Can China Fix Its Environmental Disaster?

By Paolo von Schirach

August 11, 2013

WASHINGTON – China is indeed “The World’s Worst Polluter“, as The Economist newsmagazine put it in its cover story (August 10th-16th, 2013). The implications are bone chilling for the Chinese people who are forced to breathe foul air and who cannot drink their water. But the rest of the world will also pay a huge price, given the enormous impact of China’s massive emissions on the planet. Indeed, the earth is getting close to a tipping point. Scientists indicate that we humans should do our best to keep carbon dioxide levels below 450 part per million. Well, we are now at 400 part per million. And most of the increase is due to China’s emissions. Put it differently, unless China reverses its course, even the combined efforts of the rest of the world may be not enough to avoid climate change Armageddon.  

Growth now, at any cost

Of course, we do know what happened. Over the last 30 years China pursued relentless industrialization, with total disregard as to how it was doing it. In other words: zero environmental protection standards. The goal was growth, fast growth, whatever the cost. Environmental protection measures costs money. This would slow us down. Therefore, no protection.

China’s apologists say that, in its noble pursuit of higher standards of living for hundreds of million of poor people, China was no different from Britain, the USA or Japan: “High growth now, stricter environmental standards later”. So, what’s the big deal about China’s behavior?

Lessons of experience were ignored

This exculpation is totally disingenuous. The truth is that when older manufacturing economies in the West were pursuing higher growth, the extent of the environmental damage their industries were causing was not well understood. But, beginning in the 1960s, policy makers in America, Europe and Japan began to understand it. And they started taking remedial action, while setting new standards that industries would have to abide by. 

Therefore, given  more than 40 years of Western environmental protection studies, enactment of new policies and consequent appreciation of the actual cost of cleaning polluted soil, air and water, China’s policy-makers cannot seriously claim that they had no idea that what they were doing in the 1980s and 1990s would cause serious, in fact horrible, damage.

Because of the well documented and analyzed Western experience, they knew about pollution, its consequences, the high cost of fixing it, and therefore the importance of preventing it. But they simply did not  care. And when it comes to the scale of the damage the Chinese caused, what they have done does not even remotely compare with what Europe or Japan did in the 1960s or 1970s, simply because of size. China is an enormous country of 1.3 billion. Just to cite one factor, most of its electricity comes from dirty, coal-fired plants. In order to provide electricity to all these people, not to mention hundreds of thousands of industrial plants that fueled the export-led economy, China became the largest user of high polluting coal in the world. As a result, beyond the Chinese people, now the entire world suffers the consequences of China’s emissions. 

Serious clean up efforts?

That said, what are China’s leaders going to do? Now that pollution has become a front burner public policy issue, the Government is trying to show that is really working on it. As the cited The Economist story explains, massive clean up investments have been announced, along with new regulations, strict enforcement standards, etc.

Obviously all this new activism is as much about politics as it is about caring for the environment. The Chinese people, especially the new and better educated middle class, understand that higher standards of living are of no value when the city dwellers are forced to breathe the most polluted air on earth. At some point, China’s scattered but vocal grass-roots environmental movements may morph into organized political resistance. And this is a huge worry for the Beijing leadership.     

Powerful resistance

But, while we have literally tens of million Chinese clamoring for clean air and clean water, while worrying about contaminated food, there are equally powerful interests that will resist meaningful change. The big manufacturers, the big utilities, all the super polluters have no intention to spend fabulous sums of money to clean up their mess. And, even assuming that will be forced to do this, the Communist Party leadership understands that making environmental clean up a top investment priority at least in the short and medium terms will result in slower growth. And this awareness clearly creates another political problem. The very legitimacy of China’s  leadership rests on its ability to deliver consistent high growth. If China’s economy slows down substantially, this is likely to create discontent and disillusionment.

Unpleasant political outcomes

So, there you have it. This is a classic “damned if you do, damned if you don’t” most unenviable situation.  Whichever way you look at it, China’s growth will be less potent, while its dreadfully damaged environment will improve only a little bit, and at a very high cost.

Frankly, my hunch is that the environmental damage already caused is so huge that it is probably irreversible. At best, provided sustained efforts and fabulous amounts of money, China may be able to stabilize  a very bad situation. But the price of any improvement will be lower economic growth. And that carries negative political consequences.

Indeed, as this massive clean up effort will unfold, millions of Chinese will have reasons to complain about persistent pollution and/or the impact of permanent damage, while at the same time complaining about slower economic growth and diminished opportunities.

I really have no idea how Beijing plans to manage all this.

Americans Have Discovered Hummus – Growing Sales For The Sabra Brand

By Paolo von Schirach

August 4, 2013

WASHINGTON – For once there seems to be  a positive connection between healthier eating habits practiced by a growing number of Americans, increased sales of  chickpeas based hummus, and the opportunity for Virginia farmers  to start growing a new variety of chickpeas instead of tobacco. It all started with the successful marketing of Sabra products (a joint venture between Israel’s Sabra and Pepsico) in the US market.

Hummus for America

As a result, more and more Americans have discovered hummus, a delicious Middle Eastern dip made with chickpeas. Sabra dips, along with other varieties produced by different brands such as Tribe, are becoming quite popular in America. While hummus sales volumes are still way behind salsa and other dips and snack foods, Sabra products are doing better, year after year. 

 Chickpeas will replace tobacco in Virginia

Well, now Sabra has established a new production plant in Virginia. The problem is that US chickpeas are grown mostly in the North West, creating thus a supply chain uncertainty. Indeed, it may be a problem for East Coast based Sabra to depend entirely on the reliable delivery from the West Coast of  its most essential ingredient.  

For this reason, the firm, (that now runs its main processing plant in Chesterfield County, Virginia),  turned to crop specialists at the Virginia State University for help. There they connected with India born Dr. Harbans Bhardwaj. He started experimenting with different varieties of chickpeas that would grow well in Virginia’s more humid climate. Most importantly, he has to select a variety that will develop resistance against a nasty fungus that attacks chickpeas plants, potentially destroying entire crops.

If Dr. Bhardway will succeed, then many Virginia farmers will have a good opportunity to start planting chickpeas instead of tobacco, in order to supply the Sabra processing facility.

Health dietary habits spur good business

And here is the real story. Tobacco is bad for you, as it is the basic ingredient to make cigarettes. And cigarettes may kill you. Chickpeas instead are really good for you. This humble legume is packed with proteins, several phytonutrients and fiber. 

The fact that Americans like hummus made with chickpeas represents a positive dietary change for a population that is in general addicted to unhealthy stuff. So, here is the happy picture. Americans develop a healthy eating habit. Sabra makes money selling hummus, and Virginia farmers will also make good money growing chickpeas, (instead of nasty tobacco), this way ensuring a reliable supply for the Sabra processing plant.


Egypt’s Tragedy Is In The Mix Of Impossible Politics And Total Economic Collapse

By Paolo von Schirach

July 16, 2013

WASHINGTON – The unfolding Egyptian drama sadly tells us that the Arab Spring was no Spring at all. It was a convulsion affecting populations made miserable by amazingly obtuse tyrants who failed in all respects. They believed that autocracy was the best and only political option for the Arabs, while they did not promote any meaningful economic modernization, allowing their countries to be left way behind by a rapidly advancing global economy. 

New politics?

In Egypt’s case, getting rid of shop worn Hosni Mubarak, as difficult as it seemed at the time, was in fact the easy part. After that, the Egyptians would have needed pragmatic, middle of the road and mostly secular reformers to lead the country into the mostly unknown territory of democracy and rule of law, while at the same time breaking a new path leading to economic modernization, something that should have included the emancipation of women.

Morsi: arrogant and incompetent 

Well, Egypt got none of the above. The majority of the population (mistakenly) believed that the Muslim Brotherhood could provide stability. Well, they were profoundly wrong. President Morsi proved to be arrogant, stupid and incompetent to the very end. A more pragmatic leader could have salvaged something by compromising with the opposition once the military issued its ultimatum. If Morsi had been more conciliatory, today he would still be President, albeit with far less power and latitude. Whereas he made thing worse by doggedly refusing to acknowledge that more than half the country was vehemently against him and his semi-autocratic aspirations.

Political rebellion in the midst of economic chaos

And now? Now it is a lot worse. The military is in control. Their claim that they only want to steer Egypt towards a more inclusive democracy may very well be genuine. But the country is in a terrible political mess, while teetering towards bankruptcy. And here a dreadful situation becomes truly awful. It is pretty clear that the anti-Morsi crowds were protesting against both the politics of the Muslim Brotherhood and the deteriorating economy. Now there is a totally unrealistic expectation that a new government will bring economic relief. If this expectation is not met, expect more turmoil. So, here is the mix at the root of this new chapter in Egypt’s crisis: political rebellion in large part driven by genuine hunger. 

Turning a page on the political front will be an incredible challenge. Morsi does have genuine followers who believe that he should be reinstated and who are therefore refusing to participate in any new political arrangement sponsored by the military who ousted him. But if finding a new political equilibrium is a daunting task, recreating economic stability in Egypt is almost impossible, at least for several years. 

Egypt’s economic collapse

If you want a detailed picture of the depth of systemic economic management, please read the excellent analysis provided in a WSJ op-ed piece by David P. Goldman, President of Macrostrategy LLC, (The Economic Blunders Behind the Arab Revolutions, July 13-14, 2013).

Here is an excerpt:

“Egyptians are ill-prepared for the world economy. Forty-five percent are illiterate. Nearly all married Egyptian women suffer genital mutilation. One-third of marriages are between cousins, a hallmark of tribal society. Only half of the 51 million Egyptians between the ages of 15 and 64 are counted in the government’ measure of the labor force. If Egypt counted its people the way the U.S. does, its unemployment rate would be well over 40% instead of the official 13% rate. Nearly one-third of college-age Egyptians register for university but only half graduate, and few who do are qualified for employment in the 21st century.”

Got that? 40% unemployment. And then there is the daily bleeding of state coffers due to the established practice of government subsidies for staple food and more.

Saudi Arabia will give cash

For the moment it looks as if this exhausted country of almost 90 million will get some emergency cash from Saudi Arabia, Kuwait and the UAE. But this welcome relief is not a substitute for new economic policies.

And so, here is the picture. The Egyptians will have to find the wisdom to elect a coalition government that will be able to navigate the treacherous waters of a society deeply divided between fundamentalists and urban secularists, while at the same path charting a course leading to meaningful economic improvements.

While we should wish the Egyptians best of luck, realistically we should acknowledge that this is te closest thing to  “Mission Impossible”.

America has become irrelevant

One last note. In case you haven’t noticed, America has become essentially irrelevant in this whole process. Until yesterday Cairo’s strongest ally, now Washington is routinely vilified by everybody in Egypt, liberals and conservatives.

Sure enough, it would be good for America to retain and in fact strengthen its historic ties with the Egyptian military. Therefore, by all means, do not suspend the US assistance package. But let us also recognize that the $ 1.3 billion we give to the Egyptian armed forces is not that much, considering what the country needs just to stay afloat.

The Obama administration wanted to create a new era with the Muslim World. (Remember the Cairo Speech?) But it was caught completely off guard by the Arab Spring. As the profound upheaval was taking place, a mix of timidity and lack of money proved that Washington today is at best a spectator in a Region in which it used to exert an enormous amount of influence.

With A Slowing Economy, China Is On Its Way To Becoming A “Normal” Country

By Paolo von Schirach

July 15, 2013

WASHINGTON – If you listen to Beijing Government officials, everything in China’s economy is moving along according to plan. And the plan is to rely less on growth led by fixed investments and exports, while boosting domestic consumption. Turning things around in the second largest world economy may take a while and, understandably, there may be some small shock waves here and there. But China’s leadership will eventually manage to steer the country in a new direction, based on sound, self-sustaining foundations.

Extraordinary growth may be over

Well, this may very well be the intent. But it is not at all clear that the Chinese Communist Party leadership is in total control, while there are indications that the economic fundamentals may be far weaker than the official statistics would suggest.

China’s incredible rise was built essentially on two strong pillars. The first one was construction, including an incredible modernization of all key infrastructure, (ports, airports, highways, high speed rail). The second one was export-led manufacturing made possible by a few factors: public policies favorable to investments in new plant and equipment, ultra-cheap labor provided by migrant workers coming from the impoverished country side, and the vastly improved infrastructure backbone mentioned above. Chinese factories could produce cheaply and deliver fast to their overseas customers.

Construction sector and exporters

The fact is that these two basic ingredients may not work as well as before. Construction turned into overbuilding largely led by speculators. Now, there seems to be over supply. So, expect far less construction and therefore less business for the many sectors that supplied the construction sector.

The export led boom worked extremely well in its early stages of China’s take-off, when it was all about penetrating and conquering new markets. But all this has been done. Therefore it would be foolish to expect the same levels of export growth that Chinese toy or small domestic appliances manufacturers experienced in the 1990s. Besides, China’s cheap labor advantage is slowly but surely evaporating.

Besides, and this is a key new issue, in order to keep let alone grow their export markets, going forward China’s manufacturers will have to compete on quality as opposed to just price. And this promises to be a lot more complicated. Creating and nurturing innovative enterprises with cutting edge technologies is a lot more complicated than mass producing cheap coffee makers for Wal-Mart.

Shadow banking

On top of all this, we now know –even though only vaguely– that there is a huge Chinese shadow banking system, escaping regulations and controls, that is over exposed to a massive amount of bad loans. How much money is involved, nobody really knows. But it looks as if the Government will have to intervene in order to prevent major financial shocks.

The environment has to be fixed

Last but not least there is the urgent need to fix the environment. 30 years of growth, no matter at what cost, have caused enormous damage. Official studies now estimate that people living in the Northern part of China, on average are losing 5 years of life on account of maladies caused by pollution. This is a lot more than a nuisance. It is a crisis. And it will have to be addressed swiftly. The logical corollary is that large amounts of capital will have to go into cleaning up the mess. Therefore it will not be  available for other purposes. 

The real facts still unknown

Mind you, this assessment is an approximation based on partial and perhaps inaccurate data. We do not know how many construction firms in China have gone bust. We do not know how many state-owned corporations survive only because of easy credit provided essentially for free by state-owned banks. We have no idea how large the shadow banking system that provided credit to medium and small sized private sector companies really is. We have no idea how long and how much it will take to fix China’s environment, water and air.

But, if history is any guidance, I suspect that the real problems are much bigger than the authorities are willing to admit.

That said, by comparison with other struggling world economies, China’s 7.5% rate of growth is still astonishingly high. But trajectories in the long run matter more than yearly snapshots. China is still growing, but its rate of growth is steadily falling. 

All according to plan?

The notion that all this is according to plan, and that the Chinese consumer will soon pick up the slack and re-energize growth does not look credible. If the export and construction boom is over, millions of Chinese workers will become unemployed or under employed.  Beyond that, millions of rural Chinese trapped in the country side no longer have an open avenue (factory jobs in big cities) leading to improved economic opportunity. New growth led by consumer spending must be predicated on rising disposable income levels, and that assumes a buoyant economy. A so-so economy will not do it.

Assuming lower growth, I am not quite sure where all this new cash fueling consumer spending will be coming from. If this is indeed so, having exhausted its special –and in the end temporary– economic advantages, China may be well on its way to becoming “normal” again.

Bernanke Says “Highly Accomodative Policies” Still Needed, And Markets Shoot Up

By Paolo von Schirach

July 11, 2013

WASHINGTON – No, America, the Fed is not going to remove the highly spiked punch bowl from the party. You misunderstood.  In truth, Fed Chairman Ben Bernanake clumsily said something about slowly ending QE3, this way getting everybody scared that the Central Bank induced festivities would soon be over. But, no, he did not really mean it. On the contrary, he just said that the US economy still needs “highly accomodative policies” for the foreseeable future. Got that? Not just “somewhat accomodative polices”. No, Mr. Investor, America needs “highly accomodative policies” which means zero per cent interest rates for quite a long time.  

The party will continue

After hearing the latest from Bernanake, the Wall Street crowd cheered. The stock market shot up. The dollar went down, to the delight of US exporters trying to compete with the equally “highly accomodative policies” of Bernanake’s counterparts in Europe and elsewhere, including accomodation on steroids now pursued by the Bank of Japan.

So, here is the new “rephrased” message. The Fed will not change its course, because the US economy, despite some improvements, is still too weak. Unemployment at 7.6% is too high, growth below 2% is modest, and inflation is not a problem.

Fed moves markets

It is amazing how a US Central Banker, a man who makes about US $ 200,000 a year, (yes this is the ridiculously low salary of the Fed Chairman), with just a few words can move hundreds of billion in and out of stocks, bonds and currencies.

It is amazing, and also not at all good. Capitalism should be based on market forces that should help all players  discover the real value and therefore the appropriate market price of all assets, at the same time allowing for realistic risk evaluation.

Interference is not good: you get fake numbers

As long as Central Bankers keep interfering with the fundamentals, investors will not know the real value of anything. And, what is worse, as of a few years Central Bankers interference is the established “New Normal”. Once upon a time the Fed would act may be once a year in a fashion that would move markets. But we have been living in a Fed induced market place since the Great Recession of 2008.

Today we are experiencing the consequences of the latest Fed pronouncement. As interest rates will stay low, stocks will continue to benefit from a Bernanke premium. To the extent that interest on US 10 year bonds will adjust down, US borrowers will get the added benefit of lower interest rates on their new mortgages, this way boosting the entire US housing market.

The plain truth is however that the real economy is not performing as well as an all time stock market would indicate. Just like all those records broken a few years ago by baseball players on steroids, all this Wall Street froth is mostly fake stuff.

Martin Feldstein’s Recipe For Southern Europe: Stimulus Now But Combined With Credible Public Spending Cuts

By Paolo von Schirach

Related story:

July 9, 2013

WASHINGTON – In a recent piece (see link above) I pointed out that there is no sign of a real qualitative “turn around” in Southern Europe. Greece, Portugal and the others are just limping along, supported by loans from their better off northern cousins. However, these loans are not leading to qualitative transformations. At the moment, they just keep these impoverished societies alive. And there are signs of things getting worse. Under strong pressure from exhausted populations, political leaders in Athens, Rome and Lisbon bargained with Brussels/ECB/ International Monetary Fund to obtain some relief from drastic austerity measures. While this may help calm restless societies a bit, less austerity means more borrowing and therefore, in the long run, adding to the debt and the misery. 

More borrowing is a bad idea

In an insightful FT piece, (An end to austerity will not boost Europe, July 9, 2013), Harvard economist Martin Feldstein points out that more borrowing on the part of already impoverished countries is a bad signal to financial markets. With no end in sight to Club Med’s spending and debt problems, investors will demand higher interest rates in order to lend more cash to unreliable debtors. So, short term relief today will translate into a bigger debt burden tomorrow.

Very sensibly, Feldstein argues that Southern Europe should combine short and medium term stimulus with serious public spending reform. He advises to concentrate investments in new infrastructure and training programs that will give new skills to the unemployed.

It is too late

Well, with due respect, this is a bit like saying to a terminal alcoholic that it may be wise to cut the booze. Sensible idea, of course. But it is too late. While a collective awakening entailing the re-discovery of free market capitalism is in theory possible, this would be a miracle. Southern Europe is largely prisoner of a socialist, welfare-plus-entitlements frame of mind. And this is combined with political systems that reward loyalists with fake public administration jobs. Greece elevated this wasteful practice to an art form. Likewise, poor Sicily has many more public servants than bigger and richer Lombardy. France has many more public officials than thrifty Germany, and so on.

Flawed models

Any serious public administration reform plan would have to include cutting tens of thousands of useless civil servants who are also the (often essential) political backers of the elected officials who gave them the jobs. So, double problem: a political upheaval and an economic disaster, as most of these newly unemployed bureaucrats would have nowhere to go in the private sector. 

Last but not least, very little innovation and enterprise creation in globally competitive sectors, while the better educated young people leave, seeking greener pastures elsewhere.

The sad conclusion is that fixing Southern Europe would require a highly improbable collective shift from “statism” to a genuine “private sector-led” economic model. Such a huge cultural, ideological and psychological turn around would be a monumental task on any good day. Trying to transform the values and the beliefs of millions of depressed and demoralized people in the midst of enduring hardships is next to impossible.

Europe Will Continue Bailing Out Its Weak Southern Members

By Paolo von Schirach

July 8, 2013

WASHINGTON – Back in 2009, at the very beginning of the Eurozone debt crisis, optimists believed that Greece, Portugal, Spain and Italy only needed a mix of extra liquidity and credible public spending cuts to stop the red ink and get back on their feet. The consensus was that all these countries were experiencing a liquidity crisis. With generous financial aid from its better off northern cousins southern Europe would gain the necessary time to fix its public spending, this way signalling to financial markets that there was a genuine healing process underway.

Structural crisis

Well, it did not turn out this way. Leaving aside the cumbersome and often rancorous negotiations, the fact is that several years into a huge problem that manifested itself at the end of 2009 there is till no light at the end of the tunnel. It is clear that Southern Europs’s crisis goes much deeper than temporary liquidity. The crisis is unfortunately structural. There is an unhappy combination of dysfunctional and bloated public administration, high labor costs, labor market rigidities and too little investments in innovation. All this makes these countries uncompetitive, while people continue to demand benefits and costly entitlements. 

Sure enough, drastic austerity measures imposed by the lenders did not help much. It is like putting on a diet a patient who just had major surgery. Lack of nourishment will simply delay recovery.

No turn around

Still, in the long run all the loans that the weak countries have receive make sense only if these programs will lead to a genuine, self-sustaining economic and fiscal recovery. In other words, markets need evidence that at some point Greece will have a productive economy and a slimmed down and efficient public administration. However, at the moment there is no confidence in any turn around. At the moment the debate is still focused on the modality through which more aid will be disbursed.

Endless bail out? 

And here get to the real issue. Is northern Europe willing to accept the cost of keeping alive its structurally weak southern European partners –indefinitely? At present this is the most likely scenario, even though there has been no open and frank debate.

It is quite possible that, after the German elections to be held in September, Berlin will force a serious discussion. But if the Germans do not want to press the issue, then we can expect more of the same. If the Germans, the Dutch and the Scandinavian countries are indeed too afraid of the consequences of any forced exit from the Eurozone we can expect that the bail out out the poor southern cousins will go on and on. For the time being this may appear politically more palatable. But it will weaken Europe even further.

“Power Africa”: US Aid To Increase Electricity Production

By Paolo von Schirach

June 30, 2013

WASHINGTON – Back in 1998, while working on an export promotion project in Mozambique funded by the World Bank, I had a chat with a young US Embassy officer stationed in Maputo, the capital. When I asked her what she was working on, she told me that she was organizing exchanges of musical groups. I was frankly stunned.

Musical groups exchanges?

Mozambique, a truly poor country to begin with, at that time was barely emerging from years of a civil war between FRELIMO and RENAMO that resulted in the almost complete destruction of whatever economy and infrastructure had been left behind by the Portuguese, for centuries the colonial rulers. Beyond that, Mozambique was plagued by the legacy of its nasty civil war in the shape of untold numbers of land mines that made it almost impossible to use a large part of the land. With all that, the US Government  was using scarce aid resources to organize tours of musicians? Talk about having your priorities all wrong.

Electricity for Africa

Well, now it looks as if we may be doing a bit better. While in Africa, President Obama announced a new “Power Africa” initiative aimed at funnelling US Government investments up to $ 7 bln into electric power generation and distribution. This significant amount will be matched by $ 9 bln to be provided by American corporations such as Symbion Power and General Electric. The program will target Nigeria, Liberia, Ghana, Tanzania, Kenya and Ethiopia.  

This is very good news for Africa. While the Continent is growing, it is a well known fact that lack of access to reliable and affordable electric power is probably the single biggest obstacle to economic development. It is intuitively obvious that  very little can be done without electricity. Besides, in most of Africa electricity comes and goes, with interruptions that may last for several hours, or even days.  And do keep in mind that in most countries, whatever electricity there is, distribution is usually limited to cities, with almost nothing going to rural areas.

Try and run even a small workshop –let alone a factory– without electricity. For this reason, most businesses in Africa have to invest in their own diesel powered generators. But this means a significant addition to total production costs, in countries that have low labor productivity to begin with. On top of that, African companies face other hurdles in terms of inefficient public services and inadequate to horrible roads. More reliable and reasonably priced electricity would go a long way to improve all that.

America finally stepping in

That said, what took so long? While China for decades has been unloading billions into Africa, sending there its companies, its banks and its people, America has been essentially absent when it comes to assistance targeted to economic development.

In fairness, America is in the lead among donors when it comes to fighting HIV-AIDS and supporting other health care programs. This massive amount of aid coming from America saved lives. Still, being alive but condemned to a life of ignorance and poverty is not such a great prospect.

Of course, America has what it takes in terms of know how and sizable multinational corporations that can make and support the right investments. Still, this combined $ 16 bln pledge is not that much. In most African countries 80% of the rural population has no power at all, while cities –and this includes factories, offices, government services, schools, hospitals– usually have inadequate electricity. 

First step?

My hope is that this “Power Africa” initiative launched by President Obama is just a first step, to be followed by a continuous American commitment –both Government and private sector– to Africa’s economic development. It is true that Africa is the last frontier. There are hundreds of million of potential producers and consumers eager to join the global economy. Still, without adequate infrastructure this will be a very, very long  journey.

Mass Protests In Moscow Last Year, Now Demonstrations In Turkey And All Over Brazil Are All About Bad Governance

By Paolo von Schirach

June 18, 2013

WASHINGTON – Last year there were mass anti-Putin protests in Moscow. In the last few weeks we have seen huge demonstrations in Istanbul and now more of the same all over Brazil. There is a common thread. People, especially young people, demand good governance. In Russia the issue is a semi-official autocracy. In Turkey it is about an arrogant, self-righteous Prime Minister. In Brazil it is about corruption, incompetence and massive inefficiencies.

People want accountability

Through these massive demonstrations people vent their accumulated frustrations. Rightly or wrongly (but most likely with cause) they perceive that they are governed by a bunch of incompetent and corrupt politicians and bureaucrats who cannot deliver in a decent fashion even elementary services.

In Brazil the spark that ignited the street rebellions in San Paulo and beyond was a rather banal but symbolically significant hike in the cost of bus tickets. People resisted the idea of having to pay more for a basic public service when they read about colossal mismanagement of costly public projects, (many of them currently underway to prepare fr the upcoming Olympic Games and the soccer World Cup). The street rebellions are mostly against lack of accountability, while the general public is forced to pay more.

Protests will end, problems will stay

These mass street protests may not go anywhere. In the end those who hold the keys to the institutions of real power,(police, intelligence services, army), retain an enormous inherent advantage. They can hold on, while the protesters eventually lose heart and go home.

But the eventual defeat suffered by the protesters is no “victory”. The very fact that these protests take place is an indication of ongoing, chronic mismanagement. And chronic mismanagement means rot. If unchecked, mismanagement creates a culture of mistrust between those who govern and those who are governed. The latter feel more like victims rather than citizens. As victims they will resort to tricks and subterfuge in order to minimize the damage inflicted upon them by an incompetent and often mean spirited government. Cutting corners, tax avoidance and more become a way of life for people trying to get by.

Public service?

How can these countries overcome this huge obstacle? Hard to say. It is easy to proclaim at elections time strict adherence to “values” and “the highest ethical standards”. It is quite difficult to create a political culture of “service to the public”. This would imply making those in government and the functionaries that operate the machinery of government really believe that they are indeed “accountable”; and that public service is a privilege and not a sinecure. A government job should be viewed as an opportunity to do good, not as a chance to help oneself with taxpayers funds.

A vibrant democracy requires more than free elections

In the end, one thing is clear. A real, functioning democracy needs true legitimacy. Legitimacy, of course, starts with free and fair elections. But free elections are only the beginning of the process. It is real good governanance that instills confidence and a solid bond of trust between those who govern and the governed.

If people perceive that they have to suffer under a rigged system in which those at the top steal, misuse and waste public money, the government has lost all legitimacy. Hard to have a well functioning, growing society under such conditions. And this is the main reason why so many emerging countries –including the once upon a time promising BRICs–  do not graduate to the next level.

They are held back by bad governance and by the culture of mistrust that it feeds.

Nelson Mandela, A Revered Leader, Left No Successors

By Paolo von Schirach

June 10, 2013

WASHINGTON – 94 year old Nelson Mandela, the symbol of anti-apartheid resistance, and the first elected President of the new, post 1994 South Africa, is in the hospital seriously ill. He has been in poor health for quite a while and he seems to have slipped into some form of senile dementia. All this is sad; but in a way inevitable. Mandela is a very old man, and he suffers from the consequences of ailments contracted during his long time in prison.

South Africa’s decline

Equally sad, but not at all inevitable, is South Africa’s steady decline as a country. Whatever the injustices and the open exploitation of the old apartheid regime, South Africa used to be by far Africa’s leading economy. In many ways it is still is. But the country has been doing poorly.

In large part this has to do with the unimaginative, often incompetent and unfortunately corrupt African National Congress national and local leaders. Nelson Mandela is an exceptional man. He was the ideal President for a remarkably smooth transition from White minority rule to Black majority rule. Mandela was inspiring, dignified, generous and not at all resentful regarding his oppressors. He tried to inspire all of South Africa’s citizens so that they would build together a successful, vibrant multi-racial democracy. 

Mediocre successors

But when he left the scene, ANC party functionaries took over. They are mediocre and quite often incapable. The net result of poor leadership is sluggish growth. And this means that the enormous gap between rich and poor is not going to get filled. Indeed, in order to fulfill government promises of expanded social services and greater economic opportunity for the poor, South Africa would need a growth rate well above 5% per year.

Well, GDP growth has been quite sluggish recently, around 2%. First quarter growth in 2013 has been a dismal 0.9%. 

And why the poor performance? Many reasons, including high labor costs, militant labor unions that frighten investors, energy shortages, a mostly illiterate population that cannot be employed in skilled jobs, and too much corruption.

Sadly, Nelson Mandela, himself a great leader, left no successors.