Étiquette : Africa

The illusion of entrepreneurship in Africa

Posted on by Georges Vivien HOUNGBONON

 In Africa, 60% of the unemployed are under the age of 25[1]. Both policy makers and the youth themselves have embraced entrepreneurship as the panacea against youth unemployment. As a matter of fact, governments all over the continent have implemented numerous projects to support this growing interest of the youths to start their own company. 25% of the projects are geared towards young people[2] and 35% of unemployed people seriously think about becoming entrepreneurs[3]. Is this growing interest in entrepreneurship actually becoming a reality? Could Africa be an exception to this reality? Are there any alternative options for youth employment in Africa?

The truth about entrepreneurship outside Africa

The lack of financial support is definitely one of the major constraints for entrepreneurs in the continent. If we have a look at the situation in other countries where access to funds and bureaucracy are more favourable to entrepreneurs, we see that new businesses have a high failure rate. For instance, in the USA, the past two decades have seen the development of some of the most successful companies (Google, Amazon, Facebook, Apple). However, statistically, new startups only have a 50% chance of becoming successful.

In the figure below, we can see that only 50% of startups have made a profit 6 years after their set up. The successful businesses do not always generate a very high turnover. Less than 1% of businesses have generated more than 5 million dollars in 6 years of existence. Having a successful business can be compared to a lottery. There are very few winners and it is all a question of luck. Even in a country where there are no major obstacles to entrepreneurship, only 1% of businesses will get the chance to expand and become a large company.

i
Source: Shane (2009). Donnees US Census Bureau

Some might say that it is too early to assess the success of a company after only 6 years. It is actually not true. In a survey covering over 22 000 businesses in the USA from 1987 to 2008, it is clear that 75% of companies do not have any stock-market value many years after their creation. Again, less than 1% of the businesses reach a stock-market value of more than 500 million US dollars. Whether we wait 6 years or more, it is a reality that barely 1% of small businesses become large companies. Our perception of entrepreneurship is altered by the way it is presented to the public. We only see the success stories and don’t know about the vast majority of businesses that don’t make it, just like in a lottery.

ii
Source: Hall and Woodward (2010). Donnees Stand Hills Econometrics

Playing the lottery of entrepreneurship is not a bad thing. The problem is that hundreds of job seeking people are under the illusion that their future lies in entrepreneurship. Moreover, as far as income is concerned, an employee is on average wealthier than an entrepreneur [4]. Multimillionaire entrepreneurs do exist but they are much rarer. As an employee, you are guaranteed to have a higher income than the average entrepreneur. How can we make entrepreneurship a solution for youth unemployment in Africa?

Is Africa an exception ?

In Africa, the extensive margin of entrepreneurship (traditional economic activities) is actually as significant as the intensive margin (innovations) because the middle class is growing progessively and consumes more goods and services. In industrialised countries, the technologies to produce these goods and services have already been developed in the food and agriculture, IT, transportation, financial sectors. Hence, it is very difficult for a local entrepreneur to succeed in these developing industries without any state protectionism.

As a consequence, in most African economies, the supermarkets are not the results of the merger of local shops. The market is dominated by multinational companies. It is the same situation in the fields of transportation, energy and digital technology. Multinational companies that invest in traditional sectors do contribute to create employment. However, all the jobs that were lost cannot be replaced because these companies have very efficient production technologies that require less labour force for the same production levels.

As a matter of fact, young entrepreneurs do not invest in these traditional sectors. They prefer investing in the intensive margin, especially in projects involving digital technology and renewable energies. This margin is the focus of the studies presented above on business performance in developed countries. It is by definition very uncertain because it is based on innovation. There is a high failure rate in this field, especially in the United States because there is not much opportunity for digital services and access to energy. Before the emergence of Facebook, many similar social networking sites and other innovative services tried their luck but were not successful.

In Africa, we do not have enough hindsight to assess the impact of the business incubators for entrepreneurs who try their luck in this lottery. Africa does not offer better opportunities for success in business than other developed countries. It is quite the opposite. African entrepreneurs are limited in their endeavours by difficulties in accessing finance and by the bureaucracy. What are the solutions for youth employment in Africa ?

A sketch of the alternative solutions to tackle youth unemployment in Africa

There is no miracle solution. However, African states can implement systems that worked in other developed countries such as France or the United States. In France, most major industrial groups (Renault, Peugeot, Airbus, SNCF, etc) employ thousands of people and work with many sub-contractors. The construction of a single ship is enough to guarantee employment to thousands of people for a decade. Four contracts will guarantee life employment for thousands of people. Industrialisation is one of the first solutions for youth employment.

It is a given that industrialisation is the way to go for Africa. But how should it be developed ? We suggest that industrialisation should be integrated into the new global value chains.[5] These global value chains have still got to be identified and integrated. This solution is not ideal because it is difficult to coordinate the activities of local agents and agents that are outside of the continent. This is why the integration in the global value chains is not declared. In fact, it accomplishes itself in the framework of an economy that entails comparative advantages in the production of certain intermediate goods and services. This is not the case in most African countries. As a matter of fact, a report from the Center of Global Development states that the labour cost is higher in Africa than in other comparable economies.[6]

The solutions for employment in Africa lies in the development of a local market creating competition between local industries. This strategy consists in awarding public contracts to local companies after an effective competitive procedure. With this procedure, the companies are encouraged to get the latest technologies in order to be more competitive. This procedure is very common in the United States, China, and in Europe to a certain extent. Another solution consists in merging companies in the informal sector in exchange for subsidised access to private funding. This is a good solution to protect young unemployed people in Africa from the wave of multinational companies that is spreading across the continent. These companies are attracted by an emerging middle class and seek new sources of growth. These solutions will not solve the issue of unemployment of millions of young African people. However, they will contribute to fight against a situation threatening social peace in African nations.

Translated by Bushra Kadir


 

[1] 2009 data by the BIT, as referenced in the 2012 African economic prospects http://www.africaneconomicoutlook.org/fr/thematique/youth_employment/

[2] Results of a survey by experts in the 2012 economic prospects in Africa.

[3] Data of Gallup World Poll (2010).

[4] Data from the Bureau of Statistics in Denmark .

[5] The report on 2014 economic prospects in Africa already mentionned this solution for Africa's industrialisation.

[6] Gelb et al. 2013. « Does poor means cheap ? A comparative look at Africa’s industrial labor costs » Working Paper N° 325, Center of Global Development


 

Access to housing in Africa

Posted on by Kouassivi Teico KADADJI

The current demographic boom in Africa has caused a rapid and dysfunctional urbanisation. Finding decent housing has become a serious problem. The continent has the fastest-growing urbanisation in the world. According to UN-Habitat, the urban population growth rate has reached 3 % per year. As a matter of fact, the urban population represented 40 % in 2009 and will reach 60 % in 2050 if the situation progresses at this constant rate. This uncontrolled urban growth has favoured the development and extension of precarious, unsanitary and unsafe slums. The population living in slums in Sub-saharan Africa has doubled between 1990 and 2012, from 102 million to 213 million (UNCHS data). Simon Walley[1] expects that the demand for housing will increase from 4 million in 2012 to 5 million in 2020. The public authorities have carried out many actions to make housing more accessible to disadvantaged people. Nevertheless, the problem persists and slums are expanding increasingly. Thus, only higher classes of the society can afford to live in decent houses. This situation deepens the gap between the rich and poor and requires a number of actions to guarantee housing for all. In this article, we shall look closely at the obstacles hindering the emergence of a real estate-market favouring poor people in Africa.

In an effort to counter the expansion of slums, public authorities, in South Africa and Ivory Coast, have chosen to build free or low rent social housing. However, these policies did not favour the targetted poorer population and civil servants took advantage of these measures. Due to a growing demand and lack of public financial ressources, these types of programs were not sustainable. So, the government decided to turn to the private sector for the construction of housing at a low cost. The State, in Angola for example, supported the private sector by giving a massive amount of subsidies. These programs were not very successful because they only took into account cost reduction and were not planned out and conceived for regional development. Most of the houses were built far from the main infrastructures such health centres, transportation and schools.

In theory, the demand for housing is almost unlimited. People who have a decent house wish for a bigger and more confortable one while those who do not have a decent house want one. However, this demand is not met in reality especially for financial reasons. According to the World Bank, in 2011, less than 5 % of the Sub-saharan African population took a loan to buy a house whereas in the USA or in Canada, this rate reaches 25 % to 35 %. These figures show us that the low-income households are excluded from the financial system because they represent a higher risk for credit institutions. The lack of financial culture can also explain why they do not have the sufficient ressources to be elligible for the acquisition of a house.

On the other hand, private real estate developers face many bureaucratic, regulatory and financial hurdles. Economic development is hindered by the slowness of administrative procedures in Africa, specially in the present case. Many social real estate development projects are blocked by regulatory constraints to access to property (which are rare and expensive in the urban areas). Furthermore, it is difficult for real estate developers to obtain long-term funds because credit institutions are quite reticent to finance social construction projects. In addition to these difficulties, the construction costs can be very high and qualified labor force and basic infrasctructures (such as roads, electricity, sanitation, etc) might not be available.

The failure of the attempts to solve the housing crisis in Africa reveals the importance of a better analysis of the needs of the population and a better consideration of the environment of the houses. We need a paradigm shift to implement sustainable housing policies on a larger scale. A policy that will involve all the operators in the sectors in different fields and take into consideration key-factors, such as real estate availability, types of leases authorised, funding of the sector and construction of infrastructures. Many experts will have to be consulted : demographs, land planning specialists, economists, insurrance providers, civil engineers, road specialists, etc.

Moreover, given that public ressources will not be sufficient to fund the housing needs, a collaboration with the private sector is necessary. Superficial subisidies to the private sector will not be efficient. The solution here is to implement incentive measures which will have a leverage effect. Public authorities should develop a positive environment for private investors and set specific rules and regulations to garantee the stability of the system.

The first step would be to secure and develop property. In fact, the property regulations are highly insufficient in Africa because they are made up of a combination of customary and state norms. Thus, the issuance of property titles are undoubtedly very difficult and property law lacks clarity. In some countries (such as South Africa, Uganda and Ghana), reforms shall be carried out to integrate customary norms in the national regulatory framework. Other regulatory measures including land parcelling following a cadastre model, simplification of registration procedures, and establishment of collective rights can be implemented. Once the legal framework is set up, the State should reorganise the land planning. Due to the lack of infrastructures, property developers often have to bear additional costs which affect the price per unit of the housing facilities. Morocco ideally dealt with this issue by creating a parapublic body specialised in accomodation and land planning.

The other major issue is the funding of the sector. On one hand, the private land developers need to invest large sums of money to start their projects. On the other hand, householders have to borrow on a long-term basis to fund the acquisition of the land. As far as mortgages are concerned, the African market is worth a trillion dollars (CSAE 2012)[2]. The State should encourage access to long-term financial ressources and implement risk-sharing instruments, in order to promote the developement of the market. Banks specialised in housing finance would be a good solution as this would enable traditional banks to have access to long-term ressources with higher risk guarantees. The traditional banks would then issue real estate securities on the market which would be guaranteed by mortgage loans and finance traditional banks. Thus they would then, in turn, refinance the households. Another solution would be to implement a public-private partnership by entrusting the management of the construction project to a private company. The State would secure the property market with the required authorisations, the donors would invest the first necessary funds and the property developers would implement their project on behalf of the company managing the project. To attract the remaining fundings, the private investors would be requested to fund the project as senior debt[3] with a guarantee from the promotors of the project, the State and the donors.

The State should also take interest in the informal solutions implememented by the citizens. For instance, many households rent their houses with no regulatory framework. Land owners can rent their unsanitary accomodation for a high price, or demand the payment of 2 years rent in advance (Nigeria), thus creating high distorsions on the rental market. However, the regulation of the rental sector will meet the needs of all social classes (especially the lower classes) and generate tax revenues for communities. Self-building is another example of informal initiative that started from the bottom. Households earning informal revenues buy plots and build their own houses, often of lower quality, thus favouring the emergence of informal settlements. The State should not stop these types of initiatives but set up a framework and regulate the sector with the collaboration of private investors.

It is very crucial for African states to rethink their housing policies in order to counter the current housing crisis in the continent. These policies should create a positive framework for private initiatives because pro-active public policies have shown their limits in other parts of the world. Public authorities should focus their efforts on securing operations, risk-sharing and implementing targetted incentives.

Translated by Bushra Kadir


 

[1] Mobiliser le secteur privé pour un meilleur accès au logement. Secteur Privé & Développement n°19 : relever le défis du logement avec le secteur privé. Proparco.

[2] CSAE. 2012. Research on Urban Mass Housing workshop. St Catherine’s College, Oxford, 26-27 mars 2012. Available on http://www.oxiged.ox.ac.uk/index.php/events/ urban-mass-housing

[3] A « senior debt » has specific guarantees and its repayment is a priority unlike other debts.


 

Developing cooperation between Cuba and Africa

Posted on by Rubrique Analyse Politique

cuba_africa1_leadWith the diplomatic offensives of the USA, France and the EU, Cuba has progressively returned to the group of nations. This political activism for Cuba raises a number of questions relating to Obama's new foreign policy, the Western counterparts and the economic and strategic opportunities for cooperation with the island.

So, where does Africa stand ? Historically, Africa has always maintained good relations with Cuba and the powers and the elite of the continent have always supported their anti-imperalist and anti-colonialist positionings of the country. Beyond this ideology, there is a real potential for an economic cooperation between Africa and Cuba. This cooperation is most likely to reinvent the cooperation between developping countries.

Africa and Cuba, a pact in the name of Third World solidarity

With the same causes producing the same effects, Sub-saharan African countries fought for independance in the 1960s and found in Cuba a strong ally. Fidel Castro has always supported African revolutionaries such as Amilcar Cabral, Patrice  Lumumba,  Agostinho  Neto and the Anti-Apartheid hero, Nelson Mandela. The support was not just in the spirit of revolution but Cuba actually sent military forces to fight alongside the freedom fighters.

The Cuban guerilleros also called the « Internationalists » have actually fought besides their African brothers in arms. « Cuba, an African odyssey » is an excellent documentary by Jihan El Tahri that explains the story of the independentists united to push the colons out of their borders. Che Guevara had undoubtedly a big hand in the African revolutions, especially in Congo. Laurent Kabila has always « boasted » about fighting besides the Latino-american legend.

Thus, the mythical Che went to the two Congos, Tanzania, Egypt, Mali, Ghana, Sekou Touré's boiling Guinea, in the 1960 in order to deliver a message to the oppressed population to gain their freedom from the colonialists.

The Ambush of France…before the intervention of the USA

During his recent trip to the Carribean, François Hollande met the Lider Maximo, Fidel Castro in May. This meeting is very symbolic of developing closer political relations between the two countries. Cuba still carries an enthusiastic old-fashionned socialist ideology but has opened access to its market since the past few decades.

To this end, the realpolitk of French diplomacy is very clear on the subject : Cuba is economically attractive. France is a regional power in the Carribean and does not want to let America take the lead in the short-term commercial and economic rebound when Cuba will be releaved from the international constraints. That is what is said officially.

In this geoplitical and economic lottery, it is in Africa's best interest to strengthen its relations with Cuba, given that the continent has a historical advantage and has the facility to develop cultural and trading relationships with the island.

Cuba and its Africa ally, an emerging partnership for development

Cuba has one of the best health systems in the world. During the Ebola epidemic, Cuban doctors, equipped with high quality devices, were urgently sent to the outbreak sources in Sub-saharan Africa. It is to be noted that the Cuban State sent 500 doctors and medical staff whereas China, France and the USA sent about half the amount.

It is crucial to encourage cooperation agreements between African countries and Cuba, even in the framework of a multilateral instrument carried out by the African Union to promote training of African doctors and the transfer of medical qualifications with the island.

The cooperation can also be extended to other fields, such as education. The Cuban education system is the most efficient and competitive in Latin America and the Carribean. A World Bank study showed that the investment in the education system and the training of the teachers in Cuba is unequalled. Thus « no teaching force in the region today (except possibly Cuba’s) can be considered of high quality against global comparators ». It is in Africa's best interest to learn from the successful model of education that Cuba has developped.

Africa has to focus on promoting the South-South cooperation in the fields of education, culture, tourism and commerce, whether it is on the national or institutional level. In an extremely divided world between the North and the South, it is all the more necessary to defend an idealistic cooperation between Cuba and other countries in the South or considered as such, for the sake of political realism and emergence of new modes of action.

Translated by Bushra Kadir

A New Approach to Land Tenure Security in Africa?

Posted on by Kenneth HOUNGBEDJI

kenya-105816_640Contending that tenure insecurity under informal customary institutions dampens incentives for investment and contributes to low agricultural productivity in much of Sub-Saharan Africa, policy makers have tried to formalize customary land use through the provision of de jure rights to users.

In this article we describe the challenge of low agricultural productivity in Sub-Saharan Africa and review the available evidence on the effects of the policy responses throughout the region. Our findings indicate that formalization of land rights alone is unlikely to bring agricultural productivity in Sub-Saharan Africa close to the level observed in the rest of the world. However, the time window used is often too short to credibly assess the effect of the land rights formalization programmes on agricultural productivity. Besides, the formalization of land rights in rural areas raises a number of concerns about the land tenure security of the least powerful and least informed.

While it may be too soon to assess the long-term effect of the land rights formalization programmes in Sub-Saharan Africa, other approaches to increase tenure security are tested. Read the full study.

Americanah, by Chimamanda Ngozi Adichie

Posted on by Lareus GANGOUEUS

Like most of the main characters in Chimamanda Ngozi Aidichie’s novels, Ifemelu is a young Igbo, Nigerian and African woman. After a long stay in the USA, she thinks about going back to Lagos, the city where she spent her youth and went to primary and secondary school. In a dull hair salon where she gets her hair plaited, she remembers her early years, her departure from Nigeria thirteen years ago, and her arrival in the USA. She recalls how difficult migration has been for her and how her naive expectations about this dreamland were so different from the Eden that she was promised at the university in Nigeria.

Through these very precise images, the reader dives into the world of Nigerian migrants in America. The author also gives a strict and distant perspective on the people who run or go to Mariama’s hair salon. During the events of the day and by an association of ideas, we will witness her stay in America.

 Why does the Nigerian youth leave ? 

Ifemelu left Nigeria to study in the University of Philadelphia. She is from the Nigerian middle class and an only child. Her father is a civil servant and was fired for some untoward behaviour towards his superiors. Her mother, converted to evangelism, faces the circumstances of life with a mysticity that Ifemelu devours with ferocity and distance. This is a recurring theme in the other novels of the author, such as « Purple Hibiscus ». It is interesting to see the journey of her mother through the different religious movements in Nigeria. This journey sums up the incongruities of the believers. Adichie, like Achebe, precisely observes the influence of protestantism on Nigerian people.

Her perspective of the society through this character might seem a little too harsh, if compared to the more nuanced analysis of the father of Nigerian litterature in « Things fall apart » where he leaves room for  the readers for their own interpretation. Ifemelu is a special character and particularly lucid and critical of the wrongs of the society she lives in. When her young aunt who is a doctor is financially supported by a high ranked official of the military, Ifemelu is the only one to criticise the « Mentor ».

These educated women are dependent on the financial power of these men. This situation is unbearable and will not cease to dictate Ifemelu life's choice. Why do they leave ? Obinze, who is Ifemelu's boyfriend, expresses very well the reasons why the African youth, fed by the Western culture, leaves the continent. The feeling of isolation and at the same time, the thirst to discover others and conviction that a better life is waiting in these fictitious worlds.

A difficult landing

For Ifemelu and Obinze, it will be very difficult to arrive in these lands of exile and asylum, such as the UK or the USA. Through these two perspectives, Adichie describes the life paths of the African youth confronted to these closed and idealised spaces. And the originality of this novel lies in the fact that it focuses on young people from the middle class leaving the continent. How do they survive in a constricted environment and confront the challenge of paying the rent when you do not even exist for the administration ? The love affair between Obinzé and Ifemelu will distend with the challenges of living in the West. Adichie beautifully describes this landing and attempt of immersion or evolution of the identity of the Nigerian migrants.

The issue of the identity

This issue is the main focus of the novel and the discourse of Adichie. How do we stay ourselves when others define us ? This question is analysed very powerfully before her departure to Nigeria and after the return to the home country through the USA and UK. The criteria of analysis will be the language, the hair, the race. Honest and haughty, Ifemelu wants to keep the African authenticity in the American land and does not want to be restricted to the « black » label, even though she fully understands the importance of this heritage in America. It is in America that she understands what it means to be Black. She accepts it because she has no other choice. She looks at America from a non-American African perspective. In her blog, she has a very sarcastic and ironic tone to describe Obama's America that is still scarred by the weight and suffering of the racial relationships. Americanah gives a good understanding of the Ferguson protests. Hollywood hides it well : the American dream has only one color. Ifemelu has an interesting opinion on the identity issues, and the tensions between African-American and Africans and the image of misery and compassion the white elite casts on the African continent.

The return to the home country

After giving it a lot of thought, Ifemelu decides to come back to Nigeria. But nobody understands her. The novel is organized in such a way that the reader has a global understanding of the challenges and realities facing the young woman at home. This decision is her own choice. The attitude toward the migrant is described precisely by the protagonist. Meeting with the long lost friends. Women's worries about the ideal marriage. The arrogance of Americanahs, i.e the young Nigerians who came back from the USA to make a fortune. The identity crisis is particularly striking when we observe the American references dictating the relationships between each one of them. Americanah ! Returning home also means being reunited with Obinze. This is a genuine novel where the characters are as important as the issues that are presented.

Conclusion

Due to the restricitions of a web article, this article is far from being exhaustive. Americanah is the reference for the African migration because it raises all the problems dealing with this issue. In my humble opinion, this is the best novel dealing with issues of migration. Chimamanda Ngoazi Adichie goes as far as rightfully criticizing a racial and often racist America. History weighs heavily on the society and ethnies. Obama is not enough to bring down the social constructs. Ifemelu has a thruthful perspective of the American society but she is also very critical of her own country. Feminism is also very present in the novel and is developped in a new form of public speaking. It is dealt with at the end in a subversive way. The author voices the opinion of the Nigerian middle class, like in her previous novels. I can see, without a doubt, that this book is brilliant, very well written and deals with deep issues. We had the opportunity to ponder on these issues at the Café des Livres, for the African Business Club.

Translated by Bushra Kadir


 

Is Public-Private Partnership adapted to the needs of developping countries?

Posted on by Georges Vivien HOUNGBONON

It is very important for African countries to fill in the technological gap with the rest of the world. Hence, development financing has become a major challenge in the continent’s quest for growth. This was indeed the theme of the conference on Africa’s development . The challenge has become even more apparent since the World Bank published a report on infrastructure entitled “Africa's Infrastructure: A Time for Transformation”.  In response to this lack of financing, many African countries have adopted projects involving public-private partnerships (PPPs) [1]. This infatuation with PPPs is justifiable according to the World Bank’s estimations on the infrastructure-financing deficit in Africa [2]. However, in consideration of the origins of this type of financing, it is proven that the specific contexts of certain African countries do not necessarily allow the effective implementation of PPPs.

In order to finance their infrastructure, countries traditionally issue treasury bonds, bilateral loans (between countries) or multilateral loans (from development banks) [3]. Until the beginning of the 2000s, these sources were used to finance public infrastructure projects, which were usually built and managed by governments. In this process, the State calls upon private companies for the construction of these infrastructures and bears all costs. For instance, in the case of a road construction project, the State would usually launch a tender offer to select a construction firm. Then, the Ministry of Infrastructures would take care of the maintenance and the use of the road [4].

However, this so called “Public Partnership” procedure raises two issues. On one hand, it does not encourage the construction company to produce a quality infrastructure, despite the control of a project manager. Therefore, the viability of these infrastructures is often lower than expected, which results in higher costs for the State. On the other hand, the fact that public services are non-profit entities does not either encourage the State to maintain or improve the quality of the service provided.

Public concessions have been envisaged as a solution to this issue. In this case, the State finances and constructs the infrastructure and then delegates its management to a private company. This is the case today in many areas that require public infrastructures financing such as ports, weighting stations and tolls, and the exports of certain agricultural commodities. However, these concessions do raise certain issues, especially with the transfer of risks created by demands or the costs for the State to the private operator [5].

 

Sans-titre

PPPs have been developed in order to share these risks. This risk- sharing strategy is essentially a warranty clause, which provides compensation from the government to private operators when the cash flow projections are affected by unpredictable business risks. Those risks could be related to a lower demand, or unexpected higher productions costs [6]. The factors could essentially discourage foreign investors to finance these projects as they have a very limited knowledge of the economic climate in these countries.

At the same time, the State is not completely aware of the risks associated with investments in infrastructure projects either. Typically, passenger traffics of an airport or a railway are difficult to predict, especially in a context where the market is poorly developed, and technological advancements may provide short-term alternative choices to consumers. The risk is even higher when contracts are signed within international regulatory frameworks beyond the control of governments and in environment where corruption and bad governance could skew the awarding and the execution of the contracts.

PPPs were initially used in countries like France and Great Britain, which have a fairly developed market, and a robust regulatory framework. Both of these factors minimize the occurrence of risks that could impede on the profitability of these PPPs. Moreover, another very important factor is the bargaining power between the parties concerned in the execution of PPP contracts. In the countries called into partnerships, the bargaining power is more balanced than it would be in developing countries, where the returns for the companies involved in the PPP contracts often exceed half of their GDP.

One solution to these problems would be to set up technical regional agencies in charge of reviewing and signing these contracts. This approach has the merit of relying on a wider network of markets, which gives it a bargaining power. In addition to that, it would attract expertise in the analysis and negotiation of PPP contracts while responding to the need of the states involved.

Translated by Harold AGBLONON

References
[1] Here are two articles written by Simel and Foly analysing PPPs in financing infrastructures
[2] According to World Bank report « Africa's Infrastructure : A time for transformation », the funds for infrastructures in Africa has been estimated to a total of 93 billion USD.
[3] We can also mention the funds transfered from African diaspora, which exceeds the development aid (concessional funds loaned at preferential rate by developed countries)
[4] The maintenance of roads is more and more delegated to private companies which collect the rights of way from the road users.
[5] This procedure is different from privatisation because the private operator does not own the infrastructure.
[6] The MIGA Agency of the World Bank generally deals with the non commercial risks.

Is Africa suffering from its Oil ?

Posted on by Adrien DE CALAN

The Impact of Oil in the Niger DeltaIn many Central African countries, oil has become a poisoned gift. Instead of benefitting from this ressource, many countries are undermined by the effects of corruption and clientelism.

In 1992, during the electoral campaign, the Congolese President Pascal Lissouba wanted « to transform Congo into Switzerland ». Two decades later, his promise has left a bitter taste. In this small oil-state, half of the population lives below the poverty line and the country was ranked at the 140th place in the UNDP human development indicator. Switzerland seems like a faraway dream.

However, on paper, Congo seems like a dreamland, as would think former President Pascal Lissouba. The country has a 5 % growth rate, over 4 million population, a big tropical forest around the Congo Basin in the north of the country, a coastline in the south-west, the majestic Congo river in the East, an ideal climate for agriculture and of course oil. With an estimated production of 263 000 barils per day, the precious black gold is at the heart of the Congolese economy. It represents 60 % of the GDP, 75 % of the public revenues and 90 % of the exports. This is exaclty where the problem lies.

As a matter of fact, many countries in Central Africa such as Congo-Brazzaville, as well as Equatorial Guinea and Angola are affected by the « curse of natural ressources ». British economist, Richard Auty, coined the phrase in 1993 to describe this paradox. The abundance of natural ressources has the opposite effect. Instead of encouraging growth, it slows down the economic development.  However, other countries that are less priviledged by nature are much more efficient economically.

Many political and economical explanations have been found to explain this situation. Oil (as well as other natural ressources) relies on a « rent economy », thus transforming the political game into a fight for ressources. In a recent article*, political expert Michael Ross associates three direct consequences to this situation. Oil rents support the authoritarian regime, promote corruption and clientelism and cause conflicts and civil wars (in Congo-Brazzaville and Angola for example).

Oil does promote a fast and relatively high economic growth. However, it makes the countries more vulnerable and more dependent on the volatility of oil prices. The appreciation of the currency can also have a negative impact on the exports in other sectors. Thus, imports will be favoured to the detriment of the development of the national production and diversification of the agriculture and industries.

A poisoned gift

If there are no institutional control or strong safeguard, oil can indeed become a poisoned gift. « The countries that depend the most on oil are the least democratic, the most corrupt and have the highest inequalities », bluntly states Marc Guéniat, survey officer for the Berne Decalaration (a Swiss NGO that analyses and identifies the role of Swiss traders in African oil-states). «If not a direct link, we can say that there is at least a correlation between oil and lack of democracy. However, some oil-states like Norway are models of democracy. »

Oil rents support the post colonial and neo-patrimonial African State. In this model, the ruling class mixes up public property with private interests and uses power to accumulate all the wealth shared by a small and priviledged class of people. A recent case of illegal assets under investigation in France involved Gabon, Congo-Brazzaville, Equatorial Guinea and Angola. Heads of State and their close relations and children are also involved in cases of concealment of stolen assets and accumulation of luxurious goods (mansions, appartements, vehicles) that are not justified by their positions and their declared income.

In these countries, the people who manage the oil sector and the economy are generally very close to those in power. For instance, in Congo-Brazzaville, Denis Christel Sassou Nguesso, son of the current President and deputy of the Oyo district, is also the Deputy General Director of the oil sector downstream of the National Oil Company (SNPC). In Angola, President Eduardo dos Santos' children also hold key-positions. Isabel or « Princess », the eldest one, is ranked by Forbes as the richest woman in Africa. She holds shares in many companies in Angola and Portugal. José Filomeno, her brother, manages the sovereign wealth of the country. Teodorin Obiang, involved in recent cases of illegal assets, is currently the Defence Minister and 2nd vice-president of Equatorial Guinea.

« One group of people controls the central bank in these States. They think their country is a playground. There are many latent conflicting interests, in Congo-Brazzaville for instance. The director of the SNCP (company managing oil contracts) is Denis Gokana. He is also the founder of the main private oil company in the country, African Oil and Gas Corporation, and signs deals with the State », claims Marc Guéniat.

Treating the disease

What are the solutions for this dreaded disease?

According to the Swiss researcher, the first and most important step is transparency. For him, "the public tenders should have clear and precise criteria. All the financial statements of public oil companies must be published. At the moment, the actions of these companies are very unclear. The financial statements of these companies are nowhere to be found. In other countries such as France, it would be unthinkable for public companies to not publish their financial statements and report their activities".

The Extractive Industries Transparency Initiative (EITI) was launched in 2003 to gather companies, NGOs and States willing to respect the norms on the improvement the governance of natural ressources. The countries mentioned above are far from being the best example. Gabon was removed from the ITIE because there was « no significative progress » on their part. Equatorial Guinea applied to join in 2007 but could not become a member because they did not fulfill the elligibilty criteria. Angola did not want to join the Initiative. Congo-Brazzaville has joined the ITIE and significative progress has been seen by the civil society. The State has indeed published the 2013 report on 31st December 2014 on all the oil revenues and its importance in the country's economy. The civil society claims that there is still a lack of transparency regarding some contracts, especially with Chinese partners.

In the long run, the reinforcement of the counterpowers and institutions is the solution. The oil found recently in Ghana should be beneficial to the country, according to researchers Dominik Kopinski, Andrzej Polus et Wojciech Tycholiz**. After many alternations and a peaceful succession to power, democracy is solidly implanted. The economy in Ghana is diversified and the civil society is very vigilant and demands a proper legal framework for the exploitation of oil. Thus, the country should be protected from the « disease of oil ».

Botswana is yet another example. The country's diamond industry is very successful. Even before this industry developped, the country had very stable institutions. Political leaders were determined to favour the national interest over any tribal interests. The authorities implemented transparent rules, such as the transfer to the public authorities of the tribes' rights to exploit mining industries. The budget is also managed responsibly. The diamond industry cannot fund any of the public expenditures.

The « natural ressources disease » is thus, nor automatic nor untreatable. As say World Bank experts Alan Gelb et Sina Grasmann***, « poppy seeds are not responsible for heroin addiction. The most important thing is to strengthen the people and the institutions in the exploitation of natural ressources».

The challenge here, is to use oil revenues as a lever for redistribution and investment in order to diversify the economy and develop education and health system. This challenge is huge but necessary for these countries where the youth is eager for a good education, employment and opportunities. The oil sector, alone, will not be able to take up this challenge.

Translated by Bushra Kadir

*Ross, Michael L., What Have We Learned about the Resource Curse? (June 20, 2014). Link: http://ssrn.com/abstract=2342668

**Kopinski Dominik, Polus Andrzej et Tycholiz Wojciech, “Resource curse or resource disease? Oil in Ghana”, African Affairs, 112/449, 583–601

***Gelb Alan, Grasmann Sina, « Déjouer la malédiction pétrolière », Afrique contemporaine 1/ 2009 (n° 229), p. 87-135

URL: www.cairn.info/revue-afrique-contemporaine-2009-1-page-87.htm.

Innovative development financing in Africa

Posted on by Pauline Deschryver

1852367421Many different financial instruments coexist to support the development of the continent. The main source of funding development in Africa is the public development aid which has already provided 125.6 billion USD dollars to 160 countries. Other sources that are not linked to any multilateral organisations also exist. Some are developped by the recipient countries themselves, such as public-private partnerships and recourse to debt. Other sources involve the transfer of funds by the African diaspora. According to the World Bank, these funds reached 351 billion dollars in 2011. It represents more than the double of the public development aid.

These financial flows have a mixed impact on development. The efficiency of multilateral development aid is questioned. A growing number of donors are intervening to increase the efficiency of multilateral aids, improve information and predictability and reduce the amount of multilateral funds while providing funds to more countries. Some vulnerable countries do benefit from voluntary aids called New Deals. It has been observed that since the 1980s and 1990s, private investments have taken the lead on public aids. More and more public-private partnerships have been developped by individuals and companies. Thus, more and more innovative sources of funding of development have been implemented. They are more consistant and predictable than the public development aid. These innovative systems involve public and private entities that fund local companies in a more sustainable way. For instance, Danone Communities is an investment fund that has shown great results. The aim of these new funding mecanisms is to reduce poverty and inequalities and compensate for the financial deficit, in accordance with the Millenium Development Goals. It is crucial to reach these goals in a context where the needs of the countries are increasing while budgets for public development aid are tightenning.

There are four main types of innovative funding.

1. Voluntary contributions : they are implemented by the Millenium foundation to improve health system. It also includes the funds immigrants invest in their home country.

2. Compulsory contributions : these are taxes on national and international financial transactions (taxes on air tickets and possibly on financial transactions).

3. Loan guarantees : these are pre-funding mecanisms on financial markets covered by a public guarantee.

4. Various market-based mechanisms such as auctions of carbon dioxyde emissions.

There is a controversy over taxes on financial transaction. This tax is an efficient way to raise money without weighing on financial markets. At a rate of 0.005 %, it could help raise 30 billion dollars annually. Nevertheless, this tax is very controversial because of its public opportunity.

Other innovative sources of funding include Output Based Aid programs of the World Bank and mechanisms of decentralised cooperation and carbon compensation by companies. Thus, the GERES NGO intervenes in Cambodia and Africa since 1987 to manufacture and sell solar ovens.

These innovative fundings are all the more important since public development aid is lessening. The African continent is attracting new donors such as China, Brazil, Russia. However, South-South funding follows a different set of rules. These countries invest in building infrastructures from the profits of natural ressources, develop the private sector and give priority to turnkey projects. They are more flexible and demand less in return from the countries they invest in. These new investors tend to develop the private sector and favour projects directly involving companies. These projects are on the rise but also more likely to suffer from corruption. It is difficult to gauge the actual impact of these investments for the development of the continent. These innovative sources of funding are crucial to compensate for the lessening of funds available to support development. Although the public development aid has a central place in funding the development of African countries, other innovative sources are essential to raise consistant and sustainable funds. However, the real issue here is whether these funds are really appropriate for the needs and economies of African countries.

Translated by Bushra Kadir

Will Africa benefit from its demographic prospects ?

Posted on by Georges Vivien HOUNGBONON

Africa's future is generally described by two figures : 5.2 % and 2 billion. The first figure published in the 2012 Africa Economic Outlook* is the average growth rate of the GDP in Africa from 2003 to 2011. The second figure is the expected growth of the population in Africa by 2050 predicted by the United Nations population division in 2012. These figures are systematically used in reports, articles and by economists. More and more studies are questioning the accuracy of the 5.2 percent growth rate. However, the demographic prospects do not seem to be questioned at all. Demography is a challenge and it is important to create economic prospects for the local consumers, investors and the State.

The latest population projection of the United Nations has stated that the African population should reach 2.4 billion by 2050. This is the double of the population in 2010. This projection makes Africa the most populated region in the whole world, way ahead of China and India. This situation is very challenging geopolitically and economically. Yet, in this article, we shall only focus on the economic challenges presented by this population doubling. Even if the current level of productivity were maintained, each person in Africa will have to be equipped with the same work tools we have today to maintain the income per capita. Thus, the doubling of the population will also combine the doubling of the potential market and eventually of the cash flow for investors. Hence, demographic prospects are undeniably a strong argument to attract investors.

population 1Source: Graphic presentation of the author based on data from World Population Prospects

Prospects: the 2012 revision of the division of the population (United Nations)

However, more benefit can be derived from this population prospect by increasing the productivity of the new generations of workers from now on. African workers should be equipped with more productive tools. The use of new information technologies, the construction of transport and energy infrastructure have to be taken into account as well. Still, this approach does not take into account the increase in the « human » productivity of the worker which is more important for the use of more elaborate and productive tools. Thus, it is all the more important to improve the general health and education of the population so that the investors, the population and the State can benefit from these demographic prospects.

Even though there has been some progress in human development in the past few decades, there are bigger challenges ahead of us. Here we are not going to focus on classic indicators such as lifespan, birth rate and schooling rate but on new levers that could be used to improve the productivity of the future generations of African workers.

As far as health is concerned, recent studies such as the one conducted by Nobel Prize winner James Heckman among Jamaican children have shown that the first two years of one's life are the most important. More specifically, this study showed that the psychologic and social stimuluses received by Jamaican children in their first two years of life have a significant effect on their earnings twenty years later. Actually, their salaries have increased by 42 % on average, suggesting that a good nutrition and a positive social environment in the first two years has an important impact on the future of children.

population 2

Source : Calculations of the author based on data from the World Health Organisation

There is currently a lack of reliable statistics on child nutrition in Africa. As we can see in the graph above, 35 % of children aged 5 or less suffer from stunting in 2010. The WHO expects this rate to decrease but it will still be over 25 % by 2025. One child out of 4 will still be stunted.

In a recent press release, the UNICEF has explained that stunting is not simply an issue of low height stature; but an indicator of their health and productivity as an adult. Neurologists also agree to say that stunting is correlated with a lack some cognitive abilities. Unfortunately, after the age of 5, this cognitive skills can no longer be acquired, thus limiting the child's future economic productivity; that is to say his welfare. Hence, it is all the more necessary to take action as soon as possible to avoid these deficiences for the upcoming generations. The children born from 2015 to 2030 will be 20 to 25 years old in 2050. They will be the next generation workers in 2050.

Education is another major challenge. Some progress has been made as seen in the graph below. Access to primary education has become universal as of the year 2012. Likewise, secondary and tertiary enrolment has slightly increased. However, the enrollement rates, especially in the teriary education, are still very low.

population 3

Source: Calculations of the author based on data from the UNESCO

Another issue is the mismatch between supply and demand on most of African labor markets. As a matter of fact, the more educated are much more likely to be unemployed. This does not imply that students should be discouraged from pursuing long studies and follow vocational trainings. A recent study by the International Labour Office** showed that in 8 countries in Africa, the new graduates who found a job earned higher salaries than the job seekers with lower level of education.

Therefore, the education level is not the problem. It is rather the type of education that determines employability. It is important to encourage studies adapted to the needs of the labour market and to improve the quality of the education. The State can implement specific education counceling programs for the youth in collaboration with the private sector and subsidise vocational training programs adapted to the specific needs of the private sector. This program can be funded by a specific tax on the revenues of companies or the companies can themselves fund these vocational training programs with the financial help of the State.

Above all, Africa is considered in this anlysis as a single nation and market. However, the situation is not the same across all of the African countries. Moreover, analysts often make a parallel between Africa's demographic prospects and China's. Still we believe that governing 2 billion people within a single nation is not the same as dealing with the same amount of individuals scattered in 54 different states. Nonetheless, the conclusions in this article do apply to the majority of African countries, though they have to be tailored with specific contexts.

Georges Vivien Houngbonon

Translated by: Bushra Kadir

* Studies by Morten Jerven on the quality of macroeconomic statistics in Africa and the African Development Bank publications and the inclusive growth in Africa study published by Afrique des Idées

** The inequalities are not studied here, given that we cannot predict its evolution.

Sources :

Elder, S., Koné, K. S. 2014. Transition vers le marché du travail des jeunes femmes et hommes en Afrique Sub-Saharienne. Work for Youth N°10. Bureau Intenational du Travail

Gertler, P., Heckman, J., Pinto, R., Zanolini, A., Vermeesch, C., Walker, S., Chang, S., Grantham-McGregor, S. 2013. Labor Market Returns to Early Childhood Stimulation: A 20-Year Follow-up To An Experimental Intervention In Jamaica. NBER Working Paper Series.

Morten Jerven. 2013. Poor Numbers: How We Are Misled by African Development Statistics and What to Do about It. Cornell University Press

Economic Outlook, 2012. Development Centre OECD.

Progress shows that stunting in children can be defeated, Communiqué de Presse. Avril 2013. UNICEF.

Data : the next frontier of Development

Posted on by Rubrique Analyse Economique

UntitledHow is the digital tide taking care of the digital divide? At the start of the new millennium, there was global concern that poor countries, especially in Africa, would be twice left out: economically and also technologically. Fortunately, the digital divide never became a global challenge. In fact, it is closing faster than anyone had imagined. In some parts of the developing world there are even budding signs of possible digital overtaking.

Kenya is one of few African countries driving in the fast lane. Over the past decade, it has experienced a sweeping “digital tide”. Today, Kenya has crossed the 30 million threshold of active cell phone numbers, up 29,000 from 12 years ago! Almost everyone can now afford to buy a phone, which sell for as little as Ksh 500 (or US$5) on the flourishing second hand market.break  People are also spending more on communication. in 2012, Kenyans have spent on average US$65 on communication, compared to US$45 a year ago.

Moreover, Kenya, East Africa’s powerhouse, has reached two other milestones in 2012 : 20 million users of mobile money and 15 million internet users, thanks largely to ubiquitous smart phones (see figure).

ict_penetration_0
World Bank calculations based on Communication Commission of Kenya

Now that everyone can own a phone, even in poor countries, is the mobile revolution over? Has everything that can be invented actually been invented – a claim famously associated with a commissioner of the US patent office in the 19th century?

We actually think the opposite is true: a new wave of innovation is starting, which will exploit increased connectivity to bring new solutions to old problems, including in development policy and economics. Here are three early examples of such innovation:

First is public sector accountability. In Kenya, a new service called “I Paid A Bribe” lets people expose bribery cases by reporting them online or by SMS. In less than one year, the site has reported corruption cases ‘worth’ over half a million dollars (mainly to traffic police and other government officials).“I Paid a Bribe” has helped to expose the problem publicly, which is the first step to tackling it. Similar services could also help monitor other areas of government performance such as quality of health services, teacher attendance and power services. The Kenyan government’s pioneering resolve to open-up public data at Opendata.go.ke is a good first step in making government and public services more accountable more broadly. The database is a gold-mine for developers and civil society that have already developed great uses.

Second is economic and social welfare monitoring. Previously, socio-economic data was tediously collected via paper surveys. The results were typically available to policy makers and researchers two-to-three years later when, frankly, they were often no longer relevant. In South Sudan, the National Bureau of Statistics and the World Bank have leveraged the expansion in mobile coverage to monitor how economic and social conditions are changing in near-real-time in the young nation. Last year, they conducted a monthly phone survey, with a sample of households, asking questions about their economic situation, security, outlook, and other topics.

This year, they used cellphone-enabled tablets to collect data on food security and market prices. Such high frequency, real-time data has never been available before. It is already revolutionizing how policy makers can identify problems and bring timely solutions. As Marcelo Giugale of the World Bank puts it: High-frequency data has the potential to do “to economics what genetics did to medicine”.

Third, the explosion in mobile phone and internet leaves behind ‘digital traces’ of human behavior which can help to better understand development challenges. For example, recent research by Harvard scientists using Kenya data, published in Science last month, shows how mobile phone data (tracking people’s movements) can be used to trace the spread of malaria. By conducting such monitoring in real-time, officials could for example send text message warnings to people traveling in high-risk areas and pre-position testing equipment and drugs.

There are many other examples of such use of ‘big data’ for economic, social and policy purposes. Google has demonstrated how search data can predict dengue breakouts in Brazil, India and Indonesia by monitoring how people search for dengue-related topics and symptoms. In Indonesia, the UN Global Pulse and a research firm used Twitter data to monitor food prices with surprising accuracy, finding that the way people spoke about rice on Twitter could be correlated with the actual market price of rice. As internet use increase in Africa, large amounts of digital traces will be available and useful for monitoring and tackling social problems also here.

brazil_dengue_activity
Google Dengue Trends

These examples are just the tip of the iceberg, with many more applications of new technology to be discovered. Traditionally, data was used and analyzed by “experts” within government and research institutions. Today, with more available (open) data, better visualization tools, and new, socially concerned IT developer communities, the universe of users is expanding fast. Groups of expert and volunteer computer programmers are making data accessible to the public, popularizing its use and finding technical solutions to real-world issues.

The digital divide is behind us. This generation’s challenge is to leverage the new “digital tide” for the public good. Some early innovations are already very promising and there will be many more to come.

An article by Wolfgang Fengler, lead economist in trade and competitiveness (World Bank)

Youth employment in Africa : what to do when informal is normal

Posted on by Rubrique Analyse Economique

carriere3In low-income African countries, most people cannot afford to be unemployed. Lacking any significant safety net, 70 to 80 percent of the labor force ekes out a living by working in low-productivity, informal farms or household enterprises. Private-sector wage and salary jobs have been growing at a fairly rapid clip—at 7.3 percent a year between 1992 and 2005 in Uganda, for instance (Exhibit 1)—but this growth is from such a small base that it cannot come close to absorbing the 7 million to 10 million young people entering the labor force every year. Furthermore, some of these young people are not qualified for the wage jobs that are available. As a result, most young people will end up working in the same place as their parents—small farms or household enterprises. Taking the example of Uganda again, under optimistic assumptions about economic growth and wage-employment creation, the share of the labor force in informal activities will only fall from 79 percent today to 74 percent in 2020 (Exhibit 2). In short, informal is normal.

youthEmploymentEassy_Ex1
Calculations by World Bank staff from household and labor-force surveys

The challenge of youth employment in Africa, therefore, is not just to create more wage and salary jobs—important as this may be—but to increase the productivity, and hence earnings, of the majority of young people who will be employed in informal farms and household enterprises. How can this be done? In general, workers’ productivity can be increased by (i) “demand-side” measures, such as better infrastructure and business climate, that lower the costs of production and thus increase the demand for labor; and (ii) “supply-side” measures that improve the skills of workers. In the case of farms, agricultural development is already geared toward increasing agricultural productivity. This will result in higher incomes but lower demand for labor in agriculture. This is how all economies develop; Africa is no exception. In the case of household enterprises (where the farm labor will move to), most are tiny—mom-and-pop or pop-and-son shops—that do not benefit from capital investment and economies of scale of larger enterprises. Small and medium enterprises that hire 5 to 20 people enjoy higher productivity. The problem is that very few of the household enterprises grow into larger ones; most remain very small or die.

youthEmploymentEassy_Ex2
Calculations by World Bank staff from household and labor-force surveys

There appears to be greater scope for supply-side measures. People with a primary education or less are disproportionately concentrated in the informal sector. By increasing the skills of those who leave school, we can increase their productivity in farm and nonfarm household enterprises. With higher skills, new entrants can increase their earnings by moving out of the farm sector and eventually the household-enterprise sector. Such an investment will not be lost if the worker moves out of the informal sector: they can take their human capital with them.

How can the skills of these new entrants be increased? Even among students who have completed primary school, a disturbingly high share has difficulty with reading and writing. A survey in Tanzania showed that, among seventh-grade students, 20 percent could not read a sentence in Kiswahili, 30 percent could not perform a two-digit multiplication problem, and 50 percent could not read English, which is the language of instruction in secondary school. One reason for these disappointing results is that teachers in public primary schools in Tanzania are absent 23 percent of the time. When present, they spend just over two hours a day teaching. And only 11 percent of the teachers had minimal language skills. Thus, increasing informal workers’ productivity by strengthening their skills requires reforms in basic education—making teachers more accountable to students, and politicians accountable for delivering on education outcomes.

Does this mean that there should be no effort on the demand side? No. Large-scale efforts are unlikely to work, especially if workers are eventually going to move out of agriculture. But it is possible for local governments to support the growth of informal nonfarm-sector enterprises by enabling them to conduct business—rather than suppressing them for violating property rights. Increasing access to financial services would also help these capital-strapped enterprises.

Finally, what about the wage and salary sector? Jobs in factories and services will be the final destination for all workers (possibly over a generation), so the growth of this sector is clearly important. Achieving this growth will involve a multitude of efforts to raise the competitiveness of the economy, with a better investment climate and improved infrastructure the main ingredients. Programs that support matching the skills of educated workers (secondary school and university graduates) to jobs will probably not see returns as high as those produced by simply creating more formal-sector jobs.

In sum, because most young Africans will work in informal farms and household enterprises, the challenge of increasing their productivity needs to be met by first, increasing their basic skills, which they can take with them when they move to new enterprises; and second, creating jobs in the formal sector by improving the economy’s competitiveness, so that this sector can absorb more qualified workers into a productive workforce.

An article by Shantayana Devarajan,  initially published on McKinsey on Society

Three development lessons from Asia

Posted on by Emmanuel LEROUIEL

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Much has been said about the Asian “miracle”. Countries like South Korea and Taiwan had between the fifties and the sixties levels of development similar to those of Ghana and Nigeria, and the following decades the Asian “Dragons” and the “Tigers” initiate a forced march to catch up with the developed world economically. A number of analysts welcomed the “enlightened dictatorship” of Asian leaders like Lee Kwan Yew (Singapore) or Park Chung Hee (South Korea) as the decisive factor of the catching-up process. By contrast, Africa was plagued by malicious or obscurantist dictators (Bokassa, Mobutu, Idi Amin Dada, Robert Mugabe, and the list goes on) who have led the continent to its bankruptcy. Is development a question of leadership after all? This theory that is still being defended by many supporters is simplistic in many respects. It reduces politics, which is the conduct of affairs in complex societies, to a matter of individuals, ethics and good intentions…

The essay of the economist Joe Studwell, « How Asia works » should then be welcomed in more ways than one. The author gives an explanation to the success of North-eastern Asia (Japon, South Korea, China, Taiwan) and the relative failure of South Asia (Thailand, Malaysia,  Indonesia, Philippines) through three policies which are, in his view, pivotal in the development process of a Nation.

According to Joe Studwell the structural transformation of North-eastern Asia economies is the result of a recipe made of three ingredients: free the agricultural potential of a country by the redistribution of lands in order to set a rural capitalist agriculture, reinforced by an affirmative development of support services (access to inputs and loans, efficient storage and distribution infrastructures); upgrade without delay the industrial value chain with state-of-art technologies and techniques to modernize domestic industry, with a state-driven and proactive policy compelling national entrepreneurs to take part to that effort in favor of modernization and international competitiveness; to use finance as a tool in service of the achievement of the two previous objectives and overlook short-run profits, profuse in speculative activities (land rent, property speculation) to prioritize long-term objectives like  the mastering of state-of-art industrial technologies. Those lessons from Asia are in contradiction with certain dogmas conveyed by the liberal vulgate especially by pleading for a preeminent state intervention in periods of economic catching up at the expense of the invisible hand of the market, short-termist interests of shareholders of developing firms being potential barriers to structural transformation.

Joe Studwell sees structural transformation of agriculture as the first ingredient of that Asian magic formula since the agricultural sector is employing a large majority of the population in poor countries. The transition from agrarian feudal societies to modern societies generally  goes, according to Studwell, through the stage of an intensive and productive agriculture on small plots of land (market gardening, peri-urban or subsistence agriculture) conducted by rural modest landowners. It would permit to increase the productivity of the largest category of workers with an impact on the global productivity of the country´s production factors. The result will come as a first accumulation of capital by this class of rural growers which will fuel a first consumption market and permit the emergence of a more important class of entrepreneurs. This transition was made possible, in most cases, by ambitious land reforms splitting the huge fields, property of big feudal landowners (Japan, South Korea, China, Taiwan) in plots of land (3 to 5 ha) redistributed to modest growers; conversely South Asian countries such as the Philippines, Malaysia, Indonesia still have not conducted land redistribution policies: hence big landowners are living from cash crops in large plantations (sugar cane, rubber trees, oil palm) enhanced by poor farm workers, with little effect on the economy and the emergence of a rural middle-class.

The second lever of success is the industrial transformation of the economic fabric, supported by a technological upgrading and added-value production processes. Joe Studwell pointed out that in the Asian cases, state intervention is crucial_ either by the means of creating state-owned corporations (China), either through the orientation and the framing of private firms (South Korea)_ in order to encourage, protect and drive the emergence of national industrial champions. The author brilliantly illustrates what makes the strength of Asian industrializing policies, in comparison with the failures of countries like Algeria. The condition for success of industry creation policies is to implement competition between several national operators and the inescapable export of their products (evidence of competitiveness in the international markets) both conducted by North-Eastern Asia.

Governments had no hesitation in forcing mergers of least competitive firms, later integrated to more viable groups.  For instance the growth of the electronics group Huawei went through the repurchase at a discount of less-seasoned competitors specialized in other market segments, and which thrived under the shade of Huawei.

In addition, State funding granted to domestic industries are linked to performance indicators indexed to industrial operators’ ability to sell their production abroad. The recipe for success lies in protecting domestic industries in their early years but also to establish an internal and external pressure to keep only the most competitive and not support lame ducks. Joe Studwell explains that the reasons why Soviet and Indian industries failed (before the reforms of 1991) are not to be found in public ownership of capital but in the lack of both competition in domestic markets and exports.

In the financial sector, Joe Studwell advocates a strong state control. In countries with low incomes, it is essential to allocate the little available capital to two main objectives: a rural intensive agriculture and an autochthonous modernizing industry, the two keys that put North-Easter Asia on track.

The examples coming from South Asia, by contrast, illustrate the noxious effects of a liberalized financial system, in the hands of a rentier class ( major landowners and oligarchs), either belonging to world finance or driven by easy and short-term profits which do not always meet development objectives. The volatility of foreign investments which led to the 1997 Asian crisis is distinct from long-term investments of national banks. As for the banks serving oligarchic interests, they particularly funded the housing bubble and speculative activities which did very little for the structural transformation of those countries.

The 1962 decree establishing the New Bank of Korea, under the tutelage of the Minister of Finance, had made this central bank a pivotal tool in the service of real economy designed according to development objectives, without falling in the trap of unrestricted money printing like many African countries. Preferential loans granted to domestic industries depended on the international clients’ credentials national operators were due to produce to prove their competitiveness on world markets. Banks which granted loans to those operators in order to fund their pre-purchased production abroad could refinance themselves from the central bank at below-market rates. Such measures will substantially contribute to the onset of a heavy industry in South Korea, followed by a state-of-art technology industry. The competitiveness of the South Korean operators-creditors permitted the sustainability of national debt. The 1997 crisis will eventually stabilize the South Korean economic landscape by sparing only the most economically and technologically viable operators.

 « How Asia works » is an essay which rehabilitates State action in the phase of economic emergence. Although the State is crucial in the process, it does not have a central and omnipotent role; it is stronger in its position as a regulator than as an economic agent. It is expected to make the rules fair, its strength should be oriented towards efficiency to take the best of private actors in order to reach the objectives of public welfare. An Asian lesson that could inspire several African countries striving towards emergence.

 

Translated by Ndeye Mane Sall