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European Union says no to Kenya’s plea for export tax refund
The European Union has reiterated it will not issue tax refunds to Kenyan fresh produce exporters during the four months period ahead of the formalisation of the new Economic Partnership Agreement.
The exporters are currently operating under the General System of Preferences.
This has raised concern among flower exporters who say they might incur loses next year on export taxes for Valentine’s Day shipments which will start in December.
EU Trade Commissioner Karel De Gucht who met was in Nairobi last week told exporters to forget recovering their duty payments for October to January since the trading block does not provide for export tax refunds.
“EPAs has enormous potential which will be achieved if we ratify and conclude it as soon as possible. However, we cannot provide export tax refunds for the period Kenyan exporters will be paying duty as our laws do not provide for that,” he said.
Kenya Flower Council chief executive Jane Ngige on the other hand said the Valentines period accounts for 60 per cent of flower firms annual revenues.
“We are concerned because flower shipments to the EU are attracting huge taxes since the EPAs elapsed in October 1. We have already lost Sh100 million to export taxes for last month,” the Kenya Flower Council chief executive officer Jane Ngige said.
The previous EPA which allowed goods from East Africa duty free access to the EU market ended on October 1, committing Kenya to pay customs duties of between four to 24 per cent on its produce because of its lower middle income country status.
Tanzania, Uganda, Burundi and Rwanda still have full duty free quota access to the EU market owing to their least developed countries status.
The Kenya Association of Manufacturers chief executive officer, Betty Maina urged the commissioner to lobby the EU to sign the deal before end of January saying exporters are expecting to lose Sh670 million each month which has made it difficult to move goods to the EU.
“I understand your problems and wish to solve them as soon as possible. I expect Kenya to regain duty free and quota free treatment by January at the earliest,” Gucht said.
Foreign Affairs and International Trade Cabinet secretary Amina Mohamed said the joint EAC-EU negotiation meeting held in Brussels last month concluded on all outstanding issues. “The concluded agreement will provide legal certainty for businesses and open a long term perspective for free and unlimited access to the European market for EAC countries. They will now be able to focus on improving their economic performance without worrying about the potential loss of full duty free quota free access to the EU due their improving status,” she said.
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ECOWAS officials meet to discuss Africa Mining Vision
Public Officials from the Economic Community of West African States (ECOWAS) are meeting here in Accra to discuss the Africa Mining Vision (AMV) and the ECOWAS Mineral Development Policy (EMDP).
Ben Aryee, Advisor to the Minister for Lands and Natural Resources observed that the fiscal regimes on the African continent were not generating enough revenue for their respective economies.
He emphasized mining has the potential of contributing to the growth of economies but little has been achieved in the sector.
“We are not going to get different results if we continue to do the same old things with regards to how we have conducted affairs in the mining sector,” Aryee said.
Associate Economic Affairs Officer, Special Unit on Commodities of the United Nations Conference on Trade and Development (UNCTAD), Komi Tsowou said China has become a dominant force regarding the importation of minerals from Africa.
Speaking on the topic, “Global mineral commodity trends and their implication for Africa”, Tsowou observed that “China is increasingly becoming important in the mining sector on the continent as it is the leading importer of global commodity markets.”
The Asian country between2011-2012, he noted imported between 60 and 30 percent respectively of iron ore and copper from nearly 10 and 5 percent in 1995-1996.
Similarly, exports of minerals, iron ore and metals (MOM) from ECOWAS countries to developing countries, especially China he emphasized, have increased significantly between 2003 to 2013.
This situation, he noted creates a win-win situation for both sides as China gets minerals for its industrial use while African countries are able to access natural resource backed loans for developmental projects.
Tsowou observed that MOM price trends and commodity performance in resource rich countries within the ECOWAS sub-region led to improved economic performance, high correlation between commodity prices, export earnings and economic performance but said: “the transmission of these windfall gains to a path for sustainable socio-economic development has not been successfully achieved”.
Poverty levels on the continent, according to him were still high in spite of the increased Foreign Direct Investment (FDI) inflows to Africa.
The limited benefit from the resource boom on the continent he said could be attributed to highly volatile and unpredictable commodity prices, low value created at domestic levels, unequal distribution of resource rents, and vulnerability to high prices as well as the resource curse.
The UNCTAD Associate Economic Affairs Officer urged African government to as part of the short to medium term policy options adopt a strategic and policy development, increase the shares of the rents generated commodity production vis-à-vis revising existing investment or mining contracts, more efficient form of taxing extractives industries such as progressive taxation.
Others are to adopt policies to retain values locally, targeting a broadening and deepening linkages to the upstream, sidestream and downstream from commodity production as well as to put in place a win-win local content policies.
On the medium to long term measures, Tsowou advised African countries to adopt policies that would harness windfall gains from high MOM prices in the way that facilitate wider economic transformations and boost economic growth that was not driven by commodities alone and to invest in sovereign wealth funds to cope with instability in global commodity markets as well as to smoothen inter-temporal imbalances in domestic spending and revenues.
Coordinator for Third World Network, Dr. Yao Graham said his organization was committed to promoting a reform agenda aimed at optimizing the development value of Africa’s minerals whilst strengthening democratic accountability in decision making and responsiveness of states and companies to the conditions of mining communities and workers in the sector.
The rationale for the two-day workshop he noted was about knowledge sharing on how to transform the role of minerals in the economies of African countries.
Participants for the workshop are drawn mainly from a number of institutions in the main mining countries in the ECOWAS sub-region.
They include senior officers from mining and trade and industry institutions and leading members of mineral policy committees in the legislatures and the Africa Mining Development Centre.
The goal of the workshop is to contribute to making the AMV and the EMDP the strategic drivers of mineral and development policy in the ECOWAS sub-region.
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Investing in people-centred innovation and technology essential to Africa’s development
Innovation and technology can serve as a springboard for economic transformation provided they are driven by people. This was the message put forward by partners and participants at the closing of the 9th Annual African Economic Conference (AEC), which ran from November 1-3 in Addis Ababa.
Decision-makers and business leaders, economists and academics from across the globe met for the AEC to discuss how to harness knowledge and innovation to boost youth employment, foster the adoption of new technologies, and enhance Africa’s economic transformation.
“Investments in skills, technology, knowledge, and innovation will ensure democratic and responsive governance that can deliver effective public services and facilitate universal access to basic services, such as food and nutrition, water and sanitation, shelter, health and education,” pointed out Nkosazana Dlamini Zuma, African Union Commission Chairperson.
Innovation is seen as an essential component for the transformation of African economies, said Steve Kayizzi-Mugerwa, Acting Chief Economist and Vice-President of African Development Bank, who emphasised the need to be proactive and address the challenges Africa is facing. “We need to stop being lazy analysts and take our challenges for ourselves; stop wasting resources and implement our own ideas,” he said. “Africa must first understand where we are, what brought us here and then try to understand what to do differently to bring different results.”
Beyond technology and technology transfer, the role of innovation was discussed at the conference as a trigger for behaviour and social change. “Innovation is a key determinant of the ability of economies to sustain growth, and is critical to improving socio-economic conditions. Socio-economic transformation in Africa requires both adaption of existing technologies, and the development of home-grown innovations,” said Abdoulaye Mar Dieye, Director, UNDP Regional Bureau for Africa, UN Assistant Secretary General.
The continent can boost its development agenda by using technology and technology transfer creatively, participants argued, creating revenue opportunities for farmers, jobs for youths in urban areas and tackling a wide diversity of challenges, from climate change adaptation to disaster risk reduction. M-Pesa, an innovative mobile-phone payment system, created in Kenya and expanded to Tanzania, South Africa, Afghanistan, India and Eastern Europe, has had great impact on the lives of ordinary Kenyans. It has increased access to financial services to 19 million Kenyans, created jobs, and positively impacted savings and money transfer patterns. In just five years, M-Pesa decreased informal savings in the country by 15%, increased the frequency of transfers and remittances by 35%, and increased usage of banking services by 58% beyond the levels of 2006.
It is critical to address acute skills deficits to provide African youth and women opportunities to take part in these types of new economic activities and derive benefits from the economic growth in Africa, the participants noted. “Innovation and technology-oriented education is vital for sustained economic performance and competitiveness. It gives our youth critical building blocks to secure their future,” said Carlos Lopes, Executive Secretary of the Economic Commission for Africa. Continuous investments in education, research and development, structured on-the-job training programmes, and establishments of technical training institutes were also identified by the participants as ways of engaging the youth and boosting the participation and empowerment of women.
Governments, private sector, academia and the civil society need to act as complimentary entities and not as competitors in the development process. Creating strong links between all these different entities is required to ensure innovation results in scaling up, adoption of best practices, enhancement in inclusive economic growth and sustainable development.
Given the current population profile, with the majority of the African population under 20, conference participants underlined that the age of innovation for Africa is yet to come. Fostering innovative solutions and creating a social contract in which governments, private sector, academia, and the civil society use innovation to address the barriers of inclusive development and structural transformation is key to inclusive and sustainable development. This is critical to ensure moving from aspiration to implementation with Africa’s Agenda 2063, the 50-year vision for Africa, and the Common African Position on the post-2015 development agenda.
Since 2006, the African Economic Conference has been jointly organized by the AfDB, ECA and UNDP with the mandate to foster dialogue and the exchange of knowledge on economic issues and challenges facing Africa.
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Poverty reduction rate too slow in Africa, new report indicates
The newly launched Millennium Development Goals 2014 Report (MDG 2014) has assessed that although poverty rates in Africa are declining at an accelerated rate since 2005, the pace is still too slow to meet the poverty reduction target.
The report is a product of Africa Development Bank (AfDB) in partnership with United Nations Economic Commission for Africa (ECA), African Union (AU) and United Nations Development Programme (UNDP).
The publication was officially launched Saturday at the 2014 Africa Economic Conference, a three-day event that has attracted hundreds of experts from Africa and elsewhere to Addis Ababa, Ethiopia.
Josephine Ngure, the Resident Representative of AfDB in Ethiopia, said that the report produced a mixed bag of feelings, and indicated that there is still a long way to go before all the goals can be fully achieved.
“Africa has generally accelerated towards the MDGs despite its initial political, social and economic conditions. We must realize that these goals are very much about the betterment of human life and, therefore, they must be pursued until the very end,” she said.
“We have realized that despite an upward trend, income inequality is still unacceptably high, and gender disparities have continued to exist. We need to fight this because it continues to drag the continent down despite our achievements.”
According to the report, most countries are on track to meet the primary education enrollment target; however, Ayodele Odusola, the Chief Economist at the UNDP Regional Bureau for Africa, observed that the continent still struggles with low completion rates.
“Africa still has weak infrastructure that cannot support quality education – and funding also remains a major problem,” Odusola said.
“We need significant investment in the education systems to nurture the continent’s youth and make them more skilled and entrepreneurial.”
The Director of the Macroeconomic Policy Division at the United Nations Economic Commission for Africa, Adam Elhiraika, noted that Africa is now viewed as a continent on the rise – and that its positive contributions to the post-2015 development agenda is a sign of its increasing influence on debates that shape the world.
“Africa’s growth acceleration offers potential to offset, at least in part, the revenue shortfalls that some countries may experience as a result of declines in foreign assistance,” he said.
“Higher rates of growth and revenue can be achieved if illicit financial flows are curbed, public resources are used more prudently and policies implemented from evidence-based research.”
Africa’s poverty rates have continued to decline, according to the report, despite adverse effects of recent food, fuel and financial crises in the Euro zone.
The proportion of people living on less than US $1.25 a day in Southern, East, Central and West Africa decreased from 56.5% in 1990 to 48.5% in 2010.
However, this figure is 20.25% off the 2015 target compared to 4.1% for South Asia.
It also indicates that job creation is not growing fast enough to absorb youth in spite of resounding progress of African economies.
Unemployment is markedly high in North Africa, where 27.7% of young people in the labour force were without jobs in 2013 compared to 26.6% in 2012.
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Panelists highlight knowledge and innovation as critical for sustained growth
The African Economic Conference, jointly organized each year by the African Development Bank (AfDB), the United Nations Economic Commission for Africa (ECA) and the United Nations Development Programme (UNDP), opened on November 1 in Addis Ababa with the first plenary session focusing on the conference theme of “Knowledge and innovation for Africa’s transformation.”
Panelists established that, for Africa to meet challenges of water, agriculture, education, health, sanitation, environment, gender inequality and its participation in the global economy, increased scientific and technical knowledge is required, as is innovation. Knowledge and innovation are critical dynamics for Africa’s sustained growth, they noted.
The speakers also recognized that the region has become a knowledge society. For two hours, they highlighted the constraints to a broader sharing and better management of knowledge and innovation in Africa.
African Development Bank’s Acting Chief Economist and Vice-President, Steve Kayizzi-Mugerwa, outlined that knowledge and innovation are crucial for effective growth and sustainable development “but it must be planned, with strong leadership.”
He noted that transformation is happening in Africa and everywhere in the world, but wondered if Africa had truly harnessed the development benefits of technology. “Real transformation will only come with people. We need to move from inspiration to action. What is lacking is the implementation.”
Kayizzi-Mugerwa emphasized the key role that good universities delivering quality education can play in providing qualified resources to contribute to innovation on the continent.
Kayizzi-Mugerwa also underscored that, thanks to the Bank’s Ten Year Strategy, it has contributed to increasing supply of skilled workers across the continent, and has stepped up its support for technical and vocational training linked to specific needs in the labour market.
Adebayo Olukoshi, Director, African Institute for Economic Development and Planning (IDEP), said, “If all processes are sufficiently accompanied to drive transformation, an important area is the political space as well as systemic governance.
“If knowledge and innovation are to provide a development path out of poverty, there is an urgent need to strengthen science, technology and innovation (STI) policies, with emphasis on learning and innovation; strengthening human resources development and improving science and STI infrastructure,” he said.
Olukoshi also identified “smart industrialization, infrastructure management, maximizing traditional sources of financing, harmonization of curricula and revamping training programmes,” as ways to help achieve transformation.
For his part, Ayodele Odusola, Chief Economist and Head, Strategy and Analysis Team, UNDP Regional Bureau for Africa, recognized the mobile sector as a key transformational pillar. He stressed the need for the implication and expansion of mobile systems in vital economic sectors, as it contributes to enhancing agricultural productivity, promoting financial inclusion, improving women’s health and reducing child mortality.
Anthony Maruping, African Union Commissioner for Economic Affairs, expressed the need for stronger knowledge-sharing and strengthened human capital, with focus on “training people who can think.”
“There should be a flow of knowledge among Africans and with people from other regions in the world through partnerships,” he said.
Echoing other speakers, Lemma Senbet, Executive Director of the African Economic Research Consortium (AERC), also recognized that knowledge and innovation can help spark sustainable growth on the continent. “There is urgent need to strengthen science, technology and innovation policies, with emphasis on learning and innovation, promoting national and regional innovations systems,” he said.
Leading practitioners from the public and private sectors, as well as researchers from academia, also participated in the discussions.
The African Economic Conference runs until Monday, November 3.
Opening Statement by Carlos Lopes, United Nations Under-Secretary-General and Executive Secretary of Economic Commission for Africa – 1 November 2014
I am pleased to welcome you to the Ninth Session of the African Economic Conference.
Over the past nine years, together with the African Development Bank and the United Nations Development Programme, this conference offered a platform to learn, debate and enrich the African intellectual discourse. This year’s conference theme is “knowledge and skills for Africa’s transformation” a subject dear to our chairperson.
The continent abounds with examples of knowledge helping change the narrative. Kenya’s financial inclusion performance through mobile banking is now quoted worldwide. Cardiopad, invented by Arthur Zang, a 24 year-old Cameroonian engineer, enables heart examinations through tablets. The Saphonian, invented by Anis Aouini, from Tunisia, attempts to offer an alternative way to harness wind and generate green energy that can be converted to electricity. In South Africa, a pedal-operated, self contained, easy to assemble waterless toilet called the SavvyLoo is being rolled out to respond to the need for innovative sanitation solutions. Eneza (“to reach” or “to spread” in Kiswahili), a virtual tutor and teacher’s assistant on a low-cost mobile phone is making wave in East Africa. M-Farm, provides up-to-date market information and links farmers to buyers through a virtual marketplace and shared current agri-trends.
These innovations bode well for the future. However, supplemental work is still required to speed up the pace of creation as well as the absorption rate of new technologies and spread it to all sectors of our economies. I am encouraged by your strong turnout. Both young researchers and highly respected professors are here to make a contribution. Your respective institutions continue to create opportunities to engage and exchange with industry leaders from Africa’s emerging knowledge and technology-driven commerce. I cannot over-emphasize the importance of fostering a continuous dialogue between those who create knowledge and those who commercialize knowledge in the quest for structural transformation, industrialization and sustainable development of the continent. As you know, sharing has a multiplier effect on knowledge dissemination.
Arguably, one of the most important developments of the 20th century for enhancing economic development has been the emergence and establishment of the knowledge-based global economy. Africa has to be prepared. We can actually be net beneficiaries of this focus on the role of information, technology and learning as a determinant of economic performance. We can leapfrog. We can offer frugal innovation. Technology has important implications for our ability to identify and exploit opportunities to transform our economies and for the employability of our growing young population. In today’s knowledge-driven global economy, innovation and technology-oriented education is vital for sustained economic performance and competitiveness. In practical terms, innovation and technology-oriented education gives our youth critical building blocks to secure their future. It ensures their integration into the more productive sectors of an economy, and also gives them the capability to generate new sectors and products. In this context, the Common African Position on the Post-2015 Agenda is clear – no one is to be left behind. The continent is aiming for inclusive and sustainable growth that leads to the uplifting of each and every single African: we want simple households to be capable of building wealth, whether by establishing a competitive small business or by plugging into an industrialization drive. For this to happen, we have to upgrade skills and make them responsive to the employment demands.
A key challenge for many of our countries is mobilizing finance and investment to make the required reforms happen. The solution might come from building public and private partnerships, for instance, much of the job of re-skilling our labour force takes place at the level of structured on-the-job skills development programmes, in which business is a driving force.
Where needed, business is already finding enough skilled workers to start low-end value addition. This is good news but hardly heartening. We are only going to scale up industrialization if we respond to higher and sizeable skills demands. For that, we need more synergy and synchrony between public and private sector actors.
Capacities is not the same as capabilities. We have lots of capabilities; but we need capacities. We need capacity for strategic decision-making. Capacity for enhanced productive economic activities. Capacities for aggressive absorption and generation of knowledge intensive technologies. In one sentence: capacity to transform growth into quality growth. This is a fantastic challenge for an inter-generational group of African economists.
Download the full statement below.
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South Africa Economic Update: Fiscal policy and redistribution in an unequal society
More than 3.5 million South Africans are lifted out of poverty through fiscal policy, which taxes the richer in society and redirects resources to raise the income of the poor through social spending programs, according to a recently released World Bank Group (WBG) report.
The South Africa Economic Update: Focus on Fiscal Policy and Redistribution in an Unequal Society report explores whether fiscal policy reduces poverty and inequality. It offers an analysis which is based upon the innovative use of fiscal and household survey data to provide evidence on two main questions; how do taxes and spending in South Africa redistribute income between the rich and the poor, and what is the impact of taxes and spending on poverty and inequality? Against the backdrop of a high fiscal deficit and rising debt burden, it is essential that the government uses its existing resources effectively in the fight against poverty and inequality, according to the report.
Asad Alam, WBG country director for South Africa, said this report goes to the heart of the country’s most pressing challenges and speaks to how policies are working to support the National Development Plan’s (NDP) ambitious targets of eliminating extreme poverty and reducing inequality.
The report shows that the poorest in South Africa benefit from social spending programs. About 70% of outlays on social grants and 54% of spending on education and health go to the poorest half of the population in South Africa. Cash grants and free basic services lift the incomes of some 3.6 million individuals above $2.50 a day (PPP). The rate of extreme poverty, measured as the share of the population living on $1.25 per day or less, is cut by half from 34.4 to 16.5%. The child support grant and old age pension make the largest impact on poverty.
Fiscal policy is progressive and works to reduce inequality. By taxing the income of the rich proportionally more than the poor and using social spending to boost the incomes of the poorest more than 10-fold, fiscal policy narrows the income gap between the rich and poor. Before taxes and social spending the income of the richest 10% in South Africa is more than 1000 times bigger than the poorest 10%. After taxes and social spending, this gap falls so that the income of the riches 10% becomes 66 times bigger than the poorest 10%. This corresponds to a reduction in the Gini coefficient on income from 0.77, before taxes and social spending, to 0.59 after the impact of fiscal interventions.
The report also demonstrates that South Africa is having more success than other peer countries such as Brazil, Mexico, Argentina, Indonesia, and Ethiopia in using fiscal policy to tackle inequality and poverty. Despite the strides made by fiscal policy, because the income gap was so high to begin with, the level of inequality after fiscal policy is still much higher than it is in most other countries in the world.
Catriona Purfield, WBG lead economist for South Africa, said other polices are needed to complement fiscal policy so that the country can continue to reduce economic inequality.
Executive Summary
Fiscal policy and redistribution in an unequal society
South Africa has made progress toward establishing a more equitable society. Since the end of apartheid, the government has used its tax resources to fund the gradual expansion of social assistance programs and scale up spending on education and health services. It thus was able to reduce poverty considerably. But progress in achieving greater income equality has proved elusive. Inequality of household consumption, measured by the Gini coefficient on disposable income, increased from about 0.67 in 1993 to around 0.69 in 2011, among the world’s highest.
With fiscal space becoming more constrained, this Update explores whether the government is making the best possible use of fiscal policy to reduce poverty and inequality. It provides an analysis based on the innovative use of fiscal and household survey data to answer two main questions:
1. How do taxes and spending in South Africa redistribute income between the rich and the poor?
2. What is the impact of taxes and spending on poverty and inequality?
This Update is the first study in South Africa to use the Commitment to Equity methodology developed by Tulane University, which allows the impact of fiscal policy on inequality and poverty in South Africa to be measured and then compared with that in 12 middle-income countries that have used the methodology.
In answer to the first question, this Update finds that the tax system is slightly progressive, and spending is highly progressive. In other words, the rich in South Africa bear the brunt of taxes, and the government effectively redirects these tax resources to the poorest in society to raise their incomes. On the tax side, fiscal policy relies on a mix of progressive direct taxes – such personal income taxes and slightly regressive indirect taxes – that when combined generate a slightly progressive tax system. Direct taxes (personal income and payroll taxes) are progressive, since the richer deciles pay a proportionally higher share of total direct tax collections than their share of market income. And because these taxes make up a fairly high share of GDP, they help narrow the gap in incomes between the rich and the poor. Indirect taxes are slightly regressive: the four poorest deciles contributed about 5.0 percent of total indirect tax collections, compared with their share of 4.8 percent in total disposable income. This regressivity at the lower end of the income distribution largely reflects the impact of excises, as value-added and fuel taxes are progressive.
South Africa uses its fiscal instruments very effectively, achieving the largest reductions in poverty and inequality of the 12 middle-income countries. As a result of South Africa’s fiscal system, some 3.6 million people are lifted out of poverty, measured as those living on less than $2.50 a day (in purchasing power parity dollars). The rate of extreme poverty is cut by half. The share of the population living on $1.25 a day or less falls from 34.4 percent to 16.5 percent, reflecting the impact of cash transfers and free basic services net of taxes. Inequality goes from a situation where the incomes of the richest decile are more than 1,000 times higher than the poorest to one where they are about 66 times higher. As a result, the Gini coefficient on income falls from 0.77, where it lies before various taxes and social spending programs are applied, to 0.59 after these fiscal interventions are incorporated. Still, the level of inequality remaining is higher than what all other countries in this sample start with before they apply fiscal policies.
In sum, fiscal policy already goes a long way toward redistribution. Even so, the level of inequality and poverty in South Africa after taxes and spending remains unacceptably high. But South Africa’s fiscal deficit and debt indicators show that the fiscal space to spend more to achieve even greater redistribution is extremely limited. Addressing the twin challenges of poverty and inequality going forward in a way consistent with fiscal sustainability will require better quality and more-efficient public services. It will also require faster and more-inclusive economic growth to address the need for jobs and higher incomes at the lower end of the income distribution – to narrow the gap in incomes between the rich and the poor and to reinforce the effectiveness of fiscal policy.
Executives: Smart carbon pricing policies can drive investment in a cleaner future
One hundred and twenty governments joined thousands of scientists in reminding the world today that climate change is a growing risk that is already affecting lives and livelihoods. They warned in the IPCC Fifth Assessment Synthesis Report that we need to reduce global greenhouse gas emissions quickly – by 40 to 70 percent by 2050 – to stabilize rising global temperatures and avoid the most serious economic damage.
Businesses and governments know this. They know how to cut emissions through energy efficiency, renewable energy, and sustainable land use, and they can leverage the money needed to finance a low-carbon transition.
The question is how to change economic incentives and disincentives so they can turn that knowledge into action that has a measurable impact on climate change.
It’s a challenge that forward-thinking investors, government officials, and business leaders are taking up. We spoke with business leaders during the World Bank Group/IMF Annual Meetings about solutions, particularly about carbon pricing policies that could incentivize low-carbon choices.
The executives – including from pension funds AP4 of Sweden and ERAFP of France, the international asset management firm Amundi, and the global technology company Alstom – talked about the need for consistent, meaningful carbon pricing; flexible policy frameworks that allow for innovation in how businesses lower their emissions; links between the diverse carbon pricing systems being developed around the world; and complementary policies, such as binding targets for energy efficiency and renewable energy.
They also discussed the importance of corporate disclosure of climate risks and greenhouse gas emissions to help investors and business leaders direct capital toward low-carbon choices, and the impact that requiring disclosure could have.
Capital is available to finance the low-carbon transition, they said, but it will not flow at the levels needed for the long-term until governments provide consistent and credible policy signals.
“We have to start reallocating money from the bad to the good,” said AP4 CEO Mats Andersson, whose pension fund asks the companies it invests in to report on their emissions and climate change risks. “We see many companies taking this very seriously and putting it into any investment case they have.”
Transparency
Lowering emissions starts with risk assessment. It’s a concept basic to business practices and economics: calculate today what emissions will cost your business or community tomorrow and act accordingly.
For investors, however, that risk can be obscured when companies don’t report climate risks, such as the vulnerability of their supply chains and assets to natural disasters, resource limitations tied to climate change, and the impact of climate policies or mandates. A growing number of investors are encouraging companies they invest in to disclose their climate risks and carbon footprints to improve the companies’ and the investors’ decision-making.
Requiring climate risk disclosure, starting with public pension funds, would be in governments’ best interest, said Frédéric Samama, deputy global head of institutional and sovereign clients at Amundi. Governments should be asking themselves if public pensions funds are investing in polluting companies that will ultimately costs the country, its citizens, and its budget, and they ask why, he said.
Reporting is also connected with behavioral finance, noted ERAFP CEO Philippe DesFossés: If you have evaluations every six months or every year, and if reporting is present in daily corporate monitoring, it becomes an issue business leaders will act on.
Investing for the future
For businesses, a consistent price on carbon through cap-and-trade systems or carbon taxes provides the policy direction to shift their focus from immediate returns that could damage the environment and drain resources to a longer-term outlook that supports sustainability. It can drive investment toward a cleaner economy and help them identify both climate risks and opportunities for new investments or business lines.
To encourage low-carbon investment, carbon pricing and climate policies must be feasible, achievable, and not subject to whims or constant political adjustment, said Alstom U.S. President Amy Ericson. The most effective policies are also flexible so each business can respond in the most efficient way for its situation – which leads to innovation and business opportunities.
“A long-term, meaningful price on carbon is critical for technology developers to sustain the necessary effort to bring innovative technologies to realization, like carbon capture and storage, offshore wind and smart cities,” Ericson said.
When the EU had a strong price on carbon, businesses were quick to invest in technologies that would help them lower emissions and meet the challenges of the future. It was in their economic interest to embrace energy efficiency and cleaner energy sources. With the lower carbon price today, many businesses have less incentive to invest for the future.
Developing a leadership coalition
The World Bank and partners, with input from finance ministers, investors and business leaders, are developing a carbon pricing leadership coalition to help governments learn from existing carbon pricing structures and find effective ways to encourage sustainable business decisions. The coalition will be a platform for discussion, knowledge-sharing, and ideas, including on ways to link national and regional carbon pricing systems for greater efficiency.
Investors and businesses are already moving forward. Many work within carbon pricing frameworks in the nearly 40 countries and more than 20 cities, states and provinces with carbon taxes or markets in operation or planned.
Others know they are headed for a carbon-constrained future and can gain an advantage by preparing now. Companies with hundreds of billions of dollars in assets disclose their carbon footprints, and more than 150 large companies have developed internal “shadow” carbon pricing mechanisms to help guide their decisions for a future when they expect to have formal carbon pricing in place.
Internal pricing isn’t enough, though – governments have to follow up. “We need a price on carbon,” DesFossés said. “Once we have that framework, we will allocate the capital.”
Another important source of carbon pricing action and growing knowledge is the Partnership for Market Readiness (PMR). This week, representatives from more than 30 countries in the PMR are meeting in Chile to discuss their progress in designing and building the carbon markets and carbon pricing systems of the future.
» Climate Change 2014 Synthesis Report (PDF, 6.04 MB)
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PIDA Steering Committee Meeting and Workshop of the Business Working Group of the World Economic Forum
The Programme for Infrastructure Development in Africa (PIDA) held its fourth steering committee meeting to evaluate the current status, identify challenges and recommend ways to improve working processes and capacity building with aims to accelerate the implementation of the continental programme. The meeting was followed by an interactive World Economic Forum workgroup on means of financing and engaging the private sector.
In his welcome remarks, Prof Mosad El-Missiry, NPCA Energy Expert, highlighted the need for a proper reporting mechanism on the implementation work plan of each Regional Economic Community (RECs) in order to effectively secure grants, curb the ongoing capacity issues and effectively accelerate the implementation of PIDA priority projects.
Mr. Sylvain Maliko, AfDB Acting Director, Regional Integration and Trade Department (ONRI) on his behalf expressed his organisation’s readiness to mobilize resources as well as the private sector to finance projects in line with the 2012-2022 regional integration and development financing plan. He further expressed the availability of various lending schemes to push the Programme forward.
Mr. Winfried Zarges, GIZ Sector Manager, acknowledging increased government will and belief in enhancing infrastructure throughout the Continent, stressed the need to now deliver plans to accelerate the implementation and preserve the positive international outlook towards PIDA. He further expressed his Government’s readiness to continue support to the PIDA Implementation.
Opening the meeting, Mr. Aboubakari Baba Moussa, AUC Director for Infrastructure and energy said that the meeting offers an opportunity to take stock of progress since the inception of PIDA three (3) years prior. He stressed the need for tangible results and the need to accurately link PIDA objectives with concrete implementations. He further appreciated the innovative initiatives taken by some RECs in funding their priority projects and stressed the need for adequate monitoring of all activities in order to accelerate the process.
In dealing with the status of implementation of the 16 priority PIDA projects (PIDA PAP) as identified during the Dakar Summit, the meeting heard comprehensive progress reports from EAC, ECOWAS, ECCAS and SADC. The meeting redrafted and adopted a performance memorandum of understanding to be urgently signed by the RECs under the facilitation of NPCA. The session further stressed the need to reinforce the NPCA Monitoring and Evaluation process; The need for RECs to pursue their data collection in order to feed the Virtual PIDA Information Center (VPIC) which is now online; The need to urgently formalize a network of Communication experts in order to implement the communication strategy.
On the Status of the Implementation of the Joint Work Plan 2014 of the PIDA PAP Road Map 2014 – 2015 it was recommended that the NEPAD Project Preparation Facility IPPF) evaluate accurate costs of preparation and implementation; Target Ministers of Finance of countries involved and impacted by these projects to promote and advocate innovative measures to mobilize funds; Circulate the amended rules of procedure for comments. It was further noted that the NEPADD IPPF delivery needs to be improved.
Subsequent sessions noted that the Project Preparation Facilities Network (PPFN) which is a Network of 17 projects participate in NPCA and RECs technical meetings; In addition, a draft Financing Plan for the implementation of PIDA has been presented by the AfDB hired Rebel Consulting Firm.
The two day meeting was jointly organized by the African Union Commission (AUC) through its Department of Infrastructure and Energy and the NEPAD Planning and Coordinating Agency (NPCA) and was co-chaired by the African Development Bank (AfDB) and the GIZ. In attendance were representatives of RECs, private sector, multinationals as well as various stakeholders.
During the WEF working group session, numerous private sector actors expressed interest in PIDA projects and discussed concerns in regards to investment opportunities and risk, policy challenges, cross border applicability as well as the need to co-exist with public sector involvement.
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Customs Territory to pave the way for the next phase of integration
The way to the realisation of a Customs Union in the East African Community has been one filled with roadblocks. It took four years from the conception of the EAC to set up the legal framework that paved the way for the establishment of a Customs Union.
Through the enactment and adoption of the EAC Customs Management Act, the wheels of economic integration began rolling in 2005.
Since 2004, the EAC has marked several milestones on the way towards the achievement of a fully fledged Customs Union. The most recent one of these was the Single Customs Territory (SCT), which was agreed upon during the EAC Summit held in April 2012.
In November 2013, the EAC published the framework for the attainment of the EAC-SCT. However, the adoption of the SCT was phased and on a pilot basis, with Uganda being the first country to implement it in 2014.
The SCT is a Customs system aimed at leveraging on the efficiencies derived from the adoption of the destination principle. It aims at strengthening the Customs Union, reducing the cost of business and increasing trade within the EAC.
Revenue in real time
The SCT has also solved the problem of revenue sharing among member states, as each will receive their Customs revenue in real time.
The destination principle is an international taxation concept most commonly applied in value added tax, but also applied for Customs duty.
Under this system, tax is ultimately borne by the final consumer. The fundamental purpose of this principle is to ensure that all revenue accrues to the jurisdiction where the supply to the final consumer occurs.
The EAC-SCT regime borrows heavily from this destination principle in the administration of Customs duties among the member states. Under the EAC-SCT, the destination country is responsible for the declaration of the goods entering the EAC into their Customs system.
This is a shift
But verification of imports is done by the country or port through which the goods enter the EAC. This is a shift from the previous Customs regime in which multiple declaration points existed for goods imported for consumption within the EAC.
An importer was required to declare the goods-in-transit at various border points and deposit a security bond for the same. This system increased the costs and hampered the free flow of goods within the EAC.
The centralisation of the declaration and verification of the goods under the SCT has led to the collapse of the Port Transfer, Transit and Warehouse Bonds into one General Guarantee Bond. The General Guarantee Bond is expected to translate into reduced financing cost and transport time and ease the administration of the bonds by the various revenue authorities.
Once the goods are verified by the originating country, a movement document (C2) is generated and they are ready for transport to the consignee. Although transit bonds and shipping documents are no longer required for member-state transfers, the revenue authorities plan to institute various checks along the transport route to authenticate the release documents.
In Uganda and Rwanda, for instance, all trucks carrying goods-in-transit will be monitored online using a unique number or seal.
These checks are designed to test whether the clearance procedures were observed at the port of entry and that no revenue authority is robbed of its rightful income.
In Kenya, the SCT was adopted on a pilot basis on September 15 and a notice issued by the Kenya Revenue Authority.
The goods that will be cleared under the SCT are divided into intra-trade products between Kenya and Tanzania and maritime products between Kenya, Uganda and Tanzania.
Intra-trade products include rice, maize, sugar, alcoholic products and cigarettes.
Maritime products are goods originating outside the SCT, including motor vehicles, textiles and fabrics, electronics and beverages.
The verification of the imports is done at the ports of Mombasa and Dar es Salaam and duty paid in the destination country.
In the selection of the products for the pilot clearance through the SCT, the revenue authorities may have considered the frequency of trade or import of the goods.
Critical interface
For a trading bloc to gain from the SCT, it is critical that the interface between the various revenue authorities’ information technology infrastructure runs without hitches.
In recent years, some of the Customs IT systems in place have experienced significant downtime that has hampered trade within the region.
Thus, it is important to ensure a smooth integration of the IT systems of the various revenue authorities.
It is also paramount to ensure that proper security controls are put in place to guard against fraud by unscrupulous traders.
The SCT regime, if well implemented, will result in increased trade within the EAC as well as bolster the Customs Union, paving the way for the next stage of economic integration.
Titus Nguhiu is a senior tax advisor at KPMG Kenya. The views expressed here do not necessarily represent those of KPMG.
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Kenya, Uganda agree to run standard, metre gauge railways side by side
Kenya, Rwanda, South Sudan and Uganda will soon sign a policy under the SGR Protocol, requiring all heavy cargo to be transported exclusively by rail between Mombasa and the capitals of the four countries.
Speaking in Kampala at a ceremony welcoming the arrival of Rift Valley Railways’ advance batch of refurbished General Electric locomotives on October 20, Ugandan Junior Minister for Works John Byabagambi said a decision had been taken by the Kenyan and Ugandan governments to maintain the existing metre-gauge rail alongside the standard gauge rail, because there was room for more than one rail operator.
“Ninety-three per cent of cargo out of Mombasa is still road-bound, so the SGR can and will complement the metre gauge. This is one of the policies contained in the SGR Protocol, and any cargo with a weight above 15 tonnes will not be allowed on our roads. This will save our expensive road infrastructure while ensuring that operators of the rail networks get enough traffic tonnage to pay their way,” Mr Byabagambi said.
Despite protections in the concession agreement, Mr Byabagambi’s remarks will reassure markets that had become sceptical about RVR’s future in the face of recent calls to terminate the concession by Kenya over alleged underperformance.
The rail operator was accused of failing to achieve a target of taking at least 10 per cent of the haulage business from the roads.
According to Uganda Railways managing director Charles Kateba, the strategy to use both services has been adopted because the metre gauge will form the logistical backbone for development of the SGR, and more importantly for Uganda where the government was pushing RVR to reinvest in the 500km Tororo-Pakwach line.
Currently, the line, which was revived last October after 20 years, cannot meet the demand for services, especially from the Kenyan cement industry, which uses it for trans-shipments to South Sudan. But RVR says recent investments in rolling stock and track improvement will change this state of affairs over the next few months.
Ugandan RVR stockholder Charles Mbire said new culverts and bridges installed between Jinja and Tororo, along with the power of the new locomotives, will lead to an increase in volume and speed.
“Each of these engines can haul 1,200 tonnes, and improvements to the track on the Ugandan side mean these heavier and longer trains can now run all the way to Kampala. That increases our capacity, and also improves time keeping because we no longer need to break up trains in Tororo,” Mr Mbire told The EastAfrican.
Although only three of the 20 locomotives on order has arrived, Mr Mbire said the number of engines will double to 40 by June next year.
He said there has been a 40 per cent increase in cargo moved between Mombasa and Kampala during the year to date, compared with the same point in 2013, and that transit times had been cut down to an average of 3.7 days.
The SGR, whose construction has started on the Kenyan side, is set to move cargo at 80km per hour and passengers at 120km per hour. Byabagambi says this aspect should make the SGR attractive regardless of the lower tariff the metre gauge will be charging.
There have also been concerns that the SGR, which is being developed at a cost of more than $20 billion for the entire network, will not be able to compete against a revamped metre gauge, a notion Mr Byabagambi dismisses.
“The gradient and other technical limitations of the metre gauge will not allow them to come anywhere close to the speed available on the SGR, and the $4,000 cost of shipping a container from Mombasa to Kampala by road leaves a large margin despite the lower cost of the metre gauge,” he said.
However, sources in RVR said the SGR will have an advantage of only nine hours between Mombasa and Kampala, at a cost of 45 per cent higher than the metric gauge.
According to provisions in the RVR concession agreement, the Kenya and Uganda governments are bound to compensate it for any losses arising from competition and decisions related to the SGR.
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TPP Ministers: Shape of trade deal “crystallising” following Sydney meet
Ministers from the Trans-Pacific Partnership (TPP) countries concluded a three-day meeting in Sydney, Australia on Monday, citing “significant progress” in their negotiations on both market access and on trade and investment rules.
“We consider that the shape of an ambitious, comprehensive, high standard and balanced deal is crystallising,” ministers said in a joint statement issued following their meeting.
The announcement that the shape of a potential deal is advancing comes ahead of a series of meetings where leaders from the 12-nation group are set to cross paths, which trade observers say could prove pivotal if a deal is indeed to be concluded this year.
Ministers have now pledged to continue focusing their efforts on consulting “widely at home and work intensely with each other to resolve outstanding issues in order to provide significant economic and strategic benefits for each of us.”
The 25-27 October gathering was preceded by a 19-24 October meeting of chief negotiators, and ministers confirmed that these chief negotiators would be staying in Australia for at least a few days longer to continue advancing the work.
The ministerial meeting, which officials said was meant to “lay the groundwork for the conclusion” of the TPP talks, was hosted by Australian Trade Minister Andrew Robb and chaired by US Trade Representative Michael Froman.
Along with meeting in plenary to discuss issues affecting the whole group – with officials afterward touting progress in difficult areas such as intellectual property, environmental protection, and state-owned enterprises – ministers also held various bilateral discussions during the Sydney meeting, which they said focused primarily on goods, services, and investment market access.
The 12 countries currently involved in the TPP negotiations are Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.
Finish line approaching?
In his opening remarks to ministers on Saturday, Robb affirmed that, in his view, “we are working now to try and conclude this agreement by the end of this year.”
Some sort of TPP outcome by year’s end has been a stated goal of US President Barack Obama, who suggested in June that he would like there to be “something that we have consulted in Congress about, that the public can take a look at,” in time for his November trip to Asia in order to close the deal.
An ambitious agreement, US officials have repeatedly affirmed, could help build the support in Congress for passing a separate piece of domestic legislation, known as Trade Promotion Authority (TPA) or fast-track, that is essential for ratifying trade deals in Washington without subjecting them to additional amendments by US legislators.
Despite the recent ramp-up in TPP negotiating momentum, however, Robb acknowledged in a radio interview ahead of the ministerial that the greatest risk for the talks “is for this thing to be stalled.”
“Every company’s got its sensitivities, as we do – and the biggest risk is that those things prevent this agreement being concluded,” he said during the ABC AM interview.
Speaking to reporters after the meeting, Robb affirmed that this latest ministerial demonstrated “a real sense that we are within reach of the finish line,” adding that the focus of the group seems to have increased by “several notches.”
“We are seeing a great preparedness to make some of the difficult decisions, a willingness to compromise, to get to final decisions,” he added. “We are seeing places people are prepared to move providing the rest of the package ends up as they hope. But I would say, in conclusion, that as always [in] these types of agreements, nothing is decided until everything is decided.”
US-Japan market access
The question looming over the negotiations these past several months has been whether the US and Japan will be able to reach a bilateral deal on agricultural and automobile market access.
Despite repeated meetings between Washington and Tokyo officials, the two sides remain apart, ministers confirmed on Monday, though Froman stressed to reporters that there has been “substantial progress over the past several weeks.”
The protracted negotiations between the two largest economies in the 12-country talks have been widely blamed for slowing down the overall pace of negotiations, with other members reportedly hesitant to put too much on the table until it is clear whether a US-Japan deal is reached – and if so, what it would entail.
Officials from some other TPP members tried to dispel that notion last week, noting that the bilateral talks are necessary if the broader group-wide negotiations are to succeed.
“We would be extremely concerned with both the Japanese and the US delegations if they were not meeting privately because power is very important to integrate into a negotiating process,” New Zealand Trade Minister Tim Groser told reporters on Monday. “It is absolutely essential that they explore what I’d call the outer parameters of a deal, provided that the largest parties [are] in a continuous process of discussion with countries like mine and they are.”
The New Zealand trade official did qualify, however, that a “sweetheart deal that just is made in Tokyo and Washington” – without the participation of other players – would cause “immense disruption” to the 12-country negotiations overall.
Leaders’ meetings forthcoming
Ministers told reporters on Monday that chief negotiators will stay on in Australia for a few more days to continue these discussions, in line with the instructions given by their trade chiefs. A subsequent meeting of ministers will occur “in the coming weeks,” they added, without setting a specific date at that time.
Despite not publicly announcing dates for either a ministers’ or leaders’ meeting, the fact that at least two major gatherings of regional leaders are scheduled for the next month – along with Obama’s call for a November result of some kind – have fuelled speculation that a TPP-specific leaders’ event may be forthcoming.
For instance, leaders from TPP countries will be present during the Asia-Pacific Economic Cooperation (APEC) Leaders’ Meeting in Beijing, China in early November, given that all TPP members are part of the 21-nation APEC group.
However, the fact that Beijing is hosting this year’s APEC event has sparked questions as to whether TPP leaders will indeed meet separately in the Chinese capital, given that China is not currently part of the 12-country negotiations.
While China is not in the TPP, it is involved in a separate regional integration initiative, known as the Regional Comprehensive Economic Partnership, which was launched in November 2012. (See Bridges Weekly, 21 November 2012) Along with China, those negotiations include all ten members of the Association of Southeast Asian Nations, India, South Korea, and some TPP countries such as Japan, New Zealand and Australia.
Trade officials involved in the latter talks have suggested that the deal could be another pathway toward reaching a Free Trade Area of the Asia-Pacific – though whether it would be complementary to, or in competition with, the TPP has sparked significant debate.
Another key meeting is the upcoming summit of G-20 leaders in Brisbane, Australia on 15-16 November. Some TPP members – the US, Australia, Canada, Japan, and Mexico – are part of the G-20 configuration. New Zealand and Singapore, while not G-20 members, are listed as “guest countries” for this year’s meeting.
In his remarks to fellow ministers this past weekend, US Trade Representative Michael Froman highlighted the upcoming meetings as another incentive for ramping up the talks.
“We now have in front of us an excellent opportunity to resolve the outstanding issues where possible, to narrow our differences, and to tee up these issues for our leaders as they see each other in the coming weeks in various places around Asia,” Froman said.
“It’s an effort that will further the integration of this very important region, the Asia-Pacific region, and very importantly it will be an agreement that will help set the rules of the road for this region, and it will be a very important economic and strategy opportunity,” the US trade chief said.
This article is published under Bridges, Volume 18 - Number 36.
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How to de-enclave the African resource sector for more inclusive growth and development
The recent acceleration in growth rates across much of sub-Saharan Africa may not be purely commodity-driven, but for many of the region’s economies macro-economic stability is still dependent on prudent management of natural resources. For this reason, a strategic shift is required to shield African economies from commodity boom-burst cycles.
For much of the last half century, the dominant political economy model of natural resource management in Africa was this: states received royalties from mostly private mining companies and then were supposed to invest in public goods such as roads, hospitals, and schools. Private mining companies, for their part, would pick up the slack whenever states failed. Most of the time this happened through corporate social responsibility (CSR) initiatives, as a way of buying the social license needed to operate in specific communities.
This model has proven to be a complete failure in nearly all resource-rich African states, for a number of reasons.
Opacity and leakages inherent in revenue management chains, short-term electoral calculations, and the lack of accountability of governments all have led to the misuse of royalty revenues. This has left many private companies holding the bag with regard to community development projects. And since mining companies are not development agencies, most CSR initiatives have focused on low-hanging-fruit projects whose long-term developmental impacts remained spotty and unlikely to scale up to the national level.
Furthermore, the royalties-focused strategy has encouraged the evolution of export-oriented enclave economies around natural resource sectors. These exports have contained little to no local content and related production processes generated negligible value addition.
As a result, the exploitation of natural resources in Africa has failed to create jobs, instead fueling inequality as a few politically connected interest groups benefitted from resource rents.
A new initiative by the African Union – the Africa Mining Vision (AMV) – has set out to change this. At the core of the AMV is the push to de-enclave the Africa’s resource sector and link it with other sectors in the economies of resource-rich states. Doing so will help to ensure that resource exploitation in Africa results in sustainable, job-creating growth and development.
How can this be done? It will center on two key strategies: regional integration and spatial development initiatives (SDIs).
Currently, intra-Africa trade accounts for little more than 12 percent of the region’s total trade volume. Greater regional integration can help grow this number and attract new investment. Informed policy harmonization can also set local content provisions, help create economies of scale, increase local value addition, and improve governments’ bargaining position vis-à-vis mostly foreign mining companies.
SDIs will aim to create growth corridors within resource-rich regions that cut across state borders. These corridors will be built on multi-use, shared infrastructure – roads, railways, regional power pools, and harmonized resource management policies.
But while these goals are laudable, significant challenges remain.
First, the biggest challenge will be to square the domestic political economy of the resource sector in many African states with the regional goals of a more rationalized and efficient natural resource sector.
As is documented in the 2013 Africa Progress Panel Report, governance gaps are a key challenge to the successful management of the resource sector in Africa. Annual illicit flows from the region, much of it from leakages in the natural resource sector, amount to US$25 billion. Trade mispricing, still largely involving commodity exports, adds another $38.4 billion. Given the large sums involved, significant domestic interests exist that will resist any regional attempts at policy harmonization. Reform efforts must therefore not assume that domestic political interests will necessarily embrace the potential benefits of regionally harmonized policies regarding taxation, local content, environmental management, and other areas.
Second, local content and value addition policies will have to be matched with aggressive investment in the development of capacity among local firms. Many resource-rich countries lack firms with sufficient capacity to provide both direct and indirect services to mining companies. Capacity development ought to include technical training, loan facilities, and amendment of procurement laws to boost the competitiveness of local firms.
A good example is the Nigerian Content Act of 2010. The Act created the Nigerian Content Development and Monitoring Board and the Nigerian Content Fund, designed expressly to increase the level of participation of indigenous firms in the oil and gas sector, boost capacity of local firms, and encourage greater integration of the petroleum sector within the rest of the economy. For smaller resource-rich countries in Africa, such efforts are likely to succeed if implemented at the regional level in order to enable local firms to benefit from economies of scale.
Third, because strong states make for strong regions, any regional initiatives to improve the management of natural resources in Africa must not be seen as substitutes to the hard work of reforming domestic institutions in resource rich states. Beyond addressing the governance gaps discussed above, investments will be required in enhancing the capacity of line ministries directly related to natural resources, finance ministries, and ministries in charge of regional cooperation. These domestic reforms will ensure that regional initiatives remain rooted in domestic institutional and political realities in a manner to make them sustainable in the long run.
As the case of the Pilbara Region in Australia shows, even under the best of circumstances the boom-burst cycle of resource exploitation poses real risks to economic stability in resource-rich regions. One way of mitigating this risk is to ensure that the resource sector generates a significant amount of jobs in both directly and indirectly related sectors. Such a process is critical for the development of skills that can then be shifted to other sectors during downturn periods without resulting in significant job losses.
The previous model of linking the mining sector to the wider economy primarily through public expenditures has failed because of significant downside risk during periods of commodity bursts. It is time to take seriously the less risky alternative model of de-enclaving resource sectors through local content and value addition.
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Mobile wars and political barriers to entry: Safaricom vs. Equity Bank
A few years ago, Kenyan commercial banks were fighting hard to prevent mobile phone companies from engaging in the business of money transfer. They argued that money transfers were a preserve of banks – thus allowing mobile phone providers to engage in them was in violation of the Banking Act. The banks lost this fight. However, as banks have recently begun to tap into the mobile banking industry themselves, the mobile phone providers are now pressuring politicians to stop the banks from entering the mobile banking systems purely on their own.
The Fight Against Mobile Banking
Between 2007 and 2008, then-acting Minister of Finance John Michuki was increasingly leaning towards an over-regulated banking regime that would have seriously handicapped the expansion of Safaricom’s M-Pesa money transfer program as we know it today. In fact, Michuki ordered a probe of the mobile money transfer system because it was alleged that it posed dangers to the financial system – a decision possibly “influenced by an informal cartel of local banks unhappy with the threat Safaricom's mobile money transfer service poses to their business.” The Kenyan newspaper The Star even found “well-placed sources” reporting that four big local banks actually created an “ad hoc committee” designed to stop M-Pesa. The banks apparently approached Michuki in late 2008, alleging that M-Pesa was similar to a “pyramid scheme” and that “people could lose their money if it collapsed.” On this prompt, says The Star, Michuki ordered the Central Bank of Kenya to audit M-Pesa – reasoning that the service’s popularity had made the government “jittery.” He even stated, “I am not sure M-Pesa is going to end well.”
Michuki was not the only official approached: The governor of the Central Bank of Kenya, Prof. Njuguna Ndung’u, has asserted that he turned down a plea from commercial banks' chief executives in 2007 to stop the spread of mobile money service M-Pesa. According to the governor, some commercial banks’ CEOs approached him, “complaining that M-Pesa, offered by Safaricom, would cause a financial crisis in the country.”
Had the technocrats (the non-political experts in government) sided with the commercial banks and political elements, this intense lobbying would have cost the country a great opportunity – one that has turned Kenya into a leading example of an innovative approach to increasing financial inclusion in the world. To be sure, the credit for effectively opposing the lobbying efforts by commercial banks is shared – the Central Bank of Kenya (especially its regulatory and payments systems departments), the Communications Commission of Kenya, and notably also the then-permanent secretary of the Ministry of Information and Communications, Bitange Demo, who made a strong case for licensing mobile banking. These officials clearly understood the political economy of private interests seeking to erect political barriers to entry, the consequences of which would have been large welfare losses to society at large while concentrating benefits among the few.
Now the tables have turned. After the phenomenal success of mobile banking, which clearly threatened the profitability of traditional banking models, commercial banks changed their operations and began to invest in mobile phone-based banking. They started by introducing products that linked to the services offered by the mobile phone companies. Today, commercial banks have ratcheted up their operations to full mobile banking including introducing their own SIM cards instead of relying on those issued by the mobile phone providers. Now, mobile phone operators are crying foul and seeking political cover with the intention of barring such operations. They claim that this is an issue of security: Equity’s thin SIM technology could expose its users to financial fraud. These complaints are just another attempt to create barriers to entry in order to reduce competition, just from the other side.
The New Fight: Safaricom Versus Equity Bank
Equity Bank and Safaricom are some of the best managed, innovative and successful companies in Africa. Both headquartered in Kenya, they are leaders in their core businesses – Equity in banking and Safaricom in mobile telephony and mobile banking. They have coexisted in harmony and, in the past, Equity has even sought to backpack on Safaricom’s success by introducing products that tap on M-Pesa, thus benefiting both the mobile phone company (in expanding its business) and also increasing Equity’s profitability and customer base. Thus, by and large, they have coexisted harmoniously. Until now.
Recently, Equity Bank has introduced new technology that uses an independent SIM card (one not issued by a mobile phone company). This paper-thin SIM card is layered on top of a customer’s existing card without affecting the customer’s original service provider’s network reception. With this SIM card, customers need not change to dual SIM card handsets, and they can make calls, send messages and transfer funds from the same phone. In September 2014, the Communications Authority of Kenya gave Equity Bank a license to use the technology. Safaricom has come out strongly in opposition to the introduction of the new technology, arguing that it puts users at risk of fraud and that the approval was granted before full legislation was enacted. Just as commercial banks had done when their core business was threatened by mobile phone service providers, Safaricom has sought protection from politicians – who have now recommended that Equity’s approval be suspended until they are satisfied with the security of the technology.
Commercial banks venturing directly to provide services that are the domain of the mobile phone providers introduce a new margin of competition that is a real threat to the profitability of mobile phone services providers. Thus Safaricom is now seeking to erect political barriers to entry while disguising it as a concern over safety. As one analyst in The Economist has noted, “This is a classic incumbent move, claiming safety concerns to try and prevent Equity Bank offering value-added services that Safaricom offer through M-Pesa.”
The Legislation of Innovation
As demonstrated by these tussles, one of the dangers of innovation in financial service provision is that the appropriate legislation lags behind the innovation. In a 2009 study on the success of mobile banking in Kenya, Ndung’u and I note that there are two major policy options when approaching this issue. The first is to bar the products until legislation has been passed. We also note, however, that “given that most often the process of enacting legislation takes a long time, such an approach risks the possibility of stifling innovation and thus undermining access.” On the other hand, an alternative could be to enact legislation after the products have entered the market, but, again, we note that “this approach would achieve the goal of access but could associate with financial instability.”
Kenya has somewhat followed the second approach, as we explain in our paper: “In Kenya, the strategic policy choice has been to allow technological innovations in mobile banking, but under prudent monitoring and review to ensure that the integrity of the financial system is maintained. … At the institutional level, the Central Bank of Kenya has undertaken various strategies to enhance the oversight capacity effectively keeping abreast of innovation and technologically driven financial services. This has made it possible to increase access to financial services but at the same time maintain stability.”
Clearly, mobile banking innovation should be encouraged to thrive, but watched closely by the relevant authorities, who should prioritize balancing access and stability. We emphasize that “it would be extremely unwise to expand access at the expense of financial stability and integrity of the payment system. Countries that do not have adequate supervisory capacity of their payment system would be ill advised to allow new technologically-driven financial products and should carefully weigh the potential costs of instability. Some vulnerabilities of mobile phone banking that can destabilize the financial system and lower the efficiency of the payment system include fraudulent movement of funds, network hitches, mismatch of cash balances at the pay points, and problems that associate with high velocity of funds making it difficult to stop suspect transactions.”
Thus, the key to Kenya’s successful mobile banking industry is permitting innovations and, at the same time, ensuring that the regulatory agencies work continuously to evaluate and manage potential risks. This is what the authorities are doing by allowing the commercial banks to enter the market. It is also a major reason mobile banking has been so successful in Kenya and not in many other African countries.
The technocrats have already evaluated the Equity Bank’s technology and are convinced that it is secure. Such innovations are crucial to advancing welfare and erecting barriers to entry in the name of security will only serve to undermine innovations and reduce consumer welfare. Politicians should be careful not to undermine competition as is evident in the current case of Equity versus Safaricom. Incumbent and dominant firms like Safaricom must brace for increased competition arising from technological innovations, and the best strategy for them to keep ahead of entrants is investing in innovation so as to be able to provide more, better and cheaper services.
Mwangi S. Kimenyi is senior fellow and director of the Africa Growth Initiative and currently serves as advisory board member of the School of Economics, University of Nairobi.
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2014 African Economic Conference to focus on knowledge and innovation
The critical role which knowledge and innovation should play in Africa’s development will be the focus of this year’s African Economic Conference (AEC) scheduled to take place from November 1-3 in Addis Ababa, Ethiopia.
Organized each year by the African Development Bank, United Nations Development Programme and UN Economic Commission for Africa, the conference will provide a unique opportunity to explore how to harness Africa’s knowledge industry for the continent’s transformation and inclusive growth.
The conferees, usually policy-makers, researchers, development practitioners and cohorts from Africa and elsewhere, will explore extant knowledge generation approaches and frameworks, as well as the efficacy of Africa’s knowledge and innovation institutions in developing needed skills, technology and innovation capacities. They will also discuss policies required in knowledge generation and innovation to achieve Africa’s transformation agenda.
The AEC 2014 theme, “Knowledge and Innovation for Africa’s Transformation”, draws from the African Union Agenda 2063 and the African Common Position on its Post-2015 Development Agenda which identify science, technology and innovation as key pillars for Africa’s development.
As the continent pursues its agenda of “an integrated, prosperous and peaceful Africa driven by its own citizens and representing a dynamic force in the global arena,” success will depend on adequate accumulation of skills, technology and competences for innovation, the organizers say.
Noting that while African countries are well aware that their development hinges on how fast and how well they acquire technological competences, acute skills deficit in domains critical to the realisation of structural transformation goals, significant number of engineers and science graduates remain unemployed in Africa further underling the many facets (including the slow pace of structural transformation) of the mismatch between the demand and supply of skills that exists on the continent.
Africa’s stock of graduates is still highly skewed towards the humanities and social sciences, while the share of students enrolling in science, technology, engineering, and mathematics averages less than 25 percent, according to pre-conference briefs.
“The proliferation since the 1950s of institutions of higher learning and think tanks devoted to addressing the various challenges of Africa’s development has not brought about a significant narrowing of the continent’s skills/innovation gap,” they note.
In the area of soft skills, the Bank notes that African enterprises can only develop and influence the breadth and depth of industrial linkages if they harnessed the needed skills and technologies to upgrade production processes, and identify market opportunities. Similarly, African enterprises will need to upgrade operational competitiveness, meet global technical standards and adopt world-class manufacturing practices to qualify for entry into the global value chain.
The conference will have plenary and break-out sessions featuring presentations and discussions by prominent academics, policy-makers, business actors (including emerging technological/digital entrepreneurs and the youth) and opinion leaders, as well as representatives of peer organisations.
The break-out sessions will involve in-depth and technical analyses of salient issues arising from the thematic focus of the conference. The sub-themes will enable a broad range of discussions on the current state of Africa’s transformation capacity and generate valuable insights for improved policy-making.
These include Knowledge Generation for Structural Transformation; Technology for Africa’s Transformation; and Addressing the Skills Deficit.
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Fossil fuels won’t benefit Africa in absence of sound environmental policies
Recent discoveries of sizeable natural gas reserves and barrels of oil in a number of African countries – including Uganda, Tanzania and Kenya – have economists hopeful that the continent can boost and diversify its largely agriculture-based economy.
But environmentalists and climate change experts in favour of renewable energy say that the exploration of oil and gas must stop, as they are concerned that many African countries lack the capacity to exploit oil and gas at minimal risk to the environment.
Economic policies are not driven by environmental concerns, Hadley Becha, director of local nongovernmental organisation Community Action for Nature Conservation, told IPS.
Becha said that despite the global shift away from fossil fuels, “exploration and production of oil and gas will continue” while Africa’s natural resources, particularly oil and gas, are controlled by multinationals.
Like many experts in the oil and gas industry, Becha believes that multinationals will still be awarded permits by local governments as the extractive industry has shown a great potential for revenue generation.
According to KPMG Africa, a network of professional firms, as of 2012 there were 124 billion barrels of oil reserves discovered in Africa, with an additional 100 billion barrels still offshore waiting to be discovered.
And while only 16 African countries are exporters of oil as of 2010, at least five more countries, Mozambique, Uganda, Tanzania, Kenya and Ghana, are expected to join the long list of oil-producing countries.
But Kenyan environmentalist and policy expert, Wilbur Otichillo, believes that in light of the global shift away from fossil fuels, “newly-found oil will remain underground. Most of the companies which have been given concessions for exploration in East Africa are from the West.”
He told IPS that these companies were likely to heed calls for clean energy, “especially since they are likely to be compensated for investments made to explore.”
But unlike Egypt, which has specific Environmental Impact Assessment (EIA) guidelines for oil and gas exploration, many African countries, including Kenya, have only one classification of EIAs, Becha said.
For example, in Kenya, oil and gas exploration and production is controlled by the archaic Petroleum Act of 1984, which was briefly updated in 2012.
“The Petroleum Act of 1984 is a weak law, especially with regards to benefits sharing and is also silent on the management of gas,” Becha said, adding that the oil and gas sector was very specialised and required detailed and specific environmental impact guidelines.
Experts say fossil fuels will have a significant impact on weather patterns. The Intergovernmental Panel on Climate Change (IPCC), which was released last month, revealed that temperatures on the African continent are likely to rise significantly.
“There ought to be specific guidelines for upstream [exploration and production], midstream [transportation, storage and marketing of various oil and gas products] and downstream exploration [refining and processing of hydrocarbons into usable products such as gasoline],” Becha said.
Policy experts are pushing Kenya’s government to develop sound policies and comprehensive legal and regulatory frameworks to ensure that Kenya benefits from upstream activities and can also explore technology with fewer emissions.
Executive director of Green Africa Foundation John Kioli told IPS that Kenya was committed to adopting technology with fewer emissions “for example, coal [one of Kenya’s natural resources] will be mined underground as opposed to open mining.”
Kioli, the brains behind Kenya’s Climate Change Authority Bill 2012, emphasised the need to address the issue of governance and legislation in Africa.
He added that while Africa was committed to climate change mitigation and adaptation efforts, “the continent lacks the necessary resources. Africa cannot continue looking to the East or West indefinitely for these resources.”
Kenya’s government estimates that the 2013-2017 National Climate Change Action Plan for climate adaptation and mitigation would require a substantial investment of about 12.76 billion dollars. This is equivalent to the current 2013-2014 national budget.
Danson Mwangangi, an economist and market researcher in East Africa, told IPS that to achieve growth and development, and hence reduce poverty, “Africa will need to exploit fossil fuels.”
He says that industrialised countries are responsible for a giant share of greenhouse gas emissions and Africa too “should be allowed their fair share of greenhouse gas emissions, but within a certain period. Not indefinitely.”
Mwangangi said it is now common to find assistance to Africa simultaneously counted towards meeting climate change obligations and development commitments. “This means that measured against more pressing problems like combating various diseases, climate change projects will not be given a priority,” he added.
But even as Africa is adamant that oil and gas exploration will continue, Becha says the gains will be short term and unlikely to revive the economy.
“With oil and gas, it is not just about licensing, there are also issues of taxation…” Becha said.
He explained that in the absence of capital gains tax, as is the case in Kenya and many other African countries, “the government will lose a lot of revenue to briefcase exploration companies who act as middlemen, robbing national governments of significant revenue.”
He added that African countries will have to establish a solvent fund where revenue from oil and gas will be stored to stabilise the economy “oil can inflate the prices of certain commodities hence the need to control surges in inflation.”
Ghana is also among the few countries with a capital gains tax and a solvent fund.
This is part of a series sponsored by the Climate and Development Knowledge Network (CDKN).
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AfDB Board approves Financial Sector Development Policy and Strategy 2014-2019
Executive Directors of the African Development Bank Group on Wednesday, October 29, 2014 in Abidjan approved a landmark Financial Sector Development Policy and Strategy (FSDPS) which aims to improve access to financial services by the underserved and to broaden and deepen the continent’s financial systems.
Described as “the next page in the history of the Bank’s work,” the FSDPS lays out the strategic direction of the Bank Group’s financial sector work in RMCs during 2014-2019, with a strong focus on financing to accelerate Africa’s transformation.
The FSDPS supports the Bank’s vision for Africa’s financial sector. Through it, the Bank Group, working with other key development partners, will support African countries and the regional economic communities in meeting three mutually reinforcing objectives:
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Increasing access to a range of quality, reliable, and affordable financial services paying particular attention to reaching the traditionally underserved (including women and youth) through the most effective approaches, including innovations consistent with the requirements of financial stability.
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Deepening financial markets through sound financial sector policies, laws, and regulatory frameworks that provide a conducive environment for a diverse range of financial institutions that can provide a wide range of products and services (leasing, factoring, insurance), and the development of diverse financial instruments (credit lines, bonds, equities,) that can mobilize term finance.
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Safeguarding the stability of Africa’s financial system through strengthening the monitoring and supervision of financial institutions and capacities to ensure compliance with national and regional regulations and international financial standards.
By promoting vibrant, efficient, innovative and robust financial systems in a competitive market in line with the goals and objectives of the Bank’s Ten Year Strategy (2013–2022), the FSDPS will put finance at the service of the productive sectors, and strengthen the capacity to finance Africa’s inclusive growth. The new Policy and Strategy also complements the Bank Group’s Private Sector Development Strategy and takes into account the special needs of Middle-Income Countries (MICs), Lower-Income Countries (LICs), and Fragile States, as well as gender and food security considerations.
It will facilitate access to investment and working capital by financial institutions, contribute to developing local capital markets, and help reduce the trade finance gap on the continent. Under the policy and strategy, the Bank Group will promote better corporate governance and better risk management of financial institutions, in compliance with international best practices, standards and regulations.
In preparing the FSDPS, the Bank Group identified the absence of deep, efficient financial markets as key constraints to Africa’s economic growth. “Limited access to finance lowers welfare and hinders the alleviation of poverty and the emergence of a middle class, while implementing monetary policy in a context of shallow markets is costly and inefficient.” The Strategy is cognizant that the demand from RMCs is high and the Bank can neither respond alone, nor try to do everything. Forging strategic alliances will therefore be essential for successful implementation.
Thus, the FSDPS aims to put in place “well-functioning financial systems that mobilize and allocate savings, supply the credit needs of economic agents, and allocate resources more efficiently while reducing intermediation costs,” says Stefan Nalletamby, AfDB’s Financial Sector Development Director.
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Major new steps to boost international cooperation against tax evasion
Governments commit to implement automatic exchange of information beginning 2017
The new OECD/G20 standard on automatic exchange of information was endorsed on 29 October 2014 by all OECD and G20 countries as well as major financial centres participating in the annual meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes in Berlin. A status report on committed and not committed jurisdictions will be presented to G20 leaders during their annual summit in Brisbane, Australia on November 15-16.
Fifty-one jurisdictions, many represented at Ministerial level, translated their commitments into action during a massive signing of a Multilateral Competent Authority Agreement that will activate automatic exchange of information, based on the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Early adopters who signed the agreement have pledged to work towards launching their first information exchanges by September 2017. Others are expected to follow in 2018.
The new Standard for Automatic Exchange of Financial Account Information in Tax Matters was recently presented by the OECD to the G20 Finance Ministers during a meeting in Cairns last September. It provides for exchange of all financial information on an annual basis, automatically. Most jurisdictions have committed to implementing this Standard on a reciprocal basis with all interested jurisdictions.
The Global Forum will establish a peer review process to ensure effective implementation of automatic exchange. Governments also agreed to raise the bar on the standard of exchange of information upon request, by including a requirement that beneficial ownership of all legal entities be available to tax authorities and exchanged with treaty partners.
The Global Forum invited developing countries to join the move towards automatic exchange of information, and a series of pilot projects will offer technical assistance to facilitate the move. Ministers and other representatives of African countries agreed to launch a new “African Initiative” to increase awareness of the merits of transparency in Africa. The project will be led by African members of the Global Forum and the Chair, in collaboration with the African Tax Administration Forum, the OECD, the World Bank Group, the Centre de Rencontres et d'Etudes des Dirigeants des Administrations Fiscales (CREDAF).
“We are making concrete progress toward the G20 objective of winning the fight against tax evasion,” OECD Secretary-General Angel Gurria said after the signing ceremony. "The fact that so many jurisdictions have agreed today to automatically exchange financial account information shows the significant change that can occur when the international community works together in a focused and ambitious manner. The world is quickly becoming a smaller place for tax cheats, and we are determined to ensure that developing countries also reap the benefits of greater financial sector transparency.” Read the speech here.
The Global Forum is the world’s largest network for international cooperation in the field of taxation and financial information exchange, gathering together 123 countries and jurisdictions on an equal footing. Peru and Croatia joined the Forum at the Berlin meeting.
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Rwanda to accelerate digital payments by joining the Better Than Cash Alliance
The Government of Rwanda has moved to accelerate its plans to transform Rwanda into a cashless economy and achieve 80 percent financial inclusion by 2017.
Rwanda’s commitment to using information and communications technology (ICT) for financial services was made as it officially joined the Better Than Cash Alliance, an initiative that works with governments, the development community, and the private sector to adopt the use of electronic payments. The Alliance provides support to those who commit to make the transition. These efforts aim to help people who do not have access to formal financial services and frequently have no option but to subsist almost entirely in an informal, cash-only economy. Living in a cash economy makes it extremely difficult to access financial services like bank accounts, save for the future, build assets, or get credit.
“We understand the crucial role ICT plays in all sectors of the economy, including finance. This is why we have endeavored to promote a cashless economy by digitizing financial transactions,” Claver Gatete, the Minister of Finance and Economic Planning said. “Today the Government conducts its business electronically, including paying salaries. We have put in place policies that encourage payment digitization and continue to support the private sector, especially financial institutions to embrace the use of ICT to champion financial inclusion. We believe that partnering with the Better Than Cash Alliance will further our ambition to transform Rwanda into a cashless economy and ensure that every Rwandan is financially included.”
The shift to electronic payments has the potential to advance financial inclusion and help people build savings while giving governments, development organizations, and companies a more cost-effective, efficient, transparent, and safer means of disbursing and collecting payments. For example, a recent report by the World Bank examines growing evidence that integrating digital payments into the economies of emerging and developing nations addresses crucial issues of broad economic growth and individual financial empowerment.
Currently, all government employees in Rwanda are paid electronically. The new announcement advances the commitment to transition all forms of government payments to electronic forms. The further digitization of Rwanda’s economy is expected to contribute to achieving the government’s financial inclusion goals. Additionally, Rwanda aims to expand the use of banking and retail transactions electronically, including in fuel stations, by merchants and customers across the country.
“We welcome Rwanda as the newest member of the Better Than Cash Alliance and commend the Government’s leadership and commitment to continue transitioning away from cash,” said Dr. Ruth Goodwin-Groen, Managing Director of the Better Than Cash Alliance. “We recognize that while the opportunities of digital payments abound, getting there takes work and we stand ready to support our members. Digitizing payments is achievable when a government articulates a clear vision, leads by example, and provides the right incentives for the private sector to do what they do best: innovate, develop infrastructure, and create products designed to succeed in the marketplace.”
Better Than Cash Alliance is hosted by the United Nations Capital Development Fund and is funded by the Bill & Melinda Gates Foundation, Citi, Ford Foundation, MasterCard, Omidyar Network, United States Agency for International Development (USAID), and Visa Inc.
Economic Diplomacy and the Need for a New Multilateralism
By Christine Lagarde
Managing Director, International Monetary Fund
Acceptance Speech for Foreign Policy Diplomat of the Year Award, Washington, D.C., October 29, 2014
As prepared for delivery
Introduction: Diplomats and Economists
Good evening. Thank you so much, David, for your kind introduction. And let me also thank Secretary Pritzker and President Fred Hochberg for their generosity.
For almost half a century, Foreign Policy has been an indispensable voice in promoting global understanding and cooperation – in the service of diplomacy. This role has never been more important than today; a role that we are fortunate to have Foreign Policy play with such distinction under the leadership of David Rothkopf.
I am glad to say that we are on the same side in this never-ending struggle for a better and more peaceful world. Throughout its 70-year history, the IMF has also sought to promote understanding and cooperation – economic diplomacy in the service of global financial stability.
I am delighted, therefore, to accept this award as recognition of the goal that we pursue. I receive it on behalf of our membership and my colleagues at the Fund. I am proud to lead this exceptional group of public servants, who strive tirelessly to support a global economy in which all nations and people can prosper.
When one speaks of diplomacy, political issues, conflicts typically come to mind. Yet, my experience is that economic issues often lie just beneath the surface of many political disputes and weave the fabric for many political solutions. The IMF is often involved in this interplay between economics and politics.
As you know, the Fund was created in 1944 through far-sighted diplomacy, in which the United States played the leading role. As the heirs to the Bretton Woods legacy, we have every reason to claim that diplomacy is in our DNA.
The IMF’s stock in trade, of course, is economic expertise. However, we approach our work with the mindset of multilateralism: the idea that no nation can go it alone; that key policies spill over and back; that the best solutions are negotiated solutions; and that knowledge is to be shared.
This is not a new idea. But it has undergone many changes, and I believe it needs to further evolve.
Tonight, I would like to discuss our multilateralism – the past, the present, and especially the future, where a multilateralism for the 21st Century is needed.
1. Multilateralism of the Past
First, the past. In 1944, the IMF’s founders had seen a half century of devastation. To avoid the same nightmare, they broke a fundamental link between economic isolationism, economic instability, and conflict.
In their new world, economic isolation would be replaced by cooperation, economic instability by prosperity, and war by peace. In this way, economists joined forces with traditional diplomats. It was the original multilateral moment.
That we regard such cooperation as a basic necessity today testifies to the success of this new approach then, even if the implementation proved challenging.
The commitment to cooperation through the Bretton Woods system was the foundation on which a new Europe rose from the rubble and ruins of war. I experienced it for myself: between 1950 and 1995, France’s per capita GDP rose nearly fivefold; Germany’s more than sevenfold.
And beyond Europe, throughout the world in the last 70 years, there has been more economic progress for more people than at any comparable period in history.
Multilateralism has been at the heart of it all.
It supported the newly independent nations when the winds of change and decolonization blew through Africa and other parts of the developing world. When the Iron Curtain lifted, the international community lent expertise and financing to ease the transition to new market economies.
Cooperative efforts helped Latin America to emerge from its debt crisis in the ‘80s, and East Asia from its financial crisis in the ‘90s.
The same has been true in recent times: the Great Recession that began in 2008 did not become another Great Depression largely due to the bold, coordinated response from the international community – led by the G-20.
What lessons can we draw from this history? For me, a major one is that multilateralism lies behind the success of the good times and reduces the duration and intensity of the bad times.
It is the IMF’s raison d’être to promote this cooperation. We provide a unique platform for global economic dialogue; and we employ the instruments of our economic diplomacy – financing, analysis, technical assistance – to bolster confidence and galvanize action.
By design, we are expected to go into the most difficult economic situations. We are expected to be the first responders. We are expected to be the problem solvers. We may not always get it right first time, but we are always learning – and always trying to find solutions, and improve them.
To paraphrase Woodrow Wilson, our job is to:
“… make the world safe for stable growth and prosperity.”
So this is where we have been: an IMF serving the broader interests of the international community since World War II.
Where are we now? That brings me to my second point – today’s multilateralism.
2. Multilateralism of the Present
I sometimes say, “This is not your father’s IMF.” It is certainly not your father’s world either – or your mother’s! Like many of you, we are dealing with problems with no easy answers. And yet we all must find answers.
What are some of today’s key economic challenges?
First, six years after the financial crisis hit, we still face the reality of a global economy struggling to regain cruising speed. I spoke at our recent Annual Meetings of the danger of a “New Mediocre” – the combination of anemic growth and weak job creation casting a dark cloud over the future. I am encouraged that our membership strongly agreed on policies to create “New Momentum” – including through growth- and job-friendly fiscal policies, structural reforms, and appropriate infrastructure investment.
Second, as this audience knows only too well, geopolitical problems compound our economic difficulties.
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In Ukraine, for example, a young democracy is struggling to piece together an economy undermined by conflict and corruption. The IMF – once again playing the role of first responder – is providing policy and financial support to create the space for badly needed reforms, and thereby catalyze assistance from others.
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In the Middle East, much of the hope engendered by the Arab Spring has vanished – in particular through conflict in Iraq, Syria, and Libya. Yet, with our partners, the Fund is actively supporting economic reform in Jordan, Morocco, Tunisia, and Yemen, including by making available over $9 billion in financing. In Egypt and elsewhere, our work to help build policymaking capacity aims to rekindle hope, especially for the young people of that region.
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In another fragile region, West Africa, it is Ebola that threatens to unravel hard-won stability. Working with the World Bank and others, we quickly disbursed $130 million in additional support to Guinea, Liberia, and Sierra Leone – a unique feature of the Fund’s financing being that it reached those countries within a matter of days. Still, we all recognize that the international response continues to lag the spread of this devastating disease. The IMF is ready to do more.
A “mediocre” global recovery. The intense confluence of politics and economics in various “hotspots.” Humanitarian disasters. Challenges like these can only be held at bay – they can only be overcome – through working together.
Indeed, cooperation is essential because even more complex issues loom on the horizon. This brings me to my third and final theme: the need for a “New Multilateralism” for the future.
3. Future Challenges and the New Multilateralism
One thing is certain: 21st Century challenges demand global solutions.
The model of Adam Smith’s “invisible hand” – where pursuing one’s own self-interest would also serve the collective interest – requires solid institutional underpinnings, such as the rule of law, a currency, a competition watchdog, to name a few.
On the international scene, these underpinnings are more tentative. Multilateral institutions such as the UN and the IMF have provided a global framework for the cooperation of sovereign states, and they have served their purpose well.
Yet, to me it looks more and more as if Adam Smith’s model is being turned upside down.
What do I mean?
Given the high degree of interconnectedness in the modern global economy, many of the challenges we face represent a collective threat, and call for a collective response. Rather than collective good arising out of self-interested action, it is only by acting collectively that an individual country’s self-interest can be achieved.
One obvious example is climate change. Cutting carbon emissions in an individual country cannot solve the problem while others pursue unchanged or opposite policies. Average temperatures are rising and so is the risk of more volatile agricultural output, more food and water insecurity, and more frequent natural disasters. All countries are vulnerable, and all countries must act collectively to tackle the issue.
The same is true for other problems that are now becoming more visible:
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Increasing income inequality is being felt hard from the U.S. to China. Too many people feel left out, too many people feel frustrated. If not addressed, these challenges could lead to serious breakdowns in social and political cohesion.
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There is the rising demand for better economic inclusion, hampered by gender inequality suffered by an estimated 865 million women who are being held back – ironically, in economies that need new productive forces.
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There is also sheer demographics: aging populations in some regions and huge bulges of young people in others. Some numbers: there were one billion people in Africa four years ago; that number could rise to 2.7 billion by 2050. Where will all the jobs come from? For the first time in history, the world will have more over 65 year olds than 5 year olds. Who will pay the pensions?
These are sobering issues in a world that is changing in so many other ways. Global supply chains and cross-border finance draw us closer day by day. A communications revolution connects billions and transports us instantly from Tahrir Square to trading floors and back.
Meanwhile, new centrifugal forces are at work: sectarian divisions, underground operations, non-state actors, shifting centers of power. How do we conduct economic diplomacy with a multitude of voices insisting on being heard – and at 140 characters a time?
Frankly, I am not sure how we will manage all these challenges. But I am sure that we can only do it by listening to each other, dreaming together, getting real together, and working together.
What might a “new multilateralism” look like?
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It needs to build on the institutions of cooperation that have already demonstrated their efficiency, credibility and representativeness – but these institutions must progress to constantly mirror changing global dynamics.
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It needs to harness the various dimensions of global solutions through cooperation between these institutions, without division, without turf battles, but with a true sense of partnership.
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It needs to find a way to include important new networks of influence that are bringing their voices to bear on major global issues – from inequality, to inclusion, to transparency, to the environment; it needs to do so without losing its efficiency.
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It needs, above all, to instill a broader sense of “civic responsibility” on the part of all players in the modern global economy, including the private sector, and specifically financial sector players. What I am talking about here is a renewed commitment to the global public good. What I am talking about here is the ability to define and identify the mutual interest and solutions that will serve the global public good.
Conclusion: Responsibility and Commitment
In concluding, I would like to remind us all of a responsibility – and a commitment – that can only be addressed in this very city.
You may have heard this before, but please bear in mind a line by the late Richard Holbrooke:
“Diplomacy is like jazz: endless variations on a theme.”
So here it goes:
The international community has agreed to reform the IMF to increase the representation of the emerging market countries – more in line with their increased role in the global economy. The reforms would also help sustain the Fund’s capacity to meet the challenges ahead.
Once again, therefore, I would like to add my voice to that of virtually the entire IMF membership in calling upon the U.S. Congress to approve the 2010 quota and governance reforms. By this simple act of international solidarity, the U.S. will demonstrate the global leadership that it displayed so amply seventy years ago, and should continue to display.
On that note, it is fitting to recall the words of John Maynard Keynes at Bretton Woods. By constructing a new international world order at the end of World War II, he declared:
“The brotherhood of man will have become more than a phrase.”
We must avoid another “nightmare” and strive toward a better sisterhood – of man. I am a multilateralist by upbringing, conviction, and profession, and I am convinced that we cannot let those visions and expectations vanish and be squandered.
Once again, I thank you for this honor, and I look forward to working with all of you in the future.
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How to promote food security through better discipline on export restrictions?
Countries intervening to restrict their exports are not among the main causes of food insecurity of the poor in the developing world. Nevertheless, export restrictions have proved to significantly contribute to exacerbating negative effects on food security when an unexpected, rapid increase of food staple prices occurs and a food crisis develops.
Agricultural export restrictions are a policy area which remained ‘underregulated’ in the Uruguay Round agreement; current provisions are weak and largely ignored. It was not until the severe food price spike of 2007/08 that concerns about export restrictions gained visibility in on-going multilateral negotiations. A country restricting its exports in order to reduce the transmission to the domestic market of raising international prices makes prices in other countries increase further. Food security at home is pursued at the expense of food security of the poor elsewhere. As we can expect severe price spikes to occur again, having in place an improved, multilaterally agreed regulatory framework to reduce the negative effects of export restrictions on food security would certainly be useful. However, despite the widely shared concern that has emerged in recent years on the need to introduce more stringent WTO disciplines on export restrictions, so far no agreement has been reached.
The current legal framework
WTO law on export restrictions is an area of evident ‘underregulation’ or ‘regulatory deficiency’, as it neither properly defines the circumstances under which quantitative restrictions can be used, nor regulates export taxes.* This leaves countries with ample space for policy decision-making on export restrictions, a space which they do not have when it comes to restricting imports. In fact, while export restrictions are very weakly regulated, with the Uruguay Round Agreement on Agriculture (AoA) all import restrictions for agricultural goods different from tariffs had to be reverted to tariffs, all tariffs were bound and reduction commitments introduced. This means a clear asymmetry exists in how country policy interventions limiting exports and imports are treated in the WTO.
While WTO members decided not to impose any tangible constraint on their own policies restricting exports, they have forced acceding countries to accept significant limitations on their ability to do so. China, Mongolia, Russia, Saudi Arabia, Ukraine and Vietnam had to accept obligations which go beyond, to different extents, existing WTO rules. Export restrictions are often regulated in Regional Trade Agreements (RTAs), including bilateral ones, and in this case as well provisions often go well beyond those in the WTO.
The recent food crises, the policy reactions by some of the main exporters, the implications of their decisions on the food insecurity of the poor in net food-importing developing countries and the negative effects of what happened on the reputation of international markets as a reliable source of food in national food security strategies, make for a different environment with respect to the one at the time of the Uruguay Round negotiations.
Still, reaching an agreement for the introduction of a multilaterally agreed more stringent discipline on export restrictions is a particularly complex process. In the negotiations since 1999, both in the WTO and in other international fora, exporting countries have proved as strong as importing ones in defending every single square inch of their policy space.
Options to promote food security
This article presents six alternative options for an agreement to modify current disciplines on the use, on a temporary basis, of export restrictions for agricultural goods in the event of suddenly and rapidly soaring international prices. The options are presented in increasing order of ‘ambition’ in terms of their capacity to limit the policy space currently available to exporting countries. The options are additive, in the sense that, in general, not only they are not mutually exclusive, but, quite the contrary, each of them should include the relevant provisions of the less ambitious ones.
(a) Exempting from the imposition of export restrictions food purchases by international organizations to be distributed as food aid.
Starting from the lowest level of ambition, the first option is an agreement to exempt from the imposition of export restrictions and export taxes food purchased by international organizations, to be distributed on a non-commercial basis for humanitarian purposes. Less restrictive disciplines would call for the prohibition to be imposed on extraordinary export taxes only, rather than on export taxes altogether, and for it to apply only to purchases made by selected international organizations, such as the World Food Program (WFP). Were this option to be implemented, its impact on volumes traded and market prices would be marginal. However, the benefits in terms of the amount of food humanitarian organizations would be able to distribute under their relatively rigid financial constraints would be sizeable, as it would prevent the imposition of an additional cost on the purchase and distribution of food for humanitarian purposes when this is needed the most but hardest to access.
(b) Improving the enforceability of existing disciplines.
The second option considered does not modify current WTO disciplines, rather it aims at making them enforceable by clarifying some of the terms used, adopting a transparent, unambiguous language. Under this option export taxes would remain a policy instrument countries may use; only the conditions to allow the use of export restrictions different from a tax would be clarified. This is a necessary condition to make it legally possible to identify agricultural export restrictions different from an export tax contrary to Article XI of GATT 1994, and, subsequently, to challenge such restrictions within the WTO dispute settlement framework. Also, the procedures to be followed to implement an export restriction, including consultation and notification obligations, would be strengthened. Implementation rules similar to those suggested under this option are included in several RTAs.
This option would be a significant step forward with respect to the existing discipline, as it would improve the transparency and predictability of the use of export restrictions and, hence, reduce information asymmetries and transaction costs for traders and investors and the uncertainty about world markets as a source of food when this is most needed.
The impact of this option on the quantities traded and prices would be very small, as countries could always opt for an export tax instead of the now more transparent export restrictions. However, the higher institutional cost of introducing export restrictions may deter some countries from implementing export restrictions and reduce the probability of ‘panic’ policy reactions, such as the sudden introduction of an export ban.
(c) Limiting the impact of export taxes and restrictions on world markets, rather than imposing a discipline on export taxes and restrictions directly.
This option involves a completely different approach to disciplining export restrictions. Rather than tightening the discipline on export taxes and quantitative restrictions, it imposes a constraint on their effects on world markets. Current disciplines would be left unchanged (but for what is foreseen in options (a) and (b) above), but their use would be made conditional on exporting country- and product-specific constraints on the volume exported. In order to be allowed to use policies limiting exports, countries will have to maintain unchanged with respect to the recent past the share of domestic production of the specific product which is exported. This approach can be found in some of the initial negotiation proposals on agriculture post-Uruguay Round. Provisions similar to those considered here are included in the North America Free Trade Agreement (NAFTA) and in the Canada-Costa Rica and Canada-Chile RTAs. This option would make it possible for the exporter to limit the increase in the domestic price, while allowing, at the same time, domestic producers to accrue at least some of the benefits deriving from higher international prices (depending on the policy instrument used). It also has the advantage that it would not need any negotiation of the details defining the exceptional circumstances under which a country could use export restrictions.
(d) Prohibiting the use of export restrictions, other than export taxes, on exports directed towards poor net food importing countries.
This option goes beyond strengthening the existing discipline on export restrictions as it involves making illegal the use of export restrictions on staple food exports directed towards those countries who will be more severely affected, i.e. poor net food importing countries. However, under this option too – as was the case under options (a) and (b) – the use of export taxes would remain unrestricted. The provisions should include the definition of the set of poor net food importing countries whose imports cannot be subject to export restrictions, and the list of the staple foods which would be subject to the prohibition.
(e) Introducing stricter disciplines for export restrictions as well as export taxes.
The ambition of this option lies in the stricter disciplines it would impose on the use of export restrictions and on the fact that the same restrictions would now apply to export taxes. However, the provisions under this option would not go as far as imposing limitations on policies restricting exports analogous to those currently imposed on policies which restrict imports. Essentially under this option export restrictions and export taxes would be declared illegal and then exceptions defined under which this prohibition would not apply. The exceptions could relate to the countries that would be allowed to intervene to restrict their exports, the staple food products which cannot be subject to export restrictions and the trigger mechanism which would allow a country to restrict its exports. These exceptions need to be defined in a simple and transparent way, resulting in ‘automatic’ and easy to verify, legally enforceable rules. Export restrictions and taxes would now be treated equally. This approach is common to the vast majority of RTAs.
(f) Full ‘symmetry’ in regulating import and export restrictions.
The feasible option with the highest ambition is that of extending to export restrictions, mutatis mutandis, the provisions for import restrictions currently in place. These provisions should be integrated with those in options (a), (b), (c) and (e) above, as appropriate. Bindings for export taxes and the prohibition on introducing new ones are included in the accession protocols of some of the countries which became members of the WTO since the Uruguay Round as well as in many RTAs. If an agreement were to be found to conclude the Doha Round, this would certainly include revised disciplines for market access; in this case these new provisions would be those to be extended, mutatis mutandis, to export restrictions. The effectiveness of this option in expanding volumes traded and reducing price increases in the event of a price rise initially due to an exogenous shock would be substantial.
Fighting food insecurity is a complex challenge, involving numerous factors
Six possible options for a WTO agreement on export restrictions have been identified and discussed, with different levels of ambition in terms of their capacity to limit the use of temporary export restrictions aimed at preventing the transmission to the domestic market of soaring international prices.
* The key legal text regarding the discipline of export restrictions in the WTO is Article XI (General Elimination of Quantitative Restrictions) of GATT 1994; as far as export restrictions in agriculture are concerned, they are also dealt with in Article 12 (Disciplines on Export Prohibitions and Restrictions) of the 1994 Agreement on Agriculture (AoA).
Giovanni Anania is Professor in the Department of Economics, Statistics and Finance at the University of Calabria, Italy.
This article is published under Bridges Africa, Volume 3 - Number 9 by the International Centre for Trade and Sustainable Development.
This article is based on a research paper produced by ICTSD: Giovanni Anania, Agricultural Export Restrictions and the WTO: What Options do Policy-Makers Have for Promoting Food Security?, Issue Paper No. 50, 15 November 2013. This paper seeks to provide an evidence-based analysis of the likely trade, food security and development implications of various options for disciplining agricultural export restrictions.