Sunday, December 30, 2012

Rwanda: History, Development and the Risk of Unrest between 2021 and 2030

Since the end of the 1994 Genocide, Rwanda's Human Development Indicators (HDIs) have been on a steady uptrend as Illustration 1 below shows:


Illustration 1 (click on illustration to zoom in)


While Rwanda's HDI Indice is still below the African average (Rwanda's was 0.429 in 2011 versus 0.448 for the rest of Africa), Rwanda's progress is, by all standards, phenomenal. The nation's government and development partners should be lauded for their achievements.

Rwanda has been on most frontier market investors' radars for a while. However, the "media attention" that the country is attracting has compelled most investors to stay on the sidelines while they wait and see how the situation progresses.

Truth be told, I did not know much about Rwanda's history until last week; i.e.  I did not know much about Rwanda's history until I went through the expert testimonies from the December 11th 2012 Africa Sub-Committee hearing on The Crisis in the DRC.

As I watched the hearing video, I was confronted by the superficiality of my knowledge on the history of Africa's Great Lakes region.

In this blog post, I will share what I learnt about Rwanda as I poured through a voluminous collection of articles, books, research publications and current affairs discussions.

I will start by discussing the "ethnic" make-up of Rwanda and how colonization morphed it into a caste system. I will then discuss the causes of the 1994 genocide; particularly how they were linked to high population density and falling coffee prices.

I will close off by discussing the developmental challenges that Rwanda is certain to face in a decade, and, I will exposition the risks that they would create.


...Tutsi and Hutu


 "History is mostly guessing; the rest is prejudice"

 - Will Durant


Illustration 2 below sums up the most probable origins of the two major ethnic groups in Rwanda and Burundi; Tutsi and Hutu:


Illustration 2 (click on illustration to zoom in)


Generally, anthropologists assert that Hutu are a Bantu people. According to Joseph Greenberg's widely accepted theory on the origins of Bantu peoples, they originated from South Western Nigeria.

Around 1500 BC, see B1 in Illustration 2, the first wave of Bantu people left its ancestral homeland and headed towards the Great Lakes region. There is the remote possibility that modern day Hutu descended from this Bantu stock.

Alternatively, Hutu could have descended from the 8th wave of Bantu migrants who relocated from the South West of Africa, see B8 in Illustration 2, around 500 BC. In my opinion, the latter hypothesis has got a higher probability of being valid.

However, it is important to stress that the Great Lakes region was a Bantu migration hub, i.e. a locus point of Bantu migration; the Hutu could have originated from members of other Bantu migration waves who elected to stay in the Great Lakes region, while their clansmen moved on.

Rwanda was an attractive settlement choice for the first Hutu owing to the following characteristics:
  • High Altitude: Mosquitoes and Tsetse flies do not breed at high altitudes. Thus, settling in the Rwanda region meant fewer cases of malaria and "sleeping sickness", i.e. better health and better quality of life.
  • Moderate Precipitation: The precipitation was moderate and favorable to agriculture (the Bantu were predominantly farmers).

When the Hutu settled in the Great Lakes region, they lived alongside the indigenous inhabitants of the land, who are called the Twa (or pejoratively referred to as the pygmies). The Twa were/are a hunter gatherer people who live/lived within the peripheries of equatorial rain forests. [5]

It is difficult to establish if there were interactions between the Twa and the Hutu. However, there are strong indications that the groups remained in relative isolation from each other.

According to the Hamitic Hypothesis (which was propounded by John Hanning Speke and later served as the rallying point for génocidaires), the Tutsi were a Nilotic group of pastoralists that settled in the Rwanda-Burundi region sometime after AD 800.

They may have originated from Chad [1]. A small group of the Tutsi wandered to the South East, see C? in Illustration 3, and settled in Rwanda and Burundi.

They assimilated Hutu into their societal structure as Illustration 3 below shows:


Illustration 3 (click on illustration to zoom in)


In his essay which is entitled The Cultural Face of Rwandan Genocide, Christopher Taylor asserts that the Tutsi king, in Illustration 3, was regarded as a divine being; through him, blessings suppossedly flowed to the rest of mankind. In hard times, i.e. "when the flow of blessings would be blocked", the Tutsi King would be sacrificed to unblock the flow of blessings.

The Courtiers or Elders, in Illustration 3, were a small group of Tutsi aides to the king.

As Illustration 3 shows, the majority of the Tutsi were commoners [2].

According to Jarred Diamond's account in Collapse: How Societies Choose to Succeed or Fail, The Hutu joined the ranks of the Tutsi commoners, as is shown in Illustration 3, where they intermarried with Tutsi and could switch to become Tutsi (if they switched economic roles from crop farming to animal husbandry).


...Colonial History

When the Germans (and later the Belgians) colonized Rwanda and Burundi, they found it expedient to govern through Tutsi Intermediaries. They believed that Tutsi were racially superior to Hutu (because of the Hamitic appearance of Tutsi).

Under Belgian rule, anyone who had a Hamitic appearance or at least eight head of cattle was regarded as a Tutsi, and the rest were Hutu. Different privileges came with the different labels.

In 1930, everyone was required to carry an identity card that would stipulate their ethnicity.

The colonial Rwandan-Burundian society was gradated as follows:


Illustration 4 (click on illustration to zoom in)


As Illustration 4 shows, of the African peoples in Burundi and Rwanda, Tutsi had the superior status. And, the Twa lay at the very bottom of the pyramid. Under Belgian rule, the ethnic make-up of Rwanda and Burundi was essentially similar, as Illustration 5, below, shows:


Illustration 5 (click on illustration to zoom in)


During the late 1950s, the Hutu in Rwanda and Burundi grew restless with the social order. Owing to this, they created political movements that would champion their causes.

Increasingly, the conservative members of the Belgian elite were being supplanted by more liberal elites who were sympathetic to the Hutu. In 1962, this liberal metamorphosis of the Belgian power structures culminated in the independence of both Rwanda and Burundi.

As independence was approaching, the Hutu movement, in both Rwanda and Burundi, geared itself to overturn the pecking order by supplanting "Tutsi domination" with "Hutu domination". Violent skirmishes broke out and they festered into bloodletting orgies in which Hutu killed Tutsi and Tutsi killed Hutu.

Illustration 6 below sums up the key events that occurred in post-1950 Rwanda and Burundi. 


Illustration 6 (download image for a better view)


In Burundi, Tutsi hegemony was retained, while it was supplanted by Hutu domination in Rwanda.


...Mass Killings

From Illustration 6, Illustration 7 below, can be derived. It sums-up the key mass killings that occurred in Rwanda in the post-independence era.


Illustration 7 (click on illustration to zoom in)


As Illustration 7 shows, power in Rwanda generally changes hands between a Tutsi elite and a Hutu elite. At these transition points, mass killings occur.

The mass killings that occurred in Rwanda can be summed as follows:
  1. In 1963, a contingent of Tutsi refugees, who had fled the unrest in Rwanda and settled in Burundi, formed a rebel group that made a failed incursion into Rwanda. In response to this, the Hutu in Rwanda killed at least 20,000 Tutsi.
  2. Between 1971 and 1973, Hutu in Burundi tried to seize power violently. They failed and the government in Burundi killed at least 100,000 Hutu. In Rwanda, revenge killings of Tutsi ensued immediately (it is hard to establish the exact body count).
  3. The 1994 Genocide in which between 800,000 and 1.3 million people were killed by the Interahamwe Hutu militia and Hutu civilians (the majority of the murdered people were Tutsi and moderate Hutu, and, around 10,000 Twa). A further 25,000 - 60,000 Hutu were killed by the RPF's mostly-Tutsi army (i.e. reprisal killings occurred). [3] [4]
  4. Between 1997 and 2003, an unsubstantiated number of Hutu refugees and militia, who lived in refugee camps in the DRC, were killed by the RPF-backed Banyamulenge militia.
  5. Between the late 1990s and now: (I did not include this in Illustration 7) In the North Kivu region (DRC), there are approximately 22 militia groups that roam the rain forests. These groups are predominantly off-shoots of the groups that participated in the Rwandan genocide and the first Congo war. Unable to fend for themselves in the rain forests, and with limited support from the outside world; these rebel groups periodically "prey upon" the Twa (in both the literal and figurative sense). The Twa refer to these groups as Les Effaceurs (i.e. the erasers)

One thing that stands out about the mass killings that occurred in Rwanda and Burundi is: there is a causative link between the massacres; the massacres that occurred in Rwanda were inversely related to the massacres that occurred in Burundi.

Succinctly put, killings of Tutsi in Rwanda triggered killings of Hutu in Burundi, and killings of Hutu in Burundi triggered killings of Tutsi in Rwanda.


...Genocide

The widely accepted narrative of the Rwandan genocide originated from Allison Des Forges's expert testimony. This is the version that I'll abbreviate in this post [6]:

The Rwandan genocide was not spontaneous, it was concocted by hardliners in Habyarimana's government - who did not want the Arusha Peace Agreement to be implemented. The genocide had five principal phases:
  • Phase 1: Like a classical coup, Phase 1 involved eliminating the moderates. This was done in the hours following Habyarimana's death by members of the presidential guard and the army. It basically entailed taking-out anyone who supported the implementation of the power sharing agreement, or, anyone who could impede the ethnic cleansing agenda.
  • Phase 2: Take-out influential Tutsi and Hutu who would benefit from the emergent political dispensation, and Tutsi who were suspected of supporting the RPF. This was done in the hours between Habyarimana and Uwilingiyimana's deaths.
  • Phase 3: Mount "elimination checkpoints" on every highway/street in Rwanda. This was initially done by members of the presidential guard. And, it was subsequently taken over by Interahamwe militia who initially sprayed suspected Tutsi with bullets. When the bullets ran out, they hacked people with machetes.
  • Phase 4: Mobilize the masses to form autonomous killing brigades that would take-out their Tutsi neighbors and moderate Hutu. This struck fear in the heart of Tutsi and Hutu moderates, which set the tone for Phase 5.
  • Phase 5: Encourage Tutsi and moderate Hutu to congregate at "protected/safe" places, like churches, stadiums, government buildings, hospitals and halls. This "round-up" strategy made the task of locating targets easier for the Interahamwe, and accounted for the lion's share of the body count.

Evidently, Phase 4 of the genocide harnessed the energies of civilians, which begs the question: What made the masses amenable to killing their relatives, colleagues, neighbors, teachers, students, doctors and their friends?

Illustration 8 below uses the metaphor of a bomb to exposition the confluence of the internal and external factors that spawned the Rwandan Genocide:



Illustration 8 (click on illustration to zoom in)


In this post, I will only discuss three factors using empirical data. They include Inequality, Falling Coffee Prices and High Population density:

1) Inequality

As Illustration 9, below, shows, Rwanda's Gini coefficient reached the 0.4 threshold for social unrest in the first quarter of 1993, i.e. exactly a year before the 1994 genocide:


Illustration 9 (click on illustration to zoom in)


Hence, one can conclude that an incident of social unrest of the "class warfare variety" was regrettably inevitable in Rwanda. The Hutu political elites knew that their popularity was waning and youth unemployment was high. They managed to harness and channel that public discontent towards the extermination of Hutu political foes and Tutsi.

2) Falling Coffee Prices

Rwanda's principal exports were coffee and tea, and, as Illustration 10 below shows, the price of coffee was on a steady downtrend since November of 1989:


Illustration 10 (click on illustration to zoom in) Adapted from: Index Mundi


Around that time, 70% of Rwanda's population engaged in agriculture. By and large, most of the people were semi-subsistence farmers. Plummeting coffee prices intensified the suffering of the Rwandan poor; it created a restive population.

3) Overpopulation

In 1994, Rwanda had a population density of around 760 people per square kilometer as is shown in Illustration 11 below:


Illustration 11 (click on illustration to zoom in) Adapted from: NASA Visible Earth


Rwanda was, and still remains, the most densely populated country in Africa. In 1985, all arable land in Rwanda, apart from National Parks, was being used for agriculture, such that, by 1994 the average Rwandan farm was smaller than one hectare. Thus, plots could no longer be periodically left fallow to preserve their fertility; they tended to be over-exploited. 

Over-exploitation of land, in a country with a hilly topography, translated into the rapid erosion of fertile top soils. This, in turn, translated into declining yields while population was steadily growing at the rate of 3% per year. Generally, hungry people are angry people.

According to Jarred Diamond, high population densities essentially meant that all the land in communes like Kanama was taken-up. Owing to this, young adults were increasingly delaying to start their own households. In Kanama's 20-25 year cohort, the percentage of young women who were still staying at home with their parents rose from 39% in 1988 to 67% in 1993; while for young men the number rose from 71% to 100% (during the same time-period). Crudely put, there were no young men who were independent in the Kanama region. It is such dependent young men who were recruited into killing brigades.


...Whither Rwanda?

In his book, entitled An Essay on the Principle of Population, Malthus wrote: "The power of population is indefinitely greater than the power in the earth to produce subsistence for man". When I look at charts, like Illustration 12 below, I tend to see the merit in Malthus' assertion:


Illustration 12 (click on illustration to zoom in)


As Illustration 12 shows, the two most recent incidents of mass killings that occurred in Rwanda / that had "Rwandan involvement", transpired just after the rate of population growth exceeded the food production per capita growth rate. Hence, I wonder if this avers Malthus's above-mentioned assertion; would Malthusian checks, materializing in the form of mass killings, be acting to "bring population down to the carrying capacity of the land"? Or, are these mere coincidences?


***


According to Illustration 13, below, all Rwandans were able to get the minimum recommended daily intake of calories by the beginning of 2008:


Illustration 13 (click on illustration to zoom in) Adapted from: World Bank Data


However, Rwandans' daily intake of protein fell below the recommended daily intake mid-2010, and the nation's intake of lipids still hovers below the recommended daily intake. Therefore it is reasonable to anticipate, in the very near future, a proliferation of the following diseases, especially in the poorest areas:
  • Protein deficiency diseases like Marasmus in young children, Kwashiorkor in infants, and, Chachexia in people with cancer, AIDS, chronic kidney failure, heart disease, chronic obstructive pulmonary disease and rheumatoid arthritis.
  • Lipid deficiency diseases like tooth decay and lipid oxidation disorder.

These diseases could have a negative impact on the productivity of Rwanda's population in the future.

The rate of economic growth in Rwanda (7.5% in 2010) still hovers above the population growth rate (2.82% in 2010). And, as Illustration 13 unequivocally shows, Rwanda's calorific intake lies comfortably above the WHO recommended daily intake of calories. Therefore does this imply that Rwanda has escaped the Malthusian trap? My answer to that question would be: Yes. Does this imply that the risk of societal unrest in Rwanda has gone down? To answer that question, I will quote from a paper that was authored by Korotayev et al (2011) entitled A Trap At The Escape From The Trap? Demographic-Structural Factors of Political Instability in Modern Africa and West Asia:
"El Salvador, Iran, and Algeria, whose populations in the early 1960s were at the level of undernourishment, or even famine, all managed to achieve a very significant progress in the decades before instability struck. El Salvador increased its per capita food consumption by 700 kcal/day and by 1980— the year when civil war broke out —almost reached the WHO recommended norm of 2300 kcal/capita/day (Naiken 2002). Iran also increased its per capita food consumption by 700 kcal/day (from 1800 in 1960 to more than 2500 in 1979) at the point when the country was swept by the Islamic Revolution. Algeria achieved even better progress, going over the WHO norm in 1977 with continuing growth thereafter. The civil war broke out in 1992 when per capita food consumption reached more than 2900 kcal/day, or nowhere near the undernourishment level (and approaching that of overeating). In Albania, Egypt, Liberia, South Korea, and Syria, similarly, outbreaks of political violence occurred against the background of rapidly increasing per capita food consumption. Thus, Liberian food consumption went up from 2100 kcal/capita/day in 1960 to 2500 (better than the WHO norm) by 1989, the year of civil war start."
Succinctly put, escape from the "Malthusian trap" does not immunize a society against civil unrest.


***


Rwanda aims to transform itself from a subsistence agricultural to a knowledge-based economy by 2020. One of the goals of Rwanda's'Vision 2020’ is to decrease the population dependent upon agricultural
activities from 85% to 50%. This translates to a decrease of 35 percentage points by the year 2020. The country is making serious strides towards this desired end state, they include:
  • Building a super-fast information communications grid: According to the NetIndex Household download Index, Rwanda has got the fastest household internet download speed in Africa. It currently stands at number 65 in the world with an average household download speed of 8.11 Mbps.
  • Creating competency-building partnerships: Recently, the Rwandan government partnered Carnegie Mellon for the development of graduate engineering degrees. Under this partnership, "Carnegie Mellon will establish and operate an academic program in Kigali, Rwanda, initially offering a Master of Science in Information Technology program. In addition to the academic program, CMU-Rwanda will collaborate with the Government of Rwanda to develop an innovation incubator, advanced practical training programs, executive education programs and a mobility research center." (source)
  • Establishing technology hubs: Early in 2012, Rwanda announced its plans to launch a technology hub called kLab. The hub will be based in Rwanda’s ICT Park and it envisages to co-locate students, engineers and designers. This should allow different ideas to cross pollinate and spawn an ecosystem of tech start-ups.
  • Securing lines of financing: In conjunction with the United Nations Economic Commission for Africa (UNECA), the Rwandan government established the Rwanda Innovation Endowment Fund (RIEF) to foster the development of innovative start-ups.

It would be interesting to follow the companies that are spawned by these initiatives.


***


As Illustration 14, below, shows, the contribution that agriculture is making to Rwandan GDP is on a steady downtrend, while the contribution of services to Rwandan GDP is on a steady uptrend:


Illustration 14 (click on illustration to zoom in) Adapted from: World Bank Data


These trends suggest that non-agricultural sectors will dominate future narratives of Rwanda's growth story.

Although the Rwandan agricultural sector's contribution to GDP would continue to be dwarfed by the contribution of non-agricultural sectors, its productivity will probably continue to follow the trend in Illustration 15 below:


Illustration 15 (click on illustration to zoom in) Source: World Development Indicator database


The combination of growing non-agricultural sectors, increasing agricultural sector productivity and Rwanda's youth bulge give Rwanda a high probability of following the green trajectory in Illustration 16 below:


Illustration 16  (click on illustration to zoom in) Adapted From: Korotayev et al 2011


Such a trajectory is associated with a high risk of political instability that stems from an explosive growth in the urban youth population. 

In their research, Korotayev et al (2011) teased data from 1960 to 2005 and found that "the probability of major internal violent conflicts in countries with very low young urban population growth rates (less than 15 percent increase per 5 years) was very low. For countries with intermediate values of these rates (20–30 percent increase per 5 years) the probability of such conflicts was close to 50 percent. However, even for this group of countries there was not a single occurrence of a particularly violent internal political upheaval in the given period. In countries with high young urban population growth rates (30–45 percent increase per 5 years) the probability of avoiding major political upheavals falls down to a very low level (about one chance out of four). Additionally, the probability of a particularly violent civil war becomes very high in these countries (also about one chance out of four). In countries in which the young urban population growth rates were very high (>45 percent increase in 5 years) not a single one managed to avoid major political shocks. The risk of a particularly violent civil war was very high for these countries (about one chance out of two)."

In their paper, entitled A Trap at The Escape From The Trap? Demographic-Structural Factors of Political Instability in Modern Africa and West Asia, Korotayev et al (2011) computed the risk of instability of African countries using the above-mentioned link between population structure and destabilization. Their findings can be abbreviated in Illustration 17, as follows:


Illustration 17 (click on illustration to zoom in) Adapted from: Korotayev et al 2011


According to Illustration 17, the entire Great Lakes Region, including Rwanda, faces medium to high risks of political destabilization between 2021 and 2035.This begs the question of what type(s) of political destabilization. The answer to that question is: it depends on the confluence of different factors that are too difficult to forecast accurately, at this point.

Keep watching Rwanda!


***

[1] In school, most Rwandan baby boomers were taught that the Tutsi came from Ethiopia. And, that, it was in fact the Hutu who came from Chad and Niger.
[2] According to some accounts, a Tutsi king called Rujugira consolidated the Rwandan state in the eighteenth century. He built a large military apparatus and proceeded to subjugate disparate clans (some clans were made up of both Tutsi and Hutu). The protracted military campaigns required funding, and, an administrative bureaucracy, that was largely made up of Tutsi was created to collect taxes.
[3] It is important to note that the mass killings only stopped when Kagame's RPF defeated the Hutu militia. When the RPF arrived in most towns, the Tutsi population had been completely decimated. And, the Hutu militia were now eliminating prosperous Hutu. Kagame's victory was swift because 1) the Hutu militia had mounted multiple road blocks on every road - it had spread its forces out - and thus, it could not mount a coordinated resistance effort (with critical mass); 2) the Hutu militia had run out of ammunition when it was eliminating civilians, and, the arms embargo that had been instituted by the international community meant that it could not replenish its stocks; 3) The Hutu army experienced a number of defections - some soldiers were repelled by what was happening and joined Kagame; 4) The Hutu militia were undisciplined - they spent their time drinking and raping women - they were not in fighting shape, and; 5) The Hutu militia had numerous parallel lines of command that often passed conflicting orders.
[4] A few lessons for survival that I gleaned from researching the Rwandan Genocide: 1) Whenever politicians are being assassinated and there is rhetoric about exterminating a certain ethnic group, run away immediately -  the violence will only cascade – no one is safe; 2) If you have to hide when a paroxysm occurs, do not hide in designated "safe places" - as it makes it easier for the exterminators to find you; 3) The international community will not act unless it is in its strategic interests to do so - it will never intervene to JUST save civilians; 4) International peace keeping forces are always under resourced, and more often than not, they fail to keep civilians safe; 5) It takes a long time for international peace keeping forces to be deployed - because generally no one wants to foot the bills, contribute the troops or the hardware; 6) If enough soldiers from a peace-keeping force are killed, there would be outrage in the home country of the peacekeeping force, and the peace keeping force would be withdrawn - leaving civilians vulnerable; 7) It helps to be a citizen of the US - the US government always makes provisions for the evacuation of US citizens when a conflict occurs in any region in the world; 8) In times of great upheavals trust no one, and; 9) When the rule of law breaks down, and violent conflict occurs, it does not pay to be a law abiding citizen -  obedience will mean a certain death. 
[5] A lot of theories were propounded to explain the Twa people's very short stature and they can be abbreviated as follows:
  • There are low ultraviolet levels in the rain forest  i.e., where the Twa lived. Owing to this, the Twa synthesized few fats into vitamin D, which fosters the uptake of calcium. Thus, this deficit of calcium is largely responsible for their small skeletal size.
  • Their small stature is an adaptation that allows them to move quickly through dense forests, subsist on a very low calorie diet (rain forests have got a scarcity of food) and thrive in hot humid conditions.
  • High mortality rates caused their central nervous systems to prioritize reproduction over growth. Hence their small stature.
A common thread runs through all these theories: the rain forest conditions contributed to the Twa's small stature. They are built like other peoples who live in similar latitudes (i.e. along the equator) across the globe (e.g. in Australia, Thailand, Malaysia, the Andaman Islands, Indonesia, the Philippines, Papua New Guinea, and Brazil.). 
[6] Postscript 17 April 2014: For the sake of balance, I felt that it was prudent to notify you of the existence of competing narratives: Prior to her death, Allison Des Forges revised her official narrative to incorporate abuses that were committed by the Kagame-led army. Further, for an alternate version of what happened in Rwanda, see this resource. It was prepared by Professors Allan Stam and Christian Davenport. Furthermore, in a paper titled "Let's Be Friends" Luc Reydam uses declassified US government documents to construct an alternate narrative of the events that transpired in Rwanda. Another resource of interest is Rwanda: L'Histoire Secrète by Abdul Joshua Ruzibiza. 

Thursday, December 20, 2012

Unpacking Frontier Market Geopolitical Risk: Understanding its Drivers, and, how Direct Aid Shapes its Dynamics

"If one marks off a belt a couple of thousand miles in width encircling the earth at the equator one finds within it no developed countries. . . . Everywhere the standard of living is low and the span of human life is short."
— John Kenneth Galbraith


What Kenneth Galbraith is essentially saying in the quote is: the welfare of people in the tropics, i.e. the region of the Earth that lies between the Tropic of Cancer (23° 26′ 16″ N) and the Tropic of Capricorn  (23° 26′ 16″ S), is poor in both absolute and relative terms.  The red overlay in Illustration 1, below, demarcates the tropics:



Illustration 1 (click on illustration to zoom in)


This begs the question of why "tropical" economies; i.e. the economies that satiate the needs and wants of 40% of humanity, are generally poor. Obviously, (part of) the answer to that question would be climate: most tropical nations are hot and moist (practically) all year-round. These weather conditions create an interesting mix of constraints in frontier market economies, including: 
  1. The Heat Constraint: In The Wealth and Poverty of Nations, David Landes wrote: "Three quarters of the energy released by working muscle takes the form of heat, which the body, like any machine or engine, must release or eliminate to maintain a proper temperature. Unfortunately, the human animal has few biological devices to this purpose. The most important is perspiration, especially when reinforced by rapid evaporation. Damp, 'sweaty' climes reduce the cooling effect of perspiration—unless, that is, one has a servant or slave to work a fan and speed up evaporation. Fanning oneself may help psychologically, but the real cooling effect will be canceled by the heat produced by the motor activity. That is a law of nature: nothing for nothing; or in technical terminology, the law of conservation of energy and mass. The easiest way to reduce this waste problem is not to generate heat; in other words, keep still and don't work."
  2. The Parasite Constraint:  Cold winters are the greatest vermicide of nature: In The Wealth and Poverty of Nations, David Landes asserts that "tropical countries, except at higher altitudes, do not know frost; average temperature in the coldest month runs above 18°C. As a result, they are a hive of biological activity, much of it destructive to human beings... We now know for example that many people [in tropical regions] harbor not one parasite but several; hence are too sick to work and are steadily deteriorating."
  3. The Precipitation Constraint:  In The Wealth and Poverty of Nations, David Landes also reflects that "tropical areas generally average enough rainfall, but the timing is often irregular and unpredictable, the downpours [are] anything but gentle. The drops are large; the rate of fall torrential...In such climes, cultivation does not compete easily with jungle and rain forest: these treasure houses of biodiversity favor every species but man and his limited array of crops... Clear and plant, and the unshaded sun beats down; heavy rains pelt the ground—their fall unbroken by leaves and branches—leach out soil nutrients, [and] create a new kind of waste. If the soil is clayey, composed in large part of iron and aluminum oxides, sun plus rain bakes the ground into a hard coat of armor. Two or three years of crops are followed by an indefinite forced fallow."
The above-mentioned constraints create a limiting set of initial conditions, that, in turn, shape the politics and development trajectory of most frontier market economies. Further, these constraints create an eclectic mix of risks for the frontier markets investor.

In this blog post, I will discuss a framework which I created. It can be used to dissect the unique set of risks that frontier markets investors are exposed to. The said conceptual framework was inspired by Bruce Bueno De Mesquita and Alastair Smith's riveting text entitled The Dictator's Handbook: Why Bad Behaviour Is Almost Always Good in Politics.


***

In the preceding paragraphs, I demonstrated that the geography of frontier markets creates the following developmental challenges:
  • An unproductive, morbid population with a low life-expectancy (owing to infestation by parasites).
  • Poor food security (owing to an uneven pattern of rainfall) that has a diminishing effect on the quality of human capital.
  • A "poor working environment" (owing to the great heat) that essentially taxes productivity.
Otherwise put, in frontier market economies the public goods that have the greatest demand are; basic healthcare, nutrition and shelter from the blistering heat. Succinctly; the lower Maslovian needs, i.e. Physiological needs, tend to be predominant in frontier markets. Generally, most frontier market governments have failed to adequately provide the said public goods. And, direct aid organizations, like The Carter Center, UNICEF and The Gates Foundation, have stepped-in to meet the demand for basic public goods.

By and large, most types of aid fail to achieve their envisaged objectives. However, direct aid, i.e. aid which focuses on the provision of basic public goods, has registered a number of monumental successes. For instance, The Carter Center's Efforts to combat the guinea worm in Africa and Asia has reduced the number of affected people from 3.5 million people (in 1986) to approximately 3,000 people in 2009.

Such successes shape the universe of opportunities in frontier markets, and, their risk profiles. Hence, a discussion of frontier market risk also has to incorporate the role that direct aid plays in shaping the risk factors, which the model in Illustration 2 does. The model principally expositions the types of political unrest that occur as a nation's health improves, and; as predominant Maslovian needs shift away from "Physiological needs" to "Safety needs".


Illustration 2 (click on illustration to zoom in)


In the next paragraphs, I will discuss the conceptual framework in Illustration 2. I will start by discussing the prominent risk factors that a frontier markets investor is exposed to when Physiological Needs dominate. And then, I will move on to discuss the risk factors that an investor can expect when Safety Needs dominate:


...When Physiological Needs Dominate

As I stated previously, frontier market economies have initial conditions in which the following constraints are active: The Heat Constraint, The Parasite Constraint and The Precipitation Constraint. These constraints generally limit population growth, people's quality of life and their life expectancy. In the early phases of their development, frontier markets tend to have a demographical structure that approximates Illustration 3 below:


Illustration 3 (click on illustration to zoom in)


Illustration 3 demonstrates that early phase frontier market economies tend to have:
  • High infant mortality rates, owing to poor perinatal and maternity facilities. Thus, women tend to give birth to a lot of children to reach their target number of surviving children. Otherwise put, these societies tend to have high fertility rates.
  • A life-expectancy rate that lies in the 30-50 years band.
  • A morbid adult population that is unproductive, owing to poor health that stems from parasite infestation.
  • A female life-expectancy that approximates the male life-expectancy; which signals the low status of women in the society. [1]
In such a society, the masses, including young adults, are generally ill and undernourished. Their productivity would be very low and the economy would be underdeveloped and highly informal. Thus, central government revenues from taxation would tend to be anaemic. If the country has a military, it would generally be under-funded and mutinous, i.e., unless the government has access to non-tax revenue (i.e. mineral royalties and debt funding) that can be used to fund military expenditures.

The greatest risk in such societies is the risk of a military coup, as Quadrant 1, of Illustration 2 demonstrates. If the coup has the support of all the members of the military, the incumbent leadership would be deposed quickly, and a military junta would administer the society. Any change of government carries a high risk of total impairment for any investor, and in scenarios in which power is seized forcibly and the treasury's resources are anaemic, resource expropriation is almost certain (i.e. expropriation risk is high).

However, if a minority of the military's members "becomes rogue", there is a high likelihood of guerrilla warfare or terrorist activity. The duration of the conflict would depend on the rogue network's ability to secure popular support and resources: If the rogue network manages to secure popular support, it could leverage that support to enlist recruits and to husband resources to spearhead its efforts.

In such a scenario, the length of the conflict would be inversely related to 1) The rate at which the conflict depletes the resource pool of the central government and 2) The degree of support that the rogue network attracts.

If the rogue network fails to win popular support (read: resources), it would conduct its warfare using less costly tactics like terrorism. And, it would have to scavenge for resources by either: tormenting the morbid masses; kidnapping influentials for ransom extraction; forcibly recruiting minors - as they would tend to be more obedient, and, healthier than adults (owing to the impact of direct aid programmes); counterfeiting and trading contraband items, and; seizing a key resource that can produce a high return of output per unit of unskilled labour per unit of time. Otherwise put, the following types of investors would have a high risk of impairment:
  • Investors who are in a joint venture or PPP type arrangement with the central government - Facilities and staff would be terrorised, and the magnitude and frequency of the attacks would be directly related to the amount of revenue (as a proportion of total government revenue) that the government earns from the venture.
  • Investors in mines that produce minerals that can 1) be extracted using labour intensive processes and 2) Smuggled easily.
  • Plantation and Ranch Investors - Rogues, like everyone, need to eat, and any farm, ranch or plantation that produces protein and carbohydrates is certain to lose the majority of its produce to theft (i.e. if the security on the property is high) or seizure (if the security on the property is low). Producers of cash crops that 1) have a high black market value and 2) Can be smuggled easily would also lose their produce.

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If a country has a strong government and military, there would be a low risk of a military coup, but the risk of terrorism by disaffected pockets of society cannot be ruled out, as Quadrant 2 of Illustration 2 demonstrates. The stable conditions that would be prevalent in such an environment would allow direct aid organizations to operate in an unfettered manner, which would, in turn, satiate the society's needs for the basic public goods of healthcare, shelter and primary school education.

However, the fertility rate of women would remain elevated, in the short to medium term, while the infant mortality rate falls: i.e. there would be a baby bulge that would cause an immediate surge in the dependency ratio. The high dependency ratio would be burdensome to the society in the following ways:
  • The population of, healthier but still morbid, adults would demand higher wages. Their productivity would register a slight increase, owing to healthcare improvements. But, the productivity increase, would, in most cases, not warrant the extent of the wage demand, which would almost certainly be high. As one would expect, these pressures would deter further inward investment.
  • Government would have to provide subsidies to families, and, cut taxes for middle-to-working class families. Thus, the tax burden would have to be shouldered by a declining number of entities in the society. This would, in turn, increase the government's reliance on foreign aid, royalties from a resource endowment or debt. Increasing indebtedness would, in turn, increase the risk of a future tax increase for frontier markets investors.


...When Safety Needs Dominate

Within a decade or two fertility rates in the society that benefited from direct aid would have fallen, drastically, and the infants who had access to public goods like healthcare, shelter and education would become a growing proportion of the workforce. The demographic structure of such a country would have the profile in Illustration 4, below:


Illustration 4 (click on illustration to zoom in)


Safety needs would be predominant, and the most prominent of them would be job security. If the "bulge generation" is met with increasing foreign direct investment, a growing economy, growing export markets, increasing employment and rising incomes; effective demand would rise, which would in turn, bolster aggregate demand and fuel a growth spurt. Otherwise put, a "demographic dividend" would be earned by investors in the economy. Such an economy would have a very low risk of strikes as Quadrant 4 of Illustration 2 demonstrates.

However, if the "bulge generation" is not met with a growing economy and rising incomes, youth unemployment is certain to increase which would, in turn, increase the risk of political unrest in the economy.  If the incumbent government does not suppress essential freedoms (free and fair elections, a free press, free speech, and freedom of assembly) it would be deposed in a democratic election.

And, the worst that would occur in the period leading-up to elections are peaceful protests or strikes. The risk of these events would be remote as Quadrant 4 of Illustration 2 shows. In such a scenario, the only risks that investors in the economy would face are:
  • The risk of tax increases - Increased taxes would fund a social security buffer that would reduce the risk of unrest in the near term. However, if the tax burden becomes too onerous, investors would divest, and, the economy would tailspin in the medium turn. This would increase the risk of future unrest.
  • The cost-push inflation risk - Increased minimum wages would push-up costs and erode margins in labour intensive industries.
  • The risk of onerous "societal demands" on businesses.

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If essential freedoms are suppressed mass uprisings would occur as Quadrant 3 of Illustration 2 shows. If the incumbent government responds forcefully, civil war would eventuate. This would create an eclectic mix of risk factors for frontier markets investors, that depend on a confluence of unique factors in each frontier market economy.


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[1] In most normal societies, female life expectancy is higher than male life expectancy. Why? Because women generally take fewer life-threatening risks than men.