Great Lakes Economics

Saturday, 31 October 2015

A guide to business economics in the Great Lakes region

Here is a guide to business economics in the Great Lakes region, in the form of an index for my blog in 2015. It is arranged by topic and divided into blog entries ordered by the date they were posted. If you would like to see it in a different language, please visit Google Translate and type http://greatlakeseconomics.blogspot.co.uk in the translation box.

A guide to business economics in the Great Lakes region
Agriculture

Rwanda to be a non-agricultural society within six years? Hmmm.

Banking

Bureaucracy

Is it profitable for businesses to avoid DRC bureaucracy?

Burundi

Communications

Conflict

Corruption

Reported corruption experienced by Great Lakes companies

Counterfeits

Counterfeiting, a sword with many edges

Crime

Do foreign owners have a more difficult time in Rwanda than local owners?

Data on business

Development

Economic values and the value of lives

DRC

East African Community (EAC)

Education

Employment

Rwanda NGO jobs have high pay, but the private sector offers long term prospects

Exports

Finance

Foreign investment

Government policy

Growth

Health

Industry

Inflation

Infrastructure

Innovation

Insurance

Supermarket fire in Burundi, insurance, and opportunities for suppliers of fire prevention equipment

Manufacturing

Markets

Obstacles

Productivity

Productivity per worker in the DRC varies hugely by company

Profits

Is it profitable for businesses to avoid DRC bureaucracy?

Regions

Rwanda

Size of companies

Start-up companies

Does being part of a group help start-up companies in DRC?

Subsidiaries

Tax

Technology

Trade

Women

I'm taking a break from blogging, and will probably be writing about the Great Lakes region and its dynamic economy in academic papers.

Tuesday, 27 October 2015

Burundian manufacturing undercuts international prices

There's an detailed report of a small manufacturer in Burundi here and in English here. The report talks to the company's founder, a buyer, and an investment adviser.

The company says that sells its products (sticks of chalk for schools) more cheaply than Chinese or Kenyan imports. It buys the raw material from these countries, and adds value in the preparation of the end product. As other developing countries become richer and specialise in production of higher value goods, their manufacturing of lower value goods is likely to become less competitive in the Great Lakes region (as their wage bill rises, for example), opening the door for local producers to move into production.

Thursday, 22 October 2015

Political economy in the Great Lakes region

Burundi, the DRC, and Rwanda all have long-serving presidents, and much political debate in the countries relates to their hold on power and their struggles to retain their positions. Conventional economic debates on taxation and spending attract relatively less attention than in Western countries. The pressure put on the free media limits critical comparison of economic policies across different political parties.

One frequent argument in conventional political economy is over the level of taxation in the economy. The maximum rates of personal income taxation in each Great Lakes country are reported here (I haven't independently verified them). They are 35 percent in Burundi, 30 percent in the DRC, and 30 in Rwanda. The maximum rates of corporation tax are 35 percent in Burundi, 40 percent in the DRC, and 30 percent in Rwanda.

The taxation rates are not so different across the region. Rwanda has the lowest maximum taxation, with Burundi and the DRC having higher maximum rates. None are extreme by international standards. There's a debate to be had about the optimal rates of taxation, in a discussion of conventional political economy.

Monday, 19 October 2015

Inflationary ripples in the DRC

There's been another burst of inflation in the DRC, in the north western village of Zongo, opposite the Central African Republic's capital of Bangui. I wrote about inflationary hikes in the country in my last blog post.

Inflation is a rise in prices, often persistent. In Western countries, two frequent causes of major inflation are government operations to change the money supply, and changes in the price of natural commodities. Both of those also happen in the DRC, but the causes of the recent bursts in the country relate to the arrival of refugees from conflict in the CAR (who want to buy the same goods as the Congolese), and interruptions in transport (reducing the amount of goods to buy). A feature of these DRC-specific causes is not present in the causes in most Western countries (at least not totally present - government buying and selling of their own bonds is a bit similar). The feature is that they tend to end fully by themselves. Transport starts working again, refugees go home. So an inflationary "ripple" occurs, with a rise above trend, then a fall below trend, then restoration to the trend.

I don't know whether anyone has analysed inflationary ripples, but there is probably a lot of work that could be done there.

Friday, 16 October 2015

A train is delayed somewhere in the DRC. Should an industrial economist be annoyed?

There was a decline in the price of cement from US$35 to US$26 last weekend in Kamina in the south of the DRC. According to the Fédération des Enterprises du Congo, the cause was the arrival of a train carrying goods. Transport arrivals, delays, and breakdowns can cause major shifts in prices in the country.

There are a number of ways to think about the issue from a business perspective. The sudden, large changes in prices make it more difficult for companies to plan, and increase risk. There are also implications for an efficient allocation of goods. When the central supplier first puts goods on a train, they don't know for sure what the prices will be when the goods are sold. There probably won't be a stable price over time. The distribution of goods across the DRC's territory is unlikely to be the best possible, from the point of view of maximising profits.

Industrial economists - who study markets that don't work perfectly - should be annoyed if the loss of profits for all companies combined is more than the cost of putting on more frequent trains (or mending roads). This might be the case if there is a problem with financing railways and roads, for example, or lack of information on company preferences.

Tuesday, 13 October 2015

Exciting technological projects in Burundi and Rwanda

A couple of major technological projects in Burundi and Rwanda caught my attention earlier this week.

In Burundi, a solar energy plant is to be constructed in Mubuga. Lack of electricity supply is a leading hindrance to business in the country, so the project could help companies nationally, as well as creating jobs around the plant itself. It looks like an enjoyable project to work for.

In Rwanda, there are plans to set up (reportedly) "the world's first drone airport". The airport is to be used for transporting medicines and electronic parts around the wider region. Again, it looks like a pleasant job, with plenty of mental challenges relating to construction and logistics.

Friday, 9 October 2015

Business policy in the third term of the Burundian government

It is almost two months since the Burundian government started its third term in power, and in that time it has undertaken various reforms of business policy in the country, or said that it plans to undertake them. They are a mixed bag: some are pro-market, while others are interventionist. The tone seems to lean to the former. The plans and policies include:

Wednesday, 7 October 2015

DRC growth rates by industry

Africa is growing rapidly and presents opportunities for profitable investments, if risky ones. The opportunities vary by industrial sector. Here are DRC industries ranked by the average growth of the companies in them over the period 2009-2012. Non-metallic mineral products was the fastest growing industry, and fabricated metallic mineral products was the slowest growing.

Data: http://www.enterprisesurveys.org/

I am not entirely confident that the reported returns accurately reflect economic performance (since there is some disagreement with macroeconomic growth figures), so the ranks are given rather than the actual values.

Saturday, 3 October 2015

The UN's Technology Facilitation Mechanism

The United Nations has just launched a project to promote technological development in developing countries. The full name is the Technology Facilitation Mechanism for Achieving Sustainable Development Goals. The details haven't been given yet, but I guess that the mechanism will try to set up conditions that help the adoption of existing technology, and innovation of new technology.

Wednesday, 30 September 2015

Does radical innovation require extra reforms of business practices in Rwanda?

Rwandan companies often produce innovations that are new to the company (but which are already present in the market), and less often but still frequently produce innovations that are also new to the market. Business practices can adjust at the same time (for example, to make production processes more compatible), and the changes may differ between two types of innovation.

The table below shows the rates of business practice reform in Rwandan businesses that introduced innovations new to the company over years 2009-2011. The rate of practice reform is high, averaging over 80 percent.

Data: http://www.enterprisesurveys.org/

The next table shows the rate of practice reform in companies introducing innovations new to the market. The rate is even higher than in companies with less radical innovations, approaching 90 percent. The practice reform requirements seem to be more extensive with more radical innovations.

Monday, 28 September 2015

What reforms of business practices accompany innovations in Rwandan companies?

New product innovations can also require reforms of business practices in order for them to work well. It may give larger companies advantages over small companies, because the larger companies may have the resources to implement the reforms in a way consistent with recommendations for best managerial practice - for example, big companies can hire expensively trained executives. A similar argument applies for companies in developed countries having an advantage over those in developing countries.

In Rwanda, business practice reform usually accompanies innovations in products and services. The table shows that in more than three quarters of cases of companies undertaking innovation in the last three years, there is simultaneous introduction of new manufacturing methods, logistical processes, organisational structures, and marketing methods.

Data: http://www.enterprisesurveys.org/

However, these statistics don't tell the whole story. It may be that companies are introducing business practice reforms independently of whether they are innovating in products and services. The next table shows that companies often introduce business practice reforms even if they are not innovating, but the rate of reform is lower.

The biggest gap in the rates for innovating and non-innovating companies are for manufacturing methods, followed by new logistical processes. In other words, Rwandan companies are more likely to change their manufacturing methods and logistical processes if they are innovating, but there is less of a change in their organisation and marketing. I don't know whether new organisation and marketing methods are not needed for the innovations, or whether the skills to implement the new methods are not there.

Wednesday, 23 September 2015

Supermarket fire in Burundi, insurance, and opportunities for suppliers of fire prevention equipment

On Monday, fire destroyed a supermarket in Bujumbura. While not on the same scale as the fire last month in Gitega or the catastrophic fire at Burundi's central market a couple of years ago, it does point to a tendency for fires to destroy centres of trade in Burundi. The fire service does not seem to be able to respond, so surely there are opportunities for suppliers of fire prevention equipment.

My rough calculations of the available profits would be something like this:

Suppose there is a market valued at US$1 million, and it has a 10% chance of being destroyed by fire in any one year. An insurer sells an annual policy, and would charge for the expected cost of damage (equal to US$1m*10%=US$0.1m) plus a risk cost. The risk is pretty big and uncertain (10% chance of $1m), so the insurer has to provide a lot of capital to protect against the chance of loss. They have to put up the full $1m for a year, and would want to earn a good return on it - say 30%. So the risk cost will be US$1m*30%=US$0.3m. The total premium would be $US0.1m+$US0.3m=$US0.4m.

Suppose instead that the risk of destruction was much smaller and the amount of damage much more certain (it is expected to be 3%, and never more than 20% of the market's value). The expected cost would be lower (US$1m*3%=$0.03m). The insurer would have to put up US$1m*20%=$0.2m to cover the risk, and would charge US$0.2m*30%=US$0.06m. The cost of insurance would be US$0.03m+US$0.06m=US$0.09m.

The gap between the two insurance prices is $US0.4m-US$0.09m=US$0.31m. That's a third of a million dollars for sharing between the market owners and the suppliers of the fire prevention equipment. Although insurance may not be widely used, the risk borne by traders is self-insurance with an equivalent value, so they would be likely to be willing to pay well for prevention equipment.

Monday, 21 September 2015

Interruptions in water supply hinder chemical innovation in the DRC

Chemical production uses water; it would be impossible for a chemical industry to develop in its absence. However, in the DRC many chemical companies face intermittent water supply. Of DRC chemical manufacturers who use water in production (almost all of them) and surveyed in 2013, four out of ten had experienced insufficient water supply for production. The average frequency of shortages was 4.6 times each month.

Data: http://www.enterprisesurveys.org/

How severe is the problem for output from the industry? If a company had no water shortages, then two thirds of the time they had introduced a new product in the previous three years. If a company had experienced water shortages, then they introduced a new product less than a third of the time.

It may be that innovative companies try harder to get reliable water supply. But there is also a strong argument that if water supply is not reliable, the experimentation process required for innovation will be severely hindered. Where experimentation does occur, companies with reliable supply are more likely to get to market first with the new product.

Friday, 18 September 2015

Capacity utilisation shows little relation to growth in Burundian companies

Here's a graph showing how much of their total capacity was utilised by Burundi's companies in the year 2013-2014. Capacity utilization is the company's output as a percentage of the maximum possible output with their available staff, machinery, and factories.

Data: http://www.enterprisesurveys.org/

A quarter of companies were working at full capacity. However, most weren't, and the average utilisation is 70 percent.

So what makes some Burundian companies use more of their capacity? It could be sales growth - if a company is doing well, then the owners and managers could push the company hard to benefit from the strong performance. But the data says otherwise. The next graph shows the annual growth rates plotted against capacity utilisation for a selection of Burundian companies, with a best fit line included.

Data: http://www.enterprisesurveys.org/

There is very little relation between growth and utilisation. It's a similar story for the relation between growth and hours worked per week.

Tuesday, 15 September 2015

What type of companies do banks fund in Burundi?

I wrote in the last blog post about how innovative companies get a larger share of their funding from banks, compared with non-innovative companies. I tested for other features of Burundian companies that are associated with higher bank funding, using a correlation analysis (which is quick and subject to uncertainty). The company characteristics that are loosely associated with bank funding are:

Size
Male owners
(Direct) exporting
Long inventories
Suffering theft and other crime
Paying for goods after delivery
Purchasing land and buildings
Spending lots of time dealing with government regulations
Experienced employees

Data: http://www.enterprisesurveys.org/

These are features that either suggest the company has assets and is creditworthy, is reputable, or is spending on things. So it is reasonable to think that they would be connected with bank borrowing. For the importance of male owners, there are studies elsewhere in the world that suggest that men can access credit networks more easily than women, so the same may be true in Burundi.

Saturday, 12 September 2015

Are banks financing Burundi's innovative companies?

Banks have various important roles in an economy, and one of them is lending to firms with good prospects. A way of measuring whether a firm has good prospects is whether it is innovative. Are banks in Burundi fulfilling their role of financing innovative companies?

Data: http://www.enterprisesurveys.org/

The graph shows the amount of working capital in Burundian companies financed by banks, for companies that introduced a new or significantly improved product over the period 2011-2014 (right side) and didn't (left side). Innovative companies raised more of their funding from banks. In both cases, bank finance accounted for the majority of companies' external funding requirements.

It might be that companies are not innovative because they couldn't get bank finance, rather than banks selecting innovative companies to fund. However, the innovation is in the recent past, and financing is current, so it looks like banks are providing funds to more innovative companies.

Wednesday, 9 September 2015

Legal constraints on women's economic involvement in the DRC

My blog last week mentioned how business in the DRC is having some difficulties with hiring married women, because permission from the husband is required first. I didn't know at the time whether women's rights to work are legally restricted there.

It transpires that their work rights are indeed restricted. The World Bank report "Women, business and the Law" on page 108 describes the law in the DRC as it relates to married women operating in business. The detailed questions are on page 47. Married women have to get permission to get a job, sign a contract, register a business, open a bank account, and choose where they live.

These are severe constraints on married women engaging in the economy, and there is clear evidence from surveys that they damage the DRC's competitiveness.

Sunday, 6 September 2015

Is it profitable for businesses to avoid DRC bureaucracy?

Politics in the DRC are challenging at the moment, as the current president may be moving to a controversial bid for a third term in office (with similar situations in Burundi and Rwanda too). Businesses would be prudent to avoid strong alignment with either side in the debate. But is it a good idea for businesses to avoid DRC bureaucracy as much as possible?

Data: http://www.enterprisesurveys.org/

Here's a table showing the engagement of the best performing companies (growth champions, with annual growth above 20 percent in 2012-2013), compared with the engagement of other companies. The first row shows the average number of tax inspections or meetings in the previous year. Growth champions had slightly fewer than other companies. The second row shows the percentage of companies who applied for government contracts over the same period. Growth champions applied less often, but again there's not a big gap. The third row shows the percentage of annual sales paid in informal payments, which can been seen as a means of getting bureaucracy out of the way. Growth champions pay a bit more.

Overall, growth champions seem to be a bit less engaged with DRC bureaucracy, but the differences are small.

Thursday, 3 September 2015

Computer assembly in Rwanda

The "East African" newspaper is reporting that a Rwandan factory is to start assembling laptop parts, and supplying the computers to local schools. The article says that there is a shortage of laptops, citing problems with the quality of currently available models. I suppose that computers of sufficient quality are too expensive in the market, and that the manufacturer is producing them more cheaply than available computers of an adequate standard.

It is exciting to read of a Rwandan factory able to compete on the international market, even if only in a niche market linked to the "One Laptop Per Child" program. The foreign owners of the factory say that they intend further expansion in the region, exploiting economies of scale. A welcome longer term outcome would be international sales in mass-market computers.

Monday, 31 August 2015

Restrictions on working wives damage DRC businesses

Many countries have only recently given women the right to work without their husband's permission, and others have not given them the right yet. I am not sure of the legal requirements in the DRC, but in practice a husband's approval is frequently required for their wife to work. For data over the period 2011-2013, if a company hired married women, 37 percent of the time it had to get the permission from the husband to employ at least one of these women. When it didn't hire any married women, 21 percent of the time the company said that it didn't do so because written permission of the husband was required.

It would be surprising if a husband's permission is legally required in the DRC. It is an extra cost on business, and is preventing them hiring the employees they want. It is a further employment restriction on women when they already face restrictions linked to violence. The population, like many political leaders, is young and presumably has been exposed since childhood to ideas of female equality before the law.