How Will Trump Impact East Africa's Industrialisation Drive?
Posted on :Wednesday , 28th December 2016
The global mood has shifted since Donald Trump’s surprise victory in the US presidential election. Europeans are fretful and Mexicans are panicking but many of the US investors we met in mid-November have become intensely optimistic about the prospects for their own economy. No one is quite sure whether this will benefit emerging markets or not and many Trump supporters probably don’t care. Their vote was to make America great again, not to lift up emerging or frontier economies in East Africa.
Yet US investors should still focus on economies in the East African Community (EAC), because something pretty special is brewing there. From Tanzania to Ethiopia, the region is ripe for industrialisation and growth that should easily exceed the best the US might produce in coming years. There is no doubt that US growth can accelerate in the short term but East Africa, and Kenya in particular, should grow faster.
Perhaps surprisingly, some startling similarities have become evident this year between East Asian successes such as South Korea and Taiwan in the early 1960s and East Africa today. Renaissance Capital recently found that East African countries such as Kenya are 55 years behind South Korea in terms of per capita GDP in PPP terms. In both 1960 East Asia and 2015 East Africa, agriculture represented around 40 per cent of the economy. In both, manufacturing and exports were small. Indeed, in the early 1960s there was just one manufacturer assembling 3,000 vehicles in South Korea; today, Volkswagen is just the latest direct investor to set up a Kenyan plant that can manufacture 5,000 vehicles a year.
But the really exciting shifts are structural. In 1960, South Korea finally began educating over a quarter of its children at secondary school, which elevated the country out of poverty within a generation. Today, all but nine African countries have a higher level of children in secondary education, suggesting that every country in the EAC except Burundi might now follow the Korean path to economic prosperity.
The next key development is a focus on investment. Economists measure how large investment is relative to the whole economy. Those countries that went from poverty to wealth over the past 50 years all shared one characteristic: investment reached 25 per cent of GDP even when they were still middle income and remained high for decades to come. In East Africa, this ratio is already averaging nearly 30 per cent, well above the level South Korea and Taiwan could manage in the early 1960s. Kenya is below the EAC average but has got investment up from 19 per cent of GDP in 2012 to 21.5 per cent today, with a focus on transport and electricity. Further rises should follow, thanks to the interest rate caps that will subdue borrowing for consumption and allow cheaper funding for government spending on infrastructure.
High investment with strong growth carries a cost – and that cost is a current account deficit and rising external debt. South Korea and Taiwan went through this in the 1960s. At first they were extremely reliant on US foreign aid to pay their way but after 20 years of high investment, an export generating economy was created that helped to reduce their debt. Today, aid remains highly important for some countries in the EAC, such as Rwanda and Tanzania, and this is helping them grow fast.
We cannot count on the US to do more under a Trump presidency but nor is it likely the US will undermine the progress the EAC is making. Trump does not like the sound of US jobs being moved to China or Mexico and has already announced his intention to withdraw from the Trans-Pacific Partnership. But East Africa is not a rival to the US and will not be for a few generations yet.
It is not American jobs that are at risk from East African success: it is Asian jobs that may now move to East Africa, along with the investment capital to kick-start the industrialisation story. American voters fear the best is behind them but our research shows that East Africa’s best years are surely ahead.
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