Time for Re-orientation
On September 16, 2015, the Organisation for Economic Co-operation and Development (OECD) released the world interim economic outlook – and after reading the report, there are many things of which to be concerned.
The slow progress of recovery in advanced countries and the economic slowdown in emerging economies, notably Brazil and China, are two main factors cited for sub-par global growth during the rest of 2015 and 2016. The OECD research also denotes solid growth in the world’s largest economy, the United States, due to steady job growth and consumption, although investment levels are disappointing. The euro zone is slowly limping back, albeit with the credit growth turning positive. On the other hand, weaker Chinese demand and financial turmoil are expected to impact global growth.
Interestingly, the African continent does not feature in the world’s growth story. Africa is the second largest continent, housing roughly 15Pct of the world’s population. Despite the huge resource base and consumption centres, Africa’s more than 50 economies contribute not more than 3Pct to the world economy.
On the other hand, India – with roughly the same population as Africa as a whole, and a much lower resource base, poverty rates that equal that of many African countries and the lowest rankings in the ease of doing business reports – is the 7th largest economy in the world.
Many African economies continue to remain stuck in a low-growth cycle due to low investment, high unemployment, low productivity and systemic socio-political conundrums. The un-availability of finance as an economic lubricant and the resultant weak investment and low consumption is a great barrier.
Falling or static investment levels in major African economies are holding back the growth cycle. Africa’s largest investor during the current decade, China, is suffering from faltering growth and an economic slowdown at home due to financial turmoil. In such a situation, who will invest in Africa is a mute question. Perhaps the answer lies in the hands of Africa’s leaders, who need to take a justifiable call to re-orient the policy dichotomy.
Africa’s resources – both tangible and intangible – are largely untapped. Whatever utilisation is happening is focused towards exports and does little to support inclusive growth. Such a situation very well suits a global investor but is not favourable to the continent’s long-term benefit. Therefore, policymakers need to re-work the strategy to attract investment, which will lead to production. It is likely that such investments will not mature in a short time span. In such a situation, governments have to invest themselves.
The downside to the majority governments in Africa favouring Public-Private Partnerships (PPP) is that it is also a tool to postpone or eliminate asset building. World-class enterprises engaged in producing basic commodities in emerging economies continue to be built in the public sector with public money.
Moreover, economists have now concluded that public investment is necessary for creating infrastructure in developing countries – be it power plants, roads, water, sanitation, and education. Operation and maintenance can be outsourced to enhance and retain productivity or such investment can be later sold at market rate. African governments need to enable the economic multiplier effect by investing its own resources in basic sectors. Public investment will send out a strong message to private investors that the government of the day is economically oriented and encourage them to invest.
Public Debt Sustainability
One tireless on-going debate is “what is a sustainable debt level?” Debt sustainability is a relative concept. Greece, Spain and Portugal scared the world with their seemingly sustainable public debt level of more than 100Pct of GDP. Group of Seven (G7) countries enjoy a debt to GDP ratio between 70 and 100Pct.
On the other hand, most African economies currently are range bound – 45Pct and below. Empirical studies have concluded that debt sustainability becomes an issue as debt levels increase beyond 45Pct of GDP. Conveniently, there is no debate on what happens when public debt funds are invested in creating paying assets. Therefore, African countries have to face the situation of raising public funds backed by sovereign comfort at attractive rates and invest in infrastructure and other basic sectors. Debt-GDP is a dynamic cycle. To raise GDP, a nation should continuously create products and services – and to do so, investment is crucial.
Structural Reforms and Fiscal Prudence:
One area where most African countries have to work harder is to create vibrant capital markets where financial intermediation will play a very important role in sourcing and deploying funds to various sectors. Simultaneously, the banking system needs to be strengthened and capitalised.
In countries such as Kenya, Tanzania, Uganda, Senegal, and Mozambique, there seems to be a proliferation of banks. However, these banks are so weak that they can lend in local currency to the best local businesses against 120Pct collateral and high interest rates of 18Pct and above. This is not banking but 16th century moneylending institutionalised.
Multilateral agencies have been advocating balanced policy packages that combine sustainable monetary, fiscal and structural policies at macro levels. Fiscal sustainability relates to the productive use of resources. Capital expenditure needs to dominate recurrent expenditure. Many African countries suffer from overgrown and bloated bureaucracy. A dynamically sized bureaucratic arena has been the key ingredient for the rapid growth of East Asian and Middle East economies. In Africa, public agencies have to be re-designed to be leaner, more efficient and be closer to investors, both domestic and foreign.
Nearly 40Pct of the sovereign countries in Africa are economically un-viable miniature states due to their geography, population size, bad governance, and resource scarcity. Obviously, structural reforms in such countries will not pay unless they are focused and follow the examples of Dubai, Singapore and Hong Kong. Such countries also need solid support from the regional economic blocs. However, the irony, as reported by the United Nations Economic Commission for Africa, is that despite having 14 major regional groupings in Africa, market integration amongst the member countries remains a dream due to interstate conflicts and lack of resources to support integration. These regional blocs have been engaged in creating linkages in trade, transport and communication for quite some time now. However, they have to extend their portfolio by creating a common finance and investment market.
Africa needs to integrate its marketplace with major world markets to attain the flow of investment and asset creation. African leaders have to think outside the box and re-write the economic agenda.
4th Year • November 16 – December 15 2015 • No. 33