Monthly Archives: July 2011

Perceptions of China and the United States

A guaranteed way to bait someone into a contentious discussion in Nairobi is to ask for their opinion on the value of China’s activities in Africa and how the massive investment in infrastructure and buildings has and will contribute to the development of the continent. Most are quick to dismiss the role of foreign aid in development, accusing the West of possessing ulterior strategic motives and exacerbating the problems by distorting the market for goods and services and propping up corrupt and unaccountable governments. But many also believe that China’s approach to securing land and natural resources in exchange for building roads and hospitals is bad for the countries in the long-run. They cite the poor quality of work and even accuse the Chinese of emptying their prisons and sending their criminals to work on infrastructure projects in exchange for their freedom and a guarantee that they will never return to China. This is hearsay, of course, and may well be false.

Other people – businesspeople and educated Africans – praise the Chinese for investing in Africa. They cite the sheer volume of foreign direct investment and China’s method of holding the money in escrow until it is released for Chinese construction firms to quickly and efficiently complete the projects. When you press these people about China’s “no questions asked” policy when it comes to dealing with autocratic and repressive governments, or the no-bid contracts given to Chinese state-owned construction firms, or the lopsided deals heavily weighted toward China, they understand that you have to take the good with the bad. Africa might be getting a raw deal now, but wait a few decades until the economic returns of investments today give the continent a position of leverage and the tables might just turn, they say. The other day I had drinks with an editor from the Nation Media Group, a Kenyan media conglomerate that publishes the Daily Nation and the East African. After sustaining a drubbing as a stand-in for my country, I asked how she felt about the Chinese. “I think what they’ve done for the continent is remarkable,” she said.

As it turns out, she isn’t the only one who thinks that. In fact, most of Africa and Latin America are pretty happy with China, considering them a move valuable partner in development than the United States. Or maybe these countries just have long memories and haven’t forgotten the fact that the U.S. catalyzed the coup against the first leader of independent Ghana and father of pan-Africanism, Kwame Nkrumah, or propped up Mobutu Sese Seko in the Congo and other dictators during the Cold War, or that the CIA trained military dictators how to overthrow the leftist governments in power, also during the Cold War. Either way, much of the developed world seems to prefer China’s approach to foreign policy, geopolitical relations, and trade to that of the United States.

This chart is from the 2007, so it may be a bit dated. But, given that China’s foreign direct investment in Africa has increased substantially since the data was published, I can’t imagine the opinions have changed much. Below are a few more instructive graphs show the perceptions of China by other countries around the world and other interesting charts.

(H/T Dani Rodrik)

Why is Income Inequality in the U.S at the Highest Level in 90 Years? A Brief History

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Something strange is happening in the United States. Parallel sets of reality exist, disconnected from one another in the discourse over issues like taxes, the tea party, and the debt ceiling. In one reality, there is a very loud and public debate over the growing size of government and the intrusion on the lives of ordinary folks in the form of higher taxes and more restrictions. During the debate, the GOP opposition candidate made a bald, white Ohioan nicknamed “Joe the Plumber” the central point of his campaign. He was supposed to be representative of the millions of Americans who don’t want to see the socialist then-candidate Barack Obama to “spread the wealth around” and turn the country into a latter-day Soviet Russia. In fact, people were so convinced that Obama’s policies would destroy the American dream for hard-working middle America that they formed something called the Tea Party, an ideologically-pure subset of Republicans that are now almost certainly directly responsible for bringing the country to the brink of default on its debt, a first in American history.

The tea party and the middle class is incensed with the Democratic party for bringing the country closer and closer to communism. But, if you look at the chart above, which shows that the income gap is actually widening and has been for some time, exactly the opposite is true in the United States, as the country has become more capitalistic over time.

This is other set of reality, which is supported by statistics: the United States is more unequal than ever. Wealth is more concentrated among the top 1% of earners than it has been since the the 1920’s, at the start of the Great Depression. The Bush-era tax cuts – a move to secure the political backing of the wealthy – disproportionately benefit the top earning segments of the country, yet they are vociferously defended by the Tea Party, a group that, as a generalization, stands to lose more than they will gain by their extension (which Obama did anyways at the end of 2010 in exchange for an extension of unemployment benefits – a move that certainly benefited many of those in the Tea Party that campaign against him). Capital gains are income earned from the sale of an investment – either in the stock market or from the sale of a company via a private equity firm, or some other vehicle. Because capital gains are taxed a lower rate than regular income taxes Warren Buffett, one of the world’s richest men, famously pays less in taxes every year than his secretary. Most recently and perhaps most disturbingly, according to the Pew Research center, the current wealth gap between whites, blacks and Hispanics – which now stands at an appalling 20 to 1, is the highest in history!

But the chart below is the most damning of all. It shows the Gini coefficient – an indicator of income inequality and wealth distribution – by country. As of 2007, the United States, the global economic superpower and country in which nearly half of the population believes the current presidential administration is leading us down the path to socialism, had a Gini coefficient of 45, placing it just ahead of Uruguay, Uganda, and the Philippines, and just behind Cote D’Ivoire, Cameroon, and Iran.

By all accounts, the lower and middle class of America are doing worse than ever before, yet many in these segments have been the most vocal proponents of lower taxes and fiscal austerity during a time where government spending is probably pretty damn important to prevent the country from going into a double-dip recession. So why is this happening? The answer is quite literally complex. In any country – developed or developing – the top of the economic pyramid typically has the most to lose from higher taxes and the least to gain from social programs. Welfare, Medicaid, and other policies are critical to ensure social stability, preventing the disenfranchised from falling too far in desperation and reacting in the form of protest, but the immediate benefits of living in a country where social stability is the norm is not immediately apparent.

So, sometime in the early 2000’s, Karl Rove, Bush 43’s top adviser, solidified a Republican coalition comprised of three main groups: the fiscal conservatives (typically the top 10% of earners), the defense and foreign policy hawks, which were responsible for our multiple forays into nation-building in the Middle East, and the religious right, a large and disciplined voting block that are frequently single-issue voters concerned more with social issues than those of the public purse. The first group supplied the money for political campaigns (including, according to Jane Mayer and others, the “grass roots” Tea Party movement) and received favorable tax policies in return. The second group provided the ideological approach to governance, one of “American exceptionalism” in which it was the burden of the United States to restore order to a world plagued by non-democratic regimes that stood in the way of global dominance (i.e. access to oil). And, lastly, the the third group of evangelicals provided the vast network of foot soldiers motivated by their commitment to God to guarantee the right of life and defend the sanctity of marriage through federal and state legislation.

Signing the Bush tax cuts. Where are all the Tea Partiers?

Now, anyone who has spent 15 minutes reading an article on political philosophy while perched on the john knows that, from an ideological perspective, the amalgamation of positions that make up the platform of this three-pronged Republican party are full of contradictions. For one thing, the fiscal conservatives generally believe in limited government and minimal intrusion by the government on all matters, including the way we citizens choose to live our lives. If it were politically expedient and they did not need the numbers of the religious right, you can bet your bottom dollar that that sect of the Republican party would be pro-marriage, pro-choice, and pro-legalization, if only for economic reasons.

The hawks, which believe that spending as much as the next ten countries combined on defense is essential to the survival of our way or life (or so they say), consider any cuts at all to defense to be anathema. The “Bush Doctrine,” an ideologically-pure interventionist approach to foreign policy, which controversially supported the premise of preventive war (remember weapons of mass destruction in Iraq?), has cost the United States trillions of dollars fighting wars in God-forsaken parts of central Asia and the Middle East, where the people we are trying to help despise us and would like nothing more than to see us leave. The hawks are extraordinarily pro-Israel due to its strategic interest in controlling one of the most volatile regions in the world and guaranteeing that the price of oil – the underlying element of every foreign policy decision ever made – remains favorable to the United States. The following is a direct quote from Dick Cheney, the leader of the hawks within the Bush administration:

The good Lord didn’t see fit to put oil and gas only where there are democratically elected regimes friendly to the United States. Occasionally we have to operate in places where, all things considered, one would not normally choose to go. But, we go where the business is.

Now, if the platform of the Republican party truly reflective conservative political philosophy, the fiscal conservatives would be opposed to unnecessary wars for both economic and geopolitical reasons, while the religious right would be supporting pro-growth domestic economic policies – smart and efficient social programs, school choice, etc. But that isn’t the way it goes.

Remember that Reagan raised taxes 11 times during his two terms.

The religious right is the last angle of the tri-cornered hat of the Republican party. This group tends to be lower-middle class, pious, and socially conservative when it comes to just about everything. Abortion is murder and homosexuality is unnatural and a choice (“Thou shalt not lie with mankind, as with womankind: it is abomination.”). They believe in an original interpretation of the constitution, but they don’t really understand why. They pick and choose policies based on a believe that the separation of church and state is irrelevant if you can imbue the government with Christian values. Because of their socioeconomic status – blue collar, middle America – they tend to be relatively xenophobic and anti-immigration, despite the fact that smart immigration leads to the creation of more of the same types jobs that they are terrified of losing. They stand to lose much from the economic policies of the fiscal conservatives and the foreign policy prescriptions of the hawks, yet these issues are secondary to the social issues that the former two groups support more out of convenience than conviction.

This the construct of the Republican party circa 2007. Then the 2008 election occurred and the Republican nominee, John McCain, a man the religious right could hardly stomach due to to his relatively moderate positions on social issues, realized he would not be able to win the election with his first choice for vice-president, Joe Lieberman, a hawkish, fiscally-conservative democrat from Connecticut, and needed to make a radical attempt to shoot the moon and go for broke. So he chose Sarah Palin, because she was a good-looking, young woman – someone who added diversity to the ticket to complement a black nominee (Republicans are cynical to the end) – and she appealed to the evangelical base of the Republican party, which was McCain’s only ticket to the White House. She was perfect – someone who could be used to draw in the base, but without the intellectual or political clout to influence the policies of the White House once the party was in power. So, in a hastily-planned decision encouraged by Bill Kristol, editor of the Weekly Standard and intellectual figurehead of the Hawks, McCain unveiled Sarah Palin to the world.

Bill Kristol and Sarah Palin

But then something strange happened. Sarah Palin went rogue. She realized that she didn’t need the Republican establishment and jettisoned them in the middle of the campaign as she sought to chart her own political future. After McCain lost and America elected its first black president, the Koch brothers and other fiscal conservatives who felt threatened by a Democrat with a fairly liberal voting record were busy bankrolling a new grass-roots movement designed to oppose the socialist policies of the new president, Barack Obama. Sarah Palin, the new force in American politics, became its figurehead, and, once again, the movement soon realized that it no longer needed to heed the call of its masters (the Republican party establishment) and began to vote its own kind into the government in an effort to shut it down. The 2010 midterm elections saw sweeping victories for the Tea Party, with 80 or so freshman representatives heading to the House to tear the roof off the mothersucker. Those representatives are now at the center of the dangerous game being played with the debt ceiling, a political calamity that could have disastrous effects for years to come.

The impacts will not just be felt by the Tea Partiers themselves, who don’t really understand the complexity of the debt ceiling nor do they realize the implications for future job creation, growth, and employment. It is also going to be felt by the Hawks, who are now flailing wildly as they watch, for the first time since Reagan came to power in 1980, the defense budget becoming threatened. It will also be felt by the fiscal conservatives, who are going watch billions of dollars of their net worth disappear in an instant as the stock market plummets on the news that the United States, the last refuge of the conservative investor, has voted not to raise the debt ceiling, leading the ratings agencies to downgrade our debt and send us flying back into a recession. So, what has happened over the last decade, beginning with the fantasies of Karl Rove for a permanent Republican majority to the present debt ceiling calamity, is that an effort to control and harness the raw numbers of the stupid and convince them to vote against their interests, has backfired. The machine has become self-aware, and it no longer operates at the behest of its master.

I'm guessing he hasn't read Das Kapital

In Jewish folklore, there exists a creature called a Golem, which is a beast that can be activated and used to perform tasks by its master. It provides an instructive metaphor for this phenomenon:

The existence of a golem is sometimes a mixed blessing. Golems are not intelligent, and if commanded to perform a task, they will perform the instructions literally. In many depictions golems are inherently perfectly obedient. In its earliest known modern form, one story has Rabbi Eliyahu of Che?m creating a golem that became enormous and uncooperative. In one version of this story, the rabbi had to resort to trickery to deactivate it, whereupon it crumbled upon its creator and crushed him.

The other metaphor is a little bit more of a stretch, but I still think it works. It comes from the second Batman movie, “The Dark Knight.” In the scene, Alfred, the butler, is explaining to Bruce Wayne the mind of the joker, and why it is so difficult for him and others to understand:

Alfred Pennyworth: A long time ago, I was in Burma, my friends and I were working for the local government. They were trying to buy the loyalty of tribal leaders by bribing them with precious stones. But their caravans were being raided in a forest north of Rangoon by a bandit. So we went looking for the stones. But in six months, we never found anyone who traded with him. One day I saw a child playing with a ruby the size of a tangerine. The bandit had been throwing them away.
Bruce Wayne: Then why steal them?
Alfred Pennyworth: Because he thought it was good sport. Because some men aren’t looking for anything logical, like money. They can’t be bought, bullied, reasoned or negotiated with. Some men just want to watch the world burn.

The lead-in to this story begins with Alfred explaining how Batman pushed the criminals of Gotham City into a corner, leading them to turn to a man they didn’t fully understand – the Joker. The same principle holds true for the Republican establishment.

Why so serious?

The Republican party has created a Golem in the Tea Party, which has now become too strong and unwieldy for them to control. They are electing their own politicians – specifically, Michelle Bachmann, Rick Santorum, and Sarah Palin, to name a few – and developing their own platforms. Their xenophobia leads them to be increasingly isolationist when it comes to foreign policy, to the horror of the neoconservative hawks that ran amok during the Bush administration. They are nihilistic when it comes for fiscal policy, leaving themselves open to influence from politicians who want to exploit their misunderstanding of the debt ceiling to advance their own agendas, at the expense of the country. The permanent Republican coalition envisioned by Karl Rove has fragmented, as the beast of burden is no longer content to carry the weight and has learned to assert his political voice.

This all brings us back to why the United States is in its current predicament, and why the two realities highlighted at the beginning of this post exist. It is because the people who have controlled the country for the last 10 years (see the slope of the graph since 2000) used the voting power of the uneducated (politically and economically) masses to advance an agenda of low taxes on the rich that increases income inequality to unprecedented levels and simultaneously turned the budget surplus created by Bill Clinton into one of the largest deficits in history, in no small part due to the hawks, which led us into Iraq after Afghanistan and funded both wars with debt from China – something on the order of several trillion dollars.

Well, now the Golem has woken up after the beast that the hawks and fiscal conservatives didn’t fully understand has turned on them. And the result? Calamity for everyone.

There Is a Famine in East Africa Right Now

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The official definition of a famine:

More than 30% of children must be suffering from acute malnutrition

Two adults or four children must be dying of hunger each day for every group of 10,000 people

The population must have access to far below 2,100 kilocalories of food per day

This how the UN now characterizes the worst drought in Somalia in 50 years. When the UN declares a famine in a country of 3.7 million people, that means that either 1,200 children or 600 adults are dying of hunger. Every single day.

Two weeks ago, 140 million people either watched or listened to the verdict of the Casey Anthony trial. Enraged, people protested. Last week, people watched Rupert Murdoch testify before the British Parliament as he tried to defend his company against allegations of cell phone hacking. And right now, people are flooding to the Dadaab refugee camp in Northern Kenya in unprecedented numbers, as mothers come from Somalia, Uganda, and Kenya in search of food, water, and medical care for themselves and their children. If they haven’t perished already on the long journey to Dadaab, malnourished children are succumbing to disease and dying from starvation. The latter has not received the coverage it warrants, as the Guardian explains:

This is a children’s famine, and it shines a light into the empty places of our conscience.

Arot Katikov is the opposite of a thriving western baby. Looking much younger than he is, the boy can’t stop crying and vomiting, and he has diarrhoea. On arrival at Lodwar district hospital he is discovered to be suffering from malnutrition and one of its complications, tuberculosis. When Setina, aged 10 months, turns up at the same place, she faints with hunger. Her mother, Ngiupe, grabbed Setina and her brother and ran from their farm near the Ugandan border when Pokot raiders came and stole their cattle and killed their neighbours. Setina’s three-year-old brother died on the way to the hospital, and she is now lying in her mother’s arms, too weak to lift her head, her eyes glazing over as her mother rocks her to sleep or oblivion.

Further to the south, Somalia is suffering its worst drought in 50 years. This is the children’s famine. Running from conflict, and sick with hunger and thirst, people are fleeing to the borders or the aid camps, many children dying on the way or too weak to survive once they get there. In some areas one in three children is seriously malnourished and at severe risk of death. In October the rains will come, most likely bringing epidemics of malaria and measles. Some of the children just lie down and wait for death, which is likely; or mercy, which is elsewhere.

This week, while the famine was happening, every media outlet in the western world devoted itself to the circus surrounding a gang of communications reprobates. Public outrage over News International is justified, of course, and the abuse suffered by the family of a murdered girl cannot go unheeded. There can be no hierarchy of moral outrages, and the wrong done to Milly Dowler and her family and dozens of other victims should be its own category. But must it chase the possible death of 500,000 children off the front pages? We don’t have to find the Murdochs acceptable in order to find the famine intolerable, but it is no category error to think of them at the same time.

How is it possible that this can happen in 2011? To say that it is a travesty that the world has collectively ignored this crisis would be cliché, since it is not a departure from the norm. But I am not sure how else to describe it.

Donate to UNICEF: www.unicef.org.uk

Photo credit: Foreign Policy magazine

A Toaster in Every Kitchen: Growing Demand in Developing Nations

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The chart above is a bit complicated, but remarkably interesting. For a good explanation, read Felix Salmon. For a below-average explanation of questionable veracity, keep reading. This chart displays the ratio of two ratios. The numerator is the P/E (price to earnings) ratio of all the companies on a major U.S. technology stock index, and the denominator is the p/e ratio of all the companies on a major U.S. industrial stock index. Simply defined, a P/E ratio is the market value of a share over the earnings per share. When a company has a high P/E, it means that the market views the company as having greater potential than what is reflected by its current profits, and investors are willing to pay more for less income, ostensibly because they believe that the company will make more money in the future. During the tech bubble in 2000, P/E ratios shot through the roof as companies that were not yet profitable (like Pets.com) had high valuations. So, when ratio of technology P/E to industrial P/E is less than one, it means that the market values industrial companies (manufacturers of cars, appliances, electronics, etc.) more than technology companies.

For the first time since 1996, as the chart shows, that ratio is less than one. In fact, the ratio is now at its lowest point in history. What is going on? After all, if you turn to the Marketplace section of the Wall Street Journal (if you have access, that is), you are more likely to read about Facebook’s $100 billion valuation (!) or Groupon’s pending IPO than you are about sales of GE washing machines. But if this chart is an accurate reflection of the truth, then the communal conscience of the market believes that the invisible hand is going to push sales of Cuisinarts and Hoover vacuums to levels beyond the sales of whatever snake oil the latest tech stocks are peddling. This all begs the question: in the wake of a financial meltdown and the worst recession of the last eight decades, where is all that demand coming from?

Matt Yglesias thinks he has an answer to that question, which I will quote in full:

What this says is that markets are more pessimistic about the growth prospects for high-tech firms than for industrial ones. That actually seems quite reasonable to me. The thing about high-tech firms is that the stuff they make tends to be relatively cheap. A MacBook Air is a steal compared to a new car, and a used computer can be found for almost nothing. Google is free. If you imagine a world in which the bulk of growth is going to occur in large developing nations. So imagine hundreds of millions of Chinese, Indians, Brazilians, etc. achieving something resembling the lifestyle of lower-income people in today’s rich countries. You’re imagining a household acquiring a quantity of cars, washing machines, refrigerators, toasters, vacuum cleaners, etc. whose dollar value vastly exceeds the price of its total quantity of computers, smartphones, and software.

In America, for a long time now we’ve been in a kind of major appliance funk. People don’t get richer and say, “Now I’m going to own seven toasters.” People buy these kind of low-tech goods, but it’s driven by population growth and depreciation. So the high-tech sector — new inventions — has been the high-growth sector. But in a world of catch-up growth you don’t need to be “high-tech” to find new customers. There are lots of people around the world who don’t own a blender.

Through its focused efforts to turn China into the world’s manufacturer, the Chinese government has pulled hundreds of millions of its people out of poverty. Companies like Tata Motors in India and BYD Auto in China are growing gangbusters on the backs of a burgeoning global middle class, a product of what Fareed Zakaria calls “the rise of the rest.” Say what you will about inequalities of economic liberalization and free trade, but the miracle of globalization, as someone described it to me in a conversation last night, has lifted millions of people out of poverty across the world and, moving a step higher on the ladder, created a middle class with the same appetite for convenience as your average Jack and Diane in Illinois. Higher disposable income in the hands of a newly-empowered consumer class means toaster ovens, more stoves, more irons, mores refrigerators (I am scanning my apartment in Nairobi for inspiration, but you get the point). Demand for cars in Asia, Africa, and Latin America has grown tremendously, to the benefit of the aforementioned manufacturers. And that is just on the direct consumer level. One could extrapolate further and say that the growing demand for meat and dairy products means more freezers and industrial chilling plants, for example. Manufacturers in the United States and, increasingly, in the developing world will need to scale up production to meet the tidal wave of emerging market demand. And, as Yglesias points out, smart investors are beginning to recognize that potential.

There are two interesting points to be made here. The first is that the developing world is developing fast, and the bulk of demand in the coming decades is clearly going to come from emerging economies that are savvy enough to reap the benefits of globalization. The second point stems from a conversation I had with some friends last night at a swanky outdoor lounge bar in Nairobi surrounded by the TGIF Kenyan after-work crowd, all dressed to the nines and enjoying a mixed drink and calamari appetizer before dinner. It is this: the United States and Europe do not really appreciate just how fast the rest of the world is growing. The chart on the right shows year-over-year growth in retail sales. The developing world has averaged 10% a year, with hardly a blip from the financial crisis. It is starting from a smaller base, but such tremendous growth rates cannot be dismissed as poor countries simply transitioning to lower-middle income status. As a result of globalization, the tortoise isn’t just catching up – it is becoming the hare.

The United States still has the edge in many areas. Our post-secondary education system is the best in the world, and we have a culture of innovation, entrepreneurship, and risk-taking that is still producing the largest companies on earth (Google, Facebook, Apple, etc.). Yet our policies suggest that, as a nation, we have a mixture of either ignorance, willful blindness, or arrogance that leads us to collectively believe that we are invincible. But, as the European Union (actually, just Germany and France) struggles to pull itself together as one country after another risks default (the P.I.G.S – Portugal, Italy, Greece, Spain), and the dysfunctional government of the United States threatens to actively cause the country to default on its debt, the rest of the world continues to grow. And in countries like China, India, and Brazil, where the people have less to lose and more to gain from economic development, the hunger that drives the economic engine mirrors that of the United States at the turn of the 20th century, and in Europe before that.

But this is the nature of things, as loyal followers of Develop Economies have heard me say in the past. Countries don’t develop through aid. Fewer people die from starvation and water-borne diseases because of aid, but economies do not grow on the backs of donor dollars. They grow because of investment in human capital and in manufacturing. China became the world’s manufacturer, India its hub for business process outsourcing (BPO), and Brazil its provider of natural resources. And now these three countries are reaping the benefits of hard work and discipline, while the West remains mired in unnecessary wars and struggles to uphold a standard of living it can no longer afford.

Forbes Magazine describes the magnitude of retail sales growth and the mushrooming of consumer demand in developing countries:

Retail is exploding in developing markets and those markets have become the driving forces fueling global growth in retail sales and space. Over the 10-year history of A. T. Kearney’s Global Retail Development Index (GRDI), an annual research project designed to help global retailers prioritize which countries to enter, the population of developing markets increased 11%, while retail sales per capita has almost doubled, retail space has more than tripled and Internet access grew by nearly 500%.

Ten days ago, Pew Global Research released a report which shows that the world now sees China overtaking the United States as a global superpower. Meanwhile, back in the New World, we are exactly one week away from the biggest man-made economic calamity in the nation’s history (the secondary market prediction at Intrade shows a 29.9% chance of the U.S. increasing the debt ceiling by July 31st). The rest of world is looking at the United States with a mixture of disbelief and smug satisfaction as the world’s most hubristic and sanctimonious nation undergoes a very public, very childish debate about whether not to jump off a cliff. China, which owns a not-insignificant percentage of our national debt, is telling us to shape up and deal with our problems. It used to be the other way around.

So, while the Western world struggles with its problem of unemployment, stagnant growth, and a long period of detox from debt and irrational exuberance, the developing world continues to lift its people out of poverty and expand its middle class. Industrial demand will continue to increase as the appetite for material goods grows among the newly-enfranchised. For an American insulated the rest of the world, charts like the one above defy logic and reason. For a citizen of the world, attuned to the tremendous growth and potential of emerging economies, this chart makes a whole lot of sense.

Technology Evolution and Revolution in Africa

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Chances are you have never heard of the company Huawei. Founded in 1988, this somewhat secretive Chinese company has become the fourth largest telecoms equipment and service company in the world, just a few billion in revenue behind Nokia. Huawei, with Chinese handset manufacturer ZTE, have prime access to China’s $59 billion 3G market that continues to grow exponentially. But, as with other Chinese firms, Huawei’s global aspirations in the 1990’s took them to Africa to build the growing telecom infrastructure. The industry, led by Bharti Airtel and other innovators determined to tap into the raw market potential of the African consumer, grew in part due to the physical infrastructure built during this period. Judging from the fierce price wars raging across continent, the investment turned out to be a smart and profitable venture.

Huawei has built up much of the 2G and 3G infrastructure in East, West, and Central Africa, and supplies the hardware for most of the USB modems in Africa. Now, it has developed a Android smartphone called the IDEOS, which is selling out of stores in Kenya. At less than $100, including $25 of free airtime, it is the cheapest smartphone on the market. This is in a country where 40% of the country lives on less than $2 a day, yet the cellphone penetration is now at 63% majority of the money is moved by MPESA, the mobile money service run by Safaricom, the biggest telecom in Africa.

For the last few weeks, I have been working out of shared working space for software developers and entrepreneurs called the iHub. It is the beating heart of the Nairobi tech scene; a place where young smart developers, engineers, and business development people come together to collaborate and raise the bar. Last week I had to move from where I was working because the “Open Data Evangelist” from the World Bank came to the iHub to give an impromptu pitch to the Kenyan software developers to develop applications to keep tabs on government spending and corruption. To tap into the tech scene of Nairobi, people come to the iHub.

In this environment, surrounded by Android developers, it would’t be unreasonable to assume that the IDEOS phone is going to revolutionize Kenya, if not all of Africa. A Google Android phone with 3G wireless internet that is affordable for the typical African consumer will do more for productivity, communication, information transfer than any other technology innovation on the market today. And, given the rabid levels of competition within the telecom sector in Africa, the price point of the IDEOS phone is the high mark – it can and will come down as more and more companies enter the fray.

The IDEOS phone has been very successful for several reasons:

The $100 Android phone has likely been a hit in the East African country due to the following factors:

Its affordability made it within reach of Kenyans, giving them the option of having a cost effective phone with premium features. The phone runs on Android 2.2 with a touch screen, has up to 16GB storage and has the ability to be transformed into a 3G Wi-Fi hostpot that can connect up to 8 devices. Currently, Kenyans have access to all these features and more for a hundred dollars or less.

In addition, its strategic partnership with leading Kenyan telecommunications firm, Safaricom as the phone’s main distributor and marketer also likely helped facilitate its fast adoption.

At present, most cellular phone users in Kenya use feature and low end phones. IDEOS’ fast adoption rate in the country could hopefully boost smart phone adoption rates by making it accessible to Kenyans who had previously been priced out of the market.

These reasons make a lot of sense, as they would in any free and developed market. But it is important to remember this is Africa. C.K. Prahalad, the famous management thinker, wrote Fortune at the Bottom of the Pyramid, which discussed the incredible market potential offered by the poor and low-income classes in the developing world. His book and subsequent work drew attention to the vast opportunities that exist in countries with a low per-capita GDP but a high population levels, particularly when they are concentrated in urban slums, as in Bangladesh, India, Nigeria, or Kenya. At the time of the book’s release in 2004, mobile penetration in Africa was less than 10%, and a cell phone might cost several hundred dollars, before even buying a plan. Data was out of the question, of course, as it was for the rest of the world.

But mobile communications took off, and did so in the face of some most credible prognosticators who thought that any cell phone access, much less cheap and ubiquitous continent-wide coverage, was a fantasy. In fact, Prahalad, the “base of the pyramid” visionary who saw profit potential where others saw a basketcase, had this to say about telecommunications in Africa only two years earlier in an article titled “Serving the World’s Poor Profitably” from the September 2002 edition Harvard Business Review:

It’s true that some services simply cannot be offered at a low-enough cost to be profitable, at least not with traditional technologies or business models. Most mobile telecommunications providers, for example, cannot yet profitably operate their networks at affordable prices in the developing world.

That article is almost exactly ten years old, written in the wake of the Internet bubble and at a time when Africa countries were recovering from deadly civil wars in Rwanda, Sierra Leone, and Liberia. If Mr. Prahalad were alive today, I am sure he would appreciate that, only a decade after he expressed doubt about an African telecom sector, a Chinese manufacturer of telecommunications equipment had partnered with a technology giant from Silicon Valley to develop a phone that offers high-speed internet access outside the urban centers at a price point the middle class can afford.

But this is the story of Africa, or, at the very least, Nairobi and the other burgeoning urban centers around the continent. I am a biologist by academic background (though somehow I ended up across the world as a business analyst for a chain of schools). Stephen Jay Gould, the legendary evolutionary biologist, developed a theory called “punctuated equilibrium,” which maintains that evolutionary change occurs rapidly, in geologic terms (i.e. a million years is short), followed by long periods of of stasis, or equilibrium. On a macro-scale, the theory explains why evolution of the organism occurs suddenly (the movement from water to land, for example), as opposed to in a progressive, linear fashion. Applied in a cultural and social context, the theory might explain something like the technology and mobile revolution in Africa, with the caveat that the period of equilibrium is in the past.

For decades in Africa, communication was slow or non-existent, information was tightly controlled by autocratic dictators, which kept their populations in the dark about the deep corruption and injustice perpetrated on their watch. Most of the people were poor, making it nearly impossible to provide basic human services, like sanitation and adequate health care, or profitably provide access to financial services. Remember that C.K. Prahalad’s concept of “fortune at the bottom of the pyramid” was considered to be breakthrough innovative thinking by all but a prescient multi-nationals and sovereign investors like China. And that was in 2004! Now, the continent is wired. Everyone has access to financial services through M-PESA and the other mobile money providers. Information is accessible through basic mobile phones and the next generation of super-cheap smartphones that are likely to become ubiquitous in the next five or ten years. A continent that once had a dearth of information transfer will soon have instant access to Google, Wikipedia, Facebook, and Twitter. The revolutions in Egypt and Tunisia wouldn’t have been possible without mobile phones and the Internet. Now, Kenya’s government – by most indicators one of the most corrupt in the world – has posted all of its data online for any knowledge-hungry developer to tap into. E-commerce, mobile commerce, and app development are growing exponentially. Africa is now home to some of the fastest-growing economies in the world.

It is this biologist’s opinion that Africa is moving from a period of equilibrium toward an evolutionary jump, with technology as the catalyst for systemic change. The paradigm has shifted, and the deep and broad telecom infrastructure has laid the groundwork for a revolution. Africa’s technological evolutionary paradigm will be different. It skipped the land line and went straight to the mobile phone. It skipped the desktop computer and adopted the laptop wholesale instead. The community bank became irrelevant with the creation of branchless banking in Kenya and other countries through Africa. In our modern world where cartography seems about as relevant as sanskrit or alchemy, much of the continent is not even mapped. Fortunately, Google MapMaker allows residents to map their own communities, effectively crowdsourcing a massive undertaking very simply using technology. And just two weeks ago, Huawei, the Chinese manufacturer that triggered the smartphone revolution, released the IDEOS tablet PC, only a year after the release of the iPad. The evolution here moves quickly, as it builds on existing innovations from the developed world and adapts the technology to fit the African context, which is, in many ways, unique.

I bought the Huawei IDEOS phone after a week in Kenya. I have never owned a smartphone, and wanted to understand how this phone that everyone is talking about is going to change the game. I went to three stores – it was sold out at the first two – before I could buy one. It is fast, it easy-to-use, and the law of technology pricing says that the inevitable trajectory points down and down. Being here feels like being in ground zero at the start of something big, and, insha’allah, I will continue to chronicle the tech-driven transformation that will define Africa for the next decade.

The China-Africa Trade Boom

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The following is a guest post by Joseph Cox, an MA candidate at the Georgetown Public Policy Institute and managing editor of the The Inductive, a blog about U.S. economic and foreign policy.

When polled, Americans always cite foreign aid as the budget item most in need of a good hatcheting, yet, there is also a deep suspicion of Chinese investment in Africa.

The fact is that Chinese investment in Africa dwarfs U.S. aid. The Chinese have over $100 billion in trade with Africa a year(admitted, not the same thing as direct foreign investment), while the U.S. musters about $4.5 billion in aid.

Source: The Economist

This aid is not without controversy, especially on the ground. The Financial Times (warning gated) recently reported on Zambian miners upset at low wages paid by their Chinese bosses. However, the end of the article gave the game away:

Despite simmering anger over October’s shooting and labour conditions, workers do not want Collum Coal Mine to close. In a country where two-thirds of the population lives on less than $1 a day, a poorly paid job is better than none at all.

“We’re not happy with the Chinese investment,” says Bernard Dolopo, local representative of the Mineworkers’ Union of Zambia. “But unfortunately we don’t have better investors than the Chinese.”

I have no doubt that working for a Chinese owned mine in Zambia is a miserable experience, but the fact that people are willing to work in those mines anyway demonstrates their benefit. Likewise, I can understand why Africans are skeptical of Chinese immigration (its not like people from other countries have ever exploited Africans before). But a decade of 5% GDP growth is a pretty powerful statement that something is working.

I think there is sustainability in this model since the Chinese also directly benefit, and the Africans can negotiate for a better deal later.

A basic truth in investing is that returns and risk are directly related, so the more risk the more return. Otherwise, the available arbitrage would attract investors and drive down the return. Africa has been dramatically underdeveloped for years leading to massive investment opportunities with huge political risks. Chinese government run companies are able to reap large rewards and mitigate the risk by (1) not destablizing incumbant governments no matter how illegitimate, it is all ice cream and no spinach for who ever is running the country when the Chinese come in and (2) if there was regime change, the Chinese would just pay the new person to keep the business rolling.

For all the talk from the west about how the Chinese should pressure the Africans on political goals, I think the Chinese have proven to be good examples on other fronts. The Chinese government’s philosophy is that growth brings legitimacy and that it is possible to create the economic prerequisites for growth (property rights, economic opportunity, infrastructure, working markets, investment) without losing political control. So, and this is just speculation, even if the Chinese aren’t encouraging political development I think they are (at least implicitly) encouraging growth. If you look at growth in the developing world over the last decade it has been very strong. I think this is basically because a lot of poor countries saw what China was doing and copied it. And the Chinese were happy to help them in exchange for access to resources.

So bravo China, here’s to a country with an economic strategy!

Caylee’s Law and Irrational Legislation

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Georgia O'Keefe meets The Economist

Casey Anthony, the young mother accused of killing her two year-old daughter Caylee, was found not guilty of first-degree murder. The world, it seems, is very angry that a young girl has been denied justice. Unfortunately, the reaction will be similar to other injustices involving children or sex (in the United States): a radical, emotionally-driven push to ratchet up the penalties for a broader set of crimes and put in place irrational safeguards to ensure that such injustices never happen again. At times like these, it is best to do what Hemingway did and just put the pencil down, head to the bar for a stiff drink, and don’t think about it again until tomorrow.

This, unfortunately, is not the way the world works. A crisis is a terrible thing to waste, and the politicians are wasting no time in scoring points by introducing something called Caylee’s Law. The crank of criminal penalties is self-locking, moving forward, but never moving back. It is easy to get a law on the books, particularly when it is named after a victim of highly public and terrible crime. The quickest way out of office for a politician is to be labeled as “soft on crime” (the tagline for Caylee’s Law is “a law to protect children” – are you opposed to protecting children, Mr. Senator?) In contrast, a very easy way to gain votes is to appeal to people’s insecurities, foremost of which is fear of being victimized or, worse, having their child become the victim of a crime. So laws are passed and put on the books in the heat of the moment and, regardless of whether they do more harm than good, are there to stay.

Sex offender laws are the most vulnerable to irrational expansion. The direction is always toward the most Draconian, as an Economist article from 2009 points out:

Sex-offender registries are popular. Rape and child molestation are terrible crimes that can traumatise their victims for life. All parents want to protect their children from sexual predators, so politicians can nearly always win votes by promising curbs on them. Those who object can be called soft on child-molesters, a label most politicians would rather avoid. This creates a ratchet effect. Every lawmaker who wants to sound tough on sex offenders has to propose a law tougher than the one enacted by the last politician who wanted to sound tough on sex offenders.

So laws get harsher and harsher. But that does not necessarily mean they get better. If there are thousands of offenders on a registry, it is harder to keep track of the most dangerous ones. Budgets are tight. Georgia’s sheriffs complain that they have been given no extra money or manpower to help them keep the huge and swelling sex-offenders’ registry up to date or to police its confusing mass of rules. Terry Norris of the Georgia Sheriffs’ Association cites a man who was convicted of statutory rape two decades ago for having consensual sex with his high-school sweetheart, to whom he is now married. “It doesn’t make it right, but it doesn’t make him a threat to anybody,” says Mr Norris. “We spend the same amount of time on that guy as on someone who’s done something heinous.”

The cycle continues this way as laws are haphazardly placed on the books in the wake of trials like this one. Four states are now considering something called “Caylee’s Law,” which will make it a felony to fail to report your child missing for more 24 hours. This is because Casey, the mother of two year-old Caylee, failed to report her missing child for a month and, instead, participated in a “hard-body contest” at a bar. Here is the description:

Wesselhoft, a Republican, plans to propose a law at the start of Oklahoma’s legislative session in 2012 that would make it a felony for a parent of guardian not to notify authorities within 24 hours of a child’s death. He also plans to propose a requirement for parents to notify runaways under the age of 12 in a timely manner, although he admits having a time table for that is “more difficult because you don’t know when the clock starts,” he said.

“It probably won’t be a deterrent to crime, but at least it’s something the prosecutors can charge someone with who’s violated the law,” he said. “If this law was in Florida, Casey would have some more jail time to stand.”

It is upsetting when justice is not done. But creating a law so that people who are found not guilty of crimes for which we wish they had been convicted can “have some more jail time to stand” strikes me as counterproductive at best and damaging to society at worst. The purpose of penalties is to deter criminals. The reason a person cannot get the death penalty for rape (despite attempts to change the laws after sensational trials – i.e. “Jessica’s Law”) is that it creates an incentive for murder. If the penalty for rape and murder are the same, it makes perfect sense to then kill the person and hide the evidence, since the penalty will be no different. The penalty is supposed to deter the action – that’s what penalties do. So, ten years from now, when everyone has forgotten the name “Caylee Anthony,” her name will live on as part of a law that may well see another young mother who let her child attend a sleepover and failed to call the police when she didn’t return go to jail on felony charges.

This is a hypothetical. But too often in the heat of the moment we are collectively irrational, exposing the legal system designed to protect our liberties to radical change at the hands of opportunistic politicians. It is important to consider the ramifications, lest we put a sodomy law on the books (wait, we already did that).

Anyways, 142 million people watched the Casey Anthony verdict or listened to it on the radio. Meanwhile, 200 migrants from Sudan died in the Gulf of Aden this week when their boat caught fire on the way to Yemen, and the latest news from North Korea is that starving people are forced eat grass (again). These, of course, are just two of the many terrible injustices happening in the world right now. There are others, to be sure, though these two were at the top of my Google Reader.

Yesterday I wrote about the need for marketing of injustice in the developing world. I talked about the short attention-span of the average consumer of news in the United States and explained why I thought the critics of Nicholas Kristof who accuse him of patronizing his readers with white protagonists and “bridge characters” were wrong. Until people start caring about the issue Kristof writes about or “Blood Diamond” dramatizes in the same way that they care about the Casey Anthony verdict, I will hold my ground.

Films about Africa: “Blood Diamond”

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I watched the film “Blood Diamond” for the first time the other day. For those who have not seen it, the movie is graphic, placing the horror of armed conflict in Africa on full display. The director does not seem to pull any punches in terms of violence, choosing to show child soldiers doing drugs and killing women and other children. The main storyline, however, tracks the odyssey of Danny Archer, a white mercenary from Rhodesia played by Leonardo DiCaprio, as he and his guide, a Sierra Leonean fisherman named Solomon Vandy (Djimon Hounsou), whose son has been kidnapped by the RUF, and forced to take up arms, as they venture deep into the rebel-controlled bush to search for a diamond worth millions of dollars. The cynical opportunist Archer ultimately finds redemption with the help and support of an American journalist, Jennifer Connelly. In the end, Van de Kaap, a thinly-veiled reference to the DeBeers family I’m sure, is exposed for purchasing conflict diamonds, and the world opens its eyes to the terrible war in Sierra Leone.

That is where the movie ends. One would like to see life imitate art and see a spike in Google searches for the Kimberley Process or “why am I supposed to spend three months’ salary on a diamond?” (The answer, according to the Inductive, has something to do with DeBeers marketing). At the very least, the film raises awareness about the civil war in Sierra Leone. For those unaware, here is a brief primer:

How could this happen?

The film “Blood Diamond” takes us back to war-ravaged Sierra Leone in the late 1990s when that country’s diamonds were used to finance rebel groups who fought against legitimate governments. This illicit diamond trade devastated the country, and these traded diamonds consequently were named “blood diamonds.” This war was infamous for its brutality, especially for the purposeful maiming of children, which led to panic in the population and to their flight from Sierra Leone. In such wars none of us can remain bystanders.

This film, set in Sierra Leone, showed that action can be undertaken to end genocide or war, as in Darfur, and revealed the way to eliminate financing for the conflict. During the war in Sierra Leone the Revolutionary United Front (RUF) grew from a band of 400 to an army of thousands. In the end, the civil war in Sierra Leone killed more than 50,000 people, displaced over one-third of the country’s 4.5 million people, and drove more than 500,000 to neighboring countries.

Some reviewers complain that the movie exploits the horrors of war in Africa and fails to tease out the nuance of the conflict. Others say that the film is typical in that it follows two white protagonists, using a love story and a tale of redemption as a plot device, while relegating the third lead, the poor fisherman from Sierra Leone, in more of a supporting role.

That is Naomi Campbell AKA a horrible person, next to Charles Taylor, the dictator who caused the war.

The same criticisms are often leveled at Nicholas Kristof, the New York Times columnist who has made it his life’s work to bring injustice in the developing world to the conscious of the mainstream. In his latest piece for the NYT, titled “An African Adventure, and a Revelation,” he brings two Americans – a medical student from Atlanta and a teacher from a Catholic school in Newark – to Africa to witness the realities of poverty with their own eyes. They travel to Mali, Burkina Faso, and other countries that almost never grace the pages of New York Times except when they are in reference to drug trafficking, civil war, corruption, or violence. And because he uses two typical Americans as “bridge characters,” people are able to relate the experience in a more meaningful way and, instead of immediately turning the page, read the article and learn something about countries in West Africa they have probably never thought about in the past.

People criticize Kristof for using so-called “bridge characters,” saying that it is patronizing to his readers to assume that they do not care or cannot relate to the experiences of the Africans on the ground that are doing the real work. They see this as another example of injustice. I have written about this several times on this blog, and I both understand and support what Kristof is trying to do.

The reality is that he is right – the majority of his readers probably would not read his articles if they were not written in the way he writes. The people who criticize him are, in general, people who already know, understand, and care about the issues he writes about. So it makes sense for them to assume he is being patronizing. But what they don’t understand is that they are not the readers he is targeting. Instead, his target is the woman from Florida who has never heard of the countries he writes about and, as a result of his stories, becomes incensed at the level of injustice that exists.

I felt the same way when watching this movie. I have never read much about the conflict in Sierra Leone. After watching “Blood Diamond,” I wanted to learn more. I wanted to know how achieving that level of chaos and dehumanization is possible. I am sure there are many documentaries that have covered the issue in detail. But because “Blood Diamond” was a blockbuster hit, that was my entry into understanding a complex and crucial time in West Africa.

There is no doubt that the movie achieves its goal in raising awareness. The question becomes whether awareness ultimately translates into action. In a review from New York magazine, film critic and frequent guest on Fresh Air with Teri Gross, praises the acting of Leonardo DiCaprio, saying that his performance makes the heavy subject matter a little bit lighter. But this dynamic brings with it a contradiction:

[DiCaprio’s] lightness here keeps Blood Diamond from getting weighed down by the horror of its subject. Whether it should be weighed down—that’s another matter. As I watched the senseless brutality, the shooting of mothers and children as they fled, I was torn up, divided. I thought, Why do I need to see this? Then I thought, This happened in Sierra Leone and is still happening in parts of Africa—I need to see it. Then I thought, If I need to see it, I need to see more than a sneering villain with an eye patch. I need to understand how this man—and the people under him—become the monsters they are. That’s what you don’t get in Blood Diamond, what you don’t get in even the best melodrama: insight. After we stop buying blood diamonds from conflict zones, what then?

Sadly, it is true. People need to take the next step themselves and become active in making sure that the roots of injustice are addressed. Unfortunately, I think this will take time. But, in the meantime, I think more films like “Blood Diamond” are a good thing.

The bridge characters at work

Saving as a Group

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The following is a guest post by Gemma North, an associate with Saving for Change, a community finance program run by Oxfam America.

?In 2009, I worked for a microfinance institution called CREDIT in Cambodia. On a field visit, I met a borrower who sold clothing and knick knacks to tourists visiting the nearby Angkor temple complex. She explained that her loan had helped her to expand her business and, as a result, she was planning on taking her kids out of school to work with her to continue increasing sales. Sometimes the effects of providing the outcomes are not always ideal. Microfinance expands the choices of the poor, and those choices are entirely their own. Perhaps having the borrowers’ children involved in the business made the most sense for the household at the time.

The impacts of microfinance vary, but clearly a market for credit exists for the poor. But there is also a need for savings mechanisms among the unbanked and under-banked (both internationally and domestically). To generalize, in the developing world, the rural and urban poor have few formal outlets for savings. They save money by investing in assets (livestock, jewelry, etc.), storing cash at home, organizing a savings club, keeping it with a “money guard” (a person who holds the money, usually free of charge), or a relative. These savings are susceptible to theft, loss due to natural disaster (from fire or flood, for example), or demanding family members. Perhaps the greatest temptation is to spend money on non-essential purchases.

Challenges in other settings can be cultural or psychological: individuals come from countries where there is a general distrust of banks and financial institutions; or, because of their low-earnings, individuals do not always realize they may have some discretionary income that can be put aside. Because the barriers to saving are numerous, there is an opportunity in providing a secure place for people to save.

Saving for Change, a microsavings organization started by a former microfinance practitioner, offers a solution to this problem. The program, which is being implemented in Mali, Cambodia, El Salvador and Senegal, helps the rural poor to form and operate savings groups and provides training on financial literacy and basic accounting. The groups elect their own officers; create participation guidelines and bylaws; and determine their weekly savings amount, loan interest rate and record-keeping mechanisms. The program is adaptive – for example, some non-literate groups have devised an accurate oral accounting system based on group memory and counting sticks or rocks). Participants in the program are able to save enough to purchase inventory for a store, pay for school fees, purchase seeds for planting or a cow for labor, or buy a plot of land to build a house. If a member needs a large sum of money quickly, they can borrow it from the group’s fund. By repaying the loan and added interest, they contribute to the growth of the communal savings, which is disbursed to the group members at the end of the saving cycle (which can be timed to coincide with a period when all the group members need more money, such as when food is scarce or before a major festival).

There are many advantages to this system. A communal savings organization based on mutual trust allows people to overcome the barriers to saving. Women are able to accumulate funds independently of their spouse. The model is similar to traditional savings groups (such as tontines), building on familiar and existing systems, which increases the speed and ease of uptake. Expansion often occurs due to word-of-mouth, with groups forming spontaneously or with help from existing groups.

In order to expand the program, implementing organizations train volunteers to start new groups in other communities. At an expense of $20 per client, the per-user cost is a fraction of what microfinance institutions spend to offer similar services. As a result, Saving for Change and similar models are able to reach individuals that are underserved, if not completely neglected by MFIs. More often than not, participants in savings groups, the poorest of the poor, live in areas that are too costly for MFIs to reach.

Providing credit is important, but providing a mechanism for saving is essential for achieving financial independence. When individuals save on a regular basis, they are able to build up a large sum allowing them to cover larger expenses or make investments (such as a daughter’s wedding or fertilizer for the upcoming season), or create a cushion against catastrophic events, helping them to maintain and build on their existing assets. Mechanisms to promote saving–communal loan funds or savings groups–can help expand financial self-sufficiency in less-served areas among the poor.