential through Vigorous Competition Policy (PDF, 5.95 MB)
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Debate, discord mark UN Conference on Trade and Development
The United Nations Conference on Trade and Development renewed its mandate at its annual summit last week, aiming to more closely align international trade policies and standards with the new global development agenda. But reaching consensus was not easy.
Negotiations were marked by intense discussions and a debate persists about whether UNCTAD is giving enough of a voice to the global south on issues of trade and development.
Many civil society groups contend that UNCTAD, with its development-centric mission, can go further still to embed the interests of developing countries on matters of trade and finance into international principles and agreements.
Prioritizing that development focus would go a long way to ensuring that aid indeed goes hand-in-hand with trade. But instead, groups argue, the UNCTAD has largely left it up to richer, industrialized countries to set those global standards.
Drifting focus?
The issue of an inclusive development agenda was the primary focus of civil society organizations leading up to the 14th UNCTAD summit in Nairobi, Kenya, where more than 5,000 delegates from 149 U.N. member states convened for the quadrennial UNCTAD meeting to debate high-level issues of trade and development.
UNCTAD’s role in promoting global development stands out among other large international organizations. While institutions such as the World Bank, International Monetary Fund and World Trade Organization work to advance economic development, growth and stability, UNCTAD is primarily rooted in people-centered development with a specific purpose to improve livelihoods and well-being in the “global south.” The agency promotes ways that governments can use trade to improve the lives of the poor and its mission has expanded over time to support finance, investment and technology.
However, civil society organizations have grown increasingly concerned that UNCTAD’s development mandate has taken a back seat to advancing the commercial interests of industrialized countries, promoted through predominantly Western-led institutions.
Ahead of the summit a group of 331 civil society organizations sent a letter to UNCTAD member governments, urging the agency to recenter its focus on development and not tie its agenda too closely to the missions of other institutions. The more that UNCTAD moves toward seeing developing countries mainly as engines for global trade agreements, the more the U.N. body risks redundancy and irrelevancy, the groups argued.
Civil society organizations placed high hopes that the Nairobi summit would reverse that trend. The five-day meeting was the first UNCTAD summit since the Sustainable Development Goals were approved and offered the agency a fresh chance to integrate its work on finance and trade with the global goals.
“If we look at the challenge of fulfilling the SDGs, we need a drastic change of business,” said Tove Maria Ryding of Eurodad, a Brussels-based network of civil society organizations that focuses on aid effectiveness.
Sticking points
As is customary, UNCTAD member states approved an agreement at the conclusion of the meeting that affirms the group’s mandate and establishes its work plan for the next four years. Drafting that accord was largely procedural, said Ryding, whose group followed the negotiations closely. UNCTAD negotiators reached consensus on routine matters of identifying the role of trade in development and agreeing to more closely collaborate to advance the SDGs.
But a fierce debate emerged on whether UNCTAD should expand its mandate by endorsing specific principles on tax policy and debt management. Civil society groups advocated for standards and recommendations that put industrialized and developing countries on equal footing to address those issues.
Those sticking points ultimately pushed negotiations into the 11th hour. UNCTAD officials described two days of round-the-clock talks in which negotiators resorted to caffeine pills, candies and soft drinks to keep themselves alert.
On taxes, for example, UNCTAD already helps developing countries build capacity to manage their revenue collection systems and monitor tax flows in accordance with bilateral investment treaties. But civil society groups pushed for UNCTAD to give developing countries the right to participate on equal footing with developed countries in crafting global tax standards. Such wording, however, was left out of the final agreement.
On debt, a major point of contention was whether to shift UNCTAD’s mandate simply from “debt management” to “debt crisis and prevention.”
The agency has principles in place to guide responsible borrowing and lending between countries. But civil society urged for a new UNCTAD mandate to endorse specific practices to implement those principles. Types of practices would include restrictions against “vulture funds” that sue governments to recover debt or sustainable payback practices for highly indebted countries. Neither made it into the final agreement.
By not adopting a broader mandate, members of civil society believe that UNCTAD is limiting opportunities for developing countries to contribute to a global agenda in favor of industrial country interests. An UNCTAD mandate to build global consensus on tax standards, for example, would be a more inclusive approach than the current arrangement in which Organization for Economic Cooperation and Development countries establish much of the world’s tax practices and norms.
“UNCTAD was set up as a body to help developing countries benefit from trade, stabilize their economies and escape unsustainable debt burdens,” Ryding told Devex. “However, as soon as the negotiations started, we saw a strong resistance from rich countries to strengthen UNCTAD, and this behavior is the reason why the outcome is much less ambitious that we had hoped.”
The issues of tax policy and debt management carried particular weight at the meetings. A new UNCTAD report warned of unsustainable debt burdens in many African countries and urged governments to add new revenue sources to finance development, such as remittances, public-private partnerships and a clampdown on illicit financial flows.
More broadly, a common theme of the meeting was the tenuous footing of the global economy and developing countries. The opening paragraph of the final agreement, for example, cites subdued growth, income inequality, financial fragility, volatile financial flows and a decreasing share in world trade among developing countries since the last UNCTAD summit.
Silver linings
Despite the qualms expressed by some civil society groups, the UNCTAD summit also produced positive achievements.
The meeting established an intergovernmental group to focus on financing for development, particularly around funding for the SDGs and Paris climate agreement.
The final agreement underscored the principle of common but differential responsibilities of developing countries in global trade – a key affirmation that as developing countries grow their economies they are held to different standards from industrialized ones on issues such as tariffs, the environment and intellectual property.
Ninety countries also signed a U.N. initiative to end fishing subsidies that total $35 billion globally and have contributed to sharp declines in fish stocks and degraded marine life.
Conference delegates also considered the structure and organization of the summit itself to be a success. “The event was very multifaceted,” said Matthew Wilson, chief of cabinet of the International Trade Center. “From investment topics to a commodities forum, women’s economic empowerment, small and medium-sized enterprise development, all of the key issues were covered,” he added. “There were quite a few [issues addressed] that will be helpful for the international community moving forward and be direct contributors to achieving the SDGs.”
While civil society was frustrated that some of their key demands were not met, Wilson suggests that those frustrations are perhaps misplaced.
“In many respects, the demands of civil society may be a bit more ambitious than the 150-plus members of UNCTAD can agree to,” he noted. “Civil society wanted a bit more and deeper language on taxation, debt and investment treaties – some [of the language] was not reflected in the way that they liked, but all of the key issues were mentioned.”
And while the official language of international agreements goes far to codify priorities, real progress comes from executing work programs, trade officials said.
“Some of the major hurdles to trade don’t have to do with legal text, but on implementing regulations,” said Ziad Hamoui, executive director of Tarzan Enterprise, a Ghana-based transport and logistics company, and the former president of a private sector-led advocacy group for regional economic integration in Africa.
Among the biggest barriers to trade, Hamoui said, are misaligned practices for processing and logistics between countries. Standardizing trade procedures at the border and along value chains would provide a major boost to commerce in developing countries, he noted. Eliminating this type of red tape and implementing a trade facilitation agreement is one of the WTO’s top priorities that the UNCTAD mandate supports.
While several issues still remain unresolved the high-level discussions that UNCTAD raise about them at its summit last week were important in their own right. Perhaps the most pivotal question going forward is how far UNCTAD in collaboration with other international bodies will go towards building an equitable, inclusive agenda for global development.
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IMF Executive Board completes Fourth PSI Review for Tanzania and concludes 2016 Article IV Consultation
On July 18, 2016, the Executive Board of the International Monetary Fund (IMF) completed the fourth review of Tanzania’s economic performance under the program supported by the Policy Support Instrument (PSI) and also concluded the 2016 Article IV consultation with Tanzania.
The PSI for Tanzania was approved by the Executive Board on July 16, 2014. Following the Board discussion, Mr. Min Zhu, Deputy Managing Director and Acting Chair, made the following statement:
“Tanzania’s macroeconomic performance has been strong under the Policy Support Instrument. Growth has remained close to 7 percent and inflation is moderate. Most quantitative program targets for end-2015 were met, while progress on structural reforms slowed due to the transition to the new government.
“The macroeconomic outlook is favorable, supported by the authorities’ ambitious development agenda, although risks are tilted to the downside. Sustaining high growth and implementing the development agenda while preserving fiscal and external sustainability will require a range of reforms. Somewhat higher fiscal deficits could be sustained for a few years while keeping a low risk of debt distress. However, creating fiscal space for higher infrastructure investment through sustained efforts to raise domestic revenue and increasing spending efficiency, particularly in public investment, is imperative.
“The implementation of the 2016/17 budget will be a first test of the authorities’ capacity to reconcile these various objectives. Careful prioritization and implementation of expenditures will be required to ensure that spending does not exceed available resources and to avoid domestic arrears accumulation.
“Despite significant progress in recent years, financial development remains low. Further development would support higher growth, as well as improve the overall effectiveness of macroeconomic policy. Beyond credit growth, financial development will require further improving access, particularly for businesses, and reducing high borrowing costs. Further development of the interbank and government debt markets is also desirable.
“Vigorous reforms will be required to foster further structural transformation of the economy. The authorities’ focus on creating a better environment for business and job creation is welcome, like the authorities’ strong drive against corruption. Improving the financial sustainability of the public electricity utility, TANESCO, is critical for the development of the energy sector. Tanzania could also benefit from the completion of the East African Community common market.”
The Executive Board also completed the 2016 Article IV Consultation with Tanzania.
Tanzania has achieved strong growth and macroeconomic stability over the past two decades. This performance was the result of market-oriented reforms and prudent macroeconomic policies. Growth has been driven by construction, services, and basic manufacturing, and the economy has become more diversified. Inflation, while still volatile, has remained moderate. Poverty has decreased but remains high (at 28.2 percent of the population, based on the national poverty line) with a large population of underemployed youth, and despite substantial progress toward the Millennium Development Goals (MDGs), Tanzania is likely to have missed about half the 2015 targets.
Growth has remained strong and inflation moderate in the past two years. Real GDP grew by 7 percent in 2015, with activity particularly buoyant in the construction, communication, finance, and transportation sectors. Inflation remained in single digits throughout 2015, averaging 5.6 percent, despite the significant exchange rate depreciation in the first half of 2015. Inflation in April 2016 was 5.1 percent, close to the authorities’ target of 5 percent. The external position recorded mixed developments. The current account deficit declined from 10.7 percent of GDP in 2013/14 to a projected 8.6 percent in 2015/16, mainly due to lower oil prices. The surpluses in the capital and financial accounts, however, narrowed due to lower donor support and foreign direct investment related to natural gas exploration. International reserve coverage is estimated to have declined somewhat to 3.6 months of prospective imports of goods and services in June 2016. The banking system appears sound overall, but there is wide variation within the system. The level of financial development has improved in recent years, though at a gradual pace.
Implementation of the 2015/16 budget has faced challenges. While the budget was built on ambitious but realistic revenue projections, it still had to be adjusted for external financing shortfalls and to make room for expenditures carried over from 2014/15 and some of the new government’s priorities in education. The revised budget targets a lower overall deficit of about 3.25 percent of GDP (compared with 4.2 percent in the original budget and the program). Available information (on a cash basis) for the first three quarters suggests that this target is well within reach, reflecting a significant slowdown in the execution of capital expenditures. The stock of expenditure arrears decreased during the third quarter of the fiscal year (January-March 2016), reflecting the partial clearance of construction arrears and reversing an increase during the first two quarters.
While macroeconomic management has been able to deliver fiscal sustainability and macroeconomic stability, the quality of fiscal management deteriorated until recently in some areas (e.g., expenditure arrears control) and the pace of reform has abated in recent years. The modernization of monetary policy has made only limited progress in the past two years. The business environment remains challenging and the perception of corruption has increased substantially. As a result, program performance under the PSI has been mixed. The government’s second Five-Year Development Plan (FYDP II), published in June 2016, aims to address these issues. It focuses on economic transformation through industrialization and human development. To facilitate private sector-led growth, the government aims to provide critical infrastructure and create a business environment that is conducive to job creation. The government also aims to reduce poverty by improving social services (education, health, housing, water and sanitation), enhancing income security, and promoting social protection. The plan will start being implemented with the 2016/17 budget.
Staff Report
Recent Developments
Growth has remained strong and inflation moderate. Real GDP grew by 7 percent in 2015, with activity particularly buoyant in the construction, communication, finance, and transportation sectors. Inflation remained in single digits throughout 2015, averaging 5.6 percent, despite the significant exchange rate depreciation in the first half of 2015. Inflation in April 2016 was 5.1 percent, close to the authorities’ target of 5 percent.
The external position recorded mixed developments. The current account deficit declined from 10.7 percent of GDP in 2013/14 to a projected 8.6 percent in 2015/16, mainly due to lower oil prices. The capital and financial account surpluses, however, have narrowed, reflecting lower donor support and lower FDI related to natural gas exploration. International reserve coverage has declined somewhat to a projected 3.6 months of imports of goods and services in June 2016, reflecting no accumulation in 2015/16 and the projected large increase in imports in 2016/17. The shilling depreciated sharply against the U.S. dollar in 2014/15 (about 25 percent) and experienced high volatility. While the shilling depreciated a bit further since mid-2015, the situation in the foreign exchange (FX) market has normalized, with improved liquidity and participation by commercial banks. Following the opening of the capital account to East African Community (EAC) investors in 2015, the authorities plan to extend the liberalization to all foreign investors.
Unrealistic budgets and weak commitment controls led to the accumulation of large arrears to suppliers and pension funds in recent years. The overall cash fiscal deficit remained relatively low in 2013/14 and 2014/15, at 3.3 percent of GDP. However, once corrected for significant budget expenditure arrears accumulation, the fiscal deficit actually was in the 4-4.5 percent of GDP range.1 Budget execution in recent years was affected by unrealistically high revenue projections and financing shortfalls, which required inefficient intra-year expenditure adjustment mostly falling on investment. Delays in adjusting the budget and weak commitment controls were key factors behind the accumulation of arrears.
Implementation of the 2015/16 budget has also faced challenges. While the budget was built on ambitious but realistic revenue projections, expenditures still had to be adjusted for external financing shortfalls and to make room for expenditures carried over from 2014/15 and some of the new government’s priorities in education. The revised budget targets a lower overall deficit of about 3¼ percent of GDP (compared with 4.2 percent in the original budget and the program). Available information (on a cash basis) for the first three quarters suggests that this target is well within reach, reflecting a significant slowdown in the execution of capital expenditures. The stock of expenditure arrears decreased during the third quarter of the fiscal year (January-March 2016), reflecting the partial clearance of construction arrears and reversing an increase during the first two quarters.
While central government debt has increased to about 38 percent of GDP, debt vulnerabilities remain limited. This increase reflects both fiscal deficits and the impact of the recent depreciation of the shilling on dollardenominated debt. External borrowing on nonconcessional terms has increased rapidly in recent years, partly to make up for dwindling aid.
Outlook and Risks
The government’s second Five-Year Development Plan (FYDP II) focuses on economic transformation through industrialization and human development. To facilitate private sector-led growth, the new government aims to address the infrastructure gap, which remains large in Tanzania (see table below for a cross-country comparison), and create a business environment that is conducive to job creation. The government also aims to reduce poverty by improving social services (education, health, housing, water and sanitation), enhancing income security, and promoting social protection. The plan will start being implemented with the 2016/17 budget.
The macroeconomic outlook is favorable. Growth is projected to remain strong at about 7 percent in 2016, on the back of low oil prices (a positive shock for Tanzania), continued strong growth in certain sectors (e.g., services) and the scaling up of public investment. For the medium term, in the absence of a detailed quantitative macroeconomic framework for FYDP II at the time of discussions, staff designed a baseline scenario assuming public investment scaling up. Noting that many of the authorities’ priority investments would require several years to be implemented, staff assumed that capital expenditures would remain high over a few years. The investment effort would help keep growth at about 7 percent during that period; growth would then revert to its 15-year average of about 6½ percent. Inflation is expected to remain close to the authority’s medium-term target of 5 percent, provided that the BoT maintains a tight monetary policy stance. The external current account deficit is projected at around 9 percent of GDP in 2016/17 and to remain elevated the medium term, as the implementation of FYDP II would lead to high capital spending and imports.
Risks to the outlook are tilted to the downside. Key external risks include the tightening of global financial conditions, which could result in higher financing costs and/or make external budget financing difficult, and a significant slowdown in China and other large emerging markets, which could affect external demand and the financing of key infrastructure investments and thereby growth (Annex II). Domestic risks include the possibility of fiscal slippages due to spending pressures stemming from FYDP II’s implementation, continued challenges to raise the required revenue and financing for the budget, and in the medium term slow reforms that could affect potential growth.
Policy Discussions
Discussions revolved around how to sustain high growth and implement the new government’s priorities while preserving fiscal and external sustainability. This will require mobilizing additional domestic revenue, realigning spending priorities, and creating fiscal space for infrastructure investment, as FYDP II aims to do. At the same time, the targeted transformation of the Tanzanian economy requires administrative and institutional reforms to promote credible policy implementation, higher efficiency of public spending, deeper financial intermediation, and an improved business environment.
Raising Public Investment While Mitigating Risks
The draft 2016/17 budget envisages a large increase in public investment and revenue and targets a deficit of about 4.5 percent of GDP. The tax revenue to GDP ratio is expected to increase by about 1 percentage point, through a strengthening of tax administration and tax policy measures. The nontax revenue to GDP ratio would increase by about 1.5 percentage point, owing to higher contributions of parastatals to the budget (including a large one-off transfer on account of retained earnings) and higher efficiency in the collection of various fees. On expenditure, the draft budget proposes a large change of the composition of spending in favor of investment. Current expenditure would be contained through a hiring and nominal wage freeze and efforts to significantly reduce the cost of running the government. Capital expenditures would more than double as a share of GDP, bringing development spending to about 11 percent of GDP in 2016/17.4 The budget sets aside about 1.5 percent of GDP to clear budget expenditure arrears. Higher project financing and external non-concessional borrowing (ENCB) would help finance the investment effort and higher fiscal deficit.
Mobilizing Additional Revenue
Tanzania’s tax revenue, at about 13 percent of GDP in 2015/16, is low by international standards. This reflects to a significant extent poor VAT performance. Staff analysis suggests that the tax revenue gap in Tanzania was about 4 percent of GDP in 2009-13, and assuming an unchanged tax potential would still be about 2-3 percent of GDP presently (Box 1).
Box 1. Tax Revenue Gap in Tanzania
Tanzania’s tax revenue performance lags behind that of comparable countries. Tanzania had a tax-to-GDP ratio of 11.9 percent of GDP in 2011-13, well below the average of EAC countries (13.1 percent of GDP) and that of LICs (14.7 percent of GDP). This reflects to a significant extent poor performance in VAT collection. While EAC countries collected an average of 4.4 percent of GDP in VAT revenue in 2011-13, Tanzania only managed to achieve 3.3 percent of GDP. The VAT revenue underperformance appears to be driven by a low tax productivity associated with administrative inefficiency, low taxpayer compliance, and policy gaps.
The estimation of the tax capacity suggests that there is a considerable scope to raise revenue in the medium term. Using the peer analysis and the frontier approach on a sample of 32 LICs with data during 1994-2013, Tanzania’s tax capacity is estimated at 15-16 percent of GDP in 2009-13, that is about 4 percent of GDP above the average tax revenue ratio during the same period. Assuming an unchanged tax capacity, and in light of the increase in the tax revenue ratio in 2015/16, the gap has been reduced to 2-3 percent of GDP.
Enhancing Public Spending Efficiency
Weak revenue collection has affected the level of expenditure, and spending efficiency has been low in certain sectors. Tanzania’s public expenditure was below the average for LICs in recent years, with the gap being larger for investment spending. As mentioned above, weak commitment controls and unrealistic budgets in recent years have led to intra-year expenditure adjustments affecting investment and arrears accumulation. Staff analysis suggests that Tanzania performs poorly in education and investment spending efficiency while health spending efficiency appears to be in line with the average for LICs (Box 2).
Box 2. Benchmarking and Efficiency of Public Spending in Tanzania
Public spending has broadly stabilized in the recent years and remained below the level of comparator countries. A lackluster revenue performance, combined with declining donor assistance and difficulties in securing external financing, has constrained public spending growth. Further, the need to maintain fiscal discipline in the face of revenue and financing shortfalls led to expenditure cuts that fell disproportionally on capital expenditure, thus weakening the composition of spending. Total public expenditure in Tanzania stood at 19.5 percent of GDP on average in 2010-14, well below the EAC average (24.5 percent of GDP), while capital expenditure was the lowest in the region.
There is a significant room to improve public spending efficiency. The latter was assessed using the data envelopment analysis (DEA) approach on a sample of 34 LICs with data for the period 2010-14. The efficiency score of Tanzania for health spending is estimated at 0.86 close to the sample average, using the health-adjusted life expectancy (HALE) to measure the health outcome. Eliminating remaining inefficiencies (i.e., bringing the score to 1) could raise HALE from 53 to 60 years with the same level of spending. Using school enrollment rates as the education outcome, the efficiency of education spending in Tanzania is about a third lower than in the most efficient LICs. Similarly, Tanzania ranks low in the efficiency of public investment, with the efficiency gap estimated at about a third for overall infrastructure quality.
Reforms to improve the allocation of resources in the health and education sectors and strengthen public investment management institutions would help Tanzania improve public spending efficiency. In the health sector, existing reports highlight the need to align staffing of healthcare centers and the provision of drugs to demand and performance, address the shortage of skilled staff, tackle low productivity of staff and the high degree of absenteeism, and strengthen the information management system to better monitor health indicators and performance of healthcare centers. In the education sector, reducing the large disparities of students to teacher ratios across districts, improving the quality of primary education, and improving teachers’ skills are essential. It is important that spending on tertiary education does not crowd out that of lower education levels, whereas student loans should be better targeted and their repayment enforced. Strengthening public investment management institutions would be critical to improve the selection, appraisal, management and evaluation of projects.
Monetary and Financial Sector Policies: Promoting Growth While Preserving Stability
The financial system in Tanzania is dominated by banks. Financial markets, on the whole, are shallow and less developed though a few markets (the interbank and foreign exchange markets) exhibit greater liquidity and depth. Banks are generally well-capitalized and profitable. However, there is wide variation within the system: a few large banks have shown strong financial performance but other banks, primarily smaller foreign-owned banks and community banks, exhibit low profitability and poor asset quality. State-owned banks also have relatively high non-performing loan (NPL) ratios. Tanzania stands out in its large number of banks (57).
The level of financial development has improved in recent years, though at a gradual pace. A broad measure of financial development suggests that the development of institutions has improved over time but that of markets has lagged. Among institutions, there has been notable improvement in access, particularly for households. The expansion of mobile money and banking is a key driver of this positive development. While nearly two-thirds of adults now have access to formal financial services, the picture for firms is less positive: in the 2013 World Bank enterprise survey, almost 44 percent of firms in Tanzania claimed to face difficulties in accessing finance, the highest proportion in the EAC, with small and medium enterprises facing particularly acute challenges. Further, the level of financial development in Tanzania is lower than might be expected for a country at its current level of income and similar fundamentals, with market development particularly lagging. Finally, financial efficiency is relatively low in Tanzania, with for instance high lending rates.
Improving financial development would likely yield higher growth and greater stability. Based on recent cross-country empirical work done at the IMF, Tanzania stands to benefit substantially from greater financial development. By bringing the level of development up to expected levels given Tanzania’s economic and demographic characteristics, empirical estimates suggest that growth could be higher by up to 1 percent and less volatile.
Improving financial market development in Tanzania would also facilitate macroeconomic policy implementation. The monetary transmission mechanism is weak and seems to have weakened, rather than strengthened, in recent years. There appears to be little correlation between short-term (market) rates and longer-term retail rates, probably reflecting interest rate volatility in the interbank market. The lack of market development also adversely affects fiscal policy by reducing the authorities’ capacity to raise domestic financing at a reasonable cost and run counter-cyclical policies in response to shocks, and raises risks such as rollover risks.
Growth-Enhancing Structural Reforms
The business environment remains challenging. In the 2016 World Bank’s Doing Business survey, Tanzania ranks 139 out of 189 countries and lags behind its regional peers such as Kenya, Rwanda, and Uganda. Getting credit, paying taxes, and trading across borders are mentioned as the biggest issues. The perception of corruption has increased in recent years, while the perception of government effectiveness has decreased. Corruption has directly affected public finances: for instance, corruption at the Port of Dar es Salaam led to significant tax evasion and lower revenue; corruption in the private placement of a bond in 2013 increased financing costs to the government. In addition to the possibility of potential contingent liabilities, the IPTL case and related court proceedings have also likely increased perception of risk by investors. More broadly, corruption has negatively impacted the business climate, with likely negative implications for investment and growth.
Tanzania could become a major producer and exporter of natural gas in the next decade. Recently discovered offshore natural gas, assuming it is exploited, could lead to multibillion dollar foreign investment in the next 5-10 years and make Tanzania one of the largest exporters of natural gas in the region by the mid-2020s. Potentially significant revenue from natural gas (whose size is highly sensitive to a number of parameters, particularly gas prices; see Selected Issues Paper) could play a critical role for the development of Tanzania, if well managed.
The financial sustainability of the public electricity utility, TANESCO, has not been achieved yet, affecting its credibility as an energy purchaser. TANESCO still has a large amount of arrears to gas and electricity suppliers (0.7 percent of GDP in early 2016). A large independent electricity producer (SONGAS) recently decided to shut down partially its operations as a result of TANESCO’s inability to clear its arrears; other investment decisions could also be affected. Despite this context, TANESCO requested a small tariff decrease for the spring of 2016, and a larger one for 2017, anticipating a significant improvement in its financial situation reflecting favorable developments in its production mix.
Reducing External Vulnerability
The external current account deficit is expected to remain high. Tanzania has recorded large current account deficits over the past decade, financed mainly by official flows and FDI. High development and infrastructure needs are expected to continue to lead to large investment-related imports and current account deficits.
Empirical analysis suggests that the exchange rate is broadly in line with fundamentals and desirable policies and that international reserves are adequate. The EBA-lite external sustainability and real exchange rate approaches indicate that the shilling, which was last assessed in 2014 to be somewhat overvalued, is now close to equilibrium (Annex III). The EBA-lite current account approach, however, suggests that Tanzania’s current account deficit is larger than the level consistent with fundamentals and desired policies, implying some overvaluation. This model, however, does not seem to capture well Tanzania’s situation (including substantial imports financed by FDI), as indicated by a very large residual. Moreover, the shilling has not been under significant pressure since mid-2015. According to traditional metrics and a cost-benefit analysis, Tanzania’s reserves at about 3.6 months of imports at end-June 2016 are adequate.
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SADC’s grim reality
Southern African Development Community (SADC) leaders will have to speedily bring into being the long-awaited regional development fund, or the body could flounder should anything negative happen to its funding from the European Union (EU) – its biggest sponsor.
The EU, Germany, Japan, the US, Nordic countries, Britain and other international donors cover at least 79 percent of the regional body’s annual budget, which last year totalled N$1,1 billion.
Each year the SADC Council draws up programmes around its two main intervention objectives of regional economic integration and peace and security in the region.
SADC heads of state have expressed dismay at the current state of affairs, saying that if they are to be taken seriously and move towards regional integration SADC cannot continue to rely on donor funding.
Speaking at a session on the 15-member organisation during the ongoing Namibia Foreign Policy Review Conference yesterday in Windhoek, Paul Kalenga highlighted the dire situation in which SADC finds itself, stressing that should the EU stop its funding, the body in its current state will cease to exist. Kalenga was speaking in his capacity as the technical adviser on trade related facilities of the SADC Secretariat.
“Presently we depend mainly on one donor, the EU. If the EU is no more tomorrow then there is no SADC and that is where the situation is,” Kalenga emphasised.
“We have bilateral donors like the British, Germany, Nordic countries, Japan – while others come in to fund specific programmes, such as the United States Agency for International Development,” he said.
According to him, the membership fees from member states, although important, are sadly not enough to free the body from the cycle of donor funding.
“That is a serious dependence and a serious obstacle to the implementation of what SADC wants to do.”
He however added that all is not gloom, as SADC’s ministers of finances have made tremendous success in finalising the much-anticipated SADC development fund.
“I really do not want to say what is on the table but there is a mechanism … to fund SADC. It is like a re-investment arrangement where SADC can reinvest and generate more funds for itself to fund its development programmes,” stated Kalenga.
When it was first mooted, it was announced by SADC that the fund would accelerate investment in infrastructure development as well as facilitate and forge deeper regional integration.
Also, SADC executive secretary Stergomena Lawrence Tax had earlier urged SADC member states to reduce dependence on donor funding for regional integration and development programmes.
She said that donor contributions should only supplement SADC’s own efforts and should not be the mainstay of its agenda.
According to her, for as long as donor contributions are the major source of SADC funding it will be hard for the body to independently realise its objectives – without pandering to the whims of others.
At the time, Tax stressed the importance of SADC’s ever-lasting political will that propelled the region from being a colonial asset to freedom and independence.
At a continental level, the African Union leaders recently took a decision to cut the continental body’s dependence on foreign aid for the running of its programmes and peacekeeping missions.
It was decided at its recent 27th Summit that a funding model, whereby every member country will contribute “0.2 percent of its eligible imports to the AU” should be followed. This will, however, exclude imports such as medicines, fertilizers and baby food.
This funding model is expected to raise about N$17,4 billion, which is said to be three times more than the current AU operational budget. The contributions are expected to start next year. As it is, about 72 percent of the AU budget comes from the United Nations and foreign donors.
However, the AU was cautioned to look into the fact that most of its member states still depend heavily on donor funding to cover their budgetary deficits.
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Africa will be the secret victim of Brexit
Britain’s economy may bear the brunt of the fallout from the UK’s decision to leave the European Union, but another part of the world – Africa – is set to be an unexpected victim.
Much of the economic spotlight since Britain voted to leave the EU has understandably been trained on how the so-called Brexit vote will affect the British economy as well as those of countries within the eurozone and the wider European Union.
In the UK one word – recession – dominates, with banks, economic research houses, and supranational institutions all predicting that growth in Britain will shrink this year or next.
Barclays thinks the UK is on the “cusp of recession,” Credit Suisse predicts that a recession will cost Britain 500,000 jobs, and Morgan Stanley says a recession is coming, though it was unsure of the specific details.
It isn’t just predictions that are dire. Economic surveys, like Friday’s disastrous Markit flash PMI data, are also pointing to recession.
Europe is a slightly different story. Before the referendum it was generally accepted that a vote to leave would drag massively on growth and crush confidence, but so far the impact looks to be negligible, if surveys from the German think tank Ifo Institute and Markit are to be believed.
But according to new research from Barclays, Brexit’s economic impact on Africa, and particularly sub-Saharan Africa, or SSA, could be profound and incredibly damaging to the continent’s burgeoning development. In a note by analysts led by Peter Worthington, Barclays argues that the referendum will materially affect growth on the continent, saying:
“Post-Brexit, we see growth in sub-Saharan Africa halving to just 1.4% in 2016, the slowest pace in decades, due principally to sharply weaker growth outlooks in sub-Saharan Africa’s three biggest economies: Angola, Nigeria, and South Africa, which together account for nearly three fifths of SSA GDP.”
Barclays identifies seven key reasons SSA growth is at risk from Brexit. Take a look below:
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Brexit could harm global demand for goods, particularly hitting African economies that are focused on the export of raw materials. This would lead to “slower growth and wider current account deficits,” Barclays argues.
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Weaker global demand could also, Barclays says, cause key commodity prices to fall, further undermining the African economy, which relies heavily on exporting minerals, ores, and other commodities. The possible exception would most likely be gold, which has been boosted by market uncertainty since the referendum. Two of the world’s 10 biggest gold-producing nations are in sub-Saharan Africa.
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Tourism will dwindle. A key area of economic prosperity for African nations is tourism, particularly through safaris and other nature tours. The basic argument here is simple – if Brits and other Europeans are suffering through economic hardship, an African holiday will be far less affordable.
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Fewer African workers will be able to work in developed nations, which will reduce the amount of money sent back to SSA countries. As Barclays puts it, there will be fewer “economic opportunities for African migrants to the UK and Europe, and hence less workers’ remittances to home countries.”
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If things get really bad, aid from UK and European governments could start to dry up, robbing SSA countries of vital funding for infrastructure projects and other economically beneficial plans.
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Brexit is causing heightened uncertainty and, in some respects, increased risk aversion. These factors are likely to increase financing costs and shrink capital inflows into sub-Saharan Africa.
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Earnings on sub-Saharan investments into Europe and the UK will be lower. That is likely to have the biggest impact on sub-Saharan Africa’s most developed nation, South Africa, which has substantial investments in Europe.
Barclays said it was impossible to quantify exactly how big the impact would be (emphasis ours):
“Quantifying the aggregate impact of all these factors is challenging, especially because of the many feedback loops between financial markets and the real economy, and the interlinking second order, multiplier, and lagged effects as the Brexit shock reverberates across borders around the global economy. Moreover, even once the UK triggers Article 50 (the procedure to formally initiate divorce proceedings) it is likely to take at least two years to negotiate the terms of the UK’s exit from the EU. Until these terms are clear, the ultimate effect of Brexit will be obscured by much uncertainty.”
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Sixth Global Review of Aid-For-Trade Monitoring Exercise: “Promoting Connectivity”
Joint communication from the WTO and OECD Secretariats
The Sixth Global Review of Aid for Trade, under the theme “Promoting Connectivity”, will be held at the WTO in mid-2017. Underpinning the Sixth Global Review is a monitoring exercise, based on self-assessment questionnaires and a call for case stories. Previous monitoring exercises have enjoyed high rates of participation.
The monitoring exercise for the Sixth Global Review is being undertaken using online, electronic formats. Delegations are requested to circulate the electronic formats to their national authorities and national private sector associations. Each monitoring format is also being circulated in PDF format. Links to these documents are included in annex to the joint letter.
WTO Director-General, Roberto Azevêdo, and OECD Secretary-General, Angel Gurría, launched the Aid-for-Trade monitoring exercise on 27 July 2016.
Sixth Global Review of Aid for Trade: “Promoting Connectivity”
Joint letter from Roberto Azevêdo and Angel Gurría
The Sixth Global Review of Aid for Trade will take place in mid-2017. Underpinning the Review is a monitoring and evaluation (M&E) exercise. The aim of the M&E exercise is to survey: Aid-for-Trade priorities and how these have changed since the last monitoring exercise; the status of Trade Facilitation Agreement implementation and support; engagement in, and support to the development of e-commerce; and infrastructure investment, the development of related services markets and related investment climate reforms.
One cross-cutting theme that will be examined by the M&E exercise is how Aid-for-Trade support is contributing to the achievement of the Sustainable Development Goals, notably the targets on poverty eradication and women’s economic empowerment.
To collect this information, self-assessment questionnaires and requests for case stories are being circulated to donors (bilateral and multilateral agencies), regional economic communities, South-South partners and developing and least developed countries. In addition, a call for case stories is being circulated to the private sector, academia and NGOs.
Responses to the questionnaires and information provided in the case stories will be analysed and conclusions drawn in a joint publication by the Organisation for Economic Co-operation and Development (OECD) and the World Trade Organization (WTO): “Aid for Trade at a Glance: Promoting Connectivity”. The publication will be launched at the Sixth Global Review of Aid for Trade. The Global Review event is influential in galvanizing support and directing strategies to help developing countries derive the maximum development benefit from trade.
We ask that you please complete the relevant monitoring questionnaire and submit it by 31 October 2016. We thank you in advance for your contribution.
Background Note
Overview
The 2016-2017 Aid-for-Trade Work Programme is built around, and will lead to, the 6th Global Review of Aid for Trade. Past Global Reviews have been informed by a joint OECD-WTO monitoring and evaluation (M&E) exercise that has surveyed Aid-for-Trade implementation by partner countries, bilateral and multilateral donors, South-South partners and regional economic communities. Efforts have been made to reach out to the private sector and to engage a broad range of stakeholders in the M&E exercise. Information collected by the M&E exercise have been analysed and reported at past Global Reviews in a joint OECD-WTO publication: “Aid for Trade at a Glance”. The 6th Global Review of Aid for Trade, to be held in mid-2017, will follow the same approach, using the M&E exercise to inform discussion at the Global Review meeting, and as the basis for a further edition of the “Aid for Trade at a Glance” publication.
A strong message that emerged from the 5th Global Review is that many developing countries, particularly least developed countries (LDCs), continue to face difficulties in connecting to the global trading system as a result of high trade costs. Prohibitively high trade costs continue to act as a brake on economic development with, in particular, landlocked and small economies (notably geographically remote island economies) facing inherent challenges in this regard. Research suggests that trade costs fall disproportionately heavily on micro, small, and medium enterprises (MSMEs). By focusing on “Promoting Connectivity”, the M&E exercise for the 6th Global Review will deepen analysis of the supply-side capacity and trade-related infrastructure constraints faced by developing countries from a trade costs’ perspective.
Monitoring and Evaluation Survey Themes
The M&E exercise will focus on four main themes: Aid-for-Trade priorities and how these have changed since the last monitoring exercise; Trade Facilitation Agreement implementation; e-commerce; and infrastructure investment and the development of related services markets. One cross-cutting theme that will be examined is how Aid-for-Trade support is contributing to the achievement of the Sustainable Development Goals, notably the targets on poverty eradication and women’s economic empowerment.
The first topic to be surveyed is how and why Aid-for-Trade priorities have changed since 2014. It will explore factors driving these changes (such as the 2030 Sustainable Development Agenda, industrialization, and regional trade integration objectives), and how changes are being mainstreamed into national and regional development planning frameworks and policies. On the donor side, the exercise will assess changes in donor programming such as with regard to priority partners and themes, and changes in approach, e.g. the increasing focus on private sector development, and attention to poverty alleviation and gender empowerment objectives in programming. Aid-for-Trade flows will be analysed with a view to understanding current trends and future projections.
The second topic to be surveyed is implementation of the Trade Facilitation Agreement (TFA). By mid-June 2016, instruments of acceptance had been received from more than 80 WTO Members, and a higher number of Category A notifications had been received. However, the pace of notification of Category B and C measures has so far been slower than that for Category A measures. Category C measures indicate where Aid-for-Trade support is required to support TFA implementation. A strong message from the 2015 Aid for Trade at a Glance report and from the 2015 World Trade Report is that TFA implementation is a concrete step that can be taken to reduce trade costs. OECD figures show that more than US$1.3 billion was disbursed in support reported to the OECD’s Creditor Reporting System as trade facilitation in the period 2010-2015.
The M&E exercise for the 6th Global Review will review the status of TFA implementation, explore the demand and response to requests for TFA implementation support and survey where difficulties may be arising. The case story exercise seeks to build on the evidence of impacts of trade facilitation support projects and will explore new approaches being tested by developing countries and their development partners, such as those engaging the private sector.
E-commerce is another theme that will be explored in the M&E questionnaires. E-commerce offers opportunities for trade connectivity but also creates new and specific challenges. Research presented at the 5th Global Review of Aid for Trade highlighted the trade development potential of e-commerce, in particular for MSMEs. E-commerce allows MSMEs to enter export markets without the need to grow large or to reach a certain productivity level. Barriers to trading across distance are up to 94% lower for developing countries via electronic market places, as compared to traditional markets. The efficient functioning of e-commerce requires appropriate Information and Communications Technology (ICT) infrastructure and regulatory frameworks to protect and build trust for both buyers and sellers. Furthermore, e-commerce based parcel trade may create specific clearance and handling challenges for border authorities. The M&E exercise will explore issues relating to the development of e-commerce, notably from the perspective of the physical and regulatory factors that may limit developing country participation. It will also seek to identify actions that development partners are engaged in, and could take, to address these obstacles. Actions taken to close the “digital divide” will also be surveyed. For example, high-speed internet connection is an essential e-commerce enabler – yet broadband internet penetration lags other forms of internet connectivity. Against this background, the M&E exercise will examine actions that the donor community is taking to address connectivity constraints in developing countries.
Infrastructure connectivity is the final topic that will be surveyed in the monitoring formats. Actions to bridge the “digital divide” highlight the need for investment in network ICT infrastructure and are a window onto broader constraints faced by developing countries with regard to trade-related infrastructure: such as road, rail, maritime, inland waterways, and air transport, and energy generation. The global infrastructure financing gap for basic infrastructure in developing countries to meet the Sustainable Development Goals has been estimated at US$2.5 trillion annually. The approach taken in the M&E formats will be one that examines measures taken to bridge the infrastructure financing deficit and to promote growth in related service markets.
Infrastructure investment can unlock growth in related service markets, such as, inter alia, logistics, insurance services, financial services and other business services – operations that are also essential for e-commerce. Research undertaken on global value chains has highlighted the role that services play in supporting productive capacity and moving up the value chain. The M&E exercise would review support for the development of capacity in services supply. Another element to questions here would be to look at approaches based on blended finance (concessional and non-concessional funding; public and private financing) and efforts to support improved investment climates. Questions in this section would build on the issues covered during the 2015 Aid-for-Trade Workshop on “Aid for Trade and Infrastructure”. The questionnaires would seek to identify the main constraints to the growth of services markets as identified in national and regional development planning frameworks and support provided by development partners to improve capacity in services supply.
A cross-cutting theme that will be examined through the M&E exercise is how the outcomes and impacts of Aid-for-Trade support are contributing to the achievement of the Sustainable Development Goals, notably the targets on poverty eradication and women’s economic empowerment.
Approach
This M&E exercise is a self-assessment exercise. Respondents are invited to complete questionnaires and to submit case stories. The case story exercise is an opportunity to examine in more detail where impacts have been achieved, notably from the perspective of trade performance, but also poverty reduction, gender empowerment, and other associated results. The M&E exercise will also include an update to the country profiles.6
Who will be surveyed?
Questionnaires and the call for case stories will be disseminated using an electronic survey tool and completed on-line. Case stories will be invited in both text and (for the first time) video form.
The self-assessment questionnaires will be distributed to the following recipients:
- Partner countries;
- Donors (Bilateral, Regional and Multilateral);
- South-South partners; and
- Regional economic communities and transport corridors.
The case story exercise will be circulated to the recipients listed above. It will also be disseminated to the private sector, civil society, and academia. Submissions of case stories may be made in text or video submissions, with vlogs particularly encouraged.
Outreach efforts will be undertaken with all stakeholders to publicize the exercise and to assist Members in responding.
The deadline for the submission of completed monitoring formats is 31 October 2016.
How will the information collected be used?
All information collected through the monitoring and evaluation exercise will be made publicly available through the website http://www.aid4trade.org. Information collected will be examined and an analysis of it published in a joint OECD-WTO publication “Aid for Trade at a Glance 2017”. Efforts will also be made to synthesize the information to produce regional analyses and other views.
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South Africa to host BRICS office
South Africa is set to reinforce its position as a regional economic hub, as it prepares to open a regional office, which would channel funding drawn from the New Development Bank (NDB) of the Brazil-Russia-China-India-South Africa (BRICS) grouping.
The Africa Regional Office (ARO) is expected to open in Johannesburg by the year-end, Pravin Gordhan, South Africa’s Finance Minister, was quoted as saying.
But NDB officials told The Hindu that South Africa’s role would be initially confined within the boundaries of its neighbourhood. However, expansion of the multilateral lender, with larger African membership, can increase the NDB’s continental reach.
“Initially, it will look at South Africa”
NDB funding could help reduce Africa’s infra-funding gap, which stands at an enormous $100 billion a year, throttling the continent’s promising growth prospects. “The office can [initially] look at projects only in South Africa and the region,” says Leslie Maasdorp, NDB’s vice-president and chief financial officer. He pointed to two conditions that would guide the NDB’s funding strategy in Africa at this stage. South Africa, he stressed, must be the economic beneficiary of a funded project; and the economic infrastructure of another country receiving the investment, must be integrated with South Africa.
“For example if South African companies invest in a water scheme related to, let us say the Cabora Bassa hydro-project in neighbouring Mozambique, it is possible to do so provided the water is transported to South Africa.” “But funding a project between Mozambique and Zimbabwe would not be possible as this would by-pass South Africa.”
‘African nations can get more NDB funds’
Mr. Maasdorp explained that NDB’s funds to Africa could increase if more African members join the lender, after it opens up to new members, within the next 20 months. When it expands, the BRICS countries would dilute their share to 55 per cent, and developing countries or middle income countries would take up another 25 per cent. The rest 20 per cent would be open for the developed countries. “African countries can join and take advantage of this situation, and proportionally increase fund flows to the continent, as 80 per cent of the shareholding would be held by the emerging markets and the developing countries,” Mr. Maasdorp observed.
South African officials are confident that Pretoria would be able to play a key role in the continent’s infra development, with the NDB as a major supporting pillar. “South Africa has the best business infrastructure on the continent; if you look at the world competitiveness index, you will find us in the top five in the world.
Agriculture is also strong, as are the mining and telecommunication sectors among others,” Mr. Gordhan told The Hindu, on the sidelines of NDB’s first annual conference.
He highlighted that over time, South Africa would be able to leverage its linkages with other financial institutions such as the Development Bank for Southern Africa and the African Development Bank. “This could be paired with the boost that the NDB channel of funding would provide.” Mr. Gordhan observed that nailing specific projects for funding will not be a problem. “One of the big issues on the African continent is regional integration. Logistics and infrastructure is fairly weakly developed.
Intra-African trade is 11-12 per cent compared to East Asia, which is over 50 per cent, and Europe over 60 per cent of the total trade. So there is huge potential to develop trade related infrastructure, whether it is East Africa, Southern Africa or West Africa. So the possibilities are endless.”
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tralac’s Daily News Selection
The selection: Wednesday, 27 July 2016
Featured infographic, @GATFnews: Mexico becomes the 87th country to ratify the @wto TradeFacilitation Agreement. Only 22 more to go.
Global trade is not growing slower – it’s not growing at all (WEF)
Using what is widely regarded as the best available data on global trade dynamics, namely, the World Trade Monitor prepared by the Netherlands Bureau of Economic Policy Analysis, the 19th Report of the Global Trade Alert, evaluates global trade dynamics. Our first finding is that the rosy impression painted by some, should be set aside. We demonstrate that: (i) World export volumes reached a plateau at the start of January 2015. The same finding holds if import volume or total volume data are used instead; (ii) Both industrialised countries’ and emerging markets’ trade volumes have plateaued; (iii) Except during global recessions, a plateau lasting 15 months is practically unheard of since the Berlin Wall fell; (iv) In 2015 the best available data on world export volumes diverges markedly from that reported by the WTO, IMF, and World Bank, and probably explains why analysts at these organisations have missed this profound change in global trade dynamics
Ricardo Meléndez-Ortiz: ‘What’s ahead for the WTO: looking around the corner and beyond’ (VoxEU)
In an exceptional manner, the Nairobi outcome offers a license to reframe cooperative approaches and rule-making at the WTO. Reframing would involve not only identifying different ways to achieve Doha issues, but also acting on the most pressing aspects of these today. Moving towards the forthcoming ministerial, a step-wise approach could be used whereby members consider the direction of travel as well as specific actions for the present. As WTO members prepare for a General Council meeting at the end of July, the following options may prove useful food for thought for the summer pause and the resumption of talks at the rentrée in September.
Experts craft Continental Free Trade Area draft template (UNECA)
Experts from the African Union Commission, supported by the Economic Commission for Africa and UNCTAD, met on the sidelines of UNCTAD14 to work on the draft text of the Continental Free Trade Area Agreement. The experts met in a four-day workshop, organized by the African Trade Policy Centre, following the decision of the AU summit in Kigali to negotiate the CFTA based on a template to provide room for wider consultation of stakeholders in national forums. Among other technical materials, the workshop contributed to the creation of a skeleton text covering the areas of substantive content still being negotiated. The work of the experts in Nairobi covered the modalities for negotiations for goods and services trade, the framework agreement and annexes on trade in goods, trade in services, institutional arrangements and dispute settlement. The next meeting of the experts, which is expected to finalize the agreement template, will take place mid-September 2016.
East Africa: Towards a Shipping Information Pipeline (Maersk)
Jensen began researching the paperwork and processes gumming up cross-border trade more than two years ago as part of project between Maersk and TradeMark East Africa, a not-for-profit organisation focused on enhancing prosperity in the region through trade. Jensen’s research focused on two of Kenya’s most important exports, avocados and flowers. What he found shocked him: To reach customers in Europe, the containers of avocadoes and flowers had to go through a jungle of nearly 30 people and organisations, consisting of private companies and public authorities on both continents, and more than 200 different interactions and communications between them all. “Various studies have estimated that, in general, the average border related administrative costs of trade are 21% of the total cost, compared to 8% for transportation. What we’re aiming for is to remove as much of that 21% as possible with the Shipping Information Pipeline, in order to slash the cost of international trade in the region,” says Jensen.
Regional traders continue to face hurdles on Central Corridor (New Times)
Delays in clearing goods, corruption and theft at the Port of Dar-es-Salaam in Tanzania, and high fees charged by some regulatory agencies continue to hurt trade along the Central Corridor, officials have said. Members of the East African Business Council brought the matter up during a Public-Private Dialogue in Dar-es-Salaam last week. Omar Kassim, chairperson of Uganda Clearing Industry and Forwarding Association, said clearing of goods in Tanzania takes 10 days on average, while in Rwanda the same task takes a maximum of three days. “Long clearing time in Tanzania is attributed to complicated documentation and compliance activities as businesspersons require 10 documents to import or export to Tanzania,” Kassim said. [EAC women business leaders call for more support (New Times)]
WCO study report on customs brokers (pdf, WCO)
This Report is primarily based on WCO survey results at an aggregate level and research carried out by the Secretariat, which, among others things, includes a detailed analysis of Members’ practices. The Report starts with providing an introductory general background and overview of Customs brokers’ role in the supply chain and moves on to explaining related international standards, instruments, and tools. It also examines several potential cooperation opportunities between Customs and Customs brokers as well as collaborative work on skill up-gradation and capacity building of brokers, on a sustained basis, noting their role in improving trade facilitation and compliance. [Related WCO resources: TFA Implementation Guidance Note, National Committees on Trade Facilitation]
The Mobile Economy Africa 2016 (GSMA)
At the end of 2015, 46% of the population in Africa subscribed to mobile services, equivalent to more than half a billion people. The region’s three dominant markets – Egypt, Nigeria and South Africa – together accounted for around a third of the region’s total subscriber base. Subscriber growth rates are now beginning to slow and will increasingly converge with the global average, as affordability challenges become a key barrier. Over the next five years, an additional 168 million people will be connected by mobile services across Africa, reaching 725 million unique subscribers by 2020.
African Development Report 2015 (AfDB)
The theme of this edition is on “Growth-poverty and inequality nexus: overcoming barriers to sustainable development”. Despite earlier periods of limited growth, African economies have grown substantially over the past decade. However, poverty and inequality reduction has remained less responsive to growth successes across the continent. How does growth affect poverty and inequality? How can Africa overcome contemporary and future sustainable development challenges? This 2015 edition of the African Development Report offers analysis, synthesis and recommendations that are relevant to these questions.
State of East Africa Report 2016: the political economy of inequalities (SID)
Building on previous reports, this State of East Africa Report examines the political economy of inequalities and highlights the relationship between politics and inequality. The report offers some hypotheses as to why inequalities persist and why efforts to address them are unlikely to be successful in the absence of a committed attempt to dismantle and recreate the institutions that distribute power and the networks that have emerged to extract benefits from them. The report analyzes nine sectors divided across economic, social and political pillars, and for each of these sectors it asks questions about the EAC Member States’ performance in the fiscal, normative and ethical domains.
DFID's programme in Nigeria: a review (International Development Committee)
The International Development Committee's report: DFID's programme in Nigeria, published today, highlights regional inequalities and the depth of poverty and instability in the north of the country, despite the re-establishment of democratic civilian rule in 1999 and sustained economic growth over the past 20 years. The Government's funding to Nigeria has increased over the last 15 years, rising to £266 million for 2016–17, making the country DFID’s second largest programme in Africa and third largest in the world. The Committee welcomed DFID's increasing prioritisation of Nigeria and endorsed the Department's strategy of working to strengthen the capabilities of the Nigerian authorities to tackle corruption and foster more effective and accountable governance. [Central Bank Nigeria: Monetary Policy communique]
World Bank Group suspends financing to the Inga-3 Basse Chute technical assistance project
The World Bank Group has suspended disbursements of funding to the Inga-3 Basse Chute and Mid-Size Hydropower Development Technical Assistance Project in the DRC. This follows the Government of DRC’s decision to take the project in a different strategic direction to that agreed between the World Bank and the Government in 2014. The World Bank Group is in a continuing dialogue with the Government about the implementation arrangements of the project, with the goal of ensuring that it follows international good practice. [Congo pushes for a mega-dam project, with no environmental impact studies (PRI)]
SADC launches a U$2.4bn appeal to assist millions hit by El Niño-induced drought
In his launch remarks, the SADC Chairperson noted that while the region was largely able to cope with the drought in 2014/15 through its own means, the severity of the drought of 2015/16 has overwhelmed the disaster preparedness capacity in most of the affected Member States. Responding to the Appeal, the USA pledged $300m, while the United Kingdom and the European Union pledged £72m, and €60m respectively, towards humanitarian assistance [Download].
Zimbabwe: Labour export policy nears completion (The Herald)
Government is finalising the country’s labour export policy, with the first export of graduates expected to begin as soon as Cabinet endorses the policy, an official has said. This comes amid revelations that 16 000 graduates looking for employment opportunities in several African countries have been captured from different tertiary institutions. “Our consultation process has been moving perfectly and we are pleased that policy matters will soon be completed. That will open avenues for the country to begin the exportation of thousands of people who in need of employment,” he said.
Tanzania’s EU stand that could cost Kenya heavily (Daily Nation)
Foreign Affairs Cabinet Secretary Amina Mohammed said Kenya will focus on having the EPA signed and will not rush to negotiate for the GSP although the October deadline is fast approaching while the barriers persist. The scenario now leaves Kenya with a huge headache of dealing with political squabbles of one neighbour while seeking to convince another to sign an agreement. [Kenya plans fresh talks to win EAC support for trade deal with Europe (Business Daily), Ghana: EPAs should not undermine sub-regional integration (Graphic)]
Kenya: US remittances jump offsets declining flows from EU (CBK)
Remittance inflows to Kenya increased by 6.3% in June 2016 compared with 2.3% growth registered in May 2016. The increase in June 2016 is reflected in inflows from North America and the rest of the world. Cumulative inflows in the 12 months to June 2016 increased by 11%, to $1,656m, from $1,492m in the year to June 2015.
Namibia: Cement wars reboot (Insight)
With cement consumption in Namibia currently standing at roughly 600,000 tonnes per annum, plans for a second cement factory with a 1.5 million tonne annual production capacity raises competition concerns. According to data of the United States Geological Survey, China accounts for about 60% of global cement volumes. According to industry estimates for SACU, cement demand stood at approximately 15 million tonnes across all five member states. The capacity of all operating cement factories in SACU countries is currently just over 15 million tonnes and will increase to just over 20 million tonnes by 2025. This year will show surplus capacity of seven million tonnes of cement within SACU, according to data accessed by Insight.
China joins UN trucking treaty, stepping onto new Silk Road (Reuters)
Becoming a member of TIR, an international guarantee scheme that will enable Chinese freight containers to travel all the way to Ireland without being opened up for time-consuming customs checks, is a first step towards putting the legal framework of the plan into action. "It's a key element for the Chinese government. If you had to stop a container at every border from China to Europe it would add substantial costs," said Christian Friis Bach, executive secretary of the U.N. Economic Commission for Europe, which oversees the TIR convention. The impact of China joining TIR could end up being significant, especially if partners in Asia and Africa also join, and if China uses it for shipping and rail routes as well. [China ratifies UN TIR Convention with new trade prospects in view (IRU)]
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Poverty and inequality reduction has remained less responsive to growth successes across the continent, says AfDB African Development Report 2015
Growth-poverty and inequality nexus: overcoming barriers to sustainable development
African economies have grown substantially over the past decade, but poverty and inequality reduction has remained less responsive to growth successes across the continent, says the 2015 edition of the African Development Bank (AfDB)’s African Development Report that was officially launched on 26 July 2016 at the Bank’s headquarters in Abidjan, Côte d’Ivoire by the AfDB President Akinwumi Adesina, represented by Kapil Kapoor, Acting Vice President, Sector Operations.
Despite earlier periods of limited growth, African economies have grown substantially over the past decade. However, poverty and inequality reduction has remained less responsive to growth successes across the continent. How does growth affect poverty and inequality? How can Africa overcome contemporary and future sustainable development challenges? This 2015 edition of the African Development Report (ADR) offers analysis, synthesis and recommendations that are relevant to these questions. The objective of the Report is to guide policy processes by contributing to the debate analysing what has happened during recent years, what has worked well, what hasn’t worked well, and what needs to be done to address further barriers to sustainable development in Africa?
Africa’s recent economic growth has not been accompanied by a real structural transformation. As a result, millions of Africans, especially women and youth, have been left behind. The Report highlights the intermediating role of various forms of inequality that limit the transformation of Africa’s growth into prosperity for all. Unequal access to economic resources and opportunities is mirrored in the continent’s high income inequality, gender gaps in earnings and opportunities, the rural-urban divide, youth under-employment and in the limited priority given to key poverty-reducing sectors like agriculture, agro-industries, and manufacturing.
In his Forward remarks, AfDB President Akinwumi Adesina says: “I firmly believe that development is about delivering real improvements in living conditions right across society. This analysis shows that widespread inequality is limiting both growth and poverty reduction across Africa. These income disparities have remained persistently high over decades, leaving Africa one of the world’s most unequal regions.”
Sustaining recent growth successes while making future growth more inclusive requires smart policies to diversify the sources of growth and to ensure broad-based participation across segments of society. Africa needs to adopt a new development trajectory that focuses on effective structural transformation. Workers need to move from low productivity sectors to those where both productivity and earnings are higher. Key poverty-reducing sectors, such as agriculture and manufacturing, should be targeted and accorded high priority for public and private investment. Adding value to many of Africa’s primary exports may earn the continent a competitive margin in international markets, while also meeting domestic market needs, especially with regard to food security.
Apart from the need to prioritise certain sectors, other policy recommendations emanating from this Report point to the need to address income inequality, to close gender gaps, to bridge rural-urban disparities and to promote youth employment. These are consistent with the African Development Bank Group’s Ten Year Strategy (2013-2022) for spurring inclusive and increasingly green growth with its Regional Member Countries.
More recently, the Bank Group’s high five priority areas focus the Bank’s actions to reach the poor much more effectively. Prioritizing the Hi 5s is a clear response of the Bank to the continent major challenges. By ensuring Africa’s growth is both sustainable and inclusive, the Bank will continue to convene support for the continent’s efforts to improve the quality of life for all Africans.
Overview
I. Africa has enjoyed a period of unprecedented growth
In the four decades preceding the new millennium, economic growth in sub-Saharan Africa (SSA) was largely stagnant. In real terms, GDP per capita for the region was just 7 percent higher in 2000 than it had been in 1960. From the early years of this century, this picture began to change. Africa’s growth performance underwent a dramatic improvement, with per capita annual GDP growth surging from close to zero to almost 3 percent over a 15 -year period. ‘African Renaissance’ became the headline touted around the world. A number of factors contributed to this growth acceleration: A spike in commodity prices; FDI inflows; improvements in the quality of governance and institutions; debt relief and higher aid inflows; more favourable conditions for agriculture; and, the growing weight of Africa’s middle class.
Yet despite this impressive growth performance, the continent still faces two important growth-related challenges. First, previous experience suggests that we must be cautious in concluding that the current growth path is either sustainable, or sufficient to make real inroads into poverty. The second concern is the wide disparity between observed growth rates and the scale of poverty reduction across the continent. In most countries, economic growth has not translated into commensurate levels of poverty reduction. Understanding the factors that inhibit the transmission of growth into poverty reduction is key to achieving sustainable and inclusive development.
II. Poverty has declined in Africa, but remains high
The statistics show African poverty is on a declining trend over the past fifteen years. Since 1993, African countries have succeeded in lowering the incidence, spread and severity of poverty in, not just a few, but the majority of countries. Resource-poor African countries consistently outperformed resource-rich ones. Alongside reductions in income poverty, this period witnessed substantial improvements in social outcomes such as health and education.
But, compared to other developing regions such as South and East Asia, Africa’s progress on poverty reduction has been consistently disappointing. In fact, when compared to a typical Asian country, growth in Africa’s GDP per capita generates only half the reduction in poverty.
Of course, the quality of data underlying poverty estimates in Africa makes the analysis more challenging. Poverty data from African countries is limited both as to quality and timeliness. There is broad consensus that the rate of poverty in Africa has declined over the past 15 years. However, the rate of poverty reduction remains a point of contention, as is the precise current level of poverty in Africa. Researchers arrive at different conclusions depending on their data sources and methodologies.
For the purpose of this study, we have combined income -based poverty with asset-based poverty, using data from Demographic and Health Surveys for 37 African countries in multiple waves for each country, covering the life history of some 750,000 households. The findings suggest that the percentage of households deprived of basic assets, such as those living in thatched-roofed and mud-floor houses, and lacking access to clean water, electricity, radio/television or other assets, declined from about 42% in the 1990s to 25% in 2005.
With African countries committed to ending extreme poverty in the next decade, generating high quality poverty data that is consistent across countries is a high priority. This entails building up the capacity and resources of national statistical institutions across the continent.
III. High inequality undermined the efficacy of growth in reducing poverty
After Latin America, Africa is the most unequal region in the world. This is not a recent trend but has persisted over time and across countries, despite differences in levels of development and resource endowments. Inequality is one of the key factors inhibiting the transmission of economic growth into poverty reduction. It is therefore imperative to understand its patterns and drivers. The data available suggests that inequality within countries is driven substantially by spatial (geographic) factors, which make up close to 40% of the total variation. High levels of both tertiary education and remittances appear to have inequality-reducing effects between countries, while the degree of market distortion, low initial levels of development and being an oil exporter are all correlated with higher inequality. In addition, declining agricultural activity, lack of growth in manufacturing and an expanding service sector all tend to hurt low-skilled workers, leading to worsening inequality – a situation that is currently observed across the continent.
The pace of Africa’s industrialisation has not been fast enough to bring about large-scale economic transformation. African economies continue to be the least diversified in the world. Labour-intensive manufacturing has not taken off in most of Africa, except in a few North African economies like Tunisia and Morocco. The share of the African labour force in manufacturing has declined. Diversification out of agriculture has thus been mainly into services and the informal sector. As a result, structural transformation has not emerged as a driver of great equality. Genuine economic transformation – and therefore an expansion of better paying jobs – would require higher rates of investment and faster economic growth.
In Africa, the pattern and structure of growth is as important as the speed of growth, if not more so. The poverty impact of growth depends on the initial income distribution and its pattern of change. High inequality reduces the elasticity of poverty reduction with regard to economic growth. Real progress on poverty reduction therefore requires, in addition to sustained growth, more equal societies and more diversified economies that generate more employment.
Globalisation and national development strategies also affect the structure of growth, the level of inequality and the incidence of poverty across Africa. Understanding the interrelationship between globalisation, growth and inequality, and how they impact on poverty, is key to formulating effective poverty reduction policies.
IV. Gender inequality: A double break on poverty reduction
Gender disparities in income, access to health and educational attainment are pervasive across the continent. Women farmers are eight times less likely to independently own their own agricultural land. According to a survey of experts, women with secondary education are 37% less likely to be employed in the formal, non-agricultural sectors. In most countries, girls are less likely to be sent to school, irrespective of their ability, and their schooling is more likely to be disrupted. Even when girls achieve equal levels of education with their male counterparts, they have less chance of getting salaried jobs and are likely to be paid less.
Nearly 36 percent of African women report being victims of violence, mostly inflicted on them by their intimate partners, and the true prevalence of violence against women is likely to be grossly under-reported. As well as the direct impact on women and children, violence against women has wider social and economic consequences, including on infant and child nutritional and health outcomes. It is likely that African countries could reduce violence against women through measures that address gender inequality in education and employment.
V. Youth unemployment: An immediate concern for Africa’s development
Africa will continue to account for a significant and rising share of the global youth population, rising from a fifth in 2012 to as high as a third by 2050. Current trends suggest that much of the youth bulge will be concentrated in West, Central and East Africa. It leaves Africa with the challenge of providing jobs to 29 million labour market entrants every year, which is close to 6 percent of the current workforce.
For Africa to benefit from a demographic dividend, as Asian countries did in earlier years, there is an urgent need to equip young Africans with the skills they need to be productive members of the workforce. But while educational attainment has been improving, the demand from Africa’s private sector has not kept up. Achieving the demographic dividend also requires a reduction in fertility rates. So far, however, improvements in health care and education have not resulted in significant declines in fertility in most of Africa. This points to two challenges in the continent’s drive for sustained growth and poverty reduction. There is the short to medium-term challenge of ensuring that youth can be integrated productively into the economy, and the longer-term challenge of transitioning to lower fertility levels.
VI. Structural transformation, agriculture and Africa’s development
The pattern of structural change in Africa is very different from the one that has produced high growth in Asia, and before that, in the European industrialisers. Labour is moving out of agriculture and rural areas, but formal manufacturing industries are not the main beneficiary. Urban migrants are being absorbed largely into services that are not particularly productive. A more promising strategy would be to scale up agricultural production. This would help it not only to attain food security, but also to generate surpluses that could be traded on international markets. Land and human inputs are not scarce across the continent. Improved agricultural productivity could therefore be achieved through improved policies and investment in physical capital.
It is likely that growth in the agriculture sector offers the best pay-off in terms of poverty reduction. With the agricultural sector employing two-thirds of the continent’s workforce, concentrating investment in this sector has considerable potential for sustaining growth and reducing poverty. But this requires a genuine transformation in the sector, including a shift towards more local processing of agricultural produce, to capture greater value, and a shift towards new agricultural practices and technologies, in order to drive up productivity.
This suggests that agricultural policy should focus on achieving transformation through agro-based industrialisation, rather than simply addressing poverty and food security. Adding value to Africa’s primary exports may earn the continent a competitive margin in international markets. In addition, the volume of Africa’s food imports suggest the potential for much higher intra-Africa trade in processed agricultural goods.
VII. Eliminating extreme poverty: Progress to date and Future Priorities
Africa has joined the rest of the international community in adopting a new set of Sustainable Development Goals. This includes a commitment to lowering poverty to 3%, by 2030. Based on historical records, current conditions and plausible assumptions about the future, this report assesses the feasibility of achieving this target. By maintaining annual growth of 2%, the continent could potentially lift about 172 million more people out of poverty by 2030. This would reduce extreme poverty substantially, but not to the desired 3%. Eliminating extreme poverty over the next 10-15 years, would require Africa to at least double average per capita consumption from what it is today. At the same time, most countries would require less than 5% of their national income to lift poor people out of poverty.
Countries in fragile situations are expected to make the least progress in eliminating extreme poverty. In fact, the current trends suggest a need for radical new policy interventions, to ensure that this group of countries is not left behind.
In cases of extreme poverty, where the benefits of growth are less likely to occur to the poor, government programmes such as social safety nets can be helpful. However, designing such programmes is not easy, and poor targeting could be inefficient. Using existing social infrastructure, such as traditional and religious institutions, could be an effective way not only to reach the poor but also to lower the cost of delivering social safety nets.
Africa’s progress towards the 2030 target will depend on four important factors. First, it will require maintaining the current growth momentum, if not increasing it. This growth, if accompanied by appropriate redistribution, is Africa’s best lever for poverty reduction. Growth sustainability will, in turn, depend on the availability of capital to supplement the growing quantity and quality of labour. However, it is important to note that, with commodity prices trending downwards, sustaining current growth will be a significant challenge, especially for countries that are disproportionately dependent on revenues from commodity exports.
Second, the continent needs to address inequality at various levels, including income, gender and rural-urban disparities. These disparities pose a significant challenge both to its growth prospects and the extent to which growth translates into poverty reduction. Reducing income inequality will require greater diversification of economies into sectors that create meaningful employment for the masses, while adopting some deliberate redistribution measures. Rural-urban disparities can be narrowed through decentralisation policies that ensure better life chances for rural residents. Addressing gender inequality has the potential to simultaneously boost growth and lower poverty levels. Conversely, if it is not addressed, violence against women will represent a continuing brake on Africa’s development.
Third, achieving inclusive growth requires addressing the demographic challenges facing the continent. High fertility rates and rising underemployment among youth are likely to undermine future growth prospects, and could limit, if not reverse, the current achievements in poverty reduction. The challenge for Africa is to complete the transition toward low fertility levels.
Finally, success will depend on the quality of national development strategies and how they interact with global economic conditions. Domestic politics will inevitably play a major role. Policy measures to diversify sources of economic growth, especially for resource-rich countries, will be important in order to protect national economies from external shocks. Encouragingly, Africa’s increasing diversification in trading partners is already making the continent more resilient.
VIII. The way forward to achieving sustainable development in Africa
With many of the Millennium Development Goals remaining unfinished business in Africa, the SDGs are a good fit with Africa’s priorities for the next 15 years. African countries will need to ensure that the SDGs are fully integrated into national development strategies, ensuring a more focused approach to addressing development challenges.
The recent growth in Africa has not taken place in all sectors of the economy. Most of the value addition has come from the service sector, with the contribution of agriculture and manufacturing sectors either remaining the same, or, experiencing contractions. Given that not much of the recent growth is attributable to agriculture, the majority of people who work in this sector have remained poor. For this reason, special attention should be given to the development of this sector. The future of growth and its impact on poverty reduction in Africa hinges on what happens to structural transformation. Transformative policies that increase investment in agriculture to raise productivity and add value have higher chances of sustaining broad-based growth and lowering poverty. Diversification will also prevent the natural resource curse and reduce vulnerability to external shocks, especially commodity price shocks.
Africa’s recent growth performance did not adequately address issues of inequality and exclusion, especially for women and youth. On gender inequality, despite progress over the past fifteen years particularly regarding gender parity in primary school enrolment, many outstanding challenges remain, including increasing women’s participation in decision-making and reducing maternal mortality. Yet, women still constitute the majority of Africa’s poor. Above all, they are victims of domestic violence, with average prevalence of about 37% across the continent, and close to 50% in some countries. To achieve growth that is gender inclusive, policies will have to address domestic violence to pave the way for gender equality. Youth unemployment should also be addressed to enable Africa to benefit from the demographic dividend. African youth are considered to have only benefited in a limited way from recent economic growth. Many of them lack either the relevant training or access capital and thus have not achieved meaningful employment. The “Arab Spring” demonstrated that youth unemployment might be a “ticking time bomb” if the transition from school continues to lead to unemployment. In addition, because of the high prevalence of informality in Africa, a further challenge will be to find an effective way to harness the potential of youth entrepreneurs.
To embark on a new development trajectory of structural transformation will require huge investment in human and physical capital. Africa’s vast investment gaps, especially in infrastructure, can no longer wait for a private-sector response. The cost of delaying infrastructural development is huge for many countries, constraining growth and poverty reduction. In addition to providing a conducive environment for private sector participation, African countries must now explore new financing options, with new partners, especially in priority areas such as transportation, agriculture and energy.
Continuing ‘business as usual’ will mean that poverty will remain a challenge for Africa. The continent may still face poverty ratios in excess of 5 percent: Way higher than the SDG target of zero poverty by 2030. Africa needs to grow at an average rate of 5% per capita annually for the next 10-15 years. Complementing this growth with smart distribution policies is the continent’s ideal strategy against poverty. Conflict and fragility carry high costs and impede poverty reduction. The vicious circle between fragility and armed conflict reinforces extreme poverty. Fragile situations thus warrant special attention from policymakers and development partners alike.
IX. The African Development Bank Group’s priorities and support to Africa’s sustainable development agenda
Achieving inclusive and increasingly green growth are the two core objectives of the African Development Bank Group’s Ten Year Strategy (2013-2022). The Strategy aims for a quality of growth that is: “…sustained and not isolated, but shared, for all African citizens and countries, not just for some.” Accordingly, in the years ahead, the role of the Bank in Regional Member Countries (RMCs) will be refocused on diversifying growth sources for sustainability, and enhancing broader participation of the poor and marginalised groups. To do this more effectively, and within a more cost efficient use of resources, the Bank has streamlined its TYS by identifying five key priority areas, called the “High-Five”: agriculture; power issues; regional integration; industrialisation; and improved quality of life.
» Download: African Development Report 2015 (PDF, 5.9 MB)
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Experts craft Continental Free Trade Area draft template
Experts from the African Union Commission (AUC), supported by the Economic Commission for Africa (ECA) and the United Nations Conference on Trade and Development (UNCTAD), met on the sidelines of UNCTAD14 to work on the draft text of the Continental Free Trade Area (CFTA) Agreement.
The experts met in a four-day workshop, which was organized by the African Trade Policy Centre (ATPC) of the ECA, following the decision of the 27th African Union Summit in Kigali to negotiate the CFTA based on a template to provide room for wider consultation of stakeholders in national forums.
The template agreement will ensure efficiency in the CFTA negotiations, allowing the tight deadline of 2017 to be met. It will also provide a pan-African approach to the negotiations, differentiating this continental milestone from the “business as usual” approach and limited ambition.
In particular, it will facilitate the engagement of all African countries on a level playing field by taking the CFTA process to the capitals and stakeholders on the ground.
Among other technical materials, the workshop contributed to the creation of a skeleton text covering the areas of substantive content still being negotiated.
The work of the experts in Nairobi covered the modalities for negotiations for goods and services trade, the framework agreement and annexes on trade in goods, trade in services, institutional arrangements and dispute settlement.
The work of the legal experts and economists from the three organizations was overseen by the AUC Director of Trade and Industry, Ms. Treasure Mapahnga, AUC Legal Counsel and Director for Legal Affairs, Mr. Vincent Nmehielle, ATPC Coordinator, Mr. David Luke, and Professor Maleku Desta, Principal Regional Advisor at the ECA and also an international economic law expert.
The meeting in Nairobi followed a series of technical preparatory workshops co-organized by the AUC and ECA, which have brought together experts from key organizations, such as Regional Economic Communities (RECs), the African Development Bank as well as academia and others.
The CFTA, which is expected to be in place by October 2017, will bring together fifty-four African countries with a combined population of more than one billion people and a combined gross domestic product of more than US $3.4 trillion.
With the CFTA, African leaders aim to, among other things, create a single continental market for goods and services, free movement of business persons and investments and expand intra-African trade. The CFTA is also expected to enhance competitiveness at the industry and enterprise levels.
The next meeting of the experts, which is expected to finalize the agreement template, will take place mid-September 2016.
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Tanzania’s EU stand that could cost Kenya heavily
Kenya is the only country among EAC partners which does not enjoy the Least Developed Country (LDC) status.
Kenya now finds itself in a tricky diplomatic situation following refusal by Tanzania to sign the comprehensive Economic Partnership Agreement (EPA) between East African Community (EAC) and the European Union.
This means the country faces the prospect of paying heavily for exports to Europe if EAC fails to beat the October 1 deadline. Exporters to Europe are now staring at higher tariffs that could attract more than Sh100 million in tax weekly, similar to what the country went through in 2014.
Although members of the European Parliament attending the recently concluded Unctad meeting in Nairobi gave hope of an extension of the October deadline to sign EPA, the conflict in Burundi, a member of the EAC, now adds to the mix of headaches for Kenya.
The MPs said since Burundi is on the verge of being sanctioned by the European Union over political instability, Kenya will find it hard to clinch the deal that provides relief from heavy taxes for the country’s exports to Europe.
EU chair of joint delegation of Trade and Development Committee Bernd Lange said Kenya would be the biggest casualty should the two scenarios persist and the EPA is not signed.
“Our first proposal is to have the October 1st deadline extended to allow for more time and see whether Tanzania will agree to sign or if Burundi will improve her democratic situation and evade sanctions from the European Union,” Mr Lange said.
“If none of these happen, then I expect that Kenya will apply for the GSP plus and when it is received then we can begin the market access regulations and save Kenya.”
The Generalised System of Preferences (GSP) Plus status will allow Kenya to continue exporting at the current preference terms even if the two countries fail to sort their issues but the terms are not as lucrative as the EPA.
Foreign Affairs Cabinet Secretary Amina Mohammed said Kenya will focus on having the EPA signed and will not rush to negotiate for the GSP although the October deadline is fast approaching while the barriers persist.
The scenario now leaves Kenya with a huge headache of dealing with political squabbles of one neighbour while seeking to convince another to sign an agreement.
Risk losing the preferential treatment
Kenya is the only country among EAC partners which does not enjoy the Least Developed Country (LDC) status hence has to depend on the agreement or risk losing the preferential treatment in the lucrative EU market.
European Parliamentary Member Marie Arena said the countries need to reach a deal soon having structured the agreement in way that does not leave any of them out.
“The question now is not even the details of the agreement but the timeliness and the countries really need to do that this August because as EU Parliament, we have no control on sanctions to Burundi or convincing Tanzania to sign the agreement. Kenya and other members can do that better so that we have a smooth sail in signing this agreement,” Ms Arena said.
Under the trade deal, EU would grant unlimited market access to Kenya for the next two and a half decades. The East African economic giant will also enjoy the exemption from the eight to 12 per cent taxes while selling goods to the EU market.
Should the deal flop, these taxes will hurt Kenyan exports by making them uncompetitive, forcing exporters to offer Sh600 million every month in cumulative discounts to buyers to be at par with other sellers.
Failure will also hurt agriculture, one of Kenya’s engines of economic growth. Close to 90 per cent of the country’s exports to EU are agricultural, agro-processed and manufactured products.
The scenario might also spell doom to more than 600,000 workers mainly in the flower farms and fresh food producers.
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State of East Africa Report 2016: Consolidating Misery? The political economy of inequalities
‘People do not eat GDP’: Even as the economies of EAC member states have been recording considerable growth rates, this growth has been accompanied by a growth in inequality in virtually all countries.
This is the one of the key observations of the State of East Africa Report 2016 published by the Society for International Development. GDP figures (with a regional annual average increase of 6% since 2011) tell the story of an economic expansion that has taken place in East Africa in the last few years alongside significant structural changes and greater sophistication in the countries’ economies. This GDP growth has generated optimism and greater confidence that the region is going places.
Are all citizens of East Africa perceiving or feeling the benefits of these stellar GDP growth figures registered in the region? In spite of the growth, the economic boom has not generated the jobs or prosperity for all that it was expected to. The levels of poverty, hunger and malnutrition in these countries still remain staggeringly high.
Building on previous reports, this State of East Africa Report examines the political economy of inequalities and highlights the relationship between politics and inequality. The report offers some hypotheses as to why inequalities persist and why efforts to address them are unlikely to be successful in the absence of a committed attempt to dismantle and recreate the institutions that distribute power and the networks that have emerged to extract benefits from them.
The report analyzes nine sectors divided across economic, social and political pillars, and for each of these sectors it asks questions about the EAC Member States’ performance in the fiscal, normative and ethical domains. The report explores some of the challenges that the region will need to face up to transform its economies successfully to ensure that the majority of citizens have an active stake in change processes of the day so as to benefit further from the ongoing integration processes. It also highlights some areas of possible intervention, as points of departure for policy conversation, keeping in mind that the complexity of these interventions will require a deeper analysis and broader conversation.
Executive summary
The past few years have seen the economies of the EAC member states grow by leaps and bounds, with the regional averaging some 6% annual GDP growth in the period since 2011. This is good news. Expanding economies in principle mean that there is growing economic activity taking place, an increased exchange in the volume and value of goods and services traded. These growth rates have been heralded as the proof that the region has finally made a structural shift in its economies, and have been held out as a harbinger of greater things to come. This optimism has been further buoyed by the potential emerging from the recent hydrocarbon discoveries and the extractive industries in general. The long-awaited renewal of dilapidated rail, road and port infrastructure and the race to construct new gas and oil pipelines to the region’s ports has also given a signal that the region is no longer doing business as it used to. Indeed, the ‘mix’ of the region’s economies suggests that there is a deeper and perhaps subtler set of changes taking place.
But even as the economies of the EAC have been growing, this growth has been accompanied by a growth in inequality in virtually all countries. Put bluntly, not all citizens of East Africa have seen or felt the benefits of these stellar GDP growth figures. If anything, for a growing number of East Africans, life has become – in recent years – a much harsher and harder enterprise. The economic boom has not generated the jobs that it was expected to and there is a growing frustration that perhaps these jobs will never materialize. For all the progress made in recent years, the levels of poverty, hunger and malnutrition in our countries are still staggeringly high and serve to underline the adage ‘you cannot eat GDP’.
The last State of East Africa Report highlighted the state of inequality in East Africa and sought to explore what future inequality might have in East Africa. Its title ‘One People, One Destiny – The Future of Inequality in East Africa’ interrogated the extent to which the fruits of economic growth were contributing to the stated vision of the EAC – that of ‘One People, One Destiny’. The report surmised:
‘Two powerful driving forces are shaping the future of inclusiveness and equity in East Africa. One is the inclusiveness of growth – a measure of how much the poorest East Africans are participating in generating economic growth. The second driving force is the degree of equity, which describes how the benefits of economic growth are shared among the region’s citizens, and particularly the share of income and wealth that accrues to the poorest East Africans’.
This State of East Africa Report seeks to build on the previous report and seeks to take the conversation a step further: It aims to explore and offer for reflection, some of the challenges that the region will need to face up to if it is to be able to successfully transform its economies to in order to drive up domestic demand, build and nurture local value-chains and improve the skills of its labour force in a virtuous process that reorganizes our institutions and processes to ensure that the majority of citizens have an active stake in change processes of the day.
Why political economy?
In focusing this report on examining the political economy of inequalities, we aim to shine a spotlight on the relationship between politics (domestic and regional) and inequality. To what extent are our political institutions linked to the persistence of poverty? What political factors affect the evolution of inequality and what are the effects of inequality on political choices and outcomes? Is there a relationship between our various identity formations and the manner in which public goods are provided? The report offers some hypotheses as to why inequalities persists and why efforts to address them (narrow the gap) are unlikely to be successful in the absence of a committed attempt to dismantle and recreate the institutions that distribute power and the networks that have emerged to extract benefits from them. It thus makes the argument that inequalities survive thanks to the structure of the institutions we have put in place and that it is only by reforming these institutions that we can truly address the challenges that inequalities generate.
As this report is about regional integration, the report also asks some questions as to whether the opportunities that this process presents will be helpful in supporting efforts to narrow present inequality gaps. The best answer we can give to this is a lukewarm ‘it depends’ – it depends on the choices that the leaders are willing to make; whether they are willing to take bold steps to reconfigure the institutional and power architecture to ensure that all citizens of the region benefit from integration as opposed to only a (small) section.
The report
This report analyzes nine sectors divided across three pillars: an economic pillar [Agriculture, Wages and Wage Policy], a social pillar [Education, Health, Housing and Shelter] and a political pillar [Justice, Security, Discrimination and Identities, Intergenerational Challenge]. In each of these sectors, the report asks questions that straddle an additional three domains:
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The fiscal domain: Where do we get our resources from and how do we spend them?
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The normative domain: What policy decisions are made (or not) and who benefits from these decisions?
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The ethical domain: Whose narrative prevails and what instruments are used to weaken the moral core of society?
Eight key messages
There are eight key messages this report would like to convey. Whilst the majority of the messages focus on changes that need to take place at the national level, it is impossible to divorce the needed changes from the regional integration question. When we come together at the regional level, we do so with our individual country strengths and weaknesses and this impacts the regional negotiations as well as the potential of the collective EAC. These messages are:
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The biggest task facing the state in East Africa is perhaps not so much that of pursuing ‘economic growth’ at any cost, but that of creating the foundations for lasting human development in the region. By reinforcing the livelihoods of each individual citizen, the potential for national and regional growth will be multiplied several times over. Individual citizens should be seen as allies and catalysts; not as enemies or ‘disruptive’ elements.
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There is massive potential in the region crying out to be unleashed – trade barriers, poor infrastructure, insecurity, unfair judicial systems, low wages, discrimination, weak regulation etc. are undermining the potential that could be reaped if the region were to genuinely reform its institutions to make them more equitable, predictable and inclusive.
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Our institutional arrangements at the national level are skewed in favour of the rich and powerful. Cosmetic changes and ‘make do’ adjustments are only delaying an inevitable internal crisis. The time to rethink the structure of power and economy is now.
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The implicit social contract that has accompanied our states since their formation and independence needs to be rethought and renegotiated with a view to ensuring that the majority of the citizens get a fair return out of this bargain. It cannot be taken for granted.
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Massive spending on ‘key’ infrastructure projects needs to factor in the broader public good at the outset and not as an afterthought. Current infrastructure developments are fruit of export-led strategies. Local economy growth and empowerment should be the focus of infrastructure development.
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If inequalities continue to be consolidated, there is a strong possibility that future generations of East Africans will live worse lives than the current generation of East Africans – a ‘catastrophic convergence’ of politics, economy and environment does not bode well for the region. Any magnification of systemic challenges could overwhelm our response and resilience mechanisms. As such, there is an urgent need to invest in adaptation schemes that magnify potential gains from cooperation whilst minimizing conflicts.
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East Africans need to undergo a thorough mindset shift to embrace the opportunities today that will enable them to survive in tomorrow’s world. The social habits of trust, cooperation and becoming truly ‘wananchi’ is long overdue. Furthermore, we need to shift from linear problem solving approaches to systems thinking and collaborative problem solving. To do so successfully means we will need to reinforce those institutions necessary for this task.
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We need to be able to unmask and tackle the political economies that are drivers of inequalities at the national level otherwise we will not be able to guarantee a regional integration process that is truly people centred and sustainable, one that is transformative for the lives and choices of East Africans.
Cui bono? An agenda for active policy engagement
There are many entry points that could inform the policy process that seeks to address the imbalances caused the by the existing political economy. Whereas the report has taken liberty to point out some areas of possible intervention, it does not point out specific policy cures. This would detract from the purpose of this publication as we would not have the space to explore the complexities that each individual intervention would likely have to address. Nonetheless, they are offered as a point of departure for policy conversations with a view that conversations building on these possible intervention areas would clarify not only the technical aspects involved, but also be more specific in identifying beneficiaries of these actions.
The full report is available to download here.
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What’s ahead for the WTO: Looking around the corner and beyond
Trade ministries, just as other parts of government, need to respond to calls from the public and from global leaders for action on major issues. This column argues that armed with potential policy options identified through the E15Initiative, the WTO is equipped to contribute to solutions in many areas.
Purposeful efforts over the coming months and years could help to boost the WTO’s essential and valuable place in ensuring a responsive and inclusive furtherance of globalisation and trade and investment integration that delivers sustainable development outcomes for all.
WTO members are facing a summer break that is both familiar but also new and unexpected. They now face the choice between locking down a third pattern-affirming cycle of negotiations that at previous trade ministers’ summits in Bali and Nairobi in 2013 and 2015 delivered substantive if not spectacular outcomes; or reaching further to reframe the WTO’s role governing over world trade as its frameworks face multiple existential challenges. The WTO’s eleventh ministerial conference to be held end-2017 offers a historical opportunity to deliver impressive results to reassert the WTO’s critical relevance to priorities from growth, to poverty eradication and inclusion, to low carbon development.
The political context provides the opportunity to continue to relieve what was previously a period of relative drought in multilateral trade decision-making. The clinching of the Trade Facilitation Agreement in Bali opened a new way of negotiating commitments that applied to all WTO members at different levels and with accompanying support. Last year’s Nairobi package delivered real progress on a number of long-standing issues, but importantly it also marked a point at which countries agreed to disagree on continuing pursuit of the Doha negotiating framework, while expressing a firm commitment to tackling its outstanding items. Although members also agreed not to launch multilateral negotiations on other items unless by consensus, discussions have started on a range of areas and future possibilities, a move loudly endorsed by the G20 trade ministers in early July of this year.
This dynamic reflects both a changed trade environment and also new contexts in which preferential agreements like the Comprehensive Economic and Trade Agreement between the EU and Canada, and the Trans-Pacific Partnership engaging 12 countries and 24% of global merchandise trade, have jumped ahead of the WTO (Schott et al. 2016). Both arrangements constitute the 21st century yardstick for regulatory coherence and substantive coverage for integration of national economies into global markets. At this time, however, a popular backlash against globalisation policies, riding on mediocre growth in key involved economies, looms large on the horizon with the potential to undo these integration efforts. These developments leave trade officials in the Northern summer heat facing what is admittedly a daunting task of agreeing on any deal, while also recognising that the WTO’s institutional centrality will not be fully regained with piecemeal agreements.
Critically, it is not a lack of ideas that constrains the multilateral trade system from moving forward more assertively, even if further scrutiny of the economic and distributive effects of current arrangements continues to be paramount. Indeed, over the last three years close to 400 of the world’s top experts, in collaboration with leading institutions within the E15Initiative process – convened by the International Centre for Trade and Sustainable Development and the World Economic Forum – have focused on some of the tough questions facing the future of the global trading system and identified potential policy options. The initiative also created a fresh space to articulate some WTO-specific proposals that had previously found limited room to air within the Doha gridlock. Armed with these, the politics of the moment and the richness of their deliberations and collective reflections in the past six months, WTO members are now in a unique spot to move forward over both the short and long term.
A license to reframe: Nairobi and outcomes for the forthcoming ministerial
In an exceptional manner, the Nairobi outcome offers a license to reframe cooperative approaches and rule-making at the WTO. Reframing would involve not only identifying different ways to achieve Doha issues, but also acting on the most pressing aspects of these today. Moving towards the forthcoming ministerial, a step-wise approach could be used whereby members consider the direction of travel as well as specific actions for the present. As WTO members prepare for a General Council meeting at the end of July, the following options may prove useful food for thought for the summer pause and the resumption of talks at the rentrée in September.
2016 economic priorities
The new Sustainable Development Goals and the universally adopted Agenda 2030 urge broader attention to measures supportive of trade by the world’s poor and poorest countries. E15 papers (ICTSD 2016) have articulated a need for WTO members to develop a comprehensive approach addressing constraints on trade finance, services, and investment facilitation, among other areas, in response to challenges arising in a post-crisis world. The next ministerial meeting could launch a framework on trade facilitation in services, for example, considering the potential contribution of services trade to the GDP of low-income countries. Boosting services trade may also have important gender equality impacts, given that half of global female employment is in services.
In complement, much reflection is currently taking place in Geneva and elsewhere on the subject of maximising the multi-faceted opportunities of the internet for trade, including for inclusion. E-commerce is not a new issue to the WTO, but although some aspects of digital trade are within the scope of WTO rules, coverage is more limited in others such as cross-border data flows. Recognising the increasing importance of the digital economy and related flows for trade, growth, and development, the transformation of the current e-commerce work programme into an ambitious mandate for a digital trade agreement – plurilateral or otherwise – could be a long-term goal that builds from domestic and regional innovations in the interim. As a first step, however, WTO members need to concretely identify what would be suitable to address in the short term and what will need further analysis. To help with this, the E15Initiative has recommended convening a working group to better understand the scope for WTO law to support digital trade, and/or establishing a platform in the WTO to receive inputs from external experts on the digital economy and its relationship with the international trade system.
In recognition of the realities of complex investment-led global value chains, discussions on trade and investment coherence could be enhanced multilaterally, following an acceleration of interest among G20 trade ministers in this area. One such avenue would be to reactivate the WTO Working Group on the Relationship between Trade and Investment, as noted by G20 trade ministers. Where countries put in place strong enabling environments including around infrastructure, education, enterprise development, and so on, value chains – both regional and international – can offer opportunities for economic upgrading and diversification critical for growth and development in various ways in low-, middle-, and high-income economies. Whether the WTO is able to support this ‘21st century trade’ – identified by Richard Baldwin (2013) as a “trade-investment-services-IP nexus” – and the transformative potential it holds will depend on its ability to conceive or update deeper disciplines with supply chain mechanics in mind.
Too many low- and middle-income countries face being left on the sidelines – for the moment – of mega-regional deals. For this reason and others, it is a well-versed reality that the WTO needs to contend with the wider trade and investment architecture to initiate a momentum to pave the way for a more coherent, all-embracing global trade regime. More work on the WTO’s relationship with the wider architecture – starting with the transformation into permanent of the provisional Transparency Mechanism looking into regional trade agreements – should forge ahead. An independent platform proposed by the E15Initiative to support such scrutiny and quest for coherence in a systematic manner is being established by a consortium of think tanks and regional development banks, called the RTA Exchange initiative. Going forward, into 2025 and beyond, the WTO will do well to gradually harvest best practice from regional trade agreements, and to establish itself as catalyst for coherence of the global trade regime.
In pursuit of global goals
The Doha Agenda and subsequent ministerial declarations called for work on a prohibition of certain forms of fisheries subsidies that contribute to overcapacity and overfishing. A continued pursuit of a multilateral outcome on fisheries subsidies disciplines could work based on areas of relative agreement. One such area is the prohibitions on subsidies provided to overfished stocks and to illegal, unregulated, and unreported activities, as proposed by several WTO members last year. Another option would be to adopt such disciplines among a core group of countries, in other words, a fisheries subsidies plurilateral. The idea is already reflected regionally in the signed, but not yet ratified Trans-Pacific Partnership. Incentives to join by unenthusiastic members are more limited in the WTO plurilateral context compared to the regional trade agreements dynamic, with the perennial free-riding risk, but the time to be creative is now. A willing group moving forward in some form would represent an important contribution to ocean sustainability efforts if the multilateral outcome remains unattainable in the immediate future. Such an attempt should also result in innovation on defining critical mass thresholds for rule-making, particularly on effective frameworks for the stewardship of natural resources.
Further, if the overarching goal is ocean sustainability, consideration should be given to other supportive trade tools, drawing on leaps in evidence and analysis over the last 15 years. It seems inexcusable, for example, not to also pursue additional measures through the trade system that help to close the market to illegal fish catch. Although there is still a way to go and experience to be gained with some relevant efforts underway, could the WTO eventually capture elements of best practice from the unilateral and regional efforts in a voluntary code on illegal fish imports and transhipment?
The Nairobi ministerial established clearer disciplines on agricultural export subsidies and other ‘export competition’ elements, among other farm trade outcomes. The deal on export subsidies goes some way towards satisfying a target on correcting and preventing distortions in world agriculture. This is slated as a means to achieve an ambitious goal on ending hunger by 2030. Distortions in world agriculture markets, however, are also affected by other factors such as agricultural domestic support or export restrictions, needing focused attention to avoid repeating episodes of price spikes and perverse starve-thy-neighbour, knee-jerk responses. In this context, at a time of new market dynamics arising amid warnings of more frequent climate-related extreme weather events, demographic and resource pressures from land to water growing, and diverse business models evolving, policymakers should think big (Meléndez-Ortiz 2016). WTO members could already start focusing on value chains relevant trade, in particular in agriculture products or goods critical to ensuring food and nutrition security (e.g. seeds, pesticides, fertilisers), as well as identifying services, market distortions, transport and logistics, standards, labels, barriers to the adoption of productivity-enhancing technologies, competition concerns, and intellectual property issues that may be addressed as a package that responds to the reality of food systems in today’s global economy though the multilateral trade system.
That said, no outcome on agriculture would be evolutionary unless current problematic subsidies to grain production are tackled. A big chunk of domestic support practices proven to be perverse to ensuring sustainable food production systems have so far eluded effective disciplines since multilateral attempts started over 30 years ago. A reframing approach, combined with confidence-building measures pointing to a gradual transition in traditional and non-traditional providers of subsidies, may offer elements for a WTO package in this area (Falconer 2015). In complement, talks on a Special Safeguard Mechanism that allows a balance between farmers’ incomes and access to global food supplies will need to find a middle ground solution supportive of both regular trade growth and measures to protect producers during emergencies (Montemayor 2016).
A similar innovative approach could be envisioned in support of the Paris Agreement on Climate Change and its imperative for a rapid transition to a low-carbon economy through a massive scale-up of clean energy. The International Centre for Trade and Sustainable Development has long championed the idea of a comprehensive effort to address tariff and non-tariff barriers related to value chains in clean energy technology. Current plurilateral negotiations towards an Environmental Goods Agreement within the WTO offer a partial response to market hindrances. But much more remains, including agreeing on ways forward on associated and embedded services, and the adequate frameworks for the use of anti-dumping, local content requirements, and subsidies.
In connection with this, the WTO is perfectly positioned to discipline and phase out fossil fuel production and consumption subsidies, as the only international body with a binding subsidies framework. More broadly, a comprehensive horizontal rethink on subsidies disciplines across goods, agriculture, and even the addition of services would start by evaluating and measuring impact on both third parties and the global commons. This could be combined with a new safe harbour for subsidies with a wider reach, particularly those needed to address market failures or create public goods. A way into this could be to agree to reinstate a modified version of Article 8 of the Agreement on Subsidies and Countervailing Measures concerning Non-Actionable Subsidies that expired in 2000. A working group with a mandate to explore existing and potential enhanced coverage of fossil fuel subsidy reform could be also explored.
Towards an ambitious vision
The above options speak to some of the emerging signs over the past few months in WTO economies. Other areas also remain critical. These include, for example, the implementation of decisions taken in Nairobi related to least developed countries. Special and differential treatment – already partially reconsidered in the Trade Facilitation Agreement – has been a thorny issue that deserves out-of-the box efforts such as treatment defined by multiple indicators on specific sectoral, geographic or resource-defined situations rather than anachronistic aggregate measures reflected in country groupings.
On the whole – and evident just from putting pen to paper for this column – it is undeniable that WTO negotiators face no easy task; charged with irrelevance by some voices, navigating general backlash to globalisation and integration, and without an agreed path forward.
Even small steps, however, if they are sustained, significant, and constructive, can pave the way towards broader, ambitious visions. A range of ideas were formulated by the E15Initaitive, some of which can be slotted directly into existing WTO work, and others that will need to be taken forward through further discussion before eventual decisions to initiate negotiations. The perfect moment has come to think on a grand scale, to consider a variety of modes of engagement from hard law trade deals to softer, cooperative approaches. The formats chosen, whether multilateral, plurilateral, plurilateral with eventual multilaterisation, or hybrid, as well as strengthening the role of WTO committees, should be based on what works. WTO members have in recent history shown themselves capable of adapting form to content.
Trade ministries, just as other parts of government, need to respond to calls from the public and global leaders for action on major issues. In many areas the WTO is equipped to contribute to solutions. Purposeful effort over the coming months and years could help to boost the WTO’s essential and valuable place in ensuring a responsive and inclusive furtherance of globalisation and trade and investment integration that delivers sustainable development outcomes for all.
Ricardo Meléndez-Ortiz is Co-founder and Chief Executive, International Centre for Trade and Sustainable Development (ICTSD).
References
Baldwin, R. (2013), “Global supply chains: why they emerged, why they matter, and where they are going,” in D. K. Elms and P. Low (eds), Global value chains in a changing world, Fung Global Institute, Nanyang Technological University (NTU), and WTO.
Falconer, C. (2015), “From Nairobi to Confidence Building Measures in Geneva”, ICTSD Opinion, International Centre for Trade and Sustainable Development.
International Centre for Trade and Sustainable Development (ICTSD) and World Economic Forum (2016), Strengthening the Global Trade and Investment System in the 21st Century: Synthesis Report, E15Initiative, Geneva.
Meléndez-Ortiz, R. (2016). “Food security and nutrition in the 2016 globalized economy”, guest post, International Food and Policy Research Institute (IFPRI).
Montemayor, R. (2016), “Safeguarding poor farmers from import surges: Towards a “middle ground”?”, ICTSD Opinion, International Centre for Trade and Sustainable Development (ICTSD).
Schott, J. J., C. Cimino-Isaacs and E. Jung (2016), “Implications of the Trans-Pacific Partnership for the World trading System”, Peterson institute for International Economics Policy Brief 16-8.
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Oil price forecast revised higher after supply disruptions in second quarter
Oil prices seen higher due to supply disruptions, strong demand in second quarter
The World Bank is raising its crude oil price forecast for 2016 to $43 a barrel from $41 dollars after a 37 percent jump in energy prices in the second quarter due principally to disruptions to supply, particularly wildfires in northwestern Canada and sabotage of oil infrastructure in Nigeria.
Nevertheless, oil prices are still anticipated to be 15 percent lower this year than in 2015 because of large inventories, which will take some time to work off, the July Commodity Markets Outlook says. The revised forecast takes into account a recent softening of demand for oil and the recovery of some disrupted supply.
“We expect slightly higher oil prices for the second half of 2016 as oil market oversupply diminishes,” said John Baffes, Senior Economist and lead author of the Commodities Markets Outlook. “However, inventories remain very large and will take some time to be drawn down.”
Most main commodity price indexes are expected to decline for the year as a whole due to large supplies and, in the case of industrial commodities, weak growth prospects in emerging market and developing economies. Even so, the declines of many commodities are now forecast to be less steep than anticipated in the April outlook.
Post-2011 commodity price declines haves weighed heavily on growth prospects for commodity exporting emerging market and developing economies, which are home to more than half the world’s poor. The indirect impact of slowing growth in energy and metal exporting emerging market and developing economies may outweigh the direct benefits of lower consumer prices.
Agriculture prices are projected to fall more gradually than forecast in April. The outlook reflects adequate supplies for most commodities but also takes into account reduced harvests in South America. Agricultural commodity prices are also expected to be held down by lower energy costs and plateauing demand for biofuels.
Food prices as a whole are expected to rise moderately in 2016, but grains and beverages prices are forecast to fall while oils and meals prices are projected to rise. Fertilizer prices are projected to tumble in 2016 due to surplus capacity and weak demand, among other factors.
Metals prices are expected to fall more sharply than expected in April due to weak demand and the coming on line of new capacity. Precious metals prices were revised sharply upward on safe-haven buying amid worries about global growth prospects. For 2017, a modest recovery is projected for most commodities as demand strengthens and supply tightens.
The quarterly report also examines the key role energy prices play in the determination of food prices. The post-2006 boom of food prices was partly driven by higher energy costs, and the weakness in energy prices since 2014 is expected to hold food commodity prices down in the future as well.
Agriculture is energy intensive: fuel is a key cost component of producing and transporting food commodities. While improved overall crop conditions have also played a part in lowering prices, the impact of lower energy prices has been far greater.
Energy prices fell 45 percent in 2015 and are forecast to drop 16 percent this year. Food prices are expected to average 26 percent below highs reached in 2011. Not only does energy make up more than 10 percent of the cost of agricultural production, energy price fluctuations affect incentives and policy support for the production of biofuels as an alternative energy source to oil.
“Energy exporting emerging and developing economies have struggled to adjust to persistently low prices,” said Ayhan Kose, Director of the World Bank’s Development Prospects Group. “Partly because of the strong linkages between energy prices and agricultural commodities prices, agricultural producers can expect lower prices in an era of depressed energy prices. Both energy and agricultural commodity exporting countries need to step up economic diversification efforts to bolster resilience to commodity price fluctuations.”
The diversion of some food crops to biofuels production has been an important driver of food commodity demand. During the past decade, the largest source of growth in demand for grains and oilseeds was biofuels production.
In addition to energy costs, agriculture prices are also affected by exchange rates movements, GDP and monetary conditions, and stock-to-use ratios (measures of how well supplied food markets are relatively to demand).
Scrutiny of these drivers helps explain declines in food prices after 2011. Maize prices have fallen in that period by 43 percent, wheat by 42 percent, rice by 25 percent, and soybeans fell by 23 percent. About one-third of this decline can be explained by the oil price drop. One-sixth of the decline is attributable to a rise in incomes during that period.