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Ethiopia and Kenya: Doing it my way

Further liberalisation is urgently needed in Ethiopia. Banking needs to be unshackled to provide capital to genuine private enterprises. Ethiopian Airlines, the country’s flag-carrier, ought to face domestic competition. Telecoms needs wholesale reform to reap the benefits of the mobile revolution. The phone company has a monopoly because the government fears that modern technology will help the opposition, mindful of the role of Facebook in the Arab spring. It maintains strict controls and, alone in Africa, has nationwide internet filtering. As a result Ethiopia has one of the lowest rates of internet and mobile-phone penetration on the continent.

One of the country’s leading economists reckons that “they have to open up fully to foreign investment or they’ll hit a wall. The model as it is now is unsustainable.” Meles Zenawi tried to make central control work, hoping to remove bottlenecks one at a time, but he found it hard. In the seven months since his death the cronies who succeeded him have done no better. They are wedded to his vision but struggle to implement it.

The rough and tumble of the market

Neighbouring Kenya is much closer to the American model of capitalism. Its state has got smaller. Indeed, crossing the border at Moyale it is hardly noticeable at all. Kenyan immigration checks are lax to the point of being a welcoming ceremony. The town is a gaggle of unkempt buildings. None of the roads is paved and many have been washed out by rain. Hotels have multiple metal gates. The receptionist advises being indoors by 8pm. Kenya’s north has a history of bloody tribal fighting.

But what Moyale lacks in security it makes up for in commercial and political vigour. Half a dozen phone companies vie for customers. Voters queue at registration posts ahead of an election. Politicians with loudspeakers make fiery speeches attacking the government, complaining that all electricity in Moyale is imported from Ethiopia. “Can we not produce our own?” they ask. It seems not, but unlike Ethiopians they can complain about it.

The next day a driver with muscular forearms steers his lorry over deep ruts on a dirt track. The 237 miles from Moyale south to Merille, traversing a featureless desert of black volcanic rock, is the longest unpaved stretch of road your correspondent traversed to cross Africa. Unmade sections in Liberia and Niger are shorter; everywhere else is paved. But even here, bumping along, all manner of goods and people are on the move, throwing up sheets of dust. Growth in intra-African trade has increased vertiginously in the past decade from a low base.

Near the equator and Mount Kenya the land becomes fertile. Farmers sell meat, grain and flowers by the side of the road. But Kenya’s farming population now accounts for less than half of the total. Urbanisation is in full swing. Messy but productive slums on the edge of cities are growing fast. The availability of cheap labour has contributed to GDP growth of 5-7%—roughly on a par with what Western economists reckon is Ethiopia’s actual rate, though the official figures are twice as high.

Kenya cannot rely on income from commodities, any more than Ethiopia can. But unlike its northern neighbour it rarely interferes in markets. Following the election in 2002 of President Mwai Kibaki, who is close to business, the state withdrew from many sectors. It ended price controls and disbanded ineffective coffee and cotton marketing boards. It liberalised foreign-exchange markets and brought in judicial reforms to speed up the resolution of commercial disputes. Some spending decisions on infrastructure will be devolved to local communities.

A main beneficiary of liberalisation has been the technology sector. Mobile-phone penetration is four times that in Ethiopia. The World Bank estimates that mobiles have added 1% a year to Kenya’s GDP growth since 2000. One in two Kenyans uses the internet. Google, Intel, Microsoft, Nokia, Vodafone and IBM are big investors.

Banking has also done well out of a more liberal regime. The number of account-holders has risen from 1m to 20m in the past ten years, and non-performing loans have dropped from 20% to 3%. Finance has become much more diverse. Equity Bank has opened up traditional financial services to the masses, scrapping high fees and minimum deposits. Some 100,000 informal savings groups, known as merry-go-rounds, have sprung up. But the most important innovation has been mobile banking, introduced in 2007 by a local phone operator, Safaricom. More than a third of Kenya’s GDP now flows through M-Pesa, its phone-based money-transfer service. It has five domestic competitors. Late last year Safaricom launched M-Shwari, a mobile savings-and-loan scheme using market interest rates.

Come to Silicon Savannah

The combination of modern technology and ample capital has allowed entrepreneurship to flourish. Start-ups populate what is known as Silicon Savannah in the west of Nairobi, the capital. In an airy loft space on Ngong Road, a few minutes’ walk from its biggest slum, nine internet start-ups are pitching to potential investors who have $50,000 to spare. Groups of 20-somethings explain how they will make it possible for tenants to pay rent for their apartment on the phone or trade second-hand clothing. They speak a language their farmer parents might find confusing, with talk of “seed funds” and “ecosystems”.

To be sure, Kenya has problems. Its elections are free but can be violent. Child and maternal mortality remain stubbornly high. The port in Mombasa is a big bottleneck, thanks to corrupt politicians who block reforms. Crime, corruption and favouritism are rife. The political class is still venal.

Even so, Kenya has the basics right: it is empowering individuals, involving them in important decisions such as the allocation of capital, which in turn attracts more capital from the outside world. The surest sign of success is the emergence of a middle class. A good part of the new riches is trickling down to ordinary people in Kenya.

That puts the country in the vanguard of a pan-African trend. The African Development Bank sees consumer spending across the continent almost doubling in the next ten years. It says the share of households that can afford some discretionary spending is set to grow from 35% in 2000 to 52% in 2020. The consuming class is attracting Western shopkeepers. A subsidiary of Wal-Mart has 300 shops in 14 African countries. Paul Kavuma, who founded Catalyst, a private-equity fund in Nairobi, explains that “a few years ago we didn’t think there were consumers in Africa. Now that’s all we are looking for in investments.”

Kenya’s bet on market-led development has made it the leader in the East African Community, a regional five-country block that has freed up the movement of goods within that grouping. More than half of Kenya’s trade is now with other African countries. Uganda, which has replaced Britain as its biggest trade partner, is combining border checks with its neighbour’s. Yet crossing into Tanzania south of Mombasa the formalities still take half an hour.

The influence of Kenya’s mobile technology is easy to spot. At a bus station an attendant changes dollars into Tanzanian shillings, having checked the latest exchange rate on his phone. Fishermen out at sea use their mobiles to check prices for their catch before deciding where to land their boats. On a journey of nearly 600 miles across the country from Dar es Salaam, the commercial capital, to the Zambian border, the phone signal never falters, and every town has mobile broadband internet. Had there been a hotel in Tunduma, the border village, it could have been booked online. But the only place available is a sticky room with a broken television, welded into a metal case to thwart thieves.

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