Namibia’s Growth Challenge: Response to Hidipo Hamutenya

HIDIPO Hamutenya (HH in short)’s article (The Namibian, August 10 2007) makes a case for urgently reversing the deteriorating and stagnating economic performance of Namibia’s economy.

He cautions against the tendency to rely on revenue and incomes generated by a single economic sector to support domestic consumption as this is unsustainable and could lead to a negative reinforcement in the economy. With the benefit of hindsight and the bitter lessons of the lost decades of the 1990s, HH argues that Namibia has to make a definitive and fundamental choice about its future destiny.This is to choose accelerated recovery with transformation rather than stagnation and decline.According to HH the Namibian economy has settled into equilibrium with constant average growth of 4 per cent, which is lower than the desired growth of 7 per cent that can enable Namibia achieve its Vision 2030 goals.He questions the quantity and quality of fixed investments and argues that such investments will not help Namibia realise its Vision 2030 goals, as they are concentrated in sectors with less linkage to other sectors in the economy.He insists that for economic growth to surpass the current level of growth there must be “a source of energy within the economic system which would disrupt the current equilibrium” and that source of energy is entrepreneurship.He also questions the sustainability of Namibia exporting capital to other countries.He argues that unless something is done immediately, with concerted political will, Namibia will again miss the growth opportunities as it missed growth opportunities in the first 17 years of independence.The article by HH was well researched and is quite encouraging seeing that our politicians take time to read the national accounts, as this is the only way to improve quality debates in parliament.My purpose in this article is not necessarily to criticise what HH has presented, but to build on some of his proposed solutions to our economic challenges.First and foremost HH and the Swapo Government have done exceptionally well in terms of laying the foundation for launching a future economic recovery plan.The first 17 years of independence should be seen as a period of laying a strong foundation underlined by macroeconomic stability and building infrastructure such as telecommunications, roads and rail network, electricity and water infrastructure in rural areas.The fact that Namibia managed to achieve an average growth of 4 per cent, while at the same time, managing to build a first-class infrastructure, is an achievement that HH and his colleagues in Swapo should be proud of.Design A New Economic System An economy follows an evolutionary process, and over time new economic designs are created through trial and error.Policy-makers at a point in time select and create economic designs that are fit for their particular purpose and environment.When the Swapo Government took over in 1990, it inherited an economy that was designed to produce resources as inputs into the manufacturing process of South Africa and other industrialised countries.In his book ‘A future for Africa: Transcending the politics of adjustment’ Bade Onimode notes that Africa cannot retain the inherited and perverse colonial economic structures and expect to achieve sustainable economic developments.He argues that the colonial economic structures have a built-in-commitment to crises, stagnation and decay, excessive external dependence and export vulnerability.The new political leadership including HH decided to return the colonial economic structure in its current design.This is understandable because the colonisers designed the economy in such a way that it generates enough income for the minority including the new political leadership, and still leaves enough for redistribution to the majority of the population.Policies that were implemented over the past 17 years of independence seem to have been ineffective in altering the structure of the economy.While the nation wish and desire to achieve a high growth path the economic system we inherited in 1990 was not designed to grow at our desired speed, it is mean-reverting, meaning it is designed to grow at around 3 to 4 per cent although it can fluctuate between 2 and 7 per cent, it always comes back to the mean of 3 to 4 per cent it was designed to grow.Whether Namibia achieves its Vision 2030 goals depends on whether the economic system remains with the current design and structure or restructured.You can increase investments in Namibia to 40 per cent, but because the economy was not designed to take such investments, either the rate of investment will mean-revert or the investment will not amplify economic growth.The fact that Ramatex is closing down demonstrates that the economy was not designed to absorb or sustain large manufacturing projects that are not linked to natural resources.In its current form any attempt to attract large manufacturing plants in the economy requires a substantial amount of subsidisation to the extent that the opportunity cost of maintaining these projects becomes high and unsustainable.The closure of Ramatex should be seen in the context of an economy designed to fit a specific size.However, the Namibian economy can absorb large plants or projects within the mining and fishing sector without Government support, as this is what the colonial designer of the Namibian economy wanted.Capital Outflow HH is puzzled by the fact that an economy that is growing by an average of 4 per cent, still manages to produce surplus savings for exports to other nations.The original designers of the Namibian economy designed it that way; they wanted an economy that produces natural resources and capital (savings) to support their industrialisation.To do this they established a legislative and institutional framework that ensures the growth of a dynamic long-term contractual savings in Namibia.The legislative framework stipulated limitations and guidelines on how to invest these long-term contractual savings e.g.5 per cent in unlisted shares, up to 20 per cent per bank or financially sound institutions, 75 per cent in listed shares.HH and his colleagues in Parliament accepted and endorsed these legislative frameworks in 1990.As at the end of June 2007 the total assets of pension funds amounted to approximately N$48 billion and according to the legal framework only N$2.3 billion should be invested in unlisted stocks, while N$34 billion has to be invested in listed shares.The designers of the Namibian economy new very well that the Namibia Stock Exchange would not be able to absorb the 75 per cent investment limits, and therefore funds will be transferred to their economies.HH must therefore not run to conclusions that asset managers are exporting capital, it is the Government laws that guide this investment behaviour in addition to better returns realised outside Namibia.If one is given a choice between a return of 10 per cent and 15 per cent, she or he will choose 15 per cent, so are members of pension funds who aspire to retire in comfort after a long period of hard work.Asset managers are given a mandate by trustees of pension funds on how to invest their funds, so they are only carrying out instructions from their clients who operate within the confines of Government laws.Absence of Social Technology HH argues that the low level of foreign direct investment explains the poor economic growth experienced in Namibia.Investment can be split between physical technology and social technology.Unfortunately, whenever we look at investments we tend to focus on one component of fixed investment, namely physical technology.While physical technology matters to a degree, the most significant factor is the state of the country’s social technology.The country can receive billions of foreign direct investments (physical technology) but without well established social technology it is unlikely that physical technology will translate into high economic output and this has been the main weakness in Africa, and why foreign direct investments fails to yield intended results.Soc
ial technologies are methods and designs for organising people to do things.It includes all elements necessary for organising such as institutional structures, roles, processes, and cultural norms.It has been established that countries with few resources and less physical inflows did reasonably well if they had strong, well-developed social technologies (case of Singapore), while countries with poor social technologies, despite well resource endowment and high capital inflows performed poorly (most African countries).While the intention of creating institutions such as the Development Brigade Corporation (DBC) was excellent and well intended, the poor design of its business model encompassing its management processes, organisational structures, and business culture and ethics contributed to the failure of that innovative idea.My point here is that it is not only investment in its physical form that matters, but the social technologies as defined above that will ensure that the inflows of physical investment are amplified and generate a multiplier effect on the economy.The failure to attract foreign direct investment in Namibia should not be blamed on the new leadership at the Investment Centre, but on the absence of social technology in Namibia.Foreign investors prefer to acquire, merge or take over existing business enterprises in a particular economy, instead of going through the trouble of registering and establishing new businesses.Most of foreign direct investment that has entered South Africa, for example, came through acquisitions, mergers and takeovers where foreign investors do not have to deal much with government bureaucracy and administrative barriers.The absence of good and sound small companies and established social technological structures in different sectors of the Namibian economy makes it difficult for foreign investors to quantify the investment risks present and this serves as a disincentive for foreign direct investment.As a result all foreign investors find it profitable to only invest in resource-based sectors such as mining and fishing where investment is easily quantified.Economic Diversification What can be done to initiate or accelerate the process of economic transformation and development in Namibia? I agree with HH who argues that there are sectors that should serve as engines of growth for the whole economy and agriculture and rural sector becomes a priority.Economic history has taught us that with no exceptions all poor developing countries that were successful in achieving growth and poverty alleviation in the rest of the developing world emphasised agriculture at an early stage of development.Agricultural development-led industrialisation is the development strategy that almost universally would appear to be the sine qua non of a self-sustaining process of growth with equity.If Namibia is to generate the dynamism needed for both future growth and development, agricultural output, as HH pointed out, has to increase rapidly, and agricultural productivity has to expand.Time has come to move beyond public rural infrastructure such as roads, railways, to projects that will have multiplier effect such as water harvesting for large-scale irrigation.For many years the northern regions, in particular the Caprivi Region, have suffered from floods that dry up after three months, but to date no major projects are in the pipeline to harvest this water into water reservoirs so that large irrigation programmes can be started.Since there are market failures, no private sector or foreign investor will undertake such projects.Government should therefore have a well-structured intervention strategy to address this market failure and harness the opportunities offered by the rural agricultural sector.By addressing rigidities and inefficiencies in the agricultural sector, and unleashing its potential, Namibia will have taken a first and major step in dismantling the inherited colonial economic structure and designing a new economic structure that can respond quickly to domestic policy intervention.* Martin Mwinga is a portfolio manager at RMB Asset Management Namibia.Opinions expressed in this article are those of the author.With the benefit of hindsight and the bitter lessons of the lost decades of the 1990s, HH argues that Namibia has to make a definitive and fundamental choice about its future destiny.This is to choose accelerated recovery with transformation rather than stagnation and decline.According to HH the Namibian economy has settled into equilibrium with constant average growth of 4 per cent, which is lower than the desired growth of 7 per cent that can enable Namibia achieve its Vision 2030 goals.He questions the quantity and quality of fixed investments and argues that such investments will not help Namibia realise its Vision 2030 goals, as they are concentrated in sectors with less linkage to other sectors in the economy.He insists that for economic growth to surpass the current level of growth there must be “a source of energy within the economic system which would disrupt the current equilibrium” and that source of energy is entrepreneurship.He also questions the sustainability of Namibia exporting capital to other countries.He argues that unless something is done immediately, with concerted political will, Namibia will again miss the growth opportunities as it missed growth opportunities in the first 17 years of independence.The article by HH was well researched and is quite encouraging seeing that our politicians take time to read the national accounts, as this is the only way to improve quality debates in parliament.My purpose in this article is not necessarily to criticise what HH has presented, but to build on some of his proposed solutions to our economic challenges.First and foremost HH and the Swapo Government have done exceptionally well in terms of laying the foundation for launching a future economic recovery plan.The first 17 years of independence should be seen as a period of laying a strong foundation underlined by macroeconomic stability and building infrastructure such as telecommunications, roads and rail network, electricity and water infrastructure in rural areas.The fact that Namibia managed to achieve an average growth of 4 per cent, while at the same time, managing to build a first-class infrastructure, is an achievement that HH and his colleagues in Swapo should be proud of. Design A New Economic System An economy follows an evolutionary process, and over time new economic designs are created through trial and error.Policy-makers at a point in time select and create economic designs that are fit for their particular purpose and environment.When the Swapo Government took over in 1990, it inherited an economy that was designed to produce resources as inputs into the manufacturing process of South Africa and other industrialised countries.In his book ‘A future for Africa: Transcending the politics of adjustment’ Bade Onimode notes that Africa cannot retain the inherited and perverse colonial economic structures and expect to achieve sustainable economic developments.He argues that the colonial economic structures have a built-in-commitment to crises, stagnation and decay, excessive external dependence and export vulnerability.The new political leadership including HH decided to return the colonial economic structure in its current design.This is understandable because the colonisers designed the economy in such a way that it generates enough income for the minority including the new political leadership, and still leaves enough for redistribution to the majority of the population.Policies that were implemented over the past 17 years of independence seem to have been ineffective in altering the structure of the economy.While the nation wish and desire to achieve a high growth path the economic system we inherited in 1990 was not designed to grow at our desired speed, it is mean-reverting, meaning it is designed to grow at around 3 to 4 per cent although it can fluctuate between 2 and 7 per cent, it always comes back to the mean of 3 to 4 per cent it was designed to grow.Whether Namibia
achieves its Vision 2030 goals depends on whether the economic system remains with the current design and structure or restructured.You can increase investments in Namibia to 40 per cent, but because the economy was not designed to take such investments, either the rate of investment will mean-revert or the investment will not amplify economic growth.The fact that Ramatex is closing down demonstrates that the economy was not designed to absorb or sustain large manufacturing projects that are not linked to natural resources.In its current form any attempt to attract large manufacturing plants in the economy requires a substantial amount of subsidisation to the extent that the opportunity cost of maintaining these projects becomes high and unsustainable.The closure of Ramatex should be seen in the context of an economy designed to fit a specific size.However, the Namibian economy can absorb large plants or projects within the mining and fishing sector without Government support, as this is what the colonial designer of the Namibian economy wanted. Capital Outflow HH is puzzled by the fact that an economy that is growing by an average of 4 per cent, still manages to produce surplus savings for exports to other nations.The original designers of the Namibian economy designed it that way; they wanted an economy that produces natural resources and capital (savings) to support their industrialisation.To do this they established a legislative and institutional framework that ensures the growth of a dynamic long-term contractual savings in Namibia.The legislative framework stipulated limitations and guidelines on how to invest these long-term contractual savings e.g.5 per cent in unlisted shares, up to 20 per cent per bank or financially sound institutions, 75 per cent in listed shares.HH and his colleagues in Parliament accepted and endorsed these legislative frameworks in 1990.As at the end of June 2007 the total assets of pension funds amounted to approximately N$48 billion and according to the legal framework only N$2.3 billion should be invested in unlisted stocks, while N$34 billion has to be invested in listed shares.The designers of the Namibian economy new very well that the Namibia Stock Exchange would not be able to absorb the 75 per cent investment limits, and therefore funds will be transferred to their economies.HH must therefore not run to conclusions that asset managers are exporting capital, it is the Government laws that guide this investment behaviour in addition to better returns realised outside Namibia.If one is given a choice between a return of 10 per cent and 15 per cent, she or he will choose 15 per cent, so are members of pension funds who aspire to retire in comfort after a long period of hard work.Asset managers are given a mandate by trustees of pension funds on how to invest their funds, so they are only carrying out instructions from their clients who operate within the confines of Government laws. Absence of Social Technology HH argues that the low level of foreign direct investment explains the poor economic growth experienced in Namibia.Investment can be split between physical technology and social technology.Unfortunately, whenever we look at investments we tend to focus on one component of fixed investment, namely physical technology.While physical technology matters to a degree, the most significant factor is the state of the country’s social technology.The country can receive billions of foreign direct investments (physical technology) but without well established social technology it is unlikely that physical technology will translate into high economic output and this has been the main weakness in Africa, and why foreign direct investments fails to yield intended results.Social technologies are methods and designs for organising people to do things.It includes all elements necessary for organising such as institutional structures, roles, processes, and cultural norms.It has been established that countries with few resources and less physical inflows did reasonably well if they had strong, well-developed social technologies (case of Singapore), while countries with poor social technologies, despite well resource endowment and high capital inflows performed poorly (most African countries).While the intention of creating institutions such as the Development Brigade Corporation (DBC) was excellent and well intended, the poor design of its business model encompassing its management processes, organisational structures, and business culture and ethics contributed to the failure of that innovative idea.My point here is that it is not only investment in its physical form that matters, but the social technologies as defined above that will ensure that the inflows of physical investment are amplified and generate a multiplier effect on the economy.The failure to attract foreign direct investment in Namibia should not be blamed on the new leadership at the Investment Centre, but on the absence of social technology in Namibia.Foreign investors prefer to acquire, merge or take over existing business enterprises in a particular economy, instead of going through the trouble of registering and establishing new businesses.Most of foreign direct investment that has entered South Africa, for example, came through acquisitions, mergers and takeovers where foreign investors do not have to deal much with government bureaucracy and administrative barriers. The absence of good and sound small companies and established social technological structures in different sectors of the Namibian economy makes it difficult for foreign investors to quantify the investment risks present and this serves as a disincentive for foreign direct investment.As a result all foreign investors find it profitable to only invest in resource-based sectors such as mining and fishing where investment is easily quantified. Economic Diversification What can be done to initiate or accelerate the process of economic transformation and development in Namibia? I agree with HH who argues that there are sectors that should serve as engines of growth for the whole economy and agriculture and rural sector becomes a priority.Economic history has taught us that with no exceptions all poor developing countries that were successful in achieving growth and poverty alleviation in the rest of the developing world emphasised agriculture at an early stage of development.Agricultural development-led industrialisation is the development strategy that almost universally would appear to be the sine qua non of a self-sustaining process of growth with equity.If Namibia is to generate the dynamism needed for both future growth and development, agricultural output, as HH pointed out, has to increase rapidly, and agricultural productivity has to expand.Time has come to move beyond public rural infrastructure such as roads, railways, to projects that will have multiplier effect such as water harvesting for large-scale irrigation.For many years the northern regions, in particular the Caprivi Region, have suffered from floods that dry up after three months, but to date no major projects are in the pipeline to harvest this water into water reservoirs so that large irrigation programmes can be started.Since there are market failures, no private sector or foreign investor will undertake such projects.Government should therefore have a well-structured intervention strategy to address this market failure and harness the opportunities offered by the rural agricultural sector.By addressing rigidities and inefficiencies in the agricultural sector, and unleashing its potential, Namibia will have taken a first and major step in dismantling the inherited colonial economic structure and designing a new economic structure that can respond quickly to domestic policy intervention.* Martin Mwinga is a portfolio manager at RMB Asset Management Namibia.Opinions expressed in this article are those of the author.