Development

Global Downturn and African Development

Posted on Oct 24, 2013 in Development, Economy

Global Downturn and African Development

By now it is clear that the global economy is on the downturn cycle. Projections of global GDP have been downscaled substantially. Recent reports from the IMF, World Bank and The UN have all concurred that the rate of growth of the world output is going to hover around 4% at best and possibly as low as 3.3% during 2012. The ILO report in the meantime is cautioning against a “job deficit’ of approximately 400 million worldwide. This means an average of 40 million per year, predominantly youths, are going to be out of the job market. This is a serious risk to the global socio-economic stability. Almost no region of the world, and no country per se, is immune to the potential adverse impact of this situation. What does this mean for Africa’s expected growth and development over the next decade? Overall, this is clearly not favourable for Africa. In a world of integrated trade and investment networks, what affects one region is bound to spill over to the others. So, the expected and looming economic recession in Europe is bound to have some negative consequences for Africa and its rate of growth. As it is said, ’a receding tide lowers all boats’! At the same time, it is not all doom and gloom either. Technically, Africa’s relative position globally is in fact expected to improve over the next few years. This is because the growth rate of the continent, especially in the Sub-Saharan region, is affected less adversely than most other regions. Two factors contribute to this: one is that Africa’s exports are by and large raw materials. The growing regions of the world, such as China, India, South East Asia, and parts of Europe do need such raw materials for their growth. These regions are expected to grow between 5 to 8% per annum over the next five years. Their growth is underpinned by rapid and sustained urbanization. This process, in turn, is bound to secure a high level of demand for Africa’s resources such as iron ore, coal, manganese and chrome- among others. So, the fact that the global GDP growth is slowing down is driven mostly by the rapid contraction in the OECD member countries. These countries, however, have not been the main source of demand for raw material in the recent past.   The second driver of Africa’s growth, and increasingly the more significant one, is an internal one. In the jargon of economics, the absorption capacity of Africa has increased markedly in the recent years. The main contributors in this regard have been the growing focus on national and regional infrastructure development, the promotion of local industries and the channelling of national savings towards continental projects.  Of course, the commodity boom, and the relentless exploration for oil and gas have been a major force in this process. The upshot of these interrelated dynamics has been the rising inward investment in Africa. Whereas up to the 1990s, as much as 60% of the continent’s annual savings was invested in Europe and North America, nowadays this figure is as low as 30%. At the same time, due to the dramatic changes to the investment climate in the OECD countries, a great deal of direct investments from these countries in flowing out, and Africa is receiving its share of such capital market flows. The considerable growth of private equity funds in Africa is a case in point.   The mushrooming of private equity funds in Africa is also a reflection of the fact that capital markets are not well developed in most countries on the...

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First Things First in Development

Posted on Oct 24, 2013 in Development, Infrastructure

First Things First in Development

When exploring the various elements of the sustainable socio-economic development, it is vital that we are guided by the golden rule of “first things first”. To this end, the following five factors are the foundational building blocs of any successful socio-economic policy framework.   First and foremost is the creation of a capable state, vastly different from what most developing countries have at present. An effective and efficient state, with appropriate skills and requisite structures, is an indispensible architectural component of a successful economy.   In nearly all developing countries, the failure to create a public service working environment, based on merit and performance, has resulted in the deepening of a culture of mediocrity within this sector. This managerial culture generates inordinate amounts of inefficiency and exacts a heavy welfare loss, particularly on the poor. Furthermore, in times of sustained economic growth, an ineffective public sector widens the income distribution gap, thereby deepening the structural unemployment and prolonging systemic poverty in the country.   The second basic requirement is to deal with the drivers of the country’s systemic poverty. Poverty, and more precisely the iniquitous pattern of income distribution, will never change until an effective human resource development is put in place. Over the medium to long-term, in the fight against poverty, there is no substitute for an effective education system. The creation and augmentation of human capital is essential for breaking out of the vicious circle of poverty. Historic evidence suggests that it takes at least one generation to make a real dent in systemic poverty, provided a sound education system operates within a well-integrated national human resource development framework. This in turn requires a well-integrated education and training systems.   The third basic need of sustainable development is a well-defined industrial strategy that is rooted in the country’s comparative advantages and enhanced by an appropriate mix of factor prices and implementation institutions.  The golden rule of any industrialization strategy is to begin with the country’s “initial endowment”. After that, meaningful and extensive consultation across key social stakeholders is vital. It is important to state the obvious that industrialization happens primarily through the private sector. As such it stands to reason that the private sector should have substantial involvement in the process of identification of target industries and the implementation of the set goals.   The fourth essential requirement is the alignment of and coordination among the cross-sectoral and inter-generational infrastructure programmes. The economics of limited resource use requires alignment and sequencing. This is more true the more complex an organisation gets. It is stating the fact that the public sector is the most complex organisation in almost any country. As such, the role of cross-sector alignment is so much more critical. Yet, more often than not, the operations of the state departments and state-owned-enterprises are fragmented into various silos and do not favour coordination and alignment. As a result large scale losses occur. Such losses take the form of actual as well as potential lost opportunities.   The last, but not the least, of requirements is the toughest of them all. It may be argued that the most critical challenge facing the sustainable socio-economic development is the absence of a set of well-defined and generally accepted ethical and moral values. As the forefathers of modern economics have convincingly argued, no socio-economic system is sustainable, let alone prosperous, without a set of moral values that are generally internalized across the society. The introduction and internalization of a value system is much easier in a homogeneous environment than in a setting where diverse cultures, religious beliefs and ideologies are...

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Beneath the Unprecedented Global Glum

Posted on Oct 24, 2013 in Development, Economy, Politics

Beneath the Unprecedented Global Glum

The global economy finds itself, once again, on the brink of another crisis. Escalating market volatility, vacillating political leadership in OECD member countries, and the Pan-European public debt combined with the US political stalemates have contributed to the current global conditions. However, there are deep-rooted structural factors that lie beneath these apparent phenomena.   The most basic of the structural factors is the failure of Anglo-Saxon governance value system, both in the private and public sectors- most visibly within the financial sector. This failure has been brewing for awhile, and became manifest over the past two decades via the collapse of the US Savings & Loan crisis (1989), Enron (2001), HIH Insurance of  Australia(2001), WorldCom  (2002), Lehman Brothers(2008) Satyam (2009), and a couple of ‘reputable’ audit firms in the US. It is true that the failure of Anglo-Saxon monitoring and compliance framework was a contributing factor, but so were the US Federal Reserve’s Greenspan ideology and hence the mismanagement of the monetary policy for political ends as well as President Clinton’s desire to see American capital being dominant in the global markets.   The economic philosophers of the 18th and 19th century, the forefathers of modern economics, argued convincingly that the market economy could not survive without a set of underpinning moral value system. Nor could the operations of the state be able to complement the outcome of the market economy unless the state’s operational framework had a well-define social value framework based on “the public interest’. The very notion of ‘public service’ arose from the premise that the state’s value system would operationally exercise a check on the inherent and predictable excesses of the market system, would provide a set of checks and balances for the ultimate benefit of the society. This critical line was crossed on the altar of ideological warfare and the so-called ‘the imperatives of the national security’, most prominently and openly after the 9/11 in 2001. When this line is crossed, the failure of prudential and regulatory framework is simply a matter of time!   Another structural root cause has been and continues to be the global trade regime. Ever since the 1970s, the global system has been at the mercy of an unfair, unsustainable trade regime that caused structural imbalances from time to time. Economists have been warning on the dangers of this issue for a long while. But expressions of concern and awareness of the issues, per se, do not prevent a disaster! This has been the most spectacular failure of political leadership in OECD over the past three decades. Last year alone, OECD member countries spent in excess of US$750 billion on their misguided agriculture subsidies. From an economic point of view, this is a distortionary expenditure with negative effects on the global GDP. China’s manipulation of its currency, together with others, has been another source of structural imbalances! In effect the global economy has been subjected to a pervasive ‘trade war’ for well over three decades. Since 9/11-2001, we have had another rising structural factor contributing to the destruction of value globally, namely the three resultant wars- the ‘War on Terror’, the Iraq War and the Afghan War. These three wars augment the adverse effects of the above mentioned “trade war” on the global economy. The sum-total of these four wars adds up, in terms of my estimates to 3 to 3.8% of the global GDP! This is a colossal destruction of value, far exceeding the so-called stimuli packages offered by various OECD governments. Such value destruction did not tip the system when the global economy was riding the super- cycle...

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Manufacturing Sector’s Dicey Status

Posted on Oct 24, 2013 in Development, Infrastructure

Manufacturing Sector’s Dicey Status

South Africa’s manufacturing sector has been facing uphill for over two decades, if not longer. A lethal cocktail of global, structural, technological, macroeconomic and industrial policy issues has, over time, undermined its growth and undermined its resilience. Whilst in the last decade of apartheid rule, the industrialisation process had reached its natural dead end, ever since 1994, the obstacles to SA’s industrial expansion have become increasingly self-imposed. The upshot has been a de-industrialisation process with deep and wide consequences for the political economy of the country. Nowadays, the contribution of manufacturing to national income is about 15%, nearly 25% less than what it was a decade ago. At the same time the number of jobs in the sector has declined accordingly. In 1990, the sector created over 1.5 million jobs whereas today’s manufacturing employment is hovering around the one million mark- the sector has lost nearly one third of its jobs! Broadly speaking, this is an indictment on the country’s industrial policy paradigm. This is even more so because South Africa’s inherent comparative advantages are robust and potentially conducive to a resilient and expanding manufacturing base. These include the country’s vast mineral base, the existence of scientific and research infrastructure, a competitive capital and financial market sector, and a well-established culture of manufacturing entrepreneurship integrated within the global industrial network. For the past decade, the root causes of the structural obstacles to industrialisation have been widely known, and yet these obstacles remain in place today as binding as ever. The shortage of skills, the crumbling urban infrastructure, the inefficient and increasingly counterproductive municipal management framework, and the unreliable and unsustainable power supply continue to bedevil the development of business in general, and the performance of manufacturing in particular. In addition to these domestic factors, the global economy ever since 2001 has been thrown into a tectonic, structural and turbulent spiral. Consequently, the financial markets have spun out of equilibrium, and have entered a dynamic process of compounding disequilibria, burdened by unsustainable private and public debt the world over. The upshot for the global foreign exchange markets has been disturbing volatility, rising uncertainly and systematic defiance of the old and established models of foreign exchange econometric modelling. The sustained over valuation of the rand, and its well-above-average volatility have been of considerable and adverse impact on the manufacturing sector- indeed the entire exporting industries. The rise of China, with its conversion from communism into a ferocious state capitalist machinery, with a total disregard of human rights issues, labour standards, and world trade requirements, has introduced an additional political economy factor, compounding the manufacturing challenges worldwide. Policy makers in South Africa, as in many other countries, have not risen to the challenges that these developments pose. More often than not, the reactions have been in the form of ad-hoc policy pronouncements, uncoordinated policy action plans, and largely out of sync with the urgency and enormity that the situation demands. Macroeconomic policy makers have interpreted these developments to be of cyclical and transitory nature, hence they have, by and large, shied away from taking appropriate and effective policy stances. And, where policy positions have changed, consistency and coordination have been lacking. With regard to the structural obstacles, whilst policy analysis has been correct, implementation has not followed with commitment and vigour. It is important to note that industrial promotion takes far more than a correct industrial policy framework and/or the expression of political intent. It requires an effective implementation framework sustained over a long period of time with full operational involvement of the key stakeholders, namely the manufacturing sector and the labour...

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