2010

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Working Paper 117 - Supporting Africa's Post-Crisis Growth: The Role of Macroeconomic Policies
15/01/2014 18:52
Working Paper 117 - Supporting Africa's Post-Crisis Growth: The Role of Macroeconomic Policies
Working Paper 118 - Assessment of the Trade Finance Market in Africa Post-Crisis
15/01/2014 18:52
Working Paper 118 - Assessment of the Trade Finance Market in Africa Post-Crisis
The financial crisis of 2008 caused a sharp slowdown in trade beginning 2008 and 2009. The tightening of global credit reduced capital inflows and limited the availability of trade finance. The shortage of trade finance was felt the hardest in Africa. In response, the African Development Bank established a multi-phase USD 1 billion Trade Finance Initiative (TFI). As part of the initiative the AfDB commissioned a series of surveys on African banks providing trade finance between 2009 and 2010. The survey covered a sample of African banks from Senegal, Burkina Faso, Ghana, Nigeria, Egypt, Morocco, Kenya, South Africa, Tanzania and Rwanda. Additionally, the survey covered global trade finance and development finance institutions based in the USA, UK, France, Germany and the Netherlands.   The survey participants were asked to provide information on: trade finance related activities; the state of the market for trade finance products; the availability of facilities and changes in those facilities; overall economic activity in their respective markets; and potential role for AfDB to play to facilitate access to trade finance.    Bankers contacted throughout the survey indicated that trade with China is constrained by Asian Banks’ unfamiliarity with the continent and its financial institutions. Additionally, they indicated that intra-African trade is limited by weak infrastructural linkages. Studies at the AfDb have shown that the potential for intra-African trade is large. One such study has shown that intra-African trade has more short-term development impact than extra-African trade. The study finds trade finance in Africa is characterized by volatility that is driven by regulatory change, an unstable competitive landscape, new trade patterns and weak global demand for African exports. These elements have intensified the perceived riskiness of African trade finance markets subsequently constraining the growth of trade. Thus, the study proposed the following set of measures to lessen the impact of absence of trade finance due to high risk perception.
  • Support trade financiers through guarantee facilities: African commercial banks cannot access adequate financing due to high perceived risks. Individual guarantees to confirming banks will require a large team to analyze credits and monitor usage/performance.  Partial portfolio-based guarantees issued to well- managed commercial banks will stimulate private sector finance to these African countries.
  • Support regional integration by providing finance for intra-regional trade: AfDB support for trade finance provision via regional integration initiatives could be in the form of targeted lines or risk participation through financiers of infrastructure projects.  AfDB support to trade finance alongside infrastructure investments will act as a catalyst for other private sector agents.
  • Support trade diversification via greater cooperation and information sharing with the Asian Development Bank and other trade financiers in the region: Asia-Africa trade is growing rapidly and China is becoming an important trading partner across the continent, even for resource constrained countries.  Chinese trade with Africa remains below potential as Chinese banks are unfamiliar with African risks. AfDB should work with Chinese and African financial institutions to promote risk-sharing and better information exchange.
  • Improving the information gap regarding trading firms in Africa: Basel II will increase cost of trade finance in Africa due to lack of consistent, portable and validated data on trade asset performance over time. The AfDB should collaborate with AsDB and ICC and develop an African Trade Finance Default Register.
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Categories: Financial Crisis

Working Paper 119 - Migration Patterns, Trends and Policy Issues in Africa
15/01/2014 18:52
Working Paper 119 - Migration Patterns, Trends and Policy Issues in Africa
Migration has played a distinctive role in shaping the economic, cultural and political face of Africa and continues to do so. It is estimated today that the number of people with African descent that live outside of the continent is close to 140 million, most in the Western Hemisphere. The bulk of these immigrants lost their ties altogether with the country of origin. Migrants that left their country in recent decades are able to keep in close contact with their relatives and maintain economic, social and political relationship with the country of origin mainly due to the rapid pace of globalization and continuously improving, cheaper communication possibilities a fact that also contributed to the debate on the role of migration for development. This study highlights the role of harnessing ‘migrant potentials’ and transforming them into development prospects aiding in the fight against poverty and human suffering.  This paper documents the pattern, trend and determinants of migration in Africa using rich cross-country migration matrix data and household surveys from Burkina Faso, Ghana, Nigeria and Senegal. Even though, official data on migration in Africa significantly understates the actual movement of people due to inaccurate, infrequent and inconsistent recording by officials, there has been periodic instability in the movement of people. Over the past three decades, migration rates in sub-Saharan Africa have fluctuated widely with episodes of large net migration observed during civil conflict. Even though Africa has, on average, one of the lowest rates of emigration, there are large cross country variations. Yet, there are some countries with emigration rate that far exceeds the global average. For example, Cape Verde, Equatorial Guinea, Seychelles, Sao Tome and Principe, Lesotho and Mali have rates of migration exceeding 10%. A common feature of these countries is that they are relatively small in comparison to the average African country in terms of population size and resource abundance, and tend to have higher rate of international mobility given narrow or limited livelihood opportunities and dependency on a specific commodity for trade. Intra-continental movement of people accounts for at least half of global migration. The rest tends to be transcontinental, except for emigrants from Latin America where the majority move to North America. The intra-Africa emigration rate is about 52% and marginally lower than Europe (59%) and Asia (54.7%). However, the rate for sub-Saharan Africa (65%) is significantly higher and represents the largest intra-continental or south-south movement of people in the world. Out of the 29 million stocks of emigrants from Africa in 2010, about 23% were from North Africa and the rest originated from Sub Saharan Africa. More than 90% of the emigrants from North Africa generally head to countries outside of Africa. Generally, the intra-African migration is driven by the complexities of the history of state formation where colonial borders overlooked often linguistic and ethnic commonalities, as well as waves of internal and cross-border conflicts. Whereas, the long term factors that may influence the pattern of emigration from Africa to OECD countries tend to be related to demographic and labor market pressures. Recent projections show that the evolution of the labor force across the globe raises serious developmental concerns. In 2050, nearly all major industrialized nations are expected to experience a substantial deficit in their labor force, particularly in the most productive age bracket, while currently poor regions such as Sub Saharan Africa and South Asia are expected to witness a huge surplus particularly among the young. The surge in labor surplus in Sub Saharan Africa is of particular concern as it would imply the doubling of its current labor force and at a global level will be twice that of South Asia and India. The potential problem that may arise from these global imbalances in the labor market is significant to warrant dialogue and discussion early on to devise optimal policy coordination between labor surplus and deficit regions. Upon close scrutiny, micro data reveals that the motives for migration are often economic opportunity and the attempt by households to diversify away from living in risky environments. Thus, the characteristics of households that have at least one international migrant member tend to be closely associated with the size of the household, network externalities, education of the head of the household. Evidence for Ghana, Burkina Faso, Senegal and Nigeria shows that the probabilities of having a migrant in the household are highly correlated with characteristics such as the size if the household, level of living standards. Preliminary findings suggest that the labor market effect of migration. Migrants, generally, change occupations and find jobs that require some degree of skills.   Addressing global imbalance in the labor market requires serious attention and policy coordination in a number of areas. Despite domestic efforts to reform labor markets, and improve labor productivity, Europe, North America and to a certain extent China may have to rely on immigration to meet growing shortfall in labor force. However, the degree to which available labor force is compatible with the needs of the labor market becomes central. Projected demand indicate that middle level skills tend to be in great demand and acquiring compatible skills remains a challenge to most emigrants from African countries.Read more
Working Paper 120 - Community Based Health Insurance Schemes in Africa: The Case of Rwanda
15/01/2014 18:52
Working Paper 120 - Community Based Health Insurance Schemes in Africa: The Case of Rwanda
Every year, around 100 million people are driven into poverty due to burden of health expenditure. Most of these newly poor reside in resource poor countries such as Sub Saharan Africa (SSA) where health care systems significantly lag behind developed country counterparts and are characterized by either dysfunctional or non-existent health insurance schemes. The result has been a high disease burden propagating a sickly, unproductive labor force. In Sub-Saharan Africa, formal and well functioning health insurance schemes generally exist for the very few who are employed in the formal sector. Households in poorer countries generally tend to spend as much as those living in relatively richer countries. This paper evaluates the impact of the Community-based health insurance schemes (Mutuelles) in Rwanda on demand for modern health care, mitigation of out-of-pocket catastrophic health expenditure and social inclusiveness based on a nationally representative household survey using traditional regression approach and matching estimator popular in the evaluation literature. The data used in this study was collected in 2005/06 covering around 6,900 households with about 35,000 individual histories. The data is a typical living standard survey where information on household demographics, educational attainment, health, consumption, income sources, migration, agriculture, labor market condition, household assets, living conditions and other variables were collected. The preferred method of estimation is the matching estimator that uses data organized along the dichotomy: “treated” vs. “control” conditional on observed covariates. Such a dichotomy allows estimation of three statistics relevant for evaluation. The Average Treatment Effect (ATE) compares outcomes between “treated” vs. “control” group by taking randomly selected individuals from both samples so that impact of a program is evaluated directly. The results based on simple probit model suggest that membership into CBHISs had a potential of increasing health care utilization by about 15% following an illness episode. The effect is slightly higher for poor households than the non-poor. With regard to catastrophic expenditure, there is significant effect returned by the probit model where insured households had a much lower probability of experiencing catastrophic expenditure compared to the uninsured and more so among the poor than the non-poor. Similarly, the results from the matching estimator indicate that households that were members of the CBHISs had a 15 percentage point higher utilization of health care facilities than uninsured ones following an illness episode. According to our preferred method, higher utilization of health care services was found among the insured non-poor than insured poor households, with comparable effect in reducing health-related expenditure shocks. Utilization of modern health care services among the insured did not have statistically significant effect on health utilization, particularly among the poor. The non-poor did show 21 percentage point increase in the use of health services. The CBHISs succeeded however in reducing significantly health related consumption shocks in all households, more among the poor than the non-poor. This result is very encouraging since health related shocks have the potential of persisting for a long time in typical poor households. The study also shows that if the insurance scheme was extended to non-members, heath utilization would increase by 18 percentage points. This figure is close to 30 percentage points for non-poor households and about 10 percentage points among poor households. With respect to income protection, the potential of CBHIs is still very high. It could reduce catastrophic expenditure by 17 percentage points and much more significantly among the poor than the non-poor households. Overall the matching estimator indicates stronger evidence of better utilization of health care facilities and income protection due to CBHISs in Rwanda.Read more
Working Paper 122 - Welfare Analysis Using Data from the International Comparison Program for Africa
15/01/2014 18:52
Working Paper 122 - Welfare Analysis Using Data from the International Comparison Program for Africa
This paper extends the application of data from International Comparison Program (ICP) to global welfare analysis of a “representative household” in Africa by utilizing changes in demand for broad categories of consumption items in response to changes in prices and income. This is made possible in ICP-2005 by the inclusion of consumption expenditure for 13 broad commodity groupings along with their relative prices for 48 countries covered in the study. These expenditure items are, in principle, comparable and aggregation is allowed by keeping in mind the basic assumption used in the collection of the price and expenditure data. Thus, the study makes comparisons of welfare changes following price or income movements by observing the concentration curve for different commodity groupings. In this setting, the observational units are countries and not individuals and apply to policy dialogues focused on regional issues, such as debt relief, development aid, trade that require the level of aggregation implied by the data. The study explores the welfare changes using a concentration index and simple demand systems for the commodities of interest to recover income and price elasticities that could be used for a wide range of issues that require discussion of household consumption behaviour. First, I work on an aggregated data set that has lost substantial information in the process so that nonlinearity in Engel curves or flexibility in price responses cannot be captured easily from the data. Secondly, the linear expenditure system is popular specification in most global macro and CGE models allowing estimated parameters to have some practical relevance. Third, the full parameters of the LES can be recovered from cross-section data if information on personal savings is available. Finally, interesting welfare measures such as marginal utility of income and direct link with Gini coefficient increase the attractiveness of the LES. The computations indicate that price shocks that affect, for instance, food items may cause the largest welfare loss at the continental level than shocks that lead to a proportional decline in per capita incomes or increase in transport cost through a rise in energy prices. Similar analogy can also be made about the welfare impact of global transfers made possible by proportional price declines through trade liberalization or subsidies (like food aid). Similarly, transfers that favor household expenditure on accessing education are superior to any other means of transfer in terms of improving global welfare since nearly all households in every country spend proportionately the same amount on education than on any other commodity. The paper specifies and estimates the Extended Linear Expenditure System (ELES) using personal savings to identify all the parameters necessary to estimate own and cross price elasticities as well as income elasticities. The results can be valuable inputs to global model analysis such as GTAP which uses ELES to model household behavior. The results from the ELES are intuitive and also support the inference we obtained from the concentration curves. Our estimates of income elasticities for such broad consumption categories as food (0.56), water (0.9), clothing (0.69), health (0.74) and education (0.24) suggest these are necessities while for the rest such as alcohol (1.0), recreation (1.3), transport (1.4) and communications (2.2) are luxuries. The elasticity estimates are strikingly similar to those often obtained from large household surveys for individual countries. The study uses the ELES to examine whether the “utility-consistent” measures of a poverty line are in-line with the popular one dollar a day international poverty line. The study estimates a 1.12 dollar a day subsistence consumption which is very close to the conventional poverty line of 1.08 dollars a day used in 2005. Moreover, the marginal utility of income, sometimes known as the inverse Frisch parameter, which measures “level of development”, suggests a relatively higher ratio of the subsistence component of consumption in total expenditure indicating low level of development in the region.Read more

Categories: Financial Crisis

Working Paper 116 - Unlocking Productive Entrepreneurship in Ethiopia: Which Incentives Matter
11/11/2010 11:13
Working Paper 116 - Unlocking Productive Entrepreneurship in Ethiopia: Which Incentives Matter
This paper examines challenges faced by small and medium sized enterprises (SMEs) in Ethiopia. It compares the impact of subsidies encouraging entrepreneurial search with wage subsidies on SME start-ups and finds search subsidies to be more effective for stimulate productive entrepreneurship in both the formal or informal sector. The Ethiopian government that came to power in 1991 implemented sweeping economic reforms. In a marked departure from the 1974-1990 Derg regime’s legacy of central planning, the new government aimed to stimulate private sector growth and the development of SMEs. Yet despite twenty years of liberalization, friction in the product and labor markets, small and medium sized enterprises have gained little ground. A large informal sector remains pervasive.  Private sector productivity gains have been limited to the leather and cut flowers industries. Manufacturing in particular has not developed significantly. In a vicious circle, workers have had few incentives to upgrade their skills due to the lack of high paying jobs, but the dearth of high skill workers has hampered the development of high value-added, productive firms. Most SMEs are in the informal sector. The paper finds that overall, productive private firms in the formal sector are rare, and their absence is a key constraint to productivity and job growth in Ethiopia. Ethiopia’s economy resembles that of an early-stage transition country. The state dominates non-agricultural output, private job creation has lagged, the informal sector remains large at approximately 30 percent of GDP, and unemployment remains high. The state was responsible for 80 percent of industrial output in the mid-1990s and 50 percent in the 2000s. Currently, very small firms predominate and the highly productive formal SME sector is thus underdeveloped. Due to this stagnation, productivity growth has been much slower in Ethiopia than in other emerging economies such as China, India, Mozambique, and Uganda. Job growth has not kept pace with urban population growth, leading to rising unemployment. Employment has not shifted from the informal to formal sector. In a World Bank survey, 70 percent of Ethiopian entrepreneurs complained about high taxes; other major concerns were an inefficient tax administration and unclear property rights and land access. Even in 2010, the Ethiopian private sector consisted mostly of small-scale, informal, low-productivity firms. The paper develops a theoretical model to illustrate the problems in the Ethiopian economy and potential policy solutions. The model consists of entrepreneurial startups in an economy facing labor and product market frictions with a large informal sector and imperfect information in the market for skilled workers. It predicts that labor market failures produce suboptimal outcomes. Specifically, the large informal sector and the lack of institutions blur entrepreneurs’ information about available workers and discourage them from search, and vice versa. Together with the rigid business climate, they impede the highly-productive private sector employing skilled labor. The model shows that due to frictions in the business environment, entrepreneurs under-invest in searching for business opportunities relative to the effort they would exhort in a more conducive climate. As the impact of the lack of skilled vacancies is amplified by the imperfect information in the labor market, workers are uncertain that they will find skilled jobs and thus under-invest in training. The harsh business climate, high tax rates, weak monitoring of tax evasion and strong bargaining power of skilled workers drive high productivity firms into the informal sector. By lowering productivity and skilled wages, these factors discourage workers from acquiring skills. We propose several policy interventions to address these problems. Ethiopia has offered income tax and duty exemptions to small and medium sized enterprises in targeted industries and areas since the 1990s, but this scheme’s impact has been generally limited to enterprises in the Addis Ababa region. We view rural agro-processing is a promising sector for targeted policies. Subsidies may help, but the government’s choice of the type of subsidy must address the main constraints that the private sector faces. In countries such as Ethiopia, where entrepreneurship is limited and productivity low, the key objective should be to help entrepreneurs open high-productivity firms, regardless whether in the formal or informal sector. In such a situation, the search (or start-up) subsidy is useful, as it encourages entrepreneurs to search for highly-productive business opportunities. In contrast, wage subsidies (tax cuts) would be less effective for start-ups as they mostly do not affect firms in the informal sector, where most SMEs in Ethiopia operate. In addition, improved property rights are crucial as a basis for reform. Employment exchange offices would help to improve information in the labor market.Read more

Categories: Ethiopia

Working Paper 115 - Analyzing Pro-Poor Growth in Southern Africa: Lessons from Mauritius and South Africa
11/11/2010 11:13
Working Paper 115 - Analyzing Pro-Poor Growth in Southern Africa: Lessons from Mauritius and South Africa
The study involves a micro-level analysis of the effect of growth on inequality and poverty in two Southern African countries, Mauritius over the period 2001-2006 and South Africa over the period 1995-2005. Given that poverty reduction has become a fundamental objective of development as established in the Millennium Development Goals, it is important to ask whether growth is a necessary and/or sufficient condition to achieve that objective. A comparative assessment of the pro-poor growth path of South Africa and Mauritius could allow for a better general understanding of growth and redistribution effects on poverty as well as for drawing some policy recommendations towards reducing poverty in these two countries, given that South Africa is one of the least equal countries in the developing world while inequality in Mauritius is relatively low in comparison to other African countries.   In the literature on the linkages between growth poverty and inequality, there is often a tension between macro and microanalysis and both a relative and an absolute approach have been proposed to define growth pro-poorness. In the absolute approach, growth is defined as pro-poor if it reduces absolute poverty. In the relative approach, growth is pro-poor if it reduces inequality and relative poverty, meaning that growth must benefit the poor proportionately more than the non-poor. As both approaches should be of concern to analysts interested in the impact of growth, the authors considered the impact of growth both on absolute poverty and on inequality. The authors used two recent household survey data separated by 5 and 10-year intervals from the Mauritius’ Central Statistics Office and Statistics South Africa, to assess the evolution of poverty and inequality and to evaluate the pro-poorness of growth (absolutely and relatively speaking). To compare poverty across countries and time, the authors computed PPP consumption and analyzed the consumption distribution in both Mauritius and South Africa.   Sensitivity tests were performed to check for the robustness of results. The authors used the FGT (Foster-Greer-Thorbecke) class of poverty indices to measure poverty incidence and intensity, growth incidence curves to show the growth rates of income over different parts of the population, as well as Gini indices and Lorenz curves to assess inequality. The analysis further discerns the development disparities across rural and urban areas, across districts and provinces, and across schooling achievements and gender of the household head. In the case of South Africa, the authors were also able to monitor the evolution of racial disparities. In both Mauritius and South Africa, privatization and trade liberalization were promoted as policies to spur growth. However, while Mauritius has focused its poverty reduction strategy on education and health services and has targeted in most vulnerable segment of the population through improved social safety nets, South Africa’s more recent policy towards fighting deprivation has not succeeded yet in developing skills and providing quality health care and education services across the entire country. The results in terms of growth pro-poorness have been quite different in the two countries. Although South Africa experienced the strongest positive growth, inequalities have increased significantly over the period and growth has been anti-poor relatively speaking, improving living standards only among the top third of the population while rural workers gained very little from growth and the unskilled and lower urban earners often lost from it. Conversely, growth was absolutely pro-poor in Mauritius over the period 2001-2006. In the two countries, there are important development disparities across rural and urban areas. Poverty is initially larger in rural than in urban areas; it is substantially more so in South Africa. There is also an urbanization of poverty in South Africa. Given that the share of rural population has fallen significantly, this supports the view that the migration from rural to urban areas has been associated with difficulties of the urban migrants to take full part in urban labor markets and benefit from the urban growth that is evident in the data. Mauritius and South Africa have experienced very different effects of growth on poverty and inequality. This shows that the pro-poorness of growth can be quite heterogeneous across countries. If poverty reduction is the overriding objective, then policies designed to spur growth must take into account the possible impact of growth on inequality. Although poverty is mostly a rural than urban phenomenon, policy should also be increasingly balanced in favor of urban areas as well in order to alleviate the effect of migration and rural/urban demographic pressure on urban poverty.Read more

Categories: Mauritius, South Africa

Working Paper 114 - Additionality of Development Finance Institutions (DFIs) in Upstream Oil and Gas in Africa
02/11/2010 14:34
Working Paper 114 - Additionality of Development Finance Institutions (DFIs) in Upstream Oil and Gas in Africa
The growth in the number of African countries producing oil and gas is part of a growing trend across the continent sharpening the profile of Africa as an oil and gas producing continent. Discoveries of commercially viable offshore and onshore oil and gas deposits are putting on the map countries not historically associated with oil and gas production. Ghana, Niger and Uganda are good examples. Another cohort of new oil producing countries, including Sierra Leone, Tanzania and Liberia, is expected to come on-stream by 2015. Still another group of countries is in advanced stages of exploration (Kenya, Mozambique, and Somalia). This expanding list of oil and gas producing nations has led to increased demand for project finance. Development Finance Institutions (DFIs), notably the AfDB and the International Finance Corporation (IFC), are expected to remain instrumental as funders and providers of technical assistance to a growing extractive industry. This paper assesses the value addition, Additionality of DFIs in upstream transactions in oil and gas in Africa in the context of growing demand for finance new projects and increasing operational selectivity among DFIs. The paper uses the AfDB’s framework for ex-ante Additionality and Development Outcome Assessment (ADOA) of its private sector operations. The framework allows an assessment of the distinctive contributions of DFIs vis-à-vis commercial lenders; and expected development outcomes tracked and monitored, ex-post. The paper assesses DFI value addition as a source of financing in upstream transactions in oil and gas. It identifies a sample of recent deals in the sector and examines the relevance of DFI financing.  Close scrutiny of the scale of the sector and financing options shows that the financing power of DFIs pales in comparison to the scale of projects in the sector.  Therefore, it is imperative for DFIs to specify the profile of transactions that they are prepared to finance. Additionally, the paper examined the value addition of DFIs in policy and governance; and social and environmental standards. A survey of recent deals in the upstream oil and gas sector shows that the financial absorptive capacity of the sector accounts for the diversity of transactions and financing source. A more comprehensive overview of recent deals suggests sufficient space for an array of products and actors – commercial and DFI alike. A survey of recent financing demand shows that both major and independent actors in the sector have the capacity to raise upstream development capital from commercial sources. However, it is less compelling that commercial banks have the corresponding risk appetite or the capacity to finance and absorb the full breadth of demand risk in the sector across the continent.   A survey of recent developments in the sector reveals that the size of capital expenditure required to bring a reserve to production tend to be large. For instance, development of the offshore Jubilee field in Ghana required more than USD 2.5 billion in commercial financing and a total of over USD 3 billion, accounting for DFI and private equity financing. Similarly, preliminary financing-need estimates for development of the Lake Albert basin in Uganda stood at USD 5 billion. Considering the growing trend of proven and probable oil and gas development opportunities on the continent, the scope for DFI financing is growing but remains a small piece of the pie. The challenge for DFIs is, therefore, to invest selectively for maximum impact and selective development outcomes. In this paper emphasis is given to two market segments that DFIs should target in light of the changing landscape in the upstream oil and gas sector in Africa: transactions in untested and emerging producer countries (such as Ghana and Uganda); and transactions involving smaller, independent, notably indigenous firms operating in established producer countries. In these cases high risk is a derivative of uncertainty about the market or financial sponsorship than the underlying asset which has been proven and confirmed during exploration. The strategy positions DFIs as first movers, financing growth and catalyzing development returns in unproven markets. The paper lends support to the premise that the ADOA framework can inform the process of project selection by identifying characteristics of transactions where DFI financing in the upstream oil and gas sector can have value and impact.Read more

Categories: Energy & Power

Working Paper 113 - Monetary Policy Conduct Based on Nonlinear Taylor Rule: Evidence from South Africa
11/08/2010 15:47
Working Paper 113 - Monetary Policy Conduct Based on Nonlinear Taylor Rule: Evidence from South Africa
This paper utilized non-linear models to characterize the behavior of the Reserve Bank of South Africa using interest rate functions. Interest rate interaction functions have been formulated using the linear Taylor-rule since it is generally perceived that it renders a reasonable approximation to non-linear interactions. In essence, the Taylor rule tells us adjustments in the interest rate correspond to the deviation of output and inflation from their respective targets. In the US, for instance, the federal funds rate is raised by 1.5 percentage points for each 1 percentage point increase in inflation. The increase in federal fund rates raises real interest rates and reduces inflationary pressure.   Using a logistic smooth transition regression approach, the paper analyses the applicability of a nonlinear Taylor rule in characterizing the monetary policy behavior of the South African Reserve Bank. Analysis of movements in the nominal short-term interest rate for the period 1976 to 2008 shows that a non-linear Taylor rule holds. Contrastingly, other studies have characterized the South African Reserve Bank as following a linear Taylor-rule. However, the bulk of these studies have removed the structural break coinciding with the Asian Crisis and estimated two Taylor-rules. This study does not remove the anomalous structural break and thus uses the entire sampling period. However, our results are consistent with the findings of European Central Bank and the Bank of England.   The study contributes to current monetary policy debate by evaluating speed of transiting from low to high interest rate regimes in the context of emerging market economies. Furthermore, it evaluates the performance of linear and non-linear models in providing accurate forecasts and the existence of threshold levels of transition speed in decision making. The study evaluates the above by using the Diebold-Mariano (DM) and the Sign tests to determine the forecasting performance of the linear and non-linear models. The study employs a Smooth Transition regression model to explain the evolution of monetary policy over time. This approach permits the short term interest rate to react marginally to expected output and inflation gaps to adjust smoothly over the range of the reaction function. Several studies have used the same approach to examine the possibility of both non-linearity and structural change in the interest rate functions of Central Banks. South Africa’s monetary policy primarily focuses on an inflation objective and therefore seeks to achieve price stability. Quarterly data is derived from the International Financial Statistics (IFS) for the period 1976:1 to 2008:4. Data on the Treasury bill rate, inflation rate, output gap and real exchange rate is used to estimate the Taylor-rules.   The study finds that linear models perform better over long forecast horizons compared to non-linear models. Whereas non-linear models perform better over shorter forecast horizons in describing how the Central Bank responds to positive levels of inflation or an output gap relative their required targets. Using the full sample period, the study finds a 9 percent threshold level of inflation at signals a change in behavior by the Central Bank. Additionally, sample performance measures indicate that the non-linear model performs better in tracing out the data.Read more

Categories: South Africa

Working Paper 112 - Analysis of Poverty in the Democratic Republic of Congo
09/08/2010 23:00
Working Paper 112 - Analysis of Poverty in the Democratic Republic of Congo
This study on poverty in the Democratic Republic of Congo aims at analyzing the spatial distribution of poverty in order to identify the most affected provinces and the extent of disparity. The main source of the data used in this study is the 2004-2005 1-2-3 type survey, especially phase 3 (Household Consumption Survey). The Democratic Republic of Congo is a post-conflict country marked by the civil wars of the 90s. These conflicts have left profound marks such as the disastrous impact on the people and infrastructure which, to date, weigh heavily on its economic and social recovery. The country has significant natural resources, including oil and minerals, but relatively low GDP growth rates at an annual average of 3% in the 2001-2005 period. DRC’s poor rankings for the Human Development Index (HDI) reflect a significant delay in the achievement of Millennium Development Goals (MDGs), especially those of halving extreme poverty, enhancing access to water and sanitation, and reducing child mortality. This study is structured along the following lines: After an overview of the country’s overall context comes a section explaining the methodology and the approach used to measure poverty, given its multidimensional nature. Under a first point, we have studied various poverty measurement tools, using the Foster, Greer and Thorbecke (FGT) family index to quantify the poverty rate, as well as its depth and severity across the country. The study’s second focus is on the analysis of extreme poverty. That section aims to ascertain whether the level of poverty exceeds the norm or reaches extreme levels. The last stage is devoted to studying household consumption expenditure disparity using inequality rankings like the Gini and Atkinson Indexes. Lastly, the conclusion summarizes the main results and appropriate recommendations to combat this scourge. This study has illustrated the extent of poverty in the DRC where 70% of households live below the national poverty line. This rate is among the highest on the continent. The spatial distribution of poverty shows that rural areas are more affected than urban areas, with a poverty rate exceeding 90%. The disparity between urban and rural areas is also seen in the distribution of poverty by province. Those provinces more affected than others are identified and the gap observed in some cases represents over 30 points.
The provinces of Equateur and Bandundu have the highest poverty rates, followed by South Kivu, Bas-Congo, Katanga and Orientale Provinces. Six provinces have poverty levels above 70%. This shows that poverty affects different parts of the country, particularly the East and North West regions.
The analysis in terms of food poverty confirms the extreme gravity of this situation. The results once again show that it affects the Congolese population in different forms. It is seen that nearly 60% of the population suffers from extreme poverty and is unable to meet its basic needs. A large segment runs the risk of death by starvation. The inequality analysis shows that the wealth distribution disparity has reached high levels translating into a Gini Index of about 39%. This form of inequality is more pronounced in urban areas than in rural areas. In this regard, Kinshasa recorded a Gini index higher than the national average.Recommendations concerning economic policies to be adopted are part of the comprehensive framework of a national strategy on poverty and disparity reduction among the different segments of the population, but also among the country’s provinces.The poverty reduction strategy must be part of efforts to exit conflict, consolidate peace and ensure equitable distribution of wealth across the provinces, but also fall within a vision of medium and long term development and support the country’s socioeconomic reconstruction. The desired strategy focuses on restoring peace, reestablishing the rule of law, the recovery of the country’s economy and its consolidation on a sound basis, taking into account the Millennium Development Goals (MDGs), especially those of halving extreme poverty and reducing inequalities between rural and urban areas.
Thus, the main recommendations would concern:
  • Consolidating macroeconomic stability and promoting growth;
  • Improving access to social services and reducing vulnerability;
  • Reducing unfair wealth distribution among the provinces;
  • Promoting public finance good governance and combating corruption;
  • Checking population growth and internal migration flows; and
  • Strengthening the national statistics system and the information system, in general.
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Working Paper 111 - Assessing Absolute and Relative Pro-Poor Growth: An Application to the MENA Region
29/07/2010 13:39
Working Paper 111 - Assessing Absolute and Relative Pro-Poor Growth: An Application to the MENA Region
Focusing on the MENA region, this paper proposes a multidimensional procedure for jointly assessing the absolute and relative pro-poorness of growth. It is also provides a procedure for testing whether poverty comparisons can be made over classes of indices that incorporate both absolute and relative views of poverty. Besides being robust to whether pro-poor judgements should be absolute or relative, the procedure is also robust to choosing over a class of weights to aggregate the impact of growth on the poor as well as over ranges of absolute and relative poverty lines. Previous literature often separated absolute and relative pro-poorness, and tended to focus on pro-poor measures with fixed poverty lines and with separate absolute and relative settings. This paper adopts the poverty dominance literature, and it also allows for a broader analysis of the various ranges of poverty constructions to define the experience of the poor, either absolutely or relatively. The general poverty comparisons for this study were based on multidimensional indicators of welfare; and the comparisons between absolute and relative poverty were based on monetary indicators such as income. Nine Middle-Eastern and North African countries were analyzed in this study. Lorenz curve coordinates for the nine countries were obtained from the World Bank; for Syria, Mauritania and Tunisia, other sources were used as well as data from their respective Ministries. Poverty measurements in the nine countries utilizes data for per capita expenditure from various sources, converted into 2005 prices by using the consumption price indices nationally generated by each country; and consequently these figures were converted into US dollars using the 2005 purchasing power parities (PPP) found in the World Bank’s database. The descriptive statistics show relatively high absolute poverty rates in Mauritania, Yemen and Egypt in 2004. The rest of the MENA region displays moderate levels of absolute poverty since 2000, ranging from 7.4 percent of the population in 2005 in Iran, to 13 percent in 2007 in Morocco. These figures are also lower than the incidence of relative poverty. Generally, countries did not witness a significant change in both absolute and relative poverty. Iran experienced a significant decline of 7.8 points in the incidence of relative poverty between 1998 and 2005. Tunisia experienced a significant reduction in both relative and absolute poverty; and Yemen experienced a significant increase in both absolute and relative poverty. The bi-variate stochastic dominance tests highlight the performance of three sets of countries. In terms of pro-poor growth, Tunisia, Iran and Mauritania witnessed a significant decline in both absolute and relative poverty; although Tunisia was the most significant which could be due to the sustained economic growth experienced between 1995 and 2005. In terms of anti-poor growth, Yemen and Turkey, witnessed a significant increase in both absolute and relative deprivation. Yemen’s economic recession and Turkey’s poor economic performance during the mid-1990s to 2005 may have been the cause of the high degree of deprivation- both relative and absolute. Finally Egypt, Jordan, Morocco, and Syria witnessed either an increase in one of the dimensions of deprivation or a decrease. There was no significant evidence that the economic growth experienced in the countries led to a change in the dimensions of deprivation. There is a growing realization that the absolute and relative distributive impacts of growth need to go hand in hand in assessing its impact on development. In examining the absolute and relative distributive impact of growth through a bi-variate test of the prop-poor nature of growth, we find distinct dissimilarities. The paper’s results highlight the importance of focusing on countries’ individual experiences when examining the pro-poor nature of growth. Some countries may witness a robust decline in absolute deprivation despite the economic growth experienced; while other countries may witness an increase in absolute deprivation despite economic growth. These mixed results therefore hint at a more careful application and assessment of joint absolute and relative pro-poorness.Read more

Categories: Financial Crisis

Working Paper 110 - Education and Employment in Malawi
02/06/2010 16:03
Working Paper 110 - Education and Employment in Malawi
Malawi’s educational system fairs poorly on a sub-regional scale. The gross enrolment rate is the lowest in the South African region. At the primary school level, pupil to teacher ratio stood at 80:1, repetition rates at 20 percent and the internal efficiency coefficient at 35 percent - all worse than the Sub-Saharan averages. Malawi ranked at the bottom of SACMEQ countries in English reading and math scores (SACMEQII, 2005). At 9 percent, the percentage of children reaching a minimum level of mastery in reading in English has halved over the 1998-2004 period. In Mathematics, 98 percent of the students do not possess skills beyond basic numeracy and none of them has skills beyond competent numeracy. Recent studies analyzing linkages between education, employment and earnings in Malawi employers find that graduates are more likely than others to find a job and that there is excess demand for skilled labour by the private sector [Jimat consultant (2008), Kadzamira (2003) and Pfeifer and Chiunda (2008)]. These studies find unemployment among secondary school graduates are low (8 percent in 2001 for graduates in 1990 and 1995), and close to zero among university graduates. Secondary school graduates are typically located in urban areas and are engaged in skilled wage employment. Of these, 70 percent are involved in wage employment, and 58 percent hold a professional and skilled non-manual job. The private sector is the main employer (69 percent), followed by the education system (mostly primary school teachers) This paper focuses on the relationship between education, employment and earnings in Malawi, with the aim to identify potential shortages in human capital and the incentives to be put in place for the country to satisfy its labour needs. It analyzes the relationship between education and employment in Malawi using data from the Integrated Household Survey (IHS-2) 2004-05. The study finds that education is critical to formal employment for both men and women, and leads to higher hourly earnings. Within regular wage employment, secondary education is associated with a 123 percent wage premium, and university education with a 234 percent wage premium (relative to illiteracy). In both rural and urban areas, income is positively correlated with specialization in regular wage employment. For example, in urban areas 60 percent of the households who derive at least 75 percent of their income from regular wage employment belong to the highest quartile of the income distribution. This reflects the relative scarcity of human capital. The study shows that among prime age males (25 to 39 years old), only 10 percent have completed secondary education. For women in the same age group, the situation is even worse, with the rate of completion of secondary schooling as low as 3 percent. Analysis of school enrolment highlights that teenage women experience high dropout rates, which prevent greater female enrolment in higher education, and therefore constrain future participation in the best forms of employment. The study stresses the need to address problems that cause high failure, repetition and drop-out rates for school children from poor households. Cash transfers programs that condition payments to regular school attendance may help sustain demand for education, reducing the opportunity cost of schooling. For such programs to be effective, however, supply side constraints should also be addressed. For example, the provision of monetary incentives aimed at increasing the number of qualified teachers in rural areas, where the majority of the poor live, may help reduce the ratio of students to qualified primary teachers, and may lead to improved quality of learning and pass rates.Read more
Working Paper 109 - The First Africa Region Review for EAC/COMESA
14/05/2010 00:00
Working Paper 109 - The First Africa Region Review for EAC/COMESA
The Regional Economic Communities (RECs) of COMESA and SADC recognize the importance of trade facilitation in deepening regional integration by reducing the cost of cross-border transactions, and improving the potential of growth through trade. Efforts to address supply-side capacity constraints and trade-related infrastructure needs received added impetus from the AFT initiative, launched at the Hong Kong Ministerial Conference in December 2005. The COMESA Secretariat acted quickly to set up a dedicated mechanism called COMAid to mobilise and coordinate AFT resources to support national initiatives on a demand-driven basis and address constraints, such as deficient transport and distribution networks, at the regional level. However, COMESA/EAC believes that its trade-related problems are too complex and varied, and that addressing them calls for a holistic approach, tighter regional cooperation, and external assistance. It sees in the AFT initiative a window of opportunity to lift the region out of its current marginal state in global trade and harness the benefits of trade as an engine of growth. This paper provides a mapping of trade-related bottlenecks in the EAC/COMESA region to eligible aid-for-trade (AFT) categories, and to articulate a strategy for mobilising significant amounts of aid for trade. To do so, the paper reviews the constraints to trade in EAC/COMESA. It identifies existing AFT-related programmes and activities, and documents the status of their implementation, pointing out any gaps and the causes thereof. The paper is based on the premise that the EAC/COMESA region faces unique and severe constraints to trade related to the fact that many of the member states are land-locked. This, combined with poor infrastructure and services, cumbersome border procedures, inadequate mainstreaming of trade in national development strategies, and lack of progress in deepening economic integration, explains the region’s dismal trade performance, both intra-regionally and externally. AEC/COMESA is aware of these constraints. The region has launched various initiatives to tackle them. The majority of these initiatives relate to trade facilitation measures. The North-South Corridor is one trade-related infrastructure project that has attracted attention in the region, both by virtue of its scale and purported benefits. Even though the implementation of the project was slow initially, the political impetus during the North-South Corridor High Level meeting in Lusaka, Zambia in April 2009 attracted financing in the region of US$1.2 billion. As the first pilot in East Africa, the North-South Corridor clearly shows that Aid for trade can play a key role in sustaining ongoing efforts to overcome bottlenecks to trade. The paper shows that current AFT commitments (all categories combined) fall drastically short of even the most conservative estimates of Africa’s resource needs. The whole of Africa received US$4.6 billion in AFT in 2006, of which $1.6 billion went to EAC, COMESA, and SADC. This amount is a pittance compared to what is needed to help SSA alleviate extreme poverty and attain the other MDGs. There is an urgent need for the RECs, through the Tripartite Task Force, to press the donor community for much bigger commitments. SSA’s fate lies, to a large extent, on its ability to mobilize important amounts of AFT, and for donors to believe in SSA’s future, and respond to its needs. The key message is that an effective AFT strategy should focus primarily on trade facilitation, with some emphasis on trade-related infrastructure. Since substantial aid has traditionally been directed to technical assistance and capacity building, and the trend is likely to continue, there is no need to build this element into the strategy per se. Such a strategy must: (a) Emphasise the contribution of trade facilitation measures in reducing trade costs and enhancing export competitiveness; (b) demonstrate the added benefits of modern trade related infrastructure; (c) demonstrate the political will by the EAC/COMESA member states to address the region’s constraints in the spirit of cooperation and solidarity to landlocked neighbours; and (d) impress on the donor community the need for greater AFT resources to help the region participate fully in global trade and attain the MDGs. The Aid for Trade agenda should also highlight the importance of monitoring to show its impact on trade and development. In this case, the EAC/COMESA region should maintain a database of Aid for Trade for monitoring and evaluation purposes.Read more

Categories: Financial Crisis

Working Paper 108 - Is there a Case for Formal Inflation Targeting in Sub-Saharan Africa?
08/05/2010 00:00
Working Paper 108 - Is there a Case for Formal Inflation Targeting in Sub-Saharan Africa?
Inflation targeting is increasingly seen as an essential monetary policy tool in many economies around the world, including a growing number of developing countries. However, inflation targeting has not made sufficient inroads in African economies, with only Ghana and South Africa having adopted this policy regime. Nevertheless, as the practice of inflation targeting grows in prominence, it begs the questions: is inflation-targeting the right approach to monetary policy especially where the long-run goal is to support economic development and reduce poverty? Can inflation targeting adapt to structural realities in African economies? What are the potential pitfalls of inflation targeting? The paper examines these questions and raises issues to be taken into consideration in choosing the right monetary policy regime conducive for long-run growth and development in Africa. It examines an overview of inflation targeting, reviews the justification for the regime and summarizes major critiques. It highlights the need for focusing monetary policy responses to inflation on accurate sources of inflationary pressure. Therefore, it investigates the determinants of inflation in African countries. These issues are carefully examined in South Africa and Ghana, two countries that have formally adopted inflation targeting and within the context of the global economic crisis. The first part of the study uses a panel dataset of sub-Saharan African countries for the period 1975-2007 focusing on 12 countries for which there is a relatively complete data (Botswana, Cameroon, Chad, Gabon, The Gambia, Kenya, Malawi, Lesotho, Mauritius, South Africa, Swaziland and Zimbabwe. This group spans a broad spectrum of country categories, notably: Middle income, low-income; resource-rich and resource scare countries. The second part considers an unbalanced panel of 29 countries with 20 contiguous years of observation in all variables.   The study uses a fixed effect model to show that the growth rate of M2 has a significant impact on inflation as does depreciation of the nominal exchange rate. Moreover, the results show that a 10 percent depreciation in the nominal exchange rate  has a larger impact, holding other factors constant, than a 10 percent increase in the growth rate of the money supply. The results also suggest that supply-side factors such as lagged change in food production have significant impact on current inflation. Contrastingly, the terms of trade index, the prime lending rate, and government consumption spending are all insignificant. An examination of experiences with inflation targeting in South Africa and Ghana during the crisis shows that flexibility and pragmatism had replaced strict rules as under inflation targeting regimes. The central banks’ maintained a high degree of discretion within their respective inflation targeting frameworks in order to rationally manage the costs of inflation reduction in the face of external shocks, while protecting employment, household incomes; and supporting industry and domestic activity in general.  A strict rule-based inflation targeting regime would have met its target by raising interest rates and intervening into the foreign exchange market to support the currency. Given that the crisis had significant negative impact on growth and exports, such intervention would likely have worsened the situation in these countries. In African countries, the effectiveness of any approach to monetary policy will depend on institutional and structural issues. This paper shows that a strict inflation targeting regime- a rules based system with little discretion is not the right monetary policy for countries in sub-Saharan Africa. Given inflation dynamics, strict inflation targeting would produce perverse policy responses to production and price shocks and subsequently forcing economies to defend an exchange rate which may not be conducive to long-run growth and diversification of production. Rapid rates of undermine economic development. Thus, management of inflationary pressure should be an essential component of any monetary policy. Nevertheless, the benefits and costs of maintaining very low rates of inflation are unclear and therefore subordinating other economic goals to inflation reduction is not desirable when the cost of doing so is large. It is imperative to understand that inflation targeting incorporates critical principles of transparency and accountability in monetary policy formulation.Read more

Categories: Infrastructure

Working Paper 107 - China, Africa and the International Aid Architecture
07/05/2010 00:00
Working Paper 107 - China, Africa and the International Aid Architecture
Chinese engagement in Africa, while not new, has changed significantly in recent years. The rising global prominence of Chinese aid, export credits, and bank finance has aroused both enthusiasm and concern among those concerned with development. China’s newly prominent role as a donor and financier is taking place within a set of rules, norms, and sometimes competing institutions that make up what is known as the global aid architecture. Some believe that Chinese practices in official aid, preferential export credits, and other forms of development finance pose a significant challenge to the norms governing the international aid architecture. Others welcome the rise of a new development partner, one with seemingly deep pockets, and suggest that the Chinese might provide new leverage to countries that were faced with conditionality-based aid advocated by traditional donors. Yet despite the intense interest, debates over the impact of China as a donor and financier have largely taken place with very little information.   This paper analyzes China’s growing foreign aid and export credit program as an element of the changing international aid architecture. The international aid architecture is defined as the institutions, norms, and practices that govern the transfer of concessional resources for development. It comprises four major areas: (1) Institutions and actors; (2) Volumes and composition; (4) Instruments and modalities; and (4) Rules and standards.   The evidence suggests that Chinese finance will be a significant, continuing source of capital for African countries and countries that propose bankable projects will likely be able to access some of this finance, whether or not they have natural resources, but for the most part, it is not being made available as ODA. As for cooperation with other donors and financiers, so far, the Chinese have been reluctant to participate in established donor-led groups (such as the Paris Club, or the Consultative Groups) in part because they generally do not see aid from the West as having been very effective in reducing poverty in Africa.  But there have been a number of cases of tripartite cooperation, including the South-South Cooperation Program run through the Food and Agriculture Organization’s Food Security Program.
Finally, building up local capacity to negotiate favorable natural resource deals with China Exim-bank and Chinese companies should also be a priority. In conclusion, we address three final issues. Can China compensate for what is likely to be a shrinking pool of finance from the OECD countries in the aftermath of the financial crisis? What efforts have been made to engage and work with China as a “rising donor” and how have they fared? Finally, how can African countries best position themselves to work with this significant partner country?Read more

Categories: China

Working Paper 106 - Does Human Capital Protect Workers against Exogenous Shocks? South Africa in the 2008 - 2009 Crisis
06/05/2010 00:00
Working Paper 106 - Does Human Capital Protect Workers against Exogenous Shocks? South Africa in the 2008 - 2009 Crisis
The financial and economic crisis of 2008 and 2009 took a heavy toll on the South African economy. The economy contracted for the first time since 1998 and entered recession during the fourth quarter of 2008. The GDP contraction was soon transmitted to the labor market. Between the second quarters of 2008 and 2009, employment fell by 3.8 percent. However, not all individuals were hit with the same intensity. Using panel data from a quarterly labor force survey unique to the African context, we find that human capital (i.e. education as years of schooling and workforce experience) provided a buffer against the shock. After controlling for observable characteristics, education and experience showed the potential to entirely offset the effect of the recession on the likelihood of employment. This has important policy implications, as it strengthens the case for strategic investments in human capital and helps identify the unskilled as having the greatest need for social safety net interventions during a recession. Like the rest of Africa, South Africa took a battering from the global financial and economic crisis of 2008 and 2009 (African Development Bank 2009). By the fourth quarter of 2008, the South African economy was in recession. This translated into large job losses for a labor market already characterized by unemployment rates of around 25 percent. We use unique Labor Force Survey (LFS) data covering the period before and during the crisis to investigate the role of human capital, embodied in education and experience, as a buffer against external shocks. The contribution is novel as we are among the first to exploit the longitudinal nature of the Quarterly LFS (QLFS) to build a large panel of individuals. This allows us to quantify the effects of the crisis on individuals while controlling for time-invariant unobservable characteristics. In doing so, we contribute to the understanding of South Africa’s labor market dynamics across the business cycle. We are also the first to investigate the distribution of employment gains and losses over the business cycle, and quantify the worker flow dynamics at business cycle frequencies in Africa.  In particular, we look at the likelihood of becoming non-employed and gaining employment during a recession and how this varies with the differences across the age and education distribution of the labor force. Our results indicate that, over the first year of the crisis, the overall likelihood of being employed dropped by 3.8 percent. The economy had a net loss of 360,000 jobs between the second quarters of 2008 and 2009, driving the employment rate among the working-age population down from 44.7 to 43 percent. At the same time, the unemployment rate recorded a misleadingly small increase from 23.1 to 23.6 percent, as about 349,000 individuals left the labor force. After controlling for individual characteristics, education and experience both worked as an insurance mechanism, completely offsetting the probability of losing a job. Finally, the large informal sector failed to provide a buffer against the crisis. In addition, we find that the distribution of employment gains and losses over the business cycle in South Africa is similar to that of OECD countries in which employment volatility is higher for the workers with low human capital. However, the worker flow dynamics are dissimilar to that found in OECD countries in which economic slowdowns are characterized by a sharp but brief increase in outflow from employment into non-employment and a persistent decline in the outflow from non-employment back into employment. In South Africa’s case, the economic downturn of 2008 – 09 has been characterized by an acute but brief drop in inflows into employment. These findings on worker flows are a first for African economies.Read more
Working Paper 105 - Smallholder Agriculture in East Africa: Trends, Constraints and Opportunities
05/05/2010 00:00
Working Paper 105 - Smallholder Agriculture in East Africa: Trends, Constraints and Opportunities
Despite the importance of smallholder agriculture in East Africa, the strategic, conceptual and empirical analysis in the context of the crisis, which would guide policymakers and development practitioners in their efforts to revitalise agriculture in the aftermath of the crisis, is sparse. Moreover, recent studies tend to examine specific constraints to smallholders’ activities In contrast; this paper investigates the overall trends, challenges and strategic opportunities for smallholder agriculture. The study aims at helping this important segment of the population to benefit from opportunities emerging from East Africa’s economic growth and increasing regional integration. The analysis has also examined how the recent escalation of food prices and related opportunities can be seized to fully engage East Africa’s agricultural potential. The study combined review of the existing literature and country case studies on these four East African countries. The countries studied were selected based on the size of their economies, the high proportion of smallholder farmers (over 75 percent) and relatively high contribution of agriculture to the GDP. Over 75 percent of the total agricultural outputs in the four countries are produced by smallholder farmers with farm sizes of about 2.5ha on average, producing mainly for home-consumption, and using traditional technologies. Limited commercial and semi-commercial production also occurs. Major crops include cereals, root crops, banana tea, pyrethrum, sisal, cut flowers, coffee, cotton and tobacco. Coffee, cotton, horticulture produce and tea are the main export crops. Cattle and poultry dominated the livestock sub-sector. Other important livestock reared are sheep, pigs and goat. Forestry, horticulture and fishing are also important economic activities in most of the study countries. However, contributions of smallholder farming, and agriculture in general to the region’s rapid growth between 2005 and 2008 have remained limited. Instead, growth was driven by services, in particular, trade. This paper finds that at the national level, weak institutions, restricted access to markets and credit. These factors, including inadequate infrastructure and limited access to land for agricultural purposes have constrained productivity growth of smallholder farming. In general, land expansion using existing techniques carries environmental costs as forests and wildlife areas are encroached on, and fish stocks depleted. Moreover, as increasingly marginal land comes into cultivation, productivity declines. The agricultural growth path therefore needs to combine features of the land-intensive and labour-intensive models that conserve the resource base. Because of the diversity of East Africa’s endowments, growth paths deriving from better cultivation of larger tracts will be optimal in more land-abundant parts of the countries, whereas those associated with high yields and intensive cultivation will suit areas with less abundant land. Where an increase in area per worker is possible (in relatively land-abundant areas), total factor productivity (yield) increases would be less crucial in the near term. The converse applies to areas where land is scarce. In such cases, yield increases are necessary even in the short-term. In East Africa, as elsewhere in Africa, increases in the productivity of land on the scale of the Asian Green Revolution have been elusive, although some progress has been achieved in specific areas, such as the uptake of improved varieties of maize, beans, and cassava. Despite the constraints listed above, over the longer term smallholder agriculture presents numerous opportunities. The potential of agriculture and smallholder farming can be illustrated by the enhanced income generation in several East African agricultural export sub-sectors. In this context, Kenyan horticulture exports often serve as an example of agricultural export success in Africa.  Horticulture constitutes one of the largest earners of foreign exchange in agriculture, with over 50 percent of proceeds being generated by smallholders. Furthermore, the recent large scale land investments in Africa (including East Africa) present opportunities for the transformation of farming in Africa through better irrigation infrastructure, jobs, and technology transfer and food security. However, the environmental impact factor of these new investments needs to be reviewed and factored into the agreements for such investments. This study concludes that concerted efforts of all stakeholders, including governments, NGOs, and development practitioners, are needed to remove the existing bottlenecks to productivity growth in smallholder agriculture and progress with the region’s development agenda. Research reviewed in this study suggests that given the interdependent constraints that amplify each other, several measures need to be implemented jointly for the reforms targeted at the smallholder sub-sector to succeed this time around. In particular, improving land property rights and access to land, increasing access of farmers to credit, providing appropriate incentives for the market mechanism to work, and encouraging farmers’ training so they are more inclined to use modern methods of production, are key. Other ongoing efforts, in particular improving infrastructure, also play an important role, as the recent increase in agricultural productivity in Ethiopia illustrates. Reforms to the smallholder sector need to be complemented by the development of commercial farming to achieve high and sustainable increase in agricultural productivity. The African Development Bank and other development partners also play valuable roles in helping to develop the agricultural sector, including smallholder farming, in East Africa. In addition to funding, the Bank encourages East African countries to adopt preventive measures against food crisis, including through mobilising resources. In the broader development context, the Bank promotes regional integration for enhanced trade and investment flows, supports mechanisms that prevent conflicts, and facilitates their early resolution. Finally, through policy discussion with its RMCs, the Bank identifies the best practices for adoption by individual countries, tailored to their specific circumstances.Read more
Working Paper 104 - Technology Gap and Efficiency in Cocoa Production in West and Central Africa: Implications for Cocoa Sector Development
23/01/2010 00:00
Working Paper 104 - Technology Gap and Efficiency in Cocoa Production in West and Central Africa: Implications for Cocoa Sector Development
This paper investigates the productivity potential (technological gap) and efficiency differences of cocoa sectors in countries in West and Central Africa, where tree crop systems, particularly cocoa production, are of particular interest. Approximately 70 percent of the world supply of cocoa originates from there. Producing countries derive most of their foreign income from cocoa, while export earnings and economic growth are dependent on cocoa productivity. A relevant question for agriculture policymakers is whether to pursue a strategy directed towards technological change (bringing in new technologies) or raising efficiency (improving the use of existing technologies). Shortfalls in production efficiency mean that output can be increased without requiring additional conventional inputs and without the need for new technology. In the presence of technological gap, technical progress is the rational strategy to adopt to significantly increase agricultural production. The study used data from a large survey of cocoa farmers carried out in four West Africa countries, namely Cameroon, Ghana, Nigeria and Cote d’Ivoire. We use stochastic meta-frontier production functions to measure the production efficiency and compute the technological gaps of the cocoa sectors in different countries of West and Central Africa. The results of the analysis show that in relation to cocoa production large productivity potential gaps exist between countries of the region. The gaps range between 0.70 and 0.96. These values can be interpreted as the technological gaps faced by the cocoa sector in those countries when compared at the regional level. The cocoa sector in Cameroon had the lowest technology gap, while that of Nigeria was highest. In terms of production efficiency, Nigeria’s cocoa sector had the highest mean technical efficiency relative to the national and regional frontiers. Ghana appears as the least performing country. The study supports the view that technical efficiency in the region under study is quite low and technology gap inhibits competitiveness. From a policy point of view, the priority in Cameroon should be on reducing the technology gaps, by investing in technological innovations already existing within the region. A country-to-country technology transfer arrangement should be encouraged. The findings suggest that in Nigeria and Cote d’Ivoire to achieve significant growth in the cocoa sector, priorities should be on improving the know-how of cocoa farmers. This could be achieved by putting in place sound government extension programmes and the development of rural credit institutions. In Ghana, both types of strategies should be pursued to tackle low efficiency levels and the technology gap.Read more
Working Paper 103 - Accounting for Vulnerability of African Countries in Performance Based Aid Allocation
22/01/2010 11:08
Working Paper 103 - Accounting for Vulnerability of African Countries in Performance Based Aid Allocation

Categories: Financial Crisis

Working Paper 99 - Capital Flows and Capital Account Liberalisation in the Post-Financial-Crisis Era: Challenges, Opportunities and Policy Responses
11/01/2010 00:00
Working Paper 99 - Capital Flows and Capital Account Liberalisation in the Post-Financial-Crisis Era: Challenges, Opportunities and Policy Responses

Categories: Financial Crisis

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