Week 8: Poverty in Africa

Sachs’ poverty reduction strategy plans mentioned in The End of Poverty, seemed to all have commonalities. The two countries I am focusing on are Ghana and Uganda.

Ghana’s Poverty Reduction Strategy (GPRS)

Ghana has pursued several programs to accelerate the growth of the economy. In 1995, the government presented “Ghana: Vision 2020,” aimed at making Ghana a middle-income country in 25 years. Vision 2020 focused on human development, economic growth, rural development, urban development, infrastructure development, and an enabling environment. It was followed by the Ghana Poverty Reduction Strategy. One of the main challenges to economic growth is the unemployment problem. The recent discoveries of oil and gas create tremendous opportunities for stimulating national development.

Ghana_Vision_2020

The plan Ghana is currently pursuing is called the Better Ghana Agenda. in the contexts of the constitutional requirement and the Better Ghana Agenda, the GSGDA is anchored on the following themes:

  • Ensuring and sustaining macroeconomic stability;
  • Enhanced competitiveness of Ghana’s private sector;
  • Accelerated agricultural modernization and natural resource management;
  • Oil and gas development;
  • Infrastructure, energy and human settlements development;
  • Human development, employment and productivity; and
  • Transparent and Accountable Governance.

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Uganda’s Poverty Eradication Action Plan (PEAP)

The PEAP has guided the formulation of government policy since its inception in 1997, and is currently being revised. Under this plan, Uganda is being transformed into a modern economy in which people in all sectors can participate in economic growth. This implies a number of conditions:

  • The economy requires structural transformation, including the modernization of agriculture, the development of industries, which build on demand and supply linkages from agriculture, and continued institutional development in the legal and financial sectors.
  • Poor people must be able to participate in this growth, both by expanding smallholder agriculture and by increasing employment in industry and services.
  • Economic growth must be sustainable, high quality and broadly based.
  • The non-material aspects of poverty must be addressed; participatory studies have shown that insecurity, illness, isolation, and disempowerment are as important to the poor as low incomes.

Uganda’s Poverty Eradication Action Plan (PEAP) is established on four major pillars:

  • Creating a framework for economic growth and transformation
  • Ensuring good governance and security
  • Directly increasing the ability of the poor to raise their incomes
  • Directly increasing the quality of the life of the poor.

index

Both plans with these nations seemed hopeful for their future as a developing country. In each plan, it is explicitly mentioned that these two nations can and will work their way out of poverty. As Sachs’ mentions in the reading, these plans lay out the country’s goals, targets, policies and strategies to cut poverty.

According to Moyo, Africa is addicted to aid. However, the market for African countries to issue bonds exists, but only for those countries serious intent on transforming their economies for the better. In 2007, emerging market bonds returned some 35% and JP Morgan’s EMBI+ index of such bonds performed better against American government bonds by 15%. Over a longer timeframe—say an 18 month to two year window—experienced portfolio managers can make significant returns averaging 25-30% per annum. Choosing to invest in the bonds of relatively underdeveloped economies instead of home bonds has paid off. The evidence of ten countries suggest that investors made high returns on bon lending to foreign countries than in safer home governments; despite the former’s wars and recessions, foreign bondholders got a net return premium of .44 percent per annum on all bonds outstanding at any time between 1850 and 1970. This also enhances portfolio diversification.

Dead Aid also states that emerging market debt has the advantage of being counter-cyclical to the developed business cycle, since, in a global recession, poor countries can find it cheaper to repay their debts. As global interest rates decline, which often occurs on the back of a global economic slowdown, the debt service costs for poor countries goes down.

Moyo mentions that as countries mature they may choose to reduce the number of bonds they issue in the international market in favor of domestic bond issues or relying on domestic savings and tax. South Africa is one example. Over time, as its issuance of international bonds declined, its position in the JP Morgan EMBI league table fell and eventually it was dropped.

Since 2003, fifteen African countries have obtained credit ratings, including Lesotho, all of which have rating high enough to tap the bond market.

Moyo states that in order for a country to receive an FDI the labor costs are low, its investable opportunities are high, and even theoretically, as home to some of the poorest countries in the world, Africa should be FDI’s natural suitor.

Lesotho is committed to private investment and generally open to foreign direct investment (FDI). The country does not have a specific FDI policy. The policy instruments guiding FDI are the Companies Act of 1967, updated by the Companies Act of 2011, as well as various sector-specific pieces of legislation. These covered mining, tourism, and the industrial sector, with a particular focus on textile manufacturing. The lack of strong local entrepreneurs has meant the government of Lesotho (GOL) has received no pressure to exclude foreign investment to the advantage of local investors. Therefore virtually all business sectors are open to foreign investors that are screened in a routine, non-discriminatory manner. No government approval is required, and there are almost no restrictions on the form or extent of foreign investment beyond the ownership of small-scale retail and services businesses, which are restricted to domestic ownership only. No foreign ownership, or even board directorship, by a non-citizen is permitted at any level in these restricted businesses. These restrictions on small-scale services and manufacturing businesses are instruments of immigration control. Lesotho is sensitive to the entry of small business owner-operators from abroad, especially from China and West Africa. Controlling such businesses is a means of controlling economic migration. Residents and non-residents may hold foreign exchange accounts with some restrictions. Some payments and transfers are subject to prior government approval and limitations. Many capital transactions face restrictions or quantitative limits.

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