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Why east Africa is a bright spot in the global economy

East Africa is a bright spot partly informed by the fact that region is not com- modity reliant; indeed the commodities decline

is very good news for East Africa. In the case of Kenya, the country saved KES 47.3 billion due to low petroleum prices. The region is min- imally exposed to the commodities debacle. An analysis of some eco- nomic growth figures reveals the global economy should grow at an annual rate of about 3.4 percent in 2016. Africa, for the first time in years is below the global average and is expected to grow at only 2.9-

3.2 percent this year, the slowest since 2001 according to some esti- mates. Compare this to East Africa where Kenya grew by 5.6 percent in 2015 and Tanzania registered 7 per- cent GDP growth in 2015, Uganda around 5 percent, Rwanda was esti- mated to have grown at 6.9 percent in 2015 and Ethiopia is projected at

6.3 percent a year between 2016 and 2020. All of East Africa’s economies

are well above the estimated African and global growth rate.

Even behemoths South Africa and Nigeria are struggling. A look at South Africa’s export profile reveals that the top exports of South Africa are gold, diamonds, platinum, and

iron ore. The commodities slump has fundamentally negatively affect- ed the economy particularly in man- aging the current account deficit. South Africa’s economy shrunk by

1.2 percent in the first quarter of 2016; juxtapose this Kenya’s robust growth Q1 growth of 5.6 percent. The GDP in Nigeria shrank by 2.06 percent year-on-year in the Q2 of 2016; it is the first contraction in 20 years due to decline in oil prices. The strength of the East Africa region is seen in the World Bank’s vice president for Africa listing Ethiopia, Rwanda and Tanzania as among the five sub-Saharan economies that should grow robustly, posting 7 per- cent or more growth per year until 2017.

Secondly, the region is gaining attention as becoming a manufac- turing hub not just for Africa, but the global economy. East Africa is gearing up for industrialisation and will continue to position itself as the next and last manufacturing frontier in the world. A report by McKinsey makes the point that in the past two

years, a number of European com- panies, among them H&M, Primark, and Tesco, began sourcing some of their gar- ments   from  Ethiopia.

East African coun- tries, especial- ly      Ethiopia

and        Kenya, and to a lesser extent Uganda and

Tanzania, are of interest to apparel buyers. Kenya and Ethiopia were the top two

countries in Africa where global apparel buyers expect to start or increase apparel sourcing. Wages in Asia continue to rise and in China’s coastal factories noteable increases in wages have occurred over the past 10 years making the country a less attractive manufacturing hub. As a result, factories may relocate and although some may move to inland China, Bangladesh or Cambodia, East Africa has appeared on the radar as a viable option.

The rise, specifically of textile and apparel manufacturing in the region, is particularly important because textiles and apparel are labour intensive manufacturing that can absorb a relatively low-skilled labour force. Thus the rise of tex- tile and apparel manufacturing can be a truly viable means through which millions of relatively poorly skilled East Africans gain employ- ment, build the disposable income of millions and help pull the region out of poverty.This is not to say there are no problems within the textile and apparel value chain in the   region,

but strong interest and momentum exists for this sub-sector to grow in the region.

Finally, East Africa is a bright spot due the discovery of fuel depos- its in the region namely oil, coal and gas in Kenya, Uganda, Tanzania and even Ethiopia. This discovery is positive in several ways; firstly it has occurred at a point in the his- tory of the economies of the region in a manner that will make fossil fuel dependency less likely than has been the case in other countries. East Africa had to create economies devoid of natural resource depen- dency as the region was not aware of the wealth of deposits it held. As a result, the on-lining of fossil fuel and related revenue creation will occur in a context where other parts of the economy are already well-es- tablished, making dependency less likely.  Secondly,  the commodities

decline and the havoc it is wreaking on other African countries has made

it clear to East African countries that they cannot afford to ever become commodity reliant. The commodities decline has provided  even  great- er impetus for the region to avoid following the path of commodity reliant African countries. As a result the region is better poised to reap the benefits of fossil fuel deposits in a manner that does not lead to dependency. Finally, not only were new oil and gas discoveries in East Africa a catalyst for investment into road, rail and pipeline infrastructure, they are already contributing to the region’s economic growth and this is set to only strengthen going forward.

 

Threats

However, it would be naïve to assume that all is rosy in East Africa. Going forward, there are three key constraints which the  region

must address for growth to be sustainable in the long term.

 

Political turmoil

First is political turmoil; pseudo-au- tocracy which was prevalent in parts of the region is being protested and questioned. In Ethiopia, anti-gov- ernment protests in Addis Ababa, and arrests and alleged deaths of opposition activists in the country- side across the Oromia and Amhara regions means the country is no longer a beacon of stability.

These are not one-time protests that the Ethiopia government can quell once and for all. The political instability in Ethiopia is systemic and can only be resolved through an implementation of change in how Ethiopia is ruled and governed. In Burundi, the country has seen polit- ical instability for over a year now.

In April 2015, Burundi’s rul- ing party, announced President Nkurunziza as their candidate for the forthcoming presidential elec- tions which sparked widespread protests across the capital, as dem- onstrators denounced the bid for a third term as unconstitutional lead- ing to failed military coup.

A United Nations human rights chief, stated that hundreds had been tortured or ill-treated by security forces; Reuters reported that at least

400 people have been killed since the protests began. South Sudan has been racked with political instabili- ty, crushing hopes that the country would enter its era as an indepen- dent state peacefully. Access to prof- its from the country’s substantial natural resources seems to be fuel- ling the conflict.

In Kenya, elections have always led to a certain level of political instability that mutes economic growth. Although elections were peaceful in 2012, and nothing on the scale of post-election violence that occurred in 2007/8 is likely to hap- pen in the 2017 elections, the reality

is that the elections will translate to the country being less stable than during non-election years. Further the frequent attacks Kenya faces from Islamic militants Al-Shabaab further destabilise the country and have negatively informed one of the biggest forex earner in the country- tourism.

 

‘Bulldozer’

In Tanzania, although some term President Magafuli as Tanzania’s Robin Hood, there are concerns that his ‘bulldozing’ tactics are dimin- ishing democratic space which may spill-over into instability. In Rwanda there have long been concerns that Kagame’s autocratic style of rule has crushed democracy, killed off the free press and is setting him up to be President for Life; this con- tradicts basic tenants of democracy. Such threats to political stability will have negative consequences to economic growth and development in the region; perhaps even reversing

recent gains that have been made. It is crucial that the region takes    a sober path to ensuring political stability if East Africa is to continue performing well.

Secondly is the issue of compe- tition within the region that mute the benefits that could accrue from regional markets and coordinated regional development. In August I did some research for the Overseas Development Institute (ODI) on manufacturing in Kenya and the region. What emerged is that the growth of Kenyan manufacturing in the region is related to the competi- tion emerging between manufactur- ing sectors in East Africa.

Due to development of manu- facturing in neighbouring countries a scenario is emerging where neigh- bouring countries seem to want to reserve domestic markets for domes- tically manufactured products. Thus there is a sense that neighbouring countries in the EAC seek to prevent Kenyan manufactured goods from entering their countries because they want to keep domestic markets to themselves.

 

Markets

Thus, perhaps EAC markets are not as open as one would hope. This dynamic begs the question on how to balance national ambitions with regional development strategy. Are economies in East Africa still too small and too busy building them- selves individually to really become a consolidated force to reckon with? This lack of cooperation between countries in East Africa is a serious concern, particularly is the region seeks to position itself as a manufac- turing hub. If the East Africa region is to become the ‘go-to’  location for investment in manufacturing in Africa, more coordination of manu- facturing policy and activity across the EAC as well as with Eastern African countries outside the EAC is needed.

The sense of  competition is also evidenced in Tanzania and Kenya competing to become the gate- way into East Africa. Both countries have ambitious plans to increase port capacity, with Tanzania planning to construct a large port in Bagamoyo, while Kenya is planning a new port at Lamu.

Both countries are aware that there will be first-mover advantages regarding trade dynamics and strong progress by one country could reduce the economic viability of projects in the other.

Thus again, the region runs the risk of missing out on the positive synergy between stronger transpor- tation networks in the East Africa region with competition leading to the prioritisation of national agendas and thus uncoordinated regional develop- ment. All the countries in the region need to work together, not compete with each other, if the region is to develop effectively.

The final threat is rising debt levels in the context of weak public financial management. According to the IMF the share of government debt as a proportion of GDP for EAC member states increased between 2012 and 2016 with Kenya leading in terms of debt accumulation, followed by Tanzania, Rwanda and Uganda. Kenya’s share of public debt as a proportion of GDPs stands at 55.4 per cent in 2016; Tanzania’s public debt grew from 29.2 per cent to 42.4 per cent in the same period; Rwanda’s stood at 41.5 per cent from 20.1 per cent and Uganda’s expanded to 37.9 per cent from 24.2 per cent.

Accruing debt is not negative in and of itself, however the region has problems with corruption which cre- ates warranted anxiety about accu- mulations of public debt.

In Kenya, the government has been consistently accused of embezzling  public  funds  accrued via the

Eurobond and proceeds that were meant  to  go  to  the  Olympics, and

numerous public procurement accu- sations of the flagrant theft of public funds. In Tanzania, although Magafuli has made it clear he will not tolerate corruption, the sixth Business Leaders’ Perceptions of the Investment Climate in Tanzania Report lists corruption as the issue that has been least addressed by the government.

Systemic corruption is  still  very much a feature of government behaviour in Tanzania, and although some feel Magafuli will address this issue it may come at the cost of democratic space in the country. In the case of South Sudan, a report released by

The Sentry accuses President Salva Kiir, opposition leader Riek Machar, and top generals of profiteering from the nation’s finances.

The reports accuse Kiir and Machar of stealing the money to fund their militias to attack each other.

The reports states that much of the wealth accumulated by these leaders is in the form of high-end proper- ties outside the country and extensive commercial holdings in both public sector and oil services contracting in South Sudan.

Rising debt levels in a context where the management of public funds is still generally weak is likely to trans- late to a scenario with East African citizens are saddled with debt that did not create any productive economic activity, making the debts even harder to pay off.

 

Conclusion

In short, there are numerous reasons to be optimistic about East Africa such as resilience to the commodities slump, becoming a manufacturing hub and the discovery of fuel deposits in the context of an economic structure that is relatively diversified.

However, political turmoil, competi- tion between countries in the region and rising debt levels in a context of lacklustre public financial manage- ment are threats to the region.

There is still time for the region to address these vulnerabilities while building on the strengths present. The foundation of the region con- tinuing to be a bright spot in Africa and the globe must be a focus on regional development rather than national ambition, instilling a culture of accountability both politically and financially, as well as generating a spirit in the region to more acutely support neighbours out of the quag- mires they currently face in the spirit of human rights for all.

Anzetse Were is a development economist; anzetsew@gmail.com