Argentina is a country that is relatively poor due to policy rather than a lack of resources and easy access to global markets. Though the 2015 presidential election could bring an administration with more pro business policies to power it is important to note that such a shift will not necessarily result in a major influx of capital as issues related to the development of infrastructure could still hinder the country’s development. Infrastructure and investment go hand in hand as capital is less likely to flow into countries that lack adequate facilities. The 2001-2002 Argentine default and the seizure of Repsol’s majority stake in YPF (a settlement may have been reached but a precedent has also been set) will also make investors wary of financing construction. This is not to say that there will be no investment. After all there is some foreign investment aimed at developing the Vaca Muerta shale reserves and Argentina’s hydropower resources. The reality though is that risk increases the cost of capital so the projects that do get funded will likely be on terms that are less favorable to the Argentines than they otherwise would be thus reducing the total funds that can be put towards development.
Improved infrastructure in other parts of the Americas could make Argentine exports less competitive. Argentina is the third largest soy producer in the world after the Brazil and the United States. The expansion of the Panama Canal could make the later two exporters more competitive when shipping soybeans to Asian markets. In addition to this Brazil is attempting to invest $27 billion to improve its infrastructure with the goal of quadrupling Brazilian exports by 2030. Brazil became the largest exporter of soy in 2013 despite its poor infrastructure. Projects such as the development of the Amazonian port of Santarem would make the country even more competitive. Though Brazil has its own share of political and economic issues we have seen that auctions privatizing Brazilian highways, airports and ports are proving to be fairly effective in attracting capital to the country. If Brazil continues to develop and Argentina continues to stagnate it will be difficult for the later to develop infrastructure that is competitive with Brazil. The Argentines could find themselves in a position where they might have to ship some of their goods via Brazilian ports. This would eat into Argentina's profits resulting in less capital for the country to invest in itself.
To truly develop countries have to move beyond being exporters of raw commodities whose prices fluctuate dramatically. Such as shift requires investment and the development of infrastructure such as power plants, adequate port facilities, and internal transport network. Funding such projects is challenging given Argentina’s track record and economic policies. As we have seen competition and the need to rely on foreign ports could further weaken the country and limit the amounts of capital that it can bring to develop its infrastructure. This vicious cycle is a situation that will need to be monitored closely. The increasing demand for agricultural commodities and Argentina’s geographic location will allow it to profit from its resources. That said, a country profiting off of its resources and a country developing to its full potential is not the same thing.
Friday, January 31, 2014
Friday, January 24, 2014
The Challenges of Attracting Capital to a Post-Mugabe Zimbabwe
A business delegation from Zimbabwe is visiting Belgium from January 26th to the 31st in an attempt to attract capital to the country and to assuage the concerns of European business leaders of how Harare’s policies would impact any potential investment in the country. In the short term these meeting are unlikely to result in any significant influxes of capital. This is due to Zimbabwe’s Indigenization Law (which gives Zimbabweans the right to take over and control many foreign owned companies), corruption, poor infrastructure, regulatory issues, policy uncertainty, a large external debt, and high employment. Despite these problems, the types of investments that are discussed during the visit and the relations that are established between Zimbabwe’s business elite and European investors should be monitored as Zimbabwe’s economy is damaged due to poor policy not geographic location. The country was once one of the most affluent African states. Though its governance has become worse its resource base is still strong. This reality combined with improved regional infrastructure and increased world demand for agricultural production could mean an improved standard of living for Zimbabweans in the coming years and investment opportunities as the country develops key sectors of its economy.
Historically, Zimbabwe was the "Breadbasket of Africa" however policy decisions from the late 90’s on dramatically impacted the country's agricultural output and economic performance. From 1998-2002 Zimbabwe involvement in the war in the Democratic Republic of the Congo cost the country hundreds of millions of dollars. In 2000 the Fast Track Process of Land Redistribution allowed the government to acquire commercial farms without offering compensation. The reforms essentially transferred land from white farmers to black ZANU-PF party loyalists. They were poorly implemented resulting in violence and they ultimately turned Zimbabwe into a net importer of food products. The sanctions from western countries that resulted from this are estimated to have cost Zimbabwe $42 billion. The county’s problems continued as the Reserve Bank of Zimbabwe printed so much money to fund its deficit that it caused hyperinflation. In 2009 the use of foreign currencies, such as the US Dollar and South African Rand, was implemented. This ended hyperinflation and reduced inflation to approximately 10% however structural issues still remain.
Despite these challenges there have been some potential improvements to the economy. On September 17th, 2013 the European Union announced that the sanctions against the Zimbabwe Mining Development Corporation would be lifted. This was a result of many western observers agreeing that the 2013 Election in Zimbabwe was free and fair. Given the reports of voter intimidation it is unlikely that the elections were fair though they might have appeared this way because the real repression had taken effect before the population went to the polls. Whether the elections were really free though is not the question. Western powers recognize that if they want to have any form of influence in Mugabe’s inevitable succession they need to take a less confrontational approach to relations with Harare. This would account for statements saying that the election was free as well as the EU lifting the sanctions. Mugabe and high ranking members of Zanu-PF did profit from diamond sales while the sanctions were in place however the removal of these barriers will likely result in higher profits.
One of the key issues facing Zimbabwe right now is the question of who will succeed President Robert Mugabe. Mugabe has not officially chosen a successor as such an action could reduce some of his influence. As things stand now the most probable successors are Justice Minister Emmerson Mnangagwa, who headed the Defense Ministry until the elections last July, and Vice President Joyce Mujuru.
Due to his past and current posting Mnangagwa has a great deal of influence with both the military and the police/internal security services. He also will benefits economically from the lifting of diamond sanctions due to his influence in the Marange Diamond Fields. Mnangagwa is perceived as the more hard-line candidate who would likely carry on with Mugabe’s policy. Though he does not have the popular support that Mujuru has he does have strong ties with the security forces.
Mujuru, has strong political credentials as she participated in the struggle for independence against Ian Smith’s Rhodesian regime. She benefits politically as her late husband, Gen. Solomon Mujuru, was a popular freedom fighter, who commanded the Zimbabwean army after independence. Mujuru also faired better than Mnangagwa in 2013’s provincial elections. She is perceived as more business friendly and takes a less hard line stance than Mnangagwa which would make her the reformist candidate by default (reformist is relative here).
It is important to note that given the strength of both factions there will likely be tension in Zimbabwe no matter who is chosen as Mugabe’s successor. This does not mean that a comprise cannot be reached but it is still a cause for concern. As of now ZANU-PF will continue to receive regional support from parties like South Africa’s ANC as Southern African independence parties view opposition labor parties, such as Zimbabwe’s MDC, as a threat to their power.
Clearly, there are significant political and economic challenges for Zimbabwe to overcome and it is unlikely that they will be effectively addressed in the current political climate. That said, the country has significant room to develop as its poverty is a result of policy not geography. If and when the Zimbabwe has a less maligned government and more predictable politics its economy will see a resurgence due to the demand for its resources base and access to ports such as Durban (South Africa) and Beira (Mozambique).
Historically, Zimbabwe was the "Breadbasket of Africa" however policy decisions from the late 90’s on dramatically impacted the country's agricultural output and economic performance. From 1998-2002 Zimbabwe involvement in the war in the Democratic Republic of the Congo cost the country hundreds of millions of dollars. In 2000 the Fast Track Process of Land Redistribution allowed the government to acquire commercial farms without offering compensation. The reforms essentially transferred land from white farmers to black ZANU-PF party loyalists. They were poorly implemented resulting in violence and they ultimately turned Zimbabwe into a net importer of food products. The sanctions from western countries that resulted from this are estimated to have cost Zimbabwe $42 billion. The county’s problems continued as the Reserve Bank of Zimbabwe printed so much money to fund its deficit that it caused hyperinflation. In 2009 the use of foreign currencies, such as the US Dollar and South African Rand, was implemented. This ended hyperinflation and reduced inflation to approximately 10% however structural issues still remain.
Despite these challenges there have been some potential improvements to the economy. On September 17th, 2013 the European Union announced that the sanctions against the Zimbabwe Mining Development Corporation would be lifted. This was a result of many western observers agreeing that the 2013 Election in Zimbabwe was free and fair. Given the reports of voter intimidation it is unlikely that the elections were fair though they might have appeared this way because the real repression had taken effect before the population went to the polls. Whether the elections were really free though is not the question. Western powers recognize that if they want to have any form of influence in Mugabe’s inevitable succession they need to take a less confrontational approach to relations with Harare. This would account for statements saying that the election was free as well as the EU lifting the sanctions. Mugabe and high ranking members of Zanu-PF did profit from diamond sales while the sanctions were in place however the removal of these barriers will likely result in higher profits.
One of the key issues facing Zimbabwe right now is the question of who will succeed President Robert Mugabe. Mugabe has not officially chosen a successor as such an action could reduce some of his influence. As things stand now the most probable successors are Justice Minister Emmerson Mnangagwa, who headed the Defense Ministry until the elections last July, and Vice President Joyce Mujuru.
Due to his past and current posting Mnangagwa has a great deal of influence with both the military and the police/internal security services. He also will benefits economically from the lifting of diamond sanctions due to his influence in the Marange Diamond Fields. Mnangagwa is perceived as the more hard-line candidate who would likely carry on with Mugabe’s policy. Though he does not have the popular support that Mujuru has he does have strong ties with the security forces.
Mujuru, has strong political credentials as she participated in the struggle for independence against Ian Smith’s Rhodesian regime. She benefits politically as her late husband, Gen. Solomon Mujuru, was a popular freedom fighter, who commanded the Zimbabwean army after independence. Mujuru also faired better than Mnangagwa in 2013’s provincial elections. She is perceived as more business friendly and takes a less hard line stance than Mnangagwa which would make her the reformist candidate by default (reformist is relative here).
It is important to note that given the strength of both factions there will likely be tension in Zimbabwe no matter who is chosen as Mugabe’s successor. This does not mean that a comprise cannot be reached but it is still a cause for concern. As of now ZANU-PF will continue to receive regional support from parties like South Africa’s ANC as Southern African independence parties view opposition labor parties, such as Zimbabwe’s MDC, as a threat to their power.
Clearly, there are significant political and economic challenges for Zimbabwe to overcome and it is unlikely that they will be effectively addressed in the current political climate. That said, the country has significant room to develop as its poverty is a result of policy not geography. If and when the Zimbabwe has a less maligned government and more predictable politics its economy will see a resurgence due to the demand for its resources base and access to ports such as Durban (South Africa) and Beira (Mozambique).
Friday, January 10, 2014
Is Foreign Investment Helping to Undermine the Stability of Mozambique?
This week Japanese President Shinzo Abe will visit Mozambique to discuss a variety of issues related to energy and agriculture. The trip, the first African visit from a Japanese premier in eight years, highlights the growing importance of Africa to Tokyo as Japan competes with China for influence on the continent. Abe is expected to announce $577 in loans for road construction which will help further develop the Mozambican mining industry. Mozambique has developed rapidly since the 1992 Peace Treaty which ended years of civil war. The country now has the potential to be an important exporter of agricultural goods and LNG. Mozambique’s location on the Indian Ocean also situates it in an area where it can easily service Asian markets whose demands for food and energy are ever increasing. Ensuring access to these resources is one of the primary purposes of Abe’s visit. What Japan, and the world, needs to understand is that Mozambique is facing increased internal instability and some of the agricultural deals that Abe will likely be discussing have the potential to further exacerbate tensions.
Mozambique attained independence in 1974 and almost immediately fell into a state of civil war which pitted the Marxist Frelimo against the anti-Communist Renamo. A peace deal was brokered in 1992. Since this time a great deal of development has occurred in the country, however, in October 2013 Renamo renounced the 1992 Peace Treaty. This action clearly endangers political stability. On Wednesday January 9th Renamo killed six members of the Mozambican Riot Police. In addition to this they have also reestablished a base in Nhamunde in the Southeast of the country. Renamo’s activity in Northern Mozambique has also disrupted mining operations for companies such as Rio Tinto. It is unlikely that they will cease their activities anytime soon. In fact if October’s general election is unfavorable to Renamo further instability could result. If they can generate support from the local population the situation could deteriorate further.
In theory Renamo could exploit discontent against agricultural deals which have deprived local populations of their land. This action is of course subject to how they treat the local people. Renamo has a history of recruiting child soldiers and committing atrocities against local populations. Neither action is the sort of policy that wins the hearts and minds of a population nor do people forget groups that have subjected them to such abuse. Due to past precedent it would be dangerous to assume that Renamo would be able to gain local support, however, projecting what might happen if they pursued such a plan (and were relatively successful) is a worthwhile undertaking. After all, there is a great deal of discontent against deals that benefit foreigners and Maputo at the expense of the locals. One such program is ProSavana. This program will likely be discussed during Abe’s visit as the Japanese have invested a great deal in it.
ProSavana is a joint undertaking between the Ministry of Agriculture of Mozambique (MINAG) and Local Government, the Japan International Cooperation Agency (JICA), and the Brazilian Cooperation Agency (ABC). Per ProSavana’s website the organization seeks to:
Vision
Improve the livelihood of inhabitants of Nacala Corridor through inclusive and sustainable agricultural and regional development.
Missions
1. Improve and modernise agriculture to increase productivity and production, and diversify agricultural production.
2. Create employment through agricultural investment and establishment of a supply chain.
Objective
Create new agricultural development models, taking into account the natural environment and socio-economic aspects, and seeking market-orientated agricultural/rural/regional development with a competitive edge.
Essentially, ProSavana is trying to replicate the success that Brazil had in increasing agricultural output in its Cerrado region. The Cerrado is similar to Northern Mozambique’s Nacala Corridor in terms of agricultural potential. On the surface this intent sounds positive, however, the program has led to the displacement of local farmers. There is also evidence that people who have official land usage certificates are being displaced by agribusiness. There is little evidence that their complaints have led to any real resolution. A key factor that differentiates the Nacala Corridor from Brazil’s Cerrado region is that the population density is significantly higher in the Nacala Corridor thus more people are impacted by development. This means that there could be a larger pool of individuals who feel that they have no other course of action than insurgency.
In theory foreign investment could be positive for the populations of places such as the Nacala Corridor. For example, if a company comes in and dramatically increases agricultural yield while providing jobs and training the firm could contribute to local food security and provide economic opportunity while turning a profit and exporting the extra food to countries with less agricultural output. This is a win-win situation and there certainly are cases where this model is being effectively employed. The problem is that there are other situations where displacement and the concomitant removal of livelihoods are the norm. Cases like these generate distrust and make it more difficult to negotiate positive land deals. On one hand governments are in part to blame. For example, there have been cases where companies have negotiated a deal for unoccupied land only to find villages complete with postal service (a pretty clear indication that the government knew that the settlement existed). One the other hand businesses have a responsibility to understand the local conditions in place in which they intend to invest. After all, the failure to understand local conditions can harm businesses.
Anyone investing in agriculture needs to recognize that if land is arable it is safe to assume that someone is occupying it. If no settlements exist there probably is a very good reason for this. This reason needs to be determined in order to ensure that it can not come back to harm the company. Such damages can take numerous forms. For example, sabotage can be an issue. The negative PR that depriving a people of their livelihoods is also never welcome. Security concerns can also impact production. In some cases a situation occurs in which a political group can turn the discontent of the broader population to their advantage at the expense of the private sector. This is the exact circumstance that Renamo could theoretically exploit. The potential for any of these problems is something that companies need to gauge. After all, the negative PR that results from taking peoples’ land combined with lost profits due to suspended operations is not good for business?
Mozambique attained independence in 1974 and almost immediately fell into a state of civil war which pitted the Marxist Frelimo against the anti-Communist Renamo. A peace deal was brokered in 1992. Since this time a great deal of development has occurred in the country, however, in October 2013 Renamo renounced the 1992 Peace Treaty. This action clearly endangers political stability. On Wednesday January 9th Renamo killed six members of the Mozambican Riot Police. In addition to this they have also reestablished a base in Nhamunde in the Southeast of the country. Renamo’s activity in Northern Mozambique has also disrupted mining operations for companies such as Rio Tinto. It is unlikely that they will cease their activities anytime soon. In fact if October’s general election is unfavorable to Renamo further instability could result. If they can generate support from the local population the situation could deteriorate further.
In theory Renamo could exploit discontent against agricultural deals which have deprived local populations of their land. This action is of course subject to how they treat the local people. Renamo has a history of recruiting child soldiers and committing atrocities against local populations. Neither action is the sort of policy that wins the hearts and minds of a population nor do people forget groups that have subjected them to such abuse. Due to past precedent it would be dangerous to assume that Renamo would be able to gain local support, however, projecting what might happen if they pursued such a plan (and were relatively successful) is a worthwhile undertaking. After all, there is a great deal of discontent against deals that benefit foreigners and Maputo at the expense of the locals. One such program is ProSavana. This program will likely be discussed during Abe’s visit as the Japanese have invested a great deal in it.
ProSavana is a joint undertaking between the Ministry of Agriculture of Mozambique (MINAG) and Local Government, the Japan International Cooperation Agency (JICA), and the Brazilian Cooperation Agency (ABC). Per ProSavana’s website the organization seeks to:
Improve the livelihood of inhabitants of Nacala Corridor through inclusive and sustainable agricultural and regional development.
Missions
1. Improve and modernise agriculture to increase productivity and production, and diversify agricultural production.
2. Create employment through agricultural investment and establishment of a supply chain.
Objective
Create new agricultural development models, taking into account the natural environment and socio-economic aspects, and seeking market-orientated agricultural/rural/regional development with a competitive edge.
Essentially, ProSavana is trying to replicate the success that Brazil had in increasing agricultural output in its Cerrado region. The Cerrado is similar to Northern Mozambique’s Nacala Corridor in terms of agricultural potential. On the surface this intent sounds positive, however, the program has led to the displacement of local farmers. There is also evidence that people who have official land usage certificates are being displaced by agribusiness. There is little evidence that their complaints have led to any real resolution. A key factor that differentiates the Nacala Corridor from Brazil’s Cerrado region is that the population density is significantly higher in the Nacala Corridor thus more people are impacted by development. This means that there could be a larger pool of individuals who feel that they have no other course of action than insurgency.
In theory foreign investment could be positive for the populations of places such as the Nacala Corridor. For example, if a company comes in and dramatically increases agricultural yield while providing jobs and training the firm could contribute to local food security and provide economic opportunity while turning a profit and exporting the extra food to countries with less agricultural output. This is a win-win situation and there certainly are cases where this model is being effectively employed. The problem is that there are other situations where displacement and the concomitant removal of livelihoods are the norm. Cases like these generate distrust and make it more difficult to negotiate positive land deals. On one hand governments are in part to blame. For example, there have been cases where companies have negotiated a deal for unoccupied land only to find villages complete with postal service (a pretty clear indication that the government knew that the settlement existed). One the other hand businesses have a responsibility to understand the local conditions in place in which they intend to invest. After all, the failure to understand local conditions can harm businesses.
Anyone investing in agriculture needs to recognize that if land is arable it is safe to assume that someone is occupying it. If no settlements exist there probably is a very good reason for this. This reason needs to be determined in order to ensure that it can not come back to harm the company. Such damages can take numerous forms. For example, sabotage can be an issue. The negative PR that depriving a people of their livelihoods is also never welcome. Security concerns can also impact production. In some cases a situation occurs in which a political group can turn the discontent of the broader population to their advantage at the expense of the private sector. This is the exact circumstance that Renamo could theoretically exploit. The potential for any of these problems is something that companies need to gauge. After all, the negative PR that results from taking peoples’ land combined with lost profits due to suspended operations is not good for business?
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