Exactly one year after U.S. Secretary of State John Kerry’s last multi-country tour of sub-Saharan Africa, he is preparing for another visit to the continent—to Kenya and Djibouti from May 3 to 5, 2015. In Kenya, Kerry and a U.S. delegation including Linda Thomas-Greenfield, assistant secretary of state for African affairs, will engage in talks with senior Kenyan officials on U.S.-Kenya security cooperation, which the U.S. formalized through its Security Governance Initiative (SGI) at the U.S.-Africa Leaders Summit last August. Over the past several years, the U.S. has increased its military assistance to Kenya and African Union (AU) troops to combat the Somali extremist group al-Shabab and has conducted targeted drone strikes against the group’s top leaders.  In the wake of the attack on Kenya’s Garissa University by al-Shabab, President Obama pledged U.S. support for Kenya, and Foreign Minister Amina Mohamed has stated that Kenya is currently seeking additional assistance from the U.S. to strengthen its military and intelligence capabilities.

Kerry will also meet with a wide array of leaders from Kenya’s private sector, civil society, humanitarian organizations, and political opposition regarding the two countries’ “common goals, including accelerating economic growth, strengthening democratic institutions, and improving regional security,” according to a U.S. State Department spokesperson. These meetings are expected to build the foundation for President Obama’s trip to Kenya for the Global Entrepreneurship Summit in July of this year.

On Tuesday, May 5, Kerry will become the first sitting secretary of state to travel to Djibouti. There, he will meet with government officials regarding the evacuation of civilians from Yemen and also visit Camp Lemonnier, the U.S. military base from which it coordinates its counterterror operations in the Horn of Africa region.

This week saw the proliferation of anti-government street demonstrations as current President Pierre Nkurunziza declared his candidacy for a third term, after being in office for ten years.  The opposition has deemed this move as “unconstitutional” and in violation of the 2006 Arusha peace deal which ended the civil war. Since the announcement, hundreds of civilians took to the streets of Bujumbura, despite a strong military presence. At least six people have been killed in clashes between police forces and civilians. 

Since the protests erupted, leading human rights activist Pierre-Claver Mbonimpa has been arrested alongside more than 200 protesters. One of Burundi’s main independent radio stations was also suspended as they were covering the protests.  On Wednesday, the government blocked social media platforms, including Twitter and Facebook, declaring them important tools in implementing and organizing protests. Thursday, amid continuing political protests, Burundi closed its national university and students were sent home. 

Amid the recent protests, Burundi’s constitutional court will examine the president’s third term bid. Meanwhile, U.N. secretary general Ban Ki-moon has sent his special envoy for the Great Lakes Region to hold a dialogue with president Nkurunziza and other government authorities. Senior U.S. diplomat Tom Malinowski also arrived in Bujumbura on Thursday to help defuse the biggest crisis the country has seen in the last few years, expressing disappointment over Nkurunziza’s decision to run for a third term.

Since the early 2000s, China has become an increasingly significant source of financing for African infrastructure projects, as noted in a recent Brookings paper, “Financing African infrastructure: Can the world deliver?” This week, observers have seen an additional spike in African infrastructure investments from Chinese firms, as three major railway, real estate, and other infrastructure deals were struck on the continent, totaling nearly $7.5 billion in investments.

On Monday, April 27, the state-owned China Railway Construction Corp announced that it will construct a $3.5 billion railway line in Nigeria, as well as a $1.9 billion real estate project in Zimbabwe. Then on Wednesday, the Industrial and Commercial Bank of China (one of the country’s largest lenders) signed a $2 billion deal with the government of Equatorial Guinea in order to carry out a number of infrastructure projects throughout the country. These deals align with China’s “One Belt, One Road” strategy of building infrastructure in Africa and throughout the developing world in order to further integrate their economies, stimulate economic growth, and ultimately increase demand for Chinese exports. For more insight into China’s infrastructure lending in Africa and the implications of these investments for the region’s economies, please see the following piece by Africa Growth Initiative Nonresident Fellow Yun Sun: “Inserting Africa into China’s One Belt, One Road strategy: A new opportunity for jobs and infrastructure?”

Editor’s Note: Brookings will hold an event and live webcast on Wednesday, August 26 to discuss the findings of the 2015 Financial and Digital Inclusion (FDIP) Report and Scorecard. Follow the conversation on Twitter using #FinancialInclusion 

Access to affordable, quality financial services is vital both for ensuring the financial well-being of individuals and for fostering broader economic development. Yet about 2 billion adults around the world still do not have formal financial accounts.

The Financial and Digital Inclusion Project (FDIP), launched within the Center for Technology Innovation at Brookings, set out to answer three key questions:

• Do country commitments make a difference in progress toward financial inclusion?
• To what extent do mobile and other digital technologies advance financial inclusion?
• What legal, policy, and regulatory approaches promote financial inclusion?

To answer these questions, the FDIP team spent the past year examining how governments, private sector entities, non-government organizations, and the general public across 21 diverse countries have worked together to advance access to and usage of formal financial services. This research informed the development of the 2015 Report and Scorecard — the first in a 3-year series of research on the topic.

For the 2015 Scorecard, FDIP researchers assessed 33 indicators across four dimensions of financial inclusion: Country commitment, mobile capacity, regulatory environment, and adoption of selected basic traditional and digital financial services.

The 2015 FDIP Report and Scorecard provide detailed profiles of the financial inclusion landscape in 21 countries, focusing on mobile money and other digital financial services.

On August 26, the Center for Technology Innovation will discuss the findings of the 2015 Report and Scorecard and host a conversation about key trends, opportunities, and obstacles surrounding financial inclusion among authorities from the public and private sectors.

Register to attend the event in-person or by webcast, and join the conversation on Twitter at #FinancialInclusion.

Editor’s Note: Brookings will hold an event and live webcast on Thursday, August 4 to discuss the findings of the forthcoming 2016 Financial and Digital Inclusion Project (FDIP) Report. Follow the conversation on Twitter using #FinancialInclusion.

The 2016 Brookings Financial and Digital Inclusion Project (FDIP) Report, the second annual report produced by the FDIP team, assesses national commitment to and progress toward financial inclusion through traditional and digital mechanisms in 26 countries.  

As in the 2015 report, the FDIP team analyzed four key dimensions of financial inclusion: country commitment, mobile capacity, regulatory environment, and adoption of formal financial services. The 2016 report amplifies the geographic diversity of the FDIP country sample by adding five new countries and features descriptions of the financial inclusion landscape in all 26 countries.

The 2016 FDIP Report finds that significant progress has been made toward advancing financial inclusion in many countries, and robust commitment to strengthening the digital financial services ecosystem is evident across diverse geographic, political, and economic contexts.

On August 4, the Center for Technology Innovation will discuss the key findings of the 2016 FDIP Report and host a conversation with public sector representatives about key trends, opportunities, and obstacles regarding financial inclusion in their respective countries and around the world.

Below we provide some context regarding the role of financial inclusion within the global drive for sustainable development.

What is financial inclusion?

The common themes that emerge from many definitions of financial inclusion are the ability to access formal financial services and to utilize those services in a way that promotes financial health.

For example, the Center for Financial Inclusion at Accion defines financial inclusion as a “state in which everyone who can use them has access to a range of quality financial services at affordable prices, with convenience, dignity, and consumer protections, delivered by a range of providers in a stable, competitive market to financially capable clients.”

In short, financial inclusion in itself is not the end goal, but instead serves as a key mechanism for advancing the well-being of individuals, families, and communities. At the macroeconomic level, financial inclusion provides opportunities to advance economic growth, reduce income inequality, and combat poverty.

For the purposes of FDIP, we primarily focus on individuals’ access to and usage of affordable, secure, basic financial services and products, such as person-to-person payments and savings accounts. However, we also recognize the important role that more extensive financial services (e.g., microinsurance and microcredit) can play in enabling individuals to plan for the future and absorb financial shocks. Where possible, we highlight examples of a broad suite of financial services within the country profiles of the 2016 report.

To learn more about the 2016 FDIP Report, please register to attend the launch event in-person or watch the live webcast.

A year after he and his colleagues took control of China’s government, Xi Jinping has emerged as an extraordinarily powerful leader, with a clear and ambitious agenda for remaking the Chinese governance system. Economic, social and foreign policy are now on a far more clear and decisive course than they were during the drifting and unfocused last years under president Hu Jintao and premier Wen Jiabao.

Xi arguably wields more personal authority than any Chinese leader since Mao: he has subdued the fragmented fiefdoms that arose under Hu; has arrogated all key decisions to himself, unlike Jiang Zemin who delegated much economic policy power to his premier Zhu Rongji; and does not have to deal with the cabal of conservative patriarchs that often hemmed in Deng Xiaoping.

Perhaps the biggest surprise of Xi’s first year was the speed with which he consolidated his power and signaled his policy intentions. He achieved this through two big house-cleaning drives. First was an anti-corruption campaign that neutralized a powerful political enemy (former security boss Zhou Yongkang), brought to heel a powerful vested interest (state oil giant China National Petroleum Corporation, much of whose senior management was arrested) and signaled the costs of opposing his reform agenda by sweeping up 20,000 officials at all levels of government. The other was the so-called “mass line” campaign that involved party, government and military officials engaging in “self-criticism” sessions and getting marching orders from party central.

So there is no question that Xi has power. What does he intend to do with it? The Decision document that emerged last November from the Communist Party plenum made clear that his aim is comprehensive governance reform. This does not mean eroding the party’s monopoly on power; quite the reverse. The intention is to strengthen the party’s grip by improving the administrative system, clarifying the roles of the market and the state (resulting in a more market-driven economy but also in a more powerful and effective state), and permitting a wider role for citizen-led non-governmental organizations—so long as those NGOs effectively act as social-service contractors for the state and do not engage in advocacy or political mobilization.

And at the recent National People’s Congress (NPC) we got additional detail on Xi’s economic program, which is the most comprehensive structural reform agenda since the late 1990s. (Xi’s propagandists make the bolder claim that it is the most sweeping reform program since Deng’s original “reform and opening” drive of the late 1970s.) Much commentary has focused on the Plenum Decision’s emphasis on giving the market a “decisive role,” and this shift is indeed important. But Xi is not some Chinese version of Ronald Reagan or Margaret Thatcher: for him and his colleagues, the market is a tool, not an end in itself. The respective roles of state and market need to be clarified, but the state role will remain very large. Xi’s economic agenda is not just about deregulation and improving the environment for private enterprise; it is also about fixing the state-enterprise and fiscal systems so that they become more effective instruments for achieving state aims.

If Xi succeeds, the result will be a China with a more efficient economy, a better run and somewhat more transparent government—and a Communist Party with enhanced legitimacy and tighter control of all the crucial levers of power. But there are also two less rosy potential outcomes. One is that his reforms fail, and China is left with a debt ridden, slow-growing economy with an overbearing state sector and an increasingly dissatisfied population. Another is that he succeeds—but either becomes a permanent dictator himself, or establishes the belief that China only be ruled by a strongman, thereby retarding the development of a more open and participatory political system.

It’s the economy, and we’re not stupid

On the immediate economic policy questions, a gulf has opened between foreign and many non-official domestic analysts on the one hand, and the apparent stance of the government on the other. According to the prevalent outside view, China’s biggest problem is the huge increase in leverage since the 2008 global financial crisis: total non-financial credit rose from 138 percent of GDP in 2008 to 205 percent last year. Unless this spiraling leverage is brought under control, the argument goes, China risks some sort of financial crisis. To stabilize the credit/GDP ratio, annual credit growth must fall from its current rate of around 17 percent to the trend rate of nominal GDP growth, which now appears to be around 10 percent. But such a dramatic fall in credit growth must almost certainly cause a drop in real GDP growth, at least in the short run. The conclusion is therefore that if Beijing is serious about controlling leverage, it must accept significantly lower growth for at least a couple of years. If on the other hand the leaders insist on keeping economic growth at its current pace, this means they cannot be serious about controlling leverage and imposing structural reform, and a train wreck is more likely.

As far as we can tell from the agenda laid out at the Plenum and the NPC, Xi and his colleagues do not agree with this analysis. Their priorities are to restructure the state-owned enterprises (SOEs) and the fiscal system, and maintain real GDP growth at approximately its current rate of 7.5 percent. The leverage problem, by implication, can be sorted out over several years.

The argument in favor of this approach is that SOE and fiscal reform strike at the root causes of the debt build-up. Local governments have borrowed because their expenditure responsibilities exceed their assigned revenues, they have an implicit mandate to build huge amounts of urban infrastructure, and they face no accountability for the return on their investments. SOEs have borrowed because their return on capital has deteriorated sharply. Improving SOEs’ return on capital and cleaning up local government finance, should greatly reduce the demand for unproductive debt, and hence bring credit and economic growth back into alignment—eventually. In the meantime credit will flow at whatever rate permits real GDP to keep humming at 7 percent or more, meaning that leverage will continue to rise.

In other words, the government thinks the debt build-up is merely a symptom, and it intends to attack the underlying disease while letting the symptoms take care of themselves. One can feel comfortable with approach this on two conditions: first, that the government is right that the debt buildup does not itself pose an immediate threat to economic health; and second that the government is serious about tackling the structural problems.

Debt – what, me worry?

The safety of the current debt trajectory is a judgment call. On the plus side, the last several months have seen a steep decline in year-on-year credit growth, with very little apparent impact on economic activity. Growth in broad credit (including activity in the “shadow” financing sector) peaked at 23.5 percent in April 2013 and declined continuously to 17 percent in February, while GDP growth remained basically steady in both real and nominal terms. If this pattern holds, it suggests that leverage will continue to increase, but at a slower rate than in the past two years, so the runaway-train risk is reduced.

The government’s own case for the safety of the present debt situation implicitly rests on a report by the National Audit Office (NAO) in late December, which found the debt position of local governments to be poor but manageable. Total liabilities of local governments as of 30 June 2013 were found to be Rmb18 trn (US$3 trn), or approximately 31 percent of GDP; of these liabilities 40 percent were guarantees and contingencies (and thereby not an imminent risk to local finances). NAO’s estimate of consolidated public debt, including the central government, came in at about 53 percent of GDP, well below the levels of public borrowing in most OECD countries.

Another basis for the sanguine view on debt was an extensive national balance-sheet analysis published in December by the Chinese Academy of Social Sciences (CASS), the party’s main think-tank. CASS’s calculation methods differ from NAO’s, so the two sets of figures are not directly comparable. CASS found that total government debt was 73 percent of GDP in 2011, and that broad public-sector liabilities (including the debt of SOEs and policy banks) were 151 percent of GDP. This sounds scary until you inspect the asset side of the balance sheet, which comes in at a more cheerful 350 percent. This figure is almost certainly too rosy: nearly three-quarters of it represents the land holdings of local governments and SOE assets, whose reported values are probably well above their true market values. But even discounting these values substantially, it is still possible to conclude that the public sector’s assets comfortably cover its liabilities.

Whether one agrees with these estimates or not, it is clear that policy makers accept the central conclusion that the nation’s debt problem is serious but manageable, and that direct efforts to deleverage immediately are not warranted. The important question then becomes whether Beijing’s efforts to tackle the underlying structural problems are bearing fruit.

Rolling back the SOE tide

So what are those efforts? The agenda on SOE reform is now clear. SOEs will be compelled to focus on improving their return on capital, rather than expanding their assets; private capital will be permitted to enter previously restricted sectors; direct private investment in SOEs and in state-led investment projects will be encouraged; and most likely (although government officials have been coy on this point), a swathe of underperforming locally-controlled SOEs in non-strategic sectors will be privatized or forced into bankruptcy.

In essence, this revives the zhuada fangxiao (grasp the big, release the small) SOE reform strategy of the late 1990s. The idea was that the state would retain control, and try to improve the operational efficiency, of a relatively small number of very large enterprises in strategic sectors such as railways, aviation, telecoms, power and petrochemicals, while privatizing most activity in competitive consumer goods and services sectors. This strategy was successful: in the decade ending in 2008, the number of SOEs fell from 260,000 to 110,000, the private sector’s share of national fixed investment rose from less than a quarter to 58 percent, the profitability and return on assets of state firms rose dramatically and came close to matching the returns in private firms, and the proportion of SOE assets in “strategic” sectors rose to an all-time high of 62 percent.

Thanks to the Hu/Wen leadership’s lack of enthusiasm for state sector reform, and their mandate that state firms support the massive 2009 economic stimulus, some of these gains have been reversed. Crucially, the return on assets in SOEs plummeted to less than half the private-sector average, and state firms began to re-colonize sectors from which they had previously retreated: by 2011, half of SOE assets were in these non-strategic sectors.

Now the reformers are back in charge and aim to complete the zhuada fangxiao objective. This does not mean eliminating the state sector, or privatizing the core centrally-owned firms on the economy’s commanding heights. But it does mean a determined push to shed non-core SOEs and assets, abandon consumer-facing sectors in favor of private firms, and improve the operational efficiency of the remaining SOES. The headline efforts in this direction so far have been an announcement by the Guangdong provincial government that it aims to move 80 percent of provincial SOEs to a mixed-ownership structure, with no predetermined minimum state shareholding; and an announcement by petrochemicals giant Sinopec that it will seek private investment for an up to 30 percent share of its downstream gasoline and diesel distribution operations.

Funding the unfunded mandates

SOE reform was a surprisingly strong component of the Third Plenum decision; fiscal reform took center stage in the recent NPC session. China’s central fiscal problem is unfunded mandates for local governments. Localities control less than half of revenues but are responsible for 85 percent of government expenditure. In theory, the gap is supposed to be bridged by transfers from the central government, but in practice the transfers often do not match up well with localities’ actual needs. Not surprisingly, they respond to this structural deficit by resorting to a variety of off-budget funding schemes, a lot of which involve grabbing land and selling it to developers at a big markup.

A mismatch between local expenditure and revenue was a deliberate feature of the landmark 1994 tax reform (in whose design finance minister Lou Jiwei was involved as a junior official). But until the early 2000s, localities’ expenditure share was roughly stable at around two-thirds of the total; unfunded mandates and chronic deficits have grown dramatically in the past decade.

The centerpiece of Lou’s fiscal reform strategy is a recentralization of expenditure responsibility and a more flexible transfer system, reducing incentives for local-government rapacity. But in his budget speech he outlined a host of other detailed reforms, whose combined effect would be curb over-investment in real estate and heavy industry, permit fiscal policy to become more countercyclical and increase budget accountability. The main items include:

• Revenue estimates “are now seen as projections instead of tasks to accomplish.” This aims to discourage the current practice of trying to increase tax collections during economic downturns.
• Adoption of a three-year budget cycle and accrual accounting.
• Increase local government borrowing authority (from a small base), via provincial and municipal bonds.
• Make budgets at both the central and local level more open and transparent.
• Clean up the maze of local government tax breaks.
• Impose the long-delayed tax on property values, establish an environmental protection tax and hike the resource tax on coal.

Good diagnosis, but will the cure cause more harm?

All in all the reform agenda is a strong one: its diagnosis of China’s economic ills is compelling, and the proposed cures seems sensible. There are three concerns. First, there is the worry that the government has underestimated the financial risks of the burgeoning debt burden and a rapidly-changing financial system. The only clear promise of stronger financial regulation so far is Lou’s statement that a deposit insurance system will be launched later this year. This would reduce moral hazard by clarifying for investors which financial assets are guaranteed and which are risky. But more action to cut debt and restrain the “shadow banking” sector may be needed.

Second, it is possible that reforms may be thwarted by powerful bureaucratic and business interests: some reforms (like the property tax) have been proposed in the past but gone nowhere. On the whole, Xi’s success at whipping officialdom into line by the anti-corruption and mass line campaigns suggests he will be more effective than his predecessor, but there is no guarantee. Finally, there is the worry that Xi’s program succeeds, and validates highly centralized and authoritarian style of governance that could harm China’s long-term prospects for development into a more open and liberal society.

In advance of President Obama’s historic trip to Cuba and Argentina, three Brookings scholars participated in a media roundtable to offer context and outline their expectations for the outcomes of the trip. Richard Feinberg and Ted Piccone discussed Cuba–including developments in the U.S.-Cuba relationship, the Cuban economy, and human rights on the island–and Harold Trinkunas offered insight on Argentina, inter-American relations, and the timing of the visit.

Read the transcript (PDF) »

Richard Feinberg:

The idea is to promote a gradual incremental transition to a more open, pluralistic and prosperous Cuba integrated into global markets of goods, capital, and ideas. It is a long-term strategy. It cannot be measured by quarterly reports.

Ted Piccone:

...the key [is] to unlock a whole set of future changes that I think will be net positive for the United States, but it is going to take time, and it is not going to happen overnight.

Harold Trinkunas:

Cuba is really about moving, among other things, a stumbling block to better relations with Latin America, and Argentina is about restoring a positive relationship with a key swing state in the region that was once one of our most important allies in the region.

Downloads

• Download the transcript