April 2012

International Trade Can Help Africa Grow

Africa trade Optimism about Africa’s future is no longer scarce. The continent’s growth has been exemplary in recent years. Yet it is just as easy to find signs of distrust in the global economy.

Multilateral agencies insist that international integration offers opportunities for accelerating economic growth. Official parlance has become tame since the heyday of structural reforms in the early 1990s, but they have found subtle ways to argue that trade is good. The World Bank recently launched “Defragmenting Africa,” providing an exhaustive and exhausting list of policies to increase international trade within the continent.

Unsurprisingly the prescriptions can be costly. Removing import taxes might improve economic efficiency and enhance consumer welfare, but revenues can fall in countries with limited public resources. Although Africa harbors some of the highest trade taxes in the world (World Development Report 2009), the point is that there are tradeoffs. The same applies to policies that entail investments in infrastructure for “trade facilitation.”

What would Africa get in return?

Over half the countries in Sub-Saharan Africa subsidize fuel to protect consumers from high and volatile prices. But fuel subsidies are neither cheap nor likely to be sustainable (see the full analysis in the new Africa's Pulse).

Data for 2010-11 show that fuel price subsidies consumed, on average, 1.4 percent of GDP in public resources: The fiscal cost in oil exporters was almost two-and-a-half times that in oil importers. In the face of high (and rising) world fuel prices, a number of countries have raised domestic prices to stem fiscal costs.

For example, Ghana raised fuel prices by about 30 percent in January 2011. The Nigerian government removed the subsidy on gasoline this January, although a portion of the subsidy was subsequently reinstated. With oil prices likely to remain elevated, fuel subsidies will continue to weigh on government budgets in Africa.

But who benefits from fuel price subsidies?

Expenditure data for seven African countries show that the distribution of these subsidies is disproportionately concentrated in the hands of the rich. Richer households spend a larger amount on fuel products, and, consequently, benefit more than poorer households from any universal subsidy on these products. On average the richest 20% receive over six times more in subsidy benefits than the poorest 20%.

Can Africa claim the 21st century? When the World Bank’s Africa department published this book in April 2000, most observers were doubtful that African countries would ever be in a position to become emerging markets. That year, The Economist called Africa “The hopeless continent” and global attention was focused mainly on Africa’s problems: HIV/Aids in Southern Africa; the relentless war in Somalia; and, droughts in the Sahel—which gave the pessimists plenty of ammunition.

But over the last several years, something remarkable has happened: Africa’s fragile and conflict-affected countries remain a major development challenge, but besides these, a Stable Africa has emerged. Most of this Stable Africa has experienced continued high growth for a decade, and major improvements in social indicators. Africa is becoming an investment destination, and there is hardly a week which goes by without a major investor dropping by my office, to discuss the region’s economic fundamentals.

How has Africa changed over the last decades?

This piece was co-authored with Günther Schulze¹.

Kenya may have found oil in Turkana that could change the development trajectory for the country. In 2011, Kenya spent US$ 4.1 billion on oil imports, equivalent to approximately 100,000 barrels per day. For Kenya to become a net oil exporter, the resources in Turkana would need to be substantial and similar to those of Sudan or Chad.

If indeed Kenya has substantial oil reserves, will they benefit the country in the long-term?

Some observers are predicting similar problems as in Nigeria, Equatorial Guinea and many other resource-rich African countries where corruption has been amplified.

Others argue that this need not be the case. Countries as diverse as Botswana, Chile and Norway have shown that natural resources can be a blessing. If managed well, they can even support the fight against poverty by providing the resources needed to scale up the delivery of public services. In the last ten years, many of the world’s fastest growing economies, including in Africa, have benefitted from exporting natural resources.

So who should we believe?

Sub-Saharan Africa produces more than 50 percent of the world’s cassava (aka manioc, Tapioca, and Yucca), but mainly as a subsistence crop. Consumed by about 500 million Africans every day, it is the second most important source of carbohydrate in Sub-Saharan Africa, after maize. The leaves can also be consumed as a green vegetable, which provides protein and vitamins A and B. As an economy advances, cassava is also used for animal feed and industrial applications.

Described as the “Rambo of food crops” cassava would become even more productive in hotter temperatures and could be the best bet for African farmers threatened by climate change.

Cassava is drought resistant, can be grown on marginal land where other cereals do not do well, and requires little inputs. For these reasons it is grown widely by African small and poor farmers as a subsistence crop. However, cassava’s potential as an income-earning crop has not been widely tapped.

Cassava presents enormous opportunities for trade between areas with food surplus and food deficit. Currently, a large shortfall of the regional food supply is filled by cereals bought in the international market. For cassava to become an income-earning crop at intra-regional market for small farmers in Africa, two main obstacles remain: post-harvest processing and regional trade barriers.

Suppose all of Kenya’s borders suddenly close. Goods and people can no longer enter or exit the country through the port of Mombasa, Jomo Kenyatta International Airport or roadways. Quickly the lack of fuel brings economic activity—and daily life— to a stand-still. Tea and flowers rot in warehouses, and hotels shut their doors for lack of visitors.

Now imagine a situation where Kenya is trading with the whole world, producing world class products and enriching its citizens: consumers can enjoy cheaper products, and exporters exploit expanded opportunities. Given the choice, which scenario would you pick?

A more open Kenya is indeed possible. According to the “Growth Commission”, there have been some 15 economies over the last 50 years which managed to grow at the rate of 7 percent a year for more than 15 years. In doing so they were able to move vast numbers of their citizens out of poverty. These countries have a few things in common, including that they embraced the world economy through trade. Openness to trade encouraged international firms to invest. Over time, local firms caught up and eventually became world leaders, such as Samsung.

Since the start of 2012, expectations in Zambia have been running high: stable economy; a newly elected government; recently crowned African football champions. Everything seems possible. For the new government, fulfilling election promises will require well thought through development decisions. Are the decisions taken so far having the intended consequences?

The Zambian economy has been remarkably resilient, with growth averaging 6.6% in the past five years, supported by strong macroeconomic policies, high copper production and favorable prices. End-year inflation has been in single digits for four of the last five years, the debt and fiscal positions well within sustainable levels. In addition, since independence, the country has witnessed five peaceful elections leading to four changes in government. These factors auger well for the future economic prospects of the country. Or do they?

The phenomenal success of Kenya’s M-PESA system, which allows people to store and transfer funds via electronic accounts that they access via mobile phones, has raised hopes that mobile money may provide a way for the poor to access basic banking services. In an earlier post, I presented findings from my recent working paper with Aaron Thegeya, showing that a remarkable 73% of Kenyan adults use mobile money, and nearly a quarter use it every day.

We also show that savings with a simple M-PESA account is common, with 2/3 of M-PESA users reporting that they save in some form with M-PESA. We see some mild evidence that M-PESA may increase savings: controlling for various characteristics, those who are registered for M-PESA are 32 percent more likely to report some savings activity.

Why do people save with M-PESA when it doesn’t pay interest? A possible explanation comes from an experimental study on health savings (not involving M-PESA).

April 2012

International Trade Can Help Africa Grow

Who benefits from fuel price subsidies?

Big shifts and what they mean for Africa and Kenya

Will oil be a blessing or a curse for Kenya? – Lessons from Indonesia and the rest of the world

Cassava as an income-earning crop for small farmers

Why Kenya needs a world-class port in Mombasa

Zambia: Decisions with unintended consequences?

Can mobile phones be used to "bank" the poor?

April 2012

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