Solving Africa's Problems--PERMANENTLY

Roben Farzad's (BusinessWeek columnist) article titled Can Greed Save Africa?, reignited debate on the 'Aid to Africa' imbroglio, and, intensified discourse on the topic of aid-effectiveness.

He quoted the following interesting statistics (from a study conducted by William R. Easterly, an economics professor at New York University):

• Between 1960 and 2007 (a period of 47 yrs), Africa received a 'total of USD625 billion in foreign aid'. This translates to an aid disbursement of approximately USD247 million per country per year.
• Between 1976 to 2000 (a period of 24 years), 'Africa's share of global trade dropped to 1%, from an already negligible 3%'. This shows that Africa is becoming more of a net importer of commodities: a sign of African countries' declining (production) comparative advantage.
  
• 'The U.N.'s scale of human development, which considers health, education, and economic well-being, ranks 34 African nations among the world's 40 lowest'. This means that Africans generally have the lowest welfare in the world!

The statistics clearly imply that Africa has a negative aid-growth elasticity i.e foreign aid has worsened the welfare of African people. This could mean either or both, of the following:

• Aid doesn't influence economic growth: Foreign aid may have a neutral/negligible effect on economic growth in recipient countries. Hristos Doucouliagos and Martin Paldam's working paper titled Aid effectiveness on Growth: A Meta-Study, suggests that foreign aid has an insignificant effect on economic growth in recipient countries. Therefore, this implies that Africa's declining comparative advantage, could be driven by other factors that have no connection to foreign aid; e.g civil strife, corruption, e.t.c
  
• There are flaws in the conception, design and execution of foreign aid programmes: I suspect that foreign aid fails to stimulate economic growth & enhance social welfare in Africa because of inaccurate diagnosis of Africa's problems, and, because the programmes are poorly designed. J. Orlin Grabbe, in his speech titled In Praise of Chaos (presented to the Eris Society on 12 August 1993), stated that 'handing out free food in "refugee" camps in Somalia leads to a greater number of starving refugees, because the existence of free food attracts a greater number of nomads to the camps, who then become dependent on free food, and starve when they are not fed'. This example illustrates the adverse effects of 'poorly designed' aid programmes.
  

...Solutions to Africa's problems (according to me)

Problem 1) Learned helplessness

Decades of racially oppressive colonial rule, civil strife and state failure have had a toll on African Infrastructure, and African people.

Most aid programmes target infrastructure, education and nutrition. Some address health care issues, especially those related to HIV/AIDS... But it seems that there are no initiatives that focus on improving the mental health of African people.

People who go through oppressive colonial rule, civil strife and state failure; are bound to have mental and emotional scars that need healing. These 'scars', if unattended to, may have adverse effects on the well-being of individuals and society as a whole.

New age authors like James Ray, believe that a person's situation in life is a reflection of their mental state. Similarly, a society's collective 'situation' is a reflection of the society's collective mental state. Hence, a contracting economy, increasing HIV/AIDS infections and a galloping crime rate, may be reflections of a society's unhealed mental and emotional scars.

I believe that Africa's problems can easily be solved by average African Joes and Janes, without any external assistance. Why don't they solve their society's problems? Answer; Learned helplessness--a psychological condition in which a person has learned to act or behave powerless in a particular situation, even when he/she has the ability to change his/her unconfortable or even dangerous circumstance.

So, whats the solution for the learned helplessness problem?: Aid programmes should focus the majority of their efforts and resources, on identifying and addressing the underlying psychological causes of Africa's problems i.e heal the mental and emotional scars of African people.

Problem 2) Lack of Access to Capital

My travels across the African continent have given me a valuable insight: Africa's most recent generation, born between 1978 and 2008, is; relatively well-educated, tech-savvy, ambitious, entrepreneurial, smart, passionate and it also has an awareness of global trends and events. I call it Africa's Star Generation, because it has the potential to change Africa for the better through its entrepreneurial drive.

Unfortunately, the transformative effect of this generation may fail to be realized, because it lacks access to risk based capital and specialized business expertise--critical elements for the success of the Star Generation's new ventures. Africa's banking and micro finance industry is highly conservative and lacks innovation: the sector prefers to confine its services to 'blue-chips' that invariably; have collateral (asset rich balance sheets), have a proven track record of success and operate in traditional lines of business e.g mining, agriculture and the manufacture of fast moving consumer goods. This denies the Star Generation access to capital and their right to participate in the economy. Dejected, the entrepreneurial generation relocates to developed countries, where it joins the growing ranks of middle-class immigrants of African origin--that remit hard currency to Africa. This limits the economic development of Africa and restricts Africa from participating in the 'tech-age' economy.

So, how do we solve the capital access problem?: The Democratization of access to capital through legislative instruments and financial technology!

Don't you think I should become the secretary general of the United Nations? :-)

Oil, The US Dollar, Gold, The Vietnamese Dong

Two topics I've been thinking about:

Disclaimer: The following post is not intended as investment advice. Your capital is at risk when you invest in anything – you can lose some or all of your money, so never risk more than you can safely afford to lose. This post is solely for purposes of discussion. Always seek personal advice from your investment adviser, if you are unsure about the suitability of any investment.

1) Oil, The US Dollar

In his article titled US-Dollar Is The Best Looking Horse In The Glue Factory, Steven Syre (Globe Columnist) states a common perception among financial-market-players: 'The value of the dollar and the price of oil move in opposite directions on a dependable daily basis'. This perception is validated continually by empirical evidence -- it can almost be viewed as a law!

According to an article summary on KurzweilAI.net, General Motors is currently collaborating with thirty utilities in 37 states, and, with The Electric Power Research Institute to develop a charging infrastructure for electric cars. After reading that, one thing is certain: fossil fuel powered vehicles will not be a part of our future. This got me wondering: What will happen to the US dollar and the global price of crude oil, when electric cars (or cars with engines that are powered by a non-fossil fuel) become ubiquitous?

The demand of crude oil would be curtailed by wide-spread-global-adoption of non-fossil fuel powered vehicles. Obviously, this would have an adverse effect on the price of crude oil. But does this imply that the US-Dollar is set to appreciate rapidly (ceteris paribus), when electric cars become widely adopted (since 'The value of the dollar and the price of oil move in opposite directions on a dependable daily basis') ? Also, how will this affect Gulf economies, that solely depend on oil as a revenue source? Will their Sovereign Wealth funds have the ability to insulate them from the effects of falling oil prices?

One thing is certain: One can never go wrong by investing (with a long-term focus) in electricity generating ventures and in ventures that develop safe durable technology for electric car charging stations.

2) The Vietnamese Dong, Gold

According to an article on Bullion Vault, Vietnam is 'the second largest market for gold exports in the world, Vietnam has already imported 60 tonnes of gold valued at $1.8 billion so far in 2008, an increase of 100% over the same period last year'

Recently, the Vietnamese government temporarily banned gold imports to contain the country's ballooning trade deficit (which tripped this year).

Will this move help to shore-up the Vietnamese Dong? How will the Vietnamese property market respond to this ban? How will speculators trade the Dong when the ban is lifted?

I'm confident about one thing: the value of the Dong will plummet when the ban is lifted.

Why?

Gold is a US-dollar denominated asset, so when the ban is lifted, Vietnamese market players will scramble to trade in their Dong, for US dollars to purchase gold with. This will cause the price of US dollars to appreciate in terms of the Dong. By what margin? It's hard to tell.

I also believe that the price of gold will appreciate sharply when the ban is lifted; the majority of the price spike will be driven by speculators.

Note: I don't have a position, long or short, on oil futures or the Vietnamese Dong. I may have a combination of positions on Gold and the US-dollar. This post reflects my opinions and NOT the opinions of companies and charities I'm affiliated with.

...Lets see what happens!

Regional Integration Increases correlation of regional stock prices

The Free Online Dictionary (by Farlex) defines a stock market as 'The market in which shares are issued and traded either through exchanges or over-the-counter markets. Also known as the equity market, it is one of the most vital areas of a market economy as it provides companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance.'

*****************

Stock markets, when viewed in abstraction, are essentially non-deterministic dynamical systems (stochastic systems). When these stochastic systems operate, current market prices are iterated from complex mathematical formulas that incorporate, among other things; preceding market prices and events.

Each stock market is a distinct stochastic system, that has its own 'unique formula' for pricing stocks. This 'unique formula' evolves constantly in response to:

• Political events in the country, and, in the wider global environment.
  
• Social trends in the country, and, in the wider global community.
  
• Technological trends in the country, and, in the broader 'global village'.
  
• Economic trends precipitating at a national and global level.

As regional political integration (and economic) progresses, nations within the respective integrated bloc increasingly resemble each other; politically, economically, technologically and socially (i.e countries within an integrated bloc converge towards a common order). Otherwise stated: regional integration 'homogenizes' countries with different traits. This has the effect of standardizing the underlying factors (or the 'unique formula for setting stock prices') that influence share prices within the region.

...What are the effects of this 'standardization'?

As regional integration increases, stock markets (within the respective integrated region) begin to behave in more or less, the same way: they increasingly become positively correlated.

(I suspect that) If you picked any two random shares, on any two random exchanges (within an integrated regional bloc) and studied them over a period of time; you'd find that the correlation of their prices increasingly approaches 1 (the number one).

Mathematically this can be expressed as:

Which reads As time approaches positive infinity, the correlation between two randomly picked share-prices (each from a different stock exchange within an integrated regional bloc) approaches one i.e they increasingly approach perfect positive correlation.

Note: the general assumption of the mathematical expression above, is that regional integration increases with time.

Where:

t represents time.
The 'lazy eight' represents positive infinity.
x1 Represents the price of the first randomly picked share at a specific point in time.
μ1 Represents the arithmetic mean of of x1 during a defined time period.
x2 Represents the price of the second randomly picked share at a specific point in time.
μ2 Represents the arithmetic mean of of x2 during a defined time period.
σ1 Represents the standard deviation of x1 during a defined time period.
σ2 Represents the standard deviation of x2 during a defined time period.

...And?

As stock markets (within an integrated region) approach perfect positive correlation, the (risk management) benefits of intra-regional diversification of share portfolios, diminish proportionately.

To put this into perspective: Intra-regional diversification of share portfolios, in an environment of increasing regional (political and economic) integration, is akin to loading different egg-filled baskets onto the same haulage truck.

Although your eggs are in different baskets, they still have a common environment...

What happens to your precious eggs, when another haulage truck crashes into your egg-carrying-truck?

Your attempt to limit risks by diversifying your eggs into different baskets, would have been an exercise in futility!

...Now think about mutual funds with a European Union listed-equity focus: What does this say about their risk management practices?

You have been warned! :-)