China’s „One Belt One Road “Initiative has been allocated as its most determined project ever in trying to shape and influence behavior in the international system in line with her growing figure. At the same time, mounting Sino-Africa relations have been the subject of scholarly debate with supporters taking an optimistic view, also presented by China herself, of this relationship being a win-win partnership. Critics led by the US argue China is just using Africa to extract resources for its use, an allegation she disproves. The authors therefore sought to look at Sino-African relations but focusing on the implementation of One Belt, One Road, in the African continent.
OBOR is a mixture of two outward-facing notions introduced by Mr Xi in late 2013 to uphold economic engagement and investment along two main routes. To date, reports suggest that the first route, the New Silk Road Economic Belt, will run westward overland through Central Asia and onward to Europe. The second route, the 21st-Century Maritime Silk Road, will probably circle south and westward by sea towards Europe, with proposed stops in South-east Asia, South Asia and Africa. Being the center of china’s foreign policy since 2013 study on OBOR in Africa will give an understanding and fully answer some questions surrounding these relations.
China’s approach to international diplomacy is growing. Having long sought to maintain a “low profile” on the global stage, it has in recent years begun to advocate a greater role for itself in the international order. Chinese companies are also leaving the comforts of their home-based market and going overseas, seeking to blow new markets and acquire new machineries. China’s president, Xi Jinping, is ramping up efforts to reinforce China’s global position. He has proclaimed a number of high-profile multilateral initiatives intended to advance China’s international existence and promote closer ties with more countries. The main initiative under this impulse, “one belt, one road” (OBOR), promises to be among the widest-reaching of these. It not only represents a renewed, stronger and better co-ordinated push to expand China’s influence overseas, but it is also coupled with a domestic investment drive, in which nearly every Chinese province has a stake.
In a period of three decades, China has transformed from an agricultural, self-contained and inward looking state into a global economic capital second only to the United States (Cheung & Lee, 2015). In line with her growing stature in the international system, China has sought to exert influence on the global stage, from Latin America, Middle East, South East Asia, to Africa. One way of achieving this and as part of China’s „global grand strategy‟ is the 21st Century Silk Road Economic Belt Initiative, informally known as One Belt, One Road‟. In the same vain, Sino-African relations have grown exponentially since the 1955Bandung conference. The original „Silk Road‟ was established over 2100 years ago during the Han Dynasty to promote trade and cultural development between China, Asia, Africa. The „New Silk Road Economic Belt‟ launched tenderly as “One Belt One Road‟ initiative or Yídàiyílù was introduced by china’s President Xi Jinping as the centerpiece of his foreign and economic policy in 2013. It is by far the most significant and far-reaching project China has ever embarked on however the One Belt One Road project or is fundamentally comprised of two interdependent and interrelated concepts; the „Silk Road Economic Belt‟ and the „Maritime Silk Road‟. Essentially, the „belt‟ is comprised of a network of roads, rails, power grids and gas pipelines that run over land from Central China in Xi‟an, the capital of Shanxi Province through Central Asia, to Moscow, Rotterdam and Venice. This corporation of infrastructural projects will consequently pass through a number of countries. The Maritime Silk Road on the other hand is its oceanic counterpart. This involves the construction of a network of sea ports in the South China Sea, Indian Ocean and the South Pacific Ocean. It will essentially connect South East Asia, Oceania, East Africa and North Africa through the Mediterranean. the essential pillars of the initiative are „promotion of policy coordination, facilitating connectivity, unhindered trade, financial integration people-to-people bonds and the African section of the belt and road is of concern for this article. It covers three countries; Kenya, Djibouti and Egypt.
According to Xinhua News Agency, three countries in Africa are directly involved in the belt and road initiative; Kenya, Djibouti and Egypt. However, the extent of their involvement is unclear, with many documents indicating Egypt as the sole African state to be involved in this initiative. Various factors have been attributed for the inclusion of these exclusive three African states into the center piece of china’s 21st Century diplomacy;
According to the realism theory of international relations world politics has been characterized by power politics. In the context of security and global geopolitics the horn of Africa region and the Suez Canal has been traditionally a Western-controlled zone with the US and her allies being the primary guarantor for maritime security. Any powerful state controls the security of that region, also controls the maritime trade routes between Asia, Europe and Africa. Egypt and Djibouti, two of the three African states part of the OBOR are strategically located at the heart of global geo-politics playground. Djibouti is quite unique as it now hosts military bases for the US, France and now China. While the fight against pirates has often been cited as the propellant behind this, one can’t quite push the power struggles as being the true variable for these great power shaving such a heavy military presence in the region. The entry into Djibouti and the region by China could slope and re align security partnerships that have underpinned global order since 1945 but For Egypt, its strategic geographical location at the Suez Canal gives it an indispensable status, explaining why it’s the only African nation to officially sign bilateral agreements with China on One Belt, One Road.
The initiative simply cannot afford to exclude Egypt. On the other hand, the inclusion of Djibouti has been a result of logical‟ assumptions than from official statements. This can purely be explained under the quest for global dominance and the geopolitics of the horn of Africa as stated earlier. With 30% of world shipping going through the entrance of the Red Sea from the Indian Ocean and on to the Suez Canal, Djibouti and Egypt are very critical.
In addition the opportunities can be eye from different aspects firstly the 1,780km Tanzania Zambia Railway line (TAZARA) has symbolized china’s presence in Africa since the 1970‟s. Currently China is involved in numerous mega infrastructural projects in Africa. For purposes of this paper, some of those which lie within the mandate of OBOR will be highlighted. Top on the list is the 2,700kmEast African Railway line. This includes Kenya, Uganda, Rwanda, Burundi and South Sudan. As indicated earlier, extent of involvement of OBOR affiliated institutions in financing the Kenyan part are not clear, though China‟s Exim bank has been linked. 8Another major railway project is the 1,315km Kano-Lagos railway line in Nigeria, the 1,302km Bengue railway line in Angola (which brings to total 4,000km railway in Angola constructed by China), 560km Belinga-Santa Clara railway in Gabon, 172km railway in Libya and 430km rail in Mauritania to name but a few. To put this into perspective, the entire African rail network is 50,000km.On the other hand, China is constructing port facilities in Kenya, Tanzania, Gabon, and Djibouti among others, with most road construction being handled by Chinese contractors, using Chinese financing. The 1302km Angola railway line will be linked with Angola-Zambia and TAZARA in future. On port construction, China is involved in construction of the Lamumega port in Kenya, Bagamoyo port in Tanzania, Santa Clara deep water port in Gabon amongst others9. It’s safe to say even without OBOR therefore, China is heavily involved in opening up Africa.
What Can OBOR Offer On Infrastructure?
Firstly, with China involved in all these infrastructural projects in Africa, coupled with OBOR‟s vision for improving connectivity among countries, the initiative will offer a centralized, clear vision, and concerted effort in streamlining infrastructural development in Africa. A case in point is the railway line in Angola which is complete on their side of the border, but under-utilized because neither Democratic Republic of Congo nor Zambia have linked up to connect to the port, hence hindering efforts to export their products. Secondly, capital for infrastructural development in Africa comes from various Chinese bank loans under individual bilateral agreements entered into by these countries. Through OBOR, the capital inflow can be clearly centrally monitored through the AIIB and the SRF. This need is further strengthened with China signing a memorandum of understanding with the African Union (AU) in January 2015 to connect all 54 countries with high speed rails, ports and roads. The traditional „equatorial land bridge‟ which is the natural trade route between East and West Africa can be a good starting point for OBOR in Africa expansion. This route begins in Kenya, Uganda, Rwanda, Burundi, the Congo’s, Central African Republic, to the West in Douala Cameroon.
Increase China’s Soft Power
China’s fellow competitors in global influence, enjoy considerable advantage in Africa due to colonialism and history that exists between Africa and the West. Joseph Nye (1990) defines soft power as when „one country gets other countries to want what it wants‟. This means, the country uses attraction to get support by other states rather than the traditional use of military force and pressure. China has over the years strived to increase its soft power over other competitors. Through her slogan of „peaceful development‟ (hepingfazhan) she has sought to create a niche for herself as a peace loving, development minded global citizen, who has noble intention in her relations with other states.
Undeniably, this rhetoric has been repeatedly cited by Chinese diplomatic officials, and has earned China many friends. OBOR as a grand strategy squarely falls within the realm of peaceful development as espoused, with its commitment to peace and economic prosperity along the belt and road, and amongst all states involved. In a world dominated by the US hegemony and influence in virtually all the compasses, perhaps building soft power is the only way China can earn the trust of her neighbors, while at the same time building a modern state both in terms of her people, economy, and military. Any other strategy other than a soft peaceful rise might trigger US counterbalancing measures and perhaps destabilize Chinese society, leading to civil unrest and other issues that might curtail accumulation of power and her rise. Assigning primacy over economic matters therefore is designed to prevent drawing attention to her military pursuits, which would attract counterbalancing measures leading to a Soviet-style collapse, while earning China allies both regionally and globally. This is essentially, one goal of OBOR. In essence, through OBOR, china’s vision of a new modernity, characterized by free flowing ideas, goods, services and people to people engagement, and that shared economic future, common prosperity, would replace doubt, competition and power play. The Belt Road Initiative and the new regional order‟ that Beijing is using new ideas like „China dream‟ and„ Asian dream‟ to build what Chinese leaders call a „community of shared destiny.‟ this community begins in Asia which China at the epicenter, and would gradually aim to conquer the global order. This is the gist of china’s new vision of global governance to replace the Western fronted status. Compared to the US, UK, Germany and Japan, China has less soft power abilities in Africa. These countries have for many years used language and culture (largely due to colonization), and through aid and donor agencies ,the United States Agency for International Development (USAID) has acted to impart democratic ideals of the US in Africa, the Bretton woods institutions have propagated Western free-market policies, while United Kingdom Agency for International Development (UKAID) and Japan International Cooperation Agency (JICA) have served to further UK‟s and Japan‟s soft power aspirations. China on the other hand has risen largely on a different path. It has none of these organizations to further her soft power in Africa. OBOR as a source of soft power is not on the projects themselves being implemented in Africa, but the „Beijing consensus‟ which offers an anti-thesis to the„ Washington consensus.
The „Beijing consensus‟ is one which does not give a standard solution to all situations, but which encourages development based on the unique circumstances of individual states, and a „ruthless willingness to experiment and innovate‟. While for very long the US and her allies pushed the rhetoric that economic freedom is intertwined with political freedom (Washington consensus), over the years, the Chinese model has earned many admirers all over the globe.
Nevertheless OBOR‟s focus on trade between Africa and China, and the inclusion of the continent in this initiative will boost further the commitment China shows to Africa, not due to any hidden motives but as a true ally of Africa, thus furthering the narrative in support of the „Beijing consensus‟ as the best for Africa to replace the failed„ Washington consensus‟ fronted by the Bretton woods institutions and the West for many years. While the West emphasized on governance, political and economic reform along what they thought was acceptable to them in order to access development funds in the 1990‟s (through the Structural Adjustment Programs by World Bank and IMF), OBOR and affiliate financial institutions are cognizant of the fact that one-size-fits-all solutions are not realistic. Hence, they let states handle their own internal matters while helping them access the funding they require for their infrastructural development. The immense „soft power‟ that will arise from this will propel China into great heights in global politics.
Challenges to OBOR in Africa Intra and Inter-State Conflicts
The biggest challenge to OBOR in Africa is the state of continuous warfare experienced throughout the continent. War and conflicts have exacted a heavy burden to Africa’s development since time immemorial. As cited by Ndlovu-Gatsheni (2012) highlighted the five different types of conflicts that have plagued Africa; anticolonial, imperial, international, intra-state and inter-state conflicts. At present, many countries in Africa are experiencing wars of „regime change‟ with the Democratic Republic of Congo being a perfect example, while the Greater Sudan „War of Decentralization‟ led to splitting into north and south. In time however, South Sudan has also started experiencing its own war, what can be called „inter-communalinsurrection‟.17Conflicts are not limited to these, with Somalia, Uganda, Rwanda, Burundi, Congo Brazzaville, Angola, Nigeria, Liberia, Kenya, Libya, Central African Republic, just a few of the African states to get into warand violence within the last decade or so. Greig, Mason and Hamner (2016) have identified and geo referenced over 73 different civil conflicts in Africa. In their paper, they argue that, conflicts begin, continue and end from depending on the logic behind the war.18 the potential gain from these wars is mostly control of massive natural resources which motivates parties to engage in long and drawn out wars. These wars have come with massive economic and infrastructural damage to the countries affected. In South Sudan alone, China imports 5%of its oil when operations are at full capacity.
However, the civil war within South Sudan itself, and conflict with the neighboring Sudan, has disrupted oil production from the oil fields, and subsequent shipping of this oil to China. Zhou (2014) goes further to posit that, the war in Sudan means production was reduced by over 30%capacity from 245,000 barrels of oil per day, to less than 160,000 barrels per day. Operations in oil blocks 1, 2and 4 were completely shut down in December 2013 following outbreak of war, and Chinese oil personnel evacuated from site. This is aside from the shutdown occasioned from conflict between the two Sudan’s with regards to transit fees between the two Sudan’s. While Sudan was demanding a fee of 30 USD per barrel of oil pumped through its pipeline, South Sudan wanted to pay the standard worldwide fee of 3USD per barrel on the physical infrastructure, conflict has a damaging impact on roads, railway lines and other infrastructural developments. A case in point is in Angola where over 4,000km of its rail network was destroyed in conflict and had to be repaired before it could be operational again. As an example therefore, the success of OBOR expansion in Africa would depend on how China navigates the conflict land of the African jungle for full potential to be realized. With conflicts experienced in DRC, CAR, Burundi, instability in Egypt among other countries, china’s resolve will be tested in launching and sustaining the OBOR initiative in Africa.
In conclusion China continues to be an important ally for the African continent to date. And the One Belt One Road Initiative offers an opportunity to deepen Sino-Africa Relations and should be explored further by the leadership of both China and Africa. The current status of OBOR in Africa is minute. As it is, OBOR in Africa, when looked at in terms of the importance that China puts in Africa does not mirror the optimism that Sino-African relationship has attracted in the recent past. It shows a discord between the rhetoric about the significance and growth in the relationship, vis a vis the reality, which is that Africa remains a cross-reference in china’s plans globally. 3 countries out of 67 involved in the project do not give an optimistic picture. However, the opportunity for further cooperation is still there.PRC can seize the opportunity presented by OBOR to streamline its foreign direct investment in the continent to leave lasting foot print. Indeed, successful implementation will result into firmly entrenching China as a „true friend‟ for Africa. China has global ambitions, while Africa is in dire need of capital for infrastructural development, and OBOR offers the best platform to pursue this.
Losing The Battle: How China is Outperforming the USA in Sub-Saharan Africa
Under what conditions could the United States regain its position of strategic dominance in sub-Saharan Africa (SSA) despite increasingly reduced economic support programs as well as a limited-to-no Foreign Military Financing (FMF) grants? With the expansion of China’s economic and military cooperation activities across SSA in the last decade, the United States is increasingly becoming unpopular to much of the region. It is imperative to comprehend that China did not emerge accidentally as a global economic contender. When the United States was engaged in the “Global War Against Terror (GWAT),” following the September 11, 2001 (9/11) terrorist attacks, much of its focus was in Southwest Asia and the Middle East. Most of the West, and particularly the United States, thought SSA countries had never been strategically important enough to make the priority list of geopolitically important countries. Historically, only a handful of African countries mattered to the United States: countries such as Morocco remained important due to military and commercial vessels traversing the Straits of Gibraltar into the Alboran Sea; likewise, Egypt mattered due to the Suez Canal and the Red Sea; additionally, Djibouti has also been an important country due to the Bab al-Mandab Strait. It is reasonable to assess that the United States prioritized these countries due to their proximity to those global choke points, but they still did not constitute a serious prioritization on the part of America.
Over the past half century, following their independence from colonial powers, much of SSA has been ruled by state actors who were predominantly rent-seeking and authoritarian. This is particularly important as it demonstrates the ease with which China ventured onto the African continent and immediately established engaged relations. In an effort to satisfy its need for raw materials due to its exponential population growth and scarcity of indigenous materials, China capitalized on opportunities to perform transactional economic activities while forging new relationships and partnerships across SSA. For many years the United States underestimated China as a potential economic competitor to reckon with, especially across Sub-Saharan Africa. China’s economic capacity grew though “race to the bottom” approaches, whereby China flooded African and other world markets with cheaper products, taking away competitive advantage from local businesses. Additionally, while the United States was consumed with fighting two wars in Afghanistan and Iraq post-9/11, China was expanding its economic operations and military cooperation activities across SSA. Even then the US underestimated this new development in global activity, as it saw China’s expansion as unsustainable as well as an insignificant maneuver. The United States was content with its aid packages to SSA, which accounted for less than one percent of America’s Gross Domestic Product (GDP),in addition to HIV/AIDS relief programs. Unfortunately for the US, it became quickly seen at the local level that those aid packages could not come close to the stimulus investment/trade transactions China was conducting throughout SSA.
At first glance, SSA countries viewed China’s activities on the continent as primarily humanitarian in nature. In her book entitled Dead Aid, Dr. Dambisa Moyo stated that China’s African role was wider, more sophisticated, and more business-like than any other country at any time in the post-war period. She later recanted those statements after realizing that China was in Africa to compete and not necessarily to provide humanitarian assistance. During the initial stages of China’s movement into SSA, the focus was mostly economic and infrastructure development that was also in support of China’s own domestic economic objectives. These moves are seen through China’s development of road and rail networks, which then feed into several air and seaports across the continent to ease the movement of goods inland to seas and airports across SSA. While that was ongoing, China opened its first military naval base abroad in Djibouti, a small but strategically relevant country of 800,000 inhabitants. Djibouti is also home to several other foreign military bases abroad, including the United States, with approximately 4,500 personnel stationed at Camp Lemonnier, the Combined Joint Task Force Horn of Africa (CJTF-HOA). Other bases include those of the Japanese, Italian, Spanish, and French militaries.
China provides countries in SSA with suitable capital goods and cheap consumer goods, while those countries supply China with the commodities it needs to fuel its continued economic expansion, such as oil, iron ore, cotton, diamonds and timber. The relationship is complementary because both China and SSA gain from the mutual exchanges. The negative aspect, however, is China’s ability to undercut the market for locally-owned small businesses. China is causing a massive economic imbalance in these countries. For example, oil exports to China account for 86 to 100 percent of all oil exports from Angola, Sudan, Nigeria, and Congo. According to Kaplinsky, SSA’s exports to China were less than one percent of its exports to industrialized countries in 1990; by 2006,the same exports had risen to 11 percent.
Along with the surge in trade, China’s foreign direct investment (FDI) has increased exponentially in SSA due to resource and market considerations. The negative impacts of globalization, trade tariffs, and economic structural adjustment programs (ESAP) set by the International Monetary Fund (IMF) on indebted countries in SSA, have prompted many of these developing countries to enter into bilateral agreements with China in order to lessen their hardships. Most of the Chinese FDI in SSA are from companies that are government-owned. Chinese FDI in SSA is higher than anywhere else in the world; it increased significantly from approximately $20 million per year in the 1990s to over $25billion by 2013. As one travels through SSA, there is high visibility of Chinese infrastructural development projects, which makes it difficult to differentiate FDI from aid. While the United States is mostly focused on counter-terrorism initiatives and military capacity-building across SSA to counter violent extremism, neglecting economic development and self-sustenance capacity-building in the region basically reverses those former efforts. This is where China exploits the opportunity to address those American shortfalls: its activities in SSA create suitable conditions to be SSA’s preferred partner of choice over the United States.
Formal aid connections between China and SSA were initiated through the Bandung Conference in 1955. However, in October 2000, during the Forum on China-Africa Cooperation (FOCAC) in Beijing, there were agreements to enhance cooperation between China and financial institutions in Africa. It was also during the FOCAC that China expressed its willingness to reduce Africa’s debt burden, promote investment, and assist in the development of human resources in Africa. The superb new African Union (AU) Conference and Office Complex built by the Chinese government in Addis Ababa, Ethiopia, free of charge to the AU, demonstrates real partnership between Africa and China. Within the past decade, China has committed over $75 billion in aid and development projects throughout Africa. Some International Relations analysts argue that beyond the need for natural resources, China’s infrastructural development projects in SSA – trade, FDI, debt relief, and the provision of medical support – are all part of China’s public diplomacy strategy to build up goodwill and international support for the future. In essence, China has taken advantage to expand its footprint on the resource-rich continent of Africa by providing much-needed aid while developing lasting relationships with SSA that are less punitive than aid from the IMF or USA.
China’s establishment of a naval base in Djibouti, where the United States military has operated in since 2001, was a bold move. China also built and now controls Djibouti’s freight container shipping port, the Port of Doraleh, through which the United States base is resupplied. Djibouti is the only country on the African continent with a United States military base; it is also where the United States projects force into the region, targeting al-Shabab terrorist cells and activities. Obviously, the strategic construction of the Chinese naval base in Djibouti potentially threatens US military and commercial vessels traversing this global choke point, the Bab al-Mandab Strait. Other foreign countries, such as Russia and Turkey, have also expressed interest in foreign bases in Djibouti, but the Djiboutian president cannot part with the $63 million paid by the United States annually to lease Camp Lemonnier. In addition, he also collects rent from the Chinese and Italians also based in the country.
When the United States’ FMF, security cooperation and security assistance (SC/SA) in SSA were drastically reduced and in some cases terminated by the Trump administration, China viewed that as an opportunity to strengthen its military cooperation with SSA countries. Generally, SSA countries prefer American military equipment and training over those of China or Russia. However, due to human rights vetting built into US processes, equipment and training provision to the countries of SSA takes a significant amount of time. China does not have these processes and tends to deliver much faster than the United States. Even though regarded by SSA countries as of lower quality, China delivers the needed equipment and training unlike the United States, which delivers two to three years later and when the operational requirements have become outdated.
If the United States hopes to regain its dominance in SSA, it must change its paternalistic behavior towards African countries and it must regard China as true competition. The United States must discontinue rhetoric to discourage SSA countries from doing business with China, particularly when it is not presenting any alternative options. This will only alienate the United States from the very countries with which it wishes to strengthen bilateral relations. Instead of attempting to undo progress China has made in SSA, the United States must compliment those works and find ways to build capacity across African countries and sustain those new capabilities.
Africans desire economic independence. However, that can only be achieved through aiding them in the building of their own capacities rather than just making them dependent on the US. America must continue to encourage SSA build strong governing institutions. It is imperative to understand that democracy is more conducive to economic development because of the protection and balance of these various institutions. Developing countries need an institutional framework that supports a market economy, which include distinct institutions that foster exchange by lowering transaction costs and encouraging trust as well as those that influence the state and other powerful actors to protect private property and persons rather than expropriate and subjugate them respectively. The United States must do more to differentiate itself from China and become the preferred partner of choice across sub-Saharan Africa. So far, its strategy seems to be too focused on just criticizing China’s efforts and ignoring the legitimate relationship advantage it has built over the last decade. Unfortunately for America, the time has passed where the countries of Africa automatically will choose the US over all other competitors. The longer it takes America to realize this, and adapt to it competitively, the longer it will remain an African also-ran.
South Africa: Better Education & Spatial Integration Crucial for Reduced Inequality, Job Creation
In an environment of accelerating but still modest growth, government policies that stimulate competition and create the fiscal space needed to build a skilled labor force from the poor population of South Africa, would create jobs and help reduce inequality, according to the South Africa Economic Update released by the World Bank today.
The World Bank expects real growth in gross domestic product (GD) to accelerate from 1.3 percent in 2017 to 1.4 percent in 2018, supported by a rise in confidence, global growth and benign inflation. For 2019, the forecast is 1.8 percent and 1.9 percent in 2020. But despite this modest rebound, growth in South Africa remains constrained and continues to lag behind its peers. Overall, South Africa is projected to remain largely below the average growth rate of 4.5 percent in 2018 and 4.7 percent in 2019 in emerging markets and developing economies.
“This outlook calls for fundamental policy action to turn the economy around through policies that can foster inclusive growth and reduce inequality,” said Paul Noumba Um, World Bank Country Director for South Africa. “Creating labor demand and fiscal space to finance improved education as well as reinforcing spatial integration will enhance the ability of the poor people of South Africa to participate meaningfully in the economy”.
The special focus section of this 11th edition of the South Africa Economic reviews the evolution and nature of South Africa’s inequality – among the highest in the world– arguing that it has increasingly been driven by labor market developments that demand skills the country’s poor currently lack. It suggests that significantly raising South Africa’s economic potential will require breaking away from the equilibrium of low growth and high inequality in which the country has been trapped for decades, discouraging the investment needed to create jobs.
Simulations assessing the potential impact of a combination of various policy interventions on jobs, poverty, and inequality suggest a scenario in which the number of poor people could be brought down to 4.1 million by 2030, down from 10.5 million in 2017. This would be driven by increasing the skilled labor supply among poor households through improved education and spatial integration as well as increasing labor demand through strengthened competition.
In this scenario, the Gini index of inequality would be reduced from 63 today to 56 in 2030. An additional 800,000 jobs would be created with higher wages for workers from poor households, and cheaper goods and services contributing to these outcomes, according to the report.
“In the short term, these policy interventions would include, getting the implementation of the recently granted free higher education right, continuing to address corruption, improving the competitiveness of strategic state-owned enterprises, restoring policy certainty in mining, further exposing South Africa’s large conglomerates to foreign competition and facilitating skilled immigration,” said Sebastien Dessus, World Bank Program Leader.
In the longer term, the report suggests that improving the quality of basic education delivered to students from poor backgrounds and reinforcing the spatial integration between economic hubs, where jobs are located, and underserviced informal settlements, would reduce poverty and inequality and support job creation.
Can Insurance Help Low-Income Ethiopians Cope With Risk?
The loss of crop or livestock as well as concerns about illness and accidents are key financial expenses on the minds of low-income Ethiopians.
Unexpected expenses associated with these issues are relatively common. A third of low-income Ethiopian households experienced at least one major health issue in the previous year, often paying for it out-of-pocket.
In rural areas, almost 50% of households experienced some agricultural loss in the previous year. For three-quarters of these households, these financial losses accounted for more than half of their income in a typical year.
Yet even though these crises affect a large number of the population, Ethiopians don’t have adequate mechanisms in place to cope with the financial hardship they bring.
“People don’t put money aside to deal with risk. Instead, they rely on cash and savings, if they have them, borrow money from family, if possible, or as a last resort, sell livestock to cope with these unexpected shocks,” said Craig Thorburn, a Lead Financial Sector Specialist with the Finance, Competitiveness and Innovation Global Practice of the World Bank Group, and the technical lead for a FIRST Initiative funded project that produced the new report What People Want: Investigating Inclusive Insurance Demand in Ethiopia.
Informally borrowing money is a common coping strategy as loans from formal financial institutions are expensive and hard to get. However, when a crisis, such as drought, affects an entire community, informally borrowing money from relatives isn’t a viable option. And selling livestock may inject rural households with quick access to cash, but this approach ultimately leaves families poorer and less resilient.
Last year, the World Bank Group conducted a demand-research study in Ethiopia to examine risks low-income households face and see whether insurance could be a tool that Ethiopians could tap into to reduce and better manage these financial burdens.
This country-wide survey reached close to 3000 households, totaling 13,000 people, from both rural and urban areas.
“Understanding the needs of underserved populations, including low-income households, is key to developing quality insurance products and expanding insurance markets,” Thorburn said. “Without this knowledge, potential insurers wouldn’t understand the real and perceived risk of this unserved market segment.”
The survey found that people had little knowledge or experience with insurance, and that 50% of surveyed households never heard of insurance. However, people expressed interest in it if insurance products were devised as accessible and inexpensive.
Ethiopians have unserved needs that could be met with affordable products they actually want.
For example, 97% of focus group participants indicated they would buy a proposed prototype crop insurance product if it were available to them, as it would allow them to replace lost income and buy inputs for the next crop cycle.
And for health-related issues, the survey found that while many people fear a high-cost illness, they could manage many basic expenses with their existing resources, with 75% reporting that they were able to fully recover from financial hardship. This indicated that a well-designed insurance product could leverage existing strategies such as savings, and provide peace of mind. Interest in a hospital cash prototype was high, with close to half of participants willing to pay an actuarially sound premium.
This openness to insurance could provide a great opportunity for insurers, particularly if they can customize and tailor their products to suit customers’ needs.
While this initial research indicates that low-income households are interested in insurance, it would require insurers, the government and other stakeholders to work together to develop insurance products that are accessible, affordable and appropriately designed for people’s needs. Other aspects related to extending the insurance market would need to be considered as well. These include adapting the regulatory framework to motivate insurers to enter this market and devise financial education programs to educate people on insurance.
“Ethiopia provides a significant opportunity for insurers to expand their businesses, the government to improve the overall stability of the low-income population, and low-income people to stabilize their economic status,” said Thorburn.
Focus group participants indicated they would be most likely to purchase insurance from formal financial institutions, such as banks or microfinance institutions, which would bring stability and financial capacity. They indicated that they would be less likely to purchase insurance through informal formal groups, such as savings and credit cooperatives or Edirs, which are well-ingrained local community-based organizations created to help cover funeral expenses.
The World Bank is working in Ethiopia to create an enabling environment for inclusive insurance.
These survey findings are part of a broader World Bank study that that looked at supporting more inclusive insurance markets in Ethiopia.
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