How much does it cost to construct an MDG borehole in Abuja?

The Premium Times of Nigeria reports:

Nigeria’s Millennium Development Goals (MDG) office spent N154.2 million to construct a single borehole in Abuja, in a shocking example of contract inflation that has helped undermine the country’s ability to achieve its MDG goals.

Drilling a single borehole drilling in Abuja averages N1.5 million. A hydrology firm told PREMIUM TIMES that the amount should cover drilling and casing, installation of a solar-powered submersible pump, steel tower for the tanks, tanks, pipes, joints & suckers, installation and labour.

The firm allowed an expanded estimate of N10 million if a water treatment facility is included alongside other optional accessories.

The Abuja borehole, constructed at Gwarinpa, an expansive estate in the federal capital, had no such fittings. Indeed, the borehole had long become dysfunctional and was no longer dispensing water to the residents when PREMIUM TIMES visited in June 2015.

Still, the Abuja MDG office told this newspaper it was more concerned with service delivery to the people, than the amount it takes to do so (emphasis added).

The Anatomy of Tax Evasion in Africa

Africa Confidential has a great piece analyzing leaked documents from PwC, the professional services firm, showing the various arrangements that enable multinational companies to evade taxes in Africa. You can read the whole piece here (gated).

  • One of the measures PwC advised multinationals to take was to create a wholly-owned Luxembourg-based subsidiary which would hold the rights to intellectual property used by the rest of the group. The rest of the group would then pay licensing fees to the Luxembourg-based subsidiary which, by agreement with the authorities, would be granted tax relief of up to 80%……
  • A second tax avoidance mechanism simply involved the companies becoming incorporated in Luxembourg. In 2010, Luxembourg concluded an agreement with several companies of the Socfin (Société financière) agribusiness group, which was founded during the reign of Belgian King Leopold II by the late Belgian businessman Adrien Hallet. The companies chose Luxembourg as their base and made an agreement under which their dividends were subject to a modest 15% withholding tax, a lower figure than those in force where their farms are located (20% in Congo-K and Indonesia, 18% in Côte d’Ivoire).
transfer-pricing

The art of hiding profits

Altogether, Socfin subsidiaries in Africa [in Sierra Leone, Nigeria, Liberia, Cote d’Ivoire, and Cameroon] and Indonesia produced 123,660t. of rubber and 380,770t. of palm oil in 2012. The combined turnover of its main African subsidiaries reached €271 mn. in 2013. The list also includes the 100%-owned Plantations Socfinaf Ghana Ltd. (PSG) and Socfin-Brabanta (Congo-Kinshasa). Socfin also holds 88% of Agripalma in São Tomé e Príncipe and 5% of Red Lands Roses (Kenya).

  • A third mechanism involves cross-border lending within a group of companies. Companies registered in Luxembourg are exempt from tax on income from interest.

According to the Thabo Mbeki High Level Panel report between 1980 and 2009 between 1.2tr and 1.4tr left Africa in illicit flows. These figures are most likely an understatement. Multinationals, like the ones highlighted by Africa Confidential, accounted for 60% of these flows.

Alex Cobhan, of the Tax Justice Network, has a neat summary of the various components of illicit financial flows (IFFs) and how to measure them. He also proposes measures that could help limit IFFs, including: (i) eliminating anonymous ownership of companies, trusts, and foundations; (ii) ensuring that all bilateral trade and investment flows occur between jurisdictions which exchange tax information on an automatic basis; and (iii) making all multinational corporations publish data about their economic activity and taxation on a country-by-country basis.

Alex Cobham blogs here.

More Evidence of The Effects of Unconditional Direct Cash Transfers

Haushofer and Shapiro have a really cool paper evaluating the impact of unconditional direct cash transfers to households in rural southwestern Kenya (Rarieda in Siaya County). The paper contains several great insights relevant for policy-makers on the promise of direct cash transfers. Here are some highlights:

[i] …… we find increases in holdings of home durables (notably metal roofs, ownership of which increased by 23 percentage points over a control group mean of 16 percent), and productive assets such as livestock, whose value increases by USD 85 over a control group mean of USD 167. These investments translate into higher revenues from agriculture, animal husbandry, and non-agricultural enterprises; monthly revenue from these sources increases by USD 17 relative to a control group mean of USD 49. Note, however, that this revenue increase is partially offset by an increase in flow expenses for agriculture, animal husbandry, and business (USD 13 relative to a control group mean of USD 24).

[ii] We find that indeed monthly transfer recipients are significantly less likely to invest in durables such as metal roofs than lump-sum transfer recipients, suggesting that households may be both credit- and savings-constrained. The fact that program participation required signing up for mobile money accounts, which are a low-cost savings technology (people could have chosen to accumulate their transfer – and even add other money – on their M-Pesa account), suggests that the savings constraint at work is more social or behavioral than purely due to lack of access to a savings technology.

[iii] …. contrary to previous literature and our expectation, we find no significant differences between transfers to men and transfers to women in expenditure decisions or any other outcomes.

Oh, and there is more…

… we find significant reductions in cortisol levels in several treatment arms: specifically, large transfers, transfers to women, and lump-sum transfers lead to significantly lower cortisol levels than small transfers, transfers to men, and monthly transfers. Some of these effects occur in the absence of differences in traditional outcome variables. Together, these results support a causal effect of poverty (alleviation) on (reductions in) stress levels. More broadly, they suggest that psychological well-being and cortisol can complement traditional welfare measures, and in some cases may in fact respond to interventions with greater sensitivity than these traditional measures.

Amazing stuff.

So what are some of the policy implications?

Direct cash transfers are not the panacea to underdevelopment. But these findings and others out there (see summary here) are evidence that we should seriously consider Martin Ravallion’s idea of raising the consumption floor of the poorest of the poor in developing countries through direct policy intervention (e.g. through cash transfers).

Making direct cash transfers work for development will be predicated on taking the interventions out of the humanitarian/aid sphere, and integrating them into the national political economies of developing countries.

In my view, the need for a higher consumption floor will soon become politically salient due to rapid urbanization rates in many developing countries. Obviously, aid money alone will not be able to fully finance such a policy. More efficient public finance management in developing countries will be one way to fill the gap. Putting aside the overhyped storied budgetary leakages due to corruption, many developing countries still do not meet their annual budgeted expenditure goals due to lack of absorptive capacity, i.e. money simply never gets spent at the end of the fiscal year and is returned to the treasury.

Screen Shot 2015-01-02 at 10.21.20 PM

Click on image to enlarge

For instance, according to an internal Ugandan government report, between 2004-2010 an average of 3.4% of budgetary allocations to central government ministries, departments, and agencies returned to the treasury (this was net of corruption and other leakages). Note that the figure is most likely higher if you factor in local government expenditures. And as Figure 2 above shows, late disbursement is the norm, which makes budgeting within government agencies a nightmare. In addition, over the same period (2004-10), the proportion of the budget that was simply not released (as opposed to released and not absorbed) was a staggering 9.92%!

This is money that can go directly to citizens’ pockets. And we have the technology, thanks to M-Pesa, to effect the policy. Governments shouldn’t be allowed to handle more money than they have capacity to spend. Plus making legislative appropriation conditional on agency capacity could be a way to incentivize capacity building more than a million workshops and study tours could ever do.

Lastly, the idea of a consumption floor for the urban poor might not appeal to some higher income tax payers. But smart politicians should be able to remind these voters that there is only so much physical security that one can get from high fences topped with electrified razor wire.

Most read posts in 2014

Here are the top posts in 2014

1. Corruption under apartheid South Africa: This post was top partly because of the 2014 South African elections. More on the legacies of apartheid era corruption and rent-seeking in South Africa here.

2. Kenya Security Laws (Amendment) Bill 2014: This bill (now an Act of Parliament) is further evidence of Uhuru Kenyatta’s autocratic tendencies. I personally don’t think that he is an incarnation of Moi or other dictators of years gone. Rather, Mr. Kenyatta is a poor administrator who likes taking shortcuts to get quick results. As I argued in a related post, the Security Laws (Amendment) Act 2014 could potentially severely limit civil liberties in Kenya.

3. Did European Colonialism Benefit Africans? The popularity of this post is perhaps a reminder that more research is needed on the long-run effects of colonialism not just in Africa but in other formerly colonized places as well. So far all the literature tells us is that colonialism was bad, but that the Western institutions that Europeans spread around the globe are good. More recently we’ve seen evidence that pre-colonial institutions in the colonies were pretty resilient in the face of colonial intrusion; and have had lasting effects (also remember that the duration and intensity of colonialism varied widely across the globe). One avenue of research that I have been exploring is how pre-colonial institutions interacted with colonial administrations, and how this shaped the institutions that emerged out of the independence wave of the early 1960s. More on this in the new year.

4. Why Raila Odinga Lost: A sizable proportion of Kenyans still believe that Odinga was robbed in the March 2013 election in Kenya. I disagree. In my own projections on this blog – merging disaggregated opinion polls with historical district turnout rates (perks of having a case with tight ethnic voting) – I found Mr. Kenyatta to be ahead of Mr. Odinga by about 740,000 votes, or 7.2 percentage points (which was close to the final official figure of 6.7% difference between the two).

I don’t think that Kenyatta won in the first round, but do believe that we would have trounced Odinga in a runoff anyway. Which is why I have never come to terms with the unanimous Supreme Court decision granting Kenyatta victory on the basis of less than 9000 votes out of 12.3 million cast.

5. Understanding Uganda’s Military Adventurism Under Museveni: General President Museveni has managed to create an image of himself as the anti-terror hatchet man in the wider horn of Africa region. Ugandan troops are the backbone of the AU mission in Somalia (AMISOM). Since his triumphant entry into Kampala in 1986 Museveni has also been involved in conflicts in Rwanda, the DRC, Sudan, C.A.R, and more recently South Sudan. Because of the degree of militarization of the Ugandan state and recent public displays of intra-elite friction, I think Uganda will continue to inch up in the coup sweepstakes ahead of the 2016 election.

Kenya Security Laws (Amendment) Bill 2014

Here is a pdf copy of the Kenya Security Laws (Amendment) Bill 2014.

The proposed amendments will, broadly speaking, curtail the freedom of speech and association, and limit media coverage of security related stories. They will also cut into the independence of the Kenya Police Service by granting the president the powers to appoint and fire the Inspector General of Police. Presently an independent commission picks a list of candidates from which the president chooses the IG. Lastly, the law promises to resurrect the position of the all powerful internal security minister with broad discretionary powers.

All in the name of keeping Kenyans safe from foreign terrorists, and themselves.

There are a few good things in the proposed law, including the sections that clarify the roles of the office of the Attorney General and the Director of Public Prosecutions (DPP); and those that limit judges’ discretion in the handling of cases involving terror suspects.

Despite the dubious constitutionality of some clauses in the bill, I bet a majority of Kenyans would support it in a poll. For that we have to thank the recent uptick in terror attacks and fatal communal conflicts. This year alone hundreds of Kenyans have died from such attacks.

That said, if you ask me the problem of insecurity in Kenya is not simply a result of restrictive laws that limit the government’s ability to pursue and prosecute criminals. It is a problem of a corrupt police force that takes bribes from petty criminals, poachers, drug dealers, and terrorists, alike. It is a problem of an increasingly unaccountable intelligence and military securocracy that is both fighting jihadists in Somalia and trafficking in charcoal and other goods, the proceeds of which benefit the same jihadists. It is a problem of an ineffectual intelligence service that instead of diligently doing its homework prefers to carry water for foreign agencies, regardless of the domestic consequences.

And finally, it is a problem of an elite political class that wants to have its cake and eat it. They want a criminal justice system that protects those who steal from public coffers but punishes chicken thieves. A system that protects poachers and drug dealers but nabs terrorists and armed robbers. At some point something will have to give.

Iko shida.

A short reading list for development economists and practitioners

Below is a list of books I am currently reading and that I think most development economists (and anyone interested in development) would benefit from reading. The reading list is America-centric and provides a mix of economic history and the history of governance in the US.

Let’s make this a year in which development economists and practitioners read more economic history.

  1. The Tycoons: Charles Morris’ book outlines American economic history from the perspective of four of the country’s most celebrated businessmen: Jay Gould, John D. Rockefeller, Andrew Carnegie and J. P. Morgan. You think corruption is bad for development? Can industrial policy help poor countries overcome the poverty trap? And how exactly do countries become rich? These are some of the questions that are implicitly addressed in this rather easy to read book.
  2. FDR by Jean Edward Smith: If America ever had a developmental president, it was FDR. His big push to help regular folk with the New Deal and other government programs took water and electricity to many corners of America that had previously been forgotten by mainstream politics. The story of American development is a caution agains the prevailing fascination in the development community with small-scale pro-poor initiatives that largely sidestep the state. Development is political (because it creates relative distributional winners and losers) and those who ignore this fact will always fail.
  3. The Search For Order, 1877-1920: Want to know more about how America became modern? This book provides a glimpse of the period in American history between the era when robber barons ran the show and when formal institutional arrangements became commonplace in business and government alike. The book provides an excellent account of the dynamics of institutional development both in the public and private sectors.
  4. The Evolution of American Legislatures: Want to know how US State Legislatures have evolved from the colonial times to the present? The you must read Squire’s book. I loved reading this book [yes, because I study African legislatures myself] precisely because it gives a detailed account of the very undemocratic origins of the democratic institution of the legislature(s) that we associate with modern United States. The book is a caution to institutionalists who peddle the false idea that good institutions are born good and stable. The lesson from American history is that it is all about how checks are enforced, and that sometimes to guarantee enforcement you might need to limit political participation and choice.
  5. Abraham Lincoln by Lord Charnwood: I now live in the land of Lincoln and so this was a must read for me. The big development lesson from this book is that civil wars are complex and that sometimes nations ought to be left to recover autonomously. Just imagine how the history of the US would have played out if the UN already existed (and at the time dominated by the UK, France, and Germany) and had sent in peacekeepers right after the Confederates seceded…. The book is also a nod to the Great Man theory by showing us how Lincoln’s personal life and conviction played a big role in determining the course of US history.
  6. 1913 The Eve of War: This is a random addition to the list, I know. But I added it to remind readers that things can always go wrong in the international system, with grave consequences for the entire global community. The book is also a good lesson on how Great Powers can sometimes be forced into conflict even when they would prefer not to fight.
  7. The Great Escape: I know I am late to the game on this one but Angus Deaton’s book (which got glowing reviews in the Fall) is a great account of the public health advances of the of the last century in both the developed and developing worlds. The book also reminds us that economic inequality is not always a bad thing, as long as everyone’s living condition is improving – which he says has been the case for much of the last century. Also, Deaton reminds us that aid is not the panacea to underdeveloped and that it might actually lead to more harm than good. But the solution he runs to – good governance – is equally problematic. 21st century good governance means zero tolerance on corruption, crony capitalism, and state capture by the business elite. Yet if you read the books above, you realize that because of the political risks involved in poor (or less institutionalized) countries, sometimes the habits associated with bad governance are the only means available for incentivizing investment. The point here is not that we should neglect the fight against bad governance, just that “Governance” shouldn’t be the only consideration when thinking of factors that retard economic growth. Just imagine how the Transparency International report on corruption in the US circa 1920 would have read like.

Are some Guinean government officials idiots, criminals or both?

This was an extraordinary windfall: B.S.G.R. had paid nothing up front, as is customary with exploration licenses, and at that point had invested only a hundred and sixty million dollars. In less than five years, B.S.G.R.’s investment in Simandou had become a five-billion-dollar asset. At that time, the annual budget of the government of Guinea amounted to just $1.2 billion. Mo Ibrahim, the Sudanese telecom billionaire, captured the reaction of many observers when he asked, at a forum in Dakar, “Are the Guineans who did that deal idiots, or criminals, or both?”

Image

Source: WSJ Online

That is Patrick Keefe in a long but fantastic piece in the New Yorker detailing the web of corruption that characterizes resource sector deals on the Continent. It is an account of mining executives so daring that they even sign contracts on kickback.

The villains the piece are not just the mining executives but also government officials who are too lazy to even do the required due diligence to ensure that, at the very minimum, they get a “fair value” in kickbacks from the companies to which they readily mortgage their countries.

The answer to Mo Ibrahim’s question above lies in the quote below:

During our meeting in the whitewashed building, I asked Touré how it made him feel to learn of such allegations about former colleagues. He paused. “The feeling of shame,” he said at last. “Because, finally, what they have got personally—let’s say ten million U.S. dollars, twelve million U.S. dollars—what does that amount to? Compared with the lives of the whole country?” The lights in the room suddenly shut off, and the air-conditioner powered down. He didn’t seem to notice. “I don’t think that it is tolerable or acceptable from the investors,” he continued. “But I’m more shocked by the attitude and the behavior of the national decision-makers” [Note: the new president of Guinea has been waging a war against shady deals from past administrations]

As I have complained before, something needs to be done about the way African states deal with multinationals in the resources sector (beginning with getting the skill set of government workers in the responsible ministries to match those of the oil company reps).

Also, every time I read such stories I can’t help but think, where are the African Beny Steinmetz’s? When will the African political class transition from being petty brokers to actual investors in their own resources?

Capital flight continues to plague poor nations

According to the Center for International Policy:

“Exactly 10 times the $100bn spent on aid and debt write-offs by rich countries is siphoned out of developing countries, with corporations responsible for 60 per cent of that figure through a web of trusts, nominee accounts and the flagrant mispricing of goods to escape tax………

Cracking down on tax havens and the evasion of taxes by some of the world’s biggest companies is seen as the ‘missing link’ in the poverty alleviation agenda.”

This got me thinking, perhaps naively, why it is that rulers (i.e. presidents and their entourage, most of whom fuel capital flight) in the Global South cannot secure their own property rights.

It makes sense that Mobutu and Co. (perhaps the worst pilferers ever) did not invest in Zaire (presently the moribund DRC) and so siphoned (or allowed allied firms to do so) billions abroad because the country lacked attractive investment options, mostly because of weak property rights. But it is also true that throughout his over three decades in power he and his buddies were perhaps the best placed Zaireans to secure their own property rights. Why didn’t they do it?

The quick answer might be that they had a very limited subjective time horizon and lived in constant fear of coups.

Most of the arguments out there stop here. Time horizon is king. Limited time horizons are bad for long-term investment. Yada yada yada.

But shouldn’t we also expect that after say 10 years in power a leader or elite group updates and realizes that may be they are there to stay, and start laying the foundation for local use of stolen wealth? Some certainly have – Kenya’s Moi and his henchmen come to mind.

The reasons for these leaders to invest locally are legion. The state of the roads, hospitals (think of say Ugandan elites who have to fly to Kenya or South Africa for medical care), insecurity (in Kenya MPs have been attacked by armed robbers), schools, etc etc in these places make it such that an average person in say Palo Alto enjoys a much higher standard of living than some of the wealthier people in the Global South.

What is the point of living in Kinshasa with billions in Europe, and with only one life to live? At what point does it make sense to use some of the money to improve the living standards (even in the most selfish way) in the place where one actually lives?

At the very least, don’t these guys mind the very dusty roads to their residences?

PS: The local use of wealth is, of course, relative. Even Chinese leaders, despite their massive domestic investments, still stash money abroad where property rights are more secure.

$500 million, and for what?

Congolese go to the polls on Monday, the 28th of November. The result of the election is almost a foregone conclusion. Incumbent president Joseph Kabila looks set to win another term in office – another 5 years to continue the mismanagement of the DRC’s resources through shady mining deals.

According to the Economist:

Whatever the result, doubts about the election’s fairness will persist, not least because of a perception that the electoral commission’s head is a friend of the president. Logistical problems are also ubiquitous, despite an election budget of $500m or so. As well as 11 presidential candidates, 18,000 hopefuls, including several pop stars and a rebel leader accused of ordering the rape of more than 300 women in eastern Congo last year, are contesting 500 seats in parliament. Some of the ballots will exceed 50 pages, which will surely daunt even the minority of voters who can read.

(Read the whole piece here)

If I were in charge of the promotion of democracy in the DRC I would push for a system of staggered elections, both nationally and at the provincial level. I would also try and broker a deal to create a government of national unity in Kinshasa (representing the provinces) and competitive elections at the provincial level. In my view, the longer that everyone keeps pretending that the Congo – with its 70m+ and landmass the size of Western Europe – can be run by a single central government in Kinshasa – the longer it will take to put the country on the path of institutional development that will be conducive to long run economic growth.

Centralized state development definitely makes sense for smaller African states (think of the infamous trio of the Mano River basin). But if you are the DRC, capacity development in the capital must necessarily be accompanied by the strengthening of institutions at the provincial level – with more emphasis, in my view, on the latter than the former.

The number one problem facing the DRC right now is woeful state incapacity. It is doubtful that elections alone will force politicians’ hand in the right direction.

For more on the elections follow Congo Siasa.

Quick hits

Jesus! Good intentions are not enough. (Properly regulated) Markets rule.

Kenya and Eritrea appear to be on a collision course. The Horn might get a little bit hotter in the next few months.

Some insights into politics and development in Nigeria. I hold the minority opinion that Nigeria might yet surprise those short selling it at the moment. The political situation is almost good enough. Remember, all you need (at least for the initial stages of growth) is predictability, not Sweden’s institutions.

AFRICOM has a blog. The posts are sporadic but it’s worth checking out once in a while.