Week 8: Poverty Reduction Strategy Plans & Foreign Direct Investment

The two countries poverty reduction strategy plans (PRS) I examined was Ethiopia’s Sustainable Development and Poverty Reduction Program (SDPRP) and Kenya’s Economic Recovery Strategy for Wealth and Employment Creation (ERS).  I chose them because of the proximity to each other.

The first thing that I noticed in the introductions was the description of the downward trends in the economy in the 1980s and 1990s.  Ethiopia by far had much more of an in depth PRS.  The part of the includes a poverty performance profile with analysis on a linkage between growth and poverty.  Both PRS have implementation framework at the end of the reports, yet it stood out to me how Ethiopia addresses it so early and often.

JPMorgan EMBI league table

The J.P. Morgan Emerging Markets Bond Index Plus (EMBI+) is a market capitalization-weighted index based on bonds in emerging markets. The EMBI series which covers all of the external currency denomination debt of the emerging markets, as opposed to simply Brady Bond investment.

After examining the J.P. Morgan Emerging Markets Bond Index, Sub-Saharan Africa seems to increase at a steady pace in the mid-1990 till 2008.  In 2008 around the time of the global recession, a shape spike is seen from 366.917 to in 2012 563.346.  As Moyo points out, 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.

Cover of Dead Aid (Source: http://www.dambisamoyo.com/)

I believe some countries are not appearing on maps and graphs because the debt is so small compared to the other countries.  For the EMBI+ map it appeared the next BRICS (Brazil, Russia, India, China, South Africa) and Southern American countries made up the index.  When looking through the World Bank data, Zambia debt is next to nothing, compared to the developing Sub-Saharan Africa.

The first thing countries need to do is recognize that Foreign Direct Investment (FDI) is the engine for economic growth. It has benefits, such as, just to name a few:

  • Create more jobs
  • Welcome cash to support development initiatives
  • Improve management expertise
  • Aid indigenous firms

Investors also need to know and believe they have some means of recourse – some regulatory system. Attractive tax structures are a great way to lure investors in, which Sub-Saharan countries must do to woo FDI investors.

China and India have been giving a lot in FDI funds which has increased the global flows of FDI since Sachs and Mayo book has been published.  Although China was mentioned in Mayo’s book, the global treads have followed with a slight increase.

The main problem of Zambia with FDI is attracting the investment.  According to www.heritage.org,

  • Zambia’s economic freedom score is 58.7
  • Its economy the 100th freest in the 2015 Index
  • Its score is down by 1.7 points from last year

Factors deterioration in half of the 10 economic freedoms include:

  • Trade freedom
  • Business freedom,
  • Investment freedom, and the
  • Control of government spending, that outweigh improvement in freedom from corruption.

The commodity-linked economy has grown but the economic freedom has seen a sharp decline, which in a way makes the the economy one-dimensional, which can lead to the resource curse.  Zambia’s economy will need to become more free if it wants more FDI.

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