Archive for the ‘ Africa ’ Category

South African equities hit record highs, doomsayers left waiting

Posted on Reuters’ Global Investing blog

Earlier this year it seemed that an increase in global bullishness meant the end of the road for risk-off investment strategies and, by extension, the rise in South African equities. However, 6 months later, the band is still playing, and the ship is refusing to go down.

South African equities have flourished in the face of the doomsayers, with returns this year doubling the emerging market benchmark equity performance. Both the all-shares index and the top-40 share have hit fresh all time highs this week, and prophecies of gloom for South African stocks appear to have missed the mark somewhat…

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Food prices may feed monetary angst

Posted on Reuters’ Global Investing blog

Be it too much sun in the American Midwest, or too much water in the Russian Caucasus, food supply lines are being threatened, and food prices are surging again just as the world economy slips into the doldrums.

This week, Chicago corn prices rose for a second straight day, bringing its rise over the month to 45%, and floods on Russia’s Black Sea coast disrupted their grain exports.  Having trended lower for about nine-months to June, the surge in July means corn prices are now up about 14% year-on-year. And all of this after too little rain over the spring and winterkill meant Russia, Ukraine and Kazakhstan’s combined wheat crop would fall 22 percent to 78.9 million tonnes this year from 2011.

But as damaging as these disasters have been for local populations, their effects could be much more widely felt.

The problem is that not only do rising food prices raise the cost of living, squeezing incomes further during a downturn, but by raising inflation they severely restrict the government’s flexibility in setting monetary policy. Just as Mike argued previously on this blog that the falling oil price amounted to a green light for the cutting of interest rates, rising food prices will force many central banks to think again about the pace of monetary easing.  And the problem is most acute in developing countries where the proportion of food in consumer price baskets is far higher than in the richer western economies. For example, according to the US Department of Agriculture, an additional $1 added to income sees 56 cents more spent on food, beverages and tobacco in Burundi, compared to 5 cents more in the United States.

The Russian central bank is a timely case in point when it comes to restrictions on monetary policy. On Friday they announced that they were keeping interest rates the same; as much as growth is struggling and could do with some monetary stimulus, high inflation, fuelled by food prices, is tying the bank’s hands.

Why has this happened? According to the traditional Phillips curve, there is usually a tradeoff to be made between unemployment and inflation; they are inversely related, as prices and wages will rise when unemployment is low, and vice versa.

continue reading on Reuters

Certain danger: Extreme investing in Africa

Posted on Reuters’ Global Investing blog

The Arab Spring, for all its democratic and political virtues,  put a big economic dent in the side of participating North African countries, particularly when it came to attracting foreign investment in 2011.

According to a recent UNCTAD report:

Sub-Saharan Africa drew FDI not only to its natural resources, but also to its emerging consumer markets as the growth outlook remained positive. Political uncertainty in North Africa deterred investment in that region.

So far, so logical. Except that simply can’t be all there is to it.

Why? Because plenty of African countries marred by political uncertainty have succeeded in attracted FDI.

The Democratic Republic of Congo is a good example. According to political risk consultancy Maplecroft, the country ranks as “extreme” in its risk index for governance framework, regulatory and business environment, conflict and security and human rights and society. It scores 0.00 on business integrity and corruption. And yet in 2011 it attacted over a billion dollars in FDI, according to the UNCTAD report.

Sudan tells a similar story. Its risks are high or extreme for every category that Maplecroft lists, and while its business integrity and corruption score comes in at a comparatively virtuous 0.10, it doesn’t scream out to investors as attractive. Yet Sudan too attracted over $1bln in FDI.

The reasons why Sudan and the DRC may be attractive to investors are clear enough; they possess vast mineral, commodity and oil reserves. Yet previously that has not been enough to attract FDI on this sort of scale. Conversely, Libya’s oil revenues only attracted negligible investment in 2011.

In short, there seems to have been quite a role reversal between North and sub-Saharan Africa in light of the Arab Spring.

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Alone at the top, or ahead of the curve? The regional geopolitics of Joseph Kabila’s presidency

Written 15th April

The 19th April marks the ten year anniversary of the signing of the Sun City Agreement, a peace deal aimed to bring about the end of the Second Congo War. The young President, Joseph Kabila, took little over a year in office to negotiate an framework for the end of the conflict, which had raged since 1998, and saw his stock rise as he received credit for catalysing a deal, making Rwandan reticence seem obstructionist at best and belligerent at worst. On one level this praise may well have been deserved, but there is also no doubt that pressure to end the war from the DRC’s Angolan and Zimbabwean allies played a part in Kabila’s decision. After all, his father’s failure to do so may well have cost him his life.

There is a consensus that the Angolan government, even if it did not order Kabila Snr’s assassination, in likelihood knew about it, and were not all that enthusiastic to stop it (Jason Stearns has a good overview of potential scenarios surrounding Laurent Kabila’s murder). What is less in doubt is that Kabila Jnr. rose to the presidency with the assent of the Angolans, Zimbabweans and other Congolese politicians. Mwenze Kongolo summed up the mood of these patrons when he said “We all came to the conclusion that this young man was the one we needed to keep things under control for the time being, until we have a President again”. Kevin Dunn also put it well when he wrote in 2002 that “it appears that [Kabila] has learned from his [father’s] mistake and is far more willing to follow the advice of his Zimbabwean and Angolan backers… This is in no doubt tied to the fact that Joseph Kabila’s survival is clearly in the hands of these external patrons”.

In this context, one where Kabila was clearly dependent on the support of others for his rise to the presidency, it would appear that his position should be far weaker than it was a decade ago, as his “external patrons” have one by one disappeared. Angola’s historic interest in the DRC was a consequence of a civil war mentality, and the UNITA bases in the Congo that resulted from Mobutist support for the rebel group. Since the end of the war in 2002, Angolan interest in the DRC has dissipated. Robert Mugabe was the only foreign head of state to attend Kabila’s inaugration following the 2011 elections, yet rumours about his health abound, and, long before then, Zimbabwean involvement in the DRC was increasingly unpopular as costs rose, lives were lost and the relationship to the Zimbabwean national interest of military involvement in the Congo were unclear. And domestically, the death of Augustin Katumba Mwanke, described by US diplomats as the “power behind the throne” was a huge blow, as he was seen as a key commercial link to the outside world.

Yet Kabila has consistently confounded those who have underestimated him. He carved his own path ever since his first days in office, acting in a statesman-like manner, both towards his allies but also on the broader global stage. As Gérard Prunier has noted, “devoid of a national constituency, he had decided to treat the international community as his powerbase.” And this powerbase is not one that he has been beholden to, nor one which has been static. In van de Walle’s phrasing, in playing the “politics of permanent crisis” he has exercised remarkable autonomy even as his state has demonstrated limited capacity to maintain security, and as such, changes to the mandate or nature of the deployment of MONUC/MONUSCO in the DRC has been largely on his terms, or at least to his favour. Regionally, his rapprochement with Rwanda and Uganda has shown his willingness to shift with the changing geopolitics of the region, and while this flexibility may have been forced on him to an extent, descriptions of him as a “proxy for Rwandan interests” are insensitive to his agency and capacity to evolve with the times, as what constitutes best serves his interests in self-preservation changes. After all, as Prunier has observed, those who assumed that he was a “front” for Angolan interests a decade ago “were in for a big surprise”.

The Sun City Agreement was in many ways imperfect, but also represented Kabila approaching the peak of his international legitimacy, a period which lasted until at least the elections of 2006. At this time he was given the benefit of the doubt, and the problems of the country were assumed by the UN to be solvable once peace and democracy were in place. The five years leading up to elections in 2011 saw a different tone being taken: one of frustration and one of fatigue, as rebel groups previously external to the FARDC were absorbed into it, and still abuses happened at their hands. However, despite a far less hospitable international environment, Kabila seems to be weathering the storm, and has kept one step ahead of his critics by maintaining a coalition regional support for his government, even if its members change. His problems may multiply, however, if, like his father before him, the Rwandans and Ugandans decide that Kabila Jnr is failing to meet their security concerns. Without being able to depend on Angolan or Zimbabwean support, he might find himself very isolated indeed.

A peacebuilding success? Cracks in Burundi’s fragile post-conflict settlement

News this week that a HRW report on political violence has been suppressed might come as a surprise to those in the international community who like to hail the Burundian experience as a success story when it comes to post-conflict situations.* However, to people who have studied the peacebuilding process, and to Burundians themselves, it is just one symptom of a broader picture which in reality is less optimistic.

Yesterday I saw Dr Devon Curtis deliver a talk about the situation in Burundi and the real nature of peacebuilding. While peacebuilding is often conceived of as a “neutral” activity, it is in fact by nature a political activity too.That doesn’t make it any less worthy, but if practitioners aren’t upfront about the values and priorities which infuse the frameworks they use in peacebuilding (be them centred around liberalism, stabilisation or even local ownership), then there will be problems in the future which will catch them unawares. As in the DRC, the process of peacebuilding has swung between an emphasis on the installation of Western notions of what it is to be a good liberal democracy on the one hand, and the stabilisation of the situation, so that values such as human rights are subordinated to the broader stability of politics in the region, on the other. Thus, the immediate post-1993 situation called for a stabilisation of a potentially explosive situation, whereas the Arusha process was infused with more liberal norms. I don’t think the two priorities are necessarily always so separable – what about the stabilisation ahead of DRC’s 2006 elections, elections that are at the heart of any liberal agenda? – but the dichotomy is nevertheless a helpful one. As Dr Curtis pointed out, both have order at the heart of them. With stabilisation, this is obvious, but even with the liberal approach, the DRC example is illuminating, as it doesn’t address the potential for the militarisation of politics. Overemphasis on the technicalities such as the formal completion of elections and the institutionalisation of power-sharing arrangements can miss the fact that returns to violence are still high in Burundi, and the liberal framework for peacebuilding doesn’t address this effectively. Instead, because elections are being held with regularity and the spectre of genocide has faded, the mission is wound down and declared a success; ignorant of the fact that dynamics of militarisation and control are still playing out in Burundian society today.

With a greater awareness of these issues, perhaps the international community would be more restrained in giving themselves a pat on the back for their great success in peacebuilding, and, by the same token, less surprised when it starts to unravel.

* The UNA-USA also seem to think that only 80,000 people died in Rwanda, so there’s another surprise in store for them there.

Institutions, experiments and the resource curse

Previously I mused about whether or not the East African countries who have recently discovered natural resources would be able to make the most them, to benefit their country in terms of GDP and also on a broader scale.

Now a bit more on how that resource curse supposedly works. Robinson, Torvik and Verdier (2006) have argued that the political incentives that are generated by natural resources (as opposed to purely economic ones) are key to  understanding why certain countries have resource curses and why others don’t. Rather than a static explanation unable to explain variation in outcomes across countries, such as Dutch Disease or even rent-seeking models (where pressure groups force their government’s hand in granting them concessions), Robinson et al argue that variation in institutional quality can help explain the presence or lack thereof of a resource curse. Moreover, Mehlum et al. (2006) have shown empirically that once you’ve controlled for the interaction between institutions and resources, it turns out that resources positively affect growth with good institutions, yet the “curse” sets in when institutions are bad.

So it’s worth measuring the institutions of Uganda, Kenya, Tanzania and Mozambique, to try and ascertain who might make the best use of their resources. Looking to precedence, Abidin (2001) claims that Botswana, Chile, Malaysia, Oman and Thailand have successfully escaped the resource curse, while Algeria, Ecuador, Mexico, Nigeria, Saudi Arabia, Trinidad and Tobago, Venezuela and Zambia at that time were still unable to do so. Using Sachs and Warner’s index of institutional quality, Robinson et al verify that those who have escaped the resource trap according to Abidin have good institutions according to Sachs and Warner.

The Sachs and Warner dataset is quite old nowadays, so I’m going to use the Corruption Perceptions Index for 2011 as a proxy for institutional quality. Imperfect as this is, it verifies that the countries that have escaped the resource curse, according to Abidin, are less corrupt. The exception to this is that Saudi Arabia; according to the score, it is better for transparency than both Malaysia and Thailand (I’ll return to concerns about the score at the end).

Right, so with all this in mind, how might our East African countries, newly endowed with natural resources, perform, if institutions, represented by CPI score, are predictive or determinative of resource management?

It’s marginal, but there are differences across the countries. With a rating of 3.0, Tanzania performs the best on the CPI, followed by Mozambique on 2.7, Uganda on 2.4 and Kenya on 2.2. Historical context helps to explain this: Julius Nyerere keenly strove to reduce ethnic tensions in the name of national unity, whereas leaders such as Daniel arap Moi exploited divisions. While Kenya outperformed Tanzania in economic terms for much of the post-independence period, it appears poorly positioned compared to Tanzania to manage its resource wealth effectively, as this history of maintaining power through blatantly neopatrimonial networks is exactly the mechanism that Robinson et al argue translates poor institutions into a resource curse.

So tentatively, we might think that Tanzania is the least likely to be cursed by their resources, whereas Kenya could face serious problems in resource management. But… it might not be all as simple as that. Take Angola Angola scores an incredibly low 2.0 on this corruption perception scale. However, according the Economist, Angola grew at an average rate of 11.1% last decade. The resource curse is usually couched in terms of growth (see eg, Collier, 2008). Even Abidin calls it a “low growth staple trap”. But few people would say that, given its growth, Angola has no issues in relation to its oil management; it’s not Norway. In a previous post, I said that reduction of poverty or inequality should be taken to account in assessing how well a country manages its resources, and Angola certainly fails on that count.

It’s also a puzzler for Robinson’s theory, as even if we reckon GDP isn’t the be all and end all, his theory suggests that growth shouldn’t even be sustainable with poor institutions. Perhaps the intertemporal bias cited by him towards consumption and spending today means that GDP figures are being inflated for the moment, only to see a crash later. As such, Angola hasn’t really escaped the resource trap, and might be approaching a crash when the oil dries up/if oil prices fall. But a decade is quite a long time for growth to be sustained if bad institutions are meant to be prohibitive to growth.

This is one of the reasons why the experience of the East African countries should be so illuminating. Angola had one thing which no other country had when they discovered resources – a civil war. Hence in the decade since the civil war ended, it might not be surprising that the economy grew rapidly; it escaped the conflict trap, regardless of whether or not there’s a resource trap. Moreover, previous studies that thought Angola’s institutions were harmful to their resource management might have been picking up the effects of conflict.

With four similar countries all discovering resources at a similar time, hopefully we’ll be able to have a more “scientific” take on the effect of natural resources, rather than drawing too many conclusions on the basis of a unique case in Angola, which has a lot of other things going on which may be helping or hindering growth.

Either way, the Angolan case shows that while poor institutions may be conducive to a resource trap, they are not sufficient for one, at least to the extent to which the “trap” is defined in terms of GDP. Which must be encouraging to the leaders of Kenya, Mozambique, Tanzania and Uganda, as none of the countries score especially well on the CPI. However, if it means these countries can insulate themselves from domestic discontent and fuel GDP growth while ignoring much of the population, it may be less encouraging to their people.

Friday Question – Who will manage their new found natural resources most effectively?

Following my previous post on natural resources in Africa, where I claimed that recent discoveries in someways represent a natural experiment for the effect of natural resources on economic and political elections, I’m now encouraging commentators, political scientists and readers to engage in something they should never do when considering such questions: forecasting! Don’t worry, I promise not to use your predictions to haunt you in the future. Out of those countries that have recently discovered natural resources in East and Central Africa (Kenya, Tanzania, Mozambique and throw in Uganda as they’re still getting going), who will best manage their reserves to:

1) promote economic growth?

2) tackle poverty and/or inequality?

and 3) pursue production with the least corruption?

The questions are vague, but that’s their beauty. Does growth that promotes economic growth, increases inequality but tackles absolute poverty to an extent satisfy the first two criteria? You tell me. And while the history of countries such as Tanzania suggest that economic outcomes might be more equitable, is this only because of a dearth of natural wealth previously? Or will historical trends in how national wealth is managed/whether growth is achieved continue? Or will there be even be a “reversal of fortune?

Over to you. Please comment below…