The Economist - USA (2021-07-10)

The Economist July 10th 2021 Finance & economics 69

tick in demand from holidaymakers as theyﬂyordrivetotheirdestinations,that wouldpushpricesup,perhapsover$80a barrel.Themostlikelyoutcomefromthe row,however,isa compromise.Onepos sibility isthat theuae and someother countriesarealloweda temporaryincrease inoutputandthethornyissueofquotare visioniskickeddowntheroad. Evenifadealisstruck,however,the spatmayportendfurtherdisagreements— andmorepricevolatility.opec+ members

are using divergent strategies when it comestotheenergytransitionandtheoil markets, argues Francesco Martoccia of Citigroup,abank.Facedwithdwindling demandinthelongterm,someproducers, suchastheuae, wanttoboostsupplyand monetisepetroleumreservesearlier.Oth ers,suchasSaudiArabia,wanttorestrict productiontokeeppriceshigh.Suchdivi sionswillbecomeevenclearerastheshift towards a greener economy accelerates. opec’s latesttiﬀwon’tbeitslast.n

InvestmentinAfrica

Links in the chain

I

n 2016 danielkinuthiastarteda small business in Kenya making shoe uppers for the local subsidiary of Bata, a multina tional footwear company. He was short of finance and equipment, and his contract with Bata ended when covid19 hit. But he says supplying Bata and visiting its factory taught him “what happens, how the shoe is marketed, the kind of shoe that can be sold”. Now he dreams of using those skills to build a factory of his own. Many African governments are keen to attract foreign investment. But its impact hinges on what Albert Hirschman, a post war economist, called “linkages”. By sup plying or buying from multinationals, lo cal firms like Mr Kinuthia’s can learn about markets and technology. Such linkages are all too rare in Africa, however. Many multi nationals ship in their inputs and export what they produce. That brings jobs and dollars, but does not spur development. A recent study by John Rand of the Uni versity of Copenhagen and others finds

thatlinkagesarescarcer in Africa than in developing Asia. The multinationals they surveyed in Kenya imported twothirds of their intermediate inputs, for instance, whereas those in Vietnam imported just a quarter. And local linkages transferred less technology than expected. Firms learned as much by trading across oceans as they did from foreign firms in their backyard. Extractive industries in particular tend to operate as enclaves. Mining concessions often come with importduty waivers, says Lukas Bekker, a supplychain expert who has helped set up mines in three African countries. That makes it cheaper to import equipment than to use local contractors. And buying local can be risky. A finance manager with 20 years’ experience in Afri can mining says he prefers to keep pro curement offshore, having uncovered “frauds and kickbacks” between staff and local suppliers in the past. Capacity takes time to build. In Uganda, which has long been preparing to pump

oil, a survey in 2012 found that only 200 trucks in a local fleet of 2,500 were up to scratch. “We had to transform our busi ness,” says Jeff Baitwa, who spent $20m buying equipment to upgrade his haulage company for oil contracts. Sometimes the technical gap is too wide. “I’m told the pipeline has what they call ‘seamless pipes’,” says Stuart Mwesigwa, a manager at Uganda’s largest steel company. “No one in east Africa is manufacturing that!” The problem goes beyond mining. In ternational supermarkets often truck in goods from distribution hubs—in South Africa, for example—rather than sourcing in the places where they operate. Much of Africa’s coffee, cashew and cocoa leaves the continent in packaging made abroad. Garmentmakers stitch together imported fabrics with imported zips and buttons. Governments’ attempts to nurture link ages show just how hard they are to create. Some are trying to set up clusters of knowl edge in industrial parks. Raghav Pattar, an Indian, came to Hawassa Industrial Park in Ethiopia as the manager of a Chinese ap parel factory. From there it was a short step to his current job as chief executive of Nasa Garment, the first Ethiopianowned com pany there. These kinds of moves help skills and knowhow spread. But most Ethi opian firms “are not coming to the indus trial park”, says Mr Pattar. They struggle to get the loans and expertise that foreign firms can acquire abroad. In many coun tries the entrepreneurs who gain most from foreign investment are often those with existing connections, such as those of European or Asian descent. Governments are also trying to foster links through “local content” rules, which require multinationals to procure locally to win licences. The focus needs to be on suppliers that add value, notes Judith Fes sehaie of the International Trade Centre, a development agency, who has studied such policies in the southern African min ing sectors, so that contracts do not go to importers with nothing more than “a brief case and a desk”. But the risk is that tough restrictions put foreign firms off setting up in a country altogether. Some hope that the market might create incentives to source locally, as consumers become more interested in the origins of the products they buy. “Our objective is to grow the Ghana ecosystem,” says Keren Py bus of Ethical Apparel Africa, a British gar mentsourcing company that has invested in a factory in Ghana. Ms Pybus imports fabric but wants one day to buy it locally. Foreignowned brewers are switching from imported barley to homegrown grains, marketing beerdrinking as a patri otic act. But unless suppliers have the funds, capacity and expertiseto take ad vantage of foreign linkages,such efforts will amount to small beer.n

K AMPALA Why linkages between foreign and local firms are all too rare

The Economist - USA (2021-07-10)

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