Global Emerging Markets (GEMs)

Dealing with Nigeria’s Jihadist Threat

2013-03-07T06:47:00Z

About 10 days ago I sat at breakfast in Lomé, the capital of Togo, a sliver of a country in West Africa, watching French TV news of the capture, and what turned out to be false reports of the liberation, of seven French tourists in northern Cameroon by the Nigerian radical Islamist group Boko Haram. It was hard not to feel concerned about the future of this part of the world. Lomé is a good 800 miles as the crow flies from where this most recent drama occurred – and a similar distance from northern Mali, where fierce fighting continues for control of the city of Gao – and I was in far more danger there from motorcycles going the wrong way down one-way streets than from terrorist kidnappers. But the fairly recent emergence of economic dynamism in much of Africa after decades of stagnation due to poor governance and political and ethnic strife remains fragile, and these developments highlight the risk.

The world has begun to wake up to Africa and its enormous potential. Images of fierce battles between French troops and jihadists in northern Mali and of unspeakable horrors in Darfur and Eastern Congo now have to vie for the world’s attention with pictures of gleaming skyscrapers, shopping malls, cell phones, and new ports and roads, and with reports of stunning rates of economic growth and innovative new solutions to age-old problems of poverty. Ten of the 20 fastest-growing economies are in sub-Saharan Africa, and not all of them are big energy or mineral producers. Consumer spending is expected to double over the next ten years and the number of countries with average household incomes of more than $5,000 will also double.

The Palms Mall in Lagos, Nigeria

Kenya has what may be the world’s most advanced mobile payments system, developed by the leading mobile phone operator, Safari.com, and used by everyone from gardeners to executives to pay their electric bills, send money to their parents in the village, and pay the housekeeper. According to some estimates, one-third of Kenya’s GDP flows through the system. Jumia.com, a Nigerian company, has slick online retail web sites in Nigeria, Egypt, and Morocco, selling everything from electronics to shoes and promising door-to-door delivery, no small challenge in countries where few people have fixed street addresses. To get around the payment problem, people go online and use their domestic debit cards or a bank transfer to pay for goods. A Jumia affiliate in North America then buys the stuff from Amazon and other online retailers, using U.S. and Canadian funds, consolidates the goods, and ships to Lagos three times a week via Fedex. Local knowledge is important: without it, these shipments might take ages to clear customs and cost substantial amounts of baksheesh. It’s not exactly Amazon Prime free overnight delivery, but it works, and it shows a way for companies to cater to the large and growing African middle class, people who can’t afford to fly to London or New York to do their shopping but who want, and have the means to pay for, a wide array of consumer goods.

The Nigerian Stock Exchange Index is at a 52-week high and is up nearly 65% over the past year, so regional insecurity has yet to translate into economic instability, and indeed the links between the two can be tenuous. Only a little farther afield, Egypt’s CASE (Cairo and Alexandria Stock Exchange) Index has been a star performer, up over 57% in local currency terms and 41% in dollar terms over the past 14 months, even as the Arab Spring has turned into what looks to be a long winter of discontent.

Over the long run, though, political instability and civil unrest tend to take their toll on economic growth and investment performance. If for no other reason, a country like Nigeria, whose economic prospects are bright, needs to address the problems caused by its homegrown radical Islamists. I have written previously in this space about Indonesia, another huge, ethnically and religiously diverse country, which appears to have dealt fairly successfully with a militant separatist Islamist movement in the northern province of Aceh by giving the province a substantial degree of autonomy to impose its austere version of Sharia law. The Philippines, similarly, appears to have neutralized the 40-year insurgency by the separatist Moro Islamic Liberation Front on the southern island of Mindanao, granting the region significant autonomy in a peace agreement signed last October.

Each country is different, of course, and there is no guarantee that what seems to work in Indonesia and the Philippines will also work in Nigeria. Nine northern Nigerian states have already instituted full Sharia law, while another three have given wide authority to Sharia courts to adjudicate family and commercial disputes between Muslims. But Boko Haram is based in Borno, one of the nine Sharia states, and has carried out some of its most vicious attacks in the state capital of Maiduguri. Granting additional autonomy to Borno State may be insufficient to pacify the group. At the same time, trying to crush Boko Haram militarily could instead aggravate the situation, victimizing and radicalizing innocents and swelling the ranks of Boko Haram supporters.

One problem is Nigeria’s federal system, which grants a tremendous amount of power to state governors, who control most state revenues, dispense vast patronage, and typically pick their own successors. Greater state-level autonomy means little if Boko Haram remains locked out of power.

A three-pronged approach, while it does not guarantee success, seems the only reasonable way forward. It would entail a concerted but highly-disciplined effort by the Nigerian military to weaken the group militarily – one source of popular grievance has been looting and other abuses committed by Nigerian troops in prior anti-insurgency campaigns – accompanied by efforts to prise away less radical elements with bribes and offers to share power, thus isolating the more intransigent factions and also weakening the links between Boko Haram, a homegrown movement, and international jihadists affiliated with Al Qaeda. A special, even more autonomous, status for Borno State – similar to the special status granted by Indonesia to Aceh Province – and a political dispensation which guarantees the Islamists a real voice, would also help, provided it comes with strict prohibitions on the state becoming a haven for terrorist adventurers, backed up with military force. Finally, although he has so far done a good job, President Goodluck Jonathan should consider announcing that he will not run for re-election in 2015.

Nigerian presidential politics is governed by an unwritten rule that the presidency should alternate between the Muslim north and the largely Christian south. This rule was broken when Umaru Yar’Adua, the northerner who succeeded outgoing President Olusegun Obasanjo after Obasanjo had completed two full terms in office, fell gravely ill only two years into his term and then died following six months during which Vice President Jonathan served as Acting President. Jonathan, a southerner, served out the remainder of Yar’Adua’s term and then won election in his own right in 2011.

Although Nigerian presidents are subject to a two-term limit, the Nigerian High Court recently ruled that Jonathan could run for another term because, in the words of the ruling, “after the death of Umar Yar’Adua, there was no election. President Jonathan was merely asked to assume the office … in line with doctrine of necessity…He is therefore currently serving his first tenure of office and if he so wishes, he is eligible to further seek his party’s ticket … to run for office in 2015.” Northerners felt, and still feel, short-changed. If Jonathan were to run and serve another four-year term, a southerner would have ruled Nigeria for 18 of the previous 20 years. There is no guarantee that a legitimately elected northerner in the state house in Abuja will soften Boko Haram’s stance, but it could make some difference.

Nigeria, as Africa’s biggest country by population and its second-largest economy, is too big to ignore. We don’t know what a Boko Haram-ruled Borno State would look like, and we can’t exclude the possibility that it would entail the death penalty for apostasy, stoning of adulterers, and denial of education to girls. This could be hard for most Nigerians – not to mention the rest of the world – to accept, but the alternative could be far worse for everyone.

The Gods Must Be Angry: Olympics to Drop Wrestling

2013-02-21T23:59:33Z

Slavish obedience to tradition is never a good thing, but neither is its wanton disregard. So what are we to make of the recent announcement by the International Olympic Committee that wrestling, one of the original sports in both the ancient and modern Olympic Games, is to be dropped as a core sport and will have to compete for a single slot in the 2020 Games against a number of other sports, including baseball and softball, karate, squash, roller sports, sport climbing, wakeboarding (I’d never heard of it, but it appears to be related to water skiing) and wushu, a martial art said to be hugely popular in China? Media reports on the decision stressed the vigorous and successful lobbying by proponents of modern pentathlon, an original sport in the Modern Games, also threatened with removal, which consists of running, swimming, horseback riding, fencing, and shooting – skills required by the late-19th-century cavalry officer caught behind enemy lines – to which I confess a certain fondness due in equal measure to its gloriously anachronistic quality and its complete lack of commercial appeal.

Some traditions are best abandoned. I, personally, am happy Olympic athletes no longer compete in the nude, their bodies glistening with olive oil, though I would make an exception for women’s beach volleyball. The modern Olympics themselves are to a large extent based on a misreading of the role of the original games in ancient Greece. Pierre de Coubertin, who created the modern Olympic movement, was, unusually for a Frenchman, strongly influenced by English ideas of education and sport, especially those of Dr. Arnold of Rugby School, a proponent of the notion that “organised sport can create moral and social strength,” and that, as de Coubertin put it, “L’important dans la vie ce n’est point le triomphe, mais le combat, l’essentiel ce n’est pas d’avoir vaincu mais de s’être bien battu.” (The important thing in life is not the triumph but the struggle, the essential thing is not to have conquered but to have fought well). De Coubertin would have had little use for Vince Lombardi’s world view (Winning isn’t everything. It’s the only thing), but then he also had little regard for women in sport and believed that they should be excluded from the Olympics.

There is evidence that de Coubertin misinterpreted, and excessively romanticized, the ancient Olympics. Scholars have argued whether ancient Olympic athletes were amateurs or professionals – after 480 BCE, at least, most were professionals – and have disputed de Coubertin’s belief in the contribution of the games to the prevention of war, arguing that a limited truce was declared only to permit athletes to travel to and from the Olympic site and protect the venue from attack during the festivities. What’s more, the idea that, as American sportswriter Grantland Rice put it, “For when the great scorer comes to write against your name, He marks not that you won or lost but how you played the game,” would probably have been quite alien to contestants in the ancient games. The ancient Greeks may have competed for glory, not reward, but the glory came in winning, not in being a good loser. Both Hector and Achilles, after all, were revered for their victories, not their defeats.

Still, some traditions are worth holding on to just because they are ancient and venerable. The modern Olympics are descended directly from the ancient Olympics, however much of the latter may have been lost in the translation. Wrestling was one of the core events of the ancient games and of the modern games, at least until now. Wrestling is one sport in which contestants compete purely for the glory. A few wrestlers may go on to fame and some degree of fortune in pro wrestling, but most of these guys, winners as well as losers, go on to earn a living doing something totally unrelated to the sport in which they have excelled. I have never seen a wrestler pictured on a Wheaties box, sponsored by a major shoe company, or advertising prescription drugs on TV. Some things are valuable precisely because they have no value outside themselves.

The ancient Greeks invented the concept of hubris – defiance of the gods – which typically led to nemesis, or divine retribution. Abandonment of wrestling, an ancient sport one can imagine the Greek gods watching and betting on, in favor of, say, artistic roller-skating, would be hubris at its worst, ditching whatever remains of Olympic ideals to pander to the TV networks’ eternal request for ratings. If this decision stands I fully expect nemesis to follow, perhaps in the form of a bolt of lightning that wipes out the next meeting of the International Olympic Committee.

Arming the Syrian Rebels Would Be a Terrible Mistake

2013-01-07T06:19:00Z

After watching from the sidelines for nearly two years, many of the world’s political and opinion leaders are now calling for the West to supply arms to the Syrian rebels. British Prime Minister David Cameron has spoken of a “strategic imperative” to act, at least in part to prevent extreme jihadist groups from eclipsing more moderate factions. Foreign Affairs has published an article by Michael Bröning with the Orwellian subtitle “Arms for Peace,” which similarly argues that the moderate rebel contingent is the only party to the conflict that does not have a reliable supply of arms and money from the outside, since the Russians continue to supply the Assad regime and most of the Qatari and Saudi funds go to more radical groups.

Although no Western power has yet – officially, at least – supplied arms to the rebels, the idea seems to be gaining currency in both Western and Arab capitals, especially in the wake of the December conference in Marrakech, which declared the Syrian National Coalition “the legitimate representative of the Syrian people.” For those who remember the U.N. declaration declaring the PLO as the sole legitimate representative of the Palestinian people, this too has an Orwellian tint. With the death toll in the conflict standing at an estimated 60,000 it is tempting to conclude that it is time for some kind of intervention: supplying arms at a minimum, but potentially declaring a no-fly zone over portions of the country to protect rebel-held territory from aerial attacks. But it would be a terrible mistake.

Today’s New York Times, in one of the very few Western articles I have seen that do not explicitly take the side of the rebels, reports on the large number of people in Syria, especially in Damascus, who have no love for the Assad regime but who worry about the consequences of a rebel victory. These people include business owners and civil servants, many but not all of them Alawites and Christians, who fear persecution by a future Islamist government as well as a settling of scores by various groups that may not care to lay down their weapons once the regime is deposed. Considering the turn of events in Libya, Egypt, and Iraq, their concerns are far from misplaced. The possible replacement of Syria’s multi-religious character with a monolithic Sunni identity or, worse, the potential partition of the country into ethnic enclaves ruled by warlords ought to give pause to the most enthusiastic supporters of the rebel movement. Women especially may not relish giving up the substantial equality they have enjoyed under the Assads’ secularist government.

What, then, is the solution? UN special envoy Lakhdar Brahimi has announced a new peace plan, which he says has at least tentative backing from the Russians. No details have yet been released, but the plan is likely to involve some kind of transitional unity government that will prepare the way for a new elected government. The opposition has been adamant that no peace talks can take place as long as Assad remains in power, but this may not be the stumbling block it has been in the past, Russia having recently indicated that it is largely indifferent as to whether Assad stays or goes. The offer of a safe haven in Moscow for the Assad family and the ability to spirit out however many millions of dollars they may need to live in their accustomed style could do the trick, especially if the Russians threaten to stop supplying the regime if he doesn’t accept their offer and if the alternative is to end up in the dock of the International Criminal Court or to be gunned down by the side of the road like Muammar Qaddafi. Many of those close to the Assads, seeing an opportunity to escape the worst consequences of a military defeat, would almost certainly be willing to give him an additional push.

This is far from a perfect solution. Even if Bashar and his wife agree to go quietly, his younger brother Maher, who commands the Republican Guard and the Army’s elite Fourth Armored Division, could decide to fight on. But even Maher’s agreement to leave the country would not guarantee a happy ending. After 42 years of authoritarian and often brutal rule by the Assad clique, whatever democratic habits and institutions Syria once possessed have atrophied. Our experience in Iraq shows us how hard it is to build a nation and to graft democracy onto a country with no experience of it. Both Iraq and Egypt demonstrate that even free and fair elections are by themselves no guarantee of liberty.

Still, the available alternatives appear far worse. It is time to start talking to the Russians about engineering an end to the conflict and supporting Syria’s reconstruction.

Like a Ton of BRICS: Let’s Drop the Catchy Emerging Markets Acronymns

2012-12-14T19:38:00Z

Eurasia Group founder and emerging markets guru Ian Bremmer has come around to the view that the BRICS construct is nothing more than a bunch of countries “united by a catchy acronym” and little else. His op-ed piece in last Friday’s New York Times notes that Brazil, Russia, India, and China “have formalized their club and extended their reach by inviting South Africa to join” – a development that occurred in December of 2010 and asks, “But do their meetings and joint statements really allow them to punch above their individual weight? What do these countries share beyond a common interest in bolstering their global clout?” Several hundred words later he concludes that these five countries “will sometimes use their collective weight to obstruct U.S. and European plans. But the BRICs have too little in common abroad and too much at stake at home to play a single coherent role on the global stage.” Has he been reading my blog?

I write this from Jakarta, Indonesia’s throbbing capital city of 10-million people. Indonesia, which with over 240 million inhabitants is the world’s fourth-largest country, is a vast archipelago of more than 18,000 islands, stretching some 3,200 miles from the northern tip of Sumatra in the west to the middle of the island of New Guinea in the east, whose economy is growing faster than that of any of the BRICS save China. If the Indonesians gave much thought to the BRICS – and there is no evidence they do – they might be bemused by the inclusion of South Africa, a country with one-fifth its population and half its GDP. As would, no doubt, the Mexicans, twice as many in number as the South Africans and with an economy three times bigger.

I am not trying to pick on South Africa, where I lived for seven years and for which I have very fond memories. And indeed, although South Africa stands out for its small size relative to the other BRICS countries, it otherwise has no more or less in common with the others than any of them have with one another.

As Bremmer points out, echoing my own writing on the topic, there is a whole raft of political, macroeconomic, and commercial reasons to consider the BRICS, with or without the inclusion of South Africa, a meaningless construct, as I also consider the newer CIVETS group, a term variously attributed to Robert Ward of the Economist Intelligence Unit and Michael Geoghegan, former CEO of HSBC, to refer to Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa, a group of countries that The Guardian has referred to breathlessly as “countries bearing the world’s hopes for growth.” And what do these countries have in common? Not much it seems, other than “young populations [and] economies…perceived to have relatively sophisticated financial systems and to not be overly reliant on any one sector.” I can accept this, though with the caveat that there is a world of difference between the sophistication of Vietnam’s financial system, dominated by dodgy state-owned banks with large portfolios of non-performing loans and with a total stock market capitalization of 14.8% of GDP, and South Africa’s highly developed banking sector and stock market capitalization of 210% of GDP. And although there are reasons to be bullish about each of these economies, the economic trajectory of Turkey, with a per capita GDP of more than $10,000 and a high degree of trade integration with the European Union, is bound to be very different from that of Vietnam, with a per capita income of only $1,400.

I have previously suggested that rather than coming up with a new acronym every time someone thinks to add or drop a country from a given group we should just refer to the BEEs – Big Emerging Economies – and we could call their most dynamic members the Killer BEEs. Unaccountably, it has yet to catch on.

I can’t complain too much: as long as people keep on writing about BRICS and CIVETS I can keep on sniping at them. But if one of the benefits of investing in emerging and frontier economies is their relative lack of correlation with more mature economies and also with one another, the more we try to force them into an ill-fitting straightjacket (including BRICS and CIVETS funds) the less we may benefit in future from that very lack of correlation we seek. Why don’t we stop substituting catchy acronyms for careful analysis and pay attention to what distinguishes the investment case for each of these economies rather than how they may superficially resemble one another.

François Hollande’s African Adventure: The End of Françafrique?

2012-08-01T15:46:00Z

The official visits to Paris during the first week of July by three African heads of state raised more questions than answers about the Africa policy of François Hollande, the newly-elected French President. On July 2 it was President Alpha Conde of Guinea, on July 5 Ali Bongo, President of Gabon, and on July 6 President Macky Sall of Senegal. Presidents Conde and Sall came to power through elections generally recognized as free and fair, but the 2009 elections that brought Bongo to power, succeeding his late father Omar Bongo, who had served as Gabon’s President for 42 years, were widely thought to have been rigged.

This series of visits came as something of a surprise, François Hollande having promised to put an end to “Françafrique,” the web of political, economic, and military links between France and its former African colonies, links that maintained France’s sphere of influence and allowed it to continue to think of itself as a world power. In the words of former President François Mitterrand, “Without Africa, there will be no history of France in the 21^st century.” Françafrique, though it came to have a negative connotation, had already been official French policy since the founding of the Fifth Republic by Charles de Gaulle.

When De Gaulle returned to power in 1958, it was clear that colonialism was on its last legs. France was embroiled in a conflict that would soon lead to independence for Algeria, regarded not as a colony but as an integral part of France, with the same political status as Normandy. The French had already suffered a stinging defeat at the hands of the Viet Minh in the battle of Dien Bien Phu, which led to French withdrawal from all of Indochina. In 1956, U.S. President Dwight D. Eisenhower had sided with Egypt against the French and British who, in alliance with Israel, had retaken the Suez Canal, which Egyptian President Nasser had just nationalized.

Rather than resist the tide, De Gaulle immediately set about turning it to his advantage, proposing a new community joining France to the countries of French West Africa and making an example of punishing Guinea, which instead of following the proposed timetable to independence in 1960 had voted for immediate independence (Guinea was welcomed back into the fold, more or less, in the mid-seventies). Liberal democracy and human rights were not high on the French agenda: the idea instead was to create a cadre of client states whose rulers depended on France’s military support to remain in power and civilian support to keep the lights turned on, and who, in exchange, granted French companies unlimited access to their markets and reserves of oil, timber, and minerals. The French never let democratic niceties prevent them from sending in the Foreign Legion to remove a troublesome African president or to keep a client, however repugnant, in power. To express their gratitude, these African presidents often presented their French counterparts with diamonds or suitcases of cash to finance their re-election campaigns.

Of all the client despots, none was more loyal than Omar Bongo, Ali Bongo’s father, who became, as a result, one of the longest-serving and richest rulers in the world by the time of his death in 2009 after 42 years as President.

Gabon, which has only 1.5 million people but produces around 240,000 barrels of oil per day, became one of Africa’s richest countries under Bongo’s rule, with per capita GDP in excess of $14,000. You wouldn’t know it from visiting the place. Gabon built an average of 5 km of roads per year during that period, and had one of the world’s highest infant mortality rates. A U.S. Senate investigation in 1999 revealed that in Citibank alone, President Bongo held personal accounts worth $130 million. Bongo is said to have received from the French oil company Elf Aquitaine – acquired by Total in 2000 – a commission of $1 on every barrel of oil produced in Gabon. Over 42 years, that works out to more than $3.5 billion.

Every French President has had his “Monsieur Afrique.” Some have had several. Jacques Foccart was the original, a former Resistance fighter who became Charles De Gaulle’s Chief of Staff for Africa – in which capacity he instigated several coups d’état – and he subsequently served under President Pompidou. Foccart was credited, if that’s the right word, with engineering Bongo père’s accession to the presidency in 1967 and during the 1960s, at the height of his influence, was known to telephone Ivoirian President Félix Houphouët Boigny every Wednesday. Pompidou’s successor, Valery Giscard d’Estaing, sidelined Foccart in favor of his own protégé, Martin Kirsch, but Jacques Chirac rehabilitated Foccart on becoming Prime Minister in 1986, and then brought him back again, aged 81, when elected President in 1995.

These Messieurs Afrique, working in an official or quasi-official capacity, cultivated close ties to major French companies, both private and state-owned, in a symbiosis that used those companies as instruments of French policy while smoothing their way to fat public contracts with African governments. Some of the major beneficiaries were the giant construction company Bouygues and the transportation-advertising-media conglomerate Bolloré, which with the tacit or explicit backing of the French Government, managed to win lucrative contracts and concessions through procedures that were far from transparent. Bouygues wound up with a controlling stake in Ivory Coast’s electricity and water utilities. Bolloré found itself running Cameroon’s major port and its railways, as well as owning a major share of its timber, rubber, palm oil, aluminum, and oil pipeline, and is thought to have the inside track for the $500 million construction and operation of the new deep water port of Kribi. As one Cameroonian blogger put it: “When one company is involved in your ports, your railway, your oil palm, your rubber, your timber, your aluminum, your road transport, an oil pipeline passing through your country, what do you call it? You call it your owner.”

President François Mitterand, President during Chirac’s tenure as Prime Minister, relied on his son, Jean-Christophe, nicknamed “Papamadit,” (Daddy told me) to manage relationships with African leaders, as well as a shadier – though probably more competent – fixer, Guy Penne. Penne, noted for his close personal relationships with several African leaders, including the murderous Blaise Compaoré of Burkina Faso, had few illusions about the people he was dealing with, and was quoted as saying, “When you sup with the devil, it’s best to use a long spoon.” Compaoré was one of the most important backers of Charles Taylor, the Liberian ex-President recently sentenced to 50 years in prison for war crimes.

Loïk Le Floch Prigent, the CEO of Elf from 1989 to 1993, was later brought down and sentenced to five years in prison for his role in funneling hundreds of millions of dollars of company funds (Elf was a state-owned company) not only to African leaders but also to the campaign war chests of senior French political figures.

Robert Bourgi, a French-Lebanese lawyer who served as an unofficial advisor on African affairs to Presidents Chirac and Sarkozy, in an interview last year claimed that from 2002 to 2007 he had personally carried at least $20 million in cash, gifts from the Presidents of Burkina Faso, the Congo, Gabon, Ivory Coast, Senegal, and Equatorial Guinea to fund the political campaigns of Jacques Chirac and his Prime Minister, Dominique de Villepin, transporting the loot variously in a sports bag, a poster and an African drum.

This pattern of corruption was to have stopped with the election of Nicolas Sarkozy as President in 2007. Bourgi, in his interview, maintained that he had never carried any money to Sarkozy. Sarkozy himself promised a “rupture” with Françafrique and its replacement with a “healthier relationship” of transparency and mutual respect, and a “partnership between equal nations.” But it wasn’t that simple.

On Sarkozy’s first trip to Africa after his election, he visited not only Libya, where he negotiated an arms deal with Gaddafi, but also Gabon and Congo-Brazzaville, two of France’s most loyal client states on the continent. And despite Robert Bourgi’s denials, Jean-François Probst, another of Chirac’s ‘Messieurs Afrique,” maintained that the suitcases of cash had not stopped when Sarkozy came to power. President Denis Sassou-Nguesso of Congo-Brazzaville, whom the French had backed in a 1997 civil war to wrest control from democratically elected President Pascal Lissouba, was a close personal friend, whom Sarkozy received in a state visit to Paris last February (see picture).

Picture by Eric Feferberg/Reuters

Sarkozy’s first Minister for Development Cooperation, Jean-Marie Bockel, also promised a definitive break with past policies, but he was forced out after barely a year in office by Omar Bongo, who with the support of fellow dictators Sassou-Nguesso and Cameroonian President Paul Biya, demanded, and got, Bockel’s head on a platter. Bockel’s offense? He gave a speech in which he said: “One of the main obstacles to development is bad governance: the wastage of public funds, failed institutions, and the predatory behavior of certain leaders…When oil is $100 a barrel but some of the biggest oil producing countries remain undeveloped, it calls into question those countries’ governance. When the social indicators of these countries fail to improve, or even worsen, while at the same time a small minority leads a life of luxury, it calls into question those countries governance. What happens to those oil revenues? Why doesn’t the population benefit from them? Is it really acceptable to give development assistance to countries that waste their own resources?”

At the beginning of the Arab Spring, Sarkozy’s government pledged its support to Tunisian dictator Ben Ali, Minister of Foreign Affairs Michèle Alliot-Marie going so far as to offer “the world-renowned know-how of France’s security forces,” only two days before Ben Ali fled the country. Sarkozy was forced to back-pedal furiously, denying Ben Ali sanctuary in France, while keeping his criticisms of Ben Ali’s excesses muted. Later on, Sarkozy sent French troops to Ivory Coast to force President Laurent Gbagbo out of office and install Alassane Ouattara, who had won the recent elections, and took a leading role in mobilizing the NATO no-fly zone in Libya and in transforming it into an aerial war to topple the Gaddafi regime. France is also said to have supported the Touareg separatists in Mali, hedging its bets in case they succeeded in toppling the corrupt and ineffective – though democratic – government of Amadou Touré, and also hoping they might rid the region of the terrorist Al-Qaeda in the Islamic Maghreb.

François Hollande pledged to change all of this. In the run-up to the second round of voting in the presidential elections he stated: “I will develop France’s relations with the countries south of the Mediterranean on a basis of economic, democratic, and cultural cooperation. I will replace Françafrique with an approach based on equality, trust, and solidarity… and put an end to relationships of dominance, influence, and cronyism.” In an interview with the Cameroonian newspaper Le Messager, he said: “I want to change the way France looks at Africa and put an end to the arrogance, the paternalism, and the shady collusions that have tarnished the relationship between France and Africa. I also want to turn the page on the complacency, the secrecy, and the ambiguity of that relationship. As far as I am concerned, the important thing is not just to alter the modalities of partnership between one government and another, but much more to reinforce the links between one society and another.”

Stirring sentiments. But we have heard them before. Roland Dumas, President Mitterrand’s Minister of Foreign Affairs summarized François Mitterrand’s speech to the 1990 Franco-African summit meeting: “The winds of liberty blowing from the East must inevitably one day blow to the South. There is no development without democracy and there is no democracy without development.” Mitterand went on to say, “France will henceforth adopt a lukewarm approach on assistance to regimes that continue their authoritarian ways without engaging in progress toward democracy, and enthusiastic toward those willing to take that first courageous step.” Dumas was later implicated in the Elf scandal and sentenced to 2-1/2 years in prison (two of them suspended). Mitterrand, using his son as a go-between, went on to support and arm Rwandan President Juvénal Habyarimana, whose death in a plane crash (in a jet given to him by Mitterrand as a personal gift) set off the 1994 Rwandan genocide.

Even if we give President Hollande the benefit of the doubt and acknowledge his sincerity, he will have a difficult time keeping his promises. There is no easy solution in Mali, where a military junta exercises uneasy control over the southern half of the country while Al Qaeda appears to have put the Touareg insurgents to flight and is busy imposing strict sharia law on the northern half of the country, which it now controls. While ECOWAS, the community of West African states, dithers over its response to the crisis, eyes naturally turn to France, the former colonial ruler.

In June President Hollande received President Mahamadou Issoufou of Niger. Americans may know Niger as the country Ambassador Joseph Wilson visited in the run-up to the Second Gulf War to see if there was any truth to allegations that Saddam Hussein had tried to purchase uranium there. Wilson is the husband of Valerie Plame, outed as a CIA agent in what may have been retaliation for Wilson’s refusal to confirm the Bush Administration’s suspicions.

Photo by John Schulters/Reuters

In the press conference following their meeting (see photo) President Hollande endorsed the bid of Areva, the French nuclear company, to develop and operate the huge Imouraren uranium mine, saying, “If it can move faster, we’re in favor. Anything that can be done to promote development and economic activity should be accomplished as quickly as possible.” Areva plans to invest 1.2 billion Euros in the project, which will become the second largest uranium mine in the world. Hollande went on to say that the project would be hugely favorable both to France, which gets more than 70% of its electricity from nuclear plants. and to Niger, 60% of whose export earnings come from uranium.

There may be nothing sinister about this. Issoufou, after years, some of them in prison, as the leader of the opposition in Niger, came to power in 2011 in elections generally recognized as free and fair. It is not uncommon for Presidents and Prime Ministers and even Princes Royal to act as shills for their countries’ industries. The fact that Hollande announced his intentions in public could signal a welcome move toward the transparency he advocates.

There is substantial speculation over who might become Mr. Hollande’s Monsieur Afrique, with at least a dozen party apparatchiks, functionaries, retired politicians, technocrats, and academics whose names have been floated. Though he has said he intends to abolish the position, Mr. Hollande will certainly need someone to advise him on Africa matters and to serve as a discreet diplomatic liaison. This too is not necessarily sinister. American Presidents have relied on Bill Richardson, Jimmy Carter, Bill Clinton, and other luminaries to carry messages they are unwilling to entrust to normal diplomatic channels. Hollande may follow suit, using different people in different situations, which could avoid creating the kind of secretive and unaccountable cabal that ran such a big part of France’s African relations for so long. If so, it will be, as the French say, a decisive “rupture” with past practices. It is too early to tell. The real test will come when an African crisis arises, especially one in which big French commercial interests are threatened. We will then find out not only if François Hollande is a man of his word but also if he has the strength and the will to stand up to those who would drag his administration back to the dark side.

Egypt’s Soft Coup d’Etat

2012-07-11T14:13:00Z

In retrospect, no one should be surprised at recent moves by the Egyptian armed forces to consolidate their power, in what some have called a soft coup d’état. Although the Supreme Council of the Armed Forces, which has ruled the country since Hosni Mubarak’s ouster, maintains that it will hand over power to a civilian government as planned by the end of June, it is hard to see how this might happen.

With both sides claiming victory in Sunday’s presidential election, the armed forces are poised to retain the real power no matter which of the two candidates is declared the winner when the results are announced on Thursday. Egypt’s Supreme Court, which is packed with Mubarak appointees, last week dissolved the elected parliament in which Islamists held the majority of seats, declaring it unconstitutional. This past Sunday, after the polls had closed, the armed forces issued a constitutional declaration giving it the right to veto many presidential decisions and to maintain control over its own budget. The decree also said the military would soon name a group of Egyptians to draft a new constitution, which will be subject to a public referendum within three months. Following ratification of the new constitution, an election will be held to replace the Islamist-dominated Parliament.

Even if Mohamed Morsi, the Muslim Brotherhood candidate, is elected President – unlikely, given the military’s control over the vote count – his powers will be severely circumscribed. But if the military were really clever it would declare Morsi the winner. With one of their own as President, the Muslim Brotherhood could be neutered, unwilling to take to the streets when for the first time it holds a position of power, however limited, and has the possibility of dominating the new Parliament as it did the one just dissolved.

I was always somewhat skeptical of the often-repeated claim that Egypt’s armed forces enjoyed substantial public support and respect. True, the military was less feared and reviled than the police and other Interior Ministry paramilitary forces, and it won some genuine support for its refusal to fire on protesters when they first occupied Tahrir Square in January of 2011, but it’s worth remembering that Hosni Mubarak was a military dictator, as were Anwar Sadat and Gamal Nasser before him, even though each of them swapped a uniform for a suit and tie.

The armed forces play a huge role in Egypt’s economy –15 percent to 40 percent of GDP, according to the Al Jazeera television network. They dominate many sectors, including food (olive oil, water, pasta), cement, and gasoline, and have a big presence in others, including car and TV assembly, household appliances, restaurants, real estate, and construction. Though omnipresent, the armed forces are also highly secretive, keeping military budgets classified. Some of this activity goes back to the 1950s, when Nasser nationalized much of Egypt’s industry, but it picked up steam under Sadat and then Mubarak, due at least in part to a need to give retired military officer a way to make a living and to forestall any threat of a coup. Officers, forced to retire at age 50, could look forward to a comfortable second career as company executives, so had little incentive to rock the boat.

From the beginning, the big question mark hanging over the Egyptian revolution was whether the military would submit to civilian control, which would include transparency with respect to its budgets. As far back as November 2011, the Supreme Council mooted a constitutional declaration that would have kept the armed forces’ budget under their direct control. Popular demonstrations caused them to withdraw it, but Sunday’s declaration contains an identical provision. Seen in this light, the military’s actions over the past several months have been motivated principally by a desire to protect its assets. Running their own presidential candidate, dissolving Parliament, neutering the office of the President, and promising to appoint the Egyptians tasked with drafting a new constitution can all be seen as a way to keep the army’s business private.

Even if the Supreme Council does hand over power as promised to an elected government, the military will have made sure its position, its assets, and its revenues are all protected. Egypt may prove to be slightly better off than it was under Mubarak, but that will be small consolation to the thousands of Egyptians who risked their lives and put their hopes on display in Tahrir Square, and the millions who supported them.

Good Money After Bad: Why Government Should Not Fund Private Businesses

2012-06-01T20:55:00Z

Curt Schilling is a hero to Boston sports fans. In 2004, at the relatively advanced age of 38, he valiantly pitched and won two critical post-season games while suffering from an ankle injury so severe that his sock was soaked with blood, propelling the Red Sox to its first World Series championship in 86 years. But Schilling’s career outside of baseball, especially since his retirement in 2008, has been less than stellar.

In 2006 Schilling founded a company, Green Monster Games – subsequently renamed 38 Studios – to develop and market MMORPGs – Massively Multiplayer Online Role Playing Games – for which he has a longstanding passion. Earlier this week, barely three months after release of its first product, 38 Studios laid off all of its 400-odd employees and closed its doors for good. How and why this happened is a cautionary tale for those who think it a proper function of government to provide financing to private companies.

38 Studios seemed to have everything going for it: a prominent public face and some of the best management, marketing, and technical staff money could buy. Schilling, who earned around $114 million during his career as a baseball player, put about $30 million of his own money into the venture. The company had leased 30,000 square feet of space in the historic Clock Tower business park in Maynard, a Boston suburb. The Clock Tower, which began life in the 19^th century as the world’s largest woolen mill, had previously housed another famous start-up, Digital Equipment Corporation.

But all was not well. In 2010, needing additional funding to stay afloat until it could launch its first product, the company negotiated a $75 million loan guarantee with the government of neighboring Rhode Island, which agreed to a special issue of “moral obligation bonds” to raise the funds. Moral obligation bonds carry an implicit, but not a binding, commitment by the issuer to pay bondholders if the beneficiary defaults. Schilling then turned to the Massachusetts government to see if it would go Rhode Island one better, and Massachusetts, saying it would not get into a bidding war, turned him down. So in 2011 the company moved its entire operation to Providence, Rhode Island.

38 Studios finally launched its first product, a sword and sorcery fantasy game called Kingdoms of Amalur: Reckoning, a single-player game, in February 2012, while also announcing that a second offering, a multi-player game dubbed Copernicus, was in an advanced stage of development. Kingdoms of Amalur: Reckoning sold well – over 1 million copies at $60 a pop – but it was not the blockbuster hit the company needed. In early May, 38 Studios missed a $1.1 million loan payment. On May 17 it sent a check to the state government, which bounced, though the next day it made the payment via a $1 million wire transfer plus a personal check for $100,000 from an unnamed source. That same week, the company failed to meet its payroll obligations. On May 24, 38 Studios laid off its entire work force.

This sorry history can serve as what we might call a “teachable moment.” First, celebrities are not necessarily good businessmen. For every Magic Johnson, who has become a very successful and widely admired real estate investor and property developer, there are a dozen celebrities like Lenny Dykstra, the former Mets baseball star, now bankrupt and serving a three-year prison sentence for fraudulent business dealings, or like Curt Schilling, who committed no crimes but whose talent on the field failed to translate into success off the field.

A second, and perhaps more important, lesson, is that government officials should not play at being venture capitalists. The one question Rhode Island’s Governor, Donald Carcieri, and the senior staff of the Rhode Island Economic Development Corporation should have asked but didn’t, is why Schilling’s company couldn’t raise the money it needed from real venture capitalists. It wasn’t for lack of trying.

Before turning to the Rhode Island state government, Schilling had approached several Boston venture capitalists, who turned him down flat. According to the Boston Globe, this was largely because, though a video game enthusiast, Schilling had no experience developing one and no relevant business experience. There was a widespread impression among venture capitalists that an investment in Schilling’s company “would require a lot of babysitting.” Also, Schilling was asking for $48 million, a huge amount for first-round financing of a startup with no revenue, and was unwilling to give up much stock in exchange. The venture capitalists, moreover, realized that $48 million would not be enough. The cost to develop a massively multiplayer game is huge, and Schilling himself estimated that he might need an additional $100 million to finish development of Copernicus.

The Carcieri administration was dazzled by Schilling’s celebrity – how cool is it, after all, to hang out with famous athletes –and saw in his request the chance to develop a new, high tech sector to replace Rhode Island’s declining jewelry manufacturing industry.

In the event, the deal very nearly blew the state’s entire $125 million allocation for business loan guarantees on this one project and left state taxpayers on the hook for as much as $112 million in principal and accrued interest.

In so doing, the state violated one of the most fundamental precepts of venture investing, which is that you don’t put all your money into one company, since most investments either underperform or fail outright. By most estimates, 20 to 30 percent of venture-backed companies will fail outright, and another fifty or 60 percent will underperform, merely repaying the investment or making a small return. What saves the venture capitalists from ruin is the one massive success – maybe one in ten investments for a successful firm – that pays for the failures many times over.

Some venture capital firms, such as Kleiner Perkins Caulfield & Byer, can point to a dazzling string of successful investments, which include Google, Netscape, Amazon, Twitter, Genentech, and Intuit. But even Kleiner Perkins has invested in its share of duds, companies like Segway, which despite receiving investments of more than $150 million has yet to make a profit, or Friendster, an early social networking company now all but defunct. The average VC firm is barely profitable, and when you factor in management fees, most of them lose money for their investors. According to Cambridge Associates, a research firm, the return on venture capital over the past decade has been -4.8%, as compared to -0.4% for the S&P 500.

If people whose sole business it is to pick winning companies to invest in aren’t terribly good at it, it should come as no surprise that public officials are even worse. In the current social and political climate, in which entrepreneurs get the same kind of adulation as rock stars and government is derided as the source of all our problems, it is understandable that public servants and politicians would want to play at being swashbuckling capitalists. It’s a role that ill suits them. There has so far been no suggestion that corruption was a factor in the 38 Studios debacle, even though Rhode Island is notorious as one of the most corrupt states in the country. On balance, however, corrupt politicians have probably cost the state – and the entire country – less than incompetent ones trying to do a job for which they are spectacularly unqualified.

Who Should Lead the World Bank

2012-05-01T21:24:00Z

by Charles Krakoff

Jagdish Bhagwati, a Professor at Columbia University and a leading development economist, wrote the following letter in yesterday’s Financial Times about President Obama’s designation of Jim Yong Kim to succeed Robert Zoellick as President of the World Bank. He is absolutely right. Dr. Kim is not the right person to lead the Bank, especially in a time of global economic transition, and especially when such an eminently qualified candidate as Ngozi Okonjo-Iweala, currently Nigeria’s Finance Minister and a former World Bank Managing Director, is available. Professor Bhagwati writes:

“Sir, In your editorial “The right leader for the World Bank” (March 28) you say that Ngozi Okonjo-Iweala is a hugely preferable candidate to succeed Robert Zoellick, but you nonetheless surrender to Barack Obama’s faux pas in choosing Jim Yong Kim, a healthcare expert, as “inevitable”. Whatever happened to the notion that this time around, we would opt for the “best” candidate? But more can be said.

“First, Dr Kim is no more an American than many of us: he was born abroad and is reported to have come here at the age of five. Besides, Americans do not entertain discrimination against foreign-born “intellectual guestworkers”. Dr Okonjo-Iweala has studied with great distinction at Harvard and MIT in economics, has lived in the US for many years, and (I speak from personal experience) she can outwit and outsmart almost any policy economist I know.

“Second, how can President Obama bypass an independent-minded African in favour of yet another agreeable Korean – Ban Ki-moon is another one – and keep a straight face?

“Third, an administration that prides itself on promoting women is sidelining the most gifted woman candidate for this important job. It makes a mockery of the claims that Mr Obama cares for women whereas Mitt Romney will not.

“Finally, and most important of all, the Obama administration mistakenly believes that “development” consists of healthcare, microfinance and other such projects, and not the big high-pay-off “macro-level” policies such as trade. The insidious notion that the former constitutes “development economics” and the latter does not is both wrong and glorifies the less important at the expense of the more important.

“The US government has already put an administrator with a background in health in charge of the United States Agency for International Development: Rajiv Shah. At the same time, it has destroyed Doha and encouraged the manufactures fetish and protectionism, which will cost developing countries far more than USAID’s micro projects will benefit them. Dr Okonjo-Iweala will do both “macro” and “micro” projects. But Dr Kim’s healthcare expertise comes with an uncritical embrace of the charges against “neoliberalism”, betraying susceptibility to the anti-reform, anti-growth rhetoric of the 1990s. Caveat emptor.”

No further comment needed.

Déjà Vu All Over Again: Afghanistan Reprises the Indochina War

2012-04-02T22:25:00Z

If existing parallels between the U.S. experience in Indochina and our current entanglement in Afghanistan weren’t already enough, the Afghanistan war (Operation Enduring Freedom) now has its own version of the My Lai massacre. The only surprise is that nothing like the Sunday murder of 16 Afghan civilians by a U.S. Army Staff Sergeant had previously occurred in 10 years of fighting.

For all his campaign promises to close the Guantanamo Bay prison and end our military adventures in Iraq and Afghanistan, Barack Obama has pursued a course almost indistinguishable from that of George W. Bush. But of late, he has started to sound more like Richard Nixon. In a speech he gave yesterday in the Rose Garden, the President said, “So make no mistake, we have a strategy that will allow us to responsibly wind down this war. We’re steadily transitioning to the Afghans who are moving into the lead, and that’s going to allow us to bring our troops home…And meanwhile, we will continue the work of devastating Al Qaeda’s leadership and denying them a safe haven…I am confident that we can continue the work of meeting our objectives, protecting our country and responsibly bringing this war to a close.” This sounds eerily like Nixon’s “peace with honor” and “Vietnamization of the war.”

It can’t be long before we are treated to images of American diplomats being helicoptered out of the U.S. Embassy in Kabul as the Taliban move into the city. In 1972 we brought our troops home from Vietnam, under the pretext that the Vietnamese – and the Cambodians as well – could now shoulder the responsibility for their own defense. It took another three years before the Khmer Rouge and the North Vietnamese Army seized Phnom Penh and Saigon, respectively during which corrupt governments in both countries, rather than trying to defend their people, engaged in an unseemly scramble to amass as much loot as they could before the party ended.

The Karzai government is easily the equal of Lon Nol’s Cambodian regime when it comes to incompetence and corruption, while the Afghan Army is, if anything, less capable than its historic Southeast Asian counterparts, and also infested with Taliban sympathizers. Once NATO forces withdraw, I suspect it will take far less than three years for the Taliban to take over. Tragically, that might be the best possible outcome, the worst being a return to all-out civil war between north and south.

It is time for us to leave. Now.

The Economic Consequences of the Greek Debt Crisis

2012-03-05T16:53:00Z

Draco, the seventh-century BC Athenian legislator from whom we get the word “draconian” replaced the system of blood feud and oral law with a harsh, but transparent, written legal code. One of the provisions of Draco’s code was that any debtor whose status was lower than that of his creditor was forced into slavery. It’s hard not to think of Draco when contemplating the current to and fro between the Greek government and the “troika” of the European Central Bank, the European Commission, and the International Monetary Fund, representing Greece’s creditors, trying to avert a sovereign default and keep Greece from leaving, or being ejected from, the European monetary union. These discussions are more properly considered a dictation of terms rather than negotiations.

My friend Elena Panaritis was interviewed the other day on the BBC to talk about the crisis. Elena and I worked together as consultants for the World Bank, and she is now a Socialist member of the Greek Parliament. She pointed out that it took Margaret Thatcher 17 years to restructure the British economy, and that Britain had started out in a much better position than Greece today. No one doubts the need for fundamental structural reform of the Greek economy, but it is untenable for Greece to be forced to suffer 17 years worth of pain all at once. What Elena didn’t point out, though she might have if she had been given more than a 30-second sound bite, is that Greece reduced its primary budget deficit by eight percentage points from 2009 to 2011, in what the Financial Times has called “a radical austerity effort,” and in April 2010 announced a three-year, $40 billion package of tax increases and spending cuts. The U.S, equivalent would be about $1.9 trillion, unattainable in our current political climate.

Greece’s creditors are far from satisfied, however. Led by Germany, they have demanded, and the current Greek government is trying to win Parliamentary approval for, a new set of austerity measures that would reduce the minimum wage by 22% – which would effectively reduce most private sector salaries by an equivalent amount, since they are benchmarked against the minimum wage – and cut state pensions by 10%. Unspecified, but large, reductions in government payrolls are also demanded. All this on top of previous cuts of 15 to 30% in both wages and pensions.

It is hard to see a happy ending. Greece’s official unemployment rate is already 21% and youth unemployment is estimated at around 50%. GDP has shrunk by 11% in the past three years. The new cuts can only shrink demand further, leading to greater job losses and reduced tax revenues, which reduce the funds available for debt service and will, no doubt, spark renewed calls from the Eurozone’s leaders for new rounds of spending cuts and tax increases. You don’t have to be an orthodox follower of Keynes to recognize that such radical austerity, by choking economic growth, creates a vicious circle from which no one can benefit. The Greeks will suffer yet greater misery, while the country’s creditors go unpaid. Everyone pretends that this latest set of screw tightening will solve the problem once and for all, but it’s not clear that anyone really believes it.

The consequences of Greece’s exit from the Euro would, arguably, be far worse for Germany and the other Euro-zone members than for Greece itself. After a wrenching period of adjustment, Greece would be left to devalue its new currency, a far less painful way to restore prosperity than the alternative of bleak and interminable austerity. A default would shut Greece out of international credit markets for some time, but since the Greek budget is already in balance once debt service is excluded, it would not be long before it could borrow again.

Angela Merkel, on the other hand, has said that if Greece leaves the Euro the Euro itself will collapse, and with it the entire European project. Perhaps she has adopted such an apocalyptic tone to frighten everyone into submission, but it could become a self-fulfilling prophecy.

John Maynard Keynes, who represented Britain at the 1919 Paris Peace Conference, wrote, in The Economic Consequences of the Peace:

“Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family.”

He was referring to the imposition of war reparations on Germany so onerous that “Germany has in effect engaged herself to hand over to the Allies the whole of her surplus production in perpetuity.” Like the Allies in 1919, the Eurozone leaders, rather than fixing a definite settlement with which Greece might be able to comply, seem to be trying to “skin her alive year by year in perpetuity,” in Keynes’s words

The German financial delegation to the conference yelped with indignation: “Germany is no longer a people and a State, but becomes a mere trade concern placed by its creditors in the hands of a receiver, without its being granted so much as the opportunity to prove its willingness to meet its obligations of its own accord.”

Keynes did not exactly predict the German hyper-inflation of the 1920s or the Second World War, though he strongly hinted at both: “ho can say how much is endurable, or in what direction men will seek at last to escape from their misfortunes?”

Just as the Allies in 1919 overestimated Germany’s ability to pay reparations, so too, I fear, have the Eurozone leaders overestimated the pain the Greeks are able to accept. Greece, a small country on the fringes of Europe, lacks the capacity for disruption that Germany had after the First World War. But the suffering already inflicted on Greek society is hardly consistent with the promised benefits of EU membership, and could sound a cautionary note in other small, peripheral EU members that when the time comes they too could be thrown to the wolves.

The saddest thing is that none of this is necessary. Unless the bankers and European leaders panic, a Greek default and even its exit from the Euro need not be a cataclysmic event. Rather than pushing Greece to the wall to preserve the Euro at all costs, the troika could instead develop a mechanism for Greece – and, potentially, other countries like Portugal and Ireland – to exit the Euro in an orderly way that threatens neither their survival nor that of the European project. But I wouldn’t bet on it.

Kuwait’s Arab Spring

2012-02-03T15:46:00Z

By Charles Krakoff

With the exception of Bahrain, where anti-government protests were violently suppressed by the ruling royal family with military support from Saudi Arabia, the kingdoms and sheikhdoms of the Arabian Gulf – in America we refer to it as the Persian Gulf, but that terminology does not sit well with the Arabs – have appeared largely immune from the struggles of the Arab Spring. There have been no street demonstrations, no tear gas, no bullets, rubber or live.

I have just returned from a three-week stay in the Middle East. A few days in Doha, the Qatari capital, to attend the World Petroleum Congress and then the rest of the time in Kuwait, where I am part of a team doing a feasibility study for a technology park. It was my first-ever visit to Qatar and my first to Kuwait since 1986. Doha, flush with money from natural gas, a small low-slung, dun-colored city 20 years ago, now resembles a sci-fi movie set, all futuristic towers glowing with neon, surrounded by the most barren of landscapes. Kuwait City has expanded enormously, and sprawls almost from the Saudi border in the South to the Iraqi frontier in the north. Areas that were empty desert 25 years ago are now studded with new suburbs filled with enormous mansions and shopping malls. Young Kuwaitis zoom around town in Hummers, Range Rovers, and Maseratis or on Japanese super-bikes, stopping to eat at any of a mind-boggling array of Western restaurant chains. Applebee’s, Chili’s, Taco Bell, Burger King, McDonald’s, Pizza Hut, TGI Friday’s, they are all there. The 1991 Iraqi invasion seems impossibly distant.

Part of the reason for the region’s tranquility is money, lots of it. Even in normal times, the citizens of these states enjoy generous social benefits, which include free or subsidized housing, education, and health care, armies of low-paid immigrants to perform all the menial work, and a government job for almost anyone who wants one, not to mention gasoline so cheap they practically give it away. Most of the Gulf kingdoms, however, upped the ante when they saw they wave of protest sweeping the Arab world.

Days after the fall of the Mubarak regime in Egypt last February, Saudi Arabia announced a social welfare package for its citizens worth $10.7 billion, which included pay raises for government employees, new jobs and loan forgiveness schemes. Since then, the Saudi Government has sweetened the pot with more than $120 billion in additional spending, according to a report by the Wharton School at the University of Pennsylvania. Qatar announced an $8 billion package of pay rises for state employees, while Abu Dhabi launched a $2 billion housing loan program.

If these figures seem small by the standards of U.S. stimulus and bank bailout packages, remember that apart from Saudi Arabia, which has a population of 25 million, the other Gulf sheikhdoms are tiny. Qatar has a population of about 1.8 million, of which only 300,000 are Qatari citizens. The United Arab Emirates, of which Abu Dhabi is the capital, has 8.3 million people, but only 948,000 of them are citizens. Kuwait, with somewhere between 2.6 million and 3.5 million people – countries in the region tend to be coy about demographic data, which can be politically inflammatory – counts only a million Kuwaiti citizens. The subsidies are lavished only on the citizen populations, of course. Apart from a small number of managers and professionals from Europe and North America, who enjoy gilded salary and benefits packages, the vast majority of expatriates, most of them from poorer Arab countries like Egypt and Palestine or from the Philippines and the Indian subcontinent, endure low pay and harsh working conditions which, nonetheless, are better than what they could get at home.

Kuwait, for its part, recently raised government salaries by around 20%, making it even harder for private companies to hire locals at a reasonable cost. The government has for many years provided each Kuwaiti family with subsidized rice, lentils, frozen chicken, and other foodstuffs, but earlier this year announced that for the next two years these supplies would be free of charge. Each Kuwaiti is also entitled to a $3,500 annual payment from the state. The state can certainly afford it. With oil at around $100 a barrel, Kuwait’s daily production of around three million barrels works out to $110 billion a year, or over $100,000 a year for every citizen. The Kuwait Investment Authority, which manages the country’s wealth, has about $265 billion invested offshore, providing a cushion against any precipitous drops in the oil price.

In this kind of environment, it is hard to create any sense of urgency about reforming a business environment that most foreign business people and quite a few Kuwaitis consider unwelcoming to investors. Businesses complain about long delays in getting operating licenses and project approvals. Kuwait, it is said, means “queue and wait.”

The government, and the state-owned Kuwait Petroleum and its subsidiaries, have announced major projects only to suspend them. In one of the most notorious examples, the Kuwaiti government in 2008 cancelled a multi-billion joint venture between the state-owned Petrochemical Industries and Dow Chemical in the face of parliamentary opposition. The project, which was to be the world’s largest producer of polyethylene, went to Saudi Arabia instead.

One project more or less – even a huge one – is not going to make or break Kuwait. Still, the country probably can’t survive as a rentier economy forever. A former finance minister I spoke with, now a senior economic advisor to the Emir, says the breakeven price of oil – that is, the price at which the government budget switches from surplus to deficit – is now between $85 and $90 a barrel. With oil now trading at around $100 a barrel, this is not a crisis, but it is cause for some concern as the days of peak oil recede into the future.

As little as a year ago you could find plenty of so-called experts predicting a steady rise in the price of oil for the foreseeable future, but their voices are now muted. Increased drilling and production in the United States, the prospect of Libyan oil fields coming back on-stream, and huge new contracts that promise to lift Iraqi oil production from its current level of less than three million to as much as 12 million barrels a day by 2017, all point to minimal growth if not outright drops, in the oil price, for many years to come.

Despite this small cloud on the horizon, a senior government advisor and businessman I spoke with says Kuwait is the most stable country in the Gulf. Iraq and Iran, of course, are a mess, Saudi Arabia, a pure theocracy, is still ruled by the geriatric sons of King Abdulaziz, who unified the kingdom in the 1920s, and lacks a clear plan for succession by the next generation of princes. Oman’s Sultan Qaboos, who overthrew his father in 1970 and dragged his country out of the 14^th century torpor in which it had languished, is now 71. A confirmed bachelor, he has produced no successor, and as an only child he has no brother or nephew who might succeed him. Qatar, recently awarded the right to host the 2022 soccer World Cup, is seen by much of the Arab world as too brash and too ambitious. Although the Arab League backed NATO action against the Qaddafi regime in Libya, Qatar was the only Arab country to provide material support to the rebels. This did not win it many friends among its fellow rulers in the region, who fear unrest at home. The ruling Al Thani family has bankrolled the Al Jazeera television network, which has upset Arab rulers as much as it has the U.S. Department of Homeland Security. The UAE looks stable for now, though Dubai remains on shaky ground financially. In 2010 Abu Dhabi’s ruler, Sheikh Khalifa, provided $25 billion to bail out several bankrupt companies owned by Dubai’s ruling Makhtoum family (the world’s tallest building, Burj Dubai, which was then under construction, was renamed Burj Khalifa in gratitude), but a repeat rescue, which could yet prove necessary, is far from assured.

Kuwait, meanwhile, has avoided the flashy excesses of Qatar and Dubai and appears less susceptible to the kind of sectarian violence that has torn Bahrain apart. Though Kuwait has a sizable Shia minority, estimated at around 30% of the population, it is far more stable than Bahrain, where a Sunni minority and ruling family have lorded it over a Shia majority. It is not simply demographics, though, that keep the country stable.

The Dow Chemical fiasco, however embarrassing it may have been, illustrates one of Kuwait’s signal strengths, its democratic character. Many people in Kuwait will tell you that no one person can approve a project but anyone can block it. This is quite different from autocratic rule, under which projects get approved without delay, provided the rulers want it. In a democracy it is not so easy. It is a price, however, that many countries, including most of those we consider democracies, are willing to pay. In China you would not see the kind of protest and debate that has surrounded the planned Keystone XL pipeline in the U.S.

No one would mistake Kuwait’s government for a Westminster-style democracy, but its Parliament has substantial influence, even if it lacks real power. Kuwaiti women have the right to vote, and in 2009 voters elected four women MPs in the 50-seat assembly. Though there are no official political parties, there are recognized blocs, representing secularists, Islamists, and conservative tribal groups. The CEO of Kuwait Energy, one of the country’s most prominent private companies, is a woman, and she has surrounded herself with other smart, educated, and motivated women.

In late November, hundreds of protesters, led by several elected officials and former Parliamentarians, burst into the chamber to demand the resignation of the Prime Minister, Sheikh Nasser Al Mohammed Al Sabah, who is accused of bribing 15 MPs to support the government. A week later the Prime Minister, who is a member of the ruling family, stepped down. Several editorials in the Kuwaiti press criticized the protesters for their lawlessness and called on the authorities to bring charges against them, but the fracas more closely resembled the occasional fistfights that break out in Taiwan’s and South Korea’s legislative bodies than it did the pitched street battles that have occurred over the past year in Egypt, Tunisia, Yemen, and Syria. No tear gas, bullets, or batons were used to break up the ruckus, and so far no one has been jailed.

It helps to be rich. But plenty of countries that possess enormous resource wealth are political and social failures. In a region not noted for democracy or sexual equality, Kuwait seems to be moving towards both. Slowly and deliberately, to be sure, but it is encouraging and could even be a model for some of its neighbors to follow.

America’s Stately Progress Towards Third World Status

2012-01-04T16:42:00Z

by Charles Krakoff

Compared to the U.S. Senate’s recent refusal to approve a mere $60 billion in new infrastructure spending when we really need to spend an estimated $2 trillion just to make up for all the years of neglect of our country’s roads and bridges, the recent report in the New York Times that the U.S. Agriculture Department will stop collecting and reporting data on a wide range of agricultural commodities, including catfish, sheep, goats, hops, honey, and mink, is no big deal. But it is just one more bit of evidence that the U.S. is on its way to becoming a third-world country. Compared to the revelation that the U.S. now ranks 25^th in the world in Internet connection speed, behind both Greece and Romania, the future lack of production data from the country’s 389 catfish farms and 265 mink farms is hardly a calamity. All joking aside, however, one of the many things that distinguish developed countries from less developed ones is the extent and reliability of the economic and business information they provide.

True, there are outliers. India, which remains a poor country despite its pockets of advanced technology, has always compiled voluminous data on every conceivable economic activity. Data from some wealthy countries like Saudi Arabia and Kuwait, on the other hand, tend to be unreliable and out of date. For the most part, though, the richer and more developed a country, the better the information. To some degree, the two go hand in hand. Companies use these data to make investment, recruitment, sourcing, and marketing decisions. Potential investors could, it is true, rely on figures from the Catfish Farmers of America – www.uscatfish.com – or the Fur Commission USA – “Representing U.S. Mink Farmers Since 1994” (www.furcommission.com) instead of Agriculture Department census data, but these associations are hardly disinterested parties, and might present a rosier picture of their respective industries than the facts would warrant.

According to the Department of Agriculture, eliminating the monthly reports on catfish and trout will save $480,000 a year. Getting rid of the mink report will save another $130,000; cutting out reports on hops production will save $40,000 (the annual cost of the hops reports is $55,000, but the Hop Growers of America – www.usahops.org – has been kicking in $15,000 of its own money to help support the activity). The association could possibly come up with another 40 grand a year, but this might come at the expense of the annual “Hoptoberfest” celebration at the American Hop Museum in Yakima, Washington. I don’t have precise figures on the savings from axing the sheep and goat census.

It’s hard to escape the sense that eliminating these activities has less to do with the actual savings than with the pursuit of a more radical vision to shrink government, a vision that has little or no place for public broadcasting, public libraries, or public education, not to mention publicly-funded roads and bridges. It’s a vision that would make it impossible to undertake public projects like the Interstate Highway System, the Internet (created by the Defense Advanced Research Projects Agency, DARPA), or grand public structures like the pavilions at Saratoga Springs and Timberline Lodge on Mt. Hood, constructed by the WPA in an earlier time of both greater deprivation and a greater sense of public spirit.

Voltaire, in his poem Le Mondain, refers to “the superfluous, a very necessary thing.” What he means is that if we, in our private or public lives, devote ourselves only to the material necessities, we sacrifice much that is equally, or even more, important. It is possible to make a utilitarian argument for almost anything – the space program, it is said, gave us Tang, the powdered orange drink – but some things are worth doing just because they are worth doing, even if the immediate payoff is hard to identify. Maybe the annual mink ranching census is not one of those things, but a vision of government that refuses to countenance the possibility that it might be worth doing and that it might be worth spending public funds to do it, offers us a cramped view of human possibility and leaves us all poorer in the end.

Malefactors of Great Wealth: How Citigroup, Goldman Sachs, and JP Morgan Bought Their Way Out of Trouble

2011-12-01T22:17:00Z

By Charles Krakoff

Less than a week after a federal court in Manhattan sentenced hedge fund boss Raj Rajaratnam to a record 11 years in prison for insider trading, and ordered him to pay forfeiture and fines of more than $60 million, comes the news that Citigroup has agreed to pay $285 million to settle a to settle a civil complaint by the Securities and Exchange Commission that it had defrauded investors. According to last Thursday’s New York Times, “the transaction involved a $1 billion portfolio of mortgage-related investments, many of which were handpicked for the portfolio by Citigroup without telling investors of its role or that it had made bets that the investments would fall in value.” This is the third such complaint brought by the SEC. In July 2010 Goldman Sachs paid $550 million to make the SEC’s charges go away, and this past July JP Morgan Chase settled its case with a payment of $154 million. None of the three firms has admitted any wrongdoing, and neither the firms nor any of their employees have been charged with any crime.

The substance of the SEC’s charges against the three banks is that each one constructed and sold a portfolio of collateralized debt obligations (CDOs) consisting mainly of subprime mortgage-backed securities, without disclosing to investors that it planned to short those assets. In the Goldman deal, investor John Paulson played a substantial advisory role in putting together the portfolio and then banked over $4 billion from shorting it. Citigroup, for its part, shorted about $500 million of a $1 billion subprime portfolio, making $160 million in profits and trading fees while the biggest investor –Ambac Financial, which had sold credit default swaps to Citi, thus assuming the credit risk on a big chunk of the portfolio – filed for bankruptcy last year, having lost half a billion dollars in the deal. The Wall Street Journal, reporting on the SEC complaint against Citi, quoted one experienced CDO trader describing the portfolio in an e-mail as a “collection of dogs” and “possibly the best short EVER.”

This is serious fraud by any reasonable standard. The victims may have been sophisticated institutional investors, who perhaps should have known better, but a crime is still a crime, no matter how undeserving of sympathy its victims may be.

It is much harder to identify the victims, if there are any, in the Rajaratnam case. The prosecution, asking for a 24-year sentence, characterized Rajaratnam’s actions as “brazen, pervasive, and egregious,” and in pre-sentencing memos several SEC officials maintained that insider trading threatens the integrity of financial markets and diminishes confidence in their fairness. This is unlikely. Mr. Rajaratnam’s gains from several years of documented insider trading amounted to about $72 million. Since he was trading in stocks of hugely capitalized companies like Goldman Sachs, whose average daily trading volume amounts to around $850 million, it is ludicrous to think his activities had any detectable impact on stock prices.

Far more troubling is the ease with Mr. Rajaratnam was able to suborn criminal breaches of confidentiality by people such as Rajat Gupta, former Managing Director of the consulting firm McKinsey and a member of the Goldman Sachs Board of Directors, now under indictment for tipping Rajaratnam to Goldman board decisions before their public announcement. This, more than the insider trading itself, threatens the framework of law and trust within which a market economy operates, so merits severe punishment to which Mr. Gupta and others in Mr. Rajaratnam’s circle of conspirators, if found guilty, should also be subjected.

Proportionality is a basic principle of our justice system, even if it is often honored only in the breach. If Raj Rajaratnam deserves to spend the next 10 years in Federal custody, surely the bankers at Citi, Goldman, and JP Morgan, who deliberately bilked investors out of billions of dollars, deserve much longer sentences.

Concerned About Income Stagnation? Blame Rising Health Insurance Costs

2011-11-01T14:35:00Z

It’s hard not to feel sympathetic towards the people occupying Zuccotti Park in lower Manhattan and their brethren who have mounted similar protests in cities and on college campuses across the United States. There is a pervasive sense in our country that something is wrong, and that Wall Street financiers have something to do with this sorry state of affairs. One of the charms of the movement is its lack of specific policy demands; once the occupiers come up with a manifesto they become just another interest group, hardly different from the “Republicrats,” whose pettiness and dithering have prevented Congress from enacting any sensible solutions to our current and future economic woes. But so far, the Wall Street occupiers have been eloquent, if misguided, about what they are against, and relatively clueless about what they are for.

One of the main points of discontent is the decline in real incomes of average Americans. A recent study showed that “real median annual household income has fallen significantly more during the economic recovery period from June 2009 to June 2011 than during the recession lasting from December 2007 to June 2009. During the recession, real median annual household income fell by 3.2 percent, from $55,309 in December 2007 to $53,518 in June 2009. During the economic recovery, real median annual household income fell by an additional 6.7 percent, from $53,518 in June 2009 to $49,909 in June 2011.”

Equally troubling is the stagnation in real incomes over a much longer period. In 1977, the median household income was $47,700 in inflation-adjusted terms, meaning that the average family has seen its income rise by a mere 4.6% over the past 34 years. For a generation raised to believe that growing prosperity was its birthright, this is a bitter pill to swallow.

It is tempting to blame this dismal performance on Wall Street, but it would be wrong. Many things have contributed to stagnation in real incomes, among them technological improvement and liberalization of international trade, but one thing that receives scant attention is the cost of health care. Or, to be more precise, the cost of employer-provided health insurance. The two are linked, of course, and the rising cost of health insurance tracks, to a large degree, that of health care itself. The cost of health care has risen at an average of 5% a year since 1986, while overall inflation has averaged less than 3%. Health insurance premiums have increased faster, largely because administrative costs have risen as health care reimbursement grows ever more complicated.

Between 1999 and 2008, premiums for employer-provided health insurance rose six times faster than wages, according to figures from the President’s Council of Economic Advisors. As the graph below illustrates, average total worker compensation has risen at a reasonably good clip, even as take-home pay has stagnated or declined. The rising cost of employer-provided health insurance drives an ever-widening wedge between the total cost of employing a person and the amount of money that person receives. The average annual cost of an employer-provided family health insurance package now stands at more than $13,000, at least some of which could be paid out in wages if employers weren’t saddled with the responsibility for their workers’ health.

President Obama and Congressional leaders had an excellent opportunity to show some imagination when they crafted new health care legislation, but instead of breaking the link between employment and health insurance they strengthened it, introducing penalties for companies that fail to provide insurance to their employees. Employer-provided health insurance is rooted in the wage and price controls of World War II, which made it illegal to give cash raises to workers and pushed companies to find other forms of compensation. There is no conceivable reason for it to exist today. The obligation to provide health insurance reduces labor mobility – people will stick with a job they hate just for the insurance benefit. The prospect of skyrocketing health insurance costs also constitutes a huge disincentive for companies to hire new workers. With unemployment at more than 9%, it is time to delink employment and health insurance. This, far more than imposing confiscatory taxes on the wealthy or throwing a few bankers in jail, could actually restore some hope of a better future to the beleaguered working and middle classes.

The End of Outsourcing?

2011-10-03T20:07:00Z

by Chip Krakoff

Foxconn International Holdings, the world’s largest contract manufacturer of electronic components, made notorious last year by a rash of employee suicides at its Chinese factories, recently published its half-yearly financial results, which showed that its annual labor costs per employee have risen by a third over the past year, to $2,900.

Foxconn, 71% owned by Hon Hai Precision Industry of Taipei, and which also assembles products for Sony, Dell, and Hewlett Packard, employs an estimated 400,000 people at its two factories in Shenzhen (Hon Hai, with 800,000 employees, is the 10^th-largest employer in the world). These people, most of them young, many of them women, work 11-hour shifts, seven days a week. According to the New York Times, Mr. Ma Xiangqiang, a 19-year-old Foxconn employee who jumped to his death from a Foxconn dormitory in January 2010, had worked 286 hours in the month prior to his suicide, including 112 hours of overtime, more than three times the legal limit. By all accounts, Foxconn is not a fun place to work, combining some of the worst features of military service, summer camp, and prison, but the problems facing Foxconn are far from unique.

Coastal China is in many ways a victim of its own success. China’s explosive industrial growth of the past 30 years, much of it concentrated in the Pearl River Delta in Guangdong Province, adjacent to Hong Kong, has lifted hundreds of millions of people out of abject poverty and introduced many of them to the temptations of consumerism. Rising living standards have been accompanied by increased awareness of the world and demands for more personal freedom. Workers no longer accept unremitting drudgery as an inevitable norm. Foxconn has responded in two ways: one, by increasing salaries, and the other, by setting up factories in Western China, where wages are lower and labor militancy so far nonexistent. China’s government has encouraged companies to set up factories in the interior, partly to reduce the strain on coastal cities’ infrastructure, but also to dissipate the kind of worker discontent that could quickly turn political. These are at most temporary expedients. Neither is a solution to the rising cost of doing business in China. Western China may offer lower wages, but the additional cost of moving components and assembled units thousands of miles within China may negate any labor cost savings. More fundamentally, Foxconn’s travails call into question the sustainability of China’s current export-dominated economic model.

It’s a fair bet that logistics – transporting the many components that go into an iPhone or an iPad and then getting the finished product to market – accounts for a much higher proportion of the final cost than the assembly work itself, which most analysts estimate at less than one per cent of the retail price. As the cost of Chinese assembly rises and the negative publicity associated with worker suicides and sweatshop working conditions intensifies, a company like Apple or HP might start to question whether assembling its products in China makes sense. With overtime and bonuses, a worker in a Chinese electronics factory can earn $500 a month. This is a lot less than the $3,000 or so a U.S. worker might get, but then Chinese manufacturing labor is far less productive. Shifting iPad assembly from China to the U.S. might raise unit costs by a few pennies, a small price to pay for greater control over their supply chains, while moving it to, say, Mexico, might even reduce the cost. No wonder the Financial Times said that “Hon Hai and its offshoots are looking like relics from another era.” No wonder, too, that Foxconn has reportedly been considering a $12 billion investment in Brazil, where import duties have raised the cost of an entry-level iPad 2 to nearly $1,000, as compared to around $400 in the U.S. The higher cost of Brazilian labor is insignificant compared to the savings in import duties, and a Brazilian-made iPad, just like a Brazilian-made Ford Fiesta, can also sell for a competitive price in the U.S. or Europe.

If China is no longer the cheapest place to manufacture or, as seems to be the case with Foxconn’s factories, its cost advantages are outweighed by other considerations, where does this leave Chinese manufacturing and the Chinese economic model? China continues to excel at making products like shoes and T-shirts, for which labor represents a much bigger share of the cost than for an iPad. But even in these product groups, a combination of lower labor costs and special trade preferences has caused a lot of production to shift to places like Vietnam, Bangladesh, Nicaragua, and Haiti. At some point, however, the world will run out of cheaper manufacturing locations. Once Vietnam and Haiti accede to the ranks of middle-income countries, where will the sweatshops move? Burundi? Somalia? It seems unlikely.

These developments prove only that present trends never continue indefinitely. The current fear of an unstoppable Chinese manufacturing juggernaut, which will end up like the victor in a game of Monopoly, owning all the money and all the property and manufacturing everything the rest of the world consumes, is no more valid than the old fear of an unstoppable Japan.

These developments also indicate that the doctrine of comparative advantage – the one economic theory that is neither obvious nor trivial – will reassert itself. Even if China had an absolute cost advantage in manufacturing of every imaginable product, which it clearly has not, it would still make sense for it to specialize in production of goods or services in which it is relatively more efficient. This mix of goods and services will change over time. China is likely to remain a formidable exporting power, but as its economy matures and its labor costs rise, its exports will shift from cheap, labor-intensive manufactures to goods and services containing higher added value, following a similar trajectory to that of Japan, Taiwan, and South Korea. More cars and flat panel displays and fewer T-shirts.

Does this mean an end to outsourcing? Not at all. But what is outsourced, and from where, will continue to change. Expect China, just now starting to export cars, to be building car factories in the United States 15 or 20 years from now. Expect Apple to shift assembly of its iPads from China back to the U.S. or perhaps to Mexico, where it can shorten its supply chain and better control quality. For now, your undershorts and T-shirts will continue to be made in Haiti or wherever else labor is cheapest and trade preferences greatest. For just about everything else, all bets are off.