Dirk Willem te Velde (ODI) | Four entry points for UK policy in Africa’s economic trajectory

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Dirk Willem te Velde (Director of SET Programme, Head of IEDG and Principal Research Fellow, ODI)

24 April 2017 (based on a presentation at Chatham House 20 April 2017)

An examination of UK–Africa economic relations is timely. Africa’s needs (which vary from country to country) are changing, the UK’s international position is changing and the interaction between foreign powers (such as China, the US and Japan) and Africa is fast changing too. Further, the EU will publish an Africa strategy in early May in the run-up to the EU–Africa summit in November 2017, and the G20 has suggested a compact with Africa.

This note argues that the UK can offer an appropriate support package using smart aid, targeted development finance, free trade and foreign direct investment (FDI) promotion and temporary (legal) migration policies to help with economic transformation and job creation in Africa.

It is crucial to start by focusing on what Africa wants and needs:  

First and foremost, nearly all African countries want and need more and better jobs. In the past decade, job creation efforts have lagged behind working-age population growth by a third. In the coming decade, some 13 million new jobs need to be created each year in Sub-Saharan Africa to address the relatively large increase in the number of young people entering the labour market. With agriculture producing low-quality jobs (or, in the case of natural resources, very few jobs), industrialisation and quality services production is required to sustain job creation into the future. This is what many countries state they want. It is also part of the AU 2063 strategy.

The main challenge for most countries is lack of quality growth, job creation and economic transformation. Africa achieved relatively fast growth over 2000–2014, but, despite some good examples in East Africa (IMF forecast in 2017/18 for Ethiopia (7.5/7.5%), Tanzania (6.8/6.9%), Rwanda (6.1/6.8%), Kenya (5.3/5.8%) and Uganda (5.0/5.8%)), average African growth overall has slowed down considerably owing to commodity dependence in, for example, South Africa and Nigeria.

ODI’s SET programme, which includes current work in close to 10 African countries, examines the what, why, where next and how of economic transformation. It finds that there is little evidence of significant transformation, both within sectors and in terms of movements between sectors; that a general enabling environment needs to be complemented by targeted interventions (such as market-friendly industrial policy using Special Economic Zones) to make things move; and that political economy considerations are really important. Active coordination and leadership around industrialisation are often lacking, beyond public statements (with Ethiopia and Rwanda being exceptions).

How can the UK help?

African countries are in the driving seat, but a targeted UK approach consisting of four pillars can be helpful: (i) smart aid; (ii) targeted development finance; (iii) free trade and FDI promotion; and (iv) temporary migration.

Smart aid. UK bilateral aid to Africa was £2.8 billion in 2015, and a similar amount of UK aid is provided to Africa through other routes (total UK aid was £12.1 billion). The UK could provide politically smart and technically sound analytical capacity and bring together new actors. One example relates to targeted support for trade logistics across borders, along corridors and linked to production capacity (e.g. the sort of aid provided by TradeMark EastAfrica). Our research shows such aid is highly effective in terms of reducing trade costs, promoting exports and diversification. It ultimately pays for itself; it is mutually beneficial (e.g. through cheap imports). In other research we show that UK bilateral aid of £5.1 billion in 2014 led to £1.1 billion in 2014 and the creation of 12,000 jobs in the UK.

Targeted development finance. The portfolio of investments by European Development Finance Institutions (EDFIs) in Sub-Saharan Africa quadrupled between 2005 and 2014 and amounted to €9 billion in 2014. From near obscurity in 2000, the value of DFI investment (including EDFI and IFC) in the region has risen to the equivalent of 16% of FDI and 22% of aid in 2014. Recent announcements around the CDC will increase DFI exposure further. This is good news for Africa: our econometric research shows that, if the DFI/gross domestic product ratio increases by 1% (or by some €10 billion), per capita incomes increase by around a quarter of a percent. DFI finance can be used to fund targeted infrastructure and transformational investments. Increased transfers to DFIs (building up a portfolio) should not come at the cost of other valuable aid (a financial flow).

Free trade and FDI promotion. Annual average UK imports from Africa over 2013–2015 were at £12.8 billion. Annual UK exports to Africa were at £7.6 billion (less than 3% of total UK exports). The stock of UK FDI in Africa averaged £40 billion over 2012–2015 (3.7% of total UK OFDI); the rate of earnings in 2012–2015 was 10.9% (twice that in Europe, for example), although the commodity price slump has taken a toll. Post-Brexit, the UK should offer continued and better preferential access to Africa. New research shows UK–Africa preferences are worth £300 million in reduced duties (taking into account both ad valorem and other tariffs), with all preferences worth £1.6 billion in avoided duties (but this can have significant knock-on economic effects). The UK could go further by offering relaxed rules of origin (either raise the de minimis significantly above 15% or allow full cumulation for least developed countries (LDCs), many of which are based in Africa). It could seek a waiver for Africa wide cumulation, or simply allow full cumulation for all LDCs. This benefits UK consumers and it will not be very costly for UK producers anyway (100,000 garments workers in the UK, probably catering for the high end, compared with 1.7 million (5.7%) EU garment workers – rules can therefore be more liberal than in the EU). Further attention should go to making links between UK companies, especially those in finance, and African ones. Interesting partnerships have emerged, such as that between Standard Chartered and CDC to support fragile countries such as Sierra Leone.

Business travel cards. The UK can use mode 4 – services negotiations to offer two types of benefits: control of migration and use of labour where it is most effective. Such mode 4 agreements (e.g. an ACP business travel card) allow for temporary movement based on economic needs tests, which can be controlled and implemented by and with key stakeholders. (Managed) brain circulation is a win-win.

 

Photo credit: Russell Watkins / Department for International Development

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