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ideas have consequences

You are here:Home>>Emeka Chiakwelu>>Displaying items by tag: capitalism
Displaying items by tag: capitalism

"Mitt Romney embodies a system dominated by financial engineering that uses companies as casino chips."

 

'Look, if you've been successful, you did not get there on your own. When we succeed, we succeed because of our individual initiative but also because we do things together." So said President Obama, campaigning in Roanoke Virginia, last week. He went on: "If you were successful, somebody along the line gave you some help".

 

He listed great teachers, government research, roads and bridges and the whole fabric of the American system as various ways in which "somebody along the line" would have contributed to your success. This was the essence of the social liberalism of the great British thinker Leonard Hobhouse, but now championed by a United States president. Hobhouse passionately argued that capitalist wealth was co-created by the interaction of society, social capital and the entrepreneur. Government investment, financed properly by taxation, was the precondition for a successful capitalism.

 

Fox News, self-appointed 21st-century American custodian of free-enterprise capitalism, rather as Pravda guarded communism, was on to the issue like a flash. In my New York hotel, I watched an overheated Fox commentator begin railing about socialism and before long Republican presidential candidate Mitt Romney took up Fox News' cue as is mandatory for any Republican politician. The speech really "reveals what he [Mr Obama] thinks about our country, about free enterprise, about individual initiative, about America," he declared. "Did you build your business? If you did, raise your hand." Hands, pre-arranged, shot up. "Take that, Mr President," he finished.

 

The slowest and most faltering economic recovery since World War II was already triggering anxious questions about how to regain American economic dynamism, but Romney's presidential candidacy has crystallised a fundamental debate about capitalism that will spill over into Britain. It is a potential turning point in both countries. For Romney, whose fortune was made at Bain Capital, the private equity company he co-founded, owned and ran, embodies all the ills (or strengths, if you are so-minded) of a capitalism dominated by financial engineering, with companies as casino chips. It proved Romney's downfall when challenging Ted Kennedy in the race for the Senate in Massachusetts in 1994. The Democrats are determined to make it his downfall a second time round. Bain Capital was, and is, a quintessential product of the 25-year boom in credit and asset prices that began in the early 1980s. Romney spotted the opportunity. He would raise money from private investors, saying the aim was to deploy Bain's consultancy techniques on pre-established companies carefully bought for their turn-round potential. This, coupled with significant leverage, would guarantee sky-high financial returns, not least for Romney.

 

The public understands that if you finance buying a house with a bank providing 90% of the asking price, and the house doubles in value, then your own 10% stake multiples elevenfold. Romney would apply the same logic not to the wealth-generating activity of starting innovative companies but to buying existing companies. Banks were only too keen to lend vast sums of money for such schemes, as they did right up to the financial crash in 2008. The companies' own profits would service Bain's debt.

 

Bain Capital would make the company more valuable—taking production offshore to low-cost countries, selling off redundant land, slashing research and investment budgets. And the general rise in property prices would help matters still more. When the companies' profits had risen, they would then be floated on the stock market for a much higher price and, hey presto, everybody got very rich.

 

President Obama Photo: mail &Guardian


Trail of disasters

 

Private equity has always been controversial. A few mature and poorly managed companies have benefited from the private equity treatment, but it became a huge industry dedicated to deal-making, extravagant leverage and self-enrichment, leaving a trail of disasters in its wake. In Britain, EMI has been emasculated by Guy Hands's private equity fund and now looks likely to be swallowed up by Universal. US journalist Josh Kosman in The Buyout of America writes that many of the companies in the biggest PE deals in the 1990s fared worse than had the taken-over companies stayed independent. He identifies five companies—Stage Store, American Pad and Paper, GS Industries, Dade Behring and Details, all of which paid lavish dividends and fees to Bain before filing for bankruptcy.

 

For private equity is not at core about creating value through innovation and investment. That would need private equity owners to take another risk (the results from innovation are uncertain) on top of the leverage risk, hardly the point of the deal. Instead, the overriding requirement is to fatten up the company so it can be resold on the public markets to deliver great capital profits, just as Obama says.

 

Bain Capital is part of the problem, not the solution. The private equity recipe has ripped the heart out of innovative US while leaving its banks encumbered by massive non-performing debts. The business model is now broken and the US has to start to ask questions about whether the Bain type of allegedly individualist capitalism really delivers growth and jobs. As the answer is: no, what does?

 

Obama has begun the counter-argument. Innovation is necessarily about taking risks and unless there are mechanisms to share them between the private and public sectors, the risks and innovation are necessarily not undertaken. "The internet didn't get invented on its own," Obama argued. "Government research created the internet so that all the companies could make money off the internet."

 

He could have gone much further. The same is true of industries ranging from aerospace to pharmaceuticals. The whole ecosystem in which innovation is housed—patents, copyright, finance, universities, research, knowledge transfer, ownership rules, regulation to ensure common standards—is co-created between the public and the private. Innovative entrepreneurs and companies are in a continuous trial-and-error relationship with their customers, suppliers and outsiders, not isolated in an individualistic silo.

 

The Fox News charge that this is socialism is bewildering and dangerous nonsense. Anglo-American capitalism, mired in debt, low investment and out-innovated by its competitors in Asia and Germany, is at a crossroads. What is clearer than ever is that the conservatives' response is dumb. If Obama and the Democrats can beat them in the US it will have global ramifications—a chance to recognise what really makes good capitalism work. At last, it is game on.

 

WILL HUTTON, writes for Mail & Guardian South Africa

 

 

 

 

 

 

 

 

Wednesday, 08 February 2012 16:44

Africa and Capitalism

Africa can remind the world of the capitalist way

 

Take a walk in downtown Lagos and you’ll see bustling shopping malls and streets populated not just by domestic restaurant chains but increasingly by global brands like KFC, which will soon have 20 restaurants in Nigeria, and Walmart, which is expected to soon open two flagship stores. At Lagos airport you’ll see planes owned by more than 20 international airlines, from countries such as China, Qatar and Turkey. You will also see many of Nigeria’s nearly 90m mobile phone subscribers who together sustain four major telecommunications companies.

 

Capitalism is alive and well in Africa. Some observers will worry about the recent violence arising from the removal of fuel subsidies. The truth is that today’s Nigeria is strong enough to avoid a protracted crisis. This is down to the growing power of the African consumer. A decade or two ago, the rash subsidies decision taken by President Goodluck Jonathan could have brought the country near to a full political meltdown. But in 2012, Nigerian consumers want to buy their groceries and get back to work; they have too much vested in the economy. It’s a pattern mirrored across the continent.

 

Africa is quietly catching up after a period of isolation from the rest of the world between the late 1990s through to 2008. Policymaking has justifiably been criticised for its multi-decade approach of ring-fencing Africa. This created an “us-versus-them” culture, which hinged on one set of development policies – trade, foreign direct investment, capital market access – for certain countries like China, India, Brazil, but prescribed an aid-centric policy for other (mainly African) countries.

This catalogue of policies prompted the economist Paul Collier to caution that many African countries were “shearing off” from the rest of the world. In part, as a consequence, although Africa is home to nearly one billion people, the continent’s share of world trade hovers around 2 per cent. Meanwhile, of roughly $1.12 tn worth of total global foreign direct investmentin 2010, sub-Saharan Africa received a paltry 3 per cent. However, this is about to dramatically change.

We now see some of the inadvertent benefits from this isolation: Africa is less exposed to the fallout from the radioactive economies of the developed world.

The credit crisis could take a decade to unwind. Already, many investors have been burned entering illusory recovery trades such as eurozone sovereign bonds, emerging market equities, and big financial institutions too early.

 

It is against this backdrop that African economies looks particularly stellar. Sub-Saharan Africa is forecast to grow at 5.5 percent for 2012, according to recent estimates by the IMF, nearly 4 per cent higher than the anaemic growth projected for advanced economies. Most African countries have no massive leverage problem to work through – if anything even good investment opportunities have been starved of capital.

 

And in some African countries, South Africa being a pertinent example, banking regulation is a model for the rest of the world. While the political risk premium remains relatively high, over the past decade real efforts have addressed many of the reasons for this – corruption, lack of transparency, and nervousness over property rights.

 

What’s more, the story extends well beyond the well-hyped resources sector – the majority of the stocks that trade on African exchanges are non-commodities; including telecommunications and consumer goods, and financial services, where even relatively small countries like Zambia has 18 registered foreign and domestic banks.

 

Investments will continue to benefit from the Africa demographic story, which is decidedly skewed towards the young. Over 60 per cent of Africans are under twenty-four years of age. If well harnessed, such statistics portend a boom in local private demand in decades to come. Changing dietary preferences from grain-based to protein-based foodstuffs, underlie a boom in food producers. Africa is home to many of the 2bn people who have a mobile phone but no bank account. The rapid integration between the financial products and mobile telephony creates a myriad of opportunities to directly serve the consumer, and to cut out the bureaucratic middle men.

 

Through conversations with policymakers from around Africa, including heads of state, the perspective is clear. They see what happened in the rest of the world as a failure of governments not a failure of capitalism. In its true form, capitalism is thriving in Africa, dragging millions out of poverty and into the shops. It is a happy and poignant irony that the isolated continent will succeed by following the rules of the market that the rest of the world forgot.

 

Dambisa Moyo is the author of Dead Aid, How the West Was Lost and the forthcoming book Winner Take All

 

 

Africa is confronted with lack of internal security which becomes a deterrent force in the economic advancement of the continent. Capital flight and low foreign investment are the precipitates and ramification of the insecurity.

Beyond the fundamental security motivation of the exercise: "For the U.S., however, AFRICOM will be more than a military exercise. Stephen Morrison, director of the Africa program at the Center for Strategic and International Studies, says it will feature a unique interagency mix (NPR), combining intelligence, diplomatic, health and aid experts. That suggests to many a more robust effort to fight AIDS and other diseases in Africa, to encourage democratic and market economic reforms, as well as to prevent states from collapsing and providing fertile ground for terrorists. Finally, Africa stands to play an increasingly important role as a supplier of oil to America (National Interest Online) over the next few decades, with some projecting that West Africa's exports to the United States will outstrip the Middle East's by 2015. "

Africa inability to advance economically like the rest of other continents is due to several fundamental reasons; among them is paucity of security infrastructures and apparatus. Africom can play a vital role in contributing to the stabilization of maritime life in Africa. The ships and cargoes transporting commodities and passengers must be able to conduct their businesses in a worry free environment.

The sum total of the African countries and African Union contingency plans for securing the territorial integrity of the continent is minimal and is not meeting up the requisite infrastructure needed to safe guard the continent. In the 21st century world there cannot be advancement in the economic development without adequate security that allow and guarantee passage of goods and services. Africa is beset with instability and ubiquitous intra and inters mêlée that makes free market, trade and capitalism unattractive.

At the horn of Africa, the Somali pirates operating in the Indian Ocean are not making it easy for passage of ships and cargoes including passengers who have services and expertise to render to Africa. The Africa Union does not have any strategy to safeguard waters of Africa, nor does any African country have the resources and technical know-how to undertake such a complex and gigantic project. The waters of West African coast including Gulf of Guinea, must be secured from armed militia and terrorists who are bent on obstructing oil production in the upstream oil drilling and exploration.

Africom can be a force for good because it can supply the security infrastructures, manpower and technology needed to secure Africa from the danger of pirates and criminals that are making it difficult for normal conduct of maritime business. The resource and money that African countries have devoted and allocated for securing maritime peace can be used for other project in the continent. The point is that Africa will not relinquish her responsibility to Africom but work in concert with Africom in keeping Africa safe from criminal intruder, warmongers and terrorists.

When Africa does experience uncivil eruptions and disturbances that produce exothermic havoc including pogroms, massacre and holocaust in Rwanda, and the on going Sudan problem, Africa lacks the logistic capability to transport manpower to the danger point. Africom can be of great aide in such situation and can be become a combatant force to arrest ugly situations and developments that have the potential to escalate to a monstrous dimension that can demolish massive life and property like in Rwanda massacre.

When Africa achieved a quantifiable peace the flow of investment and capital becomes more attractive to both domestic and foreign investors which can halt capital flight. Africom can be a constructive partner in this endeavor without jeopardizing African territorial integrity.

The psychology of trust

It is said, "Once bitten, twice shy." Africans cannot be blame for being skeptical about the latest development because of her antecedent history with outsiders. Slavery and colonialism legacy still permeates the continent's reaction and psychology to new ideas and developments including the presence of Africom. But Africa cannot dwell in the past, for the time has come for Africa to seize new opportunity and take reasonable risk in order to further her interest and facilitate stability in her geopolitical landscape. Africa can be able to forge strategic alliance with America and Africom. All things being equal, America has done a lot of good things in Africa. United States is an exceptional nation in that she has no colonial ambition and can be a catalyst partner for economic development in Africa. The emergence of President Obama, an African America is exemplary of the goodwill to Africa which can encourage confidence building for Africans.

Freedom and prosperity

America has to work succinctly to assiduously allay their fears and show to Africans the benefits of Africom. This must be done with goodwill and civility while respecting African territorial integrity.

Peace and tranquility are good for business for all the parties concerned which can be achieved through dialogue and understanding. To this end, American diplomats in Africa have to embark on thorough enlightenment campaign. Africa needs stability and quantifiable peace for economic progress and Africom can contribute to the endeavor.

Africa Political and Economic Strategic Center (Afripol) is foremost a public policy center whose fundamental objective is to broaden the parameters of public policy debates in Africa. To advocate, promote and encourage free enterprise, democracy, sustainable green environment, human rights, conflict resolutions, transparency and probity in Africa.