Economics and similar, for the sleep-deprived
A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?
Update: seemingly not
Update: Oh yeah!
Tuesday, June 17, 2008
Natural Born Resource Curses
Two from Felix Salmon, on the subject of this article about the Zambia/Donegal case, which frankly isn't actually one-sided at all - it might have not talked about other things that some other vulture funds might hypothetically have done in other cases, and it correctly doesn't give airtime to quite a lot of ludicrous apologetics ("we never wanted to go to court yer honour! we tried to negotiate! first we asked to be given a textile factory, then we asked to be given a bank, but nothing would satisfy those awful Zambians! eventually and reluctantly, we were forced to carry out our threats!") but as a factual description of what actually happened, it's excellent.
Brad Setser makes the clear general case against vulture funds (summary - they are the patent trolls of international debt, contributing nothing except aggro and making it much more difficult for larger and more responsible players to negotiate sensible debt workouts, by taking advantage of the lack of an international equivalent of the provisions in the corporate bankruptcy code which allow one to tell abusive creditors in a corporate insolvency to fuck off) in Felix' comments, so I won't reproduce that here. I just want to expand on one of my own comments on the general theme of - what kind of effect does the sort of behaviour described here have on African politics over the long term?
As the Joshua Hammer article correctly summarises, what we have here is the case of a financier who apparently first arrived in Africa full of good intentions.
Sheehan spent a significant part of his career running a nonprofit organization that helped poor countries find creative ways to reduce their debt. In the 1990s, his group arranged debt-for-equity swaps, through which a country could convert its liabilities into partnerships for forestry projects, orphanages, programs to treat such diseases as river blindness, and HIV-AIDS education. Sheehan estimates that he raised about $40 million in Africa, Asia, and Latin America between 1992 and 1996.
ahhh the market in action, so much more practical and hard-nosed than those weaselly aid workers. Microfinance, Hernando de Soto, World Bank, harnessing the power of the market for good ... you can practically hear Gordon Brown spouting this stuff by the yard, can ye no?
Then, in 1999, Sheehan parlayed his expertise into an opportunity to make big money.
He found out about an obscure 20-year-old loan that Romania had made to Zambia, which used the money to purchase $15 million worth of Romanian-made tractors, trucks, and police vehicles. (“It was a bad deal for us,” says David Ndopu, a top official in the Zambian Ministry of Finance. “The police vehicles broke down after six months and just sat around in parking lots.”) Zambia had been trying to negotiate with Romania for a partial forgiveness, but talks broke off in early 1999. That’s when Donegal (an investment vehicle of that name, not the Irish county -dd) stepped in. Its representatives persuaded Romania to sell them the debt at a deep discount—$3.3 million.
With predictable consequences:
At that point, Donegal was holding what was basically worthless paper. Zambia had agreed in its original deal with Romania to ensure sovereign immunity, which it hoped would guarantee that the country couldn’t be sued or have its assets seized if it defaulted on the debt. But surprisingly - and fortunately for Donegal - Zambian officials waived that immunity in 2003, leaving the country open to litigation.
In other words, the Zambians got played. There was a whole load of litigation and he-said-she-saids about whether there had been improper inducements paid, but the bottom line is that the Zambians got played. I doubt that there was even necessarily any actual corruption involved - UK local authorities are always getting played like this, agreeing to ridiculously unfavourable PFI contracts and the like. A good negotiating lawyer has a dozen ways of confusing, baffling, threatening, convincing people they're legally required to do something, etc and on. End result is that the less well-advised public sector player is roughly as likely to get screwed as Paris Hilton's prom date, and significantly less likely to enjoy it. Everything after this was downhill.
Now, two questions. First, do not think for one minute that people working for the Zambian government didn't see this and immediately think "yep, that's the way to get rich in Africa". I mean really, I have blogged at length on this one before, but if you were Levy Mwanawasa and you saw somebody walk off with $15m of Zambia's money like that, what on earth incentive would you have to stint yourself on the Learjets and Ritz-Carltons? The big reason why people agree to debt relief is that an overhanging debt burden massively reduces the incentives to good governance, because all the rewards go into the pockets of overseas creditors. To see something like this happen must be hugely, wildly demoralising for any honest players in the Zambian political system.
And second, what happens the next time we try to help the Zambians through debt-for-environment swaps, etc? The next time a fresh-faced Harvard MBA shows up with a big donation for a local education trust and the slogan "Hi, I'm from the global capital markets and we're here to help?!" I would imagine that the Zambians reason:
"The last time one of these types came here, he spent a few years buffing up his political connections, then he shafted us but good"
and proceed from thence to "No, fuck off". Now this might or might not be a fair way of characterising what the fund in question actually hoped to achieve or whose fault this mess all was, but you know for sure that the Zambians are going to see it that way. As I note in comments at Felix's place, we are all tebbly tebbly concerned about third world countries "maintaining their credibility in the capital markets" but there is also the important matter of said capital markets maintaining their credibility in the third world.
And the two of these points are tied together by a third, which is also relevant to natural resource curse. What the continent of Africa is full of, is chancers and get-rich-quick merchants. The natural resources industry is of course famous for such characters, and the trait that they share with vulture financiers is that they vastly prefer to substitute risk tolerance, sharp elbows and an eye for the main chance for graft and creativity. People like this are useful and even necessary in small doses, but (as any history of your favourite frontier and colonisation narrative will tell you), in large numbers they're pestilential; a walking, talking infestation of the same kind of behaviour that's the staple of the resource curse literature.
There's a post forthcoming (once I've got the Kapelwa Musonda book in hand) on psychological obstacles to development but I think this is the big one; not the lack of a work ethic, but the perversion of the work ethic in a large proportion of the domestic and expatriate business class, who think that success isn't something you build; it's something you find, buried in the ground or buried in a file of Romanian tractor invoices.
this item posted by the management 6/17/2008 01:36:00 PM