ECOWAS and the free movement of goods, persons and establishment

The article examines the challenges facing the non-implementation of the ‘ECOWAS’ Protocol on the Free Movement of goods, services, persons and capital. In its finding, several problems including the lack of Political commitments, administrative restrictions, civil conflicts, wars and terrorism are major obstacles to the implementation of the Protocol on free movement of goods, services, persons and capital in West Africa. Thus the Paper recommends that ECOWAS’ leaders should seriously address those obstacles in the implementation of the Protocol.

Introduction
Indeed, the 15 nation ECOWAS came into force on 28th May 1975, when the Treaty was signed in Lagos, Nigeria, by a group of countries comprising Dahomey (now Benin), The Gambia, Ghana, Guinea, Guinea-Bissau, Ivory Coast, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra-Leone, Togo, and Burkina Faso (former Upper Volta). Cape Verde acceded to ECOWAS in 1977. Hence, establishing a market of 280 million consumers and a geographical area of 6.2 million square kilometres. However, the Treaty from inception has been faced with a series of challenges, including security, underdevelopment and the implementation of the Protocol on Free Movement of Goods, Persons and the Right to Establishment in the member States. The ECOWAS Constitution is the Lagos Treaty of May, 1975 and its objectives include: Economic stability among the member States, improve the standard of living of their people, customs union, freedom of movement of persons, capital, services, agriculture, transportation, telecommunication, energy and development, industrial master plan.

Several reasons will push states to create/form economic integration among them. Indeed, reasons like economic weakness, dependence status, economies of scale and scope, political influence, security and stability may lead to it. For instance, in the West African Sub-region the principal reasons that pushed for economic integration include to encourage intra West African trade which was less than 4%, to strengthen their weak economies, improve the living standard of their people and be independent of extra African powers in the realpolitik game as a consequence of the Cold War.[1] Since the Protocol on the Free Movement of Persons, Right of Residence and Establishment was put in place in 1979.

Tanzanian customers get free mobile access to Facebook

Tigo Tanzania in a partnership with Facebook have agreed free access to Facebook services in English and a new Kiswahili version through their mobile handsets. It is the first time that Facebook will be free on any mobile network in East Africa.

Speaking at the launch of the partnership in Dar es Salaam, Tigo Tanzania’s General Manager, Diego Gutierrez said: “What this partnership means is that Tigo customers can, for the first time, access Facebook through their handsets without incurring any data charges and connect with Facebook’s two million users in Tanzania and its 1.2 billion users worldwide.

The strategic partnership is part of Facebook’s recent Internet.org initiative launched by the company’s founder, Mark Zuckerberg.

DOES FOREIGN AID MAKE ECONOMIC SENSE?

Finn Tarp, Director, UNU-WIDER

Foreign aid is often seen as different from other forms of investment, and some argue that rather than having a positive effect it tends to distort economies and may potentially slow growth and development. In this article, the author argues that this is not the case and cites UNU-WIDER research, which shows that foreign aid has had a positive effect on growth on average in the long run. Furthermore aid has been crucial in supporting the broader development process through expanding life expectancy, cutting child malnutrition and maternal deaths, facilitating transitions to democracy and reducing overall poverty.

Introduction

Many developing countries have enjoyed impressive economic growth in the last few decades. The Economist reported in 2011 that six of the 10 fastest growing economies of the 21st century so far are from Africa. This is a fact. It is also a fact that continued economic growth will be crucial in Africa post-2015. Has foreign aid had something to do with the economic turn-around, and can international cooperation help support growth in the future? The simple answer is, yes indeed. At the same time, academic and policy debates about whether aid spurs or hinders economic growth rage on; and we often see views expressed in the popular literature that argue that aid does not work; is a futile endeavor; and should rather be ended. These positions are however typically not based on the best evidence available. Arguably, it is time to move the discussion about foreign aid, growth and development beyond ideology and preconceived ideas, and focus on what hard data and sound evidence can tell us.

The Evolution of the Aid-Growth Debate

The academic literature on the aid-growth relationship can usefully be divided into four generations, reflecting changes in both economic methodology and paradigms of development. First, in the early years (roughly until around 1980) development was typically seen as a stable and linear relationship between investment and growth; and many studies assumed that aid had a positive effect on growth. Aid was simply plugged in to help close gaps in savings and/or foreign exchange, and thus facilitated growth enhancing investment. The general consensus was also that while aid does indeed tend to increase investment and savings, it does so by less than the total amount given, suggesting, perhaps unsurprisingly, that some aid is consumed rather than invested.

A second generation of studies was born in 1987 when Paul Mosley and his co-authors identified the so-called micro-macro paradox. This work raised justified doubts about the underlying growth model, suggesting both that expecting all capital investment to translate into economic output, and expecting all aid to be used as investment, were overly bold assumptions. Other doubts about previous research on the macroeconomic effect of aid were also raised. In particular it was pointed out that in order to be accurate, studies needed to take into account that countries receive aid precisely because they are poor, and their economies are performing badly (i.e., the so-called endogeneity problem). Concerns were also raised that aid seemed in some cases to be misused by dictatorial regimes; and finally the impact of aid did not seem to show up in macro-economic cross-country studies.

These doubts about the assumptions at the core of previous research, as well as the new availability of panel data, which allowed researches to look into the impact of aid both across and within countries over time, motivated the new approach of the third generation from the early 1990s. The attentive reader will probably remember the famous 1994 heading: “Aid Down the Rathole”, which the Economist used when the study of a London School of Economics professor, Peter Boone, was reviewed. His work did not stand unchallenged for long. World Bank economists Craig Burnside and David Dollar argued already in 1997 that aid works, but only sometimes, and that for aid to have an effect the right conditions, namely good fiscal, monetary and trade policy, had to be in place. Thus, the third generation ended up being cautiously optimistic about aid’s impact, even if there was disagreement about the circumstances under which aid works and has this positive impact. Big efforts were also made internationally to promote more aid-giving at the 2002 United Nations International Conference on Financing for Development, also known as the Monterey conference.

This optimism is not reflected in the fourth generation that became influential around 2005. The then Chief Economist of the IMF in 2008 published a paper where he and his co-author argued that at the macro level it is difficult to identify ‘any systematic effect of aid and growth’. This seemed to be a resurrection of the micro-macro paradox first identified by Mosley, and the non-existence of impact was used widely in the public debate to motivate aid criticism. When looking for reasons it was, for example, argued that aid is associated with Dutch Disease whereby the exchange rate tends to appreciate with foreign currency inflows and undermine exports. Other arguments put forward include political economy dynamics (keeping poor governments in place), and that aid inflows can weaken governance by encouraging corruption and rent-seeking activities in general. The problem with many of these explanations is in practice that while they may convey interesting theory and stories, few have actually tried to test them systematically with available data. So, conflicting conclusions continue to abound.

Analytical Challenges

It is interesting that so widely different conclusions have been drawn in the aid–growth debate, given that studies are in many cases based on the same publically available data. One major analytical difficulty is the question of causation. Aid is given to countries that are poor and have difficulties. When they grow and do better donors tend to give less aid. So, it may look to the uninformed eye as if less aid is a good thing. It is of course a good thing to do better, but this by no means implies that aid did not support the growth to begin with. This analytical challenge is clearly not unique to the aid-growth debate and must be taken properly into account in any meaningful analysis.

Moreover, one often hears that since econometric models do not find a statistically significant effect of aid on growth then such a relationship does not exist. Yet, absence of evidence is by no means equivalent to evidence of absence. The fact that the relationship does not always seem to be statistically significant may have many causes, including problems with the length of time the dataset covers or the care with which the econometric analysis is done. In particular, it is critical to disentangle the mechanisms through which aid may effect growth, and vice versa. Can this be done? Yes – and recent research by UNU-WIDER has done so.

Research and Communication of Foreign Aid (ReCom)

The ReCom research programme led by the UN University World Institute for Development Economics Research (UNU-WIDER) has five themes covering the most important facets of development today; social sectors, gender equality, governance and fragility, environment and climate change, and importantly questions of growth and employment. The aid-growth question was taken as the point of departure to start uncovering what works and what could work in foreign aid. UNU-WIDER brought together some of the best researchers in this area, and asked them to review, assess and add their new insights to the debate. A series of studies (based on all available analytical approaches) has by now been published in leading academic journals, and what do they show:

1. An inflow of aid at the level of 10 per cent of GDP spurs a more than 1 percentage point increase in annual per capita growth rate on average. Thus foreign aid has facilitated economic growth at the aggregate level over the long term (i.e. the period 1970-2007).
2. Views that posit a non-existent or negative impact of development aid on growth have typically been based on miss-specified models and errors in data interpretation.
3. When foreign aid is evaluated as an investment, it has had a annual internal rate of return of 16% since the mid-1970s.

Thus, the overall ReCom conclusion is that aid has had a very respectable effect on growth. This effect is in fact equivalent to what economists would generally expect based on current growth theory. So, there is no micro-macro paradox to be explained. In sum, aid has worked in promoting growth, and has worked well. At the same time, no informed individual will of course argue that foreign aid has worked with equal effectiveness everywhere and that failures have not been experienced, as has been the case with private investments. And development, which foreign aid is designed to support, is risky business.

Beyond Growth – Has Aid Supported Poverty Reduction?

Growth cannot and should not be the only measure of performance in foreign aid, as the discussion about the Millennium Development Goals (MDGs) illustrate. It is therefore encouraging that UNU-WIDER’s up-to-date ReCom research has shown that development assistance also has a positive effect on a number of intermediate factors which are seen as drivers of growth and development. Investment in physical capital and health are two clearly identifiable channels through which aid promotes growth; increased aid spending in these areas is likely to spur development in recipient countries. Education is another important area. More specifically UNU-WIDER research finds that an average annual inflow of US$25 aid per capita over the period of 1970-2007 reduced poverty by around 6.5 percentage points, raised investment by 1.5 percentage points in GDP, augmented average schooling by 0.4 years, boosted life expectancy by 1.3 years, and reduced infant mortality by 7 in every 1,000 births. So aid increases growth and helps promote social development.

Final Remarks
Is growth important for development? Yes, it is. As the economic pie grows there is more to share all around, and this “more” can then be used for furthering development to provide the possibility for dignified lives for the many, rather than just the few. After decades of foreign assistance we now know enough to assess properly whether aid works or not through rigorous analysis of the existing data. Clearly there are individual situations where aid has not worked as desired, but this should not be used to attack the premise and principles behind the entirety of foreign aid. Rather, it should encourage researchers, practitioners and policy makers to redouble their efforts to better understand the reasons why aid has not worked in some contexts, and learn as well from the situations where it has indeed worked well. In this context it is critically important to keep in mind that aid is a public resource which can be put to do things private business money typically will not do. The issue in financing development is therefore not “Trade-not-aid” as sometimes argued. It is “Trade-and-Aid”. Aid and trade are not substitutes, they are complements. Resources (including aid) can be misused and have no or little effect. And aid is at the end of the day too small to do the job on its own. So, the lesson for policy-makers is: Use aid, but use it wisely together with appropriate supporting policies and investments. Then development will follow.

About the Author

Finn Tarp is Professor of Development Economics at the University of Copenhagen Director of UN University-WIDER, Helsinki, Finland.

Professor Tarp has some 35 years of experience in academic and applied development economics research and teaching. His field experience covers numerous countries across Africa and the developing world more generally, including longer term assignments in Swaziland (two years), Mozambique (eight years) and Vietnam (three years).
Finn Tarp is a leading international expert on issues of development strategy and foreign aid, with an interest in poverty, income distribution and growth, micro- and macroeconomic policy and modelling, agricultural sector policy and planning, household and enterprise development, and economic adjustment and reform. [1]
In addition to his university positions, Finn Tarp has held senior posts and advisory positions within government and with donor organizations, and he is member of a large number of international committees and advisory bodies. They include the European Union Development Network (EUDN) and the African Economic Research Consortium (AERC).

Climate change and East Africa’s Economic progress

It is a misconception in many African countries that climate change is a ‘first world problem. While Africa has contributed little to global warming, Africa economies and environmental ecosystems is nevertheless disproportionality vulnerable to its impact. The continent risks economic regression, which could undo all the progress that the continent has made over the past decade. This is especially true in the realm of regional integration within the East African Community. The truth is the region is unprepared for intensified weather conditions and as a result, poses a real risk to future investment opportunities.

Regional Integration is Inevitable but so is Climate Change

The future is bright when it comes to East Africa’s economic trajectory. In September 2011, the African Development Bank (AfDB) produced an interesting report that looked at Africa in 2060. The report, “Africa in 50 Years Time: Towards Inclusive Growth,” shared some interesting and at times optimistic insights about the future of East Africa. There is the promising; the report believes that Africa’s dependence on advanced country markets will lessen dramatically and by 2060 aid will have decreased in importance as a driver of Africa’s development. There is the exciting; of all the regions the report expects East Africa to have the highest real GDP growth rate between 2020 and 2060, surpassing Southern Africa. East Africa’s share of the continent’s total GDP is projected to expand from 11% (of $1.71 trillion) in 2010 to a very significant 39% (of between $12.2 and $15.7 trillion) in 2060. There is also an expectation that per capita GDP will increase from the current $657 to a low of $6,000 and a high of $7,000 in the next 50 years. East Africans are expected to enjoy these benefits longer as their life expectancy will also increase.

All of these statistics bode very well for the regional integration project. Trade, specifically intra-regional trade will inherently increase as the people of East Africa live longer and get richer. A vibrant and expanded middle class will increase over the next 20-30 years, demonstrated by the expectation that Africa’s middle class will expand from the current 355 million (34% of the population) to 1.1 billion (42%) by 2060. There is a lot to be optimistic about as Mckinsey’s Rise of the African Consumer report indicated: “Africans are exceptionally optimistic about their economic future with 84% (of those surveyed) saying they will be better off in two years.”

All of these signals point to prime conditions for the regional integration project of the East African Community (EAC). The region has now surpassed a tipping point where the EAC can no longer be dismantled. For the first time, and unlike the first EAC project, the costs of breaking up the EAC would be equally felt amongst the five partner states. No country can say, with absolute confidence, they will be better off without the EAC project. The regional economic integration process is inevitable, despite skepticism about the wisdom of the monetary union and political federation. The trouble is that climate change, also something that is inevitable and for all intents and purposes already present in our daily lives, is accelerating and can undermine the social and economic integration of the EAC. Climate change is also something many policymakers in the world are skeptical about.

The regional integration process is inevitable and can benefit the people of East Africa, but simultaneously climate change and global warming is inevitable and can completely derail all the gains and momentum that has been made over the past decade. How prepared are policymakers and businessmen in dealing with the consequences of climate change? How aware are they of the costs of ignoring global warming?

When The Unexpected Becomes Expected

On April 11, 2012 the city of Dar es Salaam in Tanzania received its first tsunami warning after an 8.6 magnitude earthquake occurred near Indonesia’s Sumatra Island. The warning set the city off into a state of panic as people rushed to their homes from work. If there was ever a wakeup call demonstrating how utterly unprepared the largest coastal city in East Africa and economic hub of Tanzania was, it was on full display on the evening of April 11. Traffic jams, although not uncommon in the city, created a tight gridlock with a number of cars lined up on Salender Bridge (the main bridge that connects the city center to the peninsula and suburbs). With the advent of social media and the Internet, rumors and misinformation spread throughout the city with people not aware of what was happening.

The scare, no tsunami hit Dar es Salaam or Mombasa in Kenya, demonstrated two very important things 1) how unprepared East African governments are for unexpected but probable events like an earthquake or tsunami and 2) how unready the city is in mass evacuation strategies. Both factors do not spell well for the future when unexpected and unlikely events like tsunamis and earthquakes become commonplace due to drastic changes in weather conditions.

The coast of East Africa is no stranger to the effects of earthquakes and tsunamis. After the 2004 earthquake and tsunami that hit Southeast Asia, the ripple effects were felt throughout the region. While it was hard to imagine that the coastlines of Somalia, Kenya and Tanzania could be affected by a seaquake whose epicenter was thousands of miles away, an estimated 80 people died when the ripples of the tsunami wave reached Somalia, Kenya and Tanzania. From a purely economic perspective, the costs of rebuilding from a tsunami especially in a major city that is by and large below sea level can reach up to billions, both in direct and indirect costs. The coastlines of both Kenya and Tanzania are very lucrative especially in the context of tourism. For instance in 2011, Kenya earned an estimated 99 billion Kenyan Shillings (Ksh) (est. $1billion) in tourism earnings. Tourism and agricultural industries are two sectors that are vulnerable to climate change and extreme weather conditions. With extreme drought and unpredictable weather patterns, tourist attractions like the Maasai Mara and Serengeti may not have as many animals in the future, decreasing interest from international tourists and denting the tourism revenues and contribution to the GDP of the two countries. The same can be said with rising sea levels and its impact on coastline attractions like Mombasa and island attractions like Zanzibar.

The coastlines of Kenya and Tanzania also host the two major and most important ports of East Africa. The ports of Dar es Salaam and Mombasa are considered the lifelines of central Africa.

Tsunami and earthquake warnings alone can shutdown ports, spelling an economic crisis for landlocked countries like Rwanda, Uganda and Burundi among others. According to the Kenyan Ports Authority (KPA) the Port of Mombasa handled 5 million tonnes of transit traffic in 2011 and Uganda accounted for the majority of this at 80% and the Democratic Republic of Congo was the second highest transit market. A closure of Mombasa due to tsunami warnings or violence and instability for that matter, would prove catastrophic for the economies of the landlocked countries of the EAC. One should remember that the port also handles aid cargo each year, as Kenya is the major hub for international relief and aid agencies. According to KPA, Mombasa handles between 350,000-700,000 tonnes of aid cargo each year. An estimated 3 million people depend on food transported via Mombasa port. The irony is that those who are in need of food and aid are in their current situations obviously due to political and security reasons but also to famine and extreme weather conditions.

There is an understanding amongst East African policymakers and businessmen that the countries in the EAC cannot transform if they do not have agriculture at the center of their development strategies. They will also not be able to match the growing demand for jobs. However, the trouble is that these countries can no longer have agriculture at the center of their development and poverty reduction strategies due to the increasing changes in the weather. According to a United Nations Environment Programme (UNEP) report that analyses the economic costs of climate change adaptation in Africa, “conservative estimates are that African economies could be facing loses of at least $10-20 billion annually with other sectors, namely agriculture, being more affected than others. As the former United Nations Secretary-General, Kofi Anan aptly put it ““Without action at the global level to address climate change, we will see farmers across Africa and in many other parts of the world, including in America-forced to leave their land. The result will be mass migration, growing food shortages, loss of social cohesion and even political instability.”

The Challenges of A Negative Argument

It is obvious that both private sector leaders and policymakers need to have long-term strategic planning in dealing with climate change and its impact. The hardest argument to make, especially in the context of Africa, is to say: “it could get worse if we don’t…” Explaining to both East African constituents and leaders that things could get worse when the effects of climate change are not necessarily clear is a hard one to make. Even if we look at the United States and the presidential elections in 2012 we see a similar case. It was quite difficult for President Barack Obama to tell the American electorate that because of his actions, he prevented an economic depression. “It could have been a lot worse.” Such an argument is hard to make, you cannot sell something that is in the negative.

The argument environmentalists in Africa are making now is “it could be worse if we don’t…” something incredibly difficult to make when the realities of climate change are not felt every day. It will be especially hard to make when, as seen in an April issue of The Economist “climate change may be happening more slowly than scientists thought.” The last thing Africa and the world needs is breathing space and an excuse to defer dealing with climate change to the next generation, especially due to the uncertainty that surrounds it. As The Economist warns, this is not the time to become complacent, the risks of severe warming are still very real, though not 4°C we could still see an increase of 3°C. The AfDB also expects temperatures to rise by 3.6°C in the Sahara region and an average of 3.2°C in East Africa. It is hard to fathom these statistics in everyday life and in business and investment terms. Do investors in East Africa and businessmen think about these risks in the long-term? Do they know that global disaster costs today are more than three times what they were in the 1980s? As mentioned earlier, climate change, global warming and its real social and economic consequences have to be taken into account and be immersed in the political discourse of the region. The same can be said in the business world.

Leadership: The X-Factor

When the late Prime Minister of Ethiopia, Mr. Meles Zenawi, passed away a significant amount of the obituaries written on him focused on how he was the regional anchor to security and stability in the Horn of Africa. Although Mr. Zenawi was a key architect of regional security in East Africa and keeping Somali extremists at bay, he was also viewed as a champion for addressing climate change and environmental issues facing Africa. This should not come as a surprise considering Ethiopia, more than any country in the world, has seen the devastation of what a severe drought can bring to a population, especially if the government and is unprepared. Extreme weather such as a drought can reverse any poverty reduction and development strategies. As a result, Mr. Zenawi worked diligently to make sure his country and the region understood the challenges of global warming.

The United Nations Environment Programme (UNEP) said as much in a tribute claiming Mr. Zenawi was “a great advocate for Africa’s strong position on climate change” and went on saying he was “an environment champion who believed that Africa needed to embrace Green Economy as the central pathway to sustainable development.” Of course, it is hard to say with certainty that the drought in Ethiopia was caused by climate change, but it is clear, going forward that the intensity and frequency of droughts will increase as a result of global warming. As an Oxfam brief in September 2012 stated, “Climate change is making extreme weather-like droughts, floods and heat waves more likely.” Mr. Zenawi and Ethiopia’s position as a regional security anchor was replaced, to a certain extent by Kenya’s bold incursion into Somalia. What about his presence as a climate change champion? Who will replace him and pick up the mantle?

How we handle the future and the uncertainty that surrounds it will be up the people of East Africa and the leadership prioritizes climate change and its direct and indirect consequences. The leadership cadre of East Africa will have to think beyond each election cycle and think 20-30 years ahead. We may have bold visions and projects that will make us middle income countries by 2040 or so, but these changes could be easily reversed by the impending challenges presented by extreme weather conditions and unplanned disasters.

In September 2012, Mo Ibrahim, the Sudanese born billionaire and philanthropist and founder of the Mo Ibrahim Foundation, Index and Prize told the Wall Street Journal that “Africa doesn’t need help, doesn’t need aid. It’s a very rich continent. There is no justification for us to be poor.” The heart of the problem is governance, “without good governance, there’s no way forward.” Mr. Ibrahim is referring to what can be called the X-Factor in the future of East Africa in how it deals with the changing political, social, economic and environmental future. It is also what can embolden or undermine the regional integration process. If the region’s leaders do not take the environment seriously and the consequences of extreme weather conditions, we will be caught flatfooted when disaster hits compromising our human and economic security destabilizing the entire EAC project. As Rob Bailey, author of a Chatham House Report called “Managing Famine Risk” indicated “Governments in at-risk countries may attach low priority to the needs of the poor or marginal communities when deciding how to allocate public funds or whether to respond to early warnings.”

We can either sit back and enjoy and take comfort in the high, positive economic growth rates, the increased foreign direct investments, expanding intra-regional and global trade, and the rising global profile of the region. However, we should do so knowing full well that the economic gains and progress made over the past ten years can be easily reversed if we ignore certainties like climate change and global warming. If Africa truly wants to transform and realize the visions it has forest for itself, it must start planning ahead, preparing for the unexpected and building a society and economy that will be resilient in 50 years and not just for tomorrow.

We simply cannot afford to take these things for granted. Perhaps Nassim Taleb, the author of Antifragile: Things That Gain From Disorder should have the last word in this when he discusses risk management and preparing for the unknown:
“People in risk management only consider things that have hurt them in the past (given their focus on evidence), not realizing that, in the past, before these events took place, these occurrences that hurt them severely were completely without precedent, escaping standards.”

Ahmed Salim is a Programme Manager with the Society for International Development and co-author of The State of East Africa 2012: Deepening Integration, Intensifying Challenges.

Growth of Regional Banks in Africa

African banks are expanding into neighbouring countries and further afield benefiting from their knowledge and expertise in familiar territory.

Over the last five years Africa has witnessed a growing trend for Africa’s home-grown banking groups to extend their franchises beyond their own borders, with about 15 of them already exploring new territories. Regionalisation has become a prominent part of African banks’ strategies as these historically local players continue their ongoing search for growth and a way to diversify their earnings as competition increases in their home markets.

Obviously Africa’s high-growth economies are an attraction, but one of the key drivers of bank regional expansion is linked to clients expanding across the continent as they too take advantage of the opportunities Africa offers. Banks therefore are following their clients to areas where activity in the purchase and sales of goods are prevalent, perfectly addressing their own growth strategies.

Building local knowledge and expertise is important and forms the foundation for any bank’s expansion plan. Consequently, proximity to a bank’s home country is a key competitive advantage, as banks are usually more familiar with their neighbours than with countries in distant destinations. A good example of successful regionalisation is the robust expansion of Kenyan banks like KCB, CBA, Equity Bank and Co-Op Bank into East Africa (South Sudan, Tanzania, Uganda, Burundi and Rwanda). In South Sudan, banks like KCB, for example have had first mover advantage and are now part of the biggest banking groups in the country.

Also helping bank regionalisation is the growth of regional trading hubs between port cities (Nairobi, Kenya and Dar es Salaam, Tanzania) and between countries inland (like Uganda and Rwanda), opening opportunities for banking products and services.

However, banks are also moving further afield to take advantage of high-growth markets. An example of this has been the rapid expansion of some Nigerian banks into Africa. UBA Nigeria and Ecobank have a presence in over 15 countries on the continent. While there may not be natural trade flows or client expansion into these new markets, Nigerian banks looked at avenues to diversify their funding base, taking advantage of earnings from high-growth sectors in growing countries. This strategy is a long-term play as earnings growth is usually much slower but intrinsic value is built in these franchises along with a brand and relationships.

But the risks of regional development cannot be ignored. Unexpected regulatory changes within a country can be swift and can significantly change the economic landscape, something for which banks need to be prepared. An example is the recent requirement in Zambia for foreign-owned banks to increase their capital from US$5-million to $100-million.

Credit risk and asset diversification are other key elements for banks to assess as they diversify into other regions. Often banks first initiatives in a new country are trade related but in order to compete with local players, they usually need to diversify to gain a deposit base and build traction in their earnings. This inevitably means a move into the retail segment at some point. However, growth in retail banking presents a two-pronged challenge. Firstly, a branch network is expensive. In Mozambique, for example, a single branch costs in the region of $1-million to set up from scratch. Secondly, a growing retail base often leads to higher bad debts and banks need to be prepared for the fact that the retail space will attract higher non-performing loans than the corporate space. Getting the correct balance between corporate, investment and retail banking is the key to success for African banks expanding across the continent.

But, so far, banks are benefitting from their expansion into Africa – earnings are steadily growing and franchises are being built across the continent. A core theme which is emerging as part of this recipe for success is the successful integration of local talent with home country expertise.

However, with time, regional expansion will become more difficult and expensive for new entrants which do not have an existing presence in African markets, unless they are prepared to pay a handsome premium to acquire a regional banking franchise. For those which have already taken the risk, It’s an exciting time and the development and expansion of African banks should mean they will soon be able to compete with any in the rest of the world, if they are not doing so already.

About the author

Suresh Chaytoo heads FirstRand Bank’s International Financial Institutions and Development Financial Institutions business.

Suresh joined FirstRand Bank in January 2011 as regional head of Financial Institutions for Africa and Latin America with the responsibility for supporting FirstRand Bank’s strategic business expansion in Africa. He was appointed as sector
director to head the business in May 2013.

Prior to 2011, his previous assignments during his 20+ year career in banking include tenures as vice president and regional head of Financial Institutions (Middle East and Africa) for ICICI Bank Limited in the Kingdom of Bahrain, and head of Channel Finance at Citigroup South Africa.

Suresh has also held positions within Structured Trade Finance and Corporate Banking during his career.

He holds an MBA, a degree in Commerce and a CAIB (SA) qualification from the Institute of Bankers in South Africa.

A New Market Power: the 86 percenters

Vijay Mahajan is the author of three books on market opportunities in the developing world: The 86% Solution, Africa Rising and his most recent book Arab World Unbound: tapping into the power of 350 million consumers. All three books focus on the market power of the 86 per cent of the world population who live in the developing world. He speaks to Zara Ruban about how the multinational companies can engage with consumers in those economies.

Vijay Mahajan’s well known for his research and books on opportunities for businesses in the developing world. He is passionate about his subject and anyone who speaks with him is infected with the same enthusiasm. For him it is time that the world recognizes the potential for growth in these often neglected markets. Any company who is interested in growth and revenue will take his work seriously. Eighty-six per cent of the world population live in the developing world, where the GDP per capita is less than $10,000 dollars, the other 14 per cent live in the developed world. Professor Mahajan believes that all the opportunities in the future will be in the 86 per cent world, his extensive research in China, Africa, India and the Arab world supports that position. However, companies in the 14 per cent world have to change their mind-set in order to engage with the 86 per cent in the developing world.

Professor Mahajan has famously labelled that mind-set the 2,400 square feet mind-set. It is simply based on the size of the average American family home, one family room, living room, breakfast area, two car garages or three, buy one get one culture. And all the marketing is dictated by this mind-set. This is not what obtains in the 86 per cent world where GDP per capita is far less than $10,000.

In contrast in New Delhi for example, a professional man and his wife and children would probably live in a 750 square feet apartment, with a smaller kitchen there would be fewer and smaller appliances, therefore there would be less space for storage, which would mean more frequent visits to the market or local shopkeeper. Foreign companies who want to do business with the 86 per cent world have to change their mind set and consider new rules of engagement.

The indicators for growth

I asked Professor Mahajan why businesses would be interested in Africa, given the low GDP and its infrastructural challenges. Professor Mahajan ‘s view is that there are opportunities for those who look beyond the GDP and those statistics, there are opportunities anywhere where the GDP is close to $1,000. What then are those indicators for growth?

An indicator which is not immediately apparent to the foreign observer is the ‘shadow economy’, this operates beneath the actual economy. Professor Mahajan maintains that the GDP per capita does not tell the whole story, looking at the GDP of most African countries one would have expected that the mobile phone would be out of reach of most of the African population. But that is not the experience of the mobile phone industry in Africa. Africa is the fastest growing mobile market in the world, and the second larges after Asia; it is likely to surpass Asia in the very near future. It is predicted that sub-Saharan mobile phone subscribers will be about 800 million by the end of this year. The population of sub-Saharan Africa is estimated to be about 830 million in 47 countries. The shadow economy is therefore important and its size is a strong indicator of growth.

A second indicator relates to the percentage of the economy controlled by consumers
This is very important from the marketing point of view. In the US, the consumer controls 70 per cent of the economy and the remaining 30 per cent is accounted for by the government, federal, state and local governments.

Africa is more consumer driven than China. So when you look at their average consumption expenditure per capita for Africa in comparison to China, you will see that China has a big chunk of their economy controlled by the government and the consumer economy controls about 27%, while Africa averages about 49%, almost half of their economy is controlled by consumers. This is an important indicator and is the reason why these economies present such exciting prospects. Wherever the government has less control than the consumers, the consumers are then in a position to demand goods and services, and there lies the opportunities for foreign as well as local businesses.

It is estimated that by 2020 over 50 per cent of the world GDP will be from the developing markets. If this forecast holds true, Professor Mahajan’s view is that this would give the 86 per cent club a major power in influencing the flow of commodities and trade in the global economy. The US, for example, under Obama has a major initiative to increase US export and so is the case with other countries in Europe, China and Asia. Naturally when the consumers have such buying powers and numbers, everybody will be clamouring to find out what they can sell to them.

Another indicator for growth is the growth of the African middle classes.
At the time of researching his book, Africa Rising, Professor Mahajan found the IMF and World Bank definition of the middle class was inadequate in understanding and identifying a corresponding demography in Africa. He found that the IMF’s and World Bank’s definition were ’14 per cent focused’ and therefore unhelpful. In almost all Western economies, the middle class is divided into five groups: A B C D E.
And sometimes even within A B C D E you may have a C1 and C2 and C3, but the definition of A B C D E is very local. The middle class in the US would be very different from the middle class in the UK or in Nigeria.

In his inimitable style, Professor Mahajan decided to look elsewhere, he spoke to the advertising and research agencies, to the companies trading in Africa and found that they had developed their local based definitions. That assisted him to develop his own definition and so he identified this class as the C class, so as to avoid confusion with the World Bank’s and IMF’s definition. The A and B group became Africa1, C Africa 2 and D and E, Africa 3.

Africa 2, turned out to be anywhere between 300 million to 500 million. He estimated that about 40% of Africa would be in the C group. Typically the people who come in the C category would be say, teachers, civil servants, nurses and in many countries these may be the physicians who are government employees. They are neither poor nor rich. Interestingly, this class would also include people who are working in the hospitality industry. The hospitality industry is relevant here because of the shadow economy. Many of the people in the hospitality industry are not only living on their salary; they are also living on tips, which are often larger than their wages.

The C class, is the aspirational class, they are the people who want to give their children more than they have, they will save money to buy them the uniform. They’re the ones who work overtime to make sure that they can pay their child’s school fees. They are the ones who want private schools, not the expensive one, just a little better than the state schools. It is their aspirations that are common to this class.

No Logo No Sale

Professor Mahajan believes that the level of brand conscious in sub-Saharan Africa provides another opportunity for foreign companies. He found that Africans in sub-Saharan Africa are the most brand conscious people he came across in his research, far more than Indians or Chinese. And this cuts across classes. Even a local driver is brand conscious; he would readily show off his shirt with some logo or another, even though it was bought in a used clothes stand somewhere by the side of the road. Where people buy used clothes, they would only buy used brands. The same went for cars. Rather than buy a brand new unbranded car, the young men would rather be seen driving a a used BMW.

Therefore the challenge for the multination should be to organise the market, so that if people are going to buy the used brand, they would organize the market so that they buy ‘my used brand’. This creates brand loyalty so that when they want to migrate to a new model they migrate to a new model of ‘my brand’. Even more importantly, a used care market creates a market for the spare parts and probably servicing. Brand consciousness is quite dominant in sub-Saharan Africa and this is because of aspiration, irrespective of locality, culture, religion, the Africa 2 are very aspirational people.

Selling to the 86 percenters

With all these in mind, Professor Mahajan developed new rules engagement. In the 86 per cent Solution, he puts forward about eight or nine rules of engagement and in Africa Rising, three or four more rules and the same with the Arab Market Unbound. His thesis is that those who want to access the 86 per cent market have to start developing the solution, the products and services that will address the needs of the 86 percenters. We talked about the interesting example of Haier, a Chinese company that builds refrigerators which can be dismantled for ease of transportation in those countries where you do not usually have elevators in family accommodations.

Local knowledge

Professor Mahajan stresses that global brands cannot underestimate the strength of local competition. He cites an interesting example of a local soft drinks brand in Algeria. Hamoud, stands as a real challenge to Coca Cola’s global domination. The Algerians have a a little joke that Hamoud outlasted the French occupation which lasted more than 100 years. Hamoud understands the local market, the product is affordable and they have a huge brand loyalty amongst Algerians in and outside Algeria. Multinational companies have a tough time competing with Hamoud in Algeria.

Distribution

Distribution still poses real challenges in many of these economies. Professor Mahajan argues that Trade in these emerging economies are still very local, what he describe as ‘market stall’ economies i.e. small stalls run by individuals. While big shopping malls are being built in all the capital city, the fact of the matter is that trade is still predominantly ‘market stall’.

Distribution is also determined by the extent to which a country has been urbanised. A high percentage of the population in the developing world (including China), still live in the rural areas, for example India tops the list with 70 per cent of its population in the rural areas, Nigeria and Ethiopia feature high up in the list too. These countries are not going to have modern trade overnight; therefore a lot of the trade is limited to the urban centres. It is therefore not surprising that multinational firms restrict themselves to the urban centres, to the Shanghais and the Beijings and the Lagos and the Mumbai, Karachi, Lahore, their story basically right now are the urban centres. Except for a handful of companies. like Coca Cola in Africa, which has been in Africa for 90 years. Many just come and go. The next frontier is going to be the rural markets.

Coca Cola broke the mould, they have amazing knowledge about distribution. And they have gone to every nook and corner delivering their product by every conceivable means and as a matter of act they say that their biggest strategic advantage is distribution and their knowledge of that sector.

Global brands that understand the distribution system can have a competitive advantage. It would appear that the local brands, with their knowledge of the local market, would have the advantage over any foreign competitor. Professor Mahajan found that the multinationals have a huge advantage on their side. In his research in Africa, he found that work with advertising agencies, such as Saatchi and Saatchi. The multinationals, through the marketing research groups and through the advertising agencies gain the local knowledge they need and at the same time try to organise these markets.

Professor Mahajan also went to on discuss another more strategic advantage that the multinationals have over local competition, a phenomenon he terms ‘ricoche economy’

Besides their bank of research companies, advertising agencies etc. who bring them the much needed insight and local knowledge, they also have a high number of foreign born citizens. In the US 40 million US citizens were born outside the US, and 90 per cent of those come from the 86 per cent economies. These companies have access to the talent of their ‘immigrant’ citizens who are originally from the 86 per cent world. This segment of the population has now become a strategic advantage, because they still have connections with their country of origin. So as an example, when a US company needs a country manager to open up its market in say India, it is likely to find someone with connections with their Indian heritage to send over.

Beyond that, these foreign born citizens with connections in their country of origin create new business opportunities for businesses in the country of birth and where the country where they are domiciled. Telephone companies are paying attention to their long distance call clients who make regular calls to places in India and Africa and even business in those countries are paying attention to those in the diaspora, internet shops have sprung up to enable them to send gifts to loved ones in their countries of birth.
Professor Mahajan gave the example of a Kenyan supermarket that among other things provides services for Kenya’s in the diaspora. Nakumatt, which proudly describes itself as the Wal-Mart of East Africa runs an online store where Kenyan immigrants in the UK for example can buy products online and the products are delivered to their family in Kenya.

Bring your own Infrastructure

There are market opportunities for foreign businesses in the emerging economics, the question that remains is whether or not they can replicate their success in these emerging economies. One of Professor Mahajan’s exciting rules of engagement is what he coined ‘bring your own infrastructure’. He used the success of Coca Cola in Nigeria to illustrate the point. Coca Cola is available anywhere in Lagos, Nigeria for example, in the big hotels, restaurants and by the road side, but regardless of where you buy a bottle of Coca Cola in Lagos, you can be sure that in the sweltering heat of that city and despite the notorious power failures, you will get a cold bottle of Coca Cola. Coca Cola is kept on ice in a cooler at the side of the road. Coca Cola has one of the biggest ice making plants in Lagos. Coca Cola has a strategy that makes the ice and the cooler available to its sellers who qualify by selling an agreed number of bottles a day.

The foreign companies need not wait for all the infrastructure to be in place before they enter the market, they just bring their own infrastructure with them. Since 1948 only a handful of countries have joined the $10,000 per annum GDOP club and by American standards that figure falls within the poverty line. The infrastructure of the 86 per cent of the world market (which could quite possibly rise to 90 per cent in the next decade) will not match that of the Western economy anytime soon, and hence companies like Coca Cola do not wait around for the infrastructure to improve, they are creating their own.

This is also true when we look at the newer technologies, which have allowed for innovative solutions such as mobile banking which has reached a large proportion of these populations who do not ordinarily have bank accounts.

There are exciting times ahead and immeasurable rewards for those who dare to break out of their 2,400 square feet mind-set.

About the author

Vijay Mahajan holds the John P. Harbin Centennial Chair in Business at McCombs School of Business, University of Texas at Austin. He is a former dean of the Indian School of Business in Hyderabad. Prof. Mahajan is one of the world’s most widely cited researchers in business and economics, and has been invited by more than 100 universities and research institutions worldwide for research presentations. His last book on market opportunities in developing countries, “The 86 % Solution,” received the 2007 Book-of-Year Award from the American Marketing Association. He has published ten books to date, edited the Journal of Marketing Research, and has consulted with Fortune 500 companies and delivered executive development programs worldwide. He has extensive research in product diffusion, marketing strategy and marketing research methodologies. Mahajan has received numerous lifetime achievement awards including the American Marketing Association (AMA) Charles Coolidge Parlin Award for visionary leadership in scientific marketing. The AMA also instituted the Vijay Mahajan Award in 2000 for career contributions to marketing strategy.

Small Scale Enterprises are Sustainable Foreign Direct Investments

In this article Mazdak outlines the aspects which characterize SMEs as sustainable FD Investors and the relevance of SMEs as sustainable FDIs.

There has always been a deep discrepancy in the economic science and literature on the evaluation of foreign direct investment (FDI) for the development of the host countries. Many case studies from the second part of 20th century point out the reckless behavior of foreign investors and the economical and ecological damages caused to the society of the host country. Despite these negative aspects, the majority of the latest economic literature is in favor of FDI and is convinced of its positive effects on overall economic development. Apart from financial resources, foreign investors also provide new technologies and know-how, new jobs and other positive impulses for the economic growth of the country they emigrate to. Constantly assessing every economy by criteria such as market size, efficiency level or the existing natural resources, foreign investors are hunting for new destinations for their commercial activities.

Thus, there is extreme competition to attract FDI among developing and developed countries. Investment Promotion Agencies (IPA) and trade organizations are created to communicate the advantages of the host countries to the international FDI community. Trade and investment policies are liberalized and incentives are put in place in the battle to attract foreign investors. Surveys and economical reports from internationally renowned organizations such as the competiveness reports and rankings of World Economic Forum and IMD Institute of Lausanne or the Doing Business Report of The World Bank keep monitoring the economic framework of each country and their optimization efforts.

SMEs in the FDI world

A closer examination of the FDI theory and practice shows that they mainly reflect the behavior patterns and decision-making processes of Multinational Corporations (MNCs). The reason for this fact lays in the history of FDI, which has always been directly linked to cross-boarder activities of MNCs. European companies such as Virginia Company owned by King James I and East India Company were among the oldest corporations with international trade structures set up by FDI in the beginning of 17th century. Seeking natural resources, better trade infrastructure, cheap labor and effective entry into new markets, the MNCs were involved in many regions and different economic sectors. MNC activities included projects in railways, mining, tramways, water, gas, electricity, banking, insurance, finance, land plantations and agriculture. Although very complex and cost intensive, most of the FDI projects (predominantly in mining and manufacture sector) were extremely profitable for the MNCs, not least because of their strong influence in the host country. For the same reasons FDI remained predominantly a playground for MNCs for more than 2 centuries.

The counterparts of the MNCs are the Small and Medium Sized Enterprises (SMEs). In most countries SMEs are the beating heart of the domestic economy. They have the biggest share of employment and fuel innovation through research and developments and practical experience. In many cases SMEs are called “the hidden champions” dominating their economic sector even beyond the borders of their home countries.

Historically SMEs focused their commercial activities on the domestic and regional markets. Traditionally their international business is based on two pillars: a) exporting goods (mainly regionally) and b) serving MNCs of their country as suppliers, trusted partners and subcontractors. However, continuing globalization of the last 3 decades changed the local, regional and international business framework for the SMEs, specifically in the developed countries. The increasing relocation of their MNC clients to regions with cheap labor put them under enormous pressure to internationalize. The liberalization of global markets led to lower prices which strengthened their foreign competitors. Weak domestic markets made it inevitable for SMEs to reach out directly for lucrative projects in emerging markets. Despite their limited experience and financial abilities it was inevitable for them to internationalize their business to a much higher level and also become members of the FDI community.

Sustainable development: MNCs versus SMEs

While the vast majority of FDI research concentrates on inflow and outflow, motivation, attraction and the impact of FDI, little has been said about the differences between MNCs and SMEs as foreign direct investors. The Brundtland Commission Report’s definition of sustainable development as “development which meets the needs of the present without compromising the ability of the future generations to meet their own needs” offers a suitable scale for assessment of both groups. Their behavior in the host country can be examined with respect to the three dimensions of sustainability: economical, ecological and social. Evidently, a thorough scientific research on this topic would go beyond the frame of this article. However, a few examples and experiences from the FDI daily business are enough to explain an existing difference in this field.

Having strong political influence, an active international network, vast financial and human resources, MNCs have the power to optimize their benefits in all three dimensions. Economically they secure their know-how, occupy key positions in their foreign ventures and partnerships with their own staff and optimize the financial outcome of their activities for their shareholders. Case studies from production facilities of the US automotive industry in South America from end of the last centuries are suitable examples for this aspect. Up to today the MNCs negotiate existing commercial laws and regulation to create the best tax environment, subsidies and any other possible support or advantage from the government of the host country before making any investment decisions abroad. Ecologically MNCs use the natural recourses of the host country without paying attention to the ecosystem or wellbeing of the local environment. Large oil and mining companies in African countries are still withstanding the international pressure to comply with global ecological standards. Numerous reports document the horrific damages of the local landscape, water supplies or forests in African, Asian or South American countries caused by reckless exploration of local resources. The daily activities of the MNC employees and their families are mostly kept separated from the society of the host country, which makes social exchange, interaction or integration almost impossible. In some countries personal safety or cultural differences makes this kind of separation necessary. However, in other cases the employer even imports their food from their home country and their staff remains in separate camps in their free time with all their needs taken cared of by their companies.

The circumstances for SMEs as foreign direct investors are considerably different. Not being as influential and powerful as MNCs, economically SMEs have to comply with the local rules and regulations and face all existing challenges in the host country with their own limited abilities and recourses. Lack of financial resources makes SMEs much more careful with their activities and much more dependent on the market of the targeted country. The shortage of human resources forces them to hire and educate local staff. In many cases they even have to train the staff of their local suppliers, distributors or contracting partners to ensure the quality of their products and services for the end customers.

From the beginning SMEs have to learn the business and social framework of the host country. This also includes the environmental regulations. In fact, in many cases the SMEs implement the more advanced and environmental friendly behavior standards of their home country into their new venture. The use of water and energy and waste management rules are good examples in this context.

The entire process of internationalization of SMEs is based on close relationship and interaction with the local population, the companies and the authorities of the host country. This again leads to intensive personal connections and social and cultural understanding and a more sustainable development.

Attracting SMEs

As foreign direct investors, SMEs also benefit from the incentives offered by the authorities and marketing institutions of the host countries. However, most of the offered support programs concentrate on attracting MNCs rather than SMEs. These programs predominantly focus on company registration (one-stop-shop) and taxation. Although these aspects are also of importance for SMEs, it is more crucial for them to overcome other threads and obstacles in the process of internationalization.

These threads consist of lack of reliable and easily understandable information, cultural awareness, managerial know-how and the necessary network in the host country. Further, the most important question for SMEs in the new country is to understand how they can develop their business and remain successful over a long period of time? In other words, how to become economically sustainable in the new environment they operate in. Especially in the first two years SMEs need a lot of support when it comes to finding new projects and coping with the all the new social, cultural and business challenges. Often it is the sum of small issues that makes survival for SMEs very difficult in the new environment. Attracting SMEs as foreign direct investors means finding innovative and direct solutions for these issues, which usually occur after the establishment of the company in the host country.

IPAs and other FDI attracting organizations can use modern information and communication technologies, which offer diversified and effective options to supply transparent and updated information about the business framework and the economical potentials in their countries. Most of them have sophisticated websites and run expensive online and offline marketing campaigns. However, there is a huge discrepancy in the use and efficiency of new media between the developed and the developing world. In many cases the language barrier is not being considered. In other cases the information on the websites are not updated which leads to misunderstandings, delays and frustrations. Many questions are much easier answered through a phone call or easy accessible representative offices. Mostly family owned, SMEs have a traditional value structure which is based on personal relationships. Thus, they always prefer a direct and personal contact to clarify business related matters.
The role of the government in the host countries should not only be limited to definition and creation of a FDI friendly legal framework. Being de facto the largest participant in the local economy, governments can actively attract SMEs directly through economic promotion programs. A specific part of public projects can be assigned to SMEs. Some tenders for these projects can be pre-defined as joint venture projects between foreign and local SMEs, which will in turn promote international collaboration. Even projects for MNCs can be connected to participation of local or international SMEs as suppliers or subcontractors.
In many countries it is a matter of legal and even personal safety to comply with social rules and cultural habits of the host country. Many SMEs underestimate this aspect and often find themselves in a learn-by-doing process resulting in numerous issues in daily life. Therefore, generally any social program promoting cultural awareness is necessary and usually appreciated by the expatriate community. However, it is of great importance that these programs are communicated through effective channels so they can reach the different groups of expatriates in the host countries.

Conclusion

Multinational Corporations are still the most targeted foreign direct investors as their investments are large, they can raise the export activities of the host country, their names can be used to attract other investors and for many other reasons. Therefore, they should remain a crucial part of any FDI attraction strategy. However, they are no longer the only group active in the field of FDI. Driven by the forces of globalized economy Small and Medium-Sized Enterprises are increasingly participating in international transactions. They might not have the advantages of economy of scale but a sustainability assessment clearly proves their middle- und long-term benefits for the host countries. Hence, a holistic FDI strategy no longer can afford to avoid this group and their special needs in the process of internationalization. In order to attract SMEs as sustainable foreign direct investors, the host countries need also a sustainable incentive program with innovative measures and ideas matching with the special needs of SMEs. As in any other field, sustainability in FDI is also about giving and taking to achieve a win-win situation for all participants.

Emerging African economies: strategies for coping with global financial crisis

The recent global economic recess has far reaching implications on the stock market, employment of labor and survival of the production sector. Investors are poorly compensated, jobs are lost in thousands and hitherto viable industries are folding up. The African economy is not spared either. Policy makers and technocrats are now being challenged in an attempt to arrive at workable solutions to the current economic quagmire. In this paper therefore, several economic indicators were examined.

The implications of the various manifestations of the global financial crisis on the economic indicators of the African economy were investigated. These indicators include the gross domestic product, GDP, foreign reserves, employment opportunities among the active working population and rate of inflation on consumable goods and services, level of exports and interest rates, and so on. Some stopgap measures put in place by the African countries to circumvent or mitigate the effects of the global crisis were identified and many relevant policy frameworks were suggested for implementation. To avoid an unmanageable economic recession therefore, it was suggested that more attention be paid to the efficiency of resource use and minimization of leakages or wastages in the African economies.

Following the global financial crisis which reared its ugly head late last 2008, the level of unemployment in the United States and many European countries (particularly Britain, Germany and France) hit all-time high levels (IMF, 2009). The number of people on low wage part-time jobs had spiraled in those countries. Again, there are observable frenzied stock markets and social dislocations in these hitherto booming economies. The general manifestation of this scenario is that there is a negative growth across the various sectors in most developing economies. In addition to this, it is very clear that no African country is safe from the global financial crisis and slowdown in the over- all global economic growth. Given the inter-linkages in the global economy, policy makers also foresee the global slowdown will invariably reduce the demand for African exports. This has already been reflected in the demand for and prices of commodities in African countries. For South Africa and Egypt, there was an appreciable increase in the demand for exports and non-factor services between year 2000 and 2008 while the story was different for Nigeria and Ghana.

However; there was a general increase in the demand for imports and non-factor services by South Africa, Egypt and Ghana within the same periods (Table 1). In his paper titled: ‘What the Global Financial Crisis Means for Sub –Saharan Africa,’ Takatoshi (2009) rightly observed that the world’s growth was expected to come to a virtual halt, which would require a decisive global policy response. Quite unfortunately, despite wide- ranging policy actions by governments and Central Banks around the world, financial strains remained acute, pulling down the real economy.

Energy consumption and economic growth: evidence from low-income countries in Sub-Saharan Africa

The main purpose of this paper is to investigate the causality relationship between energy consumption and economic growth in four low-income countries in Sub-Saharan Africa using the econometrics in time-series methods. Along the estimation process, the author uses the annual data on energy consumption and real GDP per capita over the years of 1971 and 2011.

Should governments care about the relationship between energy consumption (EC) and economic growth (GR) in their home countries? It is important for policy makers to find out the causality relationship between EC and GR because the final result will help them to impose a proper energy policy. For instance, a government will pay more attention on a policy of stimulated energy use in the case where the reduction in EC will cause GR to go down as EC is found to have a positive impact on GR. Hence, the government will encourage people and firms to consume more energy in order to foster its growth since EC is also related to many factors such as unemployment, investment, savings and economic development. On the contrary, the government can carry out an energy conservation policy when there is no causality linkage between the variables or causality running from growth to energy use in that country. In such a case, if the government follows the appropriate policy it will unlikely face the severe economic turndown during the dramatic increase in energy prices.
Although a number of papers have focused on the causality relationship between energy consumption and economic growth over many countries from different continents, no clear consensus about this concern has been obtained. The differences in the estimation results mostly emerge due to the differences in countries’ conditions (i.e. economic developments, natural resources, consumption patterns, technology, and human capitals), applied econometrics techniques, and used time periods. Referring to the existing literature, there are typically four different outcomes related to the connection between EC and GR. These hypotheses are: “Conservation hypothesis” occurs when there is a one- way causality running from economic growth to energy consumption. “Growth hypothesis” exists if energy consumption causes economic growth, but GR does not cause EC. “Neutrality hypothesis” arises when there is no linkage between energy consumption and economic growth. “Feedback hypothesis” happens if there is a two-way causality between EC and GR (Ozturk, 2010).

In this paper, we plan to investigate the relationship between EC and GR in four low-income countries[1] in Sub-Saharan Africa because of following reasons: 1) The published single and multi- country studies on the case of Sub-Saharan African countries have usually neglected the mentioned countries 2) The papers include Benin, Congo, Kenya and Zimbabwe have indicated different hypothesis in these countries 3) There has not been a recent multi-country study focuses on the low- income countries in Sub-Saharan Africa[2]. Thus, the purpose of this paper is to fulfill this gap and make an empirical contribution into the economic growth-energy literature.

Globalization, foreign direct investment and economic growth in Sub-Saharan Africa

Globalization, foreign direct investment and economic growth in Sub-Saharan Africa

By Saibu M. O and T. O Akinbobola

This paper examines contributions of foreign direct investment and globalization to real economic growth fluctuation in selected sub-Saharan Africa countries. Adopting the conventional vector autoregressive mechanism and the time series data from the selected countries, the result showed that out of the eleven countries studied, foreign direct investment explained the highest proportion in just three countries, Morocco, Ethiopia, and Zimbabwe. Except in Tunisia, Tanzania and Kenya, where the degree of economic openness explained substantial proportion of the output fluctuations, the variations in most of the countries were explained by factors beyond foreign direct investment and economic openness.

The result supports the existing finding on African economies that trade liberalization had not substantially impaired the economic growth process of the sub African economies as alluded to by previous studies. The upsurge in the capital flows to African economies was also insufficient to insulate the economy from the global meltdown and furthermore kick start post crisis economy recovery in Southern African countries. Therefore, the paper concludes that fluctuations in real economic growth in these countries might be beyond the external shocks from the capital inflows and trade flows.