Monday, 15 September 2014

Commercial banking in Africa: The melting pot

Changing the way fortune is managed in Africa, might just change the fortunes of Africa.

In culinary terms, Africa is an exciting place. Variety is indeed the spice of life: from the fiery Ghanaian curries to bunny chow (food served in hollowed out bread) in South Africa. To a geek like me, financial innovation in the country is as exciting as the food - both have a rich mix of traditional and outside influences, of simplicity and complexity and of history and ingenuity.  

However, the most exciting thing about this innovation is that it's a recipe for growth. Banking is the cornerstone of a functioning economy. It provides liquidity and security, supporting both the growth of business as well as the financial security of citizens. 

It is thus dispiriting to read that Africa is one of the least ‘banked’ places in the world. The level of banking penetration (the proportion of people with bank accounts) is only 16.6% in Sub-Saharan Africa, compared with a global average rate of 63.5%. This is partly because of a lack of infrastructure (there are only 5.8 branches per 100,000 people in Nigeria). However low levels of income across sub-Saharan Africa also play a role, as banks have few incentives to attract savers with the likelihood of only ever saving small amounts. Indeed at many banks, the minimum required deposit can be as high as a person’s average annual wage. There is also reluctance by banks to locate in places where political and economic environments can be volatile. It was only a court injunction that prevented Barclays from cutting all banking services in Somalia recently, due to concerns over exposure to money laundering in the fragile state. 

But despite economic, political and structural challenges, the bottom billion is rising and the opportunity to attract first time customers is just too good to forgo. Thus a variety of actors are stepping into the breach, with new and innovative ways of providing financial services to poor Sub-Saharan Africa. The ingredients are a surprising mix, but could, in the right amounts and with good timing, send African GDP climbing. 

The ingredients for a newly banked Africa: 
  • Loans and savings:
    • Innovative saving schemes 
    • Micro finance
  • Transfer of money:
    • Cheaper and quicker domestic money transfer systems  
    • Cheaper and quicker cross-border money transfer systems
  • New types of money not subject to  state governments
    • Virtual currencies
So let's start with those traditional ingredients we take for granted in our own long established banking sector; the ability to save and take out loans. 

Providing innovative ways of saving has the ability to transform the business environment and home life for many Africans. Without bank accounts many people in sub-Saharan Africa are left without the opportunity to save for the future - to even out income streams or save enough capital to start or scale an enterprise. Instead they are entirely dependent on their daily income.

Yet, innovative schemes are negating the need for a traditional banking infrastructure. Let's start by looking at the now famous micro-finance movement. The precise origins of the schemes are unclear but it is most commonly attributed to Muhammad Yunus who set up the now largest microfinance institution, Grameen Bank, in Bangladesh.  Yunus had discovered that the poor often remain poor because of lack of access to credit or savings. Lack of access to small amounts of capital meant that when a crisis occurred such as the ill health of a wage earner, a family could not tide itself over with a loan. Equally, many micro-businesses, which operate primarily in the informal sector, often have no access to credit; either through a lack of financial know-how or because they are sitting on what Hernando de Soto described as 'dead capital'. This phenomenon occurs when, activities in the informal sector are denied loans as the capital they have is not legally securable. Therefore it cannot be used to help guarantee a loan. By making tiny loans to those living in poverty across the globe, microfinance institutions can help avoid people falling back into catastrophic poverty and deprivation as well as giving them opportunity to secure a better livelihood through entrepreneurship.

Innovations in micro-finance schemes have also lead to micro-saving schemes. These occur at the community level in the form of a saving and loans association. Similar to a regular bank, 25 to 30 members pay in small amounts of money which are then pooled and lent to individual members over a 6 to 12 month period. Interest payments form the returns to those in the association. These schemes have proved to be popular across the developing world they have 4.6 million users across 54 countries.

However banks exist not solely to provide loans and savings. They also provide other crucial services such as the transfer of money between accounts and providing hard currency, allowing account holders to securely pay bills or transfer money to friends and family. Both security and liquidity are the key ingredients provided by banks here. Traditionally this has required expensive infrastructure and willingness by financial institutions to invest in a country. 

But African entrepreneurs are finding ways around this by using technology to leapfrog traditional barriers and in the process often enhancing the technology they originally absorbed. A classic example, and the next ingredient in this recipe, is the mobile money transfer system, M-Pesa. Developed in Kenya by Vodafone's local service provider Safaricom with advice from the UK's Department for International Development, the system allows Kenyans, Tanzanians and more recently South Africans to transfer funds through their mobile phones. They can also use the service to withdraw money for a small fee. This simple technology has radicalised finance in Africa driving better financial management by individuals and an increased rate of business activity.  The charitable network CGAP found that M-Pesa increased the incomes of rural recipients by 5-30%. It has also increased security by negating the need for users to carry cash. 

This tasty ingredient could be further complemented by a superior international financial transfer system. Let's go back to Barclays attempting to cut off financial ties with Somalia. This would have been a disaster for the country, which is dependent on remittances (money being sent to the country by Somalis working abroad). Fully 40% of Somali families rely on these to meet their most basic needs, such as food and healthcare, according to Oxfam. And Somalia is not an anomaly in Africa, remittances comprise 25% of Liberia and Lesotho's GDP and 38% of Eritrea’s.

The challenge with international transfers is that moving money across borders can be expensive. Africans sending money home, using transfer services like Western Union and MoneyGram, lose an average 12.4% in fees. Within Africa it can be even worse; it costs an average of 22% to transfer money between Tanzania and Kenya, the homes of M-Pesa. These high fees are largely due to a lack of competitors and high regulatory hurdles. 

How to prevent Africans losing 12.4% of the $60 billion they send home every year? A company called Earth Port might be the answer. It is not a small start-up or a charitable endeavour, but since 1998 it has worked to become a global aggregator of local payment systems. Instead of navigating the numerous electronic banking systems it moves money on its own platform called universal payments systems. In this way it provides low cost international transfers to over 60 countries and its reach continues to expand. Its clients include smaller online transfer systems like Azimo to the major players such as Barclays and Bank of America. Earth Port promises to halve the cost of remittances compared to traditional wire payments. If adopted across Africa, this could have enormous financial benefits. A 2013 World Bank study found that if, remittances fees fell in Africa by just over half, to 5%,  then this would return $4 billion into Africans pockets. Earth Port’s innovative technology might just be a way of achieving this.

The final and most experimental ingredient in this recipe is digital currency, which has the potential to be the most transformative in Africa's financial system. I'm going to use the most infamous example of virtual money, Bitcoin, but it's possible to look to other varieties too. Bitcoin is a decentralized, software based, digital currency that uses peer-to-peer technology to facilitate instant payments, mostly to purchase goods and services.  The media has tended to focus on Bitcoin’s more nefarious uses, particularly its use to launder money and to pay for illegal substances, most famously on the Dark net marketplace, Silk Road. Yet, the features which make it such a bugbear to governments and central banks could actually bolster trade and investment in Africa. 

To begin with, digital currency might make the transfer of money faster and cheaper than any remittances service ever could. Bitcoin operates outside the traditional financial system and by cutting out banks as middlemen, it could greatly reduce the cost and speed of moving money in Africa. Moving Bitcoin is virtually free and transfers would be near instant - the current remittances process can take up to 5 days. E-commerce in Africa would particularly benefit from the wider use of virtual currency. Merchants currently struggle with global online payments as credit cards place high transaction fees on payments to Africa and fraud issues are a constant worry. 

However, the most appealing feature of virtual currency as an ingredient is that its stability does not rely on the stability of a national government. This might seem a strange point to some. How could Bitcoin, whose price volatility is 10 times that of the US dollar, and whose value dropped by nearly a third after the crash of the Bitcoin exchange Mt. Gox, be more stable than a national currency? It's important to remember that Bitcoin is relatively new and the first of its kind to achieve significant market attention. As Bitcoin and other virtually currency's expand they should naturally trend towards stability as confidence in them grows. Consumers were wary of trusting online payments such as PayPal in their early days. However a growing number of users and a proven safety record created a virtuous circle of growth and trust and PayPal was, until February, the largest online payment system. Increased liquidity will also lend stability to Bitcoin. It stands to reason that with more Bitcoins and money behind them, a single incident or player, is less able to disrupt the market. Governments also creating a fixed regulatory policy around virtual currency would also lessen much recent uncertainty

Thus an increasingly stable ingredient might be the key for many African countries where their own local currency is often very unstable. One only needs to think of the instability experienced by Zimbabwe under Mugabe, where inflation reached 79.6 billion % before the currency was abandoned entirely.  Even Ghana, a bastion of new growth and development in Africa, has seen its currency slide by around 40% this year. Bitcoin, which doesn't rely on a central bank and is relatively free from political meddling, could provide Africans with a currency they can trust. Indeed a company, BitPagos, is focused on trying to create a Bitcoin ecosystem in Latin America, where individuals in countries with high inflation such as Argentina and Venezuela, can rely permanently on Bitcoins, instead of switching into national currencies. 

Virtual currencies are not a perfect answer to unstable economies in the emerging world. There are of course risks that Bitcoin's anonymity will attract money laundering and finance terrorism in Africa, thriving on, instead of helping solve, instability. Yet the world’s most stable national financial institutions often developed over hundred year periods - in a country that is increasingly using technology to leap frog so many traditional development problems, currency should be no exception. 

So there we have it, a rich mix of innovation, coming together to ‘bank’ Africa. It’s inspiring to see a continent, where 600 million still lack access to enough electricity to light their homes, at the cutting edge of financial innovation in so many ways. From local village groups to global online payments systems, finance is driving development and equality across Africa. That’s what I’d call a recipe for success! 

Tuesday, 13 May 2014

Advice to the chef-in-chief: How to cook the perfect health care system

It's seems ever since President Obama passed his healthcare bill in March 2010, politicians on the right have been loudly protesting about the implications for American freedom. Despite health care costs significantly higher than any other developed nation and nearly 50 million uninsured resulting in 45,000 Americans deaths a year, they have reacted to the President’s attempt to ensure every American can afford treatment as an assault on America's founding principles. Perhaps they are taking Patrick Henry's "give me liberty or give me death" speech a little too literally...
Perhaps unsurprisingly, the anger surrounding the Patient Protection and Affordable Care Act appears to be largely due to misunderstanding of what it contains. Talk of 'death panels' and socialism have created a fear of the unknown. An excellent piece from the Jimmy Kimmel show (you can watch it here) shows Americans first being asked if they agree with ‘Obama Care’. They all say no. They are then asked if they support an alternative bill, the Affordable Health Care bill and describe its principles. They all say yes. They are then shocked to discover that the latter is in fact the dreaded ‘Obama Care’. This is not only an interesting study on the depth partisanship in America, but also highlights how uninformed many Americans are about this issue and how complex healthcare provision is. And indeed Americans have one of the most complicated and expensive systems in the world. Americans spend $8,602 per person annually on health care. Meanwhile, Britain spends only $3,609 per person and the Germans spend $4,495 per person. Even the “socialist” French spend less at only $4,118 per person a year. 
How to unpick this mess? In homage to the Guardian’s ‘How to cook the perfect…’ column by Felicity Cloake, I’ve decided the trick to finding the perfect healthcare recipe is to look at many different versions and see what works best. I’ll be looking at recipes from the Germans, the British, and the Singaporeans, determining what works best and from whom America could borrow.
NB. To stay true to Felicity’s style I’ve dispensed with my usual ingredient list. Please find them scattered through the content of this post.
I'll begin with Germany and their Bismarck model, named after the Prussian Chancellor who implemented their system in the 1880's. It is very similar to what President Obama would like to see in the US. It is mandatory to have health insurance and no one can be excluded based on any pre-existing conditions. Employers and payroll deductions form the basis of funding. However, one of the key differences between the systems is the insurers themselves. 
If the US was working from scratch, this model might not be too difficult to implement. Unfortunately, the President is using some ready-made ingredients. In Germany, compulsory health insurance is provided to 92% of the population through "sickness funds", private non-profit organisations none of which are allowed to deny coverage for a pre-existing condition. In the US, health insurance has traditionally been provided by for-profit behemoths. These companies are very reluctant to accept clients with pre-existing conditions that will hurt their bottom line. They lobbied heavily against the Affordable Care Act. 
The implementation of this system is hindered by an economic condition that plagues the insurance industry; adverse selection, where the propensity to buy insurance is highly correlated with an individual’s level of risk. Simply put, those with a higher risk of requiring medical attention are more likely to buy insurance. If, as the Affordable Care Act ensures, insurers are bound to serve all patients regardless of pre-existing conditions they will suddenly find themselves with a greater number of already sick and injured patients relative to healthy ones, pushing up their costs. To protect profits they will have to raise prices. Of course, if coverage was truly universal, as in Germany's recipe, this would not be an issue. The healthy low risk citizens would bolster the expensive unwell. This is what Obama is hoping to achieve - an influx of the young and fit by penalising those without health insurance. However, achieving this kind of universality will take time. Meanwhile, insurance costs will rise, further putting off the healthy and uncovered. 
If the Bismark model, so effective in Germany, works best when made from scratch are their other recipes which could perhaps guide the United States? Should they perhaps use a different set of ingredients? 
Perhaps if you can't get Americans to buy, you can get them to save? In Singapore healthcare costs are primarily covered by Medisave, a compulsory saving scheme, where Singaporeans and their employers contribute a part of their monthly wages into regulated account to save up for their future medical needs. Singaporeans are expected to use these savings, and, in dire circumstances, Medishield - a low cost catastrophic medical insurance scheme - to foot their medical bills. While healthcare costs are heavily subsidized, they are never free. This helps avoid over utilisation while still providing high quality health care.

And this recipe certainly has succeeded. Singaporeans have one of the most highly ranked healthcare systems in world - Bloomberg puts them 2nd, just behind neighbouring Hong Kong. It also has the world’s lowest infant mortality rate.

Perhaps this is because the Singaporean recipe avoids another pitfall of the traditional insurance systems: moral hazard. Simply put, if an individual feels certain that they will be protected regardless, either by insurance or by the state, they will be encouraged to take greater risks with their health. The rationale is that between using primarily savings and always paying for care, even if the fee is only nominal, Singaporeans will be discouraged from overly relying in the healthcare system and encourages them to focus on prevention. At its crudest the logic runs something like this, if I eat healthily and exercise I am less likely to need expensive healthcare treatments and am more likely to be able to afford braces for my kids. One can only imagine how appealing this recipe would be to American policy makers, where citizens suffer so much from lifestyle diseases such as diabetes or cardiovascular problems. 

But, given conditions in the US kitchen, is this recipe transferable?

Unlike the Singaporeans, Americans do not have a tradition of saving. US citizens have on average $15,191 in credit card debt alone. Contrast this with Medisave which emerged against the backdrop of high savings in Singapore. This meant that enabling a behavioural change in Singapore was not difficult. Encouraging U.S citizens to save the Medisave minimum sum of $40,500 would perhaps be a cultural shock. 

It should also be noted that the American recipe needs to feed a lot more people. Singapore is really a city state with 5.3 million people. The US population is well over 50 times that size. Dishes that work well at a small dinner party are often unfit for serving large numbers of people. 

Who then might the US turn to for culinary inspiration? Why not look at a neighbour closer in size and in heritage? With 63 million people the UK, though still a relatively small island, is more similar in size and complexity to the US. However, their approach to healthcare has been radically different. 

Instead of entrusting healthcare to private providers, the government runs the healthcare system from start to finish. UK citizens pay taxes, a portion of which are allocated to fund the National Health Service (NHS). The state also runs the healthcare infrastructure for the most part, (although there are exceptions) and pays for the doctors and nurses. In this way British citizens using the NHS never see a medical bill and most offerings are free at the point of service. Exceptions include a nominal fee for things such as dentist visits and a standard prescription fee. 

The government, as the sole large employer of healthcare workers in the UK, is something of a monopsonist. That is, it is the only major purchaser of a particular good or service, in this case doctors and nurses, allowing it substantial control in the marketplace. This allows the UK low healthcare costs, especially when compared against the United States. The British government spends only $3,609 per capita or 9.4% of its GDP. The US government spends $8,602 per head or 17.2% of its GDP. 

However, the amount collected from taxes, forms the limit of what can be spent on healthcare by the NHS. As such healthcare in this form must be rationed to some extent. The body charged with this responsibility is, perhaps ironically, entitled NICE (or on more formal occasions the National Institute for Health and Clinical Excellence). They are entrusted with deciding what treatments the NHS will and will not pay for, assessed in terms of QALYs (Quality-adjusted Life Years). Simply put, new treatments are evaluated in terms of how many quality years of life they will provide per pound spent.

As you may imagine, this is not the most PR-friendly of policies - cancer sufferers frequent news channels, explaining why the government won't pay for their treatment. This is the kind of media minefield the US government would certainly want to avoid, especially when talk of "death panels" already abounds on Fox News. Furthermore, it is hard to imagine an America, still so fearful of federal government intervention, willing to experiment in the kitchen with an entirely government run healthcare system. And while it certainly outperforms US's position, of 46th in Bloomberg’s healthcare efficiency ranking, the UK still comes only 14th.

Which recipe should the US borrow from then? I have only shown you three of the world's 40 state run healthcare systems, passing over many excellent recipes. However, what is clear, from a very brief attempt to discern the perfect recipe is that, of course no such thing exists. Each healthcare system is designed to suit the context in which it exists. And the context in which President Obama is working is particularly complicated.

Healthcare reform in America is famously difficult to implement. Nixon planned to introduce healthcare reform, far more radical than anything Obama has implemented, but this was vetoed by 70's Democrats for not being far-reaching enough. Twenty year later Hillary Clinton's attempts at healthcare reforms were also dashed. So the fact that Obama has even managed to implement his Bismarkian reforms is in itself a small miracle. That fact that the scheme has now signed up 8 million mostly poor Americans is further cause for celebration.

Is it a perfect recipe? No. So far the scheme has enrolled only a quarter of those eligible. This is partly due to the chaotic nature of its roll-out. A multitude of technical glitches affecting healthcare insurance exchanges in their first weeks prevented many frustrated American signing up. Outside of federal mismanagement, America's day-to-day government is largely run at a state level, leaving state administrators with a large say in the extent to which they implement President Obama’s healthcare reforms. Democratic Vermont for example has enrolled 85% of those eligible. Republican South Dakota just 11%.

Yet in a country as large and complex as America shooting for perfection is not the best way to get things done. To quote a Republican favourite, Ayn Rand, Republicans dissatisfied with healthcare can continue to “evade reality” but they “cannot evade the consequences of evading reality”. In the world wealthiest country, the deaths of 45,000 uninsured Americans is a travesty. Politicians should stop complaining, roll their sleeves up and focus on giving Americans the healthcare system they deserve.

Monday, 23 September 2013

A fish supper: How to make a Somali pirate

"For if you suffer your people to be ill-educated, and their manners to be corrupted from their infancy, and then punish them for those crimes to which their first education disposed them, what else is to be concluded from this, but that you first make thieves and then punish them." 
Remembering this quote the other day, it vividly brought to mind what I had been reading about Somali piracy - an intractable problem which costs the global economy $18 billion annually according the World Bank. In 2011, a piracy attack occurred every 31 hours and currently 120 sailors are being held hostage. A reduction in piracy attacks has occurred recently, falling by two-thirds, due in part to the increased weaponisation and defence surrounding ships. However, this is merely the stemming of an interminable symptom as opposed to addressing the root cause. In the words of John Clancey, chairman of Maersk shipping; "Arming merchant sailors may result in the acquiring of even more lethal weapons and tactics by the pirates, a race the merchant sailors cannot win". And they are not only the only losers in this battle. It’s hurting Somalia and its neighbours too.  Pirates often attack ships bringing goods to the region and the cost of these strikes is being passed on to African consumers in the form of increased prices for staple items like rice and flour. What to do? Perhaps the recipe for Somali pirates also holds the solution.
  •    Somali government breakdown
  •    Illegal international activity on the Somali coast 
    •         Illegal dumping of toxic waste
    •         Illegal trawling 
  •    Willingness of shipping lines to pay ransom 

Our first and most fundamental ingredient in this recipe will be the breakdown of the Somali government. This ingredient has been maturing for a while, at least since the fall of General Muhammad Siad Barre in 1991. Since his departure Somali has had but a semblance of a central authority and various states in the North have taken this opportunity to attempt to breakaway, most notably Puntland in the North East where the majority of pirates have made their base.

However even before the fall of Barre, Somalia was a difficult nation to govern owing to its strong clan system. When Barre left, Somali became effectively controlled by the twelve strongest clans in the region, all battling for supremacy or independence. Twenty-two years later, the clan system still dominates Somali political culture, making top down government and authority very difficult to impose. Yet, the greatest opposition to the formation of the government has not come from one particular clan but from the extreme Islamist group Al Shabaab. This group was so powerful that by 2012, they controlled much of the South of Somalia. However, since then they have been driven back by a concerted military push from Somali and African Union forces. 

The government in Mogadishu now controls 80% of Somalia but the central government is still very weak and has little mandate in much of the country. With historical fragility and without an effective central authority to impose the rule of law, Somalia's stability has crumbled. This weakness has allowed piracy to flourish along Somalia's coast. The lack of any effective police force or coast guard has meant that they have an almost free reign over Somalia's 2,000 miles of coastline. With no coast guard to check their behaviour they have become de facto rulers of the waves. Indeed there is evidence that authorities, far from checking piracy are actually profiting. The breakdown of Somalia's institutions has meant that corruption is rampant (Somalia comes at the very bottom of Transparency International's Corruption Perception Index, in174th place) and there is plenty of evidence of pirates paying off public officials. We can see an almost direct correlation between the strength of the state and piracy; levels of piracy fell significantly in the South after Al Shabbab lost power there.

Yet weak government does not only provide the opportunity for piracy to occur. It also provides incentives. Without a central authority and functioning institutions, the private sector has not been able to flourish in Somalia. As a result many Somali’s work in agriculture, often operating on a subsistence basis. With the absence of business or a strong public sector there are few other employment opportunities in Somalia. This has kept the majority in Somalia underemployed and living on less than $2 a day. With few jobs available and no state safety net, it is unsurprising that many young men have turned to piracy. The annual income in Somalia is $650 a year whereas a single act of piracy can yield $10,000 for an individual. This gives pirate captains a ready crew of desperate young men. Poverty and unemployment, the result of Somalia’s fragility, is one of the driving forces behind piracy. In fact, piracy really began to flourish, in 2005, when attempts to more firmly establish the government in Somalia collapsed, leading to a rise in extreme poverty.

Yet the lack of employment does not stem solely from government breakdown, it requires two further ingredients. Many on Somalia’s coasts, where the majority of pirate crews hail from, could earn a basic living as fishermen. Yet this is no longer the case. What needs to be added to explain this phenomenon is an equal pinch of both the illegal dumping of toxic material and illegal trawling for fish. One of the knock on effects of the collapse in the rule of law in Somalia has been the country's inability to protect its coastline from international predators. Since the 1991 down fall, Somalia’s waters have fallen prey to the illegal dumping of toxic waste and illegal fishing, in a situation the UN described in 2006 as a "free for all". The result has been the destruction of livelihoods and a ready incentive to turn to piracy. 

It can cost up to $1000 a tonne to dump toxic waste in Europe, where it is suspected much of the material comes from, but costs only $2.50 a tonne to dispose of toxic materials in Somali waters. There is therefore an incentive for less reputable firms to look for cheaper ways to get rid of toxic materials and the defenceless Somali coastline has suffered as a result. These materials have devastating environmental consequences particularly on fish stocks which has in turn harmed the local fishing industry. To add physical injury to this assault on livelihoods, the UN reported in 2005 that the illegal dumping of radioactive uranium and other hazardous material was causing respiratory diseases, haemorrhages and skin ailments in Somali villages on the coast, diseases consistent with radiation sickness.

However, it isn't only illegal dumping which is harming Somali fishermen. Illegal fishing trawlers, primarily from Spain, South Korea and Japan, have preyed on Somalia's fragile coast line, often under the flags of friendly governments such as Belize or Bahrain, snapping up tuna, red snapper and barracuda. The low-tech Somali fishing boats are no match for the high tech trawlers. The trawlers use banned fishing equipment such as nets with very small mesh sizes and sophisticated underwater lighting systems. As a result Somali fishermen have lost $300 million a year in sea food. In a country where most live on less than $650 a year, this is a loss to many families. On top of this, Somali fisherman report shots being fired at them from illegal trawlers or being sprayed with boiling water from on-board water cannons. 

All of this has rendered fish stocks too low for Somali fisherman to remain commercially viable. Deprived of financial security but with their boats remaining, it is easy to imagine why many would turn to piracy, especially when their original prey was those depriving them of their living. Yet the shift into piracy may have been an even more direct response to illegal trawling. In the words of Peter Lehr, lecturer in terrorism studies at the University of St. Andrews "the first pirate gangs emerged in the '90s to protect against foreign trawlers". International disregard for Somalia's maritime sovereignty caused the creation of vigilante groups formed to drive off trawlers and many of these gangs became the pirates which plague international waters today. The names of existing pirate fleets, the National Coast Guard of Somalia or Somali Marines, indicate these groups initial motivations. In fact, illegal trawling and dumping gave pirate fleets a nationalist rhetoric which they claimed with some success, justified their activities. The trawlers, who were anxious to avoid attracting attention to their activities, almost always, paid the pirates ransom. 

This neatly brings me to the final ingredient needed to fully explain Somali piracy; to the current recipe one must add in a hefty dose of willingness by ship owners to pay the ransoms demanded. On the ship owners part this is an entirely logical calculation. Quite apart from illegal trawlers, merchant ships and their cargo are often worth upward of $20 million. Paying even a tenth of that sum to a pirate crew makes good business sense. And yet, what is rational for one individual is not rational for the group, an example of what economists call the tragedy of the commons. By continually agreeing to pay ransoms at the individual level, shipping firms are incentivising pirates to continue to take their ships hostage and are also giving them the capital to do so, inadvertently financing better pirate vessels and weaponry.

So there you have a very simple recipe. Just combine a broken state, illegal fishing and dumping and a willingness to pay huge ransoms and you've got your very own Somali pirate. I hope you will, as I did, get a very different image of the Somali pirates from this recipe. An image quite different to their portrayal on the news and in the media. They become less the perpetrators of heinous crimes and more the victim of desperate circumstances. When the international community allows Somali's to live in a broken state, damages coastal livelihoods by illegally fishing and throwing toxic waste into their water and then incentivising crime through almost guaranteed ransom payment "what else is to be concluded from this, but that you first make thieves and then punish them." ?

I'm not saying that Somali’s are entirely blameless. Many ordinary Somali’s eke out a living on coastal towns, not committing crime, and are horrified by the activities of their compatriots. Yet with the different perspective this recipe grants us, we can perhaps see a more human and indeed rational side to their actions. Indeed Somali pirates are not famed for their cruelty. They tend to treat hostages well and behave in a business-like manner, at least according to a Colin Freeman, a journalist at the Telegraph who was taken hostage by pirates in 2008.
The fact is that until the international community steps up to the plate, piracy will continue. In the word of Roger Middleton, from Chatham House ; "There are ways that navies from around the world can patch over the problems of Somalia but as long as a state with grinding poverty, hunger, no law enforcement and no effective government sits beside a rich trading route, piracy will continue". The international community is therefore compelled to act, not just for moral or humanitarian reasons, but also in simple self-interest. Guilt and hand wringing over the situation we’ve helped create will get us nowhere.
The international community are already taking some steps.  It was widely reported in May that David Cameron attended a major conference on the rebuilding of Somalia, speaking of the importance of supporting Somalia’s new but fragile government. At the same conference, £50m ($77m) was committed in aid to the new government from countries including China, the US and South Africa. But more must be done. The international community must focus on state-building in Somalia. Without a strong central state, any other solutions will be merely “patches”. And patches belong on the clothes of children dressing up as pirates at Halloween this year, not international policy.

Thursday, 18 July 2013

The Arab Spring: The Devil’s-food-cake-you-know vs. the Devil’s-food-cake-you-don’t

It's been over 2 years since the Arab Spring first kicked off and you would be forgiven for asking'What for?'  Over 100,000 Syrians have been killed in the attempt to unseat Bashar al-Assad in Syria, Egypt’s democracy has been rudely interrupted by a coup d'état and American diplomats in Libya, who had supported the deposing of Muammar Qaddafi, were murdered in September 2012. To many, the revolutionary Arab Spring now seems like a damp squib. Has it been worth it? Would the region have been better off without it? Through two cakes I'm going to untangle which is better; the devil's-food-cake-you-know? Or the devil's-food-cake-you-don't. 

Both of these cakes start with the same base and it’s only to the second recipe that I'll add some catalysing ingredients, to give it a bit of a revolutionary kick.

Ingredients - Base

  • High Unemployment 
  • De-legitimisation 
  • Inflation 
  • Social Media 
You need to begin with an autocratic regime, the fundamental ingredient. Without this, the  recipe with simply will not work. It could be in the form of a royal family, or perhaps a dictator who came to power in a coup. Basically they need to be the sole source of power and to have little legitimacy with their own people. For an example you need only think of Egypt's Hosni Mubarak, who had been in power since 1981 or Ben Ali who had run Tunisia since 1987. However it is Colonel Muammar Qaddafi who takes (or should I say took?) the cake,with 42 years in control of Libya. Each of these exerted their own version of autocracy. Mubarak deployed pretend legitimacy, winning office four times but in three of elections no other candidate was allowed to stand. Qaddafi on the other hand, came to power in a revolutionary coup, overthrowing the ruling monarchy. While he allowed a form of symbolic direct-democracy to take place, the General People's Committees, these were largely a sham and he came to rule by decree. 

To autocracy you now must pour in a healthy dose of oppression. This ingredient is another key element of the recipe and is indeed often found in recipes where an autocracy is the base ingredient; they are natural bedfellows. Oppression is how an autocrat keeps his regime stable, suppressing any tendency in the batter to rise or revolt. On one end of the scale there is repression like Ben Ali's, of Tunisia. His government tightly restricted free expression and attempted to stifle online dissent through hacking and hijacking Facebook and email accounts. On the other end, we had Qaddafi who, in the name of a 'permanent revolution', banned all private ownership and retail trade, eradicated the free press and subverted the civil service and military service. Quite apart from the crippling lack of expression the  populace suffered, this oppression could have some quite nasty side-effects. In Syria, anyone who expressed dissent or an opinion differing from that of Assad, would often find themselves in the hands of the Mukharabat, the regime's secret police. This most often meant torture for the dissident and sometimes death.  

Into this mix we add a hearty glug of kleptocracy and a sprinkling of corruption, other   complementary ingredients. In an autocracy, with no civil society to contain the actions of the ruling class, those in power are free to plunder a country's wealth and resources. Back to Colonel Qaddafi, while his people starved he quite literally sat on a golden sofa in the shape of a mermaid. (I'm not even kidding. The wealth of nation does not buy taste apparently.) He and his family used Libya's huge oil resources to fund a life of luxury and as a result of Libya's corruption (and the ban on private enterprise) the economy stagnated. Similar, less extreme, situations existed in Egypt and Tunisia. Both created a type of crony capitalism which benefited only the ruling class and their friends, and not the majority of the population. In Egypt, this created a privileged elite, while the majority of the rest of the population lived on less than $2 a day. To compound this financial hardship, supposedly cheap public services, such as education or even obtaining a driving licence, became increasingly expensive due to corrupt off-the book-payments. The situation was similar in Tunisia where no investment deal could happen without a kick-back to the ruling family. Ben Ali's network of relations garnered the rather Mafioso title of 'the Family' while he was in power and with good reason - over half of Tunisia's business elite were personally related to Ben Ali. 

Our final ingredient will be a demographic boom. The population of Arab nations doubled between 1975 and 2005, creating a large number of young people in the Middle East. Indeed, two-thirds of the population in Egypt is under 30. In other, more liberal nations this might prove to provide a boost to growth, but in a corrupt economy it results in rising rates of unemployment

The resulting mixture creates a weak and stagnant economy, no matter how much of a demographic boom you add. Where autocracy allows corruption and kleptocracy, the private sector cannot flourish and subsidies handed out by autocratic regimes weaken industry still further. National "champions" owned by friends of the ruling family are mismanaged and not subject to the competition which could have strengthened them and allowed them to expand globally. The Devil’s-food-cake-you know results in a predictable tragedy; squandered natural resources, high unemployment, the wasted potential of a population, instead oppressed and silenced by an elite unwilling to sacrifice their luxurious lifestyle. For many this recipe bore much worse; poverty, starvation and torture. Could it really be that's this Devil’s-food-cake-you-know is better than a Devil's-food-cake-you-don't?

To see if this is true I'm now going to describe how to you turn this uninspiring but predictable recipe into something very different...

Ingredients - Catalysts for the Devil's-food-cake-you-don't
·         High unemployment 
·         De-legitimisation 
·         Inflation 
·         Social media

We are now going to focus on the last ingredient we added to the mix; demography. Over time, this creates unemployment, particularly youth unemployment, and it becomes a highly reactive ingredient. Prior to the Arab Spring, the youth unemployment rate was 25% across the Middle East, the highest in regional unemployment rate in the world. Thousands of young people, angry about the uncertainty of their economic future and with the large amounts of time on their hands, became the basis for the first protests. It was also the spark. Mohammed Bouazizi, a 26 year old Tunisian, had failed to find paid employment despite applying for military draft as well as for many other private and public sector roles. There were just too many other job-seekers. When government officials confiscated the vegetable kiosk he was using to feed his family and pay his sisters university fees, it was the final straw. He set himself on fire in the middle of the street. The angry, young and educated in Tunisia seized on this tragedy, starting demonstrations against the Tunisian government which would spread across the Middle East. 

Now to add another highly reactive ingredient; De-legitimisation. This ingredient is, in part, the result of a reaction between the oppression and corruption experienced by people living under autocratic governments. However, the real driver of de-legitimisation is a lack of economic growth and development. For example, people living in China similarly live without democracy and under an oppressive and to some extents corrupt regime. However, the Chinese government works hard to drive growth and development and has therefore gained legitimacy among the majority if its citizens. The same cannot be said of governments in the Middle East. Ageing leaders, corruption, ineffectual government and failure to provide not just growth but even basic services had de-legitimised them in the eyes of their citizens.

These ingredients alone give the batter enough of an impetus but to speed up the reaction further we'll add a dose of food price inflation. This was prevalent in the period leading up to the Arab Spring and by its peak food price inflation had become a problem all across the Middle East, rising to 18.9% in Egypt just before Mubarak fell. In a place where poverty is so prevalent it is no surprise that the rising price of bread drove people on to the street.

Our final catalyst, the one that is guaranteed to push the batter over the edge, is a couple of spoonfuls of social media. This is the ingredient which allowed the anger, caused by youth unemployment and de-legitimisation, to find a voice and to organise. The first mass protest in Egypt was organised on Facebook and it helped thousands of protesters outwit the police. It also spread revolution across national borders creating copycat protest movements across the region.

And there you have it; the Devil's-food-cake-you-don't. The risk with this recipe is you're never quite sure how it will turn out, no matter how many times you bake it. On the one, oven-gloved hand, you could get a fairly stable result. I'm thinking about Tunisia where Ben Ali left relatively quietly and the Tunisians are working to create a democratic system, albeit still with unimpressive economic data and the odd protest. Far from perfect but a functioning state on (hopefully) the eventual road to development. On the other, you could get, for example, something as traumatic what has happened in Syria. This includes; death, violence, mass migration, the increasing destabilisation of the region, and a total breakdown in the rule of law. Over 100,000 people have been killed in the Syrian conflict and 45.2 million people have been displaced, according to UN estimates, spreading instability across national border.

This brings us back to the question I asked at the beginning of this piece; Has it been worth it? Would the region have been better off without it? It is easy to look at the results above and declare a resounding no. The results seems largely to have been loss of life, economic damage (if not collapse) and political turmoil. None of the countries has transitioned to a fully formed democracy. Tunisia is closest but in Libya functioning democracy seems far away as militants have banning anyone who ever worked with Qadaffi from taking part in government. Thus the most capable reformers and incidentally passionate anti-Qadaffi fighters have been dismissed from government. Egypt recently ousted their democratically elected (but wannabe autocrat) leader, Mohammed Morsi. And in Syria, not just democracy, but any form of functioning government seems years away.

Against this background it almost seems callous to suggest that this suffering and instability were in anyway worth it - that the Devil's-food-cake-you-don't was the wise choice. And yet that is precisely what I am going to argue. I'm going to propose that however hard the transition is, it is, in fact, worth it.

Many are suffering as result of the instability, a fact that is hard to ignore when it makes the nightly news. Yet, even before the Arab Spring people were suffering. Repression's tools are often imprisonment and torture. The number of prisoners suspected to be held by Assad in Syria varies between 10,000 to as many as 120,000. However, the true cost of the Devil's-food-cake-you-know cannot just be measured by present suffering but by the lost potential of generations who had few opportunities to improve their lives under these regimes. The perfect example of this is Libya - a country with minimal education, limited free speech and a stagnating economy left the population in extreme poverty with little opportunity to improve their own lives. 

While some economist still rely on narrow and solely economic data to judge a countries development economists like Amartya Sen and Martha Nussbaum have expanded the approach with less traditional measures such as their capability theory. In this they define development in terms of the opportunities available for the population to flourish instead of by GDP-per-head. If we adopt this view, even in countries with healthy levels of growth, development may still not be achieved and populations can still suffer what they term “capability-deprivation” under repressive regimes. If these regimes are not removed, then it is not only the present generation that suffers but future ones too. 

The path to democracy is rough but instability now needn't mean instability later. And just because a process is prolonged and painful it does not mean it isn’t worth is, as many developed countries have proven. For example, the 1848 Spring of Nations which involved death and the exile of many Europeans. And yet in the long run it was in fact the catalyst for all the changes which led to the European monarchies falling over the next hundred years. Similarly England's glorious revolution in 1688 put it on a very long road to democracy, one which led finally to universal suffrage in 1928. The fact is that, quite frankly, it often can take a long time to make a democracy and it is not without disorder and chaos.

While this sounds demoralising it shouldn't be. The prolonged instability in Tunisia, which some have been predicted as harbinger of doom, is actually a good thing. It shows that Tunisians are unwilling to allow one party rule - they want real democracy and for this constant pressure needs to be applied to those in charge to avoid a hijacking of power. Tunisia’s street protests now will hopefully result in a stable democracy in the future. Of course, one could holdup Egypt as an example where street protest just lead to further instability under a coup d’état. It’s true that the results with the Devil's-food-cake-you-don't are never guaranteed. Since the end of World War II, there have been roughly 50 major revolutions that have either toppled autocratic regimes or led to significant political reform in “flawed” democracies. For those revolutions that have occurred under dictatorships, only about a third have resulted in transitions to democracy. Yet when the alternative is years of stagnation, suffering and missed opportunity the fight is still worth it. 

The devil's-food-cake-you-don't is a risk. Though I've given you the ingredients, I've also given you the odds. Democracies don't spring up over night and to have believed that the overthrow of autocratic regimes in the Middle East would bring about stability and democracy in a couple of years would have been naive. Yet I hope I've shown, through my two recipes, that when the certain results are poverty and the loss of so much potential that the Devil’s-food-cake-you-know is the right, if risky, choice. It's a gamble, but one definitely worth taking. 

Monday, 4 March 2013

Argentina: The country that failed to rise

Having just come back from a 2-week holiday in Argentina, I wanted to do a recipe which demonstrated Argentina’s unique economic situation.
            Its early days but it’s already been a tough 2013 for Argentina. The year had barely started when Argentina heard it had made the top ten ‘miserable nations’, according to the Global Misery Index (a ranking based on a country’s inflation and unemployment rate).  The Argentinean president, Cristina Fernández de Kirchner, has struggled to negotiate price freezes with major supermarkets in an attempt to combat the country’s intense inflation. These are just the latest in a range of failed measures and the inflation rate now stands at 25% according to economists. Yet the government stubbornly insist that the rate is no higher than 10.8%. This refusal to engage with reality has, after many threats, earned Argentina a declaration of censure from the IMF, as well as causing its black market dollar rate to hit an all time high. Not a great start to the year.
            Hopefully this will provide some context to the recipe I picked up in Argentina this January*. Travelling around, the more people I spoke to, the sadder I felt for those living in this beautiful country.  There was very little optimism and widespread dissatisfaction with the de Kirchner government. I wanted to understand how a country which showed so much promise at the turn of the 20th Century, with all the ingredients for success, could fall so flat. To better understand Argentina’s failure to rise, I’m going to compare it to a very successful country with a very similar set of ingredients; the United States. Argentina is traditionally compared to Australia and Canada but I wanted to... (please forgive the cooking pun) mix it up. Let’s take a look at their shared ingredients:
o   An abundance of fertile land
o   High rate of European immigration 
o   A constitutional presidential system
o   Civil War  

          The first shared ingredient is an abundance of fertile land which gives the country a comparative advantage in agriculture. While vast tracts of land were a common enough feature in the America’s, the quality of Argentina’s land was a differentiator. Argentina’s vast pampas covers more than 295,000 square miles and with a mild climate and evenly distributed rainfall, it is ideal for agriculture. So much so that by the 1920’s 99% of Argentina’s exports were agricultural and totalled more than $1billion.The United States had a similar comparative advantage. Indeed they had such a profusion of land that the government issued 160-acre tracts for agriculture virtually free to about 400,000 families under the Homestead Act of 1862. The abundance of land and the temperate climate meant that by the 1920’s the US was exporting agricultural good worth $1.94 billion (although this accounted of only 42% of total exports).

         The abundance of arable land, together with the addition of the second ingredient, labour, was enough to provide a platform for growth. In their initial stages both the United States and Argentina were scarcely populated, relative to their size, and thus relied on immigration to fill and work their productive farmland. Argentina was particularly successful at this; Argentina’s population rose from 4 million in 1895 to 7.9 million in 1914, and to 15.8 million in 1947. This rapid supply of labour created a significant boost to growth when combined with capital and fertile land. The Unites States experienced a similar phenomenon (although immigration had been taking place for a considerably longer period in its case).  It acquired 25 million new citizens over the period 1850 to 1930, again mostly from Europe. The US, like Argentina, relied on immigration to provide the changing demography necessary to take full advantage of its natural resources.

            These two ingredients created a catalyst for growth in both countries’ economies’, although the effects were more striking in Argentina.  Argentina’s growth between the 1860 to 1930 period was so impressive that it was expected to eventually become the Untied States of South America. GDP per capita rose from 35% of the United States in 1880 to 80% in1905. By 1913 Argentina’s income per head was on par with France or Germany's and far ahead of Spain’s or Italy’s. So where and why do these similar recipes diverge? Why did the promise of Argentina fail? The trouble lies with the final ingredients. Although Argentina managed growth for seven decades, we shall see that the seeds of disaster were already sown and would manifest themselves in the Great Depression of the 1930’s.

            Let’s start with the presidential system, one in which a president is both head of state and head of government. This particular ingredient can be notoriously difficult to work with. While the US’s presidential system has created one of the world’s most stable democracies, the same cannot be said of other countries who have adopted it.  Indeed the presidential system has been referred to as; ‘America’s most dangerous export’. This is because it gives broad powers to the executive branch the power to veto bills, appoint cabinets, and crucially to assume emergency powers. While, this has the advantages in terms of speed and decisiveness it can lend itself to authoritarian government. The US’s well developed system of checks and balances at both federal and state level have helped it avoid these problems. However, Argentina did not have strong legislative and judicial branches or even local government to act as a check on its executive branch. Indeed, Peron, following the first coup in 1930, impeached the Supreme Court, entirely eliminating the judicial branch as a check. The 1949 constitution then destroyed the separation of powers. This sealed the fate of Argentina’s presidential system. Without a history of stability the system could not develop the checks and balances it needed to prevent the political instability Argentina has suffered since the 1930s. 
            This historical instability is the result of a final ingredient; civil war. While both countries endured civil wars during the 19th Century, Argentina’s was considerably more damaging. While the US’s civil war lasted only four years, its resolution ended uncertainty and provided a platform for stability. In Argentina however, the Civil war lasted more than sixty years and seeded political and economic instability which would resurface in the 20th Century. Gross devaluations in currency, over dependence on only British capital and corruption at the heart of the financial system (in the Banco de la Nacion Argentina) were just some economic manifestations of this lack of stability.
            These two final ingredients, a presidential system and instability resulting from years of civil war, come together to create an underlying political instability and institutional weakness. This then became manifest during the Great Depression of the 1930’s when a military junta pushed aside Argentina’s fragile democracy, ending seven decades of constitutional government. Since then Argentina has suffered numerous coups and dictatorships and has fallen into long term decline. Peron, who took power following the coup, cut Argentina off from international trade and adopted a strict policy of import substitution. While many countries became increasingly protectionist during the downturn, for example the US introduction of the Smoot-Hawley tariffs, few cut themselves off to the extent Argentina did. The resultant push towards an industrial economy, created a misallocation of resources and without investment Argentina lost its comparative advantage in agriculture; sales of beef and grain stagnated. Successive governments, trying to placate Argentina’s population intervened to keep prices low while keeping public spending high. This created the conditions for the spiralling inflation which has plagued Argentina for decades. It also led to a huge amount of foreign debt which, by the 1980’s, was the equivalent of 75%of Argentina’s GNP. New, often unelected governments would frequently change and add to Argentina’s legislation and this complex mix served to further dampen economic activity. As a result, by 1969, GDP had fallen to half that of the United States.
            There were attempts to pull Argentina back. It even briefly returned to democracy in 1983. However, Argentina continued to suffer and per capita income continued to decline; by 20% between 1975 and 1990. Corruption and civil unrest during the 1990’s led to a financial crisis in 2001 resulting in massive capital flight and deposit runs. While Argentina has returned to growth due to booming demand for commodities, it is still not growing as fast as its Latin American neighbours and citizens are not benefitting. High import and export tariffs, renationalisation of companies (such as YPF) and government intervention have all worked to discourage investment and fuel inflation. 
            It is strange to think that recipes with such similar ingredients could create such starkly different results. Argentina had a promising start but underlying instability doomed it to fall even before it had risen.  Argentina’s democracy was not strong enough to withstand the pressures of an increasingly competitive global economy. It then entered a downward spiral of institutional weakness, a trap from which it was difficult to escape. The United States, with its background of stability, avoided this. Is there a recipe for Argentina’s rescue? If anyone has any ideas for an Argentina raising agent, I would love to know!
*An economist’s travel tip: If you are planning to travel to Argentine, convert you travel money to dollars first. They are widely accepted and it could save you a lot in terms of the conversion rate!