Thursday, May 21, 2009

Africa, the U.S., and the Rule of Law…

I received a very interesting email the other day from a guy who works at a firm that was hired to help study why corporate investment in Africa is lagging and what could be done to improve the flow of capital into Africa. This person, Fabiane Dal-Ri, provided a link to a study that was just accomplished.

So, what am I thinking when I see this email from a site called

I’m thinking back to all the scams from Nigeria and how I just recently had someone in Nigeria contact me about something I was selling on Craigslist and that their latest scam was much more sophisticated that just your garden variety “Prince Alleweeb” asking for your information so he can “send you some money.”

And I’m also wondering if I click on the link he provided to his “report” if I am going to get a computer virus?! LOL, hey, I’m just being honest. Let’s face it, there’s an image problem there. Heck, the only people I know who are worse at scamming than those in Nigeria are the Central Bankers in New York and London!

From a business perspective, right away I thought about the rule of law and how it was lacking in Africa and how that works to fight capital formation. His email described the report as a case study of what officers within 30 of the top Fortune 100 companies thought about Investing in Africa. So, I thought if I open the report I would surely find a bunch of marketing fluff about why corporations should invest in Africa… SURPRISE!

When I opened the report up here was their number one reason why Africa lacked corporate investment:

This survey reveals that five factors influence the decision of U.S. corporations to invest in Africa:

Rule of law -- A strong consensus exists among the respondents that the rule of law does not prevail to the degree required to make Africa an attractive investment destination. This applies to corporate, societal, and criminal law.

The Rule of Law was listed FIRST. What a shock, an honest report and no computer virus!

Here’s a link to an HTML version of the report, no virus!

Since I was so amazed to see such honesty, I read the full report and found it to be a good and accurate assessment of why Africa lacked new capital flows.

THERE’S A LESSON HERE FOR EVERYONE, especially those in the United States. When the rule of law is compromised, capital will not form, IT WILL FLEE.

Following some links in that report, I found that Fabiane’s organization is trying to develop “a new silk road” to Africa - Building the New Silk Road. This made me think of the tune “Road to Shambala which is an actual place located in the Democratic Republic of Congo‎:

Three Dog Night – The Road to Shambala:

While a silk road and economic development is certainly a worthy economic goal, how does a country achieve such things without the rule of law being in place?

I mentioned to Fabiane that the lack of rule of law leaves many of the countries in Africa with the chicken and egg scenario where they need investment but can't get it started. The rule of law NEVER comes from without, it ALWAYS comes from within. In other words, the Africans are reaching out for investment but will not, in my opinion, be successful until they FIRST reach within.

Their efforts are best spent trying to reform politics and to get the rule of law established, THEN capital formation will find them. This will be a very difficult journey, a road that needs to be traveled.

It’s a journey that we in the United States are traveling backwards! We are abandoning the rule of law. We are ignoring our own Constitution and we are making up new rules every day. We are also breaking legitimate contracts and not following the laws we have, like bankruptcy laws, that are already on the books. Money and its influence are dominating our rule of law, and that is nothing but lawlessness. Thus capital will wind up leaving the United States and that’s an appropriate response when the rule of law is ignored.

Here too we must find the strength to change from within. Dire consequences await if we do not.

I also find it interesting that our financial engineering has permeated the globe with toxic derivatives and riddled the masses with debt. Yet, one observer noted that the places in the world LEAST affected by the economic malaise were the very countries that have the fewest number of Starbucks!

Starbucks? What does Starbucks have to do with the current economic storm? Well, those countries where capital has not formed have the least amount of Starbuck stores and thus they also are not riddled with derivatives and debt! That makes them relatively better off as far as their economies growth does not have those weights holding them back! BUT BEWARE OF IMF LOANS! Accepting loans from the IMF is the very worst thing a developing country can do for the long term health of their country!

There are several other good insights in that study of Africa and some good comments from the executives who were interviewed for the report. Here are a few:

Business case.

“The most important thing for us is to grow our business profitably.

The question we ask is: ‘Do we believe there is a positive probability of securing a profit in the next couple of years?’

“We are a stock listed company so the first thing is return on investment. Can we make money? And can we get the money out? For instance you can make money in Zimbabwe but you cannot get the money out. So it doesn’t make sense for us.”

Corruption and uncertainty.

“Dangerous in terms of political and economic stability and dangerous also from a personal security point of view, whether it is related to criminality or diseases.”

“Law and ethics - a major constraint to do business in Africa? Yes, its the one market where the US Government will say – we will not help you in that market”

“The U.S. Foreign Corrupt Practices Act is a strong law that bars US companies from paying bribes. This is a barrier that some other vendors don’t face.”

“Biggest concern is trade in counterfeit goods and its impact especially in West Africa.”

Opportunity cost.

“When there is debate in the company over where to invest, there are 10 arguments pro BRIC’s and 10 arguments against Africa”

“There are other opportunities around the world that are more attractive. Africa loses; simple as that”

“We see China coming after this market so we’re becoming more aggressive.

“What China is doing is flowing $60 billion into Africa which can create prosperity if it’s done properly. But if they export workers from China to build the railways and the locals have no benefit from it, it smells a little bit like neo colonialism”

Africa stasis.

“Africa is a dichotomy. It is difficult to generalize about such a vast and complicated continent. Everyone who knows Africa can see the hope and opportunity, even if their experiences are negative. But everyone who knows Africa also knows that the challenges are many and complex.”

“Africa requires too much hard work and I am not hungry enough as yet”

These are telling comments and mostly true.

I have written lately about capital formation and how demographics or natural resources are not as meaningful for capital formation as the rule of law. For economic prosperity to occur, a country must have all the ingredients, an educated and productive workforce, their own natural resources or the ability to procure them, and above all else, they must adhere to the rule of law.

What is the rule of law and how is it applied? The rule of law means that rules are not arbitrary. They are consistent and applied equally. Wikipedia has a good entry on the rule law explaining its history and it’s progression through time and around the world: Wikipedia – The Rule of Law…

Below is a map of the world from Wiki that attempts to categorize the extent to which countries apply the rule of law. Note the red and orange areas that represent where the rule of law is lacking. Those are all areas with poorly functioning economies:

Map Key: 2005 map of Worldwide Governance Indicators, which attempts to measure the extent to which agents have confidence in and abide by the rules of society. Colors range from green (top quartile), to yellow (middle high), orange (middle low) and red (bottom quartile).

As I recently mentioned in my article on demographics, the presence of labor or natural resources is not enough for capital formation. I repost a pertinent section of that article below:
What is controversial, however, is the impact demographics have on the economy. Unlike Dr. Foot, I would put the impact at something far less than two-thirds. This is because we can look at a country like India or China, both countries with far larger populations, and see that their economic output is not as great as ours with a much smaller population. Thus there is much more to the economic puzzle than demographics. Economic prosperity is not just about natural resources either. If it were, Japan would NOT be the number two economy of the world. Thus there are other things that comprise the economic brew that add up to prosperity or a lack thereof. Take the rule of law, for example – countries without the rule of law (contracts with integrity) are far more likely to be poor because their rule-shifting drives capital away. Most of Africa has great natural resources and a ton of labor (mostly uneducated), but it is the lack of the rule of law that keeps capital formation at bay.

Here’s a chart showing the distribution of the world’s population:

Yet, here is a chart showing the distribution of world GDP:

Follow this link to an interactive version of this GDP chart: Pie Chart of GDP…

So, clearly, the size of the population does not tell us the size of the economy all by itself.

The rule of law is an important concept to understand. Politicians the world over would be wise to be schooled in the rule of law. If they desire a healthy and vibrant economy the implementing and upholding of the rule of law is the way to achieve it.

A recent negative example of this can be found in Russia. They had a tremendous opportunity to move forward and progress but have failed to implement and uphold the rule of law. If anything, the criminals are running the show there.

Hugo Chavez of Venezuela is another negative example of a leader who does not understand the rule of law. Nationalizing private industry, breaking contracts, etc., is a great way to have capital leave and never return. That will be very, very damaging to the businesses and people within Venezuela in the long run.

What do they need to do to restore the rule of law? No doubt a change of leadership is required, but revolution does not have a good track record of placing law abiding officials in office. It’s a difficult proposition, no doubt.

The cautionary tale for America is that we had a model for the rule of law in our own Constitution but are compromising it. The truth is that our own Wall Street has become far worse than the Nigeria peddlers of fraud and deceit. I hope that our politicians gaze into their looking glass to read this article and work to restore the rule of law for the very existance of our country and our way of life depend on it!

Styx – Suite Madame Blue (America Patriotic):