The Power of Power

So as I’m writing this blog, virtually the entire Ghana has plunged into darkness due to power plant failures emanating from the complete shutdown of gas-fired power plants.  Apparently the West Africa Gas Pipeline, an offshore gas pipeline that supplies gas from Nigeria to Benin, Togo and  Ghana was physically damaged in Togo.  But people are not the least bothered by it.  The papers hardly notice this mundane spectacle.  Only a terse press release from the state grid company announced it as a “normal load-shedding exercise”.

The ubiquity of “load-shedding” – planned power outages and brownouts is the way of life.  And this is Ghana.  Not Liberia, Uganda or Togo where most of the population have never been on grid.  On paper, Ghana has 75% electricity access.  These astonishingly high indices for African standards – (also something like 90% primary education access) mask the terrifying chasm between the reliability power of African countries and the rest of the world.  Just because you have a light switch in your home doesn’t mean you can turn it on.

Everybody remembers the Indian power outage that lasted a couple of days.  In Africa’s shining example Ghana, these outages would last weeks (as happened already in March of this year) and every single day (except the day of the President’s funeral), there is load-shedding in some region of the country.

For a lower-middle income African country like Ghana, lack of reliable power is the number one constraint to economic growth.  A lower-middle income country in Latin America or Eastern Europe or Asia’s constraint is usually corruption or political/social stability.  But in Africa it’s undeniably basic infrastructure like power (and to a lesser extent water and roads).  1 billion people in Africa’s combined access to power is equivalent to 10 million people in the US (or each African has access to 1/100th of the power of an American)- and that’s once again just power generation.  Far less people can actually use the power.

So right now entire neighborhoods of Accra are humming with the noise pollution of diesel generators.  I should say, entire wealthy neighborhoods.  The rich/poor chasm has never been so glaring.  People here often have to vote in pitch-dark circumstances.  As illustrated so well in the perennial Earth at night picture – Africa is a continent of darkness.  The lights of Egypt’s Nile, Johannesburg South Africa, and the few oil/gas operations off the west coast of Africa make the whole situation even sadder.

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Succession of a Leader

The sudden death of Ghana’s president this past week cast a shadow of grief, agony, and most of all, uncertainty, over the country.  But there was no sign of violence, revenge, or opportunistic political maneuvering in the wake of this tragedy.  In fact, the air of mourning had the opposite effect of uniting the country for the time being – less than five months before the elections.  Many articles extolled Ghana’s smooth transition of power with the previous vice president now taking the helm during an emergency parliamentary session with full opposition party participation.

This peaceful leadership succession after the sudden demise of a President is nothing new – just in the last year or so, similar unfortunate scenarios played out in Malawi, Nigeria, and two years ago – in Poland where not only the President, but many of the top military generals and parliamentary members were killed in a tragic plane crash.  But the broader peaceful transfer of power, usually from one party to another, (not just succession of a leader) is probably the most revealing of all the metrics that measure a country’s underlying institutional strength.

Unlike some other African countries, Ghana passed the “George Washington” test over a decade ago, and a couple of times since then, when President Rawlings willingly stepped-down following two terms.  The subsequent transfer of power from one party to another occurred without bloodshed – unlike recent Ivorian, Kenyan, Nigerian, Senegalese, Guinean, Togolese elections or quasi-elections marked by violence, ethnic clashes etc.  So while installing an acting president after the sudden demise of a leader may not be the most difficult thing to accomplish, the long-term institutionalized transfer of power is a truly daunting.

Unfortunately, the kinds of leadership transition shenanigans you see akin to the Game of Thrones still plague some unstable countries.  I’m just glad that Ghana is not one of them.

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Yes…African cities are more expensive than NYC!

I often get this comment from friends back home: the silver lining of you working in Africa is that you’ll be able to save lots of money. NO this cannot be further from the truth. Just because Africa is the least developed part of the world doesn’t mean an average Joe from America can live like a millionaire here. In fact it is exactly the opposite.

Mercer just released their 2012 cost of living index for world cities, based on a basket of 200 goods and surveyed global corporate and government employees working in foreign countries. Once again, African cities made the hall of fame. Cities in impoverished countries such as Luanda, N’djamena, Niamey, Bangui, Dakar, Abidjan, Ouagadougou, Lagos are in the same league as Geneva, Moscow, Tokyo, Seoul, London, and more expensive than NYC, or any other American city for that matter.

The most expensive African cities are also in countries that are both very poor and very unequal. Of course you can live cheaply off local dishes, travel around in matatus or tro tros, and stay in relatively dilapidated buildings without diesel generators or running water and get slaughtered by mosquitoes. A decent apartment in central Accra (which is apparently cheaper than a majority of African capital cities already) with air-conditioner, power generator etc, would cost you $3,000-$5,000 a month (not counting potentially $1,000 a month in air-conditioning fee). Isn’t that as expensive or more so than Manhattan??

A few things that are home-grown from the tropical regions are cheap – but you can count them with your fingers (avocado, mango, plantain, banana, papaya, pineapple). That’s it. Things you think would be cheap here – like rice, are absolutely not since even rice or toothpick is imported from Asia. And with any tinge of modernity in any goods or service – even well packaged avocadoes, mangoes etc, would cost you a fortune – more than in Western countries.

So here are my top reasons for the absurdity:

1) Lack of competition: due to a variety of reasons a lot of businesses don’t want to enter Africa or start in Africa – major ones being real or perceived political and macroeconomic risks and very onerous requirements to start a business.. This creates a vicious cycle of monopoly + political lobbying power = impossible barriers to entry for future competitors. There may only be one cement factory, one Mexican restaurant, or one supplier of Sony cameras. The one area of modernity that Africa has conquered is mobile technology – and that’s solely due to deregulation that allowed the entries of large multinational mobile operators each year that drove down prices to levels that can even be afforded by well over a majority of Africans.

2) Lack of demand from a middle class consumer society. The only people with enough purchase power to consume modern goods are expat workers and a few local elites – and these expats tend to be richer than the average citizen in their home country (such as oil/mining company employees). The apartheid-like inequality then breeds more unhealthy consumption patterns with expats and locals living and consuming totally mutually exclusive baskets of goods.

3) Lack of production: African countries are mostly primary commodity export-driven. There is very little manufacturing of anything, not even value added products from whatever primary commodity they are producing – like petrochemicals from crude oil or aluminum from bauxite. Any raw material is simply extracted from earth or ocean and shipped out.

4) Lack of infrastructure: this is the saddest of all. The despicable condition of roads…Even for products that are home-grown – 50% of avocadoes, mangoes, papayas etc become rotten before they can even get to market!!! That’s why an avocado cost 15 cents in a village, whereas it’s 50 cents in Accra. And forget about inter-country trade in Africa….. Strawberries and some varieties of apples, oranges and tomatoes for instance in Ghana cost $10 per kg – since it’s all imported from South Africa or the West, and only one supermarket sells it. However, the neighbor Burkina Faso produces strawberries. But the cost of transporting strawberries from Ouagadougou down to Accra is EVEN MORE than the 1,000% markup from these monopolistic importers.

5) Corruption/bribery/security: goods in the capital city, major cities, and even neighborhoods within capital cities where most expats live – goods can be 2 or 3 times more expensive than just outside of the “fenced area”. All those checkpoints are supposed to protect the expats but they are really bribe heaven. But would you want to venture out there?? Bandits, armed robbers, security forces with machetes demanding bribes larger than your head just so they can “protect you”.

6) Most countries in Africa do not have massive cheap labor like in Asia. This affects both the manufacturing and service sectors. Africa is low in population density. The spoils of the extractive sector also leads many to believe that they can get rich from mining or oil extraction (most are still unemployed looking for a job in those sectors)…

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Africa’s true size: yet another visual

There are lots of cartograms on the internet overlaying Europe, US, China, India etc onto Africa to visualize Africa’s true size. But I think it’s even more incredible comparing individual countries. Ghana looks tiny on a Mercator projection and is truly tiny for African standards, and yet it’s the size of the UK. Niger and Chad are each twice the size of Texas. The coastline of Mozambique is the length of the entire U.S. Eastern seaboard. But Africa feels EVEN larger than its ACTUAL size because there are no superhighways like in the U.S., Europe or China that connect you from one end of the continent to another…Below are a few comparisons of the actual sizes of different countries/states for different perspectives…

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A few gems of West Africa

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Re: Facebook IPO vs “Africa IPO”

As of 4pm EDT on May 22nd, Facebook achieved a market capitalization of $66.28 billion (which is based on a price of $31 per share). This is four times the GDP of the DRC, with a population of 71 million. Even more impressive was the split second exorbitant wealth crashing upon Facebook employees at that IPO moment:

The Republic of Facebook: $16 billion (from IPO)/3,000 people =$5,300,000/employee for that IPO nanosecond.

The Democratic Republic of Congo: $15.668 billion/71,712,867 people = $220 per citizen for the entire year

Now that the much anticipated Facebook IPO hurrah is over, I was brought to the attention this like-minded article comparing Facebook to capital markets in Africa: Obviously the article is written in an angel-investor’s tone. There are some interesting points raised that warrant further discussion:

1) Facebook’s gaudy IPO reinforces this basic problem: The rich world is capital-saturated while the poor world has very little physical capital per member of the labor force:

There are plenty of reasons why the rich world is capital-saturated. But a primary reason that was not mentioned in the article is that their labor is more productive. Physical capital increases labor productivity and vice versa so the two mutually reinforce each other. On the other hand, African countries are stuck in a low productivity, low capital investment vicious cycle. Without investments to upgrade equipments (most factories and machines in these factories are STILL from the Colonial days), or leapfrog into new ICT technology, labor will continue to be unproductive. On the other hand, low investments in human capital result in poor returns to physical capital investment. So this is a chicken and the egg dilemma for EVEN OPEN-MINDED investors who have assessed all other risks.

2) Investments in emerging markets like Kenya don’t get funding largely because our capital markets are weak. Entrepreneurs here have little access to the global pool of money:

This is another major obstacle. The size of the capital markets itself is a self-perpetuating prophecy. Studies after studies have shown that diversification in a portfolio is good for risk mitigation. Yet capital markets in every country tend to be overly bullish toward their own country’s opportunities while risk averse towards other markets. This is the kiss of death for African capital markets trying to gain foot-holds in the global capital market pool.

3) Aid-oriented grants and micro-loans are the world’s conventional offer to African entrepreneurs, and they are literally not taking care of business. The “middle market” in many emerging economies generates most new jobs, yet these small and mid-size enterprises are too big for the lauded microfinance revolution, and too small for traditional banks chasing real estate projects.

Well, in many African countries, this “middle market” simply doesn’t exist. I don’t think it really exists as of yet even in Kenya, despite Kenya or Nigeria or Ghana’s economic successes and what the author claims. Despite talks of “middle market” or  promising “middle sized companies” requiring hundreds of thousands of dollars of capital injection, my experience has been that many of the challenges are the same as SMEs – the basic access to reliable and affordable credit – whether it’s for expansion, initial start-up or working capital. Many of these problems are not solvable simply if some magic threshold of foreign capital investment is injected, but are fundamental legal or investment climate challenges that need to be changed via policy reforms and education of financial institutions. For instance, lack of urban planning in Africa is resulting in most suburban areas missing the most basic identification – addresses. Why on earth would any financial institution lend to some company or person located in an unknown jurisdiction?

Furthermore, Western and African definitions of SMEs are very different. Virtually all home-grown African private companies would be SMEs under a US classification. Besides the state-owned or partially state-owned or formerly stated owned enterprises, virtually everybody else struggle because of uncompetitive market rules and practices. It is not a coincidence that the most successful sector in Kenya and Nigeria are the state-controlled telecom and energy sectors. Even state-controlled sectors and companies can bring about innovation and economic growth for the whole country (just look at China). But does that really fundamentally solve the market failure problem of dearth of global capital investments? NO

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LGBT – the African Perspective

The maelstrom over gay marriage these days is not only fascinating, but has international ramifications. Even if the legality of gay marriage is murky, the U.S. and many European countries often tout respecting the rights of all individuals regardless of their orientation as a universal human right around the world.

In Africa, even the protection of LGBT orientation in most countries is sorely lacking, let alone marriage or civil union. This is not too surprising for most northern African countries, some governed by Sharia laws – all the way down to the northern third of Nigeria, where the maximum punishment is the death penalty. However, the limited rights of LGBT extend to virtually all of Sub-Saharan Africa (except South Africa) regardless of economic development levels or whether the country is democratic, autocratic, well-governed, poorly governed etc…

Even from a global south perspective (ignoring the Middle East for a moment), Africa seems like an anomaly – at least compared to some parts of Asia and especially Latin America. Could religion be a factor? The Gallup Poll results (the last picture) do show some degree of correlation between the religiosity of the country and their LGBT rights. But to some extent, Africa, Latin America, South Asia, and Southeast Asia all have very religious populations. But the degree of tolerance in Southeast Asia and especially Latin America, at least on paper, seem to be higher. So there are other local/cultural factors that account for the differences, including arguably the degree of control by traditional leaders since the local chiefs in many Sub-Saharan African countries play a major role in dictating the rule of law in their jurisdictions.

In Ghana, at least what I’ve seen is a Don’t Ask Don’t Tell policy. Although occasionally violence against LGBT individuals do flare up. In some African countries, there have been movements to grant more rights and protections to all citizens regardless of sexual orientation. This could be a positive sign that with stronger institutions, safeguarding the rights of all individuals can be strengthened independent of the country’s socio-economic levels or levels of religiosity.

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Tear Gas, Ethnic Tension and Elections

It’s election year in Ghana. I was having drinks with some friends when we felt something funny in our eyes. The next thing we knew, cars were racing down the main highway in reverse, people were running and scrambling to hop on one of the public tro tros and police/ambulence sirens going off. Apparently, police arrested an opposition leader of parliament that led to a scuffle with his supporters slinging rocks at the police headquarter and set a street on fire. And the police peppered tear gas and water canon to disburse the crowd.

At first, I was utterly shocked at how this can happen in Ghana. The arrested parliamentarian had announced on his radio program that he wanted to get rid of the Ewes, one of the main ethnic groups in Ghana. While like the US, Ghana has two major political parties and political discourse can get very heated, any public sowing of ethnic division is strictly off limits.  In fact, Ghanaians are so fearful of violence that often – the fear of violence itself, is the ultimate unifier of the country and gate-keeper of democracy.  Examples of bombings and killings from Nigeria are cited daily as examples to avoid at all cost.  In this case, even the Rwandan genocide has been compared. So this kind of rhetoric is unimaginable in the Ghanaian discourse and now the arrested leader is actually being tried for treason! Even his own party leader has denounced him.

But it’s not easy to maintain this kind of stability and peace – even in Ghana, which just like any other African country, has a myriad of ethnic groups since the boundaries of nearly all African countries were drawn arbitrarily during the colonial days. Just by looking at this map from wikipedia, it is seen how the Ewes are divided almost evenly into residents of Ghana and Togo. In fact, Ghana’s Volta Region used to be called “Togoland”, which was part of greater Togo that was actually a German colony. After the end of WWI, “Togo” was divided into British Togoland (which was adjoined to the rest of the British Gold Coast – “Ghana”) and French Togoland – which became modern day Togo. No wonder maintaining ethnic unity is difficult – the Volta Region of Ghana has more ethno-linguistic commonality with Togo than the rest of Ghana.

Whereas any other Ghanaian would be illiterate in Togo since they speak French, Ewes can cross the border effortlessly to do trade/business. They don’t even need to communicate in the official languages of their own countries. And the Ewes are only one example on that map. The Fon people of Benin are the backbone of the country’s economy as they import a lot of cheap goods into Benin from Nigeria (include dirt cheap smuggled oil/gas)…And the ethnic composition/complication in Nigeria is Ghana on 100X steroids…yikes

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Ghana and Africa’s Very Hot Economic Growth

Yesterday, Ghana’s statistical service officially recorded 14.4% GDP growth in 2011, which is effectively one of the highest in the world.  This compares to around 8.5% GDP growth rate for China in 2011.  Ghana’s 14.4% is much higher than the 5-6% long term average (ever since the early 80s when the IMF restructured the country’s finances) – the easy explanation is that the country started producing oil in 2011. But the rate is still higher than all the pundits’ predictions. Not only did at least $440 million flow into the coffers of the government from oil revenues, the mining sector grew by 206% – buoyed by record high gold prices, as well as the prices of bauxite, manganese etc. Despite bitter complaints from the press and some local industries, the government kept favorable tax agreements/treatments for a few big gold mining companies, which prompted them to increase their investments dramatically (also as a market response to record high gold prices).

But the unbelievable thing is, despite a 14.4% GDP growth rate, Ghana’s electricity consumption in 2011 actually fell by 0.8% – due to all the load-shedding, brownouts emanating from very outdated, poorly maintained transmission and distribution systems. In fact, rolling brownouts and blackouts affect industries, factories almost on a daily basis. It’s hard to fathom how much more the economy would’ve grown if power supply was not a constraint!!

At the same time, Ghana’s agricultural sector output only grew by 1%. Everybody on the streets can tell you that all this new wealth of the population is being consumed – by purchasing tons of imported rice from Asia, poultry from Brazil and beef from South Africa.

The moral of the story is that on the surface, it seems like Ghana is going down the path of other resource-cursed/dependent countries. But times have changed since the old colonial days. Ghana’s growth miracle is repeated to a lesser extent in a few other African countries that have found a wealth of natural resources (gold, diamond, oil, copper) in recent past – including Botswana, Zambia, Angola, Equatorial Guinea, Namibia, Gabon, Mozambique and Nigeria.  But it’s interesting to see how unlike the resource dependent ruthless dictatorship of Congo (especially Belgian Congo) 100 years ago and the contemporary slow growing but resource rich Zimbabwe, the recent fast growing groups of countries are mainly democracies or at least ruled by stable, competent rulers – Botswana, Zambia, Namibia, Mozambique, Nigeria. These countries at least have quasi checks and balances to ensure that most of the wealth generated from the exports of commodities is channeled into the society for the benefit of citizens (like constructing roads, schools, power lines, social safety net, lower taxes etc). This is very unlike Belgian Congo, or Charles Taylor Liberia, or Mugabe Zimbabwe.

So I continue to believe that as long as there are adequate political institutions to manage the revenue of commodities, African countries can grow and prosper for a long time to come – without the need to develop whole new manufacturing or other industries which take up a lot of unnecessary resources that can be channeled into more effective, basic infrastructure and institutional building. So with strong institutions, good investment/trade/monetary policies, African countries don’t have to follow the Asian or European economic growth model (a question I often get asked). Africa has to fully leverage its comparative advantages on the world stage.

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Why I Support the Export-Import Bank

I was flabbergasted when I saw that the Senate voted down the re-authorization of the Export-Import Bank of the US so I had to post something.  This kind of political stunt really reflects some politicians’ total ignorance of not only the ingredients of job creation and economic growth for America, but the fundamental equations of international political economy, and if I may add, global geopolitical competition. Ex-Im only provides assistance in the form of loan guarantees or small loans when there is a market failure – commercial banks unwilling to lend to companies that want to invest in “risky” overseas environments, and when foreign governments or entities want to buy US manufactured equipments (which is more prevalent than you can imagine). They have a net positive return for the government – revenue for Uncle Sam is bigger than their outstanding loans (So the “government spending” argument is a complete farce). They generated about 300,000 jobs for 2,600 companies (vast majority of them SMEs) in the US in 2011 alone.

Ok so we can forget about the few hundred thousand jobs it creates. More fundamentally, why is Ex-Im important for the US from an international perspective? Almost every other country has an equivalent – even tiny Ghana has its export financing agency. Just to illustrate, the equivalents in China – China Development and China Export-Import Banks’ total loan portfolio around the world in 2009 and 2010 totaled $110 billion, which is bigger than the development assistance portfolio of the entire World Bank group, and the $50 billion 0r so portfolio for Ex-Im for the same period. It really shows how Ex-Im is lifting almost the entire weight of America in “competing” with these Chinese state owned banks in their quests to conquer every remote corner of the world.

So basically without Ex-Im bank of the US, it is hard for me to see how the US is actually relevant in many parts of the world! US already devotes only 0.15% of its GDP to foreign assistance, compared to 0.7% for other OECD countries, but foreign assistance (USAID, military assistance etc) itself is fraught with challenges, its effectiveness the topic of perennial debates, and most importantly, is not really visible in many areas of the world (A huge chunk of our foreign assistance goes to Afghanistan, Iraq, Israel, Egypt and Pakistan). But unlike foreign assistance that takes care of basic health/education/disease/death prevention, Ex-Im’s support is really manifested in forging sustained economic partnerships as it reaches small businesses and middle class consumers. So Ex-Im is even more crucial for places like Africa – just to make sure the US has a flag in these countries, and a place at the table with dozens of other donors. But that’s the topic for another discussion.

But the more basic question I want to ask every American business owner and investor is, do you think you have the wherewithal to inject hundreds of millions of risk capital into some random African country where you don’t even know if the currency is convertible and if the government will seize your assets? Not just your business, but do you think some American bank would lend you a billion dollars to do business in Guinea or Burkina Faso?? How do they navigate the complicated terrain of securing a deal with foreign contractors, and in most cases, get the approval of some hostile or low capacity foreign government? Even if businesses know there are good opportunities in more tame places like Ghana, how do you know which companies to partner with?? Of course fraud is rampant everywhere in the developing world.

Politicians have to realize that without entities like Ex-Im and OPIC (Overseas Private Investment Corporation), which provides political insurance and project financing, there will be NO, NADA, small and medium American enterprises exporting to the vast majority of developing countries!! And furthermore, there will be no foreign buyers of American manufactured goods from small and medium sized companies. They will buy literally EVERYTHING from China (of course that’s because Chinese exports are supported by their state-owned banks), and consumers not just in America, but around the world, will only know the Chinese brand. What happened to all the complaints about Americans importing too much and exporting too little? For some reason, people only think about the problem – buying too much cheap Chinese goods, and not about the solution, which is on the export side.

In Ghana for instance, Ex-Im is providing loan guarantees for the Ghanaian government to buy power equipments such as substations and transformers for rural electrification. Not only has the medium sized American company boomed during the recession and provided thousands of jobs in the US (and tens of thousands of jobs for impoverished regions of Ghana), it is in the process of electrifying 1,400 villages. The multiplier effect of those infrastructure projects supported by Ex-Im in not so remote, but often forgotten corners of the world cannot be emphasized.

True, any federal agency – including Ex-Im could use some reform to make it even more lean, stronger and effective. And some of the loans it has approved in the past may not have provided the best returns. But don’t confuse reforming some inefficiencies with the existence of entities that define the role of America in the world. Of course slashing every program that has no domestic constituency lobbying for their existence makes for good political fodder. I think it’s time for some politicians and think-tank people to go back to school to study basic international affairs and economics.

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