Comic: How to break up the Euro...

Infinite Possibilities. This hypothetical manual should be much bigger...and there should be ample supply of whisky to play the role we're all familiar with...

Nigeria Deleveraging [1]

"We have destroyed ourselves..." - from a scene in the movie Terminator Salvation

The fuel subsidy probe and the rent-seeking framework which the probe reports have unravelled have confirmed and given legal effect to what a few citizens have surmised about over the years. James Rickards, in his book, Currency Wars, alludes to a concept known as 'rent-seeking' which he describes as "the accumulation of wealth through non-productive means". That is precisely what has been going on in many sectors over time, so it does not come as news that our collective economic prosperity has continually been threatened by the actions (and inactions) of a tiny, influential fraction of our 167 million-strong population. In the body of knowledge that defines economic history, this is not strange. 

For the purposes of speculation and on a lighter note, comic relief, let us equate part of our essence as a systemically corrupt nation to the height of irresponsible debt levels in the developed world today. In doing this, our aim is to investigate, over the next few weeks, the mechanism of  'deleveraging' on corruption in Nigeria - the developed world continues to deleverage on debt - and to find out if indeed we have reached the point of deleveraging. As we proceed, I must emphasize a clear difference between the two independents. Sovereign debt is largely monetary and can be measured to an acceptable degree of accuracy. The innate propensity for financial impropriety and misappropriation of funds, on the other hand, cannot be measured directly; only its effects can be measured. In trying to measure its effects, we may (bearing in mind the natural human proclivity for either understating or overestimating an issue) reach erroneous and typically hazardous conclusions. However, it should be clear to readers that the intent of this material is not to approximate this propensity to a set of mathematical equations, for we have, in view of the global financial crisis, seen how the grand designs of risk valuation can cause social and economic disasters of incalculable proportions.

To be continued...

A Poem: The 99%

Grandma we were at school
And our teacher who's not so cool
Kept repeating 'ninety-nine percent'
Using terms that were indecent

Are you serious?
Tell me child
What did he say to make you so furious

He said that the ninety-nine percent continue to multiply
Without thought to the world's resource supply
And that the fertility of the simple
Continues to threaten the prosperity of the nimble

Then he mentioned Occupy Wall Street
Dismissing them as an ignorant human fleet
Whose incoherent demand for justice
Has pushed the society to the precipice

Is that all he said dear?
Yes grandma that's all
Well he's right!

As Walmart and Co. Besiege Nigeria's Shores

Straight to the matter at hand, one perspective at a time...

Will the entrance of global retail firms into the Nigerian market aid in the tracking of consumer spending? Possibly, but the figures might be distorted as socio-economic inequality continues a northward trend in Africa's most populous state. Contrary to popular belief, I posit that a financially free middle class is being suppressed from emerging; in its place, a CREDIT driven middle class will emerge. As this section of private sector debt increases, any hopes of restoring a savings culture (whether under the mattress or in bonds and equities) will be extinguished. The dynamics leading to the emergence of this class of individuals will be x-rayed in a later post.

Will the prospectively high importation activities of these giant retailers put downward pressure on the Nigerian naira? Most certainly, in the medium to long term, all other metrics remaining constant. Through a cancerous combination of failed policies and widespread corruption, the manufacturing sector has remained dormant for the better part of the existence of the Nigerian state. If the government collects less in taxes than a retailer's activities cost the government (by the selling of the naira), what net economic benefit does the Nigerian state derive? If the Nigerian manufacturing sector were alive and well, the resources would, to a greater extent, be kept within the system. The CBN will have a greater workload as the western traders arrive. 

On a lighter note, the health and pharmaceuticals sector may see an upsurge in revenues from the sales of dietary supplements and other related drugs as the consumption of processed foods and the like outpace their more natural sources. So the need to fill in the nutritional gap cannot be overstated. The concept created by the illusory observance of an emerging, 'financially free' middle class so busy they might not have time to pay religious attention to their nutritional requirements will engender this revenue surge. 

Hon. Hembe's Fatal Presumptions

"The only thing that one really knows about human nature is that it changes. Change is the one quality we can predicate of it. The systems that fail are those that rely on the permanency of human nature and not on its growth and development. The error of Louis XIV was that he thought human nature would always be the same. The result of his error was the French Revolution. It was an admirable result."  - Oscar Wilde

Clear verdict from history. That's all for now. 

The €uro Will NOT Crash: the Chinese View

In the business of international relations and more importantly, the agitation for global dominance, national and regional CURRENCIES have become INSTRUMENTS of WARFARE on one hand and (to use Nixon's phrase) PEACEFUL COMPETITION on the other. From the removal of the gold exchange standard in August 1971 through the Asian currencies meltdown from July 1997, the movement of speculative and non-speculative capital has continued to determine the general prosperity of nations. As noted in the classic, The Alchemy of Finance, speculative capital basically moves in search of the highest total return. I infer that speculative capital movements will form part of the foundations for an "inquiry into the nature and causes of the debt of nations". 

In moving in the direction of bailing out the Eurozone, however, Chinese speculative capital has a longer-term view of the concept of highest total return. A mediating currency is a diplomatic imperative in the unfolding drama between the US dollar and the Chinese renminbi. Factoring in the fact that Chinese holdings of US government and corporate debt continue to go through a coordinated series of devaluation, the inflation-wary, German-led Eurozone will become for China the new DEBT frontier in years to come. Sovereign debt will become one of the hottest commodities over the next couple of decades and so speculative capital will continue to play a crucial role in global resource allocation. The European Union surpassed the United States last year as China's largest trading partner. Discounting the fact that ten of the twenty-seven EU countries do not use the common currency, with Germany, France and the Netherlands constituting a substantial weighting for the Eurozone area, we safely conclude that the survival of the Euro is in the best interest of China. 

The Paradox of LTROs

Even though the long-term refinancing operations (LTROs) of the ECB should realistically stoke the fires of inflation (as the liquidity in the financial system is increased), banks and other related financial services firms who accepted the cheap fiat money being offered by the ECB have, more often than not, chosen to hoard their cash (and many times deposit it again with the reserve bank even though deposit rates are low) in the form of reserves rather than loaning it to the real economy. This may be understandable considering that regulators will be hoping to infer a minimum of 9% capital adequacy ratio from the balance sheet of the banks by June 2012. From this writing, I may safely conclude that the REGULATORS are helping the BANKS achieve the core CAPITAL ratio requirement. So the gold bulls may have to reduce their momentum considerably as we approach H1 2012. This world is interesting...  

Ignoring the 99%

In certain sensitive, geopolitical regions around the world, heads of state are sitting tight, even though their time up. From Russia through Syria to Senegal, we see the same pattern - 21st century governments deciding to ignore the loud, though unclear, demands of the 99% and reinforcing their political positions against the dictates of the state, utilizing pseudo-democratic tactics to advance their sinister goals. We can expect the socio-economic faultines that have been developed over the last four years to morph into deeper crevices with the potential for great social upheaval unlike anything we have seen post-recession.

The Implications of Global Central Banks' Quantitative Easing

JP Morgan's recent submission gives us cause to think about the COST of bailing out the world's financial system from the spillover effects of the economic crisis of 2007-2008. Below is a chart released by a JP Morgan commodity analyst showing the assets on the balance sheet of the G-4 central banks as a percentage of their national economic output. This "G-4" includes the Federal Reserve of the United States, the Peoples' Bank of China, the European Central Bank and the Bank of Japan. The co-ordination among the central banks has been remarkable.  

Implications:

1. We can expect the spot price of gold and more importantly gold futures to hit records highs as investors and speculative players hedge against inflationary tendencies going from 2012 to 2013. Gold ETFs will experience substantial volatility this year too. 
2. Apart from the recent Galleon case (and on a lighter note MF Global), no major bank chief has been indicted for directly playing a role in engendering the recent crisis. And so the central banks continue to fan the embers of the MORAL HAZARD problem. To avoid a crisis of confidence and more importantly a re-enactment of the bank run that characterized the GREAT DEPRESSION, these reserve banks may have acted rightly, but its been four years since the recession. On the flip side, in managing the crisis in the Nigerian context, the Central Bank of Nigeria set up a "bad bank" to purchase the toxic assets of the banks and went further to take punitive steps to hold the bank chiefs responsible for their actions.
3. Energy costs are going to increase going forward as the action of the central banks of "flooding the world with cheap money" combine with the system-wide reinforcing effect of geopolitical conflict in some oil-producing states. The oil producers, in a bid to shore up their purchasing power against the volatility of the US Dollar, will, without doubt, hike energy prices. The positive feedback effect will only serve to make the entire financial system even more volatile. 
4. Net oil-importers such as Kenya and Uganda will most likely have a painful period ahead. Last year, the value of the Kenyan shilling fell more than 20%. Kenya has made efforts to secure a $143 million loan from the International Monetary Fund to hedge against this threat. They can only go so far. 
5. Net oil-exporters such as Nigeria, in the absence of a resurgence of Niger Delta violence, might see a surplus in revenues from oil this year given that the National Assembly is adjusting the 2012 budget oil price benchmark to $75 - way below the volatility range shared generally by commodity analysts. However, the windfall may be of little effect if the upsurge in food imports (growing at 11% annually) is not pared.  
6. The global equities market has had a generally good start this year - one of the best in years. No thanks to global Quantitative Easing. But as interest rates remain high in emerging and frontier markets, the bond market might have the upper hand this year, trumping the equities markets again. In my native Nigeria, the efforts of the management of the Nigerian Stock Exchange (NSE) to boost the stock market capitalization to pre-crisis levels may not come to fruition this year. Sadly. 
7. Following from the widening interest rate differential between the developed and emerging/frontier markets, the pace of carry trade will accelerate even further this year, in the absence of substantial fluctuations in exchange rates. As speculative capital continues to besiege the shores of emerging markets such as China for example, any effort by the financial authorities to reduce the surplus external position (comprising the current and capital accounts) by increasing imports may not yield the necessary results.  

As for Greece, I assume they have already defaulted and the market discounting mechanism has factored that in as usual. Who will argue that a debtor has not defaulted on a debt commitment if he's asking for some haircut from his creditors? 

*        *        *

Historical: My thoughts on the Chinese Premier's Financial Times article of 23rd June, 2011 [uncensored]

The Chinese Premier, Wen Jiabao's article can be accessed here. My thoughts (November 14th 2011) below:

- I believe that he should have made a distinction between the parts of the world where inflationary tendencies are HIGH and where he sees them LOW (due to reduced consumer spending and confidence). That distinction is very important as it guides monetary policy in any clime. As is obvious from the current state of affairs, inflationary tendencies are dangerously LOW in the US and the Eurozone (still under watch though) ---> the US Federal Reserve maintained the interest rate @ 0.25%, while the ECB lowered theirs by 50 basis points to 1.25%. All they are trying to accomplish is to help SMEs access to credit facilities and boost consumer spending. But apparently, as we can see, that is not enough. But the story is different in emerging markets like China. Inflationary tendencies are HIGH there; the after-effects of the stimulus package that the Chinese government initiated (similar in principle to the Quantitative Easing [QE] initiated by the US Fed). 

- He said that his government was going to rein in government spending and in effect reduce deficits to somewhere below 3% of GDP and external debt to 60% of GDP. Simultaneously he intends to adopt a loose fiscal policy, to support a policy of economic development through domestic demand. This double move is CONTRADICTORY. Cutting government expenditure is a sure way to reduce fiscal deficits, but increasing infrastructure spending cancels out the gains. The overall effect might be ZERO change in fiscal policy. My view is that China can handle deficits to some degree for now. Inflation has been hovering around the 6% level since this year, and a contrasting mixture of loose fiscal policy and tight monetary policy will serve to keep inflation in check. China's main worry as it grows economically will continue to be INFLATION. Its also a factor that African economies have not been able to handle that's partly the reason it's difficult to reconcile GDP growth in Africa to SOCIAL improvements (the Ugandan and Kenyan currencies have been brutalized this year, causing interest rate hikes to 23% and 16.5% respectively, to shore up their values. Of course this hasn't helped much). The 4th part of my series on Afro-Chinese matters covers this to some degree, though I focused more on the demographic trends rather than inflation. 

- All in all, China has been historically effective in managing inflation. According to Wen's article again, the Chinese strategy to keep inflationary tendencies LOW is to increase IMPORTS. This is good as the SUPPY of non-China goods and services (to the Chinese) will INCREASE, driving costs and prices LOWER. But as data from tradingeconomics.com suggests to me, balancing export volume with import volume will present itself as a major challenge too. [Another story to watch is the new Free Trade Zone (similar to NAFTA) deal being proposed by the US President for the Asia-Pacific region --> 8 countries have indicated interest but China is yet to make a move on that]. 

Let's go back to the topic of the Chinese Premier's article, it says: "How China Plans to Reinforce the Global Recovery". After reading this article, I believe Wen Jiabao made the following errors:

 - he did not understand the IMPLICATION of the TOPIC of his article; because if he did, he would know that it doesn't make sense that your main thrust for reinforcing global recovery would be 'IMPORT VOLUME INCREASE' when developed countries who have the greatest capacity to export to China are still mired in the after-effects of the credit crunch and business confidence is still relatively LOW.

- the article which as stated by the Financial Times is a rare move by CONSERVATIVE China, was written as a DEFENSIVE TACTIC in response to the developed world's call on China to re-evaluate her growth model --> China has been maintaining her fixed exchange rate regime and only allowing it to appreciate slowly (in essence favouring her exports on the international market). China's present currency level is seriously UNDERVALUED. It should be worth more than it presently is. Intellectual Property theft has also been another issue against China altogether. The last paragraph of his article reinforces my argument. Besides the tone of the article to me is that of a CHINESE-ECONOMIC SCORECARD. Like when Nigerian governors celebrate their 100 days in office. It falls short of addressing very critical issues (again, the date of the article is June 23, 2011). 

#OccupyNigeria: Between 'Strike' & 'Protest'

As 2011 rounded up with the fall of the 40-year-plus totalitarian Libyan regime, many observers reached the conclusion that such a revolution would wreck the fragile social fabric of sub-Saharan Africa if it ever happened to occur in the 'frontier' region. That scenario is currently being tested as Africa's biggest oil exporter - Nigeria - is currently under 'occupation', ironically, by her own citizens.

However, there are clear divergences between the triggers that sparked the Arabian Spring and the Nigerian case. In north Africa, these massive uprisings were mostly initiated by the citizens with decades of suppression and sinister containment of the citizenry by government serving as the main catalysts. In Nigeria, on the other hand, the protests - actually a strike action by the labour unions - can be safely approximated to knee-jerk reactions to the removal of subsidies on Petrol Motor Spirit by an 8-month old government, even though it may have served as an opportunity to protest against the wider corruption, excesses and inefficiencies of government. This divergence is particularly noteworthy because it is inconceivable that Nigerians may be asking for the resignation of President Jonathan - a duly elected leader - under a year into his administration. The #OccupyNigeria movement is increasingly becoming laced with an unfortunate lack of focus and concentration on the issues at hand. As is obvious from various sections of the nationwide protests, political opponents of the Jonathan administration have seized the opportunity to appeal to the fancies of the protesters. A growing challenge has become the dynamics of managing the protesters by the leaders of the labour unions. It is also remarkable that the more common word on the streets is now PROTEST, not STRIKE, even though it was initiated under the legal framework of the latter. The strike action initiated by the national labour unions is slowly slipping out of the control of the union leaders. I perceive that a call to end the strike by the union leaders may not necessarily end it since a critical reference point has been developed in the mind of the common protester - the Arab Spring mentality - which essentially usurps the initial motivation for the mass action. The situation is becoming more fluid and getting potentially difficult to place a timeline on when and at what point the protest will really end. 

The Subsidy Quasi-Revolution

Nigeria may be likened to a foster child who has been rotated through a sequence of irresponsible parents and when 'seemingly' responsible parents come along, the child ceases to believe that his interest and welfare has become the priority of the new parents. With a reference to typical human behaviour, that reaction is perfectly normal.

Unfortunately, Nigeria will have have to choose between the devil and the deep blue sea under the current circumstances. Many Nigerians protesting under the idealistic inclinations of the 'Arab Spring' fail to realize that historically, REVOLUTION tends to redistribute POVERTY more than it redistributes WEALTH...

Selective Cleansing

In the on-going onslaught on the Nigerian state, the perpetrators of violence and mayhem have maintained an obvious MO; waste the masses, bomb social and religious institutions, but RAID the banks. Apparently they must be in short supply of the necessary funding to keep their engine of indoctrination and violence running. The raiding of the banks is also not as frequent as the destruction of human lives. That systematic destruction needs funding. 

By engaging in SELECTIVE institutional cleansing, it is clear to the average Nigerian that an agenda more complicated than the headline news tells the citizenry is being carried out, with the intelligence of the malicious activities increasing linearly as the days go by.

Africa's Data Problems

Obtaining reliable data from many places on the African continent is still a big challenge. Economic data published by the UN and other related agencies give workable estimates, yes, but to achieve near-uniform development across sectors, a breakthrough in data collection, organization and analysis is imperative. The failure of a majority of state institutions of National Planning to achieve remarkable results in sub-Saharan Africa has its foundations in the fractured framework of data handling and analysis in African nations. Consequently, where there is no dearth of political will, the governments still lack the crucial information they need to drive sustainable growth in many African states. We cannot continue to rely on the estimates of international agencies to come to the knowledge of ourselves and our environment. This protracted dependence will do no good to African states in the long term. Africa must 'own' and drive the growth she wants. Nigeria provides an example. 

The Nigerian economy has been projected to exceed that of South Africa, the continent’s largest economy, in a little over a decade (though it might happen sooner with the current plans to use the reference year for computing Nigeria’s real GDP as 2008). A cursory survey of both economies brings an apparent disparity to the fore: the informal economy in Nigeria is largely unaccounted for compared to that of South Africa. This of course has fostered the flourishing of a cancerous culture of tax evasion in Nigeria over many years. In the place of the Federal Inland Revenue Service (FIRS), the ‘taxes’ are paid to a unique set of amateur regulators who have instituted themselves as protectors of certain informal enterprises.  In the end, such loopholes filter through to the central government with the result that insufficient resources weaken not just fiscal policy, but wreck the national development plan even while it is still in black and white.

Seemingly, the UN (or the IMF or the World Bank), with all its mandates and great responsibilities (with the result that it should probably be busier than any other non-profit entity in the world), has more information about a country than the country itself. Of course state information is an essential resource for the delivery of its mandate, but do the international agencies desire prosperity more for any African state than the state desires for itself? 

For Africa's real transformation, a revolution in our capacity to collect, interpret and analyze data – all done correctly – will catalyze and accelerate the process of African development. The tools are available already, what needs developing is our capacity – African Education – and the right deployment of this capacity in high probability setups for not just lifting Africa from poverty but also going forward to being able to tackle 21^st century challenges. The rest of civilization provides Africa with a rich history of invaluable lessons. The opportunities are tremendous. 

Finally, the educational system of the typical African state leaves a lot to be desired. As more  investments are projected to flow into Africa in the coming decade, the local management of such investments becomes a priority. The 'rich' human resources in Africa may NOT be useful if incompetence is the order of the day and the inability to handle economic prosperity is as pervasive as oxygen. 

*  *  *

Africa and the Chinese Question [4]

“The world is in the middle of a huge demographic transition that will have a significant effect on long-term economic trends”

– Mapping the Markets, The Economist (2006)

Part 3 of this series was concluded with the idea that a new benchmark index must be formulated by African societies that will serve the following purposes: first, as a basis for compromise during sector-investment negotiations and finally, as a guide for deeper integration with other emerging markets. The definition and adoption of a sound contextual framework are key steps in African economic policy development and should not be misconstrued as conspiratorial efforts to place the welfare of the African above that of her trading or investment partners. Instead, the framework should be viewed as a necessary underpinning that will highlight the foibles of the current system of doing business, correct them and move to guarantee 21^st century mutual benefits for all parties involved.

Since the dawn of the 20^th century, the demographic standing of any geographical region has become a critical economic factor in determining sector-resource allocation, the future directions of that region and the ripple effects of regional activities on the larger global economy. With the growth rate of the ageing populations of the developed world projected to continue northward (as a result of low infertility and increased life expectancy), there will be an unvoiced demand on Africa and other developing states to export her teeming youth to run and maintain the established systems of advanced economies. This demand arises from the obvious pressures of the generic African society, not necessarily from developed nations. The underlying mechanics of this human-capital export scheme are not novel. Noticeably, shifts in geographical locations have become unnecessary as technology becomes more interleaved with business activities – more young Africans are going to be working for multinational corporations of western origin domiciled in Afro-localities. Africa must grow and develop, but as long as the current structure that impels GDP growth persists, her prosperity will largely be determined by the business cycles of advanced economies, whose interests the multinationals represent (understandably), and emerging markets.

As mentioned earlier, the characteristic African growth trend is high GDP growth rates and meagre HDI growth. According to a 2011 economic report released by a synergy between the African Union and the United Nations Economic Commission for Africa,

The improved economic performance achieved over the last decade has not been translated into commensurate reductions in unemployment and poverty, nor significant progress towards the Millennium Development Goals (MDGs), especially in sub-Saharan Africa. The continent is experiencing a jobless recovery; apparently perpetuating a fundamental feature of its previous growth spell...the [African] development process has to be planned for several reasons. The changes required are substantial and therefore the decisions cannot be optimally made by free market forces...

Without trivializing the preceding sections of the AU-UN report, I choose to prey on the secondary clause that contains “free market forces”; this brings the Chinese to the fore again, albeit in a way that demands we take a superficial look at their economic growth model.

The Chinese system of socialism, interlaced with some features of free market ideology, has elevated her economy from the doldrums that resulted from the fall-out of the Cultural Revolution of the mid-sixties. 1983 circa, marked a year of opening for the Chinese market to the world when Deng Xiaoping reversed some of the debilitating policies of Chinese revolutionary, Mao Zedong. However, the state retained control of the economy and continued to counter Harvard economist, Joseph Schumpeter’s theory of “Creative Destruction”, as the state played a central role in allocating resources to sectors of the Chinese economy based on partisan prejudices. Hinging her economy on exports and being fully aware of the tides of floating exchange rates, China adopted a fixed exchange rate policy to encourage her local industries and keep her exports competitive on the international market. Discounting the relative closed-door, policy stance maintained by the Chinese economists, it is clear that China’s currently enviable, economic position cannot be diametrically attributed to the interplay of “free market forces”. 

Without ambiguity, the required structure that will lift Africa economically and socially cannot be left to the whims of the global economic order. I do not, by this submission, suggest that African economies implement fixed exchange rates or close our doors to foreign trade – indeed foreign trade is in our best interest – but we must become proactive and act ‘offensively’ (rather than defensively) to the mercurial landscape of global economics. A major transition occurred in China’s economic fundamentals when more emphasis was placed on the intellectual evolution of the ordinary Chinese and the development of a strong knowledge economy while manual labour was and is gradually (but progressively) being relegated to the back-seat. The US and Japan have been the early champions at converting raw intellectual capital to great products and services, while the former imperialist machine – the United Kingdom – has been playing catch-up, choosing the financial services space instead. The global trend is clear; at a point in its economic history, the United States manufactured a great percentage of its goods in the US until China and other Asian economies presented themselves as cheaper manufacturing destinations, with great human populations and low-wage regimes playing the role of process catalysts. China’s dominance in the global outsourcing manufacturing sector can only continue for as long as the Chinese knowledge-economy reaches a globally competitive stage. As Chinese demographic data suggests, this is inevitable. In a few years, the Chinese economy will morph into a high-capacity service-based economy with mass goods manufacturing outsourced to Africa and other developing Asia-Pacific economies. Whether Africa will be able to play that role is a different matter altogether. Currently, however, Africa does not show any desire to follow this historical developmental trend. Another source of pressure for Africa will emerge as a consequence of the current economic crisis ravaging the industrialized world.

In coming to terms with her unfavourable demographics and dwindling reputation for innovation, the United States is making serious attempts at reviewing her immigration laws and policies; the idea is to strengthen the United States’ position on the pinnacle of innovation in the world. According to history, I believe the US will reassert that enviable position, by word and by action. Job growth and unemployment are major issues as the 2012 US election year looms. Some states have taken steps to increase the retirement age – putting more of the population to work and reducing social services expenditure. Everything will be done to attract the world’s best – again. Developing economies will have to work harder to keep their professional and skilled citizens or else they will be at the losing end of the intense global competition that will result when the current crisis is over. With the demographic data tilting towards an exponential growth of retirees in advanced economies like the US and the UK, the tendency is for a gradual but steady exodus to occur from the southern hemisphere to the northern hemisphere. The cerebral elite of many African states have become conscious global citizens. They cannot be pinned down to a distressing geographical location for too long, besides the legacy atmosphere of Afro-nationalism continues to wane by the day. They will, by choice or by the pressures of the environment, move to places in the world where their life and work are treated as assets of first priority.

 ****

Africa and the Chinese Question [3]

"We shall [here] define PROGRESS as the increasing CONTROL of the environment by LIFE." - from The Lessons of History by Will & Ariel Durant 

A simple inference from previous parts of this work is that China has made relatively consistent progress over the last couple of decades. Historically high global commodity¹ prices lend credence to this fact. Africa, a rich haven of raw materials, has 'witnessed' her trade volume with China increase by more than 20% from $91billion in 2009 to $110billion in 2010². Turning the searchlight on Australia, a developed country, rich in commodities but running a substantially diversified economy, we see another resource-rich nation with high economic activities similar to that between China and Africa; between 2010 and 2011, Australian exports (with iron-ore constituting a great proportion) to China represented 33.05% of all merchandise exports to east Asia³. The value of exports to east Asia in monetary terms is put at more than A$170billion (around US$166billion) by the Department of Foreign Affairs and Trade of the Australian government. The high economic growth in China continues to demand ever more resources to fuel and encourage her staggering growth rates. I explain this further with the chart⁴ below:

The graph shows the relationship between two sets of data; China's GDP growth rate from 1999 to 2010 and the average yearly Commodity Metals Price Index for the same period. The green line represents the Commodity Metals Prices Index while the red line represents China's GDP growth rate. Immediately apparent is the steady, almost proportional growth of both data sets. A considerable depreciation in the price index (-7.8%) is observed between 2007 and 2008 when correspondingly China's growth momentum lost 4.6 percentage points. This was during the credit crisis. The calculated correlation is 63.85%, which I consider to be relatively high using the growth data of a single country.  

However, it is important to look though the screen of increased trade volumes and GDP to some other "less-news-making" data. The Human Development Index (HDI) serves a useful purpose in this regard. The question of its bias and inadequacy is an argument for another day. Australia has continued to remain in the top five of the HDI trend data while many African societies have continued to remain at the bottom. It is general knowledge that Africa has continued to grapple with the concept of a resource curse; the ability to convert her  favourable demographic status and raw materials to social prosperity has not been exploited (or is absent?). In Africa, we find that it has become commonplace to resist any comparison with the developed world (like Australia), but I ask, against what or who shall we compare ourselves? I see no point in belabouring the problems of Africa; my objective for this work is purely advisory. The thirteenth chapter of Will and Ariel Durant's book, The Lessons of History, bears the title, "Is Progress Real?". That question is blowing in the wind.

As is usual and normal for any entity, China will tend to tread a path of least resistance in her journey to sustained economic glory. More importantly, the necessary back-up structures and frameworks of redundancy will be created to guarantee that China is not stopped in her steps - why should China be stopped? With this in mind, I am constrained to infer that Africa's trade volume with China can only increase, as Africa (discounting all neo-imperialistic reasoning and general paranoia) presents little or no policy resistance to any malign trade conditions between herself and China. The events that have transpired in Zambia recently present a strong case study. China's growth has demanded more copper than ever before. Zambia happens to be a nation with one of the largest, export-grade copper deposits. The Chinese thinking in establishing a copper mining plant in the Zambian Copper-belt region is analogous to a multinational that decides to cut costs by procuring a commodity at the source of extraction, in the process bypassing the vagaries of the international commodities market.  All other (proclaimed) incentives such as GDP growth for the local economy, community development and social elevation are secondary. Of course that is understandable. China must grow. I resist the temptation of deliberating on the issue of the mine workers' demands and the ensuing political issues because I believe that the springboard of any mutual Afro-Chinese economic interplay must transcend the levels of an employee-employer relationship. 

However what is clear from the foregoing is that China's mission in Africa is one that is justified by the simple theory of natural selection. China must survive. Her ideological foundations must thrive and evolve. If Africa must play at a respectable level of international trade and negotiation, then as a matter of unequal priority, she must substantially improve her "Gross Intellectual Product". Africa will have to define a new index for collective progress and relate to China and the rest of the world based on that definition. Africa has survived for too long on instinct. Instinct has its place in human relations but when complex, human systems have been thought through and designed, instinct may become an individual's (or a people's) undoing. 

...to be continued

1 A commodity is a physical product such as grain (like wheat) or metal (like aluminium) which can be exchanged for a similar product and investors can buy and sell as a means of speculation and hedge against future risk through a futures exchange. 

2 Source: Standard Chartered

3 Source: data computed with inputs from the Department of Foreign Affairs and Trade of the Australian Government. 

4 Chart was plotted with China's GDP growth rate inputs from The World Bank Group and historical Commodity Metal Price Index inputs from The International Monetary Fund. 

Africa and the Chinese Question [2]

"The SOCIALIST system will eventually replace the CAPITALIST system; this is an objective law independent of human will. No matter how hard the reactionaries try to prevent the advance of the wheel of history, sooner or later revolution will take place and will surely triumph."

- excerpt from Mao Zedong's speech at the joint meeting of the Supreme Soviet of the USSR in celebration of the 40th anniversary of the Bolshevik Revolution (November 6^th, 1957).

[In order to achieve brevity in this series and focus primarily on the factors that I believe should inspire Africa's policies and handling of economic issues regarding China, I will skip the details of the fundamental ideologies and flash-points in the history of the People's Republic of China (PRC), but will make references to what I consider relevant to the current discourse]

In the first part of this series, I laid a general background describing the 'special' connection between the United States and China. The excerpt above, adapted from Chairman Mao's speech in the former Soviet Union, is very informative for our current economic epoch. It provides a necessary perspective into the unfolding relationship between the US, representing much of the developed world and China and how the dealings between the world's bastion of free markets and the increasingly prosperous socialists will form the framework which Africa might be forced to operate within over the next couple of decades.

As has been echoed from the political standpoint by the former US Secretary of State, Henry Kissinger and the private sector angle by Martin Sorrell, CEO of WPP Group, China is only a ‘returning’ world power. This is a view held by many. My opinion is that China is returning as a more open society compared to her pre-20^th century status as a relatively isolated, self-sufficient economy. I believe that China’s isolation could be attributed to the fact that the characteristically high, internal economic activities could sustain the nation and maintaining little or no contact with the West (mainly the British) assuaged her fears about imperialism which was sweeping across the entire world during the era. The infamous Opium Wars represented the first, concerted steps in the introduction of the Chinese economy to the world (it goes the other way too).  

With economic strength comes higher negotiating power and prestige in the arena of international politics. Needless to say, China currently possesses such capacity and resources in great proportions. However, China had previously assumed a back-seat position as the rest of the moved on, mainly due to the tightly-controlled economy and late catch-up to the digital directions of the world. China has managed her finances well over the decades, growing her economy from single to double digit growth rates by the mid-2000s as the graphical illustration below shows*.

While the rest of the world, especially the capitalist pack, throttled on, inventing ever-more complex financial debt instruments and subjecting their economies to series of booms and bursts, China for a large part of the two decades maintained a relatively silent, closed economy (only joining the World Trade Organization in 2001) and relying heavily on her power of exports. China's fixed exchange rate has helped her maintain competition in the international market for her cheap exports. By this I mean that China's exchange rate (to the US Dollar) is not left to float; with China's large pool of foreign exchange reserves, efforts are continually made to sell the yuan (or officially the Renminbi) while racking up greenbacks. Of course, the higher the supply of yuan in the Chinese economy, the lower the value and the less amount of goods a Chinese can purchase (and managing inflation becomes a challenge as a result). 

I consider it pertinent to state that China has attained her current status without adopting the innovation ideologies of capitalism and will, if she ever had any doubts before the credit crunch of 2007-2008 (till date), stick to her reformed socialism (with Chinese characteristics) principles. One could argue against Chairman Mao's statement, arming himself with the reality of the collapse of the Soviet Union in 1991, highlighting that we are inherently limited in our grasp of what the future holds. On the other hand, the same debater would be defenceless in the face of the current phase of the evolution of the global financial system. Yes, I consider it an evolution because since the Great Depression, the global financial order has witnessed various boom and burst cycles typified by credit expansion, miscalculation of risk, relaxation of lending rules and credit rating agencies, bubble growth, more credit expansion, bubble burst, higher regulation and the cycle repeats itself. 

It is also important to note that China's current position in the global marketplace was engendered to a large degree by the United States' consumer-driven economy. As the US and the rest of the developed world maintained the running of the capitalist engine, China grew and expanded with the free-market ideology as the main catalyst (even though de-localized). The capitalist system (with all its benefits and flaws) has abetted and proven 'successful' the socialist system (with Chinese characteristics). 

to be continued...

* Source: TradingEconomics.com, The World Bank Group.

Africa and the Chinese Question [1]

A single superpower emerged at the end of the cold war and continued to dominate international politics and global events until that revered position was challenged at the dawn of the 21^st century. 

The American way of life permeated every nook and cranny in the world as the 'American Dream' translated to a 'Global Dream'. The United States of America was founded upon three main tenets; the right to life, liberty and the pursuit of happiness. The multi-faceted expressions of this ideology have continued to improve the living standard of the average American over the 230+ years of the existence of the United States. The limits of the creativity of the human mind have been stretched continually on no other better test-bed than America. A typical American sees himself and is seen as a first-class global citizen, one before whom all doors are open and no request is denied. In many ways than few, this ideology is the fulcrum upon which all American endeavours have been established and sustained and has served (and continues to serve) its purpose to a degree never before envisaged by mortals. In retrospect and comparison, no other system has worked as optimally as possible to tap into the hidden potentials of mankind and utilize the discoveries for the common benefit of the human race as the American system has. 

The historic commitment to the American way of life also empowered the esoteric aspirations of more than a billion 'unique' individuals. In the years that followed the abandonment of the gold-standard and the assertion of the US Dollar as the world's reserve currency, the economics of the world became more determined by the fine desires of the average US consumer, and the American government, in a bid to keep the capitalist engine running and uphold her commitment to the pursuit of happiness, started running fiscal deficits - and the deficits continued to increase. A fiscal deficit describes a condition in which a government's total (budget) expenditure exceeds her total revenue generated. (Of course the high level of economic activity has been upheld as a good predicate for a deficit-running economy by the distinguished economist, John Maynard Keynes. That makes sense, but my submission is that perception can be different from reality). When governments run deficits, they must borrow money to run and maintain the economy. They do so by issuing government debt, known as bonds. These bonds are issued with a promise to pay back with interest to the lender. The maturity period for a bond can vary from 1 year (short-term) through 5 years (short-term) to 30 years (long-term). A shorter-term government debt - treasury bills (T-bills) - is also issued, bearing a maturity period of less than 1 year. 

On the other side of the globe, however, something important was happening. The more than 1 billion unique individuals - the Chinese - were racking up massive current account surpluses as the export component of her account continued to increase. With more than one-sixth of the world's population and relative low wages (cheap labour), she started out manufacturing very cheap, sub-standard goods and kept it up until standards improved and China became the largest exporter of goods in the world*. According to China's Bureau of National Statistics, China's population hit 1.339 billion by November 2010 and her total exports value was at $1,581 billion** by the end of the same year (just to be sure, that is about $1.6trillion). This leads me to compute each Chinese resident's contribution to the nation's export value as $1,180.73. (I understand that the demographics of the Chinese population would place it at a much higher value). These figures give an indication of the size and potential of China. 

In addition to the surplus balance of trade (higher export value than imports), a savings culture was also developed in China which surged monetary reserves to more than $1trillion. As her reserves kept increasing, she decided to put some dollars to interest-yielding ventures and the best investment destination was the United States of America. In high school biology, I remember studying a special relationship known as symbiosis, which defines a mutually beneficial association between two organisms. A similar relationship developed between the United States and China; the US was running deficits year in, year out, while China was piling up greenbacks. Consequently, to borrow David Smick's phrase, an 'ocean of capital' started flowing between the US and China. 

To be continued...

* CIA World Factbook

** if the EU is factored in as a single entity, China becomes the second largest

Africa's Critical Moment

I believe strongly that the margin that existed, if it ever did, between the unfortunate plane of ignorance and economic struggle in Africa and the glorified heights of enlightenment and prosperity in the West, has diminished substantially. Today we are exposed to tools and resources that if employed in the most optimal, value-oriented manner can spur a sustained wave of economic growth and development in Africa. As much as I appreciate the political and cultural challenges facing Africa, let's look at the following cases:

Aliko Dangote of Dangote Group founded his business in 1981. He is involved in the  production and distribution of various consumables from spaghetti to cement. He is widely regarded as one of the greatest businessmen from Africa whose net worth of $13.8billion is definitely a head-turner*

Mark Zuckerberg, the twenty-something year old co-founder of Facebook Inc., on the other hand, started off in 2004. The social network has swelled exponentially to a 750-million user base and is currently valued at $82 billion**. Mark's net worth is standing tall at $17.5billion.***

That information is just enough to allow us compare. Yes, they operate in very different sectors and under very different circumstances, but a 23-year difference in the establishment of both corporations is a thing to ponder about. What becomes immediately apparent is the organic proliferation of tools and resources over the years that can cause a giant leap in the economic well being of any global citizen.

However, excluding a few Africans like Dangote, a vast majority, whose frequent exposure to these resources stuns the average westerner, have chosen (unconsciously or not) to merely increase their purchasing power. Such a venture is definitely not malign, but it is only when economic strength is exercised in the right direction that it becomes the extraordinary experiences we forever marvel at in the northern hemisphere.

The current global challenges-the US and Eurozone Sovereign Debt Crisis, the (almost) balancing effect of emerging markets (such as the BRICS), the Arab Spring and others-provide a unique opportunity for the explosive growth and development of the African mind. Every time a revolution occurred in history, that moment became, for those who understood the times, a point of inflexion in their mental orientation and they seized the opportunity to make great strides; the French Revolution of 1789, the Russian Revolution of 1917, the end of WWII and the events that followed all yield credence to my argument. A new world order will emerge from the current state of things. Lots will be divided - again. We must take the necessary aggressive steps to ensure that in the next decade of prosperity that follows the current global issues, Africa is not again treated as one with a begging bowl.

Let's drop the begging bowl and get to work.

Good evening.

*Forbes, March 2011.

**Bloomberg, September 2011.

***Forbes, September 2011.

Dexter's Desk Live!

Hello everyone,

Welcome to Dexter's Desk! Like every venture that has a beginning, this represents one of the first steps in participating and contributing to Africa's economic expansion and igniting and sustaining the fire of innovation in Africa.

INNOVATE OR PERISH!

The global engine of capitalism is today challenged by problems whose solutions seem to have eluded the human race. But like we've learnt from the premature clamouring for the closure of the US Patent Office at the dawn of the 20th century (as many believed that everything that could ever be invented had already been invented), there's always more work to do, more rivers to cross, more mountains to level and more valleys to raise. We, as Africans, must now begin to contribute in innovative ways to finding solutions to, not just our problems, but to global problems. The global financial crisis is not hurting Africa as much as it is ruining the fortunes of the world's most advanced economies. Unfortunately, for a majority that is something to be merry about. Africa's historical complacency operates under the false pretext that there is (almost) little to lose - since 'he that is down fears no fall'. On maps and charts describing the global financial crisis, there is frequently no allusion to the fate of Africa (except South Africa, of course). But we must be illuminated to know and understand that we've got a lot to lose. We cannot keep reclining in the back-seat every decade as contributory solutions to every economic crisis are proffered by every other continent except Africa (even if those solutions stand upon faulty fundamentals). What is Africa's stake in the global scheme of things? 

We must become INNOVATIVE OR PERISH!

Good evening.