Business reforms can spur economic dynamism in the East African Community
East Africa is famous for its breathtaking landscapes and its unique concentration of wild animals. Could it also become as famous for its dynamic economic development?
In 2009 I came to Tanzania to work on tax harmonization in the East African Community (EAC). The Common Market Protocol was about to be signed and one of the biggest goals was to tap into the economic potential of the region by facilitating (cross-border) trade and improving the business climate. A year later, the five Partner States of the East African Community ratified the Common Market Protocol in order to realize “accelerated economic growth and development through the attainment of the free movement of goods, persons, labor, the rights of establishment and residence and the free movement of services and capital”. The overarching goal of the East African Community is to achieve sustainable economic growth in order to increase employment and reduce poverty.
Over the last decade Montenegro has trebled its gross national income (from $2,400 in 2003 to $7,160 in 2012), has reduced its national poverty headcount from 11.3 percent in 2005 to 6.6 percent in 2010, and enjoys the highest per capita income among the six South East European countries.
Despite this considerable progress, however, Montenegro remains a country in need of a new economic direction. The global financial crisis has exposed Montenegro’s economic vulnerabilities and has called into question the country’s overall growth pattern. The period between 2006 and 2008 was characterized by unsustainably large inflows of foreign direct investments (FDI) and inexpensive capital, which fueled a domestic credit consumption boom and a real estate bubble. When the bubble burst in late 2008 and in 2009 real GDP shrank by almost 6 percent, triggering a painful deleveraging and a difficult recovery that is not yet complete. With the base for Montenegro’s growth narrowing and the country’s continued reliance on factor accumulation rather than productivity, it has become clear that this old pattern cannot deliver the growth performance seen just a few years ago.
So, what kind of growth model can drive Montenegro’s next stage of development in the increasingly competitive environment of today’s global economy?
As spelled out in the recent report “Montenegro – Preparing for Prosperity” this country can go a long way toward returning to the impressive economic gains it was making just a few years ago by emphasizing three critical areas of development: sustainability, connectivity, and flexibility.
New fracking practices have increased the availability and decreased the cost of natural gas. This is having an enormous impact on energy systems around the world. There are numerous potential applications for natural gas including, but not limited to, use for transportation fuel, residential use, and electricity generation. Since the economic potential of exploiting this resource is so large it is likely that Canada, along with the US, will continue to ‘frack it all’ and reap the economic benefits on the global market. Other countries like China are joining in as well.
The largest increase in use of natural gas is for electricity generation. Natural gas fired power plants are appealing for many reasons. They can supply reliable base-load as well as peaking power. Also, they can be planned and built in less time than say, nuclear power stations, and for lower capital cost. Since fuel is available and cheap, natural gas power plants will continue to be built, and existing plants will continue to operate.
The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.To know more and share your feedback click here.
Who should be responsible for managing risk?
Sometimes those given the responsibility have the least capacity. People are generally capable of dealing with certain small risks. But they are inherently ill equipped to confront large idiosyncratic risks (household head falling ill), systemic risks that affect many people at the same time (natural disasters), or multiple risks occurring either simultaneously or sequentially (low harvest due to droughts followed by food insecurity due to a food price increase). To manage these different types of risks, people need support from other socioeconomic systems.
If the responsibility needs to be shared, who should share it?
Too often the first response to shared responsibility is to turn to the government for support. Government support, however, could require additional resources, possibly through increased taxes to ensure fiscal sustainability. Increased taxes could be burdensome for the economy and leave fewer resources for self-reliance (self-protection and self-insurance), which could be the most effective actions to manage some risks.
Moreover, government support can distort incentives, causing those affected by risk to take less responsibility for managing it (a situation known as moral hazard). For instance, some U.S. homeowners in disaster-prone areas do not buy disaster insurance knowing they can count on government aid if their home is destroyed. Hence approaches to sharing responsibility must ensure that risk takers or those exposed to risk retain some “skin in the game.”
- WDR 2014
“Save, you may not see Parliament again”, one two-term Member liked to tell us. In many cases non-performers with deep pockets are preferred than stingy doers. “As much as possible, avoid your constituents in the first three years and show up only towards the last half of your term, with plenty of money!”
In response, a Member of Parliament (MP) from one of the countries where Mwananchi works said, “You need to put premium on leadership”. In other words, we should not expect leaders to deliver the change we want if society encourages them to pursue perverse incentives to attain and remain in office, and to achieve solutions to collective action problems.
Looking at the backgrounds of MPs in many countries in Africa, you find that some MPs have been activists in civil society, respected civil servants or faith leaders, often suggesting that things would be very different if it was them that were in office. This is a clear case of a common African saying ‘one finger forwards, four fingers backwards,’ reminding us how easy it is to criticise without examining ourselves. This is why it should not be surprising that again and again we find that when the ‘self-imagined’ leaders get into public office they are equally caught up in the quagmire of perverse incentives as their predecessors.
A Bus Rapid Transit – BRT – system is coming to Washington, DC in the spring of 2014. The proposed corridor will connect Crystal City in Arlington with the Potomac Yard in Alexandria.
This is good news for DC residents, who are currently dealing with the worst traffic in the country. DC commuters lose an average of 67 hours per year because of congestion, resulting in an additional 32 gallons per year per commuter of gasoline wasted.
BRT systems address traffic problems by creating dedicated lanes for buses. As shown in the above photo of Delhi, cars are physically restricted from bus lanes. This allows buses to travel faster than cars, making them a more attractive transport option for commuters and reducing car usage. Basically, a BRT is an aboveground subway, except that it costs 1/10th the price.
Credit information sharing has been shown to have several benefits for the financial system. Reliable credit information can address the fundamental problem of asymmetric information between borrowers and lenders, it can alter borrowers’ behavior countering moral hazard, and improving repayment rates, and it can place banks in a better position to assess default risk, counter adverse selection, and monitor institutional exposures to credit risk. Perhaps most importantly, credit reporting can allow borrowers to build a credit history and to use a documented track record of responsible borrowing and repayment as "reputational collateral" to access credit outside established lending relationships. In addition, financial regulators can draw on credit reporting systems to understand the credit risk faced by financial institutions and systemically important borrowers, to define capital provisioning requirements, and to conduct essential oversight functions.
Despite the numerous benefits of information sharing for credit market efficiency, credit reporting institutions do not always emerge spontaneously. The Doing Business dataset shows that 26 percent of countries do not have any credit reporting institution at all (figure 1). Low and middle income countries have a relatively higher presence of credit registries while credit bureaus are more common in high income countries.
"It is almost never when a state of things is the most detestable that it is smashed, but when, beginning to improve, it permits men to breathe, to reflect, to communicate their thoughts with each other, and to gauge by what they already have the extent of their rights and their grievances. The weight, although less heavy, seems then all the more unbearable."
-- Alexis de Tocqueville (1805 – 1859). Tocqueville was a French political thinker and historian. His best known works include Democracy in America and The Old Regime and the Revolution, from which the above quote is taken.
- Alexis de Tocqueville