Infrastructure

Africa’s Triple Challenges

Posted on Nov 6, 2013 in Development, Economy, Infrastructure, Politics

Africa’s Triple Challenges

Nowadays Africa is the darling of the global investment community. Report after report highlights the impressive actual growth and the promising prospects for the continent’s economic performance over the medium to long term. The so-called “dark continent” has transmuted into the “bright continent”. And, that is most welcome. However, for these sentiments and opportunities to be converted to sustainable socio-economic developmental momentum a number of key issues need clear recognition and effective solutions. Three of them loom large in this context.   First and foremost, it is critical to recognize that there is a difference between the requirements of the short and medium term economic performance and those of the long term sustainable development. It is a fact that most African economies are growing from a low base at high annual rates. This is because at the early stages of growth, opportunities for investment are plenty and capital flows are insensitive to the critical role of economies of scale. However, when these short term- the so-called “low hanging fruits”- are exhausted, capital flows increasingly respond to market size, economies of scale in production, and the comparative advantages arising from well-designed and integrated infrastructural logistics- something that more often than not requires a great deal of transnational coordination and operation. In this regard Africa is way behind. Neither its political nor its institutional structures have moved far beyond the colonial mindset! The historic fact of Africa is that the colonial past left the continent with too many sub-optimal independent territories, most of whom lack the absolute or relative economies of scale.  On top of it blind nationalism and even raw tribalism are still excessively prevalent on the continent. Yet, many countries are way too small a market to generate internal sustainable growth momentum for the medium to long term. In a world where increasingly global competitiveness matters, this is a real challenge that Africa has to overcome- and need to do so urgently. Even if political boundaries are kept, agreements have to be reached to facilitate investment and industrialization policies that are based on solid regional integration platforms.   Second, and related to the above, is the need for industrialization across a set of industries where Africa, and sub-regions of the continent, have sustainable or dynamic comparative advantages. Once again, for such a strategy to be successful, economies of scale are vital. Strategically, the global factors are in favour of Africa’s industrialization. The continent’s resource base in some key sectors is rich, global capital markets are awash with “cheap capital”, and the required technologies are easily accessible. Examples in this regard include mining equipment industries, the petrochemical complex, food and agriculture industries, and clean energy generation. This favourable structural configuration is only the necessary condition. The sufficient condition, however, is to put in place the required long term framework that creates ample and evident economies of scale for investments in transnational logistics, market access, human resource development and capital market institutions that guarantee the medium to long term developmental sustainability. Importantly, Africa cannot replicate the industrialization templates of Europe, US, Japan or South-East Asia. The dynamics and requirements of industrialization differ at different times for different regions. In this context, the national policies within Africa are unlikely to succeed unless and until they are integrated into the continental or sub-continental industrialization strategies. The third, and most important, challenge is related to human resources development, with focus on the youths. It is a fact that Africa has one of the youngest demographic structures at present. Global projections indicate that for the next four to five decades, African demographics will be dominated...

Read More

Normalizing Economy Facing Geopolitical Risks

Posted on Nov 6, 2013 in Economy, Featured, Infrastructure, Politics

Normalizing Economy Facing Geopolitical Risks

Five years after the ‘great recession’ of 2008, the global economy is showing the early signs of ‘back to normality’. Chances are that 2013 will mark the tipping point. Normalization in common economic jargon means a global economy which is growing at or around its long term growth path and is subject to cyclical variations together with regional divergences in economic performance. Clearly, the global financial and banking crisis is by and large over- thanks to the gigantic bail out by many governments and central bankers. The housing market is also gradually returning to normality. Even the EU political debacles surrounding the euro and its associated political economy issues appear to be managed down. Predictions of the EU split have proven no more than false alarms or hasty predictions by those who have clearly under-estimated the collective intelligence and commitment of the European leaders to stay the evolutionary course of their political integration.  Whilst the banks are back in a fairly sound financial status, the same could not be said about their respective governments. In many countries, financial interventions by governments have left the national fiscus in fairly vulnerable state- that is if not already bankrupt. Countries like Ireland, Spain and Portugal are in dire fiscal conditions, whilst UK, USA and France teeter on the verge of fiscal vulnerability.   All said and done, it is by now clear that since August 2008 the unprecedented measures taken by national governments and the central bankers, mostly in the OECD member countries, have averted a total global economic and financial collapse. This has been achieved, to a large measure, at the expense of the poorer groups within the society. Because when the government finances are short, it is the poor who ultimately bear the brunt of it, especially in the short term.  With job shedding in the public sectors and drastic cut back in public subsidies and welfare budgets, the societies experience all kinds of social tensions. Political leadership in such a milieu faces a major credibility deficit. Lack of confidence in political and social leadership in turn undermines the societal cohesion, destroying much hard-earned social capital.   On the economic front, one of the direct effects of the monetary policy stance has been a sustained low interest rate policy worldwide and a global capital market operating in a liquidity trap.  Such prolonged configuration has many political economy side effects, two of which merit special attention. One is the rise in speculative activities diverting resources from real economic enterprises. Consequently, constructive and job creating ventures are substituted by financial transactions that offer high short term return on capital.  Predictably then even when economic growth is registered, the level of employment creation is either stagnant or at a much lower scale. Whilst this is a worldwide phenomenon, for the emerging economies it entails profound socio-political risks. Some of the emerging economies may even find the consequences too problematic- politically speaking. In such conditions, countries such as Argentina, Russia, South Africa, India and Nigeria are in danger of degenerating from an emerging economy status to a “sub-merging” state, however gradual it might be. The second, and as concerning, effect is the rapid rise of income inequality at both national and global levels. The combined effects of these development lead to socio-political instability.   Globally, regional economic performances are bound to differ considerably. As economic normalization takes root, it is more so that regions with better and superior fundamentals will begin to benefit more and perform at a higher sustainable growth levels. Paying attention to the basics of adequate infrastructure, governance institutional integrity, policy...

Read More

South Africa’s Falling Fortunes

Posted on Nov 6, 2013 in Economy, Infrastructure

South Africa’s Falling Fortunes

For the first time since the birth of democratic South Africa in 1994, the country’s economic fortunes have taken a sharp and substantial negative turn. In part due to the prevailing global economic conditions and in part, and more critically, as a result of domestic political economy issues the country’s growth has fallen consistently from an expected 3.4% a year ago, to the current projected growth of less than 2.5%.   However,  the two consecutive downgrades of the country’s  international credit rating, by rating agencies Moody’s and Standard & Poor, had much less to do with the falling economic growth per se as opposed to the structural political and socio-economic issues facing a government that appears unable to deal with the root causes of the complex issues at hand. Today, South Africa’s global rating is only two notches away from “the junk bond status”. This is a serious indictment on government’s ability at a time when Africa’s growth is on the rise, its development taking roots and many African countries enjoy rising international creditworthiness.   Over the past three months, a series of wildcat strikes have brought the country’s mining sector to its knees, and has spread to other sectors such as transport and manufacturing activities. The complexities of the socio-economic and political issues facing South Africa cannot be underestimated. As the most unequal society as regards income distribution, the country is further burdened by widespread poverty and deepening youth unemployment problem. More accurately, the country’s youths face a pervasive “unemployability problem”, thanks primarily to a dysfunctional and mediocre public education system.   Yet despite nearly two decades of evidence, the government refuses to account for its failures in the education field. Successive ministers of education, and governments in general, have offered a blend of dismissive political postures and defensive reactions to justify the failure of the education system. Yet South Africa boasts one of the most effective private schooling system.  Despite considerable public funding, a systemic poor public education generates graduates who are unemployable.   More broadly, the machinery of the state is incapable of dealing with the requirements of a fairly modern and complex economy, and even much less able to provide public services to the majority of the population that relies on the effectiveness of the bureaucracy to have education, health, and basic municipal services. Persistent denial on the part of the political leadership to acknowledge the deep rooted structural fault-lines within the public sector, and the ineptitude to take effective action have further compounded the frustrations and dissatisfaction of the masses.   The working classes in general, and the mine workers in particular, have been left in a precarious space. Whilst a number of highly connected political leaders of the ANC have amassed unprecedented fortunes via their connectivity to the government authorities, the working conditions of the mine workers have been left in the limbo. Neither the state bureaucracy is able to use its fiscal revenues to provide basic amenities for the workers, nor do the mining houses take seriously their commitments to their social and labour plans as required by their mining licence conditions. The dysfunctionality of the local government sphere complicates the situation even further. Moreover, the alliance between the union leaders and the ANC political leadership disarms the unions from consistent and effective focus on the workers’ interest.   In this milieu the political power relationships have exacted a heavy toll on the economy. After nearly two decades of democratic rule, South Africa today is more an unequal society than before, has serious and systemic  human skills problems, and its public service...

Read More

Financing Africa’s Infrastructure Backlog

Posted on Nov 6, 2013 in Economy, Infrastructure

Financing Africa’s Infrastructure Backlog

Africa’s recent economic profile is synonymous with infrastructural bottlenecks; be it energy, water, transport logistics(roads, rail, port facilities and airports), human skills, or local government utilities as well as a general and substantial gap in the quality of public services- a critical transversal (soft) infrastructure that influences the overall productivity of all other infrastructures.  The monetary value of the required infrastructure runs into hundreds of billions of US dollars. In South Africa alone this is estimated to be US$450 billion! It is worth noting that this estimate is more than double the current SA government’s Total Gross Loans of US$200 billion as of April 2012.   In this milieu, it is understandable that much pressure is placed on the political leadership to act. And, act they must do. Yet, in so doing it is vital that we are alert to the socio-political significance of the task ahead, and the fatal risks that we need to manage carefully and methodically. The current economic and financial malaise prevailing in Europe and USA provides valuable and relevant lessons for the approach that we need to adopt in meeting the national and continental infrastructural needs. The key lesson is this: not all infrastructure finance should be put on the public sector balance sheet- be it directly on the national fiscus balance sheet or indirectly via public enterprises investments. In brief, when the national government takes on the debt (and the risk) which belongs to the private sector, it ends up crippling the nation.   Different types of infrastructure need different forms and mix of finance. Much of the continent’s current infrastructure backlog is in the form of “near pure economic” infrastructure, such as dedicated rail lines for exporting coal, iron ore, manganese or other commodities. All such pure or near-pure economic infrastructure should be financed via leveraging the private sector assets and/or expected future revenue streams. Almost no public sector exposure should be built into this component of the portfolio of infrastructure backlog. At the other end of the spectrum is social infrastructure such as public schools, public health facilities and basic urban infrastructure. These should be financed solely via public finance and/or user charges in the case of urban amenities.   Within this framework care should be taken that neither haste nor ideological misconceptions distort the critical judgments needed for a sound structuring of the finance mix appropriate for each infrastructure project. Hard lessons from the prevailing European and American fiscal errors of judgment could help avoid financially expensive and socially consequential outcomes. Lumping all the projects into one category called “infrastructure” and seeking suitable finance based on a ‘one-size-fit-all” approach is bound to prove fatal- financially and fiscally speaking. The challenge is not just about how much ‘tax’ and how much ‘debt’. The equity-debt mix is secondary to the question of who should be financing the project in the first place.   In addition to appropriate financial structuring and funding, a productive and sustainable national/regional infrastructural programme needs other key requirement too. There are five key alignments that should be put in place if Africa’s infrastructure investment is to turn out productive and sustainable.   Based on the lessons of the past century of economic development in the West and the East, the following components of the macro-financial framework need alignment for a productive and sustainable infrastructure programme of the order of magnitude facing Africa today: Macroeconomic Policy and Financial Prudential Framework need to be reconfigured to ensure appropriate foreign exchange regime and macro-prudential measures over the medium-term corresponding with the expected average return profile of the infrastructure investments. Definition and...

Read More

First Things First in Development

Posted on Oct 24, 2013 in Development, Infrastructure

First Things First in Development

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

Read More

Manufacturing Sector’s Dicey Status

Posted on Oct 24, 2013 in Development, Infrastructure

Manufacturing Sector’s Dicey Status

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

Read More