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The Tripartite FTA: Is it the way to deepen integration in Africa?
On October 25, the Tripartite Sectoral Committee of Ministers announced that the Tripartite Free Trade Area (TFTA) covering three Regional Economic Communities – the East African Community (EAC), the Southern African Development Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA) will be launched in mid-December at the Tripartite Summit of Heads of State and Government in Cairo, Egypt. Talks on the project among the 26 countries ranging from Egypt to South Africa, were launched in 2008 and endorsed in 2011. The TFTA will have a combined population of 625 million people, and an aggregate GDP of US$1 trillion covering 58 percent of the continent’s economic activity. The immediate objective is to reduce the thickness of borders across the continent so as to raise inter-regional trade across the continent, now standing at just 12 percent to total trade. An action plan released by the African Union says that the TFTA would be followed by a continental customs union forming in 2019.
According to the WTO, in 2010, the 58 African countries were involved in 55 Preferential Trade Agreements (PTAs) of which 43 were South-South PTAs. PTAs (RECs or Regional Economic Communities is the usual acronym used when discussing regional integration in Africa) are good politics. Broad evidence suggests that economics and politics are complements rather than substitutes (as argued by defenders of multilateralism): RTAs reduce the probability of war through two channels: (i) by increasing the opportunity cost of war; and (ii) by reducing information asymmetries as partners know each other better. But to survive, PTAs must extend beyond unfilled good intentions and have a sufficiently sound economic basis, the focus of this note.
So far success on the economic front has been modest, not least because of the great diversity in memberships across PTAs. Members include resource-rich and resource-poor (see Figure 1), coastal and landlocked (15 landlocked countries in Africa), large and small, artificial borders, and many ethnic groups and languages. Figure 1 shows that the EAC is the REC with the smallest disparities in per capita exports of rent-generating natural resources. It also happens to be the REC – along with UEMOA – where integration has been ‘deep’, a five-member customs union operational since 2009.
Figure 1: Box-plot of Per capita exports of Fuels, Ores, and Metals exports by RTA groups (2012 US$)
Source: Melo and Tsikata (2014). PAFTA is the 18 member Pan-Arab Free Trade Area.
The very different interests across partners in each REC has strengthened countries’ insistence on the “respect for the sovereignty and territorial integrity of each state and the inalienable right to independent existence,” as written in the Organization of African Unity (OAU) charter of 1963. Commitment to pan-Africanism was weak during the first post-colonial wave of regional integration efforts, and has remained so during the more outward-oriented second wave of PTAs. Can the TFTA provide the glue needed to integrate African economies more deeply? Several clouds are on the horizon.
The ‘one-size-fits-all’ constraint. The TFTA is to get around the overlap in membership across PTAs that has prevented ‘deep integration’ which has also been slowed by large membership. For example, Zambia is both a member of the COMESA Customs Union (CU) – which requires applying Common External Tariff (CET) to non-members – and of the SADC FTA, putting the country in conflict over its trade policy choices. The large membership in the TFTA (and a fortiori for a continental customs union) exacerbates the “one-size-fits-all” constraint imposed by the desire (and necessity) of achieving convergence in policies to achieve ‘deep integration’. The variable geometry approach adopted may help build support, but at the cost of delaying the deepening of integration since what was intended to be a ‘single undertaking’ to establish a proper FTA that, in the end, will allow the co-existence of different trading arrangements with small integrating effects.
Africa’s linear model of integration has slowed the pace of integration. The TFTA is to be implemented in two sequences: phase one is to focus on tariff liberalization, rules of origin (RoO), trade remedies, and customs and transit procedures; and phase two will address trade in services and other issues such as intellectual property, competition policy, and trade competitiveness. This is the linear model of integration that has been followed in Africa until now. It has been criticized for neglecting ‘behind-the-border’ measures that have been a break to intra-regional trade and of missing the opportunity to open markets in services which are now essential for ensuring competitiveness in goods markets where outsourcing has been rising rapidly.
Phase one is to be officially concluded in December 2014 after the 3rd Summit of Heads of State and Government which will see the signing of the Declaration on the Conclusion of Negotiations on Phase One – Trade in Goods as the decision takes “into account the fact that the majority of the Tripartite Member/Partner States have made ambitious tariff offers.” While the decision to operationalize the free trade area by the end of this year is to be welcomed because it will jump-start negotiations on trade in services, much will remain to be done to reduce barriers to trade in goods, especially regarding the adoption of rules of origin that do not impede trade excessively.
Rules of origin. In phase one, the COMESA-EAC-SADC troika is to reach agreement on trade remedies and a dispute settlement mechanism. They also face the challenge of harmonizing the currently very different RoO across the three groupings. Up to 56 percent of RoO are different across the three RECs. Negotiators have decided to adopt a line-by-line approach (or product-specific RoO (PSRO)) to resolve this problem. This approach is a quasi-guarantee that the most restrictive PSRO will be adopted since PSRO are invariably “business-owned” rather than “business friendly”(the EU still has over 500 different PSRO), leading many to conclude that preferential trade amounts to giving with one hand (preferences) and taking away with the other (restrictive PSRO). For example, the main benefits of the Africa Growth and Opportunity Act (AGOA) was the unilateral decision by the U.S. to simplify the triple-transformation requirement for textiles & apparel (T&A) to a single-transformation rule allowing AGOA beneficiaries to source inputs from non-preferential sources. This relaxation has been estimated to amount to an increase in exports of T&A six times greater than the simple removal of tariffs. Difficult as it may be to reach consensus, negotiators could take inspiration from the simple and transparent RoO requirements in ASEAN where a wholly obtained requirement applies for unprocessed agricultural products and a single across-the-board rule of a 40 percent local content for manufactures (or a change of tariff classification if that rule is deemed too constraining).
Challenges ahead: Thinking 21st-Century FTAs
With the exception of South Africa and Egypt, TFA membership is largely composed of small fragmented and often isolated economies with resources distributed very unequally among them. In addition to political benefits, on economic grounds, this makes for a compelling case to integrate regionally to reap efficiency gains, exploit scale economies, and reduce the thickness of borders. But the distribution of gains from ‘deep integration’ will be very unevenly distributed, potentially leading to compensation mechanisms that will be distortionary (e.g. exceptions hidden under restrictive PSRO and other opaque measures) as occurred under the first wave of regional integration in the immediate post-independence period.
Equally important, until recently at least, regional integration in Africa was founded on a 20th century exchange of market access at the expense of outsiders. With the reduction in trade costs and the subsequent fragmentation of production, 21st century regionalism is about a new bargain: an exchange of domestic market reforms for FDI which brings home the service activities necessary to participate in the global value chain. In this new environment, where trade is trade in tasks and increasingly involves an exchange of intermediate goods, protection (or exchange of market access) amounts to preventing oneself from participating in global outsourcing. Indeed, Asian regionalism has been characterized by ‘race to the bottom’ tariff-cutting to bring about the services needed to diversify and participate in international production networks. It is against this changing background that the TFTA has to be evaluated.
Jaime de Melo is a nonresident senior fellow in the Global Economy and Development program.
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Globalization is recovering from financial crisis, DHL Global Connectedness Index reveals
- The world’s economic center of gravity shifts eastward; emerging economies see bigger connectedness gains than advanced economies
- Flows of trade, capital, information and people stretched out over more distant geographies, documenting a decline in regionalization
- Europe remains most globally connected region; Netherlands again ranks No. 1
DHL, the global logistics leader, on 3 November 2014 released the third edition of its Global Connectedness Index (GCI), a detailed analysis of the state of globalization around the world. The latest report shows that global connectedness, measured by cross-border flows of trade, capital, information and people, has recovered most of its losses incurred during the financial crisis. Especially the depth of international interactions – the proportion of interactions that cross national borders – gained momentum in 2013 after its recovery had stalled in the previous year. Nonetheless, trade depth, as a distinct dimension of globalization, continues to stagnate and the overall level of global connectedness remains quite limited, implying that there could be gains of trillions of US dollars if boosted in future years.
“In the aftermath of the financial crisis, globalization has increasingly come under pressure and international trade negotiations face growing resistance,” said Frank Appel, CEO Deutsche Post DHL. “In this environment of uncertainty, the DHL Global Connectedness Index offers a comprehensive, fact-based understanding of globalization and demonstrates the huge potential for countries to further increase their connectedness. I am convinced that a prosperous world needs more, not less integration.”
The DHL Global Connectedness Index 2014 documents the substantial shift of economic activity to emerging economies that is pushing the world’s economic center of gravity eastward. Emerging countries are now involved in the majority of international interactions whereas before 2010, the majority of international flows were from one advanced economy to another. Notably, the 10 countries where global connectedness increased the most from 2011 to 2013 are all emerging economies, with Burundi, Mozambique and Jamaica experiencing the largest gains.
Advanced economies have not kept up with this shift. This suggests that they may be missing out on growth opportunities in emerging markets. “Counteracting this trend would require more companies in advanced economies to boost their capacity to tap into faraway growth,” said Professor Pankaj Ghemawat, co-author of the report and internationally acclaimed globalization expert and business strategist. “This is particularly evident in light of the fact that a decades-long trend toward trade regionalization has gone into reverse.” In fact, the GCI 2014 reveals that every type of trade, capital, information and people flow measured has expanded over greater distances in 2013 than in 2005, the report's baseline year.
The 2014 Index Results
In addition to a comprehensive overview on the state of globalization, the 2014 report also provides detailed insights into the connectedness of individual countries and regions. The Netherlands retained its top rank as the world’s most connected country and Europe is once again the world’s most connected region. All but one of the top 10 most globalized countries in the world are located in Europe, with Singapore as the one standout.
North America is the second most globally connected region and leads on the capital and information pillars, with the United States as the most connected country in the Americas. Overall the US is ranked 23rd place out of the 140 countries measured by the GCI. The largest average increases in global connectedness from 2011 to 2013 were observed in countries in South and Central America and the Caribbean. Middle East and North Africa was the only region to experience a significant decline in connectedness.
Measuring Globalization in 3-D
The report was commissioned by DHL and prepared by Pankaj Ghemawat (Professor at New York University Stern School of Business and at IESE Business School in Barcelona, Spain) together with Steven A. Altman (Senior Research Associate and Lecturer in Strategic Management at IESE Business School).
Unlike other established globalization indices, the GCI analyzes globalization in 3-D: It looks at the depth of countries’ cross-border interactions, their directionality (outward flows versus inward flows) as well as their geographic distribution (breadth). “The GCI, with its unique 3-D approach, is the only one of the globalization indices to register what many observers regard as the biggest drop-off in the intensity of globalization during the financial crisis,” explains Professor Ghemawat. “That should boost confidence in using it as the basis for diagnosis and decision-making.”
The 2014 DHL Global Connectedness Index draws on more than 1 million data points from international flows covering trade, capital, information and people accumulated over the last nine years. The ranking encompasses 99% of the world’s GDP and 95% of the world’s population.
» See also: How globalized is the world today? Delivering Tomorrow blog by Pankaj Ghemawat
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COMESA Merger Assessment Guidelines
The COMESA Competition Commission (the Commission) is charged with the administration and enforcement of the COMESA Competition Regulations (the Regulations). Since the Commission commenced operations in January 2013, the most active provisions of the Regulations have been the Merger Control Provisions. As a consequence of this, the Commission has found itself with the responsibility of explaining and interpreting the Regulations and for responding to inquiries from the public regarding their application. This prompted the Commission to commence the development of the COMESA Merger Assessment Guidelines (the Guidelines). The Commission is therefore hereby publishing the Guidelines. The Guidelines are prepared as part of the Commission’s ongoing efforts to clarify and provide guidance about its merger enforcement policies and practices. The preparation process of the Guidelines was done in cooperation with the International Finance Corporation (IFC), a member of the World Bank Group.
The preparation of the Guidelines engaged wide consultations with the various stakeholders among them, the International Bar Association, the American Bar Association, international and regional law firms, National Competition Authorities and the International Competition Network. The preparation further consulted existing literature on the subject matter including the European Union (EU) Merger Regulations and Guidelines and the prevailing Regulations and Rules of Member States. The process of preparing the Guidelines also took into account the nature of markets in the Common Market. Following input and review from the aforementioned stakeholders, the Guidelines have since been finalized and adopted by the Board of the Commission.
The Commission wishes to thank the IFC and Consultants who were engaged to draft the Guidelines. Further, the Commission wishes to thank the Steering Committee and other experts who contributed to the process of preparation of these Guidelines.
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India assures Mauritius on bilateral tax treaty
India on 2 November 2014 told Mauritius that it will not take any decisions that will “adversely impact” bilateral relations while reassuring the country that amendments to the bilateral tax treaty would be made only after considering the legitimate interests of both sides.
This was conveyed by External Affairs Minister Sushma Swaraj during her meetings with top leadership of Mauritius including President Rajkeswur Purryag and Prime Minister Navinchandra Ramgoolam.
She assured them that “India was in the process of reviewing the Double Taxation Avoidance Agreement (DTAA) and will not do anything to that will adversely impact the island nation’s ties with India,” official sources told PTI.
Swaraj, who is here on a three-day visit, also said that enhanced bilateral relations between the two countries will benefit people-to-people contacts. She recalled that the first batch of Indians had arrived in Mauritius on November 2, 1834.
Earlier, terming the India-Mauritius double taxation avoidance convention an important agreement between the two countries, External Affairs Ministry spokesperson Syed Akbaruddin said both countries would ensure that their “legitimate interests” would be secured in any new agreement.
“Discussions on this are an ongoing issue and once these are ready and there is agreement between the two countries, we will then move to the next step of amending it.
“We have an agreed format in which all issues on this matter are being discussed. Given the nature of our close bilateral relations and ties, we are confident that we will take into account each other’s concerns and interests while making any changes to it,” the spokesperson said.
A proposed revision of the tax treaty has been hanging fire for a long time amid differences between the two countries. India has been seeking to make the agreement stronger to check any possible round tripping of Indian funds through the island nation.
Mauritius has been one of the biggest sources of FDI into India, which attracted inflows of $77.77 billion FDI from the country between April 2000 and January 2014.
In 2012-2013, India exported goods worth $1.31 billion and imported goods worth $28.49 million. India’s exports to Mauritius comprise largely petroleum products.
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Top Tanzania officials arrested in row over oil, gas contracts
Top officials at Tanzania’s state-owned oil agency were arrested this week on charges of failing to release to parliament oil and gas contracts the government signed with foreign and local investors.
The arrests on Monday bring to a head a simmering row over whether Tanzania is getting a fair deal for its newfound natural resources.
Huge offshore gas finds promise to lift the east African nation into the ranks of middle-income countries by 2030 and free it from dependency on foreign aid.
However, the government has insisted on keeping terms of production-sharing agreements secret, raising suspicion over whom they benefit.
The Parliamentary Committee on Public Accounts (PAC) instructed police to arrest James Andelile, acting director general of Tanzania Petroleum Development Corp (TPDC), and its board chairman Michael Mwanda for refusing to comply with its Nov. 3 deadline for releasing 26 oil and gas contracts to the parliamentary oversight panel.
“It is confirmed. They were arrested today and they will be charged in the court according to the law,” Zitto Kabwe, the committee's chairman, told the Thomson Reuters Foundation.
TPDC has resisted requests to disclose the production-sharing agreements on the grounds that it was bound by confidentiality clauses.
TPDC’s information officer Sebastian Shana said it was impossible for the agency to release the contracts, given the short time frame, before consulting with investors.
The maximum penalty is up to two years in prison. Dar es Salaam Special Zone Police Commander Suleiman Kova said the officials have the right to apply for bail pending investigations.
According to local media reports, the TPDC had asked for more time, but the National Assembly’s clerk Thomas Kashililah wrote to TPDC last week giving it until Monday to release all documents relating to the contracts, and to submit an audited report for the 2013 financial year.
STRUGGLE FOR TRANSPARENCY
Civil society groups are pressing for open contracts in the extractives industry as a means of heightening government accountability over natural resource wealth and to promote more public discussion over how revenues are invested.
From mining to natural gas, the attempts to make various contracts publicly accessible have been an uphill struggle, even though Tanzania is a member of Open Government Partnership, an international initiative that sets standards for transparency and public accountability.
Earlier this year, a leaked contract showing ExxonMobil and Norway’s Statoil will pay Tanzania no more than 50 percent of profit from a natural gas field in the Indian Ocean sparked an uproar with legislators, right groups and ordinary citizens calling for disclosure of all the contracts.
Critics have raised concerns that major international oil companies may be taking advantage of the relative lack of experience of the TPDC in negotiating highly complex exploration and production deals.
“Transparency of contracts is fundamental for ensuring proper management of natural resources. Without transparency, no accountability,” Kabwe said.
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Trade facilitation instruments behind the robust institutions
Trade facilitation instruments developed by COMESA have contributed to the creation of robust regional institutions that provide re-insurance services and regional customs guarantees. These instruments are the COMESA Yellow Card, the Regional Customs Bond Guarantee (RCTG) Scheme, and the COMESA Virtual Trade Facilitation System (CVTFS).
The Yellow Card and the RCTG are credited with significantly contributing to the success of the COMESA owned PTA Reinsurance Company (ZEP-RE). The company manages and provides re-insurance to the Yellow Card and the RCTG and is now rated among the best performing institutions in the continent.
“ZEP-RE is not only underwriting reinsurance business in the entire African continent but also in parts of Asia”, COMESA Secretary General Sindiso Ngwenya told delegates attending the 28th Meeting of the Council of Bureaux of the Third Party Motor Vehicle Insurance (Yellow Card) Scheme in Dar es Salaam last week. The company is rated by Global Credit Rating (GCR) AA for local/national and BBB- for international Business.
The African Trade Insurance Agency (ATI) another COMESA institution established in 2000 to provide political risk cover from commercial sources or export credit agencies has similarly thrived. Fifteen countries in the Economic Community of West African States (ECOWAS) have enlisted as members.
The Yellow card was developed by COMESA as a trade facilitation instrument to enable trans-boundary motorist to use only one insurance cover which is valid in all countries participating in the scheme. The RCTG commonly known as the RCTG CARNET provides one regional bond for transit goods to replace multiple national bonds for each country of transit. It has reduced the total cost of freight by between 15% and 20%.
It is against this background that COMESA has developed the Virtual Trade Facilitation System, a software application that integrates all trade facilitation instruments, including the Yellow Card and the CARNET under one online platform.
“The system provides real time information on the location of goods and means of transport and integrates all customs and trade related documentation under a single sign on,” Ngwenya told the delegates. “It also allows customs authorities to pre-clear cargo and the freight forwarders and transport operators to efficiently manage the logistic supply chain thus reducing the cost of doing business and enhancing competitiveness.
He said the CVFTS will enable the industry to eliminate forgeries of Yellow Cards and minimize the fraudulent insurance claims of goods that have hither to been paid under the guise that they either have been lost in transit or destroyed in accidents.
Subsequently, the Council of Bureaux on the Yellow Card Scheme has agreed to advance US$ 1 million to the CVTFS, subject to an Agreement between COMESA and ZEP Re the managers of the Yellow Card Reinsurance Pool. The advance will be made by ZEP RE.
Tanzania, though a non-Member of COMESA, is already implementing the Yellow card scheme and has also assured of its participation in the RCTG CARNET and CVTFS as well. This will enhance the competitiveness of the logistic supply chain through the port Dar es Salaam to and from the hinterland served, namely Burundi, Eastern and Southern D.R. Congo, Malawi, Rwanda, Uganda and Zambia.
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Results from FinScope Consumer Survey South Africa 2014
What changed in people’s lives according to FinScope since 2004? A ten year perspective on financial inclusion in South Africa
FinMark Trust released the results of its FinScope Consumer South Africa 2014 survey today. The FinScope Survey, developed by FinMark Trust, is a research tool to assess financial access in a country and to identify the constraints that prevent financial service providers from reaching the financially under- and unserved people. The FinScope Survey is a nationally representative survey of how individuals source their incomes and how they manage their financial lives. It also provides insight into attitudes and perceptions regarding financial products and services. FinScope South Africa involved a range of stakeholders engaging in a comprehensive consultation process, thereby enriching the survey. To date, FinScope Consumer Surveys have been conducted in 19 countries. The study which was conducted by TNS Research Surveys was based on a nationally representative sample of 3 900 adults who are 16 years or older.
Highlights from the survey
Overview of changes in the past ten years
The survey results show an increase in access to infrastructure in 2014 with more adults having access to electricity (82% in 2004 to 94% in 2014), tap water on property (increased from 67% in 2004 to 81% in 2014) and flush toilets (increased from 55% in 2004 to 64% in 2014). An improvement in the standard of living is indicated by the decrease in LSM 1-5 by 4.4 million since 2004 while LSM 6-10 increased by 12.2 million people since 2004. Working and unemployment status of individuals has not changed much over the past ten years with 9 million people (22%) unemployed in 2004, and 9.5 million (23%) still unemployed in 2014. The usage of cellphones has increased to 33 million up from 12 million in 2004.
Although there is an increase in the salaried adult population in 2014 (7.2 million in 2004 to 12.4 million in 2014), there is also an increase in dependence on government grants (19% in 2004 to 30% in 2014). 78% of the adult population earned an average personal monthly income of less than R2 000 per month in 2014. However the number of adults with no personal income decreased from 4.1 million in 2013 to 2.7 million in 2014.
Increase in financial inclusion
This year’s survey results indicate an increase in the number of financially included adults from 17.7 million in 2004 to 31.4 million in 2014. Banking increased from 46% in 2004 to 75% in 2014. The overall increase in financial inclusion from 61% to 86% over the past ten years is mainly driven by an increase in banking with more people accessing banking products driven by organic banking growth and SASSA roll out. Although an increase in banking is noted in 2014, the survey shows that the rate of growth in banking has dropped as indicated by bank account product usage remaining static at 75% for both 2013 and 2014.
Transactions
One of the determinants of deepening financial inclusion is the ability of South Africans to use transactional accounts to purchase/make payments for goods and services and electronic fund transfers. The study shows that 27.2 million adults have transactional products, and only 12.9 million adults use EFT or bank card payments at least once a week or monthly. Almost 100% of the banked population have transactional products.
Savings
The study reveals that 7.3 million (20%) adult South Africans have savings products with formal financial institutions in 2014. Whilst the majority of those who are saving possess long-term savings products, it is a concern to note that only 44% of the salaried individuals have long-term savings or retirement products. The contribution towards pension funds has decreased since 2013 from 4.8 million (13%) to 3.9 million (11%) in 2014. This could be the effects from the perception or “talk” that the government will nationalise pension funds and other uncertainty surrounding Government Employees Pension Fund (GEPF).
Credit and borrowing
According to the survey, 13.7 million people have formal credit products in 2014 compared to 13.9 million people with formal credit products in 2013. While secured loans are on the increase, the increase in unsecured loans, at 40%, are mainly used for developmental purposes such as child education, building/extending homes and investing in business. Use of personal loans from a bank is on the increase with 1.6 million people in 2014 compared to 1.2 million in 2013. The study shows that 2.7 million people have a credit card in 2014, a drop from 3.1 million in 2013. 36% of adults have formal credit facilities from non-bank financial institutions which could be in the form of store cards, hire purchase (HP) credit, cellphone contracts and outstanding balance for a service offered. The survey indicates that borrowing from family and friends is on the increase at 3.7 million in 2014 up from 1.8 million in 2013.
Of the 56% of the adult population who do not borrow, 32% cited not having a job as a reason for not borrowing, while 31% did not want debt and 20% claim that they cannot afford to borrow.
The study reveals that 4.9 million people are showing signs of over-indebtedness, an increase from 4.7 million in 2013. 1.9 million people have applied to have their debt rescheduled and 1.4 million have had a garnishee or emolument order, while 2.2 million people have considered cancelling insurance and investment policies in order to pay back borrowed money.
Insurance – are South Africans over-insured with funeral cover?
While some growth has taken place in the insurance sector with 60% of adults having insurance, a significant increase has occurred with burial society membership at 32% in 2014 up from 20% in 2004, and formal funeral cover doubling at 33% in 2014 up from 15% in 2004. The increase in burial society membership is also evident from 25% in 2013 to 32% in 2014. 40% of adult South Africans do not have any kind of financial product covering risk with lack of affordability cited as the main barrier to uptake. The results show a decrease in formal insurance uptake from 7.8 million in 2013 down to 7.1 million in 2014.
Increase incidence of remitting through supermarkets
The incidence of remittance within South Africa increased from 20% in 2013 to 23% in 2014. According to the survey, 85% of remittances are conducted monthly with an increase by 22% in remitting through a supermarket (an increase from 1.8 million in 2013 to 2.2 million in 2014), while remitting through cellphones has increased by 15% (up from 1.3 million in 2013 to 1.5 million in 2014). Remitting by banks only increased by 4.2% in 2014 (an increase from 2.4 million in 2013 to 2.5 million in 2014).
Mobile money – Do South Africans find technology complicated?
There has been a substantial increase in the usage of cellphones since 2004, with 33 million adults using cellphones in 2014 up from 12 million in 2004. However, despite the increase in usage of cellphones at 90% in 2014, only 24% of the adult population use cellphone banking. Cellphone banking only increased from 8.3 million in 2012 to 8.6 million in 2014. Over one third of adults in South Africa find technology complicated to use for financial activities according to the study.
Are consumers beginning to understand their rights and responsibilities?
Consumer protection and financial education are fundamental to the financial inclusion agenda of South Africa. An environment of poor financial literacy, coupled with a lack of adequate consumer protection, is likely to encourage consumer abuse and inappropriate use of financial services. Users of financial services can easily be victims of unfair treatment by service providers, which is sometimes caused by opaque disclosure or nondisclosure of costs or conditions. However, FinScope 2014 reveals that about 4 million banked adults have switched banks in the past 12 months prior to the survey. Reasons for switching banks could be related to 55% of the adult population claiming to understand the benefits of banking products.
Conclusion
Overall there are 10 million unbanked people in South Africa. The survey showed that while savings is difficult due to low levels of income, most people prefer to save at home possibly due to high banking fees and a lack of confidence in the financial services sector. Although unsecured loans are on the increase, 40% of these are being used for developmental reasons. Funeral cover seems to be the most popular insurance taken by most South Africans. The number of excluded people has dropped to 5.3 million in 2014 from 5.7 million in 2013. 48% of those that are excluded reside mainly rural traditional areas. The challenge for financial institutions is to bring appropriate affordable services to those who are not banked.
FinScope
FinScope was launched in 2002 by FinMark Trust (www.finmark.org.za). Its purpose is to establish credible benchmarks on the use of, and access to, financial services in South Africa. It is designed to highlight opportunities for innovation in products and delivery. The FinScope survey is a comprehensive and national representative study on financial inclusion, looking at how people source their income and manage their financial lives. It has been implemented in 19 countries (11 in SADC, 5 non-SADC Africa and 3 in Asia). The FinScope survey is currently being implemented in 3 more countries in Asia and 4 in the SADC region (1 first cycle and 3 repeat surveys).
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Oxfam inequality report adds to groundswell of public opinion
With the launch of their inequality campaign this week, Oxfam have deepened the groundswell of opinion that includes billionaires, the IMF, World Bank, and millions of ordinary people. Their campaign report – “Even it up” – is a welcome addition to discussions around inequality.
In Africa, inequality slows poverty reduction. Despite Africa’s impressive growth, a business-as-usual trajectory means that Africa will account for 80 percent of the world’s poor by 2030. Inequality keeps millions in poverty. It also undermines growth and contributes to economic instability.
In this year’s Africa Progress Report – Grain, Fish, Money – we argued that growth in the agricultural sector could directly benefit the two thirds of Africans who depend on farming for their livelihoods. We urged African governments to boost agriculture in order to generate better, fairer growth for millions.
Oxfam’s report contains many useful recommendations on themes that we also support.
First, equity must be a core principle within the post-2015 development goals. Equity was a core part of the Millennium Development Goals (MDGs), but not explicitly so. And some countries progressed towards the 2015 MDGs despite growing inequalities.
Equity is critical to poverty reduction. We have already picked the low-hanging fruit on poverty reduction. Sustained progress in child and maternal health, for example, requires strategies to tackle malnutrition, extend basic health services to remote areas, and empower people to hold service providers to account.
An obvious starting point for post-2015 strategies therefore will be the identification of who is being left behind. The Overseas Development Institute and others recommend the use of rolling equity targets – three to five year “stepping stones” – that focus on narrowing disparities. These “stepping stones”, determined nationally, could focus on disparities across wealth levels, gender, and regions, for access to basic services such as health and education.
Second, fiscal policy can be used more effectively to protect the more vulnerable segments of society. Tax avoidance and evasion are global problems but hit Africa hardest, especially in the extractives sectors, effectively depriving people of health and education. The global community should give better representation to Africa in discussions on tax reform. In the meantime, Africa needs technical and financial support to build capacity for tax administration in order that it can also benefit from new OECD standards on tax.
African governments must reform their fiscal policies to benefit society’s poorest groups. Move away from taxes – such as value added tax – that disproportionately hit the poor. Move away from subsidies – such as fuel subsidies – which benefit the wealthiest most. Africa spends three times as much on energy subsidies than on social protection.
The stakes are high. As the Oxfam report rightly says, some inequality is necessary to reward talent, skills, and a willingness to innovate and take entrepreneurial risk. But today’s extreme inequalities block too many people from achieving their true potential. That is a loss – not just for the individuals, but for society too.
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At UN conference, top officials urge greater development assistance for landlocked countries
The international community must aid the world’s landlocked developing countries (LLDC) in pursuing their goals for greater economic development to transition from being landlocked to “landlinked,” Secretary-General Ban Ki-moon advised today, noting that only through comprehensive improvements in trade would such nations be best prepared to tackle the post-2015 agenda.
Speaking at the opening of the Second UN Conference on LLDCs, taking place from 3 to 5 November, in Vienna, Austria, the Secretary-General told more than 1,000 delegates that the world’s new plans to address global challenges “must take account” of conditions in LLDCs.
“We need greater regional integration. This will strengthen trade ties. It will increase economic groupings,” declared Mr Ban. “Regional integration can transform countries from being landlocked to ‘landlinked.’
There are 32 countries classified as landlocked developing, 16 of which are located in Africa, 10 in Asia, 4 in Europe and 2 in Latin America. Lack of territorial access to the sea, remoteness and isolation from world markets and high transit costs continue to impose serious constraints on their overall socio-economic development.
Eleven years since an action plan for the LLDCs was adopted in Almaty, Kazakhstan, exports have increased and tangible in-roads have been made in improving their share of global trade. But such gains have not been enough to boost the prospects of these countries, many of which are still on the bottom rung of the development ladder.
Notwithstanding a sharp drop in the number of children dying from preventable diseases and an uptick in the number of young girls in school, nine of the 15 countries with the lowest Human Development scores are landlocked.
In his address to the Conference, UN General Assembly President, Sam Kutesa, told delegates they had gathered to “take stock” of the progress made since LLDC states adopted the Programme of Action in Almaty eleven years ago.
“We should feel heartened by the notable progress that has been made in several key areas,” the Assembly President said, highlighting issues such as the harmonization of transport and transit policies and procedures with transit countries, the development of transport infrastructure, and the expansion of trade.
Nevertheless, he warned “deep-rooted and multifaceted structural challenges” still remain plagued the LLDCs, hindering the economic development of landlocked states.
“Export volumes, compared to imports, are still low, and are predominantly raw materials and commodity based. Critical physical infrastructure, such as roads, railways and energy is either lacking or inadequate.”
Citing the Secretary-General’s “sobering assessment” of the state of LLDC’s, Mr. Kutesa also observed that those countries were unable to meet their development objective on their own. In 2012, he stated, the trade volume of LLDCs had been only 61 per cent that of coastal countries while import and export costs were twice as expensive as those of their non-LLDC neighbours.
“With such statistics, it may be an understatement to say that LLDCs are swimming against the tide,” he added.
Mr. Kutesa, a Ugandan national, pointed out that he too was from a landlocked developing country and thus understood the direct importance of infrastructure development, transit and trade facilitation, and policy framework, in order to reduce prohibitive transit costs and enable LLDCs to fully participate in global trade.
“Emphasis must be given to deepening regional cooperation and promoting inter and intra-regional trade. Above all, there must be renewed political will to address transit limitations and other challenges,” he continued, stressing the need for LLDCs in receiving “sustained and unwavering cooperation from transit countries; financial and technical support from bilateral and multilateral partners; and firm commitments from the international community.”
The President of the General Assembly appealed to the gathered delegates to adopt a new Programme of Action at the end of the Vienna conference in an effort to boost the LLDCs competitiveness, stimulate their productive capacities, diversify their exports and “ensure a better future for their 450 million citizens.”
At the same time, in his remarks to the Conference, Gyan Chandra Acharya, the UN High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States, called for greater synergy between the LLDC development agenda and the ongoing discussion around the next generation of development goals.
“We have all agreed that the post-2015 development agenda would be transformative, inclusive and should ensure a life of dignity for all. LLDCs issues therefore rightly deserve due consideration in the formulation in the formulation of the next global agenda,” he stated.
“Let there be a call for actions that match the magnitude of the challenges of being landlocked.”
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African Economic Conference calls for investment in skills and innovation for the continent’s transformation
Knowledge and innovation are pivotal in Africa’s quest for sustained and inclusive economic growth and should therefore be encouraged based on both targeted government policies and private sector participation. This was the conclusion from the 9th Annual African Economic Conference held from November 1-3 in Addis Ababa, Ethiopia.
The conference, co-organised by the African Development Bank (AfDB), the United Nations Economic Commission for Africa (UNECA) and the United Nations Development Programme (UNDP), provided a forum for discussions among public officials, business leaders and academics under the overarching theme “Knowledge and Innovation for Africa’s Transformation”.
“African countries are aware that their development hinges on how fast and how well their citizens acquire the skills and technological competencies needed to be competitive in today’s global market,” said AfDB President Donald Kaberuka at the opening of the three-day meeting. Kaberuka was seconded by the Executive Secretary of UNECA, Carlos Lopes, who affirmed that ”African enterprises can only develop and influence the breadth and depth of industrial linkages if they harness (…) the skills and technologies needed to upgrade production processes, and identify market opportunities.”
“Capacities are not the same as capabilities. We have lots of capabilities; but we need capacities,” added Lopes, emphasizing the need to build capacity to transform growth into quality growth on the continent.
Abdoulaye Mar Dieye, Director of UNDP’s Regional Bureau for Africa, further emphasised the human dimension underpinning the innovation-growth nexus: He called upon governments “to make sure people are at the centre of the development process.” Participants discussed various priority areas for action in order to harness the development effects from innovation and technology, among which education policy and public-private partnerships featured prominently.
A panellist and researcher from Cameroon, Luc Nembot Ndeffo, explained that the low level of Africa’s innovation compared to other regions of the world depends on four main factors, namely weak institutions, poor infrastructure, a poor regulatory and institutional environment and an inadequate education system. According to Ndeffo, these factors form a vicious circle that keeps Africa in a state of underdevelopment compromising innovation opportunities.
Investing in education and women’s skills
In the opening session of the conference, the role of education in ensuring a higher pace of skill and technology development in Africa took center stage. In this context, the Ethiopian Minister of Science and Technology Demitu Hambissa portrayed the absence of a critical mass of university-educated manpower as a major impediment to innovation on the continent.
Adding to this point, the AfDB President Kaberuka affirmed that the skill deficit is exacerbated by the fact that “Africa’s stock of graduates is still highly skewed towards the humanities and social sciences, while the share of students enrolling in science, technology, engineering and mathematics averages less than 25 percent.”
The pivotal role of education in ensuring people-centred innovation was also highlighted by academics attending the conference: For example, Abdoulaye Seck from the Cheikh Anta Diop University in Dakar, Senegal, presented a paper on technology spillovers in the Economic Community of West African States (ECOWAS), showing that the spread of world technology will be conducive to local appropriation and innovation in ECOWAS countries if the latter’s human capital is strengthened.
Moreover, participants noted that there is a gender imbalance in developing entrepreneurial skills through education: “There is a clear gender dimension to the technological divide”, said Zuzana Brixiova, a Principal Research Economist at the AfDB. According to Brixiova, women have acquired simple employable rather than entrepreneurial skills, which, in the absence of more gender-inclusive education and vocational policies, will lead to frustration and an even more pronounced outflow of female workers into the informal sector.
Brixiova further highlighted that unemployment was recorded at 11.9 percent in 2012 and 2013, with young workers making up 50 percent of the unemployed. “Policy-makers should identify the factors that force many women in Africa to join the less productive informal sector, as well as seek to address why women get lower education attainments in several countries on the continent,” she said.
Generally, value addition in human capital is paramount for Africa’s ultimate industrial boom – and basic education alone will not suffice, according to Manitra Rakotoarisoa, an Economist at the Food and Agriculture Organization of the United Nations.
Leveraging the private sector for development
In addition to education policy, participants discussed the role the private sector can play in stabilising African countries stricken by conflict, political instability and natural or man-made disasters. These debates were stimulated by the report “Assessing Progress towards the Millennium Development Goals (MDGs) in Africa”, co-authored by the three conference organisers and the African Union and released on the second day of the conference.
The report argues that stronger partnerships and domestic financing, backed notably by the private sector, are key to meet the MDGs and ensure sustainable and stable growth in Africa in the post-2015 period.
“The private sector has a huge role to play in finishing the business of the MDGs and sustaining progress beyond 2015. In fact, part of the work will consist in making sure future investments are safeguarded in the face of crises like the one we are seeing in West Africa,” said the AfDB President Kaberuka, referring to the Ebola virus ravaging principally Sierra Leone, Guinea and Liberia.
During one of the plenary sessions on the “Role of research and innovation in enhancing productivity and competitiveness in Africa”, participants noted the lack of strategic public-private partnerships on education and skills development which contributes to undermine the continent’s efforts to bridge the innovation gap. Discussants also underscored that each country should develop a coherent innovation strategy with a clear roadmap based on its specific reality and situation to facilitate monitoring progress.
“It is going back to understand what are our comparative advantages, and then focus on those comparative advantages and build centers of excellence around it,” said Antonio Pedro from UNECA.
In its background note on this year’s African Economic Conference, UNECA argues that for African companies to tap into global value chains, they “will need to upgrade operational competitiveness, meet global technical standards and adopt world-class manufacturing practices – which require a level of expertise that is not readily available.”
The African Economic Conference is organised on an annual basis and builds on the general guidelines set out in the African Union’s Agenda 2063 and the African Common Position on the Post-2015 Development Agenda, which themselves portray technology development, transfer and innovation as premises for structural transformation and people-centred development in Africa.
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Can Africa expand its trade in the face of climate change?
Specific adaptation strategies, coupled with smart trade policies, could play a role in helping African economies ensure future climate-proof development pathways.
Africa’s share of global trade has increased steadily from 2.3 percent in 2001 – equal to roughly US$277 billion – to 4.6 percent in 2011 weighing in at around US$1 trillion. This amounts to a doubling over 10 years. However, while the continent as a whole makes up 20 percent of the world’s land, African economies currently account for less than five percent of global trade. The region clearly still has a long way to go to integrate into the global economy. Meanwhile, the ominous threat of climate change looms, a factor that could seriously stunt any future potential growth.
One of the clearest climate change impacts on trade will be on infrastructure and trade routes. Across the African continent, coastal sea level rise is expected to be 10 percent higher than in the rest of the world, and studies have shown that major port cities stand to undergo substantial damages to infrastructure. The port in Dar es Salaam, Tanzania – one the largest in East Africa – could experience asset losses of up to 10 percent of the country’s GDP or US$10 billion. Agriculture is another sector where climate change will take its toll. This will have significant implications for trade in foodstuffs worldwide. In sub-Saharan Africa alone crop yields could be reduced by up to 20 percent by 2050 under a two degree Celsius warming scenario.
Africa lost its status as a net exporter of agricultural products in the early 1980s when prices of raw commodities fell and production stagnated. Since then, agricultural imports have grown faster than exports, reaching a record high of US$47 billion in 2007. A brief glance at the continent’s natural resource and landscape statistics suggests that this should not be the case. Africa holds about 60 percent of the world’s uncultivated land and 65 percent of its workforce is engaged in the agriculture sector. Meanwhile, many countries in the region rely on natural resources as an engine for economic growth. But will African economies be able to make more of these endowments in the future when faced with the predicted grave consequences of climate change? The answer is yes. For lasting success, many African nations must pursue development plans that foster structural transformation, industrial productivity, as well as ecological resilience. Fortunately, some examples exist where countries demonstrate how food systems can be adapted to climate change and coastal zones safeguarded against further erosion.
At a time when the global economy needs to make a critical shift towards a low-carbon and energy-efficient development pathway, Africa could forge ahead in this respect, and simultaneously shore up some of its climate vulnerabilities. Based on an approach called ecosystem-based adaptation (EBA), the continent could generate ecosystem goods and services, with future climate-proof sustainable production and trade in mind. Examples of ecosystem goods include food – meat, fish, and vegetables – water, fuels, and timber. Climate boosting services range from clean air, clean water, the natural recycling of waste, to soil formation and pollination. EBA uses biodiversity and ecosystem services as part of an overall adaptation strategy to help people and communities cope with the negative effects of climate change. Unlocking the potential of this approach, however, will require various regulatory and governance changes at local, national, regional, and global levels.
Increasing trade in Africa through use of ecosystems goods and services
Can African countries use their ecosystems to protect the continent’s productive sectors from the negative impacts of climate change? Without sufficient adaptation and preparation for climate impacts, African economies could face damages equal to around seven percent of the continent’s total GDP, according to a 2013 Africa Adaptation Gap report. Beyond the exchange of goods, trade can also have unintended or unaccounted environmental impacts, which under certain scenarios can exacerbate the climate challenge. For example, increasing food production can lead to deforestation, resulting in less carbon sequestration. Such trade-offs may seem economically viable in the short term but are likely to be costly further down the line. This is where various governance mechanisms and global trade system come into play and there are ways to create win-win scenarios.
Natural resources such as Shea trees provide a range of ecosystem services such as carbon mitigation, soil stabilisation, and the production of non-timber forest products such as Shea butter. Burkina Faso’s second highest export product after cotton is the Shea nut. Issues related to the production of quality Shea butter, however, prevent the sector from securing even more gains from international markets. Consequently, in one national project 120 female workers were trained in high quality Shea butter production techniques. The training was a success; the women are now able to generate higher profits and each brings home around US$18 a month from Shea butter sales. The increase moves these individuals much closer to the average national monthly income of US$47 for a family of six. At the same time the participants are incentivised to protect five hectares of Shea trees and the associated ecosystem from destruction.
In Mozambique, ecosystem-based adaptation was used to reduce environmental damage along the coastline, which was largely caused by the felling of mangroves. Found mostly in developing countries, mangroves provide ecosystem goods ranging from food to timber and perform essential ecological functions. Mangrove degradation poses a serious challenge worldwide, however, with estimates suggesting these important ecosystems are currently being destroyed at a rate three to five times higher than average deforestation rates and resulting in economic damages of between US$6 and US$42 billion annually.
Key hotspots of mangrove loss are in Mozambique and Western Africa, where the coastal forests have been impacted by agriculture, dam construction, pollution, and tourism. In certain instances, however, the EBA approach in Mozambique helped to diversify livelihoods away from practices that resulted in environmental degradation. Communities were able to develop crab and fish farming businesses while also rehabilitating mangroves. In addition to stabilising the coastline, the restored mangrove habitat had the added benefit of reviving fish populations, providing another income from wild fish catches.
An “ecosystem-based adaptation for food security” is a subset of the EBA approach, and entails the harnessing of ecosystems services to enhance the productivity of ecosystems, address climate change, and build resilient food systems. An ecosystem-based adaptation strategy for food security can increase agricultural volumes through higher crop yields generating the potential for more sustainable trade and promotes ecosystem resilience in the face of climate change. In Zambia these approaches have resulted in surplus increases of up to 60 percent per household.
The ecosystem-based approach and the subsequent trade in ecosystem goods offers the opportunity to sustainably increase trade volumes. This is particularly true for African least developed countries (LDCs) where the bulk of people’s livelihoods is directly based on their natural environment. By working to scale up ecosystem goods and services African economies can simultaneously move towards sustainable development and climate resilience. To this end, good international policies that help to properly protect and market these ecosystem goods and services and international trade policies that recognise their value globally, will be important.
What needs to be done to boost sustainable African trade?
In addition to removing barriers to trade in various tradable ecosystem goods and services, there are a number of additional ways to boost sustainable trade on the continent, all the while addressing climate challenges. Potential actions would include granting reciprocal preferences and incentives for trade-relevant ecosystem goods and services in Economic Partnership Agreements (EPAs) currently under discussion with the EU. Strong preferences for goods derived from an EBA approach could also help to allay some of the concerns regarding unfair competitive advantages enjoyed by large European firms once such trade agreements are sealed.
It will also be important to ensure the inclusion of climate change assessments in all trade negotiations. Although many developed countries now require environmental assessments as part of any trade agreement that they enter into, these assessments tend to focus on national, rather than cross-border or global environmental impacts. In order to move to a more modern approach, which takes account of the reality of global value chains, various platforms such as the UN climate talks, the sustainable development goals (SDGs), or the multilateral trade community could offer support in this area. In particular, certain developing economies would need assistance in building the capacity to conduct such assessments. Completing country trade-climate assessments in developing nations would also be a useful exercise to understand the interaction between trade expansion and climate change impacts. For example, if a country’s comparative advantage is found to be in a low-carbon production system, then it could perhaps seek to establish trade preferences based on this finding. This would likely require additional capacity building that could be facilitated through existing international commitments around technology transfer and capacity building.
Evaluating the “demand pull” and “supply push” international incentives for tradable ecosystem goods and services will also be important. “Demand pull” mechanisms are measures that target changes in consumer behaviour. “Supply push” mechanisms work in the opposite direction, in other words, they provide subsidies or other benefits to encourage the production of goods in an environmentally friendly way. The ideal combination of incentives may vary by product or country. African countries should examine the potential benefits and drawbacks of each approach from global, regional, and national perspectives.
Another option would be to explore possibilities for endorsement of ecological production methods. Ecosystem-based adaptation or climate resilience production certification schemes could take place between trading partners either at a bilateral, regional, or international level. Granted, however, the bilateral level may prove to be an easier first step although this raises the question of generating a complex panoply of labelling schemes. African countries could also consider including “like product” verification schemes in trade agreements that do not harm national and local producers and at the same time ensure environmental accountability.
Climate change poses a significant threat to development objectives. As evinced by the latest warnings from UN climate scientists, no society or landscape will remain untouched from its effects, and colossal damages are foreseen for some of the poorest on this planet. There are ways to both limit further impacts and cope with consequences that are already locked in. Africa, with its vast natural resources and potential to leap frog over out-dated technologies and approaches, is well positioned to expand its trade through products derived from EBA strategies. As the world gears up to clinch both a post-2015 development agenda and a global emissions-cutting deal next year, it is worth investing in such strategies, which could help the continent achieve both sustainable development and climate policy objectives.
Richard Munang is Coordinator, Africa Regional Climate Change Programme, United Nations Environment Programme (UNEP). Jessica Andrews, Ecosystem Adaptation Officer, UNEP Regional Office for Africa.
This article is published under Biores, Volume 8 - Number 9 by the International Centre for Trade and Sustainable Development.
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Mobile payments to determine future of global economy
Half the global working age population does not have a bank account, yet six billion people have access to a mobile phone. Ninety percent of people in developing countries have mobile phone subscriptions and 84 percent have signed up to mobile broadband subscriptions.
This supports an upward trend in adoption of mobile payment technologies in developing countries, where many users now have a means to utilise previously inaccessible financial services via their mobile phones.
It has been predicted that mobile payment subscribers will reach almost 1.1 billion users by the end of 2015, with an annual 1.3 trillion dollars in global mobile commerce by 2017.
The growth of mobile data traffic in Africa is also expected to increase 20 times between 2013 and 2019, Latin America is forecasted to experience a 67 percent growth in mobile data traffic by 2017, and Asia Pacific will produce 47 percent of all global mobile data traffic within this same period.
On a global scale, mobile data traffic will surpass growth rates of Internet access, driven primarily by developing economies that are reliant on mobile data to access the internet. Mobile devices will continue to be more common than desktop or laptop computers in developing countries, signaling that mobile commerce will continue to dominate e-commerce.
Societies that have weaker financial systems with less regulation are quicker to accept m-payment technologies, with better consumer response than in developed economies, possibly due to different expectations than those in developed economies.
These emerging economies will face a range of growing pains as regulations and competition surface in markets where digital transactions represent the first ‘mainstream’ financial system. It’s unclear whether the current model will be sustainable.
It’s highly likely that emerging economies will bypass diffusion of credit or debit cards completely. Current trends have demonstrated a move directly from cash to mobile. In order to get a credit or debit card, individuals must go through a lengthy process and merchants must invest in hardware to accept cards. Using mobile payments typically just requires a basic mobile phone subscription in developing countries.
Mobile payments and mobile banking in developing countries will establish a financial system which will be led primarily by private sector telecommunication companies.
Banks will try to enter these new markets, utilising this technology, but in many areas, telcos are already dominating the marketplace. For example, Safaricom’s M-Pesa service in Kenya has already encompassed 92 percent of the market.
“If banks try to enter markets where they’re not very well known, they’re going to have to spend huge sums trying to gain market traction and convert customers, whereas telecommunications providers are there already. Most of the services available are heavily engrained,” said Markus Milsted, CEO of mobile payment solutions provider, Omlis.
“The natural synergy is that a telecommunications provider and a financial institution sign up together, to provide banking facilities through a mobile phone which is regulated by the bank, controlled by the bank, but there’s a joint venture partnership.”
Estimates say that there is over one billion dollars in cash being saved outside of formal financial services in Africa. A reliance on cash has been shown to initiate crime, but putting money into digital accounts may drive crime rates down and secure finances for those who never had access to protection.
Populations that have never had access to a bank gain will now have access to transaction services, bill-pay, insurance, and credit scoring through new mobile payment systems.
Traditional forms of currency aren’t likely to become obsolete anytime soon, but the number of people using them will diminish in the years to come. When it comes to decentralised systems like cryptocurrency networks and the introduction of new payment technologies, complex parametres will need to be implemented for global regulation of currencies and the management of new and emerging technologies.
Digital transactions will also shed light on previously unmonitored financial activity in emerging markets. Data will become available that can help economists develop a further understanding of how money flows between people and places.
However, financial services provided by unregulated and unpracticed private companies could also result in higher costs, monopolies, and inflation. Entire populations begin to rely on unregulated systems for storing their money, placing trust in an entity that may not be secure.
With the right technology and improved security, new opportunities become available to emerging economies, enabling new business development and individual progress, borderless transactions, and financial inclusion.
“The last 50 years has seen us accelerate massively, with profound changes in terms of actually using transactions and currency as a primary method of trade. So in terms of what the future holds for digital payments, we’re only beginning to see the start. I don’t think 2015 or 2016 will be the year of mobile payments, but I think it will be 2020 before we see the critical mass of mobile payments,” said Milsted.
“This is because of certain political, cultural and socioeconomic trends and the global world pace, and the fact that it takes a while to get that technology into the mass hands. The critical changing point will be when you take mobile payments at the merchant point of sale, where the merchant isn’t competing with the providers of the mobile payments, when there is a standardised approach and the mobile can be used by people of all types, generations, backgrounds, and creeds.”
Emma Thompson is Marketing Executive at UK-based Omlis Ltd.
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European Union says no to Kenya’s plea for export tax refund
The European Union has reiterated it will not issue tax refunds to Kenyan fresh produce exporters during the four months period ahead of the formalisation of the new Economic Partnership Agreement.
The exporters are currently operating under the General System of Preferences.
This has raised concern among flower exporters who say they might incur loses next year on export taxes for Valentine’s Day shipments which will start in December.
EU Trade Commissioner Karel De Gucht who met was in Nairobi last week told exporters to forget recovering their duty payments for October to January since the trading block does not provide for export tax refunds.
“EPAs has enormous potential which will be achieved if we ratify and conclude it as soon as possible. However, we cannot provide export tax refunds for the period Kenyan exporters will be paying duty as our laws do not provide for that,” he said.
Kenya Flower Council chief executive Jane Ngige on the other hand said the Valentines period accounts for 60 per cent of flower firms annual revenues.
“We are concerned because flower shipments to the EU are attracting huge taxes since the EPAs elapsed in October 1. We have already lost Sh100 million to export taxes for last month,” the Kenya Flower Council chief executive officer Jane Ngige said.
The previous EPA which allowed goods from East Africa duty free access to the EU market ended on October 1, committing Kenya to pay customs duties of between four to 24 per cent on its produce because of its lower middle income country status.
Tanzania, Uganda, Burundi and Rwanda still have full duty free quota access to the EU market owing to their least developed countries status.
The Kenya Association of Manufacturers chief executive officer, Betty Maina urged the commissioner to lobby the EU to sign the deal before end of January saying exporters are expecting to lose Sh670 million each month which has made it difficult to move goods to the EU.
“I understand your problems and wish to solve them as soon as possible. I expect Kenya to regain duty free and quota free treatment by January at the earliest,” Gucht said.
Foreign Affairs and International Trade Cabinet secretary Amina Mohamed said the joint EAC-EU negotiation meeting held in Brussels last month concluded on all outstanding issues. “The concluded agreement will provide legal certainty for businesses and open a long term perspective for free and unlimited access to the European market for EAC countries. They will now be able to focus on improving their economic performance without worrying about the potential loss of full duty free quota free access to the EU due their improving status,” she said.
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ECOWAS officials meet to discuss Africa Mining Vision
Public Officials from the Economic Community of West African States (ECOWAS) are meeting here in Accra to discuss the Africa Mining Vision (AMV) and the ECOWAS Mineral Development Policy (EMDP).
Ben Aryee, Advisor to the Minister for Lands and Natural Resources observed that the fiscal regimes on the African continent were not generating enough revenue for their respective economies.
He emphasized mining has the potential of contributing to the growth of economies but little has been achieved in the sector.
“We are not going to get different results if we continue to do the same old things with regards to how we have conducted affairs in the mining sector,” Aryee said.
Associate Economic Affairs Officer, Special Unit on Commodities of the United Nations Conference on Trade and Development (UNCTAD), Komi Tsowou said China has become a dominant force regarding the importation of minerals from Africa.
Speaking on the topic, “Global mineral commodity trends and their implication for Africa”, Tsowou observed that “China is increasingly becoming important in the mining sector on the continent as it is the leading importer of global commodity markets.”
The Asian country between2011-2012, he noted imported between 60 and 30 percent respectively of iron ore and copper from nearly 10 and 5 percent in 1995-1996.
Similarly, exports of minerals, iron ore and metals (MOM) from ECOWAS countries to developing countries, especially China he emphasized, have increased significantly between 2003 to 2013.
This situation, he noted creates a win-win situation for both sides as China gets minerals for its industrial use while African countries are able to access natural resource backed loans for developmental projects.
Tsowou observed that MOM price trends and commodity performance in resource rich countries within the ECOWAS sub-region led to improved economic performance, high correlation between commodity prices, export earnings and economic performance but said: “the transmission of these windfall gains to a path for sustainable socio-economic development has not been successfully achieved”.
Poverty levels on the continent, according to him were still high in spite of the increased Foreign Direct Investment (FDI) inflows to Africa.
The limited benefit from the resource boom on the continent he said could be attributed to highly volatile and unpredictable commodity prices, low value created at domestic levels, unequal distribution of resource rents, and vulnerability to high prices as well as the resource curse.
The UNCTAD Associate Economic Affairs Officer urged African government to as part of the short to medium term policy options adopt a strategic and policy development, increase the shares of the rents generated commodity production vis-à-vis revising existing investment or mining contracts, more efficient form of taxing extractives industries such as progressive taxation.
Others are to adopt policies to retain values locally, targeting a broadening and deepening linkages to the upstream, sidestream and downstream from commodity production as well as to put in place a win-win local content policies.
On the medium to long term measures, Tsowou advised African countries to adopt policies that would harness windfall gains from high MOM prices in the way that facilitate wider economic transformations and boost economic growth that was not driven by commodities alone and to invest in sovereign wealth funds to cope with instability in global commodity markets as well as to smoothen inter-temporal imbalances in domestic spending and revenues.
Coordinator for Third World Network, Dr. Yao Graham said his organization was committed to promoting a reform agenda aimed at optimizing the development value of Africa’s minerals whilst strengthening democratic accountability in decision making and responsiveness of states and companies to the conditions of mining communities and workers in the sector.
The rationale for the two-day workshop he noted was about knowledge sharing on how to transform the role of minerals in the economies of African countries.
Participants for the workshop are drawn mainly from a number of institutions in the main mining countries in the ECOWAS sub-region.
They include senior officers from mining and trade and industry institutions and leading members of mineral policy committees in the legislatures and the Africa Mining Development Centre.
The goal of the workshop is to contribute to making the AMV and the EMDP the strategic drivers of mineral and development policy in the ECOWAS sub-region.
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Investing in people-centred innovation and technology essential to Africa’s development
Innovation and technology can serve as a springboard for economic transformation provided they are driven by people. This was the message put forward by partners and participants at the closing of the 9th Annual African Economic Conference (AEC), which ran from November 1-3 in Addis Ababa.
Decision-makers and business leaders, economists and academics from across the globe met for the AEC to discuss how to harness knowledge and innovation to boost youth employment, foster the adoption of new technologies, and enhance Africa’s economic transformation.
“Investments in skills, technology, knowledge, and innovation will ensure democratic and responsive governance that can deliver effective public services and facilitate universal access to basic services, such as food and nutrition, water and sanitation, shelter, health and education,” pointed out Nkosazana Dlamini Zuma, African Union Commission Chairperson.
Innovation is seen as an essential component for the transformation of African economies, said Steve Kayizzi-Mugerwa, Acting Chief Economist and Vice-President of African Development Bank, who emphasised the need to be proactive and address the challenges Africa is facing. “We need to stop being lazy analysts and take our challenges for ourselves; stop wasting resources and implement our own ideas,” he said. “Africa must first understand where we are, what brought us here and then try to understand what to do differently to bring different results.”
Beyond technology and technology transfer, the role of innovation was discussed at the conference as a trigger for behaviour and social change. “Innovation is a key determinant of the ability of economies to sustain growth, and is critical to improving socio-economic conditions. Socio-economic transformation in Africa requires both adaption of existing technologies, and the development of home-grown innovations,” said Abdoulaye Mar Dieye, Director, UNDP Regional Bureau for Africa, UN Assistant Secretary General.
The continent can boost its development agenda by using technology and technology transfer creatively, participants argued, creating revenue opportunities for farmers, jobs for youths in urban areas and tackling a wide diversity of challenges, from climate change adaptation to disaster risk reduction. M-Pesa, an innovative mobile-phone payment system, created in Kenya and expanded to Tanzania, South Africa, Afghanistan, India and Eastern Europe, has had great impact on the lives of ordinary Kenyans. It has increased access to financial services to 19 million Kenyans, created jobs, and positively impacted savings and money transfer patterns. In just five years, M-Pesa decreased informal savings in the country by 15%, increased the frequency of transfers and remittances by 35%, and increased usage of banking services by 58% beyond the levels of 2006.
It is critical to address acute skills deficits to provide African youth and women opportunities to take part in these types of new economic activities and derive benefits from the economic growth in Africa, the participants noted. “Innovation and technology-oriented education is vital for sustained economic performance and competitiveness. It gives our youth critical building blocks to secure their future,” said Carlos Lopes, Executive Secretary of the Economic Commission for Africa. Continuous investments in education, research and development, structured on-the-job training programmes, and establishments of technical training institutes were also identified by the participants as ways of engaging the youth and boosting the participation and empowerment of women.
Governments, private sector, academia and the civil society need to act as complimentary entities and not as competitors in the development process. Creating strong links between all these different entities is required to ensure innovation results in scaling up, adoption of best practices, enhancement in inclusive economic growth and sustainable development.
Given the current population profile, with the majority of the African population under 20, conference participants underlined that the age of innovation for Africa is yet to come. Fostering innovative solutions and creating a social contract in which governments, private sector, academia, and the civil society use innovation to address the barriers of inclusive development and structural transformation is key to inclusive and sustainable development. This is critical to ensure moving from aspiration to implementation with Africa’s Agenda 2063, the 50-year vision for Africa, and the Common African Position on the post-2015 development agenda.
Since 2006, the African Economic Conference has been jointly organized by the AfDB, ECA and UNDP with the mandate to foster dialogue and the exchange of knowledge on economic issues and challenges facing Africa.
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Poverty reduction rate too slow in Africa, new report indicates
The newly launched Millennium Development Goals 2014 Report (MDG 2014) has assessed that although poverty rates in Africa are declining at an accelerated rate since 2005, the pace is still too slow to meet the poverty reduction target.
The report is a product of Africa Development Bank (AfDB) in partnership with United Nations Economic Commission for Africa (ECA), African Union (AU) and United Nations Development Programme (UNDP).
The publication was officially launched Saturday at the 2014 Africa Economic Conference, a three-day event that has attracted hundreds of experts from Africa and elsewhere to Addis Ababa, Ethiopia.
Josephine Ngure, the Resident Representative of AfDB in Ethiopia, said that the report produced a mixed bag of feelings, and indicated that there is still a long way to go before all the goals can be fully achieved.
“Africa has generally accelerated towards the MDGs despite its initial political, social and economic conditions. We must realize that these goals are very much about the betterment of human life and, therefore, they must be pursued until the very end,” she said.
“We have realized that despite an upward trend, income inequality is still unacceptably high, and gender disparities have continued to exist. We need to fight this because it continues to drag the continent down despite our achievements.”
According to the report, most countries are on track to meet the primary education enrollment target; however, Ayodele Odusola, the Chief Economist at the UNDP Regional Bureau for Africa, observed that the continent still struggles with low completion rates.
“Africa still has weak infrastructure that cannot support quality education – and funding also remains a major problem,” Odusola said.
“We need significant investment in the education systems to nurture the continent’s youth and make them more skilled and entrepreneurial.”
The Director of the Macroeconomic Policy Division at the United Nations Economic Commission for Africa, Adam Elhiraika, noted that Africa is now viewed as a continent on the rise – and that its positive contributions to the post-2015 development agenda is a sign of its increasing influence on debates that shape the world.
“Africa’s growth acceleration offers potential to offset, at least in part, the revenue shortfalls that some countries may experience as a result of declines in foreign assistance,” he said.
“Higher rates of growth and revenue can be achieved if illicit financial flows are curbed, public resources are used more prudently and policies implemented from evidence-based research.”
Africa’s poverty rates have continued to decline, according to the report, despite adverse effects of recent food, fuel and financial crises in the Euro zone.
The proportion of people living on less than US $1.25 a day in Southern, East, Central and West Africa decreased from 56.5% in 1990 to 48.5% in 2010.
However, this figure is 20.25% off the 2015 target compared to 4.1% for South Asia.
It also indicates that job creation is not growing fast enough to absorb youth in spite of resounding progress of African economies.
Unemployment is markedly high in North Africa, where 27.7% of young people in the labour force were without jobs in 2013 compared to 26.6% in 2012.
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Panelists highlight knowledge and innovation as critical for sustained growth
The African Economic Conference, jointly organized each year by the African Development Bank (AfDB), the United Nations Economic Commission for Africa (ECA) and the United Nations Development Programme (UNDP), opened on November 1 in Addis Ababa with the first plenary session focusing on the conference theme of “Knowledge and innovation for Africa’s transformation.”
Panelists established that, for Africa to meet challenges of water, agriculture, education, health, sanitation, environment, gender inequality and its participation in the global economy, increased scientific and technical knowledge is required, as is innovation. Knowledge and innovation are critical dynamics for Africa’s sustained growth, they noted.
The speakers also recognized that the region has become a knowledge society. For two hours, they highlighted the constraints to a broader sharing and better management of knowledge and innovation in Africa.
African Development Bank’s Acting Chief Economist and Vice-President, Steve Kayizzi-Mugerwa, outlined that knowledge and innovation are crucial for effective growth and sustainable development “but it must be planned, with strong leadership.”
He noted that transformation is happening in Africa and everywhere in the world, but wondered if Africa had truly harnessed the development benefits of technology. “Real transformation will only come with people. We need to move from inspiration to action. What is lacking is the implementation.”
Kayizzi-Mugerwa emphasized the key role that good universities delivering quality education can play in providing qualified resources to contribute to innovation on the continent.
Kayizzi-Mugerwa also underscored that, thanks to the Bank’s Ten Year Strategy, it has contributed to increasing supply of skilled workers across the continent, and has stepped up its support for technical and vocational training linked to specific needs in the labour market.
Adebayo Olukoshi, Director, African Institute for Economic Development and Planning (IDEP), said, “If all processes are sufficiently accompanied to drive transformation, an important area is the political space as well as systemic governance.
“If knowledge and innovation are to provide a development path out of poverty, there is an urgent need to strengthen science, technology and innovation (STI) policies, with emphasis on learning and innovation; strengthening human resources development and improving science and STI infrastructure,” he said.
Olukoshi also identified “smart industrialization, infrastructure management, maximizing traditional sources of financing, harmonization of curricula and revamping training programmes,” as ways to help achieve transformation.
For his part, Ayodele Odusola, Chief Economist and Head, Strategy and Analysis Team, UNDP Regional Bureau for Africa, recognized the mobile sector as a key transformational pillar. He stressed the need for the implication and expansion of mobile systems in vital economic sectors, as it contributes to enhancing agricultural productivity, promoting financial inclusion, improving women’s health and reducing child mortality.
Anthony Maruping, African Union Commissioner for Economic Affairs, expressed the need for stronger knowledge-sharing and strengthened human capital, with focus on “training people who can think.”
“There should be a flow of knowledge among Africans and with people from other regions in the world through partnerships,” he said.
Echoing other speakers, Lemma Senbet, Executive Director of the African Economic Research Consortium (AERC), also recognized that knowledge and innovation can help spark sustainable growth on the continent. “There is urgent need to strengthen science, technology and innovation policies, with emphasis on learning and innovation, promoting national and regional innovations systems,” he said.
Leading practitioners from the public and private sectors, as well as researchers from academia, also participated in the discussions.
The African Economic Conference runs until Monday, November 3.
Opening Statement by Carlos Lopes, United Nations Under-Secretary-General and Executive Secretary of Economic Commission for Africa – 1 November 2014
I am pleased to welcome you to the Ninth Session of the African Economic Conference.
Over the past nine years, together with the African Development Bank and the United Nations Development Programme, this conference offered a platform to learn, debate and enrich the African intellectual discourse. This year’s conference theme is “knowledge and skills for Africa’s transformation” a subject dear to our chairperson.
The continent abounds with examples of knowledge helping change the narrative. Kenya’s financial inclusion performance through mobile banking is now quoted worldwide. Cardiopad, invented by Arthur Zang, a 24 year-old Cameroonian engineer, enables heart examinations through tablets. The Saphonian, invented by Anis Aouini, from Tunisia, attempts to offer an alternative way to harness wind and generate green energy that can be converted to electricity. In South Africa, a pedal-operated, self contained, easy to assemble waterless toilet called the SavvyLoo is being rolled out to respond to the need for innovative sanitation solutions. Eneza (“to reach” or “to spread” in Kiswahili), a virtual tutor and teacher’s assistant on a low-cost mobile phone is making wave in East Africa. M-Farm, provides up-to-date market information and links farmers to buyers through a virtual marketplace and shared current agri-trends.
These innovations bode well for the future. However, supplemental work is still required to speed up the pace of creation as well as the absorption rate of new technologies and spread it to all sectors of our economies. I am encouraged by your strong turnout. Both young researchers and highly respected professors are here to make a contribution. Your respective institutions continue to create opportunities to engage and exchange with industry leaders from Africa’s emerging knowledge and technology-driven commerce. I cannot over-emphasize the importance of fostering a continuous dialogue between those who create knowledge and those who commercialize knowledge in the quest for structural transformation, industrialization and sustainable development of the continent. As you know, sharing has a multiplier effect on knowledge dissemination.
Arguably, one of the most important developments of the 20th century for enhancing economic development has been the emergence and establishment of the knowledge-based global economy. Africa has to be prepared. We can actually be net beneficiaries of this focus on the role of information, technology and learning as a determinant of economic performance. We can leapfrog. We can offer frugal innovation. Technology has important implications for our ability to identify and exploit opportunities to transform our economies and for the employability of our growing young population. In today’s knowledge-driven global economy, innovation and technology-oriented education is vital for sustained economic performance and competitiveness. In practical terms, innovation and technology-oriented education gives our youth critical building blocks to secure their future. It ensures their integration into the more productive sectors of an economy, and also gives them the capability to generate new sectors and products. In this context, the Common African Position on the Post-2015 Agenda is clear – no one is to be left behind. The continent is aiming for inclusive and sustainable growth that leads to the uplifting of each and every single African: we want simple households to be capable of building wealth, whether by establishing a competitive small business or by plugging into an industrialization drive. For this to happen, we have to upgrade skills and make them responsive to the employment demands.
A key challenge for many of our countries is mobilizing finance and investment to make the required reforms happen. The solution might come from building public and private partnerships, for instance, much of the job of re-skilling our labour force takes place at the level of structured on-the-job skills development programmes, in which business is a driving force.
Where needed, business is already finding enough skilled workers to start low-end value addition. This is good news but hardly heartening. We are only going to scale up industrialization if we respond to higher and sizeable skills demands. For that, we need more synergy and synchrony between public and private sector actors.
Capacities is not the same as capabilities. We have lots of capabilities; but we need capacities. We need capacity for strategic decision-making. Capacity for enhanced productive economic activities. Capacities for aggressive absorption and generation of knowledge intensive technologies. In one sentence: capacity to transform growth into quality growth. This is a fantastic challenge for an inter-generational group of African economists.
Download the full statement below.
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South Africa Economic Update: Fiscal policy and redistribution in an unequal society
More than 3.5 million South Africans are lifted out of poverty through fiscal policy, which taxes the richer in society and redirects resources to raise the income of the poor through social spending programs, according to a recently released World Bank Group (WBG) report.
The South Africa Economic Update: Focus on Fiscal Policy and Redistribution in an Unequal Society report explores whether fiscal policy reduces poverty and inequality. It offers an analysis which is based upon the innovative use of fiscal and household survey data to provide evidence on two main questions; how do taxes and spending in South Africa redistribute income between the rich and the poor, and what is the impact of taxes and spending on poverty and inequality? Against the backdrop of a high fiscal deficit and rising debt burden, it is essential that the government uses its existing resources effectively in the fight against poverty and inequality, according to the report.
Asad Alam, WBG country director for South Africa, said this report goes to the heart of the country’s most pressing challenges and speaks to how policies are working to support the National Development Plan’s (NDP) ambitious targets of eliminating extreme poverty and reducing inequality.
The report shows that the poorest in South Africa benefit from social spending programs. About 70% of outlays on social grants and 54% of spending on education and health go to the poorest half of the population in South Africa. Cash grants and free basic services lift the incomes of some 3.6 million individuals above $2.50 a day (PPP). The rate of extreme poverty, measured as the share of the population living on $1.25 per day or less, is cut by half from 34.4 to 16.5%. The child support grant and old age pension make the largest impact on poverty.
Fiscal policy is progressive and works to reduce inequality. By taxing the income of the rich proportionally more than the poor and using social spending to boost the incomes of the poorest more than 10-fold, fiscal policy narrows the income gap between the rich and poor. Before taxes and social spending the income of the richest 10% in South Africa is more than 1000 times bigger than the poorest 10%. After taxes and social spending, this gap falls so that the income of the riches 10% becomes 66 times bigger than the poorest 10%. This corresponds to a reduction in the Gini coefficient on income from 0.77, before taxes and social spending, to 0.59 after the impact of fiscal interventions.
The report also demonstrates that South Africa is having more success than other peer countries such as Brazil, Mexico, Argentina, Indonesia, and Ethiopia in using fiscal policy to tackle inequality and poverty. Despite the strides made by fiscal policy, because the income gap was so high to begin with, the level of inequality after fiscal policy is still much higher than it is in most other countries in the world.
Catriona Purfield, WBG lead economist for South Africa, said other polices are needed to complement fiscal policy so that the country can continue to reduce economic inequality.
Executive Summary
Fiscal policy and redistribution in an unequal society
South Africa has made progress toward establishing a more equitable society. Since the end of apartheid, the government has used its tax resources to fund the gradual expansion of social assistance programs and scale up spending on education and health services. It thus was able to reduce poverty considerably. But progress in achieving greater income equality has proved elusive. Inequality of household consumption, measured by the Gini coefficient on disposable income, increased from about 0.67 in 1993 to around 0.69 in 2011, among the world’s highest.
With fiscal space becoming more constrained, this Update explores whether the government is making the best possible use of fiscal policy to reduce poverty and inequality. It provides an analysis based on the innovative use of fiscal and household survey data to answer two main questions:
1. How do taxes and spending in South Africa redistribute income between the rich and the poor?
2. What is the impact of taxes and spending on poverty and inequality?
This Update is the first study in South Africa to use the Commitment to Equity methodology developed by Tulane University, which allows the impact of fiscal policy on inequality and poverty in South Africa to be measured and then compared with that in 12 middle-income countries that have used the methodology.
In answer to the first question, this Update finds that the tax system is slightly progressive, and spending is highly progressive. In other words, the rich in South Africa bear the brunt of taxes, and the government effectively redirects these tax resources to the poorest in society to raise their incomes. On the tax side, fiscal policy relies on a mix of progressive direct taxes – such personal income taxes and slightly regressive indirect taxes – that when combined generate a slightly progressive tax system. Direct taxes (personal income and payroll taxes) are progressive, since the richer deciles pay a proportionally higher share of total direct tax collections than their share of market income. And because these taxes make up a fairly high share of GDP, they help narrow the gap in incomes between the rich and the poor. Indirect taxes are slightly regressive: the four poorest deciles contributed about 5.0 percent of total indirect tax collections, compared with their share of 4.8 percent in total disposable income. This regressivity at the lower end of the income distribution largely reflects the impact of excises, as value-added and fuel taxes are progressive.
South Africa uses its fiscal instruments very effectively, achieving the largest reductions in poverty and inequality of the 12 middle-income countries. As a result of South Africa’s fiscal system, some 3.6 million people are lifted out of poverty, measured as those living on less than $2.50 a day (in purchasing power parity dollars). The rate of extreme poverty is cut by half. The share of the population living on $1.25 a day or less falls from 34.4 percent to 16.5 percent, reflecting the impact of cash transfers and free basic services net of taxes. Inequality goes from a situation where the incomes of the richest decile are more than 1,000 times higher than the poorest to one where they are about 66 times higher. As a result, the Gini coefficient on income falls from 0.77, where it lies before various taxes and social spending programs are applied, to 0.59 after these fiscal interventions are incorporated. Still, the level of inequality remaining is higher than what all other countries in this sample start with before they apply fiscal policies.
In sum, fiscal policy already goes a long way toward redistribution. Even so, the level of inequality and poverty in South Africa after taxes and spending remains unacceptably high. But South Africa’s fiscal deficit and debt indicators show that the fiscal space to spend more to achieve even greater redistribution is extremely limited. Addressing the twin challenges of poverty and inequality going forward in a way consistent with fiscal sustainability will require better quality and more-efficient public services. It will also require faster and more-inclusive economic growth to address the need for jobs and higher incomes at the lower end of the income distribution – to narrow the gap in incomes between the rich and the poor and to reinforce the effectiveness of fiscal policy.
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Executives: Smart carbon pricing policies can drive investment in a cleaner future
One hundred and twenty governments joined thousands of scientists in reminding the world today that climate change is a growing risk that is already affecting lives and livelihoods. They warned in the IPCC Fifth Assessment Synthesis Report that we need to reduce global greenhouse gas emissions quickly – by 40 to 70 percent by 2050 – to stabilize rising global temperatures and avoid the most serious economic damage.
Businesses and governments know this. They know how to cut emissions through energy efficiency, renewable energy, and sustainable land use, and they can leverage the money needed to finance a low-carbon transition.
The question is how to change economic incentives and disincentives so they can turn that knowledge into action that has a measurable impact on climate change.
It’s a challenge that forward-thinking investors, government officials, and business leaders are taking up. We spoke with business leaders during the World Bank Group/IMF Annual Meetings about solutions, particularly about carbon pricing policies that could incentivize low-carbon choices.
The executives – including from pension funds AP4 of Sweden and ERAFP of France, the international asset management firm Amundi, and the global technology company Alstom – talked about the need for consistent, meaningful carbon pricing; flexible policy frameworks that allow for innovation in how businesses lower their emissions; links between the diverse carbon pricing systems being developed around the world; and complementary policies, such as binding targets for energy efficiency and renewable energy.
They also discussed the importance of corporate disclosure of climate risks and greenhouse gas emissions to help investors and business leaders direct capital toward low-carbon choices, and the impact that requiring disclosure could have.
Capital is available to finance the low-carbon transition, they said, but it will not flow at the levels needed for the long-term until governments provide consistent and credible policy signals.
“We have to start reallocating money from the bad to the good,” said AP4 CEO Mats Andersson, whose pension fund asks the companies it invests in to report on their emissions and climate change risks. “We see many companies taking this very seriously and putting it into any investment case they have.”
Transparency
Lowering emissions starts with risk assessment. It’s a concept basic to business practices and economics: calculate today what emissions will cost your business or community tomorrow and act accordingly.
For investors, however, that risk can be obscured when companies don’t report climate risks, such as the vulnerability of their supply chains and assets to natural disasters, resource limitations tied to climate change, and the impact of climate policies or mandates. A growing number of investors are encouraging companies they invest in to disclose their climate risks and carbon footprints to improve the companies’ and the investors’ decision-making.
Requiring climate risk disclosure, starting with public pension funds, would be in governments’ best interest, said Frédéric Samama, deputy global head of institutional and sovereign clients at Amundi. Governments should be asking themselves if public pensions funds are investing in polluting companies that will ultimately costs the country, its citizens, and its budget, and they ask why, he said.
Reporting is also connected with behavioral finance, noted ERAFP CEO Philippe DesFossés: If you have evaluations every six months or every year, and if reporting is present in daily corporate monitoring, it becomes an issue business leaders will act on.
Investing for the future
For businesses, a consistent price on carbon through cap-and-trade systems or carbon taxes provides the policy direction to shift their focus from immediate returns that could damage the environment and drain resources to a longer-term outlook that supports sustainability. It can drive investment toward a cleaner economy and help them identify both climate risks and opportunities for new investments or business lines.
To encourage low-carbon investment, carbon pricing and climate policies must be feasible, achievable, and not subject to whims or constant political adjustment, said Alstom U.S. President Amy Ericson. The most effective policies are also flexible so each business can respond in the most efficient way for its situation – which leads to innovation and business opportunities.
“A long-term, meaningful price on carbon is critical for technology developers to sustain the necessary effort to bring innovative technologies to realization, like carbon capture and storage, offshore wind and smart cities,” Ericson said.
When the EU had a strong price on carbon, businesses were quick to invest in technologies that would help them lower emissions and meet the challenges of the future. It was in their economic interest to embrace energy efficiency and cleaner energy sources. With the lower carbon price today, many businesses have less incentive to invest for the future.
Developing a leadership coalition
The World Bank and partners, with input from finance ministers, investors and business leaders, are developing a carbon pricing leadership coalition to help governments learn from existing carbon pricing structures and find effective ways to encourage sustainable business decisions. The coalition will be a platform for discussion, knowledge-sharing, and ideas, including on ways to link national and regional carbon pricing systems for greater efficiency.
Investors and businesses are already moving forward. Many work within carbon pricing frameworks in the nearly 40 countries and more than 20 cities, states and provinces with carbon taxes or markets in operation or planned.
Others know they are headed for a carbon-constrained future and can gain an advantage by preparing now. Companies with hundreds of billions of dollars in assets disclose their carbon footprints, and more than 150 large companies have developed internal “shadow” carbon pricing mechanisms to help guide their decisions for a future when they expect to have formal carbon pricing in place.
Internal pricing isn’t enough, though – governments have to follow up. “We need a price on carbon,” DesFossés said. “Once we have that framework, we will allocate the capital.”
Another important source of carbon pricing action and growing knowledge is the Partnership for Market Readiness (PMR). This week, representatives from more than 30 countries in the PMR are meeting in Chile to discuss their progress in designing and building the carbon markets and carbon pricing systems of the future.
» Climate Change 2014 Synthesis Report (PDF, 6.04 MB)
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PIDA Steering Committee Meeting and Workshop of the Business Working Group of the World Economic Forum
The Programme for Infrastructure Development in Africa (PIDA) held its fourth steering committee meeting to evaluate the current status, identify challenges and recommend ways to improve working processes and capacity building with aims to accelerate the implementation of the continental programme. The meeting was followed by an interactive World Economic Forum workgroup on means of financing and engaging the private sector.
In his welcome remarks, Prof Mosad El-Missiry, NPCA Energy Expert, highlighted the need for a proper reporting mechanism on the implementation work plan of each Regional Economic Community (RECs) in order to effectively secure grants, curb the ongoing capacity issues and effectively accelerate the implementation of PIDA priority projects.
Mr. Sylvain Maliko, AfDB Acting Director, Regional Integration and Trade Department (ONRI) on his behalf expressed his organisation’s readiness to mobilize resources as well as the private sector to finance projects in line with the 2012-2022 regional integration and development financing plan. He further expressed the availability of various lending schemes to push the Programme forward.
Mr. Winfried Zarges, GIZ Sector Manager, acknowledging increased government will and belief in enhancing infrastructure throughout the Continent, stressed the need to now deliver plans to accelerate the implementation and preserve the positive international outlook towards PIDA. He further expressed his Government’s readiness to continue support to the PIDA Implementation.
Opening the meeting, Mr. Aboubakari Baba Moussa, AUC Director for Infrastructure and energy said that the meeting offers an opportunity to take stock of progress since the inception of PIDA three (3) years prior. He stressed the need for tangible results and the need to accurately link PIDA objectives with concrete implementations. He further appreciated the innovative initiatives taken by some RECs in funding their priority projects and stressed the need for adequate monitoring of all activities in order to accelerate the process.
In dealing with the status of implementation of the 16 priority PIDA projects (PIDA PAP) as identified during the Dakar Summit, the meeting heard comprehensive progress reports from EAC, ECOWAS, ECCAS and SADC. The meeting redrafted and adopted a performance memorandum of understanding to be urgently signed by the RECs under the facilitation of NPCA. The session further stressed the need to reinforce the NPCA Monitoring and Evaluation process; The need for RECs to pursue their data collection in order to feed the Virtual PIDA Information Center (VPIC) which is now online; The need to urgently formalize a network of Communication experts in order to implement the communication strategy.
On the Status of the Implementation of the Joint Work Plan 2014 of the PIDA PAP Road Map 2014 – 2015 it was recommended that the NEPAD Project Preparation Facility IPPF) evaluate accurate costs of preparation and implementation; Target Ministers of Finance of countries involved and impacted by these projects to promote and advocate innovative measures to mobilize funds; Circulate the amended rules of procedure for comments. It was further noted that the NEPADD IPPF delivery needs to be improved.
Subsequent sessions noted that the Project Preparation Facilities Network (PPFN) which is a Network of 17 projects participate in NPCA and RECs technical meetings; In addition, a draft Financing Plan for the implementation of PIDA has been presented by the AfDB hired Rebel Consulting Firm.
The two day meeting was jointly organized by the African Union Commission (AUC) through its Department of Infrastructure and Energy and the NEPAD Planning and Coordinating Agency (NPCA) and was co-chaired by the African Development Bank (AfDB) and the GIZ. In attendance were representatives of RECs, private sector, multinationals as well as various stakeholders.
During the WEF working group session, numerous private sector actors expressed interest in PIDA projects and discussed concerns in regards to investment opportunities and risk, policy challenges, cross border applicability as well as the need to co-exist with public sector involvement.