Brookings: Experts - Vera Songwe

From Bottom Billion to Top Trillion: Using Commodity-Backed Securities to Support the Future of Africa’s Resource Economies

Vera Songwe — Wed, 17 Apr 2013 13:00:00 -0400

The surge in mineral discoveries in Africa provides a vehicle through which countries can transform their economies at a faster pace. The use of commodity-backed securities to raise to fuel growth and create jobs is within reach. It is estimated that Africa is home to 30 percent of known global mineral resources, and, for some commodities (particularly, uranium, platinum, diamonds and gold), Africa’s share is more than 50 percent. These numbers are projected to increase over time. Increasingly, hitherto non-resource rich countries are becoming resource rich. Senegal’s top export commodity in 2012, for example, was gold. Mineral exports as a share of GDP in Senegal doubled over the last decade from 3.1 percent in 2000 to 6.3 percent in 2012. In a few years, Senegal, like many other African countries, is hoping to become part of a much talked about set of countries in the region—the commodity or resource-rich countries. Similarly, coal production in Mozambique’s Tete province is projected to reach 100 million metric tons in a decade, resulting in an additional $2 billion of fiscal revenues by 2020. Iron ore mining in Sierra Leone and Mauritania is expected to boost their GDP growth by over 25 percent by 2020.

This week the international development community will meet in Washington, D.C. for the IMF and World Bank Spring meetings to discuss the future of development financing and the state of the world economy. This event precedes the 10-day trip of President Xi Jinping of China to Africa two weeks ago, during which he signed about 70 cooperation agreements with countries including South Africa, Tanzania and the Republic of the Congo Most of the China-Africa agreements had one thing in common: the exchange of resources for investments in large-scale infrastructure to finance development.

How can African countries use their mineral resources to accelerate overall economic growth? The visit of the Chinese President Xi Jinping to Africa may provide a clear and bold answer. With China, Africa has entered into a system of spot trading its mineral resources for infrastructure. The process is seen to be heavily lopsided by most, as African countries do not always get the most critical infrastructure in return for the sale of their commodities. Many countries enter into these agreements in an attempt to respond to the growing needs of their populations for services, infrastructure and jobs. Unfortunately, in general, these exchanges have not been transformational.

Following the 2008 global financial crisis, it became clear that African countries could no longer rely on development aid to fund the big transformative infrastructure and social projects needed to sustain and accelerate growth.

Following the 2008 global financial crisis, it became clear that African countries could no longer rely on development aid to fund the big transformative infrastructure and social projects needed to sustain and accelerate growth. Africa needs over $75 billion to fund its infrastructure needs. The amounts needed to improve access and quality of education and health care are substantial. There is a growing sense of urgency on the continent as leaders look for solutions and their populations grow impatient. The enthusiasm around the BRICS (Brazil, Russia, India, China and South Africa) Bank, Global Infrastructure Bank and others is a manifestation of this need. Sub-Saharan Africa, with 800 million people, has about 80 gigawatts of energy generation capacity—on average supplied at prohibitive costs for businesses. This is about the same capacity as Spain, with 40 million inhabitants. By 2030, there will be over a billion people demanding energy, with over 50 percent of them residing in cities. The growing middle class will demand better housing and transport. The growing number of youth will demand better education systems and jobs. African governments are aware of this yawning expectations gap and the threat it poses.

The optimism about growth in Africa could quickly turn into despair if governments are not able to provide the basic services needed to fulfill growing expectations. As citizens exhaust their capacity to wait for a chance to participate in this now much-touted growth of the continent, the celebration of Africa as the rising continent could quickly dissipate. The recent turmoil in Mali, Niger and the Central African Republic may be the first warning signs of this impatience. As we have seen in the Arab Spring countries as well, there comes a time when citizens are no longer willing to stand by and wait while the education system fails to deliver, good jobs are only for the elite, and parts of the country are left behind. The new challenge for Africa is how to manage the continents’ vast natural resources so as to accelerate growth that is inclusive and delivers for all.

How Does Africa Sustain Growth?

President Xi Jinping and China’s cooperation agreements offer a solution that is attractive because of its expediency. The international community and the international finance institutions working with the private sector can offer another option to finance infrastructure and other economic development plans—commodity-backed securities (CBS). The resource curse could become a blessing if Africa worked to bring the future forward, if African governments used future prospects to build the present realities in a classical over-lapping generations model where future revenue helps build the present. With Africa’s demographic structure, investments must be made today to benefit from demographic dividend. This approach can help countries fast forward their development by a full generation.

While the world continues to look for ways to fully recover from the financial crisis, there are some lessons we must not totally discard. The development of a U.S. mortgage market helped accelerate growth in the U.S. and today the U.K. is once again trying to use mortgages to spur growth.

While the world continues to look for ways to fully recover from the financial crisis, there are some lessons we must not totally discard. The development of a U.S. mortgage market helped accelerate growth in the U.S. and today the U.K. is once again trying to use mortgages to spur growth. The concept of mortgages and mortgage-backed securities is fundamentally a sound one if the underlying assets are secure, are properly valued and have an appropriate regulatory framework.

How can mineral resource-rich countries in Africa take a page out of the book on the development of new innovative financial instruments to serve infrastructure needs in the Africa? It is time that these countries began seriously considering, in a transparent manner, the use of commodity-backed securities as a new asset class to leverage financing for their development.

Commodity-Backed Securities Should be Considered Now

Concessional resources have dried up and private resources are in search of better returns. With the financial crisis of 2008 and the current eurozone crisis, the flow of concessional resources to many developing countries has slowed considerably. On the other hand, with the low interest rates in the West, investors are increasingly looking to resource-rich economies as a way of diversifying investments and seeking higher returns. The largest public pension in Los Angeles, Calpers, for example, is investing $800 million in commodities over the next two years—a quarter of these investments will be in actively managed derivatives—as it tries to diversify its traditional portfolio. Like Calpers, many other institutional investors are ready to enter into commodity securities trading but need clear risk mitigation frameworks.

Innovative technologies in the mining sector allow for a better assessment of countries’ reserves. New pattern recognition technology and other mineral exploration technology innovations are increasingly being launched in the mining field. These technologies will allow for better accuracy in the assessment of reserves and potentials. Development of these technologies should, over time, lead to more efficient exploration and lower costs, which continue to be an impediment for more exploration on the continent. Improvements in extraction technology are also increasing making previously uncompetitive mines more attractive. Together, these technological developments should make valuation of countries’ mineral assets easier to establish and hence create an environment for improved valuation of country assets.

The expansion of new markets for commodity trading is likely to continue as new commodities are introduced on trading floors at a faster pace.

Mineral assets are easier to price. Mineral pricing mechanisms are increasingly public, with the advent of the Australian stock exchange and now the Shanghai futures exchange. The expansion of new markets for commodity trading is likely to continue as new commodities are introduced on trading floors at a faster pace. This open floor trading improves price transparency and helps low-income, resource-rich countries with little financial expertise improve their negotiating skills. Some more work is needed to develop index prices for all commodities but with the rapid development of more mineral-traded platforms and China’s continued demand for minerals, the trend will continue to be toward more market and price discovery.

Greater transparency should lead to more reliable and credible commodity-backed securities. As a result of the financial crisis, there has been a focus on strengthening the regulatory framework for trading, such as the Dodd-Frank regulation and other Financial Stability Board recommendations. There has also been scrutiny placed on the ratings industry and a subsequent reform of their methodologies for structured securities. These improvements in transparency and disclosure should help give investors the comfort needed to provide debt financing backed by future commodity receivables.

Low debt levels in many countries and low interest rates make borrowing an attractive proposition. An important element of the commodity securitization proposal is the fact that countries will be able to raise substantial amounts of capital to fund transformational projects. This move implies debt creation. However, if the rate of return on the investment is higher than the interest rate on the debt, meaning over time the investment will contribute in reducing the debt stock, then it is acceptable. In effect, countries need not worry about the ability to service the debt as this will be assured through the future exploitation of resources and increasingly by the return on the investments. With interest rates at their lowest levels in decades, and set to stay low, borrowing by developing African countries on the market will be cheaper comparatively and could be made concessional if an instrument such as the commodity-backed security were traded through appropriate confidence-instilling intermediaries and with appropriate guarantee mechanism attached to raise resources for development.

A Credible Commodity-Backed Securities Scheme Needs International Support

The international community needs to give a mandate to international institutions to work with African countries to develop these financing instruments. This is crucial to ensure that the people of Africa benefit sustainably from this unprecedented growth potential and that all the gains achieved over the last two decades in terms stability and growth are protected. Questions around pricing, reserve management, size of the securitized portion as a share of total assets, operational risk and governance framework will need to be clarified. International financial institutions (IFIs) are uniquely placed to perform this task. While China needs resources to build its cities today, Africa needs transformational projects to generate sustainable growth over the medium term. For this growth to happen, a dynamic resource model must complement the existing China-Africa trade model. The international community needs to innovate the financing model for development so as to reduce reliance on transfers from developed countries that now face enormous fiscal pressures. The combination of low interest rates in the West, low debt levels in Africa and the availability of a list of transformational projects, the growing mineral resource base of countries presents a unique opportunity.

The commodity-backed securities proposed structure should enable a “virtuous credit cycle,” reducing both current IFI credit exposure—through secured interest in resource ownership and associated revenues—and future IFI credit exposure—through improvement in recipient nation credit-worthiness thanks to economic development spurred by investments in sound infrastructure projects.

The IFI’s intermediary position and credit backing will, in particular, enable resource-rich countries to have access to markets and allow capital sources not otherwise open to these countries participate since the country risk will be diminished either through guarantees provided by the IFIs or interest buy downs.

The structure will enable international financial institutions to directly link access to capital with commercial capital market infrastructure—which today remains a challenge. The IFI’s intermediary position and credit backing will, in particular, enable resource-rich countries to have access to markets and allow capital sources not otherwise open to these countries participate since the country risk will be diminished either through guarantees provided by the IFIs or interest buy downs.

In the case of the Democratic Republic of the Congo (DRC), for example, where the total sum of its mineral resources on 15 percent of its territory is estimated at over $3.4 trillion the issuance of commodity-backed securities valued at $10 billion or less than 3.5 percent of the DRC's total future value of its commodities could serve as the catalyst needed to help the DRC break away from the cycle of conflict and fragility. For Gabon, the possibility of having $2 billion to invest in much-needed infrastructure over the next five to seven years (the length of normal infrastructure projects) will not only begin to provide jobs for the youth of Gabon but will transform the narrative of this small resource-rich country.

Furthermore, if the funds raised through commodity securitizations are invested wisely in infrastructure development, growth can be accelerated and diversification in the economy can take place. For example, if the investment proceeds were used to finalize construction of the Inga Dam, the country could begin the diversification process. The experience of Laos and the transformational Nam Theun 2 Dam project provide an example of the impact of such projects on an economy. With investments in hydro power undertaken eight years ago, Laos today has been able to go from being a billion dollar economy to a $9 billion economy in less than 10 years and has substantially diversified its economy.

With its young population Africa needs to urgently secure growth today to provide savings for the future. Africa's youth needs a future built, its urban centers equipped and its lights turned on today. With a clear program to manage its commodities to deliver growth and prosperity today, additional resources could transform Africa from the continent of the bottom billion to the continent with the top trillion. This goal is within reach.

Sources

European Gold Centre, Mining in Africa, Editor: Henk J. Krasenberg, Issue March 2010.

Serven, Luis Fiscal Rules, Public Investment, and Growth, 2007, World Bank Policy Research Working Paper No. 4382.

Collier, Paul. The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It, 2008, Oxford Press.

Authors

Vera Songwe

BRICS Investing in Africa: Geopolitical and Economic Ramifications

Thu, 28 Mar 2013 09:30:00 -0400

Event Information

March 28, 2013
9:30 AM - 10:30 AM EDT

B-354
Rayburn House Office Building
45 Independence Ave. SW
Washington, DC 20515

On Thursday, March 28, the Africa Growth Initiative at Brookings (AGI) and the Congressional African Staff Association (CASA) hosted a briefing for congressional staffers on the growing relationship between the BRICS—Brazil, Russia, India, China and South Africa—and African countries, and implication for U.S. foreign policy and economic relations with Africa. Panelists included: Yun Sun, Brookings visiting fellow, and Haroon Bhorat, professor of economics and director of the Development Policy Research Unit at the University of Cape Town. Brookings Africa Growth Initiative Nonresident Senior Fellow Vera Songwe moderated the discussion, and Gregory H. Simpkins, professional staff member of the House Subcommittee on Africa, Global Health, and Human Rights, provided opening remarks.

This event is part of the Africa Policy Dialogue on the Hill, a monthly congressional briefing hosted by AGI and CASA on topical issues relevant to Africa’s growth and security.

TRANSCRIPT

MR. SIMPKINS: Good morning, everyone. Welcome to the Africa Dialogue on the Hill. I’m Greg Simpkins, Professional Staff Member for the House Subcommittee on Africa, Global Health, Global Human Rights and International Organizations. Our forums offer an African perspective on Africa issues as well as those of outside experts. This is a monthly co-presentation by the Congressional Africa Staff Association, or CASA, and the Africa Growth Initiative of the Brookings Institution.

For those who don’t know CASA, we’re a bipartisan, bicameral association of staff members who seek to educate our colleagues on today’s substantive Africa issues on the continent and within greater Africa diaspora through panel discussions, briefings, and other events with decision makers and officials involved in Africa policy.

Read the full transcript » (PDF)

Event Materials

0328_brics_investment_africa_new

Exports and Export Diversification in Sub-Saharan Africa

Vera Songwe and Deborah Winkler — Wed, 12 Dec 2012 14:00:00 -0500

INTRODUCTION

The past decade has been one of great volatility for Africa but also of substantial progress. At the turn of the decade, many in the developing world wondered if Africa would become “the doomed continent” (Quenum 2000), crippled by political and ethnic tensions (Easterly and Levine 1997), or if in fact Africa could claim the 21st century (Gelb 2000). In that environment, predictions that sub-Saharan Africa (SSA) as a continent was about to enter the fastest growth period of its young 50-year history would have seemed impossible. However, between 2002 and 2008 gross domestic product (GDP) grew by 6.5 percent annually in the region. Commodity-exporting countries as well as non-commodity-exporting countries experienced high growth rates. In fact, some of the non-commodity-exporting countries such as Burkina Faso, Mali and Rwanda grew faster than their commodity-exporting neighbors.

The hitherto poor macroeconomic indicators that had become synonymous with Africa have also changed. Inflation in most countries was brought down to single digits for the first time in decades, debt ratios fell to sustainable levels, and deficits were reduced as countries moved to consolidate the size of government, rationalize spending, and obtain debt write-offs. In an overall favorable external economic environment, these reforms quickly began to produce results. Foreign exchange reserves, including gold, increased more than 300 percent from $37 billion in 2001 to $154 billion in 2008. Net flows of foreign direct investment more than doubled from $14 billion in 2001 to $34 billion in 2008. Goods exports over the period 2000–2008 grew by 18 percent per year as the continent became increasingly more open and globally connected.

The channels through which export expansion enhances aggregate productivity and growth are well-known. Exports allow for specialization in a country’s comparative advantage and thereby raise growth. Ricardo, in his famed theory of comparative advantage, showed that countries benefit by specializing in the production of those goods with the lowest opportunity cost and trading the surplus of production over domestic demand, taking as given appropriate exchange-rate regimes. Under this model, a country will quickly specialize in sectors in which it has a comparative advantage. The new trade theory à la Helpman and Krugman (1985) and generalized by Grossman and Helpman (1991), however, shifted the focus from the static gains from trade to dynamic ones in which the increased investment, knowledge and technology associated with increased productivity growth can transform trade patterns and accelerate overall economic growth. Under the new theory, specialization is a result of scale and concomitant efficiencies.

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Authors

Vera Songwe
Deborah Winkler

Image Source: © Thierry Gouegnon / Reuters

The Health of African Leaders: A Call for More Transparency

Vera Songwe and Mwangi S. Kimenyi — Tue, 07 Aug 2012 14:05:00 -0400

Editor's Note: Data for the article was provided by Ehui Adovor and Vera Songwe, from the African Political Transitions database, forthcoming 2012.

On July 22, 2012, Ghana lost its 12th president, Dr. John Evans Atta Mills, to ill health. Reports after his death reveal that the late president had been unwell and unable to fully to execute his duties for some time before his death.

President Atta Mills will be fondly remembered by most Ghanaians, especially his former students and fellow faculty members, as a soft-spoken academic. He will also be remembered by many Africans as a pacifist who preferred dialogue to arms in a decade plagued by continuous regional instability and violent uprisings.

The late president will also be remembered for assuring a peaceful transition between his political party (the National Democratic Congress) and former President John Kufuor’s party (the New Patriotic Party), despite a close, and what could have easily been a disputed, election. In the dawn of 2009, Ghana gave hope to the continent by conducting a peaceful election and organizing a seamless transition. Similarly, following the president’s death, Mills’ vice-president was sworn into office without a hitch, solidifying the country’s position as a maturing democracy with clear constitutional processes.

Mills’ death has added Ghana to a growing list of countries that have lost a sitting president or head of state. So far, the list comprises 19 African countries. These countries include: Algeria, Angola, Botswana, Burkina Faso, the Central African Republic, Comoros, Cote d’Ivoire, Egypt, Gabon, Ghana, Guinea, Guinea-Bissau, Kenya, Liberia, Malawi, Mozambique, Niger, Nigeria and Zambia. Gabon, Guinea and Nigeria have each lost two sitting presidents, bringing the total number of leaders who have died in office to 22.

The average age of these leaders at their death was 63. Côte d'Ivoire’s Félix Houphouët-Boigny (88), Kenya’s Jomo Kenyatta (84) and Malawi’s Bingu wa Mutharika (78) were among the oldest on the list and Algeria’s Boumedienne (45) was one of the youngest. Of the presidents who passed away in office, 13 were rumored ill and undergoing treatment while in power, fueling continuous suspicion about leadership transitions in those countries and undermining successful development. (Cameroon’s President Ahmadou Ahidjo is the only African president to have resigned from power due to ill health, in 1982, after ruling for 22 years.)

Many African governments adamantly conceal their ailing leader’s health status. In fact, in some African countries, discussions of a leader’s health are considered as criminal offenses punishable by death. But the phenomenon of concealing a leader’s health is not unique to Africa: U.S. Presidents Kennedy, Reagan, and (Franklin) Roosevelt, as well as French President Francois Mitterand all concealed illnesses while in power. However, none of these men died in power as a result of ill-health.

As the number of ailing presidents increases, three major issues are emerging: First, the continent demands more transparency regarding it’s leaders’ health; second, democracies need clear term limits; and third, successful democratic transitions require transition processes outlined in the constitution, that are understood and familiar to all. With these safeguards in place, the risks of administrative paralysis, political tension, internal conflict and instability that characterize situations in many African countries could be mitigated. Unfortunately, in many African countries today there is a general lack of clarity around term limits and even less clarity and agreement on succession: Term limits are changed on a rolling basis, and constitutions are amended frequently.

Given these circumstances, the health of a country’s leaders cannot be left out of the political debate. Transparent information on the relevant health conditions of current leaders must be made public. If, as in the U.S. and France, presidents respected and adhered to clearly stated term limits, the demand for health disclosure may not be as important and leaders could keep this information private. While not all illnesses diminish a person's ability to stay focused, lead and make important decisions on the future, the issue is serious enough that in the U.S. and other developed countries, presidential candidates are obliged to disclose their health reports before they are vetted. African presidential candidates should make similar information available. Today, as the number of African presidents who pass away in office due to ill health increases, so does the clamor for more transparency on this issue.

While the increase in the frequency of truly democratic elections in Africa is a cause for celebration, the increase in the number of presidents passing away in office could undermine these gains. Today there are seven African presidents (Gabon, Ghana, Guinea, Guinea-Bissau, Malawi, Nigeria, Togo and Zambia) who are in power directly or indirectly as a result of a sitting president’s passing.

Health status disclosure, especially when it limits a leader’s ability to be effective in office, is an important facet of entrenching the democratic process. This type of disclosure demands constitutions and constitutional processes that are clear on transition mandates and expectations for new elections. Most importantly, this disclosure also requires an acceptance by the government to respect and implement the process. Thankfully, Ghana’s immediate swearing-in of President John Mahama as the fourth president under the Fourth Republic and Malawi’s transition to President Joyce Banda demonstrate that there is an increasing acceptance to follow the constitutional process. Nigeria, over a year ago, also managed a particularly difficult transition.

Thus, as Africa mourns his passing and celebrates a peaceful and constitutional transfer of power, Professor Mills leaves us with three important lessons: First, lack of transparency on leaders’ health issues creates a dangerous insecurity; second, term limits need to be clear and respected; and, third and most importantly, a clearly defined constitutional transition process helps provide certainty in uncertain times. The existence of two or all of these criteria in a country should be regarded as a positive step towards real democracy. To truly honor President Mills, African democracies can aim to move increasingly in this direction.

Authors

Image Source: Joshua Roberts / Reuters

The G-20 Los Cabos Summit 2012: Bolstering the World Economy Amid Growing Fears of Recession

Fri, 08 Jun 2012 14:48:00 -0400

Leaders will head to the G-20 Summit in Los Cabos, Mexico, among renewed serious concern about the world economy. The turmoil that started with the U.S. subprime mortgage crisis has resulted in now almost five years of ongoing instability. The emerging market economies fared much better than the advanced economies and pulled out of the crisis already in 2009, but the slowdown we are now facing in 2012 is again global, demonstrating the interdependence in the world economy. The emerging market economies have stronger underlying trend growth rates, but they remain vulnerable to a downturn in the advanced economies. The center of concern is now squarely on Europe, with a recession threatening most European countries, even those that had reasonably good performances so far. After an encouraging start in 2012, the U.S. economy, while not close to a recession, is also showing signs of a slowdown rather than the hoped for steady acceleration of growth. And the slowdown is spreading across the globe.

At a time like this it would be desirable and necessary that the G-20 show real initiative and cohesion. The essays in this collection look at the challenge from various angles. There is concern that the G-20 is losing its sense of purpose, that cohesion is decreasing rather than increasing, and that policy initiatives are reactive to events rather than proactive. Let us hope that at this moment of great difficulty, the G-20 will succeed in giving the world economy a new sense of direction and confidence. It is much needed.

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Image Source: Andrea Comas / Reuters

Supporting Financial Innovation and Stability in Africa’s Agriculture

Fri, 08 Jun 2012 14:48:00 -0400

Vera Songwe and Mwangi Kimenyi explore the challenge for African countries in sustaining their growth rates in a volatile and uncertain global economy. They stress that the challenge for G-20 leaders will be to ensure that the much needed financial regulation designed to prevent another global crisis does not endanger access to finance for African agribusinesses and farmers.

Publication: The G-20 Los Cabos Summit 2012: Bolstering the World Economy Amid Growing Fears of Recession

Why the G-20 Must Prioritize Financial Inclusion to Promote Global Growth

Fri, 08 Jun 2012 14:48:00 -0400

With fostering financial inclusion to promote economic growth as a key agenda item of the G-20 Mexican presidency, Mwangi Kimenyi and Vera Songwe assess the ability of expanding mobile financial services technology to address issues of financial inclusion in developing countries and the role of the G-20 in promoting this agenda.

Publication: The G-20 Los Cabos Summit 2012: Bolstering the World Economy Amid Growing Fears of Recession

Peaceful Elections in Senegal: Solidifying the Democratic Process One Country at a Time

Vera Songwe — Mon, 26 Mar 2012 14:01:00 -0400

Yesterday marked another milestone for Senegal with both the Senegalese people and institutions passing what was undoubtedly a great "stress test" of democracy. After weeks of debate and tensions domestically, and with the rest of the continent waiting anxiously for the outcome of the Senegalese elections, there could not have had a better finish. President Wade called his opponent Macky Sall to congratulate him for winning the elections—the ultimate sign of a mature democracy.

Following elections in Ghana, Guinea, Nigeria, Liberia, Niger, and Zambia, Africa is clearly solidifying the democratic process on the continent one country at a time. There will undoubtedly be setbacks like this week’s the coup d'état in neighboring Mali, but the overall trend in Africa is positive. The credibility of democratic processes in these countries has led to a democracy dividend with peaceful elections being rewarded by the international community and the private sector through increased investments in durable infrastructure that directly contribute to faster growth.

Across all these countries, four elements are emerging as key ingredients for success. The first is a free and transparent environment for dialogue and debate in the run up to the elections. This is exemplified by the presence of a free, active and independent press, but more importantly, as in the case of Ghana, an informed press that helps to frame the dialogue. In Ghana the media organizes debates and hosts presidential candidates in open forums, which directly contribute to public scrutiny of candidates. Transparent budget processes, the availability of spending data and better understanding of the budgeting process has also helped improve the quality of media debates and led to an informed evaluation of candidates.

A second element is an active civil society—particularly through the engagement of youth and women. In Senegal organized youth groups undoubtedly helped rally many people around pressing issues needing attention in the elections, particularly issues of youth unemployment and education. This not only helped simplify the population’s demands, but also made the issues real and urgent through the slogan Y-en-Marre, which means fed up. In Nigeria, a similar youth movement called "What About Us" was actively mobilized through social networking media to dialogue with presidential candidates on youth issues of employment, access to finance and capacity building. In Liberia, women brought a new face to the national policy debate and helped bring gender issues to the forefront of public dialogue. In Senegal the involvement of female leaders under the banner, "Femmes Afrique Solidarites," helped pacify the population when the situation was tense and helped keep the focus on the elections. The female vote and voice is increasingly relevant and many candidates are taking note. In Senegal, Cameroon and Ghana women are not only participating in the dialogue, but are also putting their names on the ballot. Debates on gender access and empowerment are common to these elections.

The third factor to successful democratic elections is adequate electoral institutions, transparency and clarity in electoral processes. In Nigeria, Ghana, Niger and Senegal, the presence of clearly predetermined rules and dates set by an independent body have proved to be critical. The inability of incumbents to alter the electoral calendar and defined rules for the opposition has helped to keep pressure on incumbents to respect the process and has also forced the challengers to be prepared and focused. In these cases, it is easy to get the ballots on time, register voters, and train election staff. In many of these countries, the constitutional courts, the electoral commissions and the observers have exhibited above average signs of independence. More is needed, but great progress has been made.

Finally, there is an emerging pool of credible and qualified political candidates. After over 20 years of reliable institution building, and the development of professionals both from within the civil service, civil society, the private sector and international organizations, Africa now has a cadre of well qualified leaders. The national leaders of Liberia, Ivory Coast, Guinea and now Senegal are great examples of this phenomenon. More importantly countries are moving away from incumbent leaders preparing or hand-picking a successor, to a model where elections produce real political change. Equally important is the presence of an emerging class of leaders who are willing and able to peacefully hand-over power. Ultimately effective leadership also means knowing when to peacefully respect the will of the people and the constitution and bow out as President Wade has done.

As countries move to solidify citizen participation in the governing process these four criteria will need to be continuously perfected and modified to respond to the aspirations of the population. Countries are already sharing best practices through South-South exchanges. Ghana is learning from Nigeria's experience with biometric voter registration machines as it prepares for its own election. However, as these processes are refined, in the meantime, voters across the continent have distinct new reasons for optimism.

Authors

Vera Songwe

Image Source: © Stringer . / Reuters

Senegal’s Presidential Election: A Turning Point for Democracy and Economic Growth in West Africa

Thu, 16 Feb 2012 10:30:00 -0500

Event Information

February 16, 2012
10:30 AM - 12:00 PM EST

Falk Auditorium
The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

Senegal—a nation long considered a leader in African democracy—will hold its presidential elections on February 26. In a recent and controversial court ruling, President Abdoulaye Wade received approval to pursue re-election for a third term in office despite a constitutional two-term limit. The decision has sparked public unrest and heightened discontent, although opposition candidates remain fragmented and unable to unify around a challenger.

On February 16, the Africa Growth Initiative at Brookings hosted a discussion on Senegal’s elections and their implications for democracy, economic growth and regional stability. Panelists included Mamadou Diouf, professor at Columbia University; Chris Fomunyoh, senior associate for Africa at the National Democratic Institute; and Vera Songwe, World Bank country director for Senegal, Cape Verde, Gambia, Guinea Bissau and Mauritania. Senior Fellow Mwangi S. Kimenyi, director of the Africa Growth Initiative, provided the introductory remarks and Witney Schneidman, president of Schneidman and Associates International and a special guest with the Africa Growth Initiative moderated the discussion.

After the program, the panelists took audience questions, and the event was followed on Twitter via the hashtag #AGISenegal.

» Read "Around the Halls: 2012 Senegal Presidential Election" -- Africa Growth Initiative experts dissect the political climate throughout Senegal, including the country's external relationships, the youth vote, prospects for democracy, and post-election outcomes.

Participants

Moderator

Witney Schneidman

Special Guest, The Brookings Institution
President, Schneidman & Associates International

Panelists

Mamadou Diouf

Director, Institute for African Studies
Professor, African Studies and History, Columbia University

Chris Fomunyoh

Senior Associate for Africa
National Democratic Institute for International Affairs

Vera Songwe

Nonresident Senior Fellow, The Brookings Institution
Country Director, Senegal, Cape Verde, Gambia, Guinea Bissau and Mauritania, The World Bank

Removal of Fuel Subsidies in Nigeria: An Economic Necessity and a Political Dilemma

Nelipher Moyo and Vera Songwe — Tue, 10 Jan 2012 10:12:00 -0500

Lagos, the second most populated city in Africa, is an uncharacteristic ghost town today. The government’s decision to eliminate Nigeria’s costly but highly popular fuel subsidy program has sparked mass protests and unrest across the country as fuel costs have increased officially from $0.40/liter to $0.86/liter. On Monday morning, labor unions began a nationwide general strike that has brought Nigeria to a standstill.

Despite the unrest, the decision to abolish Nigeria’s fuel subsidy is the right one. In 2011 alone, Nigeria’s fuel subsidy cost the country an estimated $8 billion and the price tag for 2012 was expected to be even greater. This does not even take into account the country’s losses due to market distortions as a result of the subsidy. While politically costly in the short run, if Nigeria’s government can implement transparent and well-structured reforms, the funds from the fuel subsidy program could be put to far greater use.

With an estimated 37.2 billion barrels of proven oil reserves, Nigeria is one of the world’s largest oil producers. However, the country’s mineral riches have not resulted in a significant improvement in the quality of life for the majority of Nigeria’s citizens, 54 percent of whom live below the national poverty line. In 2010, Nigeria earned $59 billion from oil exports. Therefore, Nigeria does not lack the resources to reach its development goals, rather its resources have been utilized inefficiently.

In the wake of the global financial crisis and increasing sovereign debt risk, financing for development is drying up and developing countries must now look inward to finance their growth and development needs. Crisis times require bold reforms and President Jonathan of Nigeria has the ability to take on one of the most difficult problems in his country. But in order to succeed, he will also have to take on another challenge – transparency in the use of the $8 billion fuel subsidy funds. The government must utilize these resources more efficiently to create social welfare and infrastructure improvement programs that will not only improve the quality of life for Nigeria’s poorest but also put the country on track to meet its development goals.

Cost of the Fuel Subsidy

The cost of the fuel subsidy has continued to grow exponentially. This is partly due to the rising cost of fuel—which meant that the government had to spend even more to keep domestic prices low— and also due to Nigeria’s increasing population— which resulted in increased fuel consumption; together these pressures made the cost of the fuel subsidy unsustainable. The price of crude oil increased from 30.4 dollars per barrel in 2000 to 94.9 in 2010 over the same period Nigeria’s population increased from about 123 million to 158 million. By 2011, the fuel subsidy accounted for 30 percent of the Nigerian government’s expenditure and it was about 4 percent of GDP and 118 percent of the capital budget.

Nigeria’s fuel subsidy continues to crowd out other development spending. By comparison,, Nigeria’s total allocation for education is about $2.2 billion and it is not much higher for health care. Infant mortality in Nigeria remains unacceptably high at 90.4 per 1,000 live births. In 2004, it was estimated that only 15 percent of the country’s roads were paved. The $8 billion from the fuel subsidy could help to address some of these issues.

In addition, keeping the domestic price of oil artificially low with the fuel subsidy has discouraged additional investment in Nigeria’s oil sector. This is especially problematic given that the oil sector is the lifeblood of the Nigerian economy. Since 2000, Nigeria has issued at least 20 refinery licenses to private companies. However, not one refinery has been built because investors could not recoup their investment under the artificially low price structure.

Who Benefits the Most?

In debating the merits of Nigeria’s fuel subsidy it is important to understand who benefits the most from the program. Contrary to popular belief, it is the rich not the poor who disproportionally benefit from Nigeria’s fuel subsidy. With the government subsidizing the market to keep domestic fuel prices artificially low, it is those who consume the most that have a greater benefit from the subsidy. Nigeria’s poor rely primarily on public transportation as such their per capita fuel consumption is significantly less than the country’s rich, who generally use private vehicles. Neighboring countries also benefit significantly from Nigeria’s fuel subsidy through smuggling.

Sustaining Reforms Amidst Unrest

One legitimate criticism against the Nigerian government is that it has done a poor job in planning for the subsidy removal and in communicating the huge costs of the fuel subsidy and the benefits of its removal to the population. In a country where there is already a lack of trust between the people and government, communications is critical. Otherwise the protesters will continue to believe that this is just another ploy by Nigeria’s elite to further capture the country’s resources. The real challenge the government faces is winning the trust of the people. Working Nigerians are hurting and their livelihoods are in danger with the doubling of petrol prices. They want to know that the government has a credible plan and the protests represent a call for the government to quickly implement post-subsidy programs. Some form of social protection must be launched immediately to protect the most vulnerable. This could include measures to reduce the cost of public transportation in the near term.

The Nigerian government must implement a transparent system for redirecting and monitoring the use of funds from the fuel subsidy program so that its citizens can review and scrutinize the expenditure. The government has announced its intention to redirect the funds from the subsidy into infrastructure, support for small businesses and safety net programs. This is a step in the right direction, but the success of these programs rests on having proper oversight and participation of civil society. The government should assemble a committee of key civil society organizations to oversee the investment of these funds. Unlike the fuel subsidy itself, these programs should be targeted toward helping the poor including programs to reduce maternal and infant mortality and improve road quality and access. Most importantly, the programs must be tied to Nigeria’s overall development goals. The government and the proposed civil society oversight committee must prioritize sustainable investments that will have a long-term development impact. Pork barrel type investments spread across the country to appease the people will not serve President Jonathan and his government well in the long run.

It is too early to tell whether the Nigerian government will succeed in these efforts but after 20 years of dodging the issue and trillions of Naira spent, the removal of the fuel subsidy should be supported. If implemented correctly, the subsidy funds could lead to major development gains. Moreover, the removal of the fuel subsidy - if successfully implemented - creates the space for Nigeria to finally develop refinery capacity and consequently increase its potential revenue from the oil sector and create jobs. Civil society organizations should take this opportunity to fully engage in the debate on how best to redirect the funding from the subsidy program. In turn, the Nigerian government must communicate its plans and actions transparently to the people.

Authors

Nelipher Moyo
Vera Songwe

China-Africa Relations: Defining New Terms of Engagement

Thu, 05 Jan 2012 13:48:00 -0500

Vera Songwe and Nelipher Moyo examine the China-Africa relationship. They argue that in 2012 African countries must articulate a comprehensive China policy that goes beyond trade to include issues of industrialization, agriculture, labor markets and politics.

Publication: Foresight Africa: Top Priorities for the Continent in 2012

Strategies for Improving Food Security in Africa

Thu, 05 Jan 2012 13:48:00 -0500

Vera Songwe examines the burden posed by constant fluctuations in food prices on African farmers. Songwe explores how implementing communal storage warehouses for food and agricultural products can help mitigate problems of food price volatility and identifies the next steps for African governments and the private sector.

Publication: Foresight Africa: Top Priorities for the Continent in 2012

The Eurozone Crisis Dividend an Opportunity for Africa’s CFA Franc Zone

Nelipher Moyo and Vera Songwe — Fri, 16 Dec 2011 17:09:00 -0500

Last week from December 8-9, the European Council met to develop strategies to restore the credibility of the euro. During the meeting, 26 member states pledged to accelerate economic and financial integration and adopt a credible and transparent surveillance system. While a clear strategy for implementation of this agreement will take time to develop, it is clear is that the euro will continue to exist as a currency. Nonetheless, until such an implementation strategy is adopted, the eurozone crisis presents a lingering threat to global economic growth in 2012.

For a few countries, however, the crisis might also provide opportunity. Under the right conditions, Africa’s Communauté Financière Africaine (CFA) franc zone could yield positive dividends as a result of the crisis and the weakening of the euro. Between July 2008 and December 2011 the euro depreciated by over 14 percent against the U.S. dollar. During the same period, the euro depreciated 20 percent against the Chinese yuan renminbi. For the 14 CFA franc zone countries whose currency is pegged to the euro, this means an instant improvement in competitiveness. These countries can build on the gains in competitiveness resulting from this depreciation to create conditions for stronger export growth.

Since the CFA franc is pegged to the euro, its depreciation should lead to increased competitiveness of CFA zone exports to the U.S., China and other regions. In 2010, about 41 percent of all exports from CFA countries went to the U.S. (27 percent) and China (14 percent). In order to maximize the potential export gains from a depreciated euro, these countries will need to implement a series of market reforms to improve their export competitiveness. In fact, if CFA countries fail to reform their labor markets as well as the overall business and trade environment, they will miss an opportunity to increase their export competitiveness. Furthermore, they may be worse off after the crisis if the euro begins to appreciate or EU market demand switches to more competitive markets for its intermediary inputs. Reaping the eurozone crisis dividend will require active cost and policy adjustments on the part of CFA zone countries.

The eurozone crisis will have a varied impact on the Economic and Monetary Community of Central Africa (CEMAC) and the West African Economic and Monetary Union (WAEMU) countries - the two communities that together form the CFA franc zone. CEMAC countries, which are mostly oil exporters, stand to benefit the most from the crisis dividend. In WAEMU countries there is increasing concern that the depreciation of the euro will make food and fuel imports more expensive, which is also a concern in CEMAC countries but to a lesser extent. While concerns about high import bills are valid, both regions could offset these costs with increased exports and subsequent increases in foreign currency reserves. However, this requires a concerted ‘export push’ on the part of CFA zone governments.

Although the EU is the main trading partner for CFA zone countries and it accounts for 34 percent of all exports from the CFA zone in 2010, its relative share of exports from the region has declined over the past decade, a sign that countries are diversifying into new markets. This is especially true in Senegal where the share of exports to the EU fell from 71 percent in 1995 to 36 percent in 2007. Since much of the past export gains in the CFA zone have been due to demand effects, the depreciation of euro could help to increase the competitiveness effects relative to the demand effects. However, this must be supported by strengthening the region’s labor markets, trade environment and governance institutions.

A key area of focus for CFA zone countries should be on improving labor market flexibility. While CFA countries have an abundant supply of labor, rigid labor market policies and regulations contribute to increasing costs of doing business in the region. On average, it is much more difficult to hire workers in CFA zone countries than in the BRICs (Brazil, Russia, India, China and South Africa), with a difficulty of hiring index of 53.6 compared with 35.6 respectively. Furthermore, labor markets in CFA zone countries are much more rigid than their counterparts in the BRICs, with CFA zone countries having on average a higher rigidity of working hours index and rigidity of employment index.[1] Firing costs in CFA countries appear to be within the same range as the BRICs; however, there is significant variation across countries. For example, it can cost as much as 133 weeks of salary to fire a worker in Equatorial Guinea. There is a growing body of research that suggests rigidities in the labor market discourage firms from exporting. Therefore, it is important that CFA zone countries make it easier for firms to hire workers and allow companies some flexibility in setting employment hours and employment contract terms.

There are a number of other high transaction costs that severely undermine the competitiveness of CFA zone exports. On average, it costs between 104 to 106 percent of the national income per capita to start a business in the CFA zone, with the costs almost doubling in Chad at 208 percent of income per capita. It is important to note that the averages presented in the table above mask serious disparities in the region. While it typically takes only 25 days to start a business in WAEMU countries and 76 days to start a business in CEMAC countries, starting a business takes only 5 days in Senegal and over 160 days in Republic of the Congo. Overall, it takes 7 to 19 more days to export goods from the CFA zone countries than from the BRICs, and export processing times range from just 11 days in Senegal to 75 days in Chad. It costs almost two and a half times more to export goods from the CEMAC franc zone countries than from the BRICs, $3,324 per container compared with just $1,355 per container respectively. While it is less costly to export goods from WAEMU franc zone countries, it still costs $478 more to ship a container from WAEMU countries than from the BRICs. In addition, average customs transactions in the CFA zone involve 20 to 30 different parties and about 40 different documents.

The scope to expand exports of existing products to new markets is vast and can play a major role in export growth in the CFA zone. The index of export market penetration (IEMP) shows that on average, exports from African countries only reach about 5 percent of available markets, indicating an enormous gap between potential markets and exploited markets. Breaking into new markets could provide a significant boost to the CFA zone’s trade performance and CFA zone countries should look at the U.S. as a potential new market for its goods. Trade preferences such as the African Growth and Opportunity Act, coupled with a depreciating euro would make CFA zone exports quite competitive in the U.S. market, even in the face of competition from Asia and Latin America.

Finally governments in the CFA zone need to improve the governance environment in their countries. With a few exceptions, Mali and Benin, CFA zone countries scored in less than the 50th percentile on all six performance measures in the 2010 Worldwide Governance Indicators. Governments in the region continue to underperform on measures of government effectiveness, control of corruption, regulatory quality, rule of law, voice and accountability, and political stability. Similarly, only four countries in the CFA franc zone, Benin (11), Senegal (15), Burkina Faso (19), and Mali (22), ranked in the top half of the 2011 Ibrahim Index of African Governance. CFA zone countries will only reap the crisis dividend if they anchor these benefits to structural reforms to reduce export costs, improve labor market flexibility, and build strong governance institutions. CFA zone countries should prioritize these reforms in the short run as part of their ‘export push.’ For lasting benefits, however, these reforms must be coupled with long standing efforts to improve infrastructure in the region.

[1] This index measures the regulation of employment, specifically the hiring and firing of workers and the rigidity of working hours.

Authors

Nelipher Moyo
Vera Songwe

Strategic Approaches for the G-20 to Support Africa’s Infrastructure Deficit

Wed, 26 Oct 2011 00:00:00 -0400

Publication: The G-20 Cannes Summit 2011: Is the Global Recovery Now in Danger?

From Subsistence Agriculture to Agribusiness in Africa: the Role of Commodity Exchanges

Vera Songwe — Wed, 05 Oct 2011 10:27:00 -0400

Following the 2008 food crisis, increased attention has been given to the roles that globalization and “financialization” play in determining agricultural commodity prices. For the many African countries that are net food importers and for the small holder farmers that comprise much of the continent’s agriculture sector, these trends have come at a high cost, most noticeably in terms of increased price volatility.

However, they have also come with an opportunity. They have potential to promote the rapid growth and restructuring of the agriculture industry from a largely subsistence-based form to a more sustainable and profitable form of agribusiness. An obvious question policymakers must wrestle with is: what can be done to accelerate this transformation while simultaneously ensuring that African countries and smallholder farmers benefit the most from its consequences?

Thankfully, the issue is receiving some attention; the G-20 agricultural and finance ministers have it as an agenda item and will discuss it in their upcoming November summit.

But G-20 policymakers need to change their thinking on the topic. They need to better appreciate how important the private sector’s role is in transforming the agriculture industry in Africa. Neither the public sector nor smallholder farmers can affect the necessary change by themselves. Neither have good experience managing volatility (hedging, arbitrage), improving price discovery (information), ensuring adequate storage facilities or linking farmers effectively to diverse markets.

Part of the G-20’s current approach has been to support the creation of regional food reserve facilities that would serve as a safety net, providing grains in the event of a humanitarian emergency. The G-20 also plans to create an Agriculture Market Information System (AMIS) to enhance commercial transparency. While laudable, these efforts use public solutions to try to address problems that are driven largely by private incentives. Consequently, if implemented in isolation, they will fall short of their intended goals. Ultimately, the public sector must create room for the private sector to provide the sustainable and transformative solutions needed to complement these efforts.

The G-20 should endorse market-improving solutions for agriculture trading and one practical way to do so would be to assist Africa in developing a network of viable, privately-held commodity exchanges. These instruments have been used effectively in countries such as the United States, Brazil, Chile, Argentina, Ukraine and Russia. To ensure the breadth and depth of these exchanges, the network of African exchanges should be merged onto a single platform to create a virtual network regional commodity exchange platforms. The exchanges should be underpinned by a number of privately-run warehouse receipt systems effectively functioning across major commodity-producing countries.

Such a system would have a number of benefits. It would provide both national and regional price discovery points, improve transparency of the commercial system and build on the Agriculture Market Information System (AMIS) initiative. It would allow smallholder farmers to smooth any income volatility they experience by enabling them to better stagger the sales of their commodities and, in some cases, by prompting them to switch cropping varieties altogether based on market demand and price information obtained through the exchange. It would give these farmers a predictable conduit into a global market and direct access to multiple trading options and partners.

The system would also help mitigate the problem of price volatility. Commodity exchanges could be used to anchor the G-20’s vision of a series of humanitarian food reserve facilities; participating countries could purchase rolling 30 – 90 day commodity futures from a regional commodity exchanges as a way to prepare for the worst. The World Food Program could pilot this initiative working with a national commodity exchange in Africa as part of the G-20 agenda. Since the World Food Program is a large buyer of grains on the African continent, its support would help significantly in the development of these markets.

The G-20 can meaningfully inject an appreciation for the private sector into a discussion that has, to a large extent, focused primarily on public sector solutions. Following the successful experience of the South Africa commodity exchange and the emerging experience from the Ethiopia Commodity Exchange, Ghana, Tanzania, Nigeria, Kenya and Zambia, among others have begun to put in place the building blocks for the development of commodity exchanges supported by a system of warehouse receipts. The international community and G-20, in particular, should applaud, support and expand upon these efforts.

Authors

Vera Songwe

Brookings: Experts - Vera Songwe

From Bottom Billion to Top Trillion: Using Commodity-Backed Securities to Support the Future of Africa’s Resource Economies

How Does Africa Sustain Growth?

Commodity-Backed Securities Should be Considered Now

A Credible Commodity-Backed Securities Scheme Needs International Support

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BRICS Investing in Africa: Geopolitical and Economic Ramifications

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Exports and Export Diversification in Sub-Saharan Africa

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The Health of African Leaders: A Call for More Transparency

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The G-20 Los Cabos Summit 2012: Bolstering the World Economy Amid Growing Fears of Recession

Supporting Financial Innovation and Stability in Africa’s Agriculture

Why the G-20 Must Prioritize Financial Inclusion to Promote Global Growth

Peaceful Elections in Senegal: Solidifying the Democratic Process One Country at a Time

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Senegal’s Presidential Election: A Turning Point for Democracy and Economic Growth in West Africa

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Removal of Fuel Subsidies in Nigeria: An Economic Necessity and a Political Dilemma

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China-Africa Relations: Defining New Terms of Engagement

Strategies for Improving Food Security in Africa

The Eurozone Crisis Dividend an Opportunity for Africa’s CFA Franc Zone

Authors

Strategic Approaches for the G-20 to Support Africa’s Infrastructure Deficit

From Subsistence Agriculture to Agribusiness in Africa: the Role of Commodity Exchanges

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