Tag Archives: economy

A Trinity of Trade: Africa soon to Launch TFTA

Map of TFTA

By Otito Greg-Obi

Recently, African heads of state gathered together in Egypt to sign the Tripartite Free Trade Area agreement (TFTA) which will join the forces of the East African Community (EAC), the Common Market for Eastern and Southern Africa (COMESA), and the Southern African Development Community (SADC).

Free trade is crucial to global economies because it reduces tariff barriers which in turn results in trade creation. The benefits of trade for developing nations in general are numerous. To name a few: first and foremost, trade allows for specialization meaning countries can build a comparative advantage by focusing on producing goods with low opportunity costs. Secondly, trade encourages healthy competition which incentivizes businesses to increase efficiency and cut costs. Lastly, trade can reduce dependence on existing markets and stabilize countries affected by seasonal changes in markets.

The TFTA agreement has been long awaited – negotiations began in 2005 and were expected to conclude in December 2013. Major components of the trade agreement include the promotion of socioeconomic development and the free movement of goods and services. A customs union is also in the works to be implemented at a future date. But, the TFTA addresses more than just trade, it promotes the upward mobility of business people and advances the cause of social justice.

Although the creation of the TFTA is an exciting development in the world of business, there are still hurdles to overcome during its implementation. Economic integration can be a slow, demanding process, especially since many African countries in this new trading bloc are at varying stages in economic development and trade activity. Furthermore, transportation costs pose a major impediment to the integration of TFTA. Connecting these 26 countries will be a difficult task because the land is vast and requires large infrastructure projects. It will be difficult to ensure that domestic African businesses reap substantial benefits from the new trade area. And lastly, some countries such as Swaziland, Uganda, Tanzania and Zambia are concerned about the loss of revenue that will come from customs unions.

The promotion of the free market is a major stimulant for economic development. However, in order for the free market to run smoothly, it is important for African countries to continue working on other important issue areas such as corporate governance, transparency, and public-private dialogue. CIPE has engaged with TFTA countries such as Ethiopia and Kenya on these issues. These issues must remain at the forefront so that the new TFTA can operate effectively and remain beneficial to all parties involved.

Challenges aside, there is still plenty for businesses and governments in the new African free trade area to look forward to. This trade powerhouse totals $1 trillion in GDP. This is big news for African businesses because it will enhance enterprise ecosystems in the region immensely. With the implementation of this new agreement, trade is expected to increase from 12 percent to 30 percent, meaning economic activity will reach more than 600 million people. This could be a major step towards a Continental Free Trade Area, which the African Union aims to complete by 2017.

Otito Greg-Obi is a CIPE intern for Knowledge Management. She is a rising junior at University of Pennsylvania. 

Beyond the elites: Why Syrian businesspeople have a stake in democracy, not Assad

A small business in Syria. Photo: http://www.kfw-entwicklungsbank.de

In searching for an end to the bloody stalemate in Syria, many have identified the Syrian “business community” as one of the last pillars of support propping up Bashar al-Assad’s presidency.

In June, The Financial Times ran a story headlined “Business reluctant to cut loose from Assad.” In October, when The Christian Science Monitor attempted to answer the question “Who backs Syria’s Assad?” it pointed the finger first at “businessmen.” Most recently, Elliot Abrams identified “turning the business community” as one of the four tactics US policymakers can use to knock Assad from his perch and stanch the bloodshed.

The idea that the business community is complicit in the repression of Assad’s security forces stems from the idea that moral concerns of Syrian businesspeople are trumped by those of dollars and cents. As the idea goes, the Syrian business community, or at least sizeable pockets of it in Aleppo and Damascus, believes that the policies of the Assad government have allowed it to prosper, and that future prosperity relies on the guiding hand of Assad.

Recently, Radwan Ziadeh, Syrian activist and member of the Syrian National Council (SNC), spoke at Johns Hopkins School of Advanced International Studies and exposed this idea as myth. “There is no business community support for the Assad regime,” Ziadeh stated. On the contrary, he argued that many in the business community form a pillar of support for the opposition, funding many of its operations.

Indeed, The Guardian reported in May that one of the earliest opposition conferences was funded by prominent Syrian businessmen, such as Ali and Wassim Sanqar, sibling luxury car dealers, and Ammar Qurabi, chairman of Orient TV. Exploring their motives, the article reported that all three had been burned directly by the government’s preferential treatment of Syria’s most notorious crony capitalist Rami Makhlouf. These three businesspeople do not stand alone in their support for the protest movement. According to Ausama Monajed, a member of the SNC, “Millions of Syrian pounds are coming from these people. If a protesting community needs something, the money gets to them very quickly.”

In comparison, the segment of the business community supporting Assad seems to be small. At an event at USIP on October 13, Murhaf Jouejati, a member of the SNC, estimated that Assad’s support in the business community is limited to perhaps 10 to 15 elites who have long benefitted from his favor and now stand to lose much from his ouster. In a recent article in Foreign Policy, Randa Slim estimated that Assad’s nouveau riche “do not exceed 200.”

Of course, as my colleague Abdulwahab Alkebsi argued recently, the idea of a monolithic business community unanimously supporting or opposing anything is a myth. The term business community, even more than the term private sector, encompasses a range of firms of various sizes, operating in a range of different sectors. This diverse part of society comprises a dizzying array of conflicting agendas. Thus, it’s not surprising that some support Assad and some oppose him. Yet, the question remains whether the average businessperson has a stake in supporting the continued rule of Assad.

Recent Syrian economic history does not seem to merit significant support among businesspeople. Indeed, under Assad, the Syrian economy has underperformed for many. Between 2006 and 2010, due to some limited economic reform, Syria’s per capita GDP rose from just over $1700 to just under $2900. That rise put the average Syrian on par with the average citizen of Guatemala or Egypt. While Syria’s 6 percent growth in 2009 was relatively impressive, its 3.2 percent growth in 2010 lagged behind the world average. This growth has benefitted very few, many of whom selected by Assad rather than the markets.

The story of Rami Makhlouf is telling. While Bashar inherited the political power of his father Hafez, Makhlouf inherited the economic power that had been granted to his family when Makhlouf’s aunt married Hafez. Initially operating in the telecommunications industry, Makhlouf scooped up businesses throughout the economy during Assad’s period of “reform.” With his connections in the halls of power and in the security forces, Makhlouf’s participation in a business deal was thought to be crucial to its success. An oft cited figure characterizes Makhlouf as controlling 60 percent of the Syrian economy. Some, like Makhlouf, have prospered due to their connections. Others have prospered because they have operated in a sector that Assad and Makhlouf chose to support. For the majority, however, business has been difficult.

Even before the uprising, Syria’s economy offered extremely barren soil for business. The recently released Arab World Competitiveness Report sheds light on this troubled business climate. The report ranks the Syrian economy 98th in the world in competitiveness, putting it ahead of only Yemen in the Arab world. Beyond the ranking, the report describes a Syrian economy in which it was difficult to secure capital, difficult to compete with the country’s few mega-firms, difficult to hire and fire workers, and difficult to participate in trade or attract foreign investment. If the average businessperson supported Assad heading into the uprising, it was not because Assad had made conducting business easy.

Assad’s effect on business since then has only made things more difficult. His brutal crackdown on unrest has disrupted commerce, crushed the country’s growing tourism industry, and attracted economic sanctions that have put the country’s annual $2.5 billion in oil revenue in serious jeopardy. While the IMF recently forecast that the Syrian economy would shrink by 2 percent this year, some economists estimate that the damage is actually far worse. The governor of the country’s central bank recently admitted that the government has spent $3 billion to stave off the collapse of its currency. With access to Euros limited by international sanctions, government officials recently “threatened” to conduct transactions in rubles.

With the country’s economy in disarray, Assad’s hand has been anything but firm. Last month, Assad’s government announced an import ban. After days of spiraling prices, the government quickly retracted the ban. With its economy collapsing, Assad’s government announced that rather than tightening the belt during tough times, it would increase next year’s budget by 59 percent to provide social support, a decision that would make even Keynes stir in his grave. In August, a Syrian businessperson told The Financial Times, “The regime has sacrificed the economy for its own survival.” Indeed, if Assad’s years of economic mismanagement had failed to alienate the Syrian private sector, the past few months may have done the trick.

The remaining justification for Syrian businesspeople to stand behind Assad would be a combination of confidence that the current government can right the ship, and fear that in the absence of Assad, there will be no stability in Syria. In a country in which sectarian identity seems to matter, it is concerning to some that the opposition has been slow to unite and present a positive vision of a better future for all Syrians. The increasing militarization of the Syrian uprising has blurred moral lines to some. The difficult transition in Egypt is also affecting the attitudes.

At the same time, Assad’s supporters sing a bizarrely confident tune. A Syrian official recently predicted, “In a few months the protests will stop and the situation will be getting back to normal. This is a problem we will overcome.” One Syrian analyst stated, “Economic reforms will continue and if waste is cut and corruption cut back, the economy will emerge from this period stronger than it was at the start.”

These rosy predictions, like much of the administration’s message, seem largely divorced from reality. The Syrian economy has far greater problems now than waste and corruption. Even if Assad is to gain the upper hand in this conflict, life in Syria is unlikely to return to its previous normal. The sanctions will likely remain. The tourists will be slow to return. The economic dislocation is likely to persist. Resentment will fester. Another uprising will likely always lurk around the corner. While the opposition’s road is difficult, Assad’s road seems more so.

In February, when Hosni Mubarak clung to power despite the widespread calls for his resignation, I attended an event at the Carnegie Endowment titled “Egypt on the Brink.” At the event, Neil Hicks, advisor for Human Rights First, observed that Mubarak had a choice: he could hand over power or he could remain as the Robert Mugabe of North Africa. Today, Bashar al-Assad is presented with a similar choice: he can leave, or he can preside over a collapsed economy and perhaps a civil war. While he may be able to choose the second option, I doubt there will be many in the business community excited to stand behind him.

What do Libya, Norway and El Dorado have in common?

(photo: NewsWarped.com)

Husni Bey, a Libyan entrepreneur, employed the language of legend to express confidence in his country’s ability to rebuild itself after decades under Gaddhafi. “Definitely, Libya is an El Dorado,” he said.  “It has great resources that [will] really allow it to turn around in no time.” Indeed, with vast fields of oil beneath it, Libya’s natural wealth is substantial. While many countries would buckle under the weight of a post-civil war reconstruction that some estimate will cost $80 billion, Libya should have no problem paying its bills.

Yet, while this oil revenue should ease the costs of Libya’s reconstruction, many observers are concerned that it could make Libya’s path to democracy hazardously slick. That’s because all too often an abundance of natural resources, oil in particular, allows wealth and power to gather into the hands of the few and prevents the development of democracy. El Dorados usually make poor democracies.

Indeed, since the 1960s and 1970s when many states began to seize control of their oil resources from Western oil companies, many scholars have noted an inverse relationship between oil export revenues and freedoms in a given country. Headed by countries such as Saudi Arabia and Iran, a perusal of the world’s largest oil exporters reads like a roll call of autocracies. This relationship is more than a correlation.

In these countries, oil distorts the relationship between state and citizen. States that do not require tax revenue to provide services to their citizens are less likely to feel accountable to them. When citizens express frustration, the state can co-opt them with handouts. If that fails, these states are able to lean on their disproportionately well funded coercive apparatuses. Unaccountable to their citizens and flush with revenue, resource-rich states can become incubators for corruption. Such was the case under Gaddhafi whose nationalization of Libya’s oil allowed the country’s descent into kleptocracy.

Fortunately, the connection between oil and corruption is not a fait accompli in Libya. In the wake of Gaddhafi’s fall, some have shifted their attention to Norway, which has largely broken the link between oil and corruption, as a possible model for Libya. By limiting the amount of oil companies may drill and shielding oil revenues from the reach of government officials, Norway has managed to facilitate the growth of a diverse economy and transparent political system.

In Libya, a country in which tribal identity is an important means of social organization, the distribution of oil revenue has the potential to combust. The distribution of oil revenue has already emerged as a source of contention: Businessmen based in Benghazi, an eastern city that suffered disproportionately under Gaddhafi and ultimately spawned the now ruling National Transitional Council (NTC), have launched a campaign to pry the state-owned National Oil Company away from Tripoli.

The Norwegian model cannot and should not be applied directly to Libya, a country whose similarities to Norway may start and end with its oil wealth. Still, it is heartening to know that by fostering transparency and accountability, a country can avoid succumbing to the oil curse. With critical decisions regarding the distribution of oil revenue among Libya’s many tribes looming, the time to focus on instilling and institutionalizing these values is now.

Libya will likely resume oil exports in the next week or so. The International Energy Agency projected that Libyan oil production, currently operating at about ten percent capacity, will reach 1.1 million barrels a day by the end of next year. While this amount would still be below capacity, it would nevertheless represent a massive flow of revenues into the economy.

Should consequential decisions about oil revenues be made by the consensus of representatives of all Libyans in an atmosphere of transparency and accountability, they could infuse Libya’s fragile transition with the confidence of its people. Should it appear that the victors of Libya’s civil war are merely collecting their spoils at the expense of the losers, however, Libya’s transition to democracy will have been made more difficult. Libyans would be wise to focus on creating a transparent system that limits opportunities for abuse before the oil resumes its free flow. Many El Dorados have become miserable places in which to live. With transparency and good governance, Libya – like Norway – can become an exception.

Why golf?

Photo: www.safariegypt.com

On a normal day I would characterize my golf game as frustrating and borderline embarrassing. On the best of days I hit shots that save me from being embarrassed, but I am still frustrated by inconsistent play.

After a recent outing in which my score approached something similar to Gabon’s ranking on the Economic Freedom Index (in case you don’t have Gabon’s ranking memorized), I asked myself for the thousandth time, “Why in the world do I continue to play this sport?” My virtuous response…golf is good for the economy.

According to the most recent Golf 20/20 report which measured the U.S. golf industry in 2005, golf was responsible for 2 million jobs in the United States and generated $76 billion of goods and services. That makes the golf industry larger than performing arts, spectator sports, and the motion picture and video business.

At the local level, if a community is lucky enough to host a Professional Golfers’ Association (PGA) Championship, the economic impact for that region averages between $40-80 million. Exposing these figures may help eliminate the long-held belief that golf is a sport which only benefits the rich – both recreationally and financially.

In the United States, golf became popular amongst all social classes in the 1990s and the industry boomed as a result. Although golf still has a long way to go in shedding its elitist image, affordable courses can now be found in nearly every town throughout the country.

The National Golf Foundation reported that in 2009 there were 9,132 daily fee facilities (i.e. privately owned but provide public access) and 2,449 municipal facilities (i.e. owned by a tax-supported entity and open to the public). Compare this to the 4,398 private facilities that restrict play to members and their guests, and you see that Americans do have significant access to the game of golf even if they can’t afford a country club membership.

So we have access, but is golf really affordable? The average green fee for 18 holes in West Virginia and Kentucky (the cheapest places to play in the U.S.) was $34.20 in 2010. Still too pricey for some; but when you consider that the initiation fee for many private country clubs tops $100,000 – not including the monthly fee after becoming a member – $34.20 for four hours of outdoor recreation seems like a good deal.

In the developing world, however, golf remains a hobby for tourists and the local bourgeois. Specific statistics on the number of public vs. private golf courses in developing countries are hard to come by, but online searches generally show foreign golf facilities are only open to club members, tourist groups, and hotel guests if the course is associated with a hotel.

Based on the economic success of the game in the United States, other countries – particularly in Africa and the Middle East – are slowly beginning to pick up on the sport. Currently, 118 countries belong to the World Golf Foundation, whose goal is to grow the game of golf around the world. In addition to addressing challenges related to culture, climate, and resources, these countries must create golf industries that are inclusive if they want to popularize the sport and enjoy similar economic benefits.

It is clear that the golf industry can provide significant benefits for a country’s economy. The U.S. saw a boom once it popularized the sport for the masses and made it accessible to people from the middle and lower class. For countries looking for an economic boost, particularly in terms of job creation, golf seems to be a good option. The problem is that golf is available at expensive venues but remains out of reach for ordinary citizens.

Perhaps the 28.7 million golfers in the United States rationalize their golf hobby differently than me, but until my score tally consistently reflects Turkey’s Economic Freedom ranking and I am making money on the PGA Tour, I will just keep reminding myself how the golf industry benefits our economy. Hopefully other golfers around the world can soon begin saying the same thing about golf in their respective countries.

Private enterprise and democracy

There’s no conflict between free markets and the aspirations of developing democracies. The private sector can deliver the economic benefits of democracy while reinforcing the openness and fairness of democratic government.

In the video above, Ira Millstein, Jesus Estanislao, and Alan Larson explain the links between private enterprise and democracy at CIPE’s Democracy that Delivers event. To learn more, visit www.democracythatdelivers.com/2009/

Additionally, women must be included political and economic life in order for the private sector to truly deliver benefits for all members of society. To explore these themes further, CIPE will host a Democracy that Delivers event specifically geared towards women’s empowerment.

These are important issues for consideration. We hope you will join us as we explore these themes as the conference approaches and beyond.

A new dawn for Africa

Sunrise at Durban, South Africa. (Photo: Oscar Abello)

While one should not refer to “Africa” as a single cohesive unit, 27 of the continent’s 30 largest economies have been expanding more rapidly since 2000. That’s enough for some to call this “Africa’s New Era,” but has enough time passed to make this claim?

It’s true there are many are many positive factors currently driving growth in Africa, including better macroeconomic policy decisions, foreign direct investment from Asia, and political stability. One of the biggest drivers of economic growth, however, is people moving out of low productivity activities in rural areas in to high productivity activities in urban areas.

Certain industries and technologies, such as ICT, have provided many of the emerging high productivity activities in some economies. These industries cannot grow and maximize their potential, however, without the institutions that allow them to do so.

For example, despite the fact that an ICT firm in Ghana had adequate management capacity, investment capital, access to a quality pool of labor, and everything else necessary to grow, that firm could not scale up its activities. Why? Because a weak system of property rights prevented that firm from buying or renting a bigger office to house more employees.

A steady flow of people to urban areas has provided the human capital necessary for the growth of ICT and other industries in the cities. There is reason for concern that comes with this trend, though: these industries are not growing fast enough to keep pace with the influx of people moving to the urban areas where they are located. Without enough formalized firms to absorb all the people moving to cities, entrepreneurs emerge in urban informal economies where their productivity and potential to scale is limited. Unless existing firms grow or many new firms emerge, productivity and growth may lag once more.

Furthermore, the lack of job opportunities, particularly for youth, is one of several reasons behind unrest in Tunisia, Egypt, and elsewhere the Arab world. If economies are to continue growing, they need to expand to absorb bulging youth populations into their workforce. That, in turn, will also contribute to the political stability.

While innovation and entrepreneurship can spur economic growth, economies must have a substantial fabric of good, productive and growing firms if they are to continue experiencing positive growth rates. If current trends keep up, and decision-makers deliver sound economic policy and institutions, it is the dawn of a new era indeed.

Egypt’s 800 billion pound gorilla

Depositors line up to withdraw funds from Banque du Caire, a state-owned bank in Egypt. Where has their money been? (Photo: Reuters/Amr Abdallah Dalsh)

With an estimated 800 billion Egyptian Pounds ($136 billion) in domestic deposits, you’d think Egyptian banks would have plenty of loans and credit available for Egyptian small- and medium- sized enterprises (SMEs). Not quite, when Egyptian government debt held domestically is nearly the same amount.

Egypt’s banks have taken a few important steps toward greater access to capital for SMEs. In the past decade, one state-owned bank in Egypt has been privatized, and the other three have undergone aggressive restructuring. Banks in Egypt have also implemented governance and risk management measures in compliance with the international Basel accords for banking supervision, with a focus on financing for SMEs. Transparency and competition are two forces that can drive banks toward disciplined and responsible small business lending, but Egyptian government debt remains a major constraint.

In part a legacy of writing blank checks for the Egyptian government during decades of authoritarian rule, Egyptian banks still have an insatiable thirst for financing government debt instead of lending to the private sector. In the summer of 2010, Egyptian banks maintained an anemic loan-to-deposit ratio of about 52 percent, compared with 100 percent ratios typical in Persian Gulf countries. Even in the midst of the U.S. credit crunch, U.S. banks maintained loan-to-deposit ratios closer to 80 percent. Healthy loan-to-deposit ratios tend to hover between 95 and 105 percent.

On top of that, Egypt’s onerous bankruptcy procedures discourage entrepreneurs and banks from doing more business with each other. So why extend more loans or credit to entrepreneurs when there are plenty of government bonds to buy that are safer, more available, and pay more than enough interest for banks to remain profitable? The insatiable thirst for government bonds isn’t entirely the banks’ fault.

It’s a classic case of what economists call crowding-out and it’s partly why Egyptian SMEs haven’t emerged to provide goods, services, and jobs that Egypt needs.

The rest of the Egyptian financial sector as it stood before January 25 held some hope with young firms offering factoring services or leasing equipment to SMEs. A few equity funds in Egypt even had limited interest in start-ups. In 2010, trading began on the Egypt-based NILEX, the Middle East and North Africa’s first small- and mid-cap stock exchange, and there is certainly room for impact investing and microcredit to step in and take on some of the lending that Egypt’s commercial banks aren’t taking on for themselves. But no matter how you slice it, commercial banks play an important role in allocating capital efficiently and responsibly. The total market capitalization of Egypt’s main stock exchange was only about half the value of the country’s bank deposits as of January 2011.

Even the cheaper Egyptian Pound, due to vast amounts of foreign capital and trade fleeing or avoiding Egypt, isn’t going to help exporters as much as it could without greater access to loans and cheaper credit. Egyptian exporters have duty free access to the EU as well as current and pending free access to 26 countries in Africa, but without capital to ramp up production and distribution quickly, there are plenty of lost opportunities.

There’s plenty of capital already in Egypt to mobilize as loans or credit to SMEs. Egyptian banks have implemented cumulative sector-wide reforms to help handle the risks and other challenges of small business lending. They need the 800 billion pound gorilla of government debt off their backs, and that’s a choice before the Egyptian people to demand from their future leaders.

Cross-posted on Nextbillion.net.