South Sudan: Fragile and Resilient

In July 2011, South Sudan gained political independence. With the exception of Eritrea, no other African state has been created in the post-colonial period (i.e., since the 1950s). South Sudan now faces a long and difficult road to stability and prosperity.

Like many of the former European colonies in Africa – especially the Belgian and Portuguese territories – South Sudan’s independence inheritance was limited. In the case of South Sudan, governments in Khartoum systematically marginalized this geographically peripheral region. Some basic data tell a grim tale of under-development:

  • Only about 25 percent of the young state’s population is literate. Most developing countries have figures in the range of 50 to 80 percent.
  • South Sudan possesses a physical area larger than France. The new country, though, has virtually no paved roads. The longest stretch – connecting the capital of Juba to Uganda – is only about 100 kilometers.
  • Less than 1 percent of the population has access to electricity. That’s right, only a tiny fraction of South Sudanese can count on reliable access to a power grid. The 1 percent figure presumably does not include those who have access to a generator.
  • Maternal and infant mortality rates are falling, but they are shockingly high. The improved figures (since independence) are: 76 infants deaths per one thousand and 2,054 maternal deaths for every one hundred thousand births. This maternal mortality rate is the worst in the world.
  • A disputed border with Sudan and internal conflicts have led to the displacement of hundreds of thousands.

Yet, the new country has weathered its early independence phase better than many predicted. This assessment is especially remarkable given the long standoff with Sudan over oil transit fees. And South Sudan does have key natural resources other than oil. A high percentage of arable land, fairly dependable fresh water supplies, and ecotourism potential are a few of the country’s key natural assets.

The world’s newest state, though, is landlocked and situated in a highly volatile region of Africa. The Central African Republic and the Democratic Republic of Congo are both neighboring failed states. Adjacent portions of Uganda, Kenya, and Sudan have also experienced armed conflict or communal unrest in recent years. The South Sudanese people will require much more resilience in the years ahead.

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Business Climate and Failed States

This morning I launched a new business. Although I had to fill out many forms and submit fees to various government agencies, this process has been remarkably easy. In fact, I live in a country that offers helpful public resources to support entrepreneurs. For  entrepreneurs in failed states, starting a business is an arduous and expensive task, and one that is frequently abandoned.

People can reasonably disagree about how much businesses should be regulated. Most, however, would concur with the sentiment that the private sector should be restrained no more than necessary. This principle is especially important with regard to forming a new business. If it is too difficult to legally form an enterprise, whole economies suffer. The dynamism of free markets is suppressed. Prospective entrepreneurs will remain without work or under-utilized as employees of existing companies. And black markets will flourish.

The Burden of Bureaucracy

This collage features Franz Kafka and Max Weber, two authorities on bureaucratic obstacles. Illustration credit: Harald Groven (via Flickr, Creative Commons license).

It will come as no surprise that it is very difficult to start a business in failed states. Beyond the challenges of poor infrastructure and under-educated populations, poor governance hinders entrepreneurial activity. Each year the Heritage Foundation and the Wall Street Journal publish an “Index of Economic Freedom.” I don’t agree with all of the ideological judgments behind the index, but it is nonetheless a very valuable dataset.

One of the ten criteria assessed in the index is “Business Freedom,” which is defined as follows:

Business freedom is a quantitative measure of the ability to start, operate, and close a business that represents the overall burden of regulation as well as the efficiency of government in the regulatory process. The business freedom score for each country is a number between 0 and 100, with 100 equaling the freest business environment.

Poor performance on this criterion is common among failed states. Poor performers on “business freedom” are frequently referred to on this blog. These countries include: North Korea, Haiti, Zimbabwe, Central African Republic, Democratic Republic of Congo, and Myanmar (Burma).

In contrast, my home state of Virginia offers a “Business One Stop,” for new businesses. And, based on my experience, Virginia deserves the praise it receives for business friendliness. (Sorry, I couldn’t resist a bit of local boosterism.)

Bucking the Global Trend: Africa’s Economic Growth

Europe’s economic funk continues. Japan’s aging society is struggling under a huge pile of public debt and slow GDP growth. Recovery in the United States is about what can be expected from a post-financial crisis expansionary cycle. And in China, Communist Party leaders are adjusting to much slower growth. In much of Africa, though, growth prospects are strong, if we can believe aid agencies such as the World Bank and USAID.

On April 15th, the Washington-based World Bank issued a periodic check-up on Africa’s near-term growth prospects. Partly fueled by high commodity prices – especially for energy resources and minerals – continental growth is forecasted to be more than five percent per year over the period 2013-2015. The optimistic forecast also highlights the impact of increased consumer spending in many countries south of the Sahara, including places like Ethiopia, Angola, Ghana, and Mozambique. Indeed, many sub-Saharan states have seen above-average growth rates for more than a decade, leading to some reduction in still-high poverty rates. The diffusion of mobile phones and more predictable macro-economic conditions are key factors leading to better growth prospects.

USAID and the World Bank are probably right about continued high commodity prices. Even if some of this new African wealth is squandered through corruption, better terms of trade will lift many ordinary people out of poverty. A cautionary word is in order, though. Enclave-based development – especially if it involves oil or high-value minerals – can facilitate political instability and armed conflicts. Think diamonds in Sierra Leone and Angola, numerous precious resources in eastern Democratic Republic of Congo, and oil in Nigeria. In short, over-reliance on mineral and energy exports can lead to so-called “rentier states” (and failed states) that do not necessarily promote broad-based human development. Careful observers of the DRC and Nigeria know about the “resource curse” all too well.

So, boosting international trade between Africa and other continents is set to grow significantly in coming years. With luck and better governance, many states will avoid the worst excesses of the resource curse.

The perennial problem of limited inter-state trade in Africa also requires urgent attention. Vast distances, colonial legacies, poor governance, and under-investment in transportation infrastructure have all contributed to high costs of trade throughout much of the continent. As USAID indicates,

Trade among African countries makes up only 10 percent of the region’s total trade volume. In East Africa, it costs 50 percent more to move freight one kilometer than it does in the United States or Europe, and in landlocked countries transport costs can be as high as 75 percent of the value of the goods they are trying to export.

Like South Asia (India and its neighbors), Africa possesses huge potential for growth in intra-regional trade and investment. This potential will only increase if Africa’s middle classes continue to swell.

The economic news out of Africa is relatively good, particularly compared to the world as a whole. Still, it is worth remembering the continent’s patchwork pattern of progress on governance, peace, and economic reforms. The overall trend is clearly positive, but recent news out of the Central African Republic (CAR), Mali, and the DRC reminds us that progress is geographically uneven.

Weak States and Global Economic Development

This post was written by a guest blogger, Evelyn Robinson

Human suffering and insecurity worldwide is being caused by fragile states and violent conflict, a world leader has said. Finland’s Under-Secretary of State for International Development, Anne Sipilainen, spoke out at the opening of the recent conference into conflict and the post-2015 development agenda in Monrovia, Liberia.

Ms. Sipilainen said more than 1.5 billion people live in countries that are in constant battle with violence and political wrangling. She added that peace processes are being demolished by criminal violence and countries’ inability to generate security, justice and economic development.

The minister said: “Environment suffers, education suffers, the most basic health care cannot be provided, child mortality increases, women are not heard… in this kind of condition, it is very difficult to work on long term development challenges and goals.”

The conference was co-hosted by Liberia and Finland’s governments in the latest United Nation-led push to involve societies in issues surrounding disasters, conflict and security and how a universal framework can be created. A new approach must be taken to see the development of fragile states, Ms. Sipilainen added. Only then would we see the international partners coming together and witness international money transfer, equality and aid across the globe.

Also speaking at the conference, Liberia’s Finance Minister Amara Konneh said almost half of all civil wars and political upheaval in the world between 1990 and 2005 took place in Africa, and its war-related deaths far exceeded all other conflicts in the world. He highlighted the importance for leaders at the conference to agree on how conflict, violence, disaster and fragility hinder development around the world and how solutions must be met.

It is recognized that conflict, violence and disaster are huge obstacles which lie in the way of the Millennium Development Goals (MDGs) being met in many countries. The eight aims of the MDGs involve: eradicating extreme hunger; universal education; gender equality; child mortality; improving maternal health; combating HIV and AIDS; environment sustainability; and global partnerships.

Are Jobs In Kenya Being Killed By Corruption?

The reality of leaving school with an education only to find there are no jobs is one frustration many young Kenyans have to deal with. But imagine how it must feel to realize that about 250,000 jobs may never be created because of corruption in your country.

The World Bank has revealed in its latest report “Kenya at Work” that the loss of resources at the hands of fraud amount to that quarter of a million number. As the economic climate stands, about 50,000 youths leaving education gain employment, out of a total of 800,000 graduates every year.

The World Bank country director, Johannes Zutt, said: “Nepotism, tribalism, sexual harassment and corruption determine who gets these jobs leaving the rest to find their own means of survival.” The World Bank’s research says firms pay up to 12 per cent value of government contracts in order to win them, and four per cent of their sales goes towards bribes.

The organization concludes total bribes on government contracts are Sh36 billion, while another Sh69 billion is paid in other kickbacks. The report suggests: “Kenya stands out for its high level of business-related corruption.”

The country’s growth is below the African average and substantially below the growth of its neighbors in the East Africa Community. Mr. Zutt said other obstacles in Kenya’s job creation are access to electricity and poor infrastructure. General election shocks and the Euro crisis have left Kenya’s economy in a “stable but vulnerable” state.

The report says: “Kenya’s economy is out of balance and the external position has become even more vulnerable as the country’s current account deficit has skyrocketed and could reach 15 per cent of GDP in 2012. This is among the worst external balances in the world and poses a significant risk to Kenya’s economic stability.”

An imbalance in import and export has struck over the past ten years, as the fragile state’s imports have grown faster than its exports and the top four exports not making enough to pay for oil imports alone. The World Bank report recommends that manufacturing capacity should be boosted. And, critically, Kenya must deal with the negative effects of corruption on farmers.

Mexico’s Geopolitical Resurgence

For many in the United States and elsewhere, Mexico is most closely associated with poverty, illegal immigration, and drug violence. True, those are all ongoing realities for Latin America’s second giant. Foreign investors, though, are mostly focusing on one word, opportunity.

The Economist magazine recently published a special report on Mexico, to coincide with the presidential inauguration of PRI leader Enrique Pena Nieto on December 1st. The report is truly eye-opening for those who only see America’s southern neighbor as a violence-wracked state on the verge of state failure. In fact, Mexico is moving in a positive direction, propelled by recent strong economic growth and a political system that is maturing.

Skyline of Mexico City

Skyline of Mexico City. Photo credit: rutlo, via Flickr (Creative Commons license).

As Shannon O’Niel wrote in 2009 in Foreign Affairs, the surge in drug violence during the presidency of Felipe Calderon (2006-2012) was a sign of better governance in Mexico. For too long, the one-party system of the Institutional Revolutionary Party (PRI) colluded with the drug cartels. When new federal leadership pushed back against this corruption, the cartels lashed out at the central government. Fortunately, drug-related violence has begun to abate somewhat. The bigger political story, though, is the consolidation of democracy in Mexico, which is further confirmed by the PRI’s return to power.

Though Mexico has registered under-appreciated gains in the political sphere, the country’s impressive economic resurgence seems to have particularly impressive forward momentum. Here the key development is a revitalization of Mexican manufacturing. After some struggles in the decade of the 2000s, the newest OECD member in the NAFTA region is returning impressive industrial growth. Here are a few of the key factors:

  • Free trade deals with 44 other states, which is the largest total for any country in the world.
  • Mexico’s proximity to the United States market, which affords quick and low-cost access to American consumers.
  • An average manufacturing wage rate ($2.10 per hour in 2011) that is now comparable to China’s rate ($1.60 per hour). (In 2000, these rates were $1.50 per hour in Mexico and $0.30 per hour in East Asia’s biggest tiger. Sources: HSBC, The Economist.)
  • The relative dependability and productivity of Mexican workers.
  • Higher energy prices, which reinforce Mexico’s position relative to Asia’s emerging markets, due to higher transportation costs from Asia to North America.

Mexico’s geopolitical resurgence is supported by other economic strengths. International tourism arrivals have remained strong, despite the drug violence. The country is still a significant energy producer. And Mexico’s agricultural sector continues to show signs of dynamism.

Mexico is rising. Arguably the clearest indication of this is the confidence that international investors are placing in the country. World leaders like Siemens, LG, Nissan, and Ford are voting with their dollars, euros, and yen. The Pentagon’s 2009 warning about Mexico becoming a failed state is not coming true.

South Africa’s Slide

This week’s Economist magazine highlights mounting troubles in Africa’s largest economy. Though South Africa is far from state failure, the heady optimism of early post-apartheid days is long gone. Even as many African countries are surging ahead, politically and economically, the “rainbow nation” is stalling out.

Mandela’s land is dear to me, since I have traveled there three times in the last few years, leading groups on two occasions. It is a land of tremendous beauty and potential, but the current political climate and nagging legacies of the white supremacist era are holding South Africa back.

The main obstacle to South Africa’s progress is an uncompetitive electoral landscape, which breeds corruption and bad governance. There is no way around it: the ruling African National Congress (ANC) has lost its way. Though South African elections are basically free and fair, a serious opposition party is yet to emerge as the country nears two decades since the end of apartheid. The ANC’s dominance must be broken, if only for a short time, if the country is to move forward.

Lack of electoral competition is hardly the only challenge that South Africa faces. As the Economist’s special report highlights, South Africa’s schools are in pitiful shape. Many of the country’s southern African neighbors produce better outcomes, and that with less spending per student. To be fair, these neighboring states do not have to deal with the fallout of the struggle against apartheid. During the last 15 years of white minority rule, widespread protests and civil unrest led to a “lost generation” with respect to education. And, despite some recent gains, HIV/AIDS persists as a major burden for the country. And we could go on.

Let’s hope that South Africa’s current travails are simply a rough patch in an otherwise promising post-apartheid narrative. Africa and the world need a stable, free, and prosperous South Africa. And, after the nightmare of apartheid, it would be tragic if South Africa goes the way of Zimbabwe.

The Machines are Not our Friends (On Technological Change and Economic Growth)

Contrary to the title of this post, I am no luddite. Though I selectively adopt new technologies, I recognize the value of such things as MP3 players, ereaders, and smartphones. Even so, a growing chorus of economists and business experts are appraising recent technological changes as a very mixed bag for the (American) economy.

On the positive side of the ledger, recent technological innovations are improving our quality of life through ebooks, digital audio recordings, and the wonders of social networking. True, not everyone likes these innovations, but large numbers of people do. Human creativity and communications have benefited enormously from these relatively recent innovations.

A recent column by Rana Foroohar, however, points out the clear downsides of recent advances in computing, software development, and technology more broadly. Here is the bottom line, as it relates to job growth: machines are steadily replacing human workers, in both white collar and blue collar settings, and in various industries. Here is how Foroohar puts it:

Corporate profits are at record highs – the private sector is, in fact, doing just fine – and companies are buying plenty of cool new technology. The problem is that they are using it to replace human workers everywhere, with software eliminating white collar administrative jobs and robots getting Chinese factory gigs.

The Time magazine columnist goes on to quote the influential MIT scholar Andrew McAfee, co-author of the book Race Against the Machine.

For most of the post-World War II period, Americans enjoyed a low unemployment rate (approximately 5-6%) during expansionary economic cycles. Many economists – from across the ideological spectrum – are now arguing that the United States is likely to see historically elevated unemployment for the foreseeable future. Their argument, in large part, rests on the reality of jobs-destroying technological innovation.

But, wait, isn’t economic innovation supposed to be good for the economy? Yes and no. This is why Obama’s statement that the “private sector is doing fine,” is both true and not true, depending on how you assess the state of the economy. As Foroohar correctly notes, private firms are reporting excellent profits by historical standards, even as they are creating relatively few jobs. The main purpose of private companies, though, is not to create jobs. If firms can utilize machines to produce goods and services more efficiently and reliably, they will do so in most cases. And given the very high costs of health care in the U.S., they are especially inclined to choose machines.

In later posts, I will explore the potential geopolitical and social implications of technology-induced jobless growth in the United States. Though the looming 2012 elections in the U.S. are critically important, these economic mega-trends will outlive the next American administration and the next Congress.