Kabila’s Waiting Game is Costly to D.R. Congo

Less than two years before the 2016 general elections, Congolese still do not know whether or not Joseph Kabila, the incumbent President in power since 2001 after his father, Laurent Desire Kabila, was assassinated, will peacefully leave power. After winning the first free and fair multiparty elections in 2006, he narrowly won the 2011 elections, which were marred by irregularities and violence. Although the Congolese President stated previously that he will respect article 220 of the Congolese constitution, which limits his presidency to two-terms, his supporters in the parliament, however, expressed their intentions to amend it by referendum. This incertitude is putting the country on edge, especially after the recent uprising in Ouagadougou, Burkina Faso, which led to the departure of Blaise Compaore after 27 years in power.

As the taciturn Kabila and his supporters to obfuscate Congolese people, the Democratic Republic of Congo (DRC), like other African countries in its position, is suffering economically and politically from this waiting game. A country already plagued by high rates of poverty, unemployment, corruption, lawlessness and violence cannot afford to leave foreign firms and individuals up in the air. In addition, government officials from high-ranking ministers to bribe-hungry custom agents are swindling as much money as possible before the next president or political upheaval. Needless to say, there is a certain feeling of sauve-qui-peut throughout the Congolese bureaucracy.

Although the central Africa country suffered from the 2008 global financial crisis, which depressed hard-commodity prices, it has rebounded from a relatively meager GDP growth rate of 2.9% in 2009 to 7.2% in 2012 and 8.1% last year, according to the African Bank for Development. This blooming is mostly restricted to its extractive sector, however. As shown below, agriculture sector remains the largest employer and main source of income for most Congolese. In the capital city of Kinshasa, however, the services sector is by far the main employer. Given low levels of education (human capital) and lack of mechanization, DRC is unable to fulfill its potential.

Screen Shot 2014-11-24 at 11.16.05 AM

Will He or Won’t He?

The sentiment on the ground is that Joseph Kabila will cling on to power post-2016 due to his age (43-year-old), fear of a political witch hunt, and economic reasons (corruption). Since its independence from Belgium in 1960, there has not been a peaceful political change of power. The first post-independence democratic government was overthrown in 1965 by a military official, Joseph Desire Mobutu, who ruled for 32 years with an iron fist. After a swift military campaign with the help of neighboring Rwanda and Uganda, he was eventually overthrown in 1997 by a Marxist-leaning longtime rebel leader Laurent Desire Kabila.

Recent events in Ouagadougou, however, have changed the topic of discussion in Kinshasa. Kabila and his camp are nervous, and have started muzzling and intimidating the opposition. Yesterday, for instance, Radio-Télévision Lubumbashi Jua (RTLJ), emitting from Lubumbashi, Congo’s economic capital in the copper and cobalt-rich province of Katanga, was turned off after its owner, Jean-Claude Muyambo, a member of parliament left Kabila’s coalition and voiced his opposition to a constitutional change.Since the line between personal and state businesses in DRC is blurry, many politicians and businesses are even more hesitant to rock the boat.

Given DRC’s natural resources abundance and monarchical power held in the executive branch, you can understand the current political tension. Since Belgium’s King Leopold II, who ran this vast territory the size of the United States west of the Mississippi River as a personal property in the late 1800s, DRC has been nothing more than a kleptocracy. Last year, for example, a panel of experts led by Koffi Annan, the former UN secretary-general, published a damning report that showcased the extent of corruption in the country. As the Economist reported (see below), many people have struck it rich thanks to Kabila’s position at the helm, and they have a vested interest to keep him there for the foreseeable future.

The report highlights some puzzling details. For instance ENRC, a London-listed Kazakh mining firm, waived its rights to buy out a stake in a mining enterprise owned by Gécamines, Congo’s state miner, only to acquire it for $75m from a company owned by Dan Gertler, an Israeli businessman, which had paid $15m for it just months earlier. Mr Gertler is close to Joseph Kabila, Congo’s president. ENRC, which is being investigated by the Serious Fraud Office in Britain, was Congo’s third-largest copper producer last year. Both ENRC and Mr Gertler deny wrongdoing.

In a country now famous for political instability and dubbed as “the rape capital of the world,”  the least President Kabila and his supporters can do is to finally clear the air about his post-2016 ambitions. It is irresponsible and selfish, I might add, for an individual and his sycophants to hold a country of almost 70 million people hostage for their own political and economic gains. Two years away from general elections, they have to inform the public of their intentions, so the country can begin preparing for the next provincial and national elections. Any political maneuvering, however, could trigger violence in a country with a high rate of youth unemployment, which will further retard its development. For a country already ranked low in this year’s World Bank’s Doing Business Report and at the bottom of the UN Human Development Index Report, there is a desperate need for a high degree of political certainty and stability to lure much needed foreign investments.

Standard

Ebola Hysteria and the Midterm Elections

Two weeks away from the November midterm elections, politicians on both sides of the aisle are cashing in and playing politics with the current outbreak of the deadly Ebola virus. After the death of Thomas Eric Duncan, a Liberian visitor who recently became the first victim of the virus on American soil, Republican from Mitch McConnell (K.Y) to Ted Cruz (TX) have called for travel restrictions or outright ban of airline flights. Democrats, on the other hand, blamed the limited spread of the virus in the U.S. on the Center for Disease Control and Prevention (CDC) budget cuts, even though the government institute received $6.8 billion ($200 million more than its $6.6billion FY2014 budget request) in FY2014 compared to $6.3 billion in FY2013. This Ebola hysteria demonstrates a lack of understanding of the virus, but, more importantly, it’s irresponsible and myopic of political leaders to rely on fear-mongering to score political points. As the Economist recently pointed out:

IN THE crowded field of Ebola alarmists, Rand Paul of Kentucky stands out. Before he was a Republican senator with presidential ambitions, he was an eye doctor. Apparently the Hippocratic oath does not cover panic-mongering: Dr Paul has popped up on talk-radio shows, alleging that when Barack Obama or his scientists say that Ebola is rather hard to catch, they are fibbing. Or, as he puts it, they are downplaying the risk that Ebola might spread across America for reasons of “political correctness”. Ebola is “incredibly transmissible”, Dr Paul has asserted, talking of doctors falling sick even after they suited up and took “every precaution”.

Ebola alarmists should know that the virus, which was originally discovered in a remote region of the Democratic Republic of Congo, then Zaire, in 1976, is a poor man’s (rural) disease. To call for a travel or visa ban from affected countries in West Africa is a irrelevant, because the Obama administration already implemented screening measures for travelers from these parts of the world on their arrivals to the U.S.. In addition, “bushmeats” like monkey and fruit bats are not as popular to globetrotting African city dwellers. Having lived in Kinshasa, capital city of DRC, such meats are rare and expensive compared to beef, fish and imported chicken (thanks to EU subsidies). In contrast, in Equateur province, where the virus recently reappeared, smoked meat is a local delicacy. Since the recent reappearance of the virus in the region, for instance, monkey meat prices fell by slightly more than 40% from USD$10.81 to $6.48. Similarly, the current Ebola outbreak in West Africa began in a remote region of Guinea, where authorities unsuccessfully banned bat soup to contain the spread of the virus. Second, there are no direct flights from the three Ebola-stricken West African countries of Liberia, Sierra Leone, and Guinea. As the New York Times, highlighted today, “… a flight ban would have to ground connecting flights from Brussels, Amsterdam and other European cities.”

A visa ban for Ebola-affected countries would send a wrong message to African countries, especially after Obama held a summit attempting to build stronger economic ties with the continent less than two months ago. Moreover, after revoking the HIV travel ban in 2010, an Ebola visa ban would definitely be a step in the wrong direction given scientific facts about the virus and U.S. top-notch health infrastructure. Although certain countries in West Africa have sealed their borders and implemented travel restrictions, the U.S. is thousands of miles away and has the needed resources to limit its spread on American soil. Finally, the Republican party risks alienating African immigrants who are, for the most part, socially conservative. Relying on Ebola to get out the vote can backlash against the GOP, which should be courting this growing segment of the population. As the Times wrote today, demanding a visa ban might help the GOP win this year’s midterm elections, but it would be a Pyrrhic victory:

Campaigning on possible threats from undocumented immigrants — similar to claims that President Obama and the Democrats have left the country vulnerable to attacks from Islamic terrorists and the Ebola virus — may backfire after November. At that point, the party will have to start worrying about its appeal beyond the conservative voters it needs to turn out in midterm elections.

Standard

White Privilege is Just Another Cop-out

This week, Bill O’Reilly, had another standoff with The Daily Show’s Jon Stewart on “white privilege”. The pugnacious Foxnews political commentator acknowledged that historical discrimination of blacks and other racial minorities in the U.S. have had a lasting effect, but he argued that personal responsibility (i.e. good values), now, is the main determinant of one’s socio-economic ascendance. Jon Stewart, on the other hand, believes that “white privilege” is a major factor in today’s socio-economic condition of black and white Americans. He cited previous racial discrimination, including in O’Reilly’s hometown of Levittown, NY, where black World War II veterans were excluded due to government directives. This, according to Stewart, proves that whites were given a head start, while blacks lived in the ghettos.

I don’t think anyone is disagreeing with the Daily Show’s host argument that whites in the United States have had a head start given past racial preferences. As O’Reilly noted, however, blacks and other minorities, today, don’t face the same obstacles that past generations had to tackle. In today’s America with a black president, billionaire, multi-millionaires, scientists, generals, and many others. This fact doesn’t mean that racism or de facto discrimination is a thing of the past. It simply means that we live in a time when your attitude, work ethic, and personal responsibility determines your economic altitude. White privilege, in my opinion, is just a cop-out. Many rather blame whites for several ills in the black community that are truly self-inflicted. Black authors such as Thomas Sowell, Walter E. Williams, and, recently, Jason L. Riley have eloquently stated that government programs purported to help the black underclass have done more harm than de jure discrimination.

Instead of wasting our time arguing about white privilege, it will be better to focus our attention and energy on finding solutions to improve the lives of poor Americans who suffer from too much government involvement. As Milton Friedman’s argued, minorities have done and continue to do well in areas with less government involvement. Black billionaires and multi-millionaires today, for instance, are mostly self-made businessmen and women thriving in sports/entertainment, where they have the opportunity to showcase their talents compared to other areas of the economy with government created barriers to entry such as occupational licenses and minimum wage laws. Yes, white privilege do exist, but it’s a small factor in determining one’s socio-economic rise in today’s America, where African immigrants are thriving and in someways outperforming native born whites.

Standard

My thoughts on the closing of this year’s transfer window

The 2014 transfer window closed today, and, as a Chelsea FC fan, I am happy with my team during this hectic period. Jose Mourinho addressed our lack of firepower by finally getting rid of Fernando Torres (loaned to AC Milan), and signing Diego Costa from the Spanish La Liga Champions, Athletico Madrid. The Brazilian-born Spanish striker has been terrorizing defenses in the league so far by scoring four goals in three matches. Chelsea also signed former Arsenal marksman, Cesc Fabregas, from Barcelona, where he was second choice after Xavi. I must admit, I was not too keen on his signing, but I am impressed by his sharpness and work ethic so far.To stay within the UEFA Financial Fair Play (FFP) rules, the West London club also sold promising young striker Romelu Lukaku and Brazilian defender David Luiz to Everton and Paris Saint Germain, respectively. This was expected given Mourinho’s lack of trust in young strikers, and Luiz’s inconsistency, as illustrated during this summer’s FiFA World Cup in Brazil. 

What about Man United’s Van Gaal?

The British media was eupeptic about the arrival of Dutch disciplinarian coach, Louis Van Gaal, to Manchester United after a lackluster 2013-2014 season under the Scot David Moyes. As the team’s record (2 draws and one loss) indicates, however, LVG has a lot of work to do to transform this team, and incorporate his (in)famous 3-4-1-2 system/formation. The departure of captain Nemanja Vidic, Rio Ferdinand, and Patrice Evra have left the team, especially its defense, without a reliable backbone. Chris Smalling, Phil Jones, Rafael, and Evans lack are not top defenders. The signings of highly rated left-backs Luke Shaw and Marcos Rojo are intriguing given the lack of a dominant experienced central defender.

I liked the arrival of Angel Di Maria from Real Madrid, however. He would have won the World Cup for Argentina if it wasn’t for his hamstring injury. He has pace, powerful left foot and can anticipate runs, something United currently lacks in midfield. The arrival of Dutch midfielder/ left back Daley Blind was expected given his versatility, and familiarity with Van Gaal’s 3-4-1-2 formation, which helped the Dutch team to third place finish in this year’s World Cup. Today’s surprising one-year loan signing of Colombian talisman Rademel Falcao, after a serious knee injury, from Monaco is a wonderful sign, but questions remain. Would he play along side injury-prone Van Persie, and Rooney? Where does it leave former Chelsea Spanish midfielder Juan Mata? 

Ready to Rumble

As a football/soccer fan, I am excited about this year’s competition and looking forward to seeing these (Chelsea) players thrive and help their teams win trophies. Though, It would be a miracle if Man United breaks into the top four given its inexperienced defense, and unbalanced squad. Manchester City, last year’s champions, are still strong and have added some more pieces to their team after acquiring Fernando and Mangala from the Portuguese league. Arsenal, on the other hand, I am afraid would struggle, again, with Everton and Tottenham for the fourth Champions League spot given the lack of a viable striker, especially after Olivier Giroud’s recent injury. The signing of Dani Welbeck from Manchester United leaves more questions than answers due to his lack of goals. Liverpool has also done well during this window.

The expected departure of controversial Uruguayan striker Luis Suarez, who bit Italian defender Chellini during this summer’s World Cup, has given Brendan Rodgers cash to sign Mario Balotelli and others. We would see how they cope with the Champions League, and without Suarez who was the league last year’s top scorer. After the closing of the transfer window today, now we know which teams are really in it to win it. As Michael Buffer would say, “let’s get ready to rumble.”

Standard

Why I am a relative pessimist about South Africa

After reading Tyler Cowen’s post on Bolivia, I thought about writing a similar post on South Africa, the economic giant in my neck of the woods. Without further ado, here are five reasons why I am a relative pessimist about former President Nelson Mandela’s beloved country.

1) Since the first democratic elections in 1994, the African National Congress (ANC) continues to maintain a grip on the country’s politics. As illustrated by this year’s elections (see previous post), Nelson Mandela’s party enjoys a relatively strong, but slowly diminishing control on the Rainbow Nation. The sooner a viable alternative to the ANC (Democratic Alliance?) comes onto the scene, the better Pretoria would be in the long run.

2) Lethargic economic growth in South Africa’s largest export market, the European Union (see chart below), has contributed to Pretoria being in the doldrums for the last five or 6 years. It is important to add that South Africa’s trade and investment relations with the EU are administered under the Trade, Development, and Co-operation agreement signed in 1999. Unlike the African Growth and Opportunity Act (AGOA), which provides non-reciprocal trade preferential treatment to most sub-Saharan African countries, Pretoria products don’t enjoy the same treatment to the European market. EU-ACP Cotonou agreement does not extend the same non-reciprocal treatment to Pretoria due to its status as a middle income/emerging economy.

Screen Shot 2014-09-01 at 7.44.37 PM

3) With a relatively stable government, abundant natural resources, a strong manufacturing sector, and a world-renowned stock exchange, South Africa has solidified its position as an economic powerhouse in southern Africa. However, recent labor strife in the mining and automobile sectors has slightly damaged its image to foreign investors. South Africa’s rigid labor sector is a serious impediment (see previous post).

4) Since the 2007 global economic downturn, South Africa has enjoyed a huge inflow of equity and portfolio investment (hot money) driven by low interest rates in the U.S. and Europe (see figure below). Cheap money has increased South Africa’s 40% debt to GDP ratio, and is fueling a housing bubble.

Screen Shot 2014-09-01 at 8.24.26 PM

5) As illustrated in Figure below, mineral products continue to be South Africa’s main export products. Falling mineral prices and mining sector instability have negatively impacted the country’s economy. Investors would continue to shun Pretoria’s mining sector despite its abundant natural resources due to labor sector friction.

Screen Shot 2014-09-01 at 8.48.57 PM

With a 25% unemployment rate, 20 percent of the population accounting for just 2.7 % of national income, and almost one third of the population living on less than $2 a day, it is imperative that the African National Congress (ANC) strengthens manager-employee relationship to avoid blemishing the country’s position as the main destination for investors. To make up for sluggish economic growth in Brussels, South Africa should follow the Mexican example, and aggressively diversify its trade partners by signing FTAs. Moreover, instituting labor sector flexibility and education reforms would go a long way in combating racial income inequality in the Rainbow Nation.

Standard

U.S.- Africa Summit: After Asia, is Obama Pivoting to Africa?

Next week, as promised during his trip to Africa last year, President Obama will host the first US-Africa Summit in Washington, D.C. to highlight the administration’s goal of strengthening political and economic ties with the continent. From August 4th-6th, more than 40 African presidents along with leaders of the African Union will be hosted at the White House to discuss economic, political and security issues. The three-day event is a statement to Africa’s recent economic rise and the Obama administration’s attempt to challenge China’s status as Africa’s main trading partner.

Despite the expanding Sino-African relationship, between 2004-2013, U.S. firms invested in 768 FDI projects in Africa or 12.2% of the total, according to EY’s Africa Attractiveness Survey 2014 (here). Except in 2008 when Beijing-based Industrial and Commercial Bank of China (ICBC) purchased 20% of Johannesburg-based Standard Bank for $5.4 billion, the U.S. remains the largest investor in Africa. In addition, the U.S and the World Bank’s IDA also provide more than 17% of official development assistance to African countries compared to China, which focuses mostly on resource-credit swaps and concessional loans, a model it learned from Japan. In such deals, Chinese State-Owned Enterprises (SOEs) enjoy exclusive rights to bid for infrastructure projects.

Countering China in Africa

Since the beginning of its “Going out” policy in the late 1990s and early 2000s, China has increased its trade with the African continent from $10 billion in 2000 to more than $200 billion last year. This commodity-driven trade relationship has underwritten Africa’s recent economic growth, especially in oil-rich countries such as Angola, Nigeria and Congo (Brazzaville). Given China’s mammoth $3.66 trillion foreign currency reserve, it has armed its SOEs and Exim bank to secure access to vital energy sources in Africa. This largest foreign reserve has also given Chinese SOEs a competitive edge over Western and local firms in acquiring infrastructure contracts throughout the continent. As deduced from China’s new white paper on foreign aid by Brookings Institution, Beijing’s involvement in Africa includes:

…14 agricultural technical demonstration centers, 86 economic infrastructure projects, 30 hospitals, 30 malaria centers, as well as 150 schools, and 105 clean energy and water projects as well as training more than 5,000 agricultural technical experts and more than 3,000 medical staff. 

Obama’s Pivot to Africa

This year’s US-Africa summit is happening almost 14 years after China’s first Forum on China-Africa Cooperation (FOCAC) held in Beijing, where 44 African presidents and 80 ministers attended. The conference illustrated China’s emphasis on South-South cooperation, which has recently exceeded the value of trade between developing and developed countries. Next FOCAC will be held in 2015 in Durban, South Africa, where Chinese leaders will allocate special attention to every African country, something the Obama administration does not promise to African presidents next week.

After the Obama administration’s strategic pivot to East Asia, it is beginning to look like next week summit is another U.S. strategic test to China growing influence in a different part of the world. Since the fall of the USSR and the end of the Cold War, the U.S. looked at Africa through humanitarian lenses, but the growing Sino-African cooperation and the continent’s improving economic conditions are slowly changing the narrative. For example, U.S. Trade Representative, Michael Froman, mentioned yesterday that the U.S. would like to eventually upgrade the African Growth and Opportunity Act (AGOA), slated to expire in September 2015, to a reciprocal trade agreement.

Unlike in FOCAC meetings, the Obama administration is not promising additional ODA to African presidents. Instead, the “Investing in the Next Generation” themed summit will focus on trade and investment between the United States and African countries. With two years left to go, President Obama is now trying to cement his legacy on U.S-Africa relations, especially with his multi-billion Power Africa initiative to double access to reliable electricity throughout the continent.

After Shinzo Abe’s three-day event on African development last year, the Obama administration is finally jumping on the “Africa Rising” bandwagon. Due to the rise of security issues in Nigeria, Libya, and elsewhere on the continent, next week U.S.-Africa summit is well-timed. As the largest investor in Africa, it is important for the U.S. to maintain a strong relationship with the African continent, where 7 out of the 10 fastest-growing economies in the world are located. Even though Africa is rising, several challenges remain, and the U.S. certainly has a role to play in helping the continent surmount those hurdles.

 

Standard

Shanghai FTZ and China’s Shift Into Services and Consumption

To gradually transition its economy from an export- and investment-based growth model to domestic consumption and services, last September, Chinese authorities announced the creation of the China (Shanghai) Pilot Free Trade Zone (hereafter Shanghai FTZ). After three decades of double digits annual GDP growth rate, the Middle Kingdom decelerated to approximately 7.7 % annual growth rate due to rising labor cost and sluggish growth in major export markets. Therefore, this shift is part of China’s ambition to revitalize and diversify its economy.

Since the Tenth Five-Year Plan and its 2001 WTO membership, China has been devoted to expanding and liberalizing its services sector to spur its manufacturing-dependent economy and avoid the middle-income trap. There is a clear correlation between the rise in level of income per capita and the share of services sector in total output (% of GDP). For instance, the share of services sector in total output as grown from 23.9% and 67% in the early 1980s to 43% and 80% in 2010, respectively, in China and the United States. Thus, a rise in personal income also leads to higher discretionary spending and consumption.

Although Beijing has removed certain restrictions on the services sector, strict barriers remain. Unlike barriers on trade in goods/merchandises, services sector barriers are difficult to track and measure due to their nature. Using the World Bank’s Service Trade Restriction index (STRI), however, we can infer that China has strict protection on trade in services compared to the 103 countries surveyed between 2008 and 2010 (Borchert et. al. 2012a). STRI covers six service industries: financial, telecommunications, retail, transportation, and professional services. Based on STRI findings, it is imperative for China to further liberalize its services sector to diversify its economy, allow competition, increase economic efficiency, and create well-paying jobs.

Since the September announcement, Shanghai municipal authorities have developed a negative list and put an emphasis on the following six sub-sectors: transportation, finance, shipping, professional services, culture, and entertainment. According to its Framework Plan, Shanghai FTZ’s overall objective is expedite the functional transformation of government, open up services, promote the reform of foreign investment administration system, and develop the economy. Chinese authorities are determined to use Shanghai FTZ as a laboratory to transform the economy, as they did in the early 1980s in Shenzhen and elsewhere.

A shortage of well-qualified workers in the services sector remains a concern in China, however. Even though its pool of university graduates is humongous, few graduates of Chinese universities are considered well-qualified. According to a survey of 600 executives based in China, for example, their top concern remains the lack of high-skilled workers. As recently highlighted by China Daily, almost half of enterprises from industries such as technology have reported difficulties in hiring skilled workers. This shortage would also negatively impact Shanghai’s intent to usurp Hong Kong and Singapore as main regional financial centers.

After 35 years since Deng Xiaoping’s economic reforms and liberalization, the Chinese economy is running out of steam and is in need of reforms. Shanghai FTZ is China’s response to upgrade the economy and become a high-income country. Thus, services sector liberalization is a move toward the right direction. However, further economic liberalization and reforms, especially regarding the services sector, currency convertibility, and State-Owned Enterprises (SOEs) are necessitated to provide a boost to the Chinese economy and environment.

Standard