Africa Growth Forum 2014

Between June 15th and June 17th 2014, the IGC held its second Africa Growth Forum in Accra, Ghana. This conference was organised by the IGC team in Ghana, in partnership with the Ministry of Finance and the Bank of Ghana. The objective of this conference was to continue the important discussion over how to devise solutions to economic and social problems in Africa.

Guests included policymakers and researchers from across Africa and the world. The programme of the event is available here.

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Sessions

Welcome Session

Dr Jonathan Leape, Executive Director of the IGC, welcomed the participants to the IGC’s second Africa Growth Forum. Dr Leape talked about the mission of the IGC, and in particular, explored the process of knowledge creation. Knowledge creation is most effective when researchers and policymakers come together through dialogue to discover the key policy questions. There are a number of challenges to doing this, but which IGC is uniquely positioned to facilitate through its extensive network of top scholars and its embedded country teams.

Dr Henry K Wampah, Governor of the Bank of Ghana, delivered the official opening speech, and thanked the IGC for hosting the Africa Growth Forum in Accra. Africa is receiving significant attention and there is strong optimism about Africa’s economic growth, even amidst challenging global economic conditions. However, there are two underlying challenges:

· How do we sustain the growth process?

· How do we translate this growth into employment opportunities for the continent’s large youth population?

Africa’s vast natural resource base has been a strong source of the economic growth, but also makes countries very vulnerable to macroeconomic instability which can hinder growth efforts. Another challenge is the lack of the necessary infrastructure which would support socioeconomic development. In spite of fiscal constraints, governments must find ways to break the vicious cycles that keeps Africa underdeveloped. The Governor hoped that the Africa Growth Forum will generate practical ideas around these issues, and stressed that while solutions may be grounded in theory, they need to take into count local conditions and constraints.

By Jeanett Rosbak, Coordinator, IGC Hub

Session 1: Macroeconomic Management in a Constrained Fiscal Environment

On Monday, June 15, 10:30am -12:30pm, Dr. Ibrahim Stevens, IGC Country Programme Director, chaired AGF’s first session, Macroeconomic Management in a Constrained Fiscal Environment. Professor Nada Eissa, IGC Lead Academic for South Sudan, led discussion regarding Efficient and Equitable Taxation, during which she presented on the composition of taxes and aggregated revenue performance in Sub-Saharan Africa. She was followed by Dr Louis Kasekende, Deputy Governor of the Bank of Uganda, who presented Macroeconomic Management in A Constrained Fiscal Environment. Dr Kasekende’s presentation comprehensively reviewed the competing challenges of fiscal expansion for growth, affordable credit to the private sector, and inflation and liquidity management. Then a policymaker from Ghana discussed contributing factors to Ghana’s present fiscal constraints, particularly falling commodity prices, the statutory nature for the budget, and the accumulation of arrears and interest. The session concluded with a presentation by Dr Francis Chipimo, Director of Economics and the Bank of Zambia, who outlined current policy challenges, including supporting necessary investment, improving revenue generation and mobilization, and tax administration. The session left the audience to further consider the questions of the optimal level of fiscal deficit, the appropriate pace for fiscal consolidation, and the role of Central Banks in facilitating development and financial inclusion.

By Anne Laski, Country Economist, IGC Liberia

Session 2: State Effectiveness - Strengthening Governance

The session was opened by Professor. Burgess (LSE) who presented a paper on Kenya, trying to identify the link between the the President’s ethnicity and the amount of roads building in his coethnic district, i.e. the district where the president’s ethnic group is majority. He showed that over the 1964-2002 time span, when democracy was in place, the districts that are coethnic with the president receive on average twice as much expenditure on roads than others, although they receive three times more during autocractic periods. As a consequence, he concludes that even an imperfect democratic process can improve the quality of decision making, ultimately forcing politicians to share more across ethnic groups. Finally he stresses that the role of civil society is crucial in this whole democratization process.

Mr. James then followed with a presentation on a set of randomized control trials that he and this team conducted in Sierra Leone, trying to understand how information availability can affect the voting behavior of citizens. Exploratory research in Sierra Leone showed that 70% of voters are illiterate, and that the majority of them rarely know the name or the programme of the different candidates. As a result of the experiments, Mr.James shows that encouraging public debates between the candidates does translate into a voting behavior which is more in line with the voter’s preferences, ultimately making the political contest more competitive and fair.

The last presentation was given by Professor. Suri (MIT) who started acknowledging that democratic participation is a major challenge everywhere, but more so in low income countries where low alphabetization rates and the novelty of democratic institutions itself results in extremely low rates of electoral participation. As a consequence, Prof.Suri implemented a series of randomized control trials in Kenya across the 2013 election period, using mobile technology to send different types of text messages to incentivate voters’ participation to the local elections. It was a fortunate coincidence that her experiments coincided with the establishment of a new biometric voters’ register and of an independendent authority to monitor the electoral process.The results were positive overall, in so far as participation substantially increased as a result of the different treatments.

Finally, the session was closed by a stimulating discussion between policymakers, panelists and attendees. In particular, Mrs. Kafarama (Advisor for the Office of the Presidency in Rwanda) underlined how using home-grown solutions to increase participation is often the best strategy. She brought the example in Rwanda of regular community meetings which seem to have improved on the voters’ perception of the candidates’ accountability. In this way, the citizens’ level of trust towards institutions was substantially increased, ultimately resulting in higher participation rates.

By Novella Maugeri, Country Economist, IGC Mozambique

Session 3: Building Effective Cities for Growth

Professor Sir Paul Collier began by stating if rural livelihoods are Africa’s past, cities are the future. They bring people and firms together, and this density unlocks the potential for enhanced creativity and efficiency. Statistically speaking, each time you double the size of a town or city, you raise the productivity of those in it by 5-10%. But when we break down the numbers, we see that some cities have a much stronger relationship between size and growth, while others have none at all. The link depends on policy.

The fact that Africa is less than half way through its urbanisation is a great advantage to build efficient, effective modern cities. Africa’s cities are also developing alongside Africa’s natural resource boom. This is also opportune, because the growth from resources is unsustainable, but if these resources are invested in reliable sources of long-run growth can build growth for the future. Efficient cities, and human capital development through education, are the best investment opportunities out there.

Building efficient cities is difficult, though. So far, African states haven’t succeeded in building efficient cities, and there’s a risk that the second half of Africa’s urbanisation will be like the first.

Urbanisation involves three distinct urbanisation process around three sets of assets. The first set of assets is infrastructure, and these investments are made by the government (local or national). The second set of assets is housing, in which investments are made by households; typically in a developed economy, half the capital stock is housing, so this is hugely important. The third set of assets is commercial, invested by firms.

The productivity depends on the complimentarity between these three sets of assets; but the government only controls infrastructure. Of course, the government can influence housing and commercial investment through regulation, but a lot is still uncontrollable. Thus, the success of urbanisation depends on government’s actions, and the actions of households and firms.

In most African cities, households have been the first mover in the investment process. The second mover has been business, and the last mover has been the government putting in infrastructure. This is disastrous, as people arrive in cities to inadequate, inefficient, dangerous infrastructure which cannot be conducive to productivity and growth. The right order is that the government works first to put in place infrastructure, before households move on mass.

Informal settlements such as slums may feel crowded, but they in fact have low economic density: people live in single-storey dwellings, with very low incomes. Whereas a city’s density should be greatest in the centre, gradually reducing towards the periphery like a pyramid.

How can cities regulate to encourage dense, pyramid-like, cities? Cities should target- instead of single-storey dwellings and separate commercial buildings- three to four storey buildings, with shops on the ground floor and houses above.

The second important ingredient is proper regulation. This does not, in fact, mean tight careful regulations like those seen in colonial times (and generally retained since then). Tight regulations leave no opportunity for poor households to comply, and so informal housing proliferates. The informality of poor housing also precludes poor people from obtaining land and property rights, and hence mortgages and other forms of finance. Rental income tax is also precluded from landlords with informal dwellings. Regulations must attempt to facilitate the integration of the poor into the formal housing market, through revising them downwards as far as safety allows.

What about infrastructure? For low and middle income cities, buses are the only way forward. These must be coordinated with regular, reliable schedules, and infrastructure such as bus lanes- which are rarely implemented in Africa. Private individuals invest in cars and motorbikes in a way unmatched by the government’s investment in buses, although the government can never build enough roads for private transport to deliver efficiency.

Mr. Richard Kikonyogo, Stategy Management Officer at Kampala Capital City Council discussed the Ugandan context. He stated, in Kampala when we talk about economic clusters, in their current form, we see natural clustering in transport, artisan workshops, retails, restaurants and bars. But in its current state Kampala is economically unsustainable: the central government fundamentally drives its economy. Meanwhile, our economic hubs tend to have poor infrastructure and facilities, and are congested and spread congestion further; they tend to have poor customer service and no standardisation; they, like the government cluster, in fact, tend to be hugely informal; they are overwhelmingly user-centric, grounded in immediacy and daily survival rather than any long-term planning. That’s not to say that they have no organisation or systems- legal systems are in place, for example, but they engagement with these tends to be difficult.

As a result of the situation in Kampala, we have insecurity and hazardous safety, social unrest, low levels of innovation. If these trends continue, there is a risk we will have an ungovernable, unserviceable city with an awful environmental footprint. This city will have 8-15 million people, and one of the youngest populations in the world. The changes Kampala must make will demand behaviour change, which we don’t yet understand how to achieve.

Thirdly, Mr. Steve Akuffo, Commissioner of the Ghanaian National Development Planning Commission asks – Cities are agents of economic change. But how to we make sure that change is as positive as it can be? Although Accra was one of the first cities in Africa to have a master plan, its development has always combined the formal and the informal. Our city underwent some rapid burst of population growth, at which points much development was sporadic and plans weakly implemented. A central problem is a lack of effective, affordable housing, while large middle class houses are encroaching on potential land for their development and livelihoods.

Finally, Mr. Horatio Max Gorvie, an Engineer in Freetown, stated that his city is overpopulated, with seriously inadequate urban services, from roads to water and sanitation to public education. They followed the path described by Paul Collier earlier, whereby households invest in migration to the city in advance of government investment in urban infrastructure.

An interesting discussion then followed. A respondent asked: Is it infrastructure, or planning, that needs more attention? Collier responded: In order to implement plans, a tax base is needed, and the most hopeful source of revenues is the appreciation of land values. In Africa this value rise has been captured by individuals owning land (especially the political class), rather than the government for public spending. The second question posed the following: If someone moves from A to B, it is because B looks more attractive. Shouldn’t we, then, seek more equitable distribution of resources between A and B, to prevent overpopulation and crowding in cities? Collier responded: There’s always a hierarchy of cities within a country, and having a network of efficient cities can be more effective than having one ungovernable mega-city.

By Sally Murray, Country Economist, IGC Rwanda

Session 4: Firm Capabilities

Professor John Sutton presented his on his Enterprise Map series. As economies have grown and developed, new qualitative work has been needed to understand the changes going on. However, the interesting aspect is that there have been very similar changes across countries, and the firms at the front of this are world-class. Of successful areas, they share certain qualities: an internalised supply chain within the country, and a large enough domestic market in the particular industry within a country to support it.

The challenge is how to broaden the industrial base. Investment agencies have been crucial in identifying new areas for expansion of the supply chain, and the crucial factor behind investment agencies’ success has been trusted relationships. The challenge beyond this is to ensure increasing sophistication of the activities undertaken by firms and, particularly, multinationals.

There are, though, several misconceptions. First, is that large engineering firms should be targeted. Not necessarily so. Mid-size service firms can be hugely beneficial. Similarly, other sectors, like retail are unfairly overlooked.

Professor Jonas Hjort of Columbia University spoke about the broader challenges firms face based on the Liberian context. His research covers three questions in this area: information frictions between firms which hinder their ability to connect and grow, informality, and linkages across firms – how different parts of the economy are inter-related.

Information frictions, when firms cannot identify partners and work with them, can be a factor in holding back the growth of firms, forcing them to stay small. Randomising the information which firms receive and looking at the effects provides an indication of the extent to which information frictions matter.

Informality: there are three theories of why firms choose to be informal. One, informal firms are “entrepreneurs waiting to be released” – reduce government regulation that holds them back. A second theory sees them as parasites, where informal firms take advantage of public gods without contributing to them. The third theory is that informal firms exist because it is the only option available to people – reducing informality may just devastate people who have no other choices. Research looking at randomising ‘carrots’ and ‘sticks’ to move out of informality has been designed to reveal which of these theories dominate in Liberia

Linkages across firms: is economic activity shared across sectors, or is it concentrated in particular areas? Looking at shocks which affect firms, and seeing what happens to its suppliers gives an indication of the linkages between firms.

By Charles Beck, Country Economist, IGC South Sudan

Session 5: Farm Productivity and Agricultural Development

The session was chaired and opened by Dr. Alemayehu Seyoum Taffesse, Country Director for IGC Ethiopia. Presenters were Professors Chris Udry, Tavneet Suri and Michael Carter. There were two discussants; Professors Rafael N. Uaiene and Shashidhatra Kolavalli.

The main focus of this session was to explore ways to increase farm productivity in Africa. Results of three field experiments, two focusing on farm productivity and one on agricultural input subsidies were presented all with long term policy insights.

The studies noted that agricultural productivity in Africa is generally low, with average yields not exceeding 20 kilograms per acre. This is a major concern as increased productivity is seen as a root to ending rural poverty on the continent. Low use of fertilisers and lack of innovative farm technologies are some of the contributing factors. Fertilisers in particular tend to be very expensive especially for rural farmers due to low population density and poor transport infrastructure, which means that farmers have to pay more than average per bag of fertiliser to get to the nearest fertiliser markets. While lack of access to credit by farmers is often viewed as a constraint, the researchers conclude that it may not be so, as availability alone does not improve farmer income because there are other factors at play. As a matter of fact in cases where credit is available, take-up is often low.

The role that technology is able to play in increasing productivity and improving nutrition was also demonstrated. A randomised controlled trial based in Sierra Leone also demonstrated how a new rice brand, known as the ‘New Rice for Africa’ (NERICA), is able to produce more yields of rice per acre in a much shorter period than ordinary rice. The early maturation of this brand of rice makes it possible for households to have an earlier than usual harvest in the middle of the planting season, also referred to as the ‘hungry’ season when food is in short supply, allowing households to have food and improving household nutrition. In a nutshell, this study is an excellent demonstration of what African farmers and the population at large can gain from the take up of modern farm technology which in turn could improve farm productivity, household incomes and livelihood. However, this will call for significant investments in research by African governments.

Lastly, farm input subsidies in Africa have become a common response to low farm productivity. Though initially intended to be temporal, they have become permanent, creating a permanent drain on national resources. For some African countries such as Malawi, the opportunity cost of subsidising inputs could be significant as their share of total agricultural budgets have been as high as 58% in some instances. While subsidies could be profitable and have positive effects that may persist for more than two years, African governments should invest in this particular area with a lot of caution. But since most countries are entrenched in subsidies the issue remains on how to withdraw them without jeopardising agricultural productivity and incomes especially in rural areas.

By Felix Mwenge, Country Economist, IGC Zambia

Session 6: Priorities for Further IGC Research

Public Lecture: Professor Sir Paul Collier on 'Fiscal Sustainability and Growth - Challenges for African Countries'

Paul Collier explained that he would be talking about natural resource management, because proper natural resource management is the most important factor for the future economic success of Sub-Saharan Africa.

Natural resource management is even more important than industrial policy. Many states in East Asia have developed rapidly in the last half century, with varying but deep industrial policies. But alongside these states, Hong Kong also grew impressively with next to no industrial policy, despite very similar underlying conditions.

Turning to natural resource management, Collier told the story of two states- one landlocked and surrounded by desert, the second on a superb coastal position with a favourable climate. Both were extremely poor around fifty years ago, but since then both have discovered diamonds. One state now has the highest GDP per capita in Sub-Saharan Africa. The second is suffering intense poverty and a post-conflict situation. Surprisingly, the state which is doing well is the landlocked one, and that doing badly is that in the superb coastal position. These countries are Botswana and Sierra Leone.

This underlies the importance of proper resource management for the economic success of a country, both absolutely and relative to other major policies.

In Africa, $60,000 of sub-soil mineral wealth has been found for every square kilometre, compared to $300,000 in wealthy OECD countries. However, this does not mean Africa is poorer in natural resources. The distribution of sub-soil minerals across the world is in fact effectively random, so why is the figure for Africa so much lower? The answer is, probably, that Africa has seen lower exploration to locate mineral wealth. The resources under the soil in Africa should be huge.

Companies can search for these resources, but they are averse to risk, reducing the fees they are willing to pay for the privilege. Instead, then, governments should undergo and finance the discovery of mineral wealth; once resources are found, companies will offer huge amounts for rights to their extraction and sale.

After taking this first vital step of financing exploration, the government must then be sure to tax resource wealth, taxing what is most visible and measurable.

The next key is spending the resultant revenues effectively to nurture sustainable growth in incomes and living standards. One challenge of this task is distributional: resources are somewhere, not everywhere. And where they are extracted, there is often a considerable toll on the local population. There may well be pressure on the government to focus its resource-financed public spending on communities located in proximity to the resources, rather than equitably across the country. If this pressure is exerted in the form of disruptive localised violence, it may well be successful, and as locals learn that violence works, a disastrous vicious circle of violence, disruption, and patronage can follow (as in the Niger Delta).

Some companies try to avoid this by pretending they are charities, and funding local schools and health centres. But this is completely the wrong approach – governments should take responsibility for schools and hospitals, and their provision by oil companies really leaves local communities jobless and frustrated, and the government short-changed. The government must instead insist that extracting companies invest in the creation of shared infrastructure, such as railways and electricity that can be used by all.

A recent example of this development of public infrastructure is from Guinea. An extraction company in Guinea needed to develop a railway to transport goods; the President requested that this railway carry passengers also, which the company originally claimed was impossible. However, through firm and relentless negotiation from the highest levels of government, expert assistance, and the firm’s own realisation of its need to develop a constituency of support in the country, it was agreed that this railway would indeed also carry passengers, and create a development corridor across Guinea.

In Nigeria, local content requirements were offering low returns due to low local capacity to supply the inputs needed. Thus, the government forced firm investment in local infrastructure and capacity, so that local firms could produce pipelines for them – pipelines which are now not only being produced locally, but also exported, to significant benefit to the Nigerian economy.

The government should also invest its own resource revenues in the development of infrastructure. Saving all of one’s resource income does not maximise the long-run income of low-income, growing, countries, because they have so much need for investment now. This goes against the advice of many, which is to follow the example of Norway and invest most of one’s resource wealth in off-shore sovereign wealth fund. Norway only began investing its money offshore once it had reached a point of having so much capital in its own economy that capital per head was one of the highest in the world; at that point, of course, one’s wealth will bring higher returns carefully invested in China or Brazil. Most low income countries are, of course, not saturated with capital. Their resource income, then, is best invested ‘at home’.

Of course, they should only invest this income ‘at home’ once the country has the capacity to invest it properly, to develop wealth and income for the future, and most low-income countries are not at that point. This leads us to the crucial conclusion, then, that low income resource rich countries must develop their capacity to absorb capital effectively.

How can they do this?

Three ingredients are critical: rules, institutions, and a critical mass of informed citizens.

Rules: Firstly, these are important because once a rule is established its transgression becomes public knowledge and demands public justification. Rules also facilitate the process of searching for sub-soil minerals, and their subsequent taxation.

Of course, the force of rules depends on proper monitoring and enforcement capacity.

It is worth mentioning one rule countries often adopt, which is to invest a certain portion of mineral revenues in savings, or public goods, and so on. Countries must design these rules in a way that does not leave resource funds fungible. That is to say, targets must be integrated into a complete fiscal model, so that mineral wealth investment is not in fact funded by increased borrowing in another part of the budget. Rather, if $50 million of resource wealth is to be dedicated to investment, aggregate government investment must rise by $50 million, instead of a case where $50 million from resource wealth is invested while national borrowing increases by $50 million.

Institutions: Institutions are teams with mandates and the capacity to implement them. Especially important in natural resource management are teams that can scrutinise projects and arrange effective surveys of mineral resource wealth. Also important are institutions for bargaining contracts effectively; in particular, laws should be established in advance of negotiations, so that countries can make demands that are both strong and credible in the face of expert and experienced private negotiators. Finally, institutions for investing resource income are crucial: until they are established, for example, it is important to ‘park’ one’s resource wealth in off-shore savings, until one is ready for effective, high-return domestic spending.

Rules and institutions must not simply be rules on paper. The Euro is an institution with only two fiscal rules and one institution (the European Central Bank). Yet only one of its member signatories have kept all of these rules (Finland, incidentally). Why is this? It is because in Europe, there is no critical mass of citizens who understand why the Euro rules are important.

Some people think that citizens are bad for resource management. But poor citizens understand the need for future investment – because they have children. Those children will need incomes, infrastructure, and social support twenty years from now, and so citizens can plan twenty years ahead. Governments no not have children- they have elections. Elections happen every two to four years, and so government time horizons are much shorter. Thus, it is critical to build a narrative among the population so that their needs surrounding long term resource management become election priorities. Politicians actually have a role in this, as even more than decision makers, they are communicators, who must educate their citizens and carry this narrative forwards.

What should politicians and policy makers make sure their citizens know? All citizens must know two numbers. Firstly, their country’s mineral income per capita. Too often resource income and wealth is reported in the aggregate- “We have signed a deal with Exon worth $50 million!” Research by the UK’s Department of International Development shows that to the average citizen, fifty million sounds the same as fifty billion or fifty trillion: they are all just numbers with lots of zeroes, of which we have little meaningful concept. When a citizen hears their country has won a $50 million resource contract, they tend to think they are rich. But if that country has a four million population, that $50 million is about $12 per head. Communicating this per capita income is crucial to ensure that citizens have realistic expectations about what their national wealth can achieve.

Secondly, of course, citizens need to know how long that mineral income stream will last.

In spite of their diamond wealth, citizens of Botswana have a motto (which is not, “We’re rich, let’s go shopping!”). The motto says, “We’re poor, and therefore we have to carry a heavy load.” This is exactly the kind of narrative that everyone can understand, and that upholds realistic expectations about the offerings of natural resources, so that public finances can be responsibly managed.

It is also worth highlighting my recent research into the effect of democracy on resource-rich countries. We found that the most important aspect of democracy for the successful management of natural resources was in fact the checks and balances built into democratic systems – the real, effective constraints on power. Indeed, holding the effect of these constant, electoral competition showed as somewhat negative in resource-rich countries. Of course, the constraint is that checks and balances are particularly undermined in resource-rich countries, as they come between crooks and money.

The good news in all this is that there is a lot of the future left, and there are a lot of natural resources left in Africa. The great shame would be to repeat the mistakes of the past. Collier closed saying that it is not his role to manage these resources, but that of the politicians and policy-makers assembled. It is their fight, and they can win it.

By Sally Murray, Country Economist, IGC Rwanda