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Monthly Archives: May 2012

Africa 2050 – A Private Sector Perspective, By Abdoulie Janneh, UN Under-Secretary-General and Executive Secretary of ECA, 16 – 23 May 2012.


With growth averaging about 5% per annum since the turn of the Millennium, Africa has  moved from being the second slowest growing region to the second fastest growing region with the result that global research firms and leading news media are trumpeting our performance.  Of course, in some minds, the picture painted is rather too optimistic because the growth is occurring on the back of high commodity prices  and moreover while progress has been made towards achieving the MDGs, it is clear that there is still much to be done.

The optimism about Africa is justified and we should indeed be thinking about the long-term prospects of our continent particularly if we consider that the spending power an emerging African middle class is expected to rise to 2.2 trillion dollars in 2030.  The success of our efforts will thus hinge on the contribution of the private sector to economic transformation in the continent.

There is abundant evidence that the celebrated economic performance in Africa is being powered by privately owned companies across the continent and we should therefore take some time on mutual reflections on our aspirations and expectations from the private sector over the next forty years.  It is inevitable in doing so to examine constraints and challenges and means of overcoming them.

There can be no doubt that the state over-extended itself in the early post-independence years but the market fundamentalism of the past thirty years has also been costly in terms of equity, growth and development.  It is therefore appropriate, as we think of Africa’s progress over the next four decades that we give serious consideration to striking the right balance between the respective roles of states and markets in our continent.

Another key role for the private sector in Africa is that it must contribute to job creation.  The stark truth is that the recent growth in Africa has been largely jobless which means that millions of young people lack the opportunity for gainful employment with attendant consequences for equity and peace and security.  For the private sector in Africa to make its expected contribution to the transformation of Africa it must invest in activities that add value to the commodities and natural resources that abound in the continent, which is why it is particularly unfortunate that the share of manufacturing to Africa’s GDP has fallen drastically over the past few decades.

This leads quite naturally to the issue of imparting relevant skills to our young people.  All productive activity requires certain knowledge be it of processes, intellectual property or institutional arrangements. Without such know-how, it would not be possible for Africa’s youth to be productively employed in the private sector, yet our societies are not equipping them with appropriate skills for the modern era.  This points to the important role of the private sector in Africa to supplement efforts of government to provide training for young people particularly those that relate to manufacturing or the services sector including ICTs, banking, health and education.

While there are several remaining areas in which one can conceive of for private sector contribution to the economic transformation of Africa, let me conclude this part of my remarks by mentioning the important role of the private sector in financing development.  Aside from the obvious role of banks in financial intermediation, the private sector has a key role to play in mobilizing much needed resources for investment in farms, factories and infrastructure.  The truth is that with a few exceptions the private sector has not filled the gap in infrastructural investment promised by structural adjustment programmes.  Of course, the private sector needs to be socially responsible and must meet its tax obligations to enable governments provide common services.

We must admit that if the private sector, particularly its small and medium scale component is to play a meaningful role in the development process, it must be supported in a meaningful way to overcome critical constraints, such as poor access to credit, lack of long-term financing, poor infrastructure, as well as onerous regulatory burdens. Also significant in this regard are developments in the international economy which may derail growth in Africa through reduced foreign direct investment, official development assistance, trade earnings, and remittances.

ECA is committed to supporting Africa’s development including through direct promotion of private investment and public-private partnerships (PPPs) as well as through policy platforms such as the Pan-Africa Investment Forum.

 
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Posted by on May 18, 2012 in Uncategorized

 

Africa Investment Potential: Need for Sound Public Policy, By James Shikwati, Director of Inter Region Economic Network, Kenya.


The rise of the middle class and the increase of wealth in private hands in Africa signal great opportunities for growth for the continent and investors. Merrill Lynch and Capgemini consultants indicate that the continent has 100,000 Africans with USD 1 million to invest. Africa’s momentum towards productivity calls for enactment of sound public policies.

In the beverages sector; Diageo Plc, one of the oldest investors on the continent, sees the increased number of Africans with money to spend as a great opportunity for growth. It made the largest single investment in Ethiopia by a British entity with its acquisition of Meta Brewery and in Nigeria under Guinness Nigeria Plc made a USD 359 Million investment in 2011. In the last 5 years alone, Diageo has invested over USD 1.6 billion in Capex and acquisitions in Africa. The British alcoholic beverages giant first landed its Guinness beer in Sierra Leone in 1827. Heineken B.V. acquired 2 breweries in Nigeria in 2011; SABMiller entered a strategic alliance in 2001 with Castel Group and bought 20% stake in Paris-based group’s beer and soft drinks operations in Africa. Global giants are not the only ones who have sensed growth opportunities on the continent, African investors have taken proactive steps to tap into the emerging growth trends.

Nigeria, a member of the Economic Community of West African States (ECOWAS) was one of the leading investors in Ghana last year. Nigerian owned companies invested USD 1.5 billion in Ghana’s economy. In the East African Community (EAC), the retail sector has taken the lead. Kenyan owned Nakumatt supermarket has invested in three East African countries (Tanzania, Uganda and Rwanda) while Uchumi Supermarket has invested in Uganda and Tanzania. South Africa based supermarkets take the lead in driving intra Africa FDI through their leading chains such as Shoprite (in 16 African countries) and Pick’n Pay (in 5 African countries).

In Africa,  the term “investor” which was once attributed to foreigners from the West and Asia has gained a new meaning. An estimated 90% of Africa’s investment promotion agencies target FDI from their regions on the continent. Africa’s 313 million middle class population (34% of the population) that spend USD 2 – 20 per day have presented a new set of demands triggering an investments growth momentum.

According to the United Nations Conference on Trade and Development (UNCTAD) World Investment Report of 2006, intra-regional investment flows within Africa amounted to an estimated USD 2 billion annually in 2002 – 2004; USD 1.6 billion during 2005 – 2007; and hit USD 6 billion in 2007. Intra-regional investments are mainly driven from North and South Africa with East and West African countries as recent players.

Countries that have recorded significant interest in free trade area initiatives have citizens engaged in cross border investments. The African Union ministers of trade that met in Rwanda in 2010 pointed at the significant progress towards regional free trade in 4 out of Africa’s 8 Regional Economic Communities namely: the Common Market for Eastern and Southern Africa (COMESA); East African Community (EAC); Southern African Development Community (SADC) and Economic Community of West African States (ECOWAS).

Time is ripe for Africa to consider sound public policy elements and involve investors in continental policy formulation. Public policy elements include strategic offer of incentives to achieve desired targets. Such incentives include custom duties exemption for plants, machinery, graduated and reasonable corporate taxes and tax holidays, relief from double taxation, and location incentives through tax rebates for manufacturing companies.  Additional policy elements include fair competition (rule of law and not rule of man); long term impact of decisions to all people (not to serve interest groups at expense of the public); people freedoms (to uphold standards, safety and individual liberty) and strong government as a facilitator of good business environment (transparent regulatory framework).

It is important that African policy makers seize the momentum created by intra African investors and invite them on the table to share their challenges and solutions. African integration plans driven by the 1980 Lagos Plan of Action, the 1991 African Economic Treaty and the 2000 Constitutive Act of the African Union are largely driven by politicians and bureaucrats. Africa is not short of policies. However, they have always been viewed to be externally driven. Past experience with the World Bank’s Structural Adjustment Policies (SAPs) that reportedly increased external dependency and structural weaknesses in Africa’s economies previously made Africans skeptical. This is Africa’s moment to take charge.

 
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Posted by on May 10, 2012 in Uncategorized

 

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Has the discovery of natural resources especially natural gas and oil in Africa led to the Dutch disease? By Chofor Che, Wednesday, 2 May 2012


Christine Ebrahim-zadeh of the International Monetary Fund refers to a very popular viewpoint propounded by Miguel de Cervantes Saavedra, the celebrated sixteenth-century Spanish author of Don Quixote de la Mancha. The saying goes thus: ‘the gratification of wealth is not found in mere possession or in lavish expenditure, but in its wise application.’ This view was expressed at a time when ‘Spain enjoyed new-found access to a wealth of natural resources, including gold, from the Americas.’ According to Ebrahim-zadeh, Miguel de Cervantes Saavedra did not expect his own expression to be associated, with his own country, ‘symptoms of what later became known as the “Dutch disease,” a term that generally refers to the damaging ‘consequences of large increases in a country’s income.

In the 1960s, the Netherlands experienced a vast increase in its wealth after discovering large natural gas deposits in the North Sea. Unexpectedly, this ostensibly positive development had serious consequences on important sections of the country’s economy, as the Dutch guilder became stronger, making Dutch non-oil exports less competitive. This syndrome has come to be known as the ‘Dutch disease.’ Although the disease is generally associated with a natural resource discovery, it can emanate from any development that causes a large influx of foreign currency, including a great rise in natural resource prices, foreign aid, and foreign direct investment. Economists have utilised the Dutch disease concept to analyse such events.

How does this happen especially in oil rich African states? Let’s take the example of an African country like Equatorial Guinea that discovers oil. An increase in the country’s oil exports primarily raises incomes, as there is more foreign exchange inflow. If the foreign exchange were spent completely on imports, it would have no direct consequence on Equatorial Guinea’s money supply or demand for domestically manufactured goods. But suppose the foreign currency is converted into local currency and spent on domestic non-traded goods, what happens next depends on if the country’s (nominal) exchange rate—that is, the price of the domestic currency in terms of a key foreign currency—is fixed by the central bank or is flexible.

If the exchange rate is fixed, the conversion of the foreign currency into local currency would boost the country’s money supply, and pressure from domestic demand would push up domestic prices. This would lead to an increase of the ‘real’ exchange rate—that is, a unit of foreign currency now purchases lesser ‘real’ goods and services in the domestic economy, as was the case before. If the exchange rate is flexible, the augmented supply of foreign currency would lead to an increase in the value of the domestic currency, which also implies an appreciation in the real exchange rate, in this scenario via a rise in the nominal exchange rate rather than in domestic prices. In both situations, real exchange rate appreciation lessens the competitiveness of the country’s exports and, hence, causes its traditional export sector to collapse. This whole process is referred to as the ‘spending effect’.

Simultaneously, resources, especially labour and capital, would deviated into the manufacturing of domestic non-traded goods to meet the increase in domestic demand and into the growing oil sector. Both of these transfers would reduce production in the now lagging traditional export sector. This is referred to as the ‘resource movement effect’.

It is evident that these effects which played out in the oil-rich nations in the 1970s, when oil prices soared and oil exports rose at the expense of the agricultural and manufacturing sectors, are now playing out in oil rich African states. Similarly, higher coffee prices in the late 1970s, after frost damaged Brazil’s coffee crops, led to an increase in coffee sectors in producers like Colombia at the expense of the traditional export sector as spending and resources were transferred to the non-traded goods sector. Oil rich African states have also given less importance to the agricultural sector and have concentrated on oil concessions and agreements with the West.

Is the hindrance on the lagging traded goods sector like agriculture in Africa really a problem? Some economists do not agree especially if the higher inflows are expected to be permanent. In such a situation, they say, the Dutch disease may merely indicate the economy’s adaptation to its new-found wealth, making the term ‘disease’ a misnomer. The shift in production from the tradable to the non-tradable sector is simply a self-correcting mechanism, a way for the economy to adapt to an increase in domestic demand.

But other economists argue that even a permanent change is disturbing. When capital and labour, drift from one sector to another, industries are forced to wide up and workers have to seek for new jobs. This transition—no matter how short—is painful, socially, economically and politically. Economists also worry that a drift in resources away from manufacturing sectors that promote ‘learning by doing’ might endanger a country’s long-term growth potential by choking off a vital source of human capital development. The bottom line is that, irrespective of whether these changes are seen as a problem, policymakers especially in oil rich African nations like Cameroon and Equatorial Guinea must help the economy cope with these ramifications.

A plausible solution

What can policymakers in oil rich African states do? A lot will depend on whether the new-found wealth is temporary or permanent. In African countries that expect new resource discoveries to be depleted fairly rapidly, aid flows to be temporary, and terms of trade gains to be transitory, policymakers may want to protect the vulnerable sectors—possibly via foreign exchange intervention. The sale of domestic currency in exchange for foreign currency—that is, the build-up of official foreign exchange reserves—tends to keep the foreign exchange value of the domestic currency lower than it would otherwise be, helping to insulate the economy from the short-run consequences of the Dutch disease that will soon be reversed. But there remains the challenge of ensuring that the build-up of reserves does not lead to inflation and that the country’s additional wealth is spent wisely and managed transparently via, for instance, a central bank account or a trust fund.

In African states whose new-found wealth is likely to be permanent, policymakers need to manage the inevitable structural changes in the economy so as to ensure economic stability. They may want to adopt measures to boost productivity in the non-traded goods sector (possibly via privatization and restructuring) and invest in worker retraining. They may also want to continue to diversify exports to reduce dependency on the booming sector and make them less vulnerable to external shocks, such as a sudden drop in commodity prices.

Whether exercising caution in managing new riches or changing the course of the economy to adapt to new circumstances in oil rich African states, such wise application of wealth would, indisputably, have won Cervantes’s endorsement.

 
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Posted by on May 2, 2012 in Uncategorized

 
 
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