I’ve been writing a lot about the Financial Crisis and relatively little about African development but I found a great short little paper by Shanta Devarajan, Chief Economist of the Africa Region at the World Bank, about the impact of the crisis on Africa that combines the too. If you’re curious about how the crisis has impacted other countries here’s a post about it’s impact in Eastern Europe and Iceland. It’s late and I want to keep this short but here’s the core idea followed by the five ways of how the crisis could have an impact, read the paper for more:
It is argued that the transmission mechanisms between the financial systems in Africa and the rest of the world are weak and will minimize the impact on the crisis. African financial institutions are not exposed to risks emanating from complex instruments in international financial markets because most banks in Sub-Saharan Africa rely on deposits to fund their loan portfolios (which they keep on their books to maturity); the interbank market is small; the market for securitized or derivative instruments is either small or nonexistent, and few rely on foreign borrowing to fund their lending operations. Exceptions to this position are then made for countries like Nigeria and South Africa which are seen as having meaningful transmission mechanisms with the larger financial systems in crisis.
This conventional position is now being challenged. As the immediate crisis faced in the last couple of months subsides, and policymakers begin to consider the longer term impact of the crisis in Africa, an emerging view is that the impact on the financial sector in Africa may actually be more significant and longer lasting than first assumed, and the impact on the non-financial sector in Africa will be more notable.
Finally, one obvious way the crisis will affect the real economy is through a drop in commodity prices:
Declining demand for commodities will impact African countries significantly. In Zambia for example, the economy is likely to take a hit from a share decline in copper prices (-24%ytd). As the financial crisis surges into all parts of the real economy in developed economies, African countries will experience a substantial decline in exports as the rapid pace of trade expansion in this decade decelerates sharply.
Another paper by Ray Fisman, this one together with Roberta Gatti on how government decentralization affects corruption. They use cross country data and find that “ﬁscal decentralization in government expenditure is strongly and signiﬁcantly associ-
ated with lower corruption.” I’m not going to go into the actual methodology of the paper here – it’s definitely an area that needs some further study but I wanted to summarize the different theories as to why decentralization might increase or decrease corruption (from the paper):
Important: Tie local revenue generation to local expenditures, since vertical ﬁscal transfers may allow local ofﬁcials to ignore the ﬁnancial consequences of mismanagement.
David Fisman, Ray Fisman, Julia Galef, and Rakesh Khurana have a fascinating (I know I overuse this word but it’s really deserved here) working paper that tries to estimate the value to a company of a connection to Vice President Dick Cheney. They look at the market reaction (i.e. stock price) of companies connected to Cheney to Cheney’s heart attacks, his selection as Vice President, the likelihood war in Iraq at certain points in time, and the probability of a Bush victory in 2000 to see if these events cause the companies to significantly over- or underperform their respective sectors. They find that the value of such ties is zero.They think that this is to some degree generally applicable to individual politicians in the US:
While prior evidence suggests that business-government relations are an important part of U.S. commerce, our results suggest that these connections are more institutional than personal. That is, there are well-organized institutions (such as political action committees and other lobbying entities) for facilitating these relations that differ from the deeply personalized favor exchange that characterize business-politics relations in so much of the world.
I think that this result needs much further study but the implication that the value to a company of a personal connection to a politician is relatively unimportant compared to more formal and broad lobbying and PACs is going to be hugely important in figuring how to best fight corruption and the influence of special interests.
Update: Here’s another similar paper Estimating the Value of Political Connections by Ray Fisman on how news about former Indonesian President Suharto’s impacted companies with connections to him. I remember reading this about two years ago but don’t remember for which class…
As most people have heard at this point, Iceland has been one of the hardest hit in the current financial crisis. Björk summarizes the situation best in this very thoughtful article in the London Times:
Gigantic loans, it has been revealed, were taken out abroad by a few individuals and without the full knowledge of the Icelandic people. Now the nation seems to be responsible for having to pay them back.
This weekend I wanted to learn a bit more about what the situation in Iceland is like and found an Icelandic blog Iceland Weather Report linked from A Fistful of Euros that has been giving regular updates on the situation on the ground:
[T]here were massive layoffs here at the end of last month. Most of those were in the construction industry – manual workers, designers, architects … anyone in the business of constructing new buildings. Many were foreign citizens who had been living and working here temporarily in construction. The second-largest hard-hit industry was, obviously, the financial services sector – bank workers being laid off. The third-largest was retail. In addition, many people have been laid off and then re-hired on different terms, which usually has meant that they’ve had to take a pay cut.
Basically, things here have slowed down drastically. Public and private spending has been cut back wherever possible. Pretty much anything that can be postponed, has been postponed. That goes for companies and institutions [public and private], as well as individuals. People aren’t going out to buy new cars or even new clothes these days, nobody is remodelling their house or doing anything of the sort that isn’t absolutely crucial. A state of affairs that I suspect isn’t unique to Iceland – this is what happens across the board in a recession.
What IS unique to Iceland – and very troubling – is the state of our currency.
The New York Times had an article on the impact as well, much of it focusing on the implications of Kronur’s rapid fall in value on the economy. The starkness of it all didn’t really hit me until I read that a third of Icelanders are considering leaving though:
Her fixed costs are no longer fixed. Five years ago, the company built a new factory, borrowing the 120 million kronur — about $1.5 million — in foreign currencies. But the currency’s fall has increased her debt to 200 million kronur. This summer, her monthly payments were 2.5 million kronur; now they may be double that — the equivalent of $38,500 in Iceland’s debased currency.
“My financial manager is talking to the banks every day, and we don’t know how much we’re supposed to pay,” Ms. Hedinsdottir said.
In a recent survey, one-third of Icelanders said they would consider emigrating. Foreigners are already abandoning Iceland.
So how did this happen? Tom Friedman explains the basics:
The Icelandic banks, while not invested in U.S. subprime mortgages, had gone on their own borrowing and lending binges, wooing savers from across Europe with 5.45 percent interest savings accounts [Note: Interest rates were around 15% because of high inflation].
In a flat world, money can easily seek out the highest returns, and when word got around about Iceland, deposits poured in from Britain — some $1.8 billion. Unfortunately, though, when global credit markets closed up, and the krona fell, “the Icelandic banks were unable to finance their debts, many of which were denominated in foreign currencies.”
The current situation is dire and its enormity is somewhat difficult to comprehend, Iceland is a small country and according to Iceland Weather Report the claims that Britan is making on Landsbanki , “are 3-4 times higher than the war compensation claims Germany was made to pay after World War II.” Recovering from a shock like this is going to be a difficult, long, and painful process. And yet I want to end this post on a somewhat positive note. While the effects of this crisis are truly terrible and none of what happened can be excused it is also an opportunity to reevaluate and to change direction. Icelanders are a proud, dynamic, and well-educated people and have recovered from worse, or (once more) in the words of Iceland Weather Report:
Cultivating what really matters. A return to basic values. That’s the prevailing emphasis around here these days and yes, it is a Very Good Thing. A few short weeks ago the media was still glorifying our “Tycoons” and doing features on people who decorated their massive concrete homes with cold fixtures and soulless minimalist furniture. What we get now is stories of people sticking together, helping each other [...]
Education authorities are making sure children have a secure place in the preschools even if their parents default on payments. A crisis committee is being set up to help people who have lost their jobs. Mortgages are all being taken over by the state’s Housing Financing Fund and those who can’t make mortgage payments can apply to have them halted for the time being. [..]
We have good, solid resources: fish in the sea, heat in the ground, copious amounts of energy, a beautiful country with myriad opportunities in tourism, and an excellent workforce: a nation of well-educated and hard working people, many of whom are now out of work and who can use their expertise to help rebuild our economy and much of the infrastructure. After all, this is not the worst that we have endured: on two or three occasions in the past the Icelandic nation has been close to being wiped out by calamities much worse than this, such as volcanic eruptions and the bubonic plague.
After my initial (somewhat hastily written) piece on the Surge and the followup I wanted to present some thoughts from someone who was actually on the ground in Iraq before and after the Surge. Lieutenant Colonel Dale Kuehl has a paper in Small Wars Journal that you should read in full but I will present his key points here and then delve into the case of a certain Abu Abed (summary is quoted from the article):
One particularly interesting point is the initial goal of the battalion in training the Iraqi army instead of directly focusing on the security situation:
When we arrived in Iraq in October 2006, the focus of the operational concept was transition to the Iraqi Security Forces. Gen Casey briefed us at the COIN Academy in Taji that we would be transitioning the lead for security in Baghdad to the ISF by summer 2007 while our forces would provide tactical overwatch over these security forces. [...]
We soon shifted our focus from transition to protecting the populace. While I am sure units were doing what they could to protect the populace, the focus upon our arrival was on transition. [...] By [doing this] we made a distinct change in our understanding of the center of gravity of this fight. With this understanding we came to one quick conclusion: we were doing a poor job in protecting the populace. The shift in focus led to a subsequent shift in our tactics, techniques and procedures that placed greater emphasis on getting into the community and engaging the populace to a greater degree at all levels.
Additionally, a big part of the success of the Surge was gaining the support of Sunni groups that had previously been fighting together with al-Qaeda and I think that understanding how exactly this was accomplished is important. Kuehl spends some time discussing this and its implications:
As for why Abu Abed and his men came forward when they did…I don’t know for sure, but do have some thoughts based upon my conversations with him and community leaders. First, these guys did not just spontaneously erupt. I believe there was a group of people who were willing to work with us against al-Qaeda, a minority against the cause of the AQI led insurgency. This minority was getting organized and looking for an opportunity. Among this minority were the imams that Col Gentile introduced me to. Not all were on board at first. I think this group was looking for the right time
A story in the Guardian from last year gives a more in-depth account of Abu Abed in his group, agreeing with their reasons for joining the US efforts but cautioning of the dangers of giving so much power to these warlords that might come back to haunt the US and Iraq military later down the line.
Finally, while there are many important lessons in the paper I wanted to point out one that everyone can relate to but that is also difficult to write about. As someone unaffected by this violence it is very easy for me to say this but I have incredible respect for those who can do the right thing when faced with this circumstance. Violence breeds violence: when we are attacked by someone it is easy to lash out and blame everyone in their group/country/religion/etc. but in a situation like Iraq a carefully measured and targeted response will not only help to make sure that the right people will be found and brought to justice but also that future killing will be prevented:
During this time we also put in a COP in northwest Ameriyah. While putting in this outpost a deep buried IED exploded killing an entire Bradley crew of six Soldiers and one interpreter. I believe that our response to this catastrophic event was also one of the reasons the Sons of Iraq came forward when they did. One of the imams told me later that the whole neighborhood expected us to tear the place apart after this event. We had been going through a tough month with six other Soldiers killed in the previous two weeks. The restraint and discipline of our Soldiers was noted and cited by the locals themselves as one of the reasons they chose to work with us.