Economic policy lessons from EADB's anniversary forum

In December 2018, an extraordinary fete celebrated East African Development Bank's (EADB) 50 years of development financing and management in Kampala, Uganda.

It reviewed industrial and macroeconomic policies for sustained development. Invited as a panelist to the Think-Tank, I was tasked to comment on work presented by eminent scholars and policy makers from Norway, Turkey, UNCTAD, and a top representative of the credit rating agencies. Panelists warned of the unusual outlook in the rule books of development and trade. The trade war between the US and China on one hand, and Brexit on the other may end in tears not just for the protagonists.

EADB members still configuring economic transformation were exhorted to review new developments. Early economic transformers such as China, India, Korea, Turkey, etc benefited from a key driver, namely, export-oriented strategy, under rules-based trade. Toddlers in economic transformation such as EADB member countries will find the strategy already a casualty of the above wars. Better to seek new development, financing and trade strategies.

The panel provided an evidence-based search for alternatives: how to formulate a new strategy for development and financing rather than bury our heads in the sand. What should we think? Let’s be clear: Unless we act now, anti-globalisation in slow motion will catch Africa unprepared. The Semi-Centenary yielded important policy lessons.

CLOSING THE DEVELOPMENT GAP: It focused choice of priorities in the real economy, macroeconomic policies and financing in a changing world. On strategies for economic transformation and sector priorities, a retrospective helped map out prospects for EADB member countries for the next 50 years.

In contrast to the experiences of China, South Korea, Turkey and the US that have increasingly industrialised under globalisation (especially easy movement of goods, production, capital, and resources, as well as financial interconnections), primary commodities still predominate in Africa.

Africa may well be time-barred from replicating this model of transformation. This creates challenges in transforming to higher productivity, with targeted industrial policies and exports of sophisticated products under state-led developmental policies. Prospects will diverge. Already, per capita GDP trends of Korea and Turkey had improved relative to USA, compared to Africa’s relatively downwards trending per capita GDPs. State-led strategies spearheaded the transformations of successful countries, even with meagre resources.

In contrast, Africa still holds the richest concentration of natural resources in the world and has 30 per cent of the remaining bulk of natural resources on earth. While globalisation and specialisation were key drivers for major economies that have transformed, Africa’s belated economic transformation and productivity, if it occurs, can no longer assume the economic conditions of the past.

State leadership of strategies is one key lesson from the past that is indispensable. Transformative sets of sector priorities still must be identified as vital steps in the productivity drive of EADB member countries, such as Kenya’s choice of the “Big Four” strategy.

State engagement can be effective. It does not mean a revival of central planning, which many consider discredited. Few economies today are in any case immune to strategic price incentives and self-interest.

While the incentives are often poorly implemented, policy choices still generally lie between markets and some kind of public investment, maybe with some decentralisation of control, but still more or less what we used to mean by socialism.

In the post-China-US-Brexit conundrum for late economic transformers, countries may well need to adopt “Domestic-First” in economic activity and “Regional Trade” in transformation and trade possibilities within regional trade arrangements.

The strategy is not imaginary. It is already reflected in Tanzania’s current strategy; Egypt’s completion of the $8 billion Suez Canal Extension was 100 per cent domestic, especially in financing; and South Africa’s approach in large infrastructure projects is substantially driven with domestic policy and resources. Kenya’s arsenal in this strategy shows three key unexploited areas: mobile money; Diaspora inflows; and potentials of primary dealerships in the issuance of government securities that would revolutionise financing strategies and free the country from costly Eurobond.

MACRO-POLICY AND FINANCING: Macroeconomic policies, stability and policy matching with industrial objectives led by governments became a critical panel discussion. Appropriate macroeconomic policies are crucial for the success of economic transformation where the interplay of public and private sectors is planned to yield development results. How countries coordinate the separate powers of fiscal and monetary policymaking matter more than ever in this alternative model. Poor macro-policy and financing can undermine the public-private sector interplay.

To clear doubts, questions on the classical separation of fiscal and monetary sides of policy have long been settled: the objective is to deny Treasury policymakers exclusive control over the money supply, and thus avoid the temptations of paying off deficits by printing money. To avoid the severe hyperinflation that can result, central banks retain exclusive power to assess economic data and set interest rates accordingly. However, this always begs the question as to how coordination is to be achieved with the fiscal side. Uncoordinated fiscal and monetary policies tend to pull in opposite directions. This would negate growth in the transformation model described above.

The EADB member countries face severe macroeconomic restraints because sovereign public debt levels and interest rates are rising fast. Africa’s average debt to GDP ratio rose to 57 percent in 2017 at the end of a decade of cheap debt. Countries that piled on fiscal deficits and debt face financing constraints. While the EADB has achieved high ratings (better than member countries and despite many pitfalls in the past), the demands on it as a regional lender will increase with deficit pressures. It must avoid the pitfalls of traditional development financing.

EADB has fairly low capitalisation compared to lower-rated regional lenders such as the Trade and Development Bank (formerly PTA Bank) or South Africa’s DBSA. Yet, asking for increased shareholder capital subscriptions to EADB may be problematic due to members’ public debt constraints.

It was suggested to EADB, as a financing strategy, to devise innovative and catalytic initiatives to mobilise project financing - including championing the region’s bankable projects. It should aim at only partly meeting the financing gaps of members itself while attracting third parties in team-up efforts, based on EADB’s reputable ratings.

Appropriate coordinated macro-policy mix for short-to-medium term outlooks of EADB members emerged in the vital re-thinking of the state-led public-private sector model. Internal and external balances, and the appropriate macro-policy mix came into focus.

Kenya illustrates the problems they will face. The appropriate and coordinated stance in the short-to-medium term outlook (which recently was the focus of the World Bank’s Economic Update - In Search of Fiscal Space) is fiscal consolidation and easier monetary policy.

Yet Kenya’s expenditures and borrowing have trended upwards. This contradicts not just the World Bank analysis but the monetary policy stance of the Central Bank of Kenya (CBK) which retained an easier monetary policy over three consecutive sittings of the Monetary Policy Committee (MPC) in 2018.

This speaks of questionable co-ordination between monetary and fiscal policies. Both sides take an expansionary stance while consolidation on the fiscal side and easing on the monetary side are technically appropriate.

The latter mix is taken when a country has acute fiscal deficit pressures, less pressure on the current account, exchange rate and inflation, etc., and where it seeks to capture a slack in economic activity.