"When thoughtful people disagree, you get the opportunity to learn a lot"
– Ray Dalio
I've had the opportunity to re-watch the video that captures the key proceedings of the "De-Risking Africa" event that was hosted by CNBC Africa (at the just ended World Economic Forum). Surprisingly, my thoughts, when I watched the recorded footage of the debate, were different to the thoughts that raced through my mind as I watched the live screening of the debate.
When I watched the debate live, I felt that:
- It was too short to cover the crucial issues. I felt that it would be prudent for CNBC Africa to host follow-up events to discuss all the facets of this very pertinent topic.
- It moved, expeditiously, to issues of skewed risk-perception before the fundamentals were exhausted. And, I also felt that everything else was overshadowed once the discussion touched upon the emotive issue of risk-perception.
However, when I watched the video this time around, I felt that all key facets of this topic were reasonably covered. And... that with more time, they would have been exhausted completely.
In both instances, I was of the opinion that the moderator did a great job; the panellists were engaging, and; the discussion was spirited, optimistic (to a fault) and insightful; it definitely elevated my thinking. The event also motivated me to reflect on the topic of "De-risking Africa".
In this post, I will share the end-products of this reflective endeavour.
***
When
I reflected on the topic of "De-risking Africa", I aimed to drill deeper
than the surface issues; I desired to further explore the hidden
dimensions of the issues that the panellists broached. The
breadth of the topic made it difficult to tackle it head-on, so I broke
it down into manageable chunks as Illustration 1 shows:
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| Illustration 1 (click on illustration to zoom in) |
Illustration 1 shows that I employed the following three questions to scope the coverage of the topic: What is Risk? Which Risks are Prevalent in Africa? Which of these Risks can be managed?
The questions will each be briefly discussed below:
...What is Risk?
Illustration 2, below, is a quantitative definition of risk:
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| Illustration 2 (click on illustration to zoom in) |
As Illustration 2, shows there are two components to risk; the probability of a negative event occurring and the expected loss from the event. Therefore, the term "de-risking" implies reducing or removing risk by doing either of the following:
- Reducing or eliminating the probability of the occurrence of a negative event, or;
- Reducing or eliminating the expected loss from a negative event, or;
- Doing both 1) and 2)
If you take a risk like "losses that stem from social unrest", governments and state agents have control over the probability of the negative event occurring; they can mitigate it by instituting policies that create employment. Whereas, private sector players can mitigate the expected losses from such an event by
diversifying their investments across disparate countries and by using financial instruments to hedge their exposures.
This
serves to show that, in any discussion of "de-risking", it is
of paramount importance to clearly establish which stakeholder contingent can reduce which
element of risk (refer back to Illustration 2 for the elements of risk).
***
...Which Risks are Prevalent in Africa?
To answer this question, I scanned through the archives of the World Economic Forum's publications. And, I found an article which is titled Africa Faces Numerous Risks. Illustration 3 expositions the risks that, according to the article, are prevalent in Africa:
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| Illustration 3 (click on illustration to zoom in) |
All of these risks are interrelated in one way or another as Illustration 4 shows:
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| Illustration 4 (click on illustration to zoom in) |
Illustration 4 expositions seven chains of causation, including:
- Climate change → Economic Shocks (e.g. two to three years ago, climate change-induced drought affected Kenya’s horticultural industry and curtailed the nation's ability to generate sufficient hydrological electricity).
- Climate Change → Economic Shocks → Geopolitical Instability (this chain tends to manifest itself in agrarian economies).
- Climate Change → Food and Water Security Issues → Economic Shocks.
- Climate Change → Food and Water Security Issues → Economic Shocks → Geopolitical Instability.
- Geopolitical Instability → Economic Shocks (e.g. Kenya and Zimbabwe’s tourism industries after the countries' violent elections in 2009).
- Geopolitical Instability → Food and Water Security Issues (e.g. Darfur and Somalia during conflict times).
- Economic Shocks → Geopolitical Instability (e.g. Falling coffee prices were cited as a cause of the 1994 genocide in Rwanda).
From these chains of causation, the following is evident:
- Climate change is the root cause of most Economic Shocks and Food and Water Security Issues in Africa. As emissions negotiations demonstrate time and time again, it would be very difficult to minimize the probability of the occurrence of catastrophic climate change by reducing emissions. Hence, to mitigate the climate change risk, African stakeholders should focus their attention on the "reducing the expected loss from the events" lever in Illustration 2.
- That similar chains of causation (e.g. Climate change → Economic Shocks, and, Climate Change → Economic Shocks → Geopolitical Instability) spawn different end-risks. Put more clearly: Geopolitical Instability arises (from a set of similar factors) in some instances and not others. This begs the question of why. The easy answer to this question is: Coordination Public Goods (i.e. Free Speech, Free Press and Freedom of Assembly, Free and Fair Elections e.t.c.) are responsible for this difference; they mitigate the risk of geopolitical instability. However, it is important for this link to be demonstrated empirically in new studies, and, it is also important to explore the other factors that play a role in mitigating geopolitical instability.
Africa has come a long way, and for the 5-6% growth rate to be sustained, it is important for stakeholders to have more solution-focused "De-risking Africa"-type debates.
By solution focused debates I mean debates that discuss how to: 1) eliminate the probability of key negative events, and; 2) mitigate the losses that would stem from the-said events. Further, it is also important to give Climate Change the lion's share of the time in such discussions (refer back to Illustration 4), because it is the root cause of most risks in Africa.
