What kind of financial system is sure to collapse if the central bank cares about people’s well-being?
The recommendation by South Africa’s Public Protector that the Reserve Bank’s mandate change, says much about Busisiwe Mkhwebane, none of it flattering. It says just as much about mainstream economic debate - and none of that is flattering either.
Mkhwebane recommended that the central bank’s constitutional mandate, which makes protecting the currency its primary goal, be changed to one which requires it to “promote balanced and sustainable economic growth while ensuring that the socio-economic well-being of the citizens are protected”. She also said the constitution should require the bank “to achieve meaningful socio-economic transformation”.
This triggered a wave of protests, as well as an announcement from the South African Reserve Bank that it would take the matter to court. The Reserve Bank had no option. The constitutional court has ruled that the Public Protector’s findings are binding unless they are challenged in court. Her recommendation wildly exceeded what she is allowed to do by the constitution – or democratic good sense - and the Reserve Bank could not allow it to stand.
Democratic constitutions are changed by large majorities of the people or their elected representatives – not by individuals. By making a binding recommendation that the constitution be changed, Mkhwebane signalled that she either doesn’t understand – or does not care – for democracy.
Her report is also very useful to a faction of the governing party which wants to deflect charges of state capture by claiming that white monopoly capital already controls the state. There are real questions about the fitness for office of a Public Protector whose report seems more interested in protecting connected politicians and business people than with taking the people’s will seriously.
But the reaction did not stop at insisting that Mkhwebane has no business telling the people what the constitution should say. Much of it objected not only to her saying what the Reserve Bank’s mandate should be, but to anyone at all doing that.
An important debate
The prize for the wildest reaction went to the commentator who declared that Mkhwebane’s ideas on the Bank’s mandate were inspired by someone who denied that the Nazi genocide happened. Others stopped short of tarring constitutional change with the same brush as mass murder but were united in claiming that to suggest that the Reserve Bank’s mandate be broadened is “economically illiterate” and deeply damaging.
Absa, who was the subject of a separate finding by the public protector on the issue of a controversial bailout, asked a court to rule that her proposed change posed a “serious risk to the financial system”. For its part the rating agency Standard & Poor’s, happy as ever to police the boundaries of economic correctness, warned that any interference with the Reserve Bank’s independence could trigger new downgrades.
To insist that anyone who proposes changing the Reserve Bank’s mandate is economically damaging and stupid is as contemptuous of democracy and dangerous to the economy as Mkhwebane’s excess. It is undemocratic because it seeks to close down policy debate by declaring that only one view of the Reserve Bank’s mandate can ensure a healthy economy. It is dangerous because it blocks the search for economic remedies by seeking to bully even those who propose only mild changes to what the country now has.
The idea that the Reserve Bank should have a broader mandate is neither radical nor dangerous. The most famous central bank, the US Federal Reserve, has a broader mandate. Its dual mandate requires it to seek maximum employment as well as price stability.
The Australian equivalent’s mandate includes “maintenance of full employment and economic prosperity and welfare of the people”. The European Central Bank, famed for its love of austerity, has a mandate to seek “sustainable growth”.
And the the Bank of England’s website says that, subject to its goal of price stability, it aims to support the government’s economic objectives.
In South Africa, not only has the view that the central bank’s mandate is too restrictive been repeated periodically but it may well have been implemented for a while. In 2010, then finance minister Pravin Gordhan wrote to then Reserve Bank governor, Gill Marcus, proposing a mandate which included growth and employment. Marcus reacted positively, which suggests that the bank acted on Gordhan’s letter. The financial system survived.
The US, European and Australian financial systems have also not collapsed. Their mandates have not triggered a downgrade and no one has accused these societies of economic illiteracy.
So either double standards are being applied or we are being told that restrictive central bank mandates are essential only if countries are in particular parts of the world (such as Africa) and governed by particular types of people (Africans).
And why does a change in the Bank’s mandate undermine its independence? A central bank loses its independence if politicians (or anyone else) can tell it what to do, not if its mandate changes.
For all its flaws, the Public Protector’s proposal would retain the Reserve Bank’s independence, leaving it to the bank to decide what promotes the “well-being” of the people or “transformation”.
Closing down debate is common
None of this means that the Reserve Bank’s mandate must change. Or that central bank independence must go. But it does mean that no one should be discouraged from debating the issue, as people routinely do in other democracies and market economies. What, besides that prejudice which we prettify by the term Afropessimism, explains the insistence that we may not debate what is freely discussed in most other places?
Closing down debate in this way is common in South Africa. It also lies behind complaints of policy uncertainty which does not mean, as it does elsewhere, that government keeps changing its mind and sending mixed messages – the macro-economic framework has been stable for more than two decades. It means, rather, that some people – who some others may take seriously – raise policy ideas the economic mainstream does not like.
This demand that people can say anything they like about economic policy as long as the mainstream likes it too offers a misleading view of the economy. It says that there is nothing wrong with it except political interference and that it will flourish if politicians simply leave alone what is done now.
The contrary evidence is offered by mainstream organisations such as the International Monetary Fund and the South African Reserve Bank itself which have shown that the current economic rut is a product of problems in the private economy as well as what government does.
This means that the economy must change. This, in turn, requires new ideas. They will not emerge unless everything is up for debate and ideas are not silenced because they trigger the fears and prejudices of a few.
Low cost carrier, Fastjet says it will increase the number of flights on its Harare-Johannesburg route to three per day from July 1 in response to high demand.
Fastjet, which has been operating a single flight per day on the route, will also introduce an additional flight on the Harare-Victoria Falls “in response to strong passenger demand,” marketing manager, Faith Chaitezvi said.
“On its route between Harare and Johannesburg, fastjet Zimbabwe will now offer up to three daily return flights,” said Chaitezvi in a statement. “This represents an addition of 12 flights per week on this strategic route between the two cities, providing passengers added flexibility to manage their diaries – a particularly important consideration for business travellers who travel this route frequently.
Due to seasonal demand, fastjet Zimbabwe has also added a fifth weekly flight on Mondays between 17 July and 11 September on its route between Harare and Victoria Falls.”
The Harare-Johannesburg route is a cash cow, with South African Airways also having multiple daily flights. Other airlines that ply the route include British Airways through its Comair unit, Air Zimbabwe and the new privately owned Rainbow Airlines, which plies the route three times a week.
- The Source
The Ethiopian Power Engineering Industry organized under the Metals and Engineering Corporation said it has begun manufacturing motors for vehicles used for automotive, construction and agricultural activities.
Industry General Manager Major Assefa Yohannes told the daily Addis Zemen that the industry has begun manufacturing motors that would help modernize the agriculture thereby advancing the industrial development.
The industry is scoring a rapid economic development in the country in the past consecutive years and to transform the economic structure from agriculture driven to industry led economy. He said the industry is manufacturing motors with a capacity of 2.2 to 400 KW used for collecting harvest , construction small motors to loader and excavator, and for automotive busses, truck and pickups as well as other vehicles.
He said the trial manufacturing was launched four months ago and so far over 2,000 motors have been manufactured. Bishoftu Automotive Engineering has received a 700 busses order while the Adama Agricultural Machinery has also started manufacturing motors.
Laid on 30,000 hectares of land the recently completed motor manufacturing factory in Mekelle town is targeting the foreign market with the capacity to produce 20, 000 motors annually, he said.
He said some 30 percent of the manufacturing inputs produced locally and while the balance would be imported based on the specification of the corporation. He said government and private organizations are exerting efforts to reach 80 percent of the inputs to be produced locally.
According to major Assefa, currently the factory has created 500 jobs and close to 2,000 citizens would get jobs in the near future. Ethiopian Metal Engineering Corporation aspires to facilitate industry development, address market gap and advance the transformation of industrialization-led economy with 16 industries and close to 100 factories, according to a report filed by the daily Amharic Addis Zemen.
- The Ethiopian Herald
As the ride-hailing company Uber lurched from one clumsy mess to the next, it had appeared that CEO Travis Kalanick would somehow ride out the storm. His recent resignation is an admission that the company needs to explore new avenues.
I wrote recently about tech CEOs who had protected themselves from the usual pressure from shareholders, and were able to freely dictate strategy and culture. I’m happy to say that Kalanick’s departure from the top job (he will stay on the board) signals that there is indeed a line to cross where even disenfranchised investors can assert their power. It is not hard to see why: Uber is facing up to some tough decisions.
Aside from the rows around a damaging corporate culture, news that rival Lyft has increased its share of the US ride hailing market from 17% to 23% is rapidly destroying investor assumptions about this industry. Uber investors have stumped up US$12 billion in the belief that this is a winner-takes-all market. That now looks not to be the case.
This is great news for the customer as low fares are likely to persist. Uber investors had been funding incentives to both customers and drivers in the hope that both would stay put once the incentives stopped. Evidence is beginning to suggest otherwise. Uber’s 2016 losses, largely driven by the funding of incentives globally and from the development of driverless car technology, were US$2.8 billion.
So where did that winner-takes-all belief come from? Well, investors had looked at Amazon, Facebook and Google. The first mover in those cases developed a large customer base attracted by an increasing number of suppliers. In turn, suppliers found access to large numbers of customers and had no motivation to go elsewhere. The software simply does the matching.
An Uber customer wants a quick pick-up and cheap fares while the drivers want to be busy generating higher wages. So, in theory, an app which offered both at a high level, and was first to market, should attract most of the drivers and customers.
However, the app is readily copied. Many taxi firms now have their own app with similar attributes. Customers may now have several ride hailing apps on their phones which they can check for the cheapest and most rapid arrival.
Additionally, drivers are self-employed and can switch their allegiances rapidly. This is not a recipe for world domination.
Existing firms leap at the opportunity to expand. Lyft has proved that to be so by gaining US market share just as Uber’s reputation was soured by allegations of a sexist and macho culture. A major lawsuit from Google has only added to the sense of a company struggling to maintain its grip.
Uber can learn from Lyft, which has succeeded with a clear market focus, unhindered by unrelated diversification. Lyft has focused on ride hailing in the US alone. Uber has expanded globally and invested heavily in driverless car technology. Uber spent $2 billion in a Chinese market it has now exited under pressure from the local competitor Didi Chuxing.
In the Indian market, which is led by Ola, Uber was slow to adapt to very different market conditions and lost time and position. Even in the UK, Uber has faced competitive and political pressure from established taxi operators. Focus means being able to channel resources, knowhow and competitive strategy into one area. Uber has left itself open to attack on too many fronts.
That brings us to Kalanick’s odd move into driverless car technology, taking on the might (and vast resources) of Google. Many of the world’s major car companies, with their own attendant resources and technology partners, are also investing heavily. Was Uber really going to win a fight against Ford, Mercedes, GM, and Tesla?
It is likely they are all further ahead than Uber. Indeed it is difficult to see what technology Uber has to offer in this particular market. Surely this is a prime opportunity for a deal where Uber supplies the demand while the more advanced partner supplies the technology and cars.
Kalanick’s ambition has been fundamental to the rise of Uber. With his departure from the CEO role, perhaps that ambition will give way to strategic sense. Kalanick was able to cling on for so long partly thanks to investors’ desire to unearth the next tech giant, which made them indulgent of the founder’s control. The hope must be that the Uber experience encourages investors to tighten the reins on tech executives. The job for the next CEO will be to convince investors and customers that it is worth sticking around to see how this all ends.
Atlas Mara Ltd., the company co-founded by former Barclays Plc head Bob Diamond, plans to sell a 35 percent stake to Fairfax Africa Holdings Corp. so it can increase its stake in a Nigerian bank.
Atlas Mara will raise $200 million selling new shares to existing shareholders and Fairfax Africa and by issuing a convertible bond to the Toronto-based investment company, Atlas Mara said in a statement on Wednesday. London-listed Atlas Mara also agreed to acquire an indirect 13.4 percent shareholding in Union Bank of Nigeria Plc from the Clermont Group for $55 million, which will raise its effective stake in the Lagos-based lender to 44.5 percent.
“A strategic partnership with Fairfax Africa creates a strong relationship between two like-minded, long-term investors in Africa,” Atlas Mara said. “Each is focused on capitalizing on the long-term growth potential of Africa and provides permanent capital to support growth.”
Union Bank has been Atlas Mara’s single biggest investment in Africa since Diamond started the company in 2013. The Nigerian lender is the country’s worst-performing bank stock this year, having announced in November it plans a rights issue to boost its capital levels as the country’s small- and mid-sized lenders struggled to cope with a contraction in the economy of Africa’s biggest oil producer.
Atlas Mara, which has investments in banks across seven African countries, has lost almost 80 percent of its value since an initial public offering in December 2013 as growth across the continent slowed and currencies weakened, hurting profit converted back into dollars. Diamond, 65, in February ousted Chief Executive Officer John Vitalo and pledged to cut annual operating costs by $20 million after expenses engulfed income and threatened the company’s ability to expand through acquisitions.
Fairfax Africa agreed to buy at least 30 percent of the $100 million of new shares at a price of $2.25 apiece, representing an implied purchase price of 0.33 times book value, the company said in a separate statement. Atlas Mara’s stock has traded at an average this year of $2.26, according to data compiled by Bloomberg. The shares fell 0.5 percent to $2.50 as of 9:02 a.m. in London, giving the company a market value of $194.5 million.
“Banks are at the forefront of economic development in sub-Saharan Africa,” Prem Watsa, Fairfax Africa’s chairman, said in the statement. “Atlas Mara represents a unique opportunity to invest in many profitable banks in the region at a very attractive valuation.”
The partnership with Fairfax Africa, which has investment holdings across Africa, will give Fairfax four directors on Atlas Mara’s board, while a new management incentive plan will be put in place, Atlas Mara said. Diamond will continue as Atlas Mara’s executive chairman.
The World Bank’s relationship with US president Donald Trump has raised concerns about its political neutrality in recent weeks, but a larger and potentially much more important shift in how the Bank operates is underway. The World Bank is reinventing itself, from a lender for major development projects, to a broker for private sector investment.
In April 2017, World Bank Group President Jim Yong Kim outlined his vision in a speech given at the London School of Economics. He argued that development finance needs to fundamentally change in speed and scale, growing from billions of dollars in development aid to trillions in investment.
Kim said that there are significant financial resources readily available, literally trillions of dollars “sitting on the side-lines” on capital markets, generating little in the way of returns, particularly compared to what they could make if invested in developing countries. Private investors’ lack of knowledge about these countries, and their tendency to remain generally risk-averse, mean that these funds remain largely untapped.
In Kim’s view, the World Bank should therefore be a broker between the private sector and developing countries. Its future top priority should not be to lend money, but to “systematically de-risk” development projects and entire developing countries. To do that, it will promote policies that make countries and projects attractive for private investment.
Kim hopes that this will enable private sector financing, while at the same time benefiting poor countries and their populations. In his view, the bank would mediate between the interests of a global market system, developing country governments, and people in poverty.
Kim provides several examples of this catalytic role: the bank’s International Finance Corporation (IFC) enabled private sector involvement in building and managing Jordan’s Queen Alia International Airport; the IFC and the bank’s investment guarantee agency MIGA helped privatise Turkey’s energy sector; and the IFC’s new risk mitigation program covers private sector investment risk with public money. As a broker, the World Bank thus provides a mixture of services that range from investment and insurance to business advice and policy lobbying.
Kim’s vision would shift power away from the traditional lending arms of World Bank operations, the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA), and towards the private sector arm of the bank, the IFC.
The IBRD, formed in 1948, provides loans and advice to middle-income and low-income countries which are deemed creditworthy. These loans are profitable, even if the IBRD does not work to maximise its income but aims instead to foster global socioeconomic development. The IBRD is largely financed via capital contributions it receives from its 188 member states as well as via the issuance of World Bank bonds. In 2016 it disbursed US$22.5 billion (almost half of World Bank Group disbursements overall).
The IDA was created in 1960 and provides low-interest loans and grants to the world’s poorest countries. It is funded by so-called “replenishments”, or donor commitments, generally every three years. Broadly speaking, it does not make a profit, but works mostly towards the goals of poverty alleviation and economic growth. In 2016 it disbursed US$13.2 billion (slightly over a quarter of group disbursements).
The IFC, created in 1956, aims to foster private sector involvement in development projects around the globe. In 2016 its disbursements amounted to US$10.0 billion (one-fifth of group disbursements). Its work has been severely criticised by activists, academics and civil society organisations. They argue for example that the IFC has exacerbated inequality in health and famously, concerns persist about the fallout from its attempts at water privatisation.
The rise of private finance
The role of investment broker makes sense from the World Bank’s own perspective, if we take into account the larger political economy context of development. Low and middle-income countries have become less reliant on World Bank lending, given increasingly attractive alternative sources of financing; the current US and UK administrations favour trade and business over development aid, and private finance has in past decades rapidly outgrown other parts of economic activity.
The World Bank therefore risks becoming irrelevant unless it reacts to these trends. Moreover, since its founding articles of agreement define the bank as an institution that facilitates private sector investment, its role as a finance broker does correspond to its core mandate.
However, making the private sector its first port of call may fit less well with the goal of making development work for the world’s poorest people. Two major concerns are worth highlighting. First, why exactly should assessment of the value and effectiveness of development activities primarily be made with reference to their profitability for the private sector? As French economist Thomas Piketty has shown, when left to its own devices the rising power of private capital markets is a force for, rather than against, income and wealth inequality. Surely, the most important question to ask is thus whether the private sector does enough for people living in poverty or in highly unequal societies, rather than vice versa.
Second, what makes this renewed turn towards private sector solutions so much more promising today than during previous decades when Kim himself had vigorously criticised them? In his LSE speech, he remarked that the bank has learned from past mistakes. Yet, “de-risking” entire countries for private sector investors is likely to include policies such as strict inflation controls, large-scale privatisations, rapid trade liberalisation and strong government cutbacks on social spending. These have in the past made World Bank lending activities notoriously destructive for developing countries.
In Bolivia, for example, structural adjustment policies imposed as part of World Bank lending conditions from 1985, led not only to a rise in unemployment and a reduction in public revenues, but eventually to countrywide riots over water privatisation and resulting price hikes.
Even if we leave aside concerns over the financial transparency of the corporations which will be involved, the bank’s changing role reflects a worrying shift in how the development sector operates more widely. There may well be vast amounts of capital waiting in the wings, but putting development work in the service of private capital creates a new risk altogether – that of people in poverty being pushed out of sight.
Tax evasion benefits individuals to the detriment of society, wiping out state services. It also hampers the achievement of the eight United Nations millennium development goals (MDGs), which were designed to meet the needs of the world’s poorest people.
If tax evasion takes place in the grey area between legality and illegality – such as when companies shift their headquarters to tax havens – tax fraud involves the overt breaking of laws. It is often combined with dirty money from illegal activities (trafficking, terrorism, etc.) and thus weakens the gross domestic product (GDP) of African states. The organisation Global Financial Integrity estimates that Mauritania loses 12% of its GDP to such activity, Chad 20%, and the Republic of Congo 25%. As a result, illicit financial flows both damage African states and hold back their industrialisation and development.
Tax evasion, a major obstacle to the development of Africa
The chart shows that fraud and tax evasion weigh heavily on the timing of countries that want to achieve their millennium development goals. Source: Global Financial Integrity.
Illegal financial flows bleed Africa dry
“PIB” stands for gross domestic product (GDP). The chart shows illicit financial flows as percentage of GDP. Africa loses far more than it receives in aid and foreign direct investment.
The Cross Border Operation between RSA and Botswana at Gemsbok Port of Entry is focusing on prevalent crime incidents such as stock theft, smuggling of goods and drugs between RSA and Botswana. Patrols, stop and searches are continuing along the border.
A 30-year-old man, a Botswana citizen was arrested at Meerhof farm near Gemsbok Border Post on 16 June 2017 for alleged theft of 14 Dorper sheep worth R19 200 in May 2017. He will appear before court on 19 June 2017 and might be linked to other stock theft cases reportedly committed in the same areas.
A 39-year-old man who was arrested on 15 June 2017 during the operation for possession of dagga worth R2000 and will appear in the Ritfontein Magistrates’ Court on 19 June 2017. Police investigations are continuing.
Major General Mnguni, Deputy Provincial Commissioner responsible for Policing addressing a joined parade of Botswana police officials and SAPS officials at Gemsbok Port of Entry.
- South Africa Today