More on debt, macroeconomic stability, and natural resources in Africa (Uganda Edition)

See earlier posts on this subject here and here. Below is a quote from FP on Uganda’s growing petroleum sector (see also the Global Witness report on Uganda’s secret oil contracts here):

Source: Global Witness

Uganda’s Projected Oil Production Curve. Source: Global Witness

The bulk of Ugandan government borrowing against future oil revenues has focused on grand infrastructure schemes built and funded by the Chinese. In 2014 alone, the government signed deals with China to build two hydropower dams worth $2.2 billion, a standard gauge railway that could cost up to $8 billion, and a $600 million fertilizer plant. Additional projects include a $2 billion oil field being developed by the state-owned China National Offshore Oil Corporation and a $350 million roadbetween Uganda’s capital, Kampala, and Entebbe International Airport. The possibility has even been raised that a Chinese bank may bail out Ugandan parliamentarians in danger of going to jail for failure to honor their debts.

And how efficiently is Uganda spending the [expensive] borrowed money?

Costs for the Ugandan section of the East African Standard Gauge Railway are especially out of control. The project had an initial price tag of $4.5 billion for the Ugandan side of the railway, compared to $3.8 billion for the Kenyan side. Estimated costs in Uganda subsequently shot up, first to $8 billion and then to a staggering $11 billion

So what will happen when China decides to deal with its public debt situation and the effects propagate to its many public companies involved in mega-projects in Africa?

To reiterate, let’s not declare mission accomplished in the war against the resource in Africa just yet.

Netflix is making thousands of Americans flunk geography

You can’t make this stuff up:

Screen Shot 2015-02-03 at 8.01.17 PM

The show began to air in 2010. This is its description as of February 3rd, 2015.

That said, if you have to visit Africa, the place to go is KENYA!

Because of this:

HT Hayes Brown

Education and Human Capital Externalities (in Benin)

Wantchekon, Klasnja and Novta have a really cool paper (forthcoming in QJE) investigating the relationship between human capital and development:

Using a unique dataset on students from the first regional schools in colonial Benin, we investigate the effect of education on living standards, occupation and political participation. Since both school locations and student cohorts were selected with very little information, treatment and control groups are balanced on observables. We can therefore estimate the effect of education by comparing the treated to the untreated living in the same village, as well as those living in villages where no schools were set up. We find a significant positive treatment effect of education for the first generation of students, as well as their descendants: they have higher living standards, are less likely to be farmers, and are more likely to be politically active. We find large village-level externalities – descendants of the uneducated in villages with schools do better than those in control villages. We also find extended family externalities – nephews and nieces directly benefit from their uncle’s education – and we show that this represents a “family-tax,” as educated uncles transfer resources to the extended family.

The amazing finding is that having just one educated person in an extended family makes a significant difference, not only for the educated person’s offspring, but also for their nieces and nephews:

These descendants have better education at all levels than descendants (either children on nieces and nephews) in families where no progenitor was educated. These effects are statistically significant and substantial  – such descendants are 20% more likely to have primary school education, 19% more likely to have secondary school education and 11% more likely to go to university..

The main takeaway of the paper is that investment in human capital has a positive effect on long-term development that is independent of (colonial) institutions.

Is Nigeria’s Economy Overrated?

Here is Izabella Kaminska of the FT:

Source: Financial Times

Source: Financial Times

On the surface, Nigeria’s oil sector has dropped in significance to a mere 13% of real GDP, while the services sector has climbed to 40% in real terms. Yet, the reality is that it is the country’s oil revenues that have supported growth and, to a large extent, maintained social order. Without oil, both would fall apart; government spending would be much smaller, interest rates much higher, and the currency’s valuation much lower.

….. the country’s domestic savings rate, at a measly 20 per cent of GDP, is extremely low for a developing economy at this stage. A key reason being the government’s inability to tame chronically high inflation, meaning bank deposits have earned negative real interest rates for most of the past decade.

More on this here (HT Tyler Cowen).

And by the way, on this score Nigeria is not alone.

In an instance of the triumph of hope over experience The Economist recently pronounced the end of the resource curse in Africa. I do not completely buy their argument. Yes, growth and investment across the Continent may no longer be tightly coupled with natural resource cycles. But from Ghana, to Zambia, macro-economic stability (and important aspects of social spending) are still very tightly tied to movements in the global commodity markets.

Furthermore, many of these countries have recently re-entered the global debt markets partly backed by primary commodities as surety. The same applies to debts owed to Beijing. Last year alone foreign debt issues in the region exceeded $6.5b. As I argued in June of 2013, we might be entering another pre-1980s debt bubble.

Tanking crude prices have put Angola on the ropes. The country recently slashed $14b of previously planned spending. The Cedi and Kwacha took a nosedive (26% and 13%, respectively) last year because of sagging commodity prices (gold and copper) and government deficits (fueled by the expectation of future commodity bonanzas, especially in the case of Ghana whose debt to GDP ratio is now a staggering 65%). Even well-balanced Kenya (also a recent eurobond issuer) has had to go to the IMF for a precautionary loan against currency-related shocks in the near future. The current situation has prompted ODI to warn that:

The exchange-rate risk of sovereign bonds sold by sub-Saharan African governments between 2013 and 2014 threatens losses of $10.8 billion, equivalent to 1.1 percent of the region’s gross domestic product, the ODI said. While Eurobonds are typically issued and repaid in dollars, the depreciation of local currencies in 2014 makes it harder for governments to repay them.

All this brings to the fore SSA’s biggest challenge over the next two decades: How to carry out massive investments in infrastructure and human capital, while at the same time maintaining a sustainably balanced macro environment that is conducive to long-term saving.

Are Power Pools the Answer to Chronic Power Shortages?

Auriol and Biancini have a nice theoretical take on the subject of regional power pools in the World Bank Economic Review:

Power market integration is analyzed in a two-country model with nationally regulated firms and costly public funds. If the generation costs between the two countries are too similar, negative business stealing outweighs efficiency gains so that, subsequent to integration, welfare decreases in both regions. Integration is welfare enhancing when the cost difference between two regions is large enough. The benefits from export profits increase the total welfare in the exporting country, whereas the importing country benefits from a lower price. In this case, market integration also improves incentives to invest compared to autarky. The investment levels remain inefficient, however, especially for transportation facilities. Free riding reduces incentives to invest in these public-good components of the network, whereas business stealing tends to decrease the capacity to finance new investment.

powerpool

Existing and Planned Power Pools in Africa

There is a lot of excitement in the power sector in Africa these days. Eastern Africa will probably be the most power-rich in the next few years: Ethiopia’s 1870MW Gibe III will likely come online later this year (oh, and there is the ongoing Grand Renaissance Dam project that will produce 6000MW [or 2800MW?]); Kenya has had a massive push for geothermal, solar and wind generation; and Kenya, Uganda, and Tanzania have commercially viable deposits of oil and gas that will also come online within the next six years. The region is also very well integrated, although there is need to upgrade power transmission infrastructure. The Bank has an ongoing project in this regard [that is way behind schedule].

For more on this subject see my commentary on energy sector integration in Africa over at the African Development Bank blog.

On the upcoming Nigerian elections

On February 14 Nigerians will go to the polls in what is arguably the most important election in the world this year. Here is a (small) collection of things you need to read before then:

1. Alex Thurston has a great backgrounder for CSIS on the upcoming Nigerian elections. Want to know about the coalitions angling for power in Abuja and state capitals all over Nigeria and how ongoing political maneuvers will impact the outcome of the presidential election? Then click here.

2. Earlier this month Nigerian journalist Tolu Ogunlesi wrote an excellent piece for FT that emphasized the fact that this will be Nigeria’s closest and most unpredictable election yet (a point echoed by Zainab Usman, a Nigerian DPhil Candidate at Oxford, over at African Arguments). The level of competition will no doubt put pressure on INEC, and the losing candidate, to ensure that the legitimacy of the process is not tarnished, regardless of the outcome.

3. Brookings has a nice summary of some of the key political and policy issues at stake in this year’s election.

4. In the only detailed forecast that I have seen ahead of the election, DaMina Advisors project that APC’s Rt. Gen. Muhammadu Buhari will win with 51% of the vote (and get 25% in at least 27 states). There have not been any reliable polling data coming out of Nigeria in this election cycle, so take DaMina’s projections with a Naija size grain of salt.

5. And lastly, here is an op-ed from the former Governor of the Central Bank of Nigeria, Charles Soludo, on the economic dimension of this year’s election, as well as incumbent Goodluck Jonathan’s many failures.

If you have suggestions on interesting analyses ahead of the election please do share in the comments section.

Working in Development

Sentences to ponder:

Field experience is one of the most important things you can have as an aspiring development professional. It demonstrates your understanding of what development is like on the ground, and shows your genuine commitment to working in the sector. Even a few months in the field scores you more CV points than a much longer period in an office in London or New York.

What’s more, you may be able to land a position with more responsibility than you would back home. For example, our intern Marcus has just returned after two years as a manager of an educational project in Ghana, a job he secured with little previous experience.

For more on what you really need to know before deciding to pursue a career in international development click here.

The ICC’s case against Uhuru Kenyatta

Following the collapse of the case against President Uhuru Kenyatta of Kenya, ICC prosecutor Fatou Bensouda made public her case against Mr. Kenyatta for his alleged role in the 2007-08 post-election violence in Kenya. More than 1300 people died and 300,000 were displaced.

You can find the public [redacted] version of the prosecution pre-trial brief here.

UPDATE: And here is the defence’s response.

On the Zambian Presidential By-Election

Zambians go to the polls today to elect a president to serve the remainder of the late Michael Sata’s term. President Sata died on the 28th of October, 2014. The winner of the by-election will be office until late 2016 when when elections are due for both the presidency and the National Assembly.

Today’s contest is between the two front-runners: Edgar Lungu, the candidate of the ruling Patriotic Front (PF); and Hakainde Hichilema (HH), the candidate of the United Party for National Development (UPND). Lungu has the advantage of incumbency, and a favorable electoral map (interim president Guy Scott is constitutionally barred from running). As the table below shows, support for Sata in the last election (2011) was concentrated in provinces that were both vote-rich (column 7) and recorded high turnout (column 5). HH’s support has historically been strongest in his native Southern Province and the vote-poor Western and Northwestern Provinces. He is also competitive in Central Province.

Presidential Election Results (2011)
Province Sata (PF) Banda (MMD) Hichilema (UPND) Turnout Turnout (2008) Vote Share (Ascending)
Northwestern 10.85 50.21 35.24 54.88 42.7 6.249513033
Western 23.12 33.2 28.21 47.77 38.4 6.800182089
Luapula 73.54 22.9 0.85 50.49 37.8 7.447270534
Central 28.28 48.21 20.82 46.87 40.6 8.149764957
Eastern 18.46 72.6 3.33 49.89 40.5 11.60268286
Southern 6.59 19.15 71.41 58.04 49.8 13.47451036
Northern 64.18 32.16 0.78 57.28 44.6 13.62680466
Lusaka 55.94 30.76 11.29 52.05 50.7 14.50255098
Copperbelt 67.88 26.22 3.57 59.5 52.8 18.14672051

HH’s chances will depend on whether the fallout within PF (Lungu’s nomination did not occur without incident) and the implosion of MMD produce a swing in his favor. Disaffected MMD supporters will therefore be a critical swing bloc. Furthermore, ahead of the elections Hichilema managed to get the endorsement of Geoffrey B. Mwamba (GBM), a former minister in the Sata government. But it is unclear whether GBM will be able to sway voters in his native north of the country, which voted solidly for Sata in 2011 (see map below). Sata, like GBM, was from Northern Province (since divided into Northern and Muchinga Provinces).

Sata constituency level vote share (% of votes cast)

Sata constituency level vote share (% of votes cast)

A low turnout today will favor PF. In the last presidential by-election (in 2008) turnout was 45.43%, 8 percentage points lower than the 53.65% recorded in the 2011 General Election. PF, with its wide support in the more urbanized Copperbelt and Lusaka (see map and table, column 6), therefore enters the race with a distinct advantage. If Hichilema is to have a chance he must not lose the turnout contest, and at the same time win by wide margins in the northwest, west and south of the country.

Of course the biggest unknown is whether Lungu can attract the same level of support as did Sata in 2011 (I lean towards him getting a sizable sympathy vote). Lungu is new to the presidential race, while HH has run multiple times. HH therefore has an assured strong base in the south (and possibly west) and better name recognition across the country. So despite PF’s incumbency status (which is no small matter), in many ways this is an open race.

From a research perspective, I’ll be keen to observe how the map above changes once all the votes are in. Which regions of the country will swing out of the PF column? Will the MMD survive this election? Can HH break out of his “Southern” tag?

Whatever the results, this by-election is a warm-up to what promises to be a very exciting General Election in 2016 (Also, I hope to have opinion poll data to play with ahead of the 2016 contest).

Taxation in Africa

Why do developing countries tax so little?

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Fig. 1: click on image to enlarge

Besley and Persson begin to provide answers in this 2014 paper:

Low-income countries typically collect taxes of between 10 to 20 percent of GDP while the average for high-income countries is more like 40 percent. In order to understand taxation, economic development, and the relationships between them, we need to think about the forces that drive the development process. Poor countries are poor for certain reasons, and these reasons can also help to explain their weakness in raising tax revenue.

……….low taxation may reflect a range of factors that also help to explain why low-taxing countries are poor. From this perspective, the most important challenge is taking steps that encourage development, rather than special measures focused exclusively on improving the tax system.

Click on image to enlarge

Fig. 2: click on image to enlarge

In the specific case of Africa, here is a chart from 2010 (2007) showing the tax mix in African states. We know from theory that the share of direct taxes in the tax mix tends to be a good proxy for state capacity.

But the structure of the economy appears to matter, and endogenously determines both the proportion of taxes as a share of output collected (see Figure 1 above) and whether states bother to invest in the capacity to exact direct taxes (see the extreme case of oil rich Equatorial Guinea).

Lastly, the tax story in Africa points to a positive increase in state capacity over the last 25 years. Since the early 1990s, the region’s mean tax revenue as a share of GDP has grown from 22% to more than 27%. Per capita tax collection has also been on the rise. That said, there is quite a bit of variance in these measures, with lower income countries doing considerably worse than their richer counterparts.

More here. See also here.

Update: Morten Jerven (author of Poor Numbers) just alerted me of the existence of this cool dataset on taxation and development.