Melting Pot & Cauldron of Fire – A review of Levant by Philip Mansel

I thoroughly enjoyed reading Levant: Splendor and Catastrophe on the Mediterranean: a book describing the enigmatic history of the Levant by chronicling the vicissitudes of life over four centuries in Beirut, Alexandria and Smyrna (now the Turkish city of Izmir). The Wikipedia entry on the Levant region describes it as including “most of modern Lebanon, Syria, Jordan, Israel, the Palestinian territories, and sometimes parts of Cyprus, Turkey and Iraq”. This region of the world has quite distinct characteristics from the Middle East’s Gulf regions and the Maghreb region of West Africa. This unique identity however tends to get obscured in the statements and actions of those who prefer simplistic - and probably ignorant –terms such as “Arab world” or the much more annoying phrase: “Muslim world”. It is quite absurd to compare the multicultural, long established and often secular Levantine cities such as Beirut, Damascus, Alexandria and Istanbul with the more homogenous, conservative and recently founded cities of the Gulf Kingdoms.

The world we live in is not one that celebrates dual or split identities. It is considered an insult to be described as “two-faced”: a phrase we associate with traits such as insincerity and hypocrisy. We regard people or societies with “two faces” to be making an unwholesome attempt at “having it both ways”. There is even a biblical injunction assuring the “spitting out” of people who are “neither hot nor cold”. I have always found the scorn heaped on people trying to “have it both ways” to be quite silly: why should I or anyone else have it one way if we can have it two, three or even four ways! The ancient Greeks had the good sense to recognize the virtue of split personalities. Classical mythology is replete with figures such Janus: the two-faced god of beginnings and ends who looks both into the future and the past. Most of the heroes of Greek mythology have split human/god personalities and are therefore prone to perform god-like acts like slaying thousands of men but also capable of very human traits such as throwing fits over being jilted by lovers.

 I find the Levant region fascinating because it is a region that has throughout its history tried to have things both ways and to keep multiple identities. It is a region that looks both to the West and to the East; it is both ancient and modern; both Christian and Muslim; Arab and European. The author describes a region that was equal part melting pot of cultures, nationalities and religions and also equal part frighteningly combustible cauldron of fire. The Smyrna, Beirut and Alexandria of the17th, 18^th and early 19^th centuries described by the author were cities in which Turks, Greeks, Arabs and Europeans freely coexisted and were able to practice their Muslim, Jewish or Christian faiths as they wished. To understand how unique this was we should note that it was taking place at a time when Jews and Synagogues in Europe were largely still restricted to Ghettos and the Muslim population in Spain had been either forcibly converted or banished. These were multilingual commercial centers where thousands of European traders and their families lived with Turks and Arabs. Philip Mansel describes a Janus-faced region with men trotting about in European dresses adorned with Arab headgear; a society of debutant balls and Islamic marriages (Nikah) and a place with assimilated Europeans who had converted to Islam and taken on Arab names. I will not be stretching credulity by saying that 19^th century Levant gave the world a foretaste of globalization and multiculturalism. A poster child of this period was Mohammed Ali Pasha, founder of modern Egypt and patriarch of a dynasty that ruled the country 1805 to 1952. Ali Pasha was an Albanian born in Macedonia who first came to Egypt as an officer in the Ottoman Army. This is a more notable rise to the top than many ascents in our modern age that are often prefaced with the words “only in America will –“.

All these good things notwithstanding, it’s important to realize that the Levant region of yore was not some multicultural nirvana where nice people gathered to hold hands and sing Kumbaya. This rich tapestry of nations, faiths and cultures was always on the edge of being ripped apart by partisanship, latent religious prejudice and the pursuit of narrow sectarian interests. Resentment of the special privileges or capitulations granted to Europeans and of the perceived impiety of the elite by the often more pious masses has always been a sticking point. This resentment often boils over and has been the cause of significant conflicts and bloodlettings from Smyra in the early 19^th century to the long drawn out civil war in Lebanon which lasted from 1975 to 1990. These tensions were considered sufficiently serious by many western powers that they took to stationing warships off major Mediterranean ports both as a deterrent and also as a means of quickly evacuating their citizens in the event of a conflict. Intermittent social conflict was not also the only challenge faced by the Levantines; also bubbling under the surface was a somewhat rigid social hierarchy. 19^th century and early 20^th century Lebanon has been described by some as a strict hierarchy with Catholics at the top and Shia Muslims at the bottom. In Mohammad Ali’s Egypt, European and Turkish officers were significantly better paid and more highly placed than their native Egyptian counterparts. These inconveniences and prejudices could be viewed as the worrisome Mr. Jekyll side to the more alluring Dr. Hyde side of the Levant where various nationalities and faiths coexisted.

However one constant theme, especially in Egypt, is the tension between the largely secular and pro-Western elite and the poor and pious masses over which they preside. This tension has become more important in the wake of the Arab spring: which saw the ouster of secular, pro-western strongmen such as Hosni Mubarak of Egypt. The hope of many western observers was that these strongmen would be replaced by secular democratic parties, alas the results of elections has given these people great pause. Islamist parties have won popular, free and fair elections in Egypt (Muslim Brotherhood) and Tunisia (Ennahda) while secular parties championed by the liberal educated elites have received sound drubbings. Turkey is also another country going through a similar transition as democratically elected parties with Islamic links have been rolling back much of the heavily pro-western regulations instituted by Kemal Ataturk. Described as the father of modern Turkey, Ataturk changed the Turkish alphabet to a Latin script; proclaimed Turkey to be a secular western country and banned the wearing of the Hijab (headscarf) by women in public. Parties campaigning on pledges to champion a bigger role for Islam have been winning elections with the wife of the current president also being known to wear the Hijab despite its official ban. While there are many challenges in the current-day Levant region, I regard the managing of the dual personalities of the region to be among the most important to get right.

In conclusion, this book validates the aphorism (attributed to US President Harry Truman) that “the only new thing in the world is the history you do not know”. Reading about the vicissitudes of life many centuries ago in these great cities, I am struck by how much of the lessons and challenges described by the author remain relevant today.

The European Cental Bank’s LTOR Initiative – furthering a deadly embrace?

To say the entire world has been fixated on the twin woes of a weak European banking sector and faltering sovereign fiscal situations will be stating the obvious. However, there is great justification for this fixation because of the extraordinarily tight connection between the economic fortunes of most European countries and their banks. Much has being made of the “too big to fail” issue as it concerns large American universal banks such as Bank of America, Citigroup, JP Morgan etc. While these institutions are large and have gotten larger in the recent past, their impact on the US economy seems really benign when compared to the impact their European counterparts have on their host countries.

Throwing out some numbers, the weakened Dexia Bank’s assets account for ~150% of host country Belgium’s GDP, RBS’ assets exceed 100% of UK’s GDP, BNP Paribas’ asset base is up to 100% of France’s GDP and so on. While a big driver of these numbers come from the far more international activities of European banks, it does not detract from the fact that in the vast majority of European countries we have less than 5 banks controlling substantially all of the banking system’s deposits and assets. French banking is basically controlled by BNP Paribas, Credit Agricole & Societe Generale, Unicredit & Intesa Sanpaolo have that distinction in Italy while Deutsche Bank has a kind of overwhelming influence on German finance that no American bank even comes close to having. If you couple this dominance with the fact that Europe has a more bank-centric financing system than the US, then the power of these banks become more glaring. Over the past couple of decades a shadow banking system, fuelled by securitization, has emerged in the United States to challenge the dominance of banks in extending credit to the economy. This has been far less developed in Europe with banks on the continent been more likely to hold assets on their books.

This has become apparent in the past couple of years with European nations basically turning a banking crisis into a fiscal one. Some of the fiscal problems currently ripping through Europe can be traced to the massive costs incurred by these nations as they tried to bail out their banks and ended up breaking their fiscal purses. One can easily link, to a non-trivial extent, the Irish fiscal crisis to the cost faced in bailing out such large lenders such as the Allied Irish Bank and the Bank of Ireland. As these banks have stabilized, the true costs of the (admittedly necessary) bailouts have become apparent as they are reflected in the higher borrowing costs of marginal European nation.

This now brings me to the potential danger in the ECB’s latest plan to shore up the European banking system through the recently introduced Longer Term Refinancing Operation (LTRO). Theoretically, the aim is to provide a liquidity backstop to European banks as they seek to jumpstart lending to the economy. I am however somewhat skeptical of LTRO’s benefits due to the potential for the carry trade. The December round of approximately EUR 500 Billion 3-year LTRO funds disbursed have an interest rate of 1%, while Italian, Irish and Portuguese government 3-year notes yield 3.9%, 4.5% and 1.91% respectively. From these numbers one can easily see a situation where the banks take money from ECB and just plough them into purchases of European sovereign bonds. For example, Intesa Sanpaolo (the big Italian bank) participated in the LTRO funding window up to the tune of EUR 24 Billion. Since the bank has an average Net Interest Margin (NIM) of ~1.6%, borrowing from the ECB and buying Italian bonds will yield a spread of 2.9% (almost double its NIM on loans). And to crown the good deal, due to banking regulations its purchase of these bonds will be deemed riskless and it will not need to set aside any capital for potential losses.

If this happens across the banking sector, we will end up in a scenario where bank holdings of sovereign debt increases in an era of increasing fiscal instability. If there are defaults on these debt holdings, the banks will suffer large losses and will have to be bailed out by the governments whose fiscal situations will then worsen as a result. In essence, this move may be locking European banks and sovereigns in a tighter deadly embrace.

I hope that the doomsday scenario does not happen, but I see a reason to be skeptical

Life post-PMS subsidy – Ensuring we do not let a “crisis” go to waste

I woke up on the morning of January 1^st to Facebook updates from friends denouncing and disparaging the Nigerian government’s “heartless” decision to remove subsidies on PMS (Gasoline) effective immediately. I completely relate to the sentiments expressed by many Nigerians as the pump price of Gasoline is expected to increase by at least 200-250% and this is money from the pockets of ordinary people. The government has advanced a fiscal argument for the removal of subsidies: since Nigeria lacks any meaningful refining capacity, the rise in crude oil and freight prices have made these subsidies increasingly expensive for the government. The finance minister and central bank governor have both stated that sustaining the subsidies will place the government on the path of higher deficit spending financed by unprecedented domestic borrowing. The major buyers of these bonds are Nigerian pension funds and banks, so a worsening fiscal condition can (in an extreme scenario) can potentially weaken our banks and threaten pensions. A clear result of this borrowing, which is probably beyond contestation, is that it has led to the crowding out of private borrowing as rising yields have made government bonds a lucrative risk-free and high-yielding investment that has increased the cost of private borrowing. However, whether you buy this argument or not, there is an opportunity for the country to use the removal of this subsidy to effect some structural changes in the economy

A key reason the removal of the subsidy is generating so much uproar is due to the Gasoline-intensive nature of the Nigerian economy. A possible unintended consequence of decades of government subsidy is that we have effectively subsidized and encouraged inefficiencies because of the artificially low cost of PMS. Nowhere are these inefficiencies as prevalent and absurd as those of the transportation and logistics sectors: two sectors that affect everyday things as the cost of getting to work and the cost of food. Anyone who has visited Lagos will witness the huge number of cars on the road as almost the entire middle class (or anyone who can afford a car) drives to work, with carpooling being taken up by only a minute percentage of the population. That’s why the recent moves being made to introduce commuter rail to Lagos is a big, cost-effective step in the right direction. We need every metropolitan center in the country working on similar schemes.

These inefficiencies are not limited to intra-city transportation; they also extend to inter-city travels. It is beyond absurd that the vehicle of choice for inter-state transportation in Nigeria is the 18-seater bus. This is an inefficient vehicle for providing mass transit services over long distances. Other countries have the good sense to consign these buses for shuttle services between airports, tour sites etc. Spreading fuel costs over only 18 people gives us more expensive transit than we would have if we used 42 or 50-seater buses for inter-city transportation. Hopefully, higher fuel costs we force us to make this switch into large-scale, efficient transportation choices.

Obviously, I have saved the most egregious for last. And that is the logistics and haulage system in the country, which is the primary reason food costs can be expected to skyrocket following the removal of subsidies. Nigeria must be one of a few countries in the world where bulky, non-perishable goods are shipped almost exclusively over long distances (i.e. over 1,000 Kilometres) by trucks. Name the bulky stuff (cement, grains, steel rods etc), we transport it by road! We even transport petroleum products (including Gasoline) using trucks, no wonder everything costs more than it should. As a country, we need to revamp our railway network to transport bulky products in a much more cost-effective manner and also better monitor our pipeline systems so we can stop the lunacy of transporting Gasoline over 1,000 Kilometres by road.

I know adjusting to a life without PMS subsidies will be difficult for most Nigerians but we should not let this opportunity go to waste, we need to use this opportunity to correct the structural deficiencies in our economy.

Mitigating the “Mancession” in the United States – the need for great endeavors

"the historian has difficulty in suggesting the degree to which the canal obsessed and enchanted Americans in the fall of 1825. It was taken to be a symbol of the boundless potentialities of the country, its resilience and its hopes” – contemporary newspaper article following the opening of the Erie Canal in October 1825.

Much has been said of the effects that the Great Recession and its aftermath have had on the employment picture in the United States as the unemployment rate has stubbornly refused to go below 9%. A level hitherto thought to be highly unlikely by some really smart and powerful people (including the White House’s economic team which predicted a maximum level of 8% in Q1, 2009 as they tried to sell the stimulus package). While a 9.1% unemployment rate is bad enough, it is important to realize that this is an average number. And like all averages it masks some really telling differences in the characteristics of the various sub-populations in the country. Through the recession, men lost jobs at a faster clip than women did. College educated men have a lower unemployment rate than men with high school diplomas, a group whose prospects are in turn better than those who never finished high school. All this information can by no stretch of the imagination be deemed to be new or insightful as everyone agrees that the recession and its aftermath have been particularly harsh on blue-collar men who tend to work in construction and other cyclical industries.

However, what is particularly scary about the situation is that this is not your typical cyclical unemployment driven by the boom & bust of economic cycles. The sustained household construction boom of the 2000s is gone and is likely not coming back; the Obama administration may have saved Detroit but these jobs don’t pay nearly as much as they used to and many of the manufacturing jobs that have flowed to low-cost countries are unlikely to flow back. This trend of burly men used to working with their hands being out of jobs has profound socio-economic consequences ranging from declining consumer demand to failed marriages and even heightened racial tension and xenophobia. It’s not unreasonable to expect social tension, domestic abuse and other ills to result from men being out of work and having to depend on their spouses or partners for sustenance.

A lot has been said about the need for innovation, reinvention and retraining for the new skills in demand in the new knowledge economy. I am in full support of these moves as it is clear that a lot of the well-paying blue-collar manufacturing jobs are not coming back to the US, neither should we expect nor even hope for the building boom of the 2000s to resurface. However, I think retraining is just one part of the answer as the more we look at what it entails, the less certain a solution this option appears to be. Firstly, the unemployment rate for college graduates is considerably less than that of high school graduates. So an obvious solution will be for unemployed folks to head back to college, right? Not so fast actually. Imagine telling a 50 year old guy who’s been either working in factories or construction sites to head back to college for 2 or 4-years and have to study calculus, macroeconomics or whatever it is college students learn these days. And while he is at it he will have little or no income to support his family. So while it is a sound and noble idea, many working people will balk at getting on the college track due to the difficulties involved in executing such a move.

It’s however not all gloomy as not every job that is projected to boom in numbers over the coming years requires a college education. However, only 8 out of the 30 fastest growing jobs being forecast by the US government requires nothing more than a high school diploma. These are: Personal and Home Care Aides; Home Health Aides; Medical Assistants; Social & Human Services Assistants; Gaming Surveillance Officers/Gaming Investigators ; Pharmacy Technicians; Dental Assistants and Gaming & Sports Book writers/runners. Looking through these eight job categories very few jump at me as being particularly well suited for a middle-aged man who has been pouring cement or hammering steel for decades. I am not sure it is very reasonable to expect a 50-year old worker laid-off from a closed refrigerator factory in rural Pennsylvania or Illinois to be particularly excited to work as a home health aide or as a dental assistant. Also not sure many people will also be rushing to hire a guy who has been shaping steel (and who looks the part) for a job tending to Grandma and Grandpa!

However, it will only be gloom and pestilence for the blue collar man if the country chooses to have it that way. I believe there is a way out and this lies in something counterintuitive: launching a massive and sustained construction boom. Not the housing construction boom that created a mess big enough to sink the global economy. I speak of a nationwide infrastructure boom that will fix the country’s crumbling infrastructure and equally as important: put millions of blue collar men back to work using the skills they have gained over a lifetime. The American Society of Civil Engineers estimates that the US will require about $2.2 Trillion over the next 5 years to fix its crumbling infrastructure. People could be put to work fixing these infrastructure gaps that are an impediment to economic growth and a threat to human lives. Beyond fixing problems, there is a place for “great endeavors”: the building of the Erie Canals and Transcontinental Railroads of the modern era. This is the century of renewable energy so people can be put to work building the platforms of a green economy: building windmills and solar panels; revamping transmission lines and retrofitting homes and public buildings to make them more energy efficient. These things can be done and people could be gainfully employed doing thereby enabling the nation to buy time to retrain the workforce for higher knowledge while insuring itself against infrastructural decay and obsolescence.

This need not be entirely financed by the government. If there has ever been a time for public private partnership in infrastructure, it is now! The transcontinental railroad, the Suez Canal, Eurotunnel and many other landmark projects were not wholly financed by governments. There is no reason why the United States cannot enact legislation to build a National Infrastructure Bank that will be mainly privately funded. The money is there, the projects are there and the ingenuity and skills are abundant. If the rest of the world keeps piling money into Treasuries after a downgrade and were willing to finance NINJA mortgages for overextended people then they surely will invest in the debt and equity of an infrastructure bank investing in the future of the United States. It is a win-win for everyone and the millions of unemployed men will thank policymakers and financiers for it.

The “People’s Princess” as gold digger – lessons in the humanity of our hero(ine)s

Diana Spencer: Princess of Wales would have clocked 50 this year if her life had not been so ultimately cut short in Paris on an August night in 1997. So I found myself reflecting on the near apotheosis that was going on in the media about what a Princess Diana at 50 would have meant. So I asked myself: who was Princess Diana & what is the appropriate narrative for her life? Is it that of an intellectual lightweight, a lady who took her husband “to the cleaners” in a divorce receiving $28 million upfront & $600,000 annually and who seemed to have a less than ideal taste in men (some of whom were married). A possible “home wrecker” and a member – after her divorce – of the jet setting, hard partying crowd with the likes of Dodi Al Fayed (playboy extraordinaire still on an allowance from “daddy” at 42). Or is the proper narrative that of the “people’s princess”: who publicly hugged an AIDS sufferer, highlighted the horrors wrought by landmines and showed genuine interest in poor & oppressed people all over the world. A princess who brought people closer to royalty and demonstrated warmth often lacking in that institution. In reality, my question is sort of a “trick question” as she fit both of the above narratives. She was a good person but also an acknowledged adulteress (with James Hewitt) and I think this does not in any way remove or distract from all the great things she did for so many people.

This trend of us deifying our heroes: expecting them to be something other than human and subjecting them to unrealistic standards is disingenuous, naïve and unrealistic. George Washington was the father of his country, refusing to rule for life as a quasi-monarch when he could have done so. But he was also a man of limited military abilities & success and who was frankly not a very bright fellow. Martin Luther King was alleged to be an adulterer but he inspired a whole nation to seek change and justice in a non-violent way. These people – and many more of their stature – were giants among men and they all lifted the generations in which they lived. Their indiscretions or moral failings did not make them any less great but it demonstrated that even the noblest of humans is after all still human and that perfection is neither necessary nor sufficient for greatness.

I believe setting the records straight about great historical figures is not about “speaking ill of the dead” or even about striving for historical accuracy, it is rather to help us as citizens to have a more balanced and nuanced view of our leaders. Recognizing and discussing the flaws of people referred to as “founding fathers”, “queen of hearts” etc will enable us cut our less illustrious political leaders the required slack they deserve and need! Time after time, political candidates – especially in the United States – must continually bow at the altar of the false gods of piety and unrealistic expectations. Is it really important for us to know whether Bill Clinton smoked marijuana as a college student barely out of his teenage years? Did that have any bearing on his qualifications to lead wisely and make good decisions 30 years after? Adultery should not be condoned but isn’t there something weird in ascribing a consensual affair as “high crime & misdemeanor” (the criteria for impeachment)? Must everyone striving for political office have a wife, kids and dogs that look like images out of Christmas cards?

I think these are questions citizens and electorates need to ask themselves as they elect their leaders. The world is becoming increasingly complex with near intractable problems, so we need leaders willing to plunge headlong into discussing these problems and finding workable solutions. We don’t need them distracted by fears that someone will publish pictures of them at a fraternity party 30 years ago or unearth sordid details of amorous liaisons now confined to the dung heaps of history. We need to stop the deification of our leaders, accept their minor failings and concentrate on their abilities & passion for solving the great problems facing humanity. As the “great” political comedian: Bill Maher once said when comparing Presidents Bill Clinton & George Bush: “there is more to the presidency than not getting blown”.

The false security of state-sponsored “land grabs”

While the jury is still out regarding whether the recent IPO of the Swiss commodity trading giant: Glencore represents the end of the recent bull run in both soft and hard commodities, some trends are fairly settled. First, is that long-run demand for agricultural commodities outstrips current capacity with major capex investments needed in the coming decades to fix this imbalance. Secondly, food prices over the next half century will be broadly higher than they have been in the last half-century. Lastly, there will be increasing imbalance between where food can be effectively grown and where it is most needed. China, South Korea, the Gulf Cooperation Council (GCC) amongst other places are examples of places that will definitely experience increasing food import bills. This trend has started with the Saudis: as they have decided to phase out the growing of wheat and revert their policy of wheat self-sufficiency as a response to declining water tables in the country. While it may seem transparently absurd in the 1st instance to attempt to turn desert land into a wheat growing region. A better understanding of food and its role in politics will make the initial decision to grow wheat more understandable.

Over the years, governments have tended to fall when their citizens are unable to feed themselves. You can often get away with toying with people’s freedoms but you are best advised to make sure their bellies are filled! Moses in the biblical era faced a rebellion and may have been toppled in a “coup” if it were not for the miracle of manna (“heavenly food”) falling from the sky! The French revolution was as much a reaction to the rising cost of bread as it was a desire for greater political self determination. Given this history of food driven revolts it is therefore understandable that many governments with high food import dependence are fretting over their security and are seeking to acquire vast tracts of land across the world, especially in Africa.

There has been increasing reports of massive “land grabs” in various African countries (Ethiopia, Sudan etc) by various state-sponsored entities with a main aim of exporting the products of such farms to the countries sponsoring these land purchases. While a lot of people have written about the human and property rights issues involved with such purchases, my view on the topic has more to do with how secure this strategy will be for these food dependent countries.

While I completely respect the drive of these food import dependent countries to act to protect their interests, I think they may be falling into the fallacy of mistaking ownership with control. Import dependent countries can own millions of hectares of land in agricultural producing countries and it is unclear at best whether these assets will prove useful in a crisis. This is because while foreign governments or foreign entities may own farms overseas, it is the governments of host countries that determine if exports will be allowed or not. And history has shown over and over again (from the Biblical story of Pharaoh’s wheat storage during the “years of plenty” to the Russian wheat export ban of 2010) that governments will act primarily to first secure food for their own citizens. For example, ownership and export plans meant next to nothing in 2010 when the Russian government imposed an export ban on wheat following after droughts and fires. That means a government of X foreign country could have invested billions of dollars in farmland and export infrastructure and they would be of no value just at the time that they needed it the most. Generally, I struggle to see how continuous exports of food will be sustainable without domestic demand being fully met regardless of what ownership documents and supply contracts say.

In conclusion, while I do not have an answer for what the best strategies for food import dependent nations are. I am quite convinced that buying up huge swaths of land overseas will be of little value in ensuring their food security in times of crisis. Their energy, time and money are better spent in ensuring more efficient global agricultural markets

Feeding the world – The Next Big Thing?

Every now and then it seems the world develops some level of collective hysteria around an emerging or ever-present scare topic with these “scary issues” running the gamut. During the cold war, we had the threat of a nuclear Armageddon, the world fretted about fuel supplies during the Arab oil embargo of the 70s, the 90s brought with it the threat of a world where nothing works because of a nice little bug called “Y2K”. The 2000s was not about to be outdone as that decade brought a litany of worries including: escalated global terrorism, potential global financial ruin due to some folks deciding to buy houses they could not afford and a worry about “peak oil” that led to crude oil reaching highs of $140+ per barrel. It seems this decade may be one of genuine worry regarding the world’s ability to feed itself in the long run.

When a magazine with the gravitas of Foreign Policy decides to wade in the issue with no less than an entire edition tagged “the Food Issue”, I guess we all have to sit up and listen. The articles in the edition (click here) were particularly insightful as they brought to light – in a cohesive and succinct way – the myriad of interlocking factors that are contributing to make this a real threat and why the threat of a hungry world is not one to be ignored or sniffed at. The article illustrated various tell-tale signs of the world’s worsening food situation: ranging from land grabs in Sub-Saharan Africa to grain riots in Asia to export bans placed on food in producing countries (e.g. the wheat export ban initiated by the Russian government last year)

What I find most intriguing about the world’s food situation is the multi-faceted nature of the factors acting simultaneously on both the demand and supply sides of the “food equation”. The demand side for food is driven by many things among which include the steady growth in human population: the world is projected to be home to 9 Billion people by 2050. Accompanying this headline population growth is income growth. And there are few relationships that are more certain than that between calorie intakes and income as people transit from starvation to maintenance rations, to comfortable diets and almost surely to indulgent consumption (seriously, no one needs a McDonalds Triple-Decker Burger or fine cuts of prime steak to survive or maintain healthy growth). As China, India and other lower-income countries become middle and/or high income economies, their protein intakes are expected to rise and demand for livestock will spike. And due to the weird construct of the Agriculture-Industrial complex, it seems cows and poultry can’t seem to get enough corn in their bellies. So greater absolute and relative quantities of the world’s grain output will be diverted to feed animals.

If diverting vital grain to feed animals rankles you, then it may be interesting to know that cars have started and are likely to continue “eating” corn in increasingly greater volumes. Renewable energy standards will see more ethanol use in cars as countries across the world enact clean-fuel standards that mandate minimum ethanol levels. What this means is that: 1) there will be increased competition for the world’s grain by the world’s cars (which we will continue to buy more of!) and 2.) the price of crude oil – which is getting scarcer as well – will set some sort of floor for the price of corn. As at higher oil prices, farmers will be incentivized to divert more of their output to ethanol production until equilibrium is reached that takes this incentive away. So consumers, brace up for a period during which the price of what goes into your car’s tank may very well determine the cost of what goes into your belly!

If the demand picture seems somewhat dire, the supply picture does not seem to be cutting the world any slack. Probably the biggest challenge to the supply picture is the rearing ugly head of climate change: droughts are getting longer and more frequent while floods are becoming more commonplace and severe. Both of these scenarios do not bode well for the planting process. Drought in Russia in 2010 delayed the planting season, which led to sharply reduced output and disruptions across the world. An equivalent drought in the United States would have had the same impact. Worsening climate conditions are also happening at a time when the world may be hitting the ceiling on farm productivity that is the result of a natural drop-off after years of gains and possible “over farming” of land and nutrient loss in major planting regions of the world.

Although I am no expert in this area (or anything for that matter), I’d wager that given the expected tightness in supply and boost in demand it may be prudent to be long food and the infrastructure and support systems required to deliver it to our bellies!.

“You just got Taylorized” – Why the urge for efficiency may be ruining society

I was sitting in an Operations Management class last week and my really young and energetic professor kept on going on about ”Taylorism” and how complex processes in various sectors can be broken into smaller, repetitive steps and how this makes for more efficient processes. (for the “uninitiated”, “Taylorism” refers to the concept of scientific management of processes and is named in honor of Frederick Winslow Taylor: the father of the industrial engineering). He then proceeded to show a video documenting the implementation of this concept in fields ranging from automobile manufacturing to the preparation of hamburger. Frankly, I thought that breaking the manufacturing of a car into discrete, easily-repeatable processes was cool but I became slightly disturbed with its application in producing hamburgers (with the exact number of ketchup and mustard squeezes on each bun pre-programmed, you can’t make this stuff up!!). That was the highlight of the class as I soon “zoned out” afterwards and started to think about the broader societal impacts of Taylorism and this near-maniacal drive for standardization. While I agree that Taylorism and standardization has enabled mankind make remarkable progress, ensured greater consistency across units of the same product and made every product more affordable. I think the drive for standardized processes - with its chief attendant consequence of “de-skilling” the labor force - has a perverse effect on society, hence it should be viewed with the seriousness that it deserves by policy-makers and businessmen alike.

A key result of increased standardization is the “de-skilling” of the labor force. Starting with Henry Ford’s brilliant move to an assembly line system which ended the era of skilled craftsmen building cars piece by piece and made it affordable. The blue collar labor force has been on a steady march to “de-skilling” as each person on the line needs to only know a particular, simple repetitive process and stick with it. At some point the cook at the local deli needed to know how to make a hamburger and determine –often through trial and error – the exact mix of ingredients that made a good hamburger. Now the dude at McDonalds only needs to follow a detailed guideline that allows for little discretion, in fact he may be only responsible for adding a few squirts of ketchup to the bun as someone else adds the meat!! Its difficult to argue that someone who spends all his day only squeezing ketchup on a succession of buns has any tangible skill, even if he does it for ten years straight. He is probably as good as he was squeezing ketchup as he was on his first day at work, ten years back! This makes labor very replaceable and hence cheap, which works well for companies as they can continuously capture more of the surplus and hand same to shareholders and other providers of capital.

While this seems great at face value: increased standardization leads to greater efficiency and the economy benefits, right? It is however not that simple because the “de-skilling” of increasingly greater array of jobs will lead to stagnation in wages as workers will not be able to demand higher wages because they can easily be replaced with young, novice workers who can also read manuals and operating procedures. The effect is the stagnation in blue-collar wages that is evident in the United States in the last two decades, which has in turn placed pressure on the middle class and widened the inequality gap. While I am by no stretch of imagination a socialist, it is a little bit disturbing to see stagnation in real wages for the lowest income section of society in an era of rising food and energy costs. There is a risk of a “permanent underclass” being created from people whose jobs have been “de-skilled” and this may breed resentment, envy and a general disenchantment with the economic system. The last thing business people and policy makers need on their hands is some sort of class warfare, no one wants that and we all have to work to ensure that this does not happen.

While I have no concrete suggestions of ways of reversing or reducing this trend,, I still believe it is a threat that needs to be taken seriously by society. Efficiency and standardization are great but are we pushing it too far to an extent that it becomes too costly for society as a whole. At the very least, I am frankly disturbed to see that my food has become a sheet in the book of standard operating procedures issued by Hamburger University!!.

A match made in heaven – The case for a JPM-Standard Chartered merger

Sitting in my room reading news reports regarding the performance of JP Morgan and Citigroup, part of the triumvate (alongside Bank of America) that dominate banking in the United States (at least the commercial and retail variant of it). I started to think about which of the banks (i.e. Citi or JPM) is the dominant or better one. I don’t know why this is what I spend my free time thinking about, I guess you can blame the fact that I am a nerd, I spent ungodly hours playing monopoly as a kid or that I currently go to business school and we are encouraged to bask in delusions of grandeur. You are free to pick your favorite rationale!!

Anyways I was thinking about both banks’ and I couldn’t help but conclude that despite JPM’s great performance and Citigroup’s recent lackluster to mediocre performance, Citigroup is still better placed to thrive in the new global reality. My vote for Citi rests on its unparalleled global footprint and strength in major emerging markets (from Africa to Asia to Latin America etc). JP Morgan’s storied investment bank has a global presence but its private, retail and commercial banking franchises remain basically US operations and are also-rans in most emerging markets. Therefore, my opinion is that for JPM to match Citi it needs to bulk up its international operations to become a “network bank” for global corporates and boost its presence in fast-growing emerging markets. Building this footprint organically will be very difficult if not impossible (Citigroup already had a branch in China has far back as the turn of the 20th century). Therefore the best option may be an acquisition and I think the right “bride” will be Standard Chartered Bank Plc. So why buy Standard Chartered?

Firstly, it can be done and the bank seems like a decent sized target that JPM can swallow! (before you turn your noses up, a lot of “transformational deals” have been done in the past simple because it could be done!). JP Morgan currently has a market capitalization of US$175 Billion while Standard Chartered has a market cap of about US$60 Billion (i.e. Standard Chartered is only about a third of JPM’s size). JPM should therefore be in a position to finance and pull off some sort of hybrid cash & stock offer for the bank without necessarily “breaking the bank” or overly diluting shareholders!. In addition, Standard Chartered has a core investor: Temasek (the Government of Singapore’s direct investment company) that could be convinced to back a deal if it requires some liquidity.

Secondly, while bankers often tout the “synergies” of every deal , this tie-up will come with almost unparalleled geographic synergies. Standard Chartered – though nominally a British bank – derives almost all its revenues from Asia, Middle East & Africa (Regions of the world where JP Morgan still needs to do a GREAT JOB in advancing its on-the-ground presence). Buying Standard Chartered will instantly give JPM an on-the-ground network in these fast growing regions of the world. On the other hand, Standard Chartered has an almost non-existent America’s franchise and would thus be a nice geographic plug for JPM. A Standard Chartered acquisition will enable JPM benefit from trends such as increasing Indo-China, Sino-African and Indo-African trade and as an added bonus: the combined bank may purchase South Africa’s Nedbank to achieve a more complete African footprint!

Lastly, there would be room for JPM to build on Standard Chartered’s product offerings and this may be a source of “alpha” or upside for the bank’s shareholders. Despite a push towards more sophisticated product offerings, Standard Chartered bank still resmains a largely retail and commercial bank with strong transactional banking products aimed at corporates operating in emerging markets. JPM may deploy its strengths in trading and investment banking to boost Standard Chartered’s offerings in its core markets and increase the full earnings potential of the British bank’s franchise and footprint.

Obviously, life is a lot more complicated than the mental wanderings of a bored student and there are many reasons why such a deal will not materialize. However, I think this is a deal with a lot of merit and will be happy to see both banks “walk down the aisle”!

In pursuit of a non-zero sum world

Currently reading my favorite TV historian: Niall Ferguson’s seminal book on the rise of the West and a recurring theme through the pages was the role exploration (or exploitation in my book!) played in ensuring the dominance of European or European-inspired societies (such as the US). A key reason for the ascendance of Europe was the continent’s role as a colonialist that ensured cheap products to advance its own resource-constrained societies. For example at the middle of the last millennium, the average height of the Asian and European populations were about even but this situation changed in the later centuries as the Europeans typically had a much larger calorie-rich diet, which was in turn made possible by their colonial activities. Throughout human history - from the Persian civilization, to the Roman and the modern-day American & British empires – it seems that the rise of a people has almost always involved the subjugation or exploitation of another set of people or the environment. The rise of mining brought us useful metals but destroyed pristine lands, the rise of textile technology raised western standards of living but depended on slave-picked cotton from the antebellum southern United States and the list of zero-sum scenarios goes on.

It is therefore refreshing to see that many business executives and policy makers have begun to view business and development through a non-zero sum lens and have begun to put in place policies that ensure that all stakeholders can all benefit from growth. This movement has taken on two parts: 1) Shared Value and 2.) Social Impact Investing, which I believe are equally important concepts that should be embraced or at least considered by all.

The Shared Value concept is been popularized by no less an eminent figure than Harvard University Professor Michael Porter (of the 5-forces fame) and it is at its core a new framework for evaluating business decisions that gives due consideration to social and environmental issues. This is not some feel-good CSR department that sprinkles a few dollars on “noble causes” to obtain pictures that look nice and endearing enough to be published on corporate websites and annual reports. Michael Porter is advocating nothing short of a fundamental rethinking of the corporate business model and has highlighted various success stories such as GE’s launch of affordable, hand-held scanners that have proven effective in boosting healthcare delivery in India while delivering robust profits to GE. Closely related to the concept of Shared Value are concepts such as “greening of the Supply Chain” (i.e. reducing environmental impact of corporate supply chains while reducing costs and serving customers at the “Bottom of the Pyramid”. Central to all these concepts is the emerging thinking that doing good by society and also making money need not be diametrically opposed. Michael Porter’s insightful article about shared value can be found here.

The second related concept is that of Social Impact Investing and it involves a not-so- new concept that investors can strive to achieve a double bottom line of social prosperity and market-rate financial return. This concept isn’t new as organizations such as the IFC (the private sector lending and investing arm of the World Bank Group) have been incorporating social and environmental considerations in its activities for decades and it is yet to record an annual loss since its founding. In an attempt to make this more mainstream and adopted by many more investors, institutions such as the Rockefeller Foundation, Clinton Global Initiative, JP Morgan etc have come together to form the Global Impact Investment Network (GIIN) to agree on a set of common standards for the sector. This evolving field has great potential for growth as the funds in the global investment community is exponentially larger than the global philanthropy community can muster.

Although I fully support the growth of both of the above-mentioned sectors, I still have major doubts about their usefulness. These involve where the line will be drawn between “good works” and “filthy lucre”: at what point will investors sacrifice extra profit to achieve higher societal impact? Secondly, how much of the Shared Value initiatives will companies make anyways because they are financially compelling and are we just giving a fancy name to business as usual?. Anyways while there are legitimate doubts regarding the impact of these initiatives, one thing most people can agree with is that they are directionally correct in gradually moving the world into a non-zero sum state. And that I am happy about!

Book Review – “Our Last Best Chance”

I was walking down a street in a quaint little town with a couple of friends on Monday and saw a bookstore which I ducked into to basically window shop. I ended up seeing a book titled: “Our Last Best Chance” by King Abdullah II of the Hashemite Kingdom of Jordan. Although I ended up losing track of my friends and spent about 20 minutes searching for them, I consider my purchase of this book to be one of the best impulse purchases I’ve made in the recent past. So why do I think so highly of my purchase? Only because I think it’s one of the books I have most enjoyed reading in the last half-decade or so. And these are my reasons:

Unique position of the author. King Abdullah of Jordan is a leader in the Middle East and has actively been involved in brokering peace deals in the region. However, the source of his importance – and by extension that of his kingdom – is not due to military might or abundant mineral wealth. Jordan is not an oil producer like the Gulf states neither can anyone say that its armies are a match for the Egyptian, Iranian or Israeli armies (the military juggernauts of the region). However, King Abdullah has advanced the role of reformer and peace maker adopted by his late father: King Hussein. Due to Jordan’s position as one of only two Arab countries with a peace treaty with Israel and its cordial relationships in the Arab community, its kings have served as mediators in the region. An ailing King Hussein (battling cancer) made a trip from his deathbed to Camp David to encourage the late Yasser Arafat and Benjamin Netanyahu in talks brokered by President Clinton in 1998. His son: King Abdullah has also made great strides over his decade of ruling the kingdom, with GDP growth averaging 7% over the last decade. Jordan’s economy is regarded as the freest in the region, even ranking above good performers such as the UAE and Lebanon. It has more Free Trade Agreements than any other country in the region, it has a well developed services sector and it is emerging as a key financial center in the region with many leading companies such as Aramex (the leading logistics firm in the region) having their headquarters in Amman. To cap it all, his wife: Queen Rania has been involved in championing women and children rights globally while his younger sister is a Brigadier General in the Army and a Military Attaché with paratrooper wings!. King Abdullah has also established the first co-educational prep school in the region with full financial support for indigent students. I guess by now it should be obvious that the man is one of my favorite world leaders!

Good Layout. If I had to pick my favorite characteristic of the book, it will be its layout and organization. I think leaders who write autobiographies have to thread a fine line and exercise judgment regarding how personal their books should be. You don’t want it too personal or you may start to feel like a teenager’s diary and you don’t want it to be too high sounding or lofty, or else it may read like a position paper or (worse!) a United Nations resolution. I think with this book, King Abdullah got it just right like Goldilocks. The 1^st third of the book dealt with his family’s historical role as guardians of the holy places of the region, his family life growing up and the institutions - such as Deerfield Academy (a New England prep school in the US) and the Royal Military Academy, Sandhurst - that shaped his worldview and provided the basis for some of his most enduring friendships. The 2^nd third of the book provides a good ringside account of various events in the region through his lenses as a young army officer and a confidant of his father. He wrote about various clandestine trips with his father to broker peace between various warring parties and he provided insights into the character of many leading figures in the region (including Saddam Hussein, Yasser Arafat, Ariel Sharon and Benjamin Netanyahu). The last 3^rd of the book was more “macro” in nature and dealt with his big picture ideas of why the world should care greatly about the Israeli-Palestinian conflict, his views on radical Islamism and his vision for a more prosperous, harmonious and stable region. I really enjoyed this part of the book because it speaks a lot about his character and strength of conviction to offer bold recommendations for moving forward even if some powerful interests may disagree with him.

The author’s pragmatism. The final quality that really made me enjoy the book is the author’s clear-headed pragmatic view of the world and of the harsh realities that his kingdom and region faces. I view myself as a pragmatist and I have always harbored a slight distaste for really passionate “true believers” who adopt a “my way or the highway” attitude as I believe human progress is best assured by reasonable, pragmatic people making compromises in pursuit of their enlightened self-interests. The author writes about the fine balance that his father had to take during the 1^st Gulf War and how he struggled to seek grounds of agreement between Saddam and western powers. He also talked about his own efforts to prevent and lobby against the US invasion of Iraq in 2003 but detailed how he came to reconcile himself to the inevitability of President Bush’s decision to go to war and the need to ensure that Jordan maintained a degree of neutrality that will prevent its economy from taking a hit. I found his descriptions of his travels to Washington interesting, especially the way he convinced the US government to give up its request to stage combat troops out of Jordan. All through the book I detected a certain unwillingness to demonize people with differing opinions, always realizing that world leaders are only acting in their national interests and that in most human affairs there are few if any moral absolutes. Today’s terrorist may become tomorrow’s statesman, a foe today an ally tomorrow with alliances and allegiances as fleeting as shadows. I admit this is not the most flattering picture of humanity but human beings are only human and I appreciate the king’s candidness in acknowledging that in his book.

Overall, I thoroughly enjoyed reading the book and I think it will be great not only for people interested in the Middle East but also for everyone interested in deciphering international politics and the psychology of world leaders.

Going Green – The very pressing case for “Black Swans”

I go to graduate school at a university which can be described as “ground zero” for the environmental movement in North America, that’s if anywhere can be described as such. I was also fortunate to take a class on environmental policy these past few weeks and this exposed to some of the latest thinking in the fields of conservation, solar energy, windmills etc. Although I cannot in good faith describe myself as an environmentalist or activist of any sort, I am enough of a pragmatic business person that I realize the clear and present danger posed to the world by the warming climate and degrading environments.

However, a lot of what I have been hearing has been along the lines of why we should conserve more and consume less energy. I do not think waste is good and I think the energy-intensive lifestyle of the developed world is less than ideal but I also realize that the world cannot conserve its way out of the crisis that confronts it. One person I really respect in the environmental debate is the Silicon-Valley Billionaire: Vinod Khosla, co-founder of SUN Microsystems and former big-hitting partner at the VC firm: Kleiner Perkins. I have listened to some of his speeches and I am more than impressed by his pragmatic approach to the entire issue of climate change and conservation. The Economist recently ran a piece about him and some of the investments he has made in the “green” space. And they all seem to have something in common: a high probability of failure mixed with the potential to be significant game changers.

The first of Mr. Khosla’s assertions is that of the “Chindia price”: basically the price at which a product or service will become generally accepted by the poor and emerging middle classes of China and India. The mistake many people make in the environmental lobby is to think that because a product has gone mainstream in Northern California, Germany and Scandinavia then the world has a workable product. Consumers in these markets have shown a willingness and ability to pay a premium for environmentally conscious products. However, this works for them because they are typically well-heeled and educated. However for consumers in markets like China and India, paying extra for a “cleaner” or “greener” option just would not cut it. Given that these will be the fastest growing consumer markets in the world, they will ultimately be the test case for any new technologies that will replace current fossil-fuel based technologies. And for this people, price is key! Mr. Khosla illustrated this by saying that for electric cars to make a real dent they must approach the “Tata Nano price”. I could not agree more.

The 2nd and probably more important theme for the article is the need for the world to concentrate on finding game-changing “black swan” solutions to our problems. We are not going to “LED light” and “low-flow toilet” our way out of the challenges that face. We need to come up with solutions that ensure that consumers can continue with the lifestyles they’ve grown accustomed to and what’s more? we cannot deny the hundreds of millions of Chinese and Indians coming out of poverty the washing machines and machine dryers they’ve been waiting for. The world has got to find a way to do this cost-effectively.

This brings us to why “black swans” are the solution that the world’s business, political and scientific leaders should concentrate on. A lot of the technologies that are being discussed represent incremental progress that may move the needle a bit but will not ultimately provide the “oomph” that the world needs. The world is so bad at forecasts, imagine if someone had tried to forecast intercontinental travel at the turn of the 20th century. Their forecasts would have been way off because they would have based their forecast on the technologies available at the time: steam ships, railroads etc. They would have absolutely no idea that airplanes will be invented by the Wright Brothers in 1913 and the invention of the airplane totally changed intercontinental travel. Anyone in 1990 that was asked to forecast telecom penetration in developing countries would have grossly underestimated the future as no one knew of the technological innovations that dropped the cost of telecoms equipment and made the cellphone ubiquitous. Bill Gates once said in the 1980s that he saw no reason why anyone will need more than 64KB of computer memory and he is a really smart guy! To solve the world’s toughest environmental and social problems, everyone needs to be on the lookout for black swans and game changers. Incremental progress won’t cut it and that’s why my fingers are crossed for Mr. Khosla’s investments.

Before the world forgets…

The first two months and counting of 2011 has ushered in tremendous winds of change across the Arab world, in particular the Maghreb countries of North Africa. The young year of 2011 has witnessed the ouster of two long-standing leaders in the region – Ben Ali of Tunisia and Hosni Mubarak of Egypt. Furthermore, the United States is leading a coalition of western and Arab countries to bomb targets in Libya in a bid to force Qaddafi out of power and prevent the continued slaughter of civilians.

While the Maghreb has certainly deserved the attention of the world leaders due both to the scale of the protests and the wider Middle-East’s role as the world’s gas tank, it is also important for world leaders not to lose sight of trouble brewing is less conspicuous places. It has become easy for the world to forget the tragedy that is going on in the Ivory Coast, where a president who the world has acknowledged lost the general election still manages to cling on to power. This is despite the United Nations, United States and the African Union’s recognition of his opponent: Allasane Quattara as the legitimate president of the country.

Despite calls for him to step down, the incumbent “president” Gbagbo remains entrenched in power and the calls have become less stringent and fervent as the crisis in the Middle East as now become front-burner in the minds of world leaders. This ought not to be so as an incident that started off as a power struggle between two politicians is fast approaching the scale of sectarian clashes and civil war. With Gbabgo already encouraging civilian supporters to join in the “battle” against Quattara and the battle lines being drawn once again along North-South lines.

The country has in the meantime defaulted on its Eurobond interest payment, further putting pressure on potential issuances by African countries and raising the cost of issuance for those who manage to do so. The country’s famous cocoa industry has also come under a lot of strain as the fighting has caused disruptions in the supply chain and this has had a non-trivial effect on the global cocoa industry. Adding to the already bad situation is the contagious tendency of civil wars in Sub-Saharan Africa with fighters drifting off to cause trouble in nearby countries and refugees from war-torn countries placing strains on already stretched social services in neighboring countries. A full blown civil war is something the world has to prevent in Ivory Coast and the international community must find a way to diffuse the tension and restore calm! I salute the world’s courage in Libya but I think Ivory Coast should not be forgotten!!

Connected, cosmopolitan and high IQ’d – The rise of a new global elite

It’s that time of the year when high-powered executives, academics and government officials all over the world gauge their importance and place in the world with a simple metric. And that is where they rank in the Davos pecking order: were they invited at all?, did they receive only a general pass or were they asked to moderate, chair or participate in a panel? who shows for their cocktails etc. The yearly spectacle which is Davos can be described as a modern day temple devoted to the worship of high achievement, smarts and wealth. If Mt. Olympus was the gathering place of the gods of ancient Greece, Davos can probably be termed the gathering place of the gods of the modern era: high achieving businessmen and policy makers. Something must be said about the resourcefulness displayed by Klaus Schwab – the Swiss academic who founded the World Economic Forum – in transforming a sleepy ski resort in the middle of nowhere to probably the single greatest annual concentration of wealth, power and prestige in recent human history. However, Davos is in my opinion only a manifestation of larger trends occurring in the world.

The first is the rise of a global elite and the increasing similarity between people with great wealth and power, even if they are from different ends of the world. As noted recently by the Economist, the banker in New York may be more culturally similar to fellow bankers or moneymen (/women) in Mumbai , Shanghai or Johannesburg than they might be to their own neighbors in the Bronx or Brooklyn. The rise of a global marketplace in higher education has made many executives and government leaders from various countries to be alumni of a disproportionately small number of elite institutions, primarily in Europe and the United States. Many of them have further gone ahead to work for a smaller handful of firms – largely investment banks and consultancies – that are generally regarded as the biggest magnets for the “best and brightest”. They all share similar characteristics: an expensive education, an obsession with being regarded as the best and a high level of comfort with a global world. This phenomenon may have an impact of dampening the sometimes positive effects of national loyalties, cultural heritages and differing intellectual aptitude. A global firm may assemble executives from 20 different countries and not have a hint of intellectual, socio-economic or ideological diversity. This in itself may not be bad if it were not for the potential that it has for fostering “group think”: a pattern of thought which the recent financial crisis has shown to be potentially troubling.

The second point is the change in the nature of the new breed of wealthy people, especially in the United States. It was the case in 19th and early 20th century America that the wealthiest people were tough, roughhewn men such as Vanderbilt, Rockefeller and Carnegie with little formal education but lots of grit. They were simple men who joined gold rushes, went wildcatting for oil and built railroads. Many of them would definitely not have been admitted into the elite academic institutions of their day, although they did get some kicks from doling huge sums to such institutions after they made a pile of money. The 2nd half of the 20th century, turned this model on its head especially with the rise of the technology and finance sectors. A lot of the wealth that has been created – and many of the millionaires – have come from two sectors: finance and high technology, which demand a higher than average level of education and intelligence. The Hedge Fund and Private Equity sectors has been prodigious in minting a lot of multi-millionaires every year and these are not “plain-speaking townfolk” who raised themselves by the bootstraps with little education. No, these are high school valedictorians, chess champions, Ivy-League graduates with high-priced MBAs from top business schools. These are literally the “smartest guys in the room”. The same is true – to a possibly greater extent – in the high tech industry. It takes a level of mathematical aptitude that is not present in most of humanity to be accepted into Computer Science Phd programs in places like Stanford and MIT: places that have produced a lot of tech millionaires and billionaires. These guys are smarter than you and would like you to remember that!

This in itself is great but it has implications for class relations. The world has moved from medieval-era class relations predicated on the relations between the landed aristocracy and their serfs to Victorian-era relations between mill owners and the near-permanent underclass who toiled in such mills. The world has become far more meritocratic than at any point in its history and people have risen to great positions from diverse backgrounds. However, a new aristocracy has emerged and it’s the “aristocracy of the brainy”. Today’s aristocrats have attended the best universities across the world, worked for a handful of “brand name” companies and congregate at forums such as Davos and Bilderberg. It would be difficult to choose a point in human history when education and wealth has been so positively correlated. The difference in the lifetime earnings potential between people with high school diplomas and college degrees have widened significantly in the last couple of decades. Even within college graduates, those with degrees from a handful of colleges regarded as “top tier” will earn far more than those with degrees from places no one has ever heard of. Furthermore, the range of middle class occupations available to folks with high school diplomas continues to shrink daily.

This situation has socio-political implications with the most extreme being class warfare. People who sense they were trapped in a permanent underclass have taken out their frustrations on their better endowed neighbors in the past: the French Revolution was as much a revolt against monarchy as it was a backlash by the poor against the landed aristocracy. While this is very unlikely in the modern era, some of the “soak the rich” sloganeering and debates about corporate bonuses of the past 3 years (though somewhat justified) can be described as “distant cousins” of class warfare. This may also account for the poor performance of many business executives in recent election cycles, with some being resented for having made a lot of money in the corporate boardrooms while the rank and file felt pain. Carly Fiorina caught a lot of flak for cutting jobs and earning bonuses even though she was only doing her job to maximize value for shareholders! I think in the final analysis, governments and companies must come together to look out for the ordinary people who lack the degrees that have become so critical for success. Assembly-line workers who lose their jobs should be given aid in retraining, community colleges should be better funded to give people a hope of some form of tertiary education. And more importantly new growth sectors that will employ huge numbers of non-college graduates need to be created to sustain social harmony. I hope these issues find their way into the discourse in the snow-covered mountains of Davos!

Book Review – Overhaul

I just finished reading the book: Overhaul – An insider’s account of the Obama administration’s emergency rescue of the auto industry, written by President Obama’s Auto Czar: Steven Rattner. Mr. Rattner prior to his appointment had been an investment banker – at Lazard and Morgan Stanley – and founder of a private equity firm: Quadrangle. His appointment as the “auto czar” was met with considerable skepticism due to his lack of auto industry experience. However, by many accounts he and his team gave a good account of themselves with the recent IPO of “new GM” being a testament to their efforts.

I enjoyed reading the book largely because of the “no holds barred” approach the author adopted in writing the book. He was quite open in heaping praises on the people he felt added a lot of value to the process and with whom he was impressed. He was also quite brave enough – or vengeful depending on who you talk to – to call out the individuals and institutions whose work and/or abilities he found wanting. The book’s conversational, first-hand account makes for a fascinating read and helps the reader develop some sort of familiarity with the central characters involved in the auto bailout. I really enjoyed reading Overhaul and I drew a number of lessons.

Outside advisers can add value. Investment bankers and management consultants like to pride themselves on the value they are able to create by helping their clients think through hard decisions. While this may be true in many cases, there are also many instances where this claim seems tenuous, especially given the number of mergers that have not turned out great. However, the auto bailouts and restructuring episode was a poster child of the value bankers and other advisers can create for their clients. Mr. Rattner and his team – affectionately termed “Team Auto” – were basically acting as a small investment banking team with a very powerful but concerned client: Uncle Sam. The auto bailouts were not really about cars or manufacturing, if it was about these things then Team Auto would have failed quite spectacularly. It was at its core a restructuring problem: GM and Chrysler had debts and other liabilities that had clearly become unstable given their current operating liabilities. Both companies’ debt burdens had to be reduced, some employee and retiree liabilities jettisoned and their operations and brands scaled down significantly. The author wrote of marathon negotiation sessions with lenders to strike debt restructuring deals and with the unions to secure concessions to ensure viability.

The US political system still works. While a lot has been said about political gridlock in the US congress with pundits constantly reminding TV audiences about how the US congress can’t seem to get things done. It was quite instructive to see that in times of deep crisis – such as the auto bailout episode – politicians find a way of working together. A politician with a free market philosophy as fervent as President Bush was basically responsible for authorizing billions of dollars of federal aid for the auto companies, a move many legislators in his own party vehemently opposed. The book even describes a scene in which Vice-President Cheney (whom no one can accuse of being a big government liberal) went up to Capitol Hill to lobby republican lawmakers on the auto bailout. It was also interesting to find out that despite some initial outcries, congressman largely allowed the rescued companies to go ahead with dealer closures even though many of their prominent constituents and campaign contributors were affected.

Sacrifice has to be broadly shared. Reading the book, it was really clear that various stakeholders had to make sacrifices and settle for outcomes that were less than ideal for them. The companies had to close some struggling brands and close some plants, lenders had to take significant haircuts on their loans while workers and retirees took a big hit on benefits. Anecdotes abound in the book about marathon negotiation sessions with labor, the bitter pills that the unions had to swallow and the personal toll that these decisions had on the president of the United Auto Workers (UAW). While some commentators have (rightfully) questioned the move to place employee and retiree benefits (unsecured creditors) above lenders who are senior creditors and explained it as a political move by the Obama administration to favor its union supporters. The book suggests that this may have been due to just plain operating reality, as the author said: “I need workers to make cars but I don’t need lenders”. So while lenders had seniority above employee liabilities in the priority structure, operating realities favored the workers. While this makes sense, I can’t help but wonder what impact this would have on future restructurings.

Success can lead to insularity and lethargy. General Motors in its heyday represented the finest of American industry, overtaking Ford Motors and its iconic Model T and instituting routines under famed CEO: Alfred Sloan that came to define management best practice. However, the picture the author painted of GM in the pre-bailout days was very far from flattering. The book was replete with anecdotes of GM management missing multiple deadlines, being unable to accurately estimate cash holdings & requirements, holding bureaucratic review meetings and even being unable to provide Team Auto with its financial model (the bankers had to improvise by building one).

In conclusion, while I agree with a lot of what has been said about the ineptitude, arrogance and lack of responsiveness of the auto companies’ managements to changing conditions. I can’t help but wonder whether the companies ended up being “punished” for their role in building America’s middle class through the very benefits and perks which ultimately rendered them uncompetitive. Getting a job on GM’s assembly line in its heyday was a ticket to a middle class life with good wages and a robust package of healthcare and other benefits. People paid off their mortgages, lived in decent neighborhoods and put their kids through college all on an assembly line wage and a high school education. With the constant erosion of the auto industry in the US and the steady reduction in wages and benefits, an auto industry job will in no way represent the security and stability of past years. The question then is: what opportunities at a decent wage await people in the US with only a high school education in the new global economic reality. Although the book doesn’t proffer solutions for addressing these issues, I think its still a very good book about a very important time in the global economy.

“No thanks!” – HSBC sensibly decides to withdraw from acquiring Nedbank

The past couple of months has ushered in a flurry of positive deal and investment activity on the African continent, notable among which are the proposed acquisition of South Africa’s Nedbank by HSBC and Massmart – also of South Africa – by Walmart. Many analysts and investment managers focused on Africa and other frontier markets hailed these moves as signs that the rest of the world has begun to see the light in the “dark continent”. Investment bankers have been quick to talk up these announcements as just the advance party in a wave of acquisitions of African assets in the coming years.

Many analysts surely would have regarded HSBC’s recent announcement that it is pulling off from the deal as a blow to the “rising Africa” theory. Well I think this may be a setback for Nedbank and Old Mutual (its parent company that really can use the extra cash to deleverage its balance sheet). I believe this deal is idiosyncratic and is not representative of the potentials for acquisitions and investments in Africa. When the proposed deal was announced, I kept on struggling to understand the strategic benefits of the deal and I could not find any that was very compelling. I understand HSBC’s rationale for seeking a foothold in Africa: the continent is growing fast, banking penetration is low and banks can still make decent money from boring stuff like taking cheap deposits and funds out at much higher interest rates. Western bankers will give an arm and a leg to achieve the sort of Net Interest Margins that African banks take for granted.

So what is my grouse with the deal? HSBC picked the wrong target to expand in Africa. Nedbank is not Standard Bank – the market leader in South Africa with a wide footprint across the continent, it is basically the 4th largest bank in a South African market dominated by 4 banks!!. It has very limited operations in the rest of Africa and its international operations are concentrated in a handful of small Southern African countries. It is practically absent from the other big sub-Saharan African economies of Nigeria, Ghana and Kenya (not to mention North Africa). I concede that there is a partnership with Ecobank Transnational, which has a wide banking network across much of Sub-Saharan Africa. However, I don’t believe alliances are the most cohesive forms of business combinations and they can be like mermaids: i.e. you get a fish when you need a human and you get a human when you need a fish. The Nedbank-Ecobank alliance will be more valuable - in my opinion - if it were a merger. It is therefore clear that Nedbank is not the best vehicle for a bank like HSBC to gain a continent-wide exposure to the African banking sector. If it did the deal it would have had to execute another major acquisition – maybe with Ecobank – or buy multiple banks across Africa. Which is frankly time consuming!

Which leads me to the ideal suitor for Nedbank. I believe the ideal candidate for the bank has to be a global bank with an existing network across Africa that it can integrate Nedbank into. The two banks that fit the bill are Barclays Bank and Standard Chartered Bank. However, Barclays already controls ABSA: one of the big 4 banks in South Africa and I am near certain that the South African authorities will be very reluctant to approve such a deal due to competition considerations. Which leaves Standard Chartered Bank, which has a formidable presence across Western and Eastern Africa. It has significant operations in fast growing economies such as Ghana, Nigeria and Kenya, however the missing piece in its strategy is a sizable operation in South Africa (the region’s largest economy). Acquiring Nedbank will complete the picture and open up hitherto unlocked cross-selling opportunities. However, the bank – which is currently in the middle of a cash call – has basically signified that it would not be bidding as it intends to use the rights issue proceeds to bolster capital ratios not fund acquisitions. This really puts Old Mutual in a bind and it may have to reevaluate its strategy. However, if Old Mutual and its advisers want to get paid anytime soon, they have to beat a path to Standard Chartered CEO Peter Sands’ door and fall at his knees, kiss a ring and do whatever it takes to get him and his board to make a good bid for Nedbank. I think that is the only game in town!

Mobilizing domestic financing for infrastructure – recent positive developments

The past few weeks have ushered in a flurry of announcements of various policies/initiatives aimed at improving the infrastructure situation in Nigeria, with electricity power reform always leading the discussions. The reactions trailing the government’s decision to effectively privatize the electricity power sector has largely being met with positive comments by both Nigerian and international analysts. A major concern that has however underlined these positive comments has been the nation’s ability to attract sufficient investor interest in the power sector. An initial estimate of US$10 Billion is currently being bandied around as being required in the power sector.

This will require a massive sales effort by the government, the privatization agencies and the Nigerian finance & investment community. A very common response to the financing question has been: “Foreign investors are interested”. While I believe that the Nigerian power sector – if properly structured – presents a compelling investment proposition, there are also potential limitations that may prevent the expected rush of foreign investors. Firstly, Nigeria is setting on a privatization program for its electric infrastructure at a time that major emerging market economies are launching programs of similar nature. Brazilian President Lula has announced a US$500 Billion infrastructure upgrade plan, an integral portion of which will utilize private funding. The Indian Government is also planning a multi-billion dollar transportation and electric power upgrad that is expected to require huge private investments in the near future. Therefore, a lot of the infrastructure funds and big firms will be concentrating on these markets and we would face an uphill task competing against these destinations. Secondly, Nigeria also has some way to go in proving its stability as an investment destination particularly with the upcoming elections.

Hence, it is clear that while we should work hard at getting foreign investors we should also be doing as much as we can to mobilize funds domestically. That is why I am quite happy at PENCOM’s – the national pensions regulator – proposal to allow Pension Funds in Nigeria to invest up to 20% of their assets into infrastructure projects and funds. Given the current estimate of pension assets size of N1.73 Trillion (US$ 11.5 Billion), this proposal may free up to US$2.3 Billion for investments in infrastructure. I believe the bulk of these infrastructure investments will be in the electricity sector. I think the proposal to allow Pension Fund Administrators to invest in assets such as Private Equity and infrastructure is a good one as I have long believed that the pension guidelines - as they are currently written – suffer from an illusion of safety. I believe a good national pension fund system should serve two goals: mobilize savings for developing the nation and provide good returns on pension contributions to ensure a decent nest egg for retirees. The very restricted nature of the previous guidelines have led – in my opinion – to distortions or overheating of certain market segments in the country. Pension funds’ constant purchases of Federal Government bonds once pushed the yield on the longest dated (i.e. 20 year) bonds to 8%, in a country with double digit short term inflation rates!!! Analysts also believe that pension funds’ purchases of subnational, state government debt may also spark a bubble in the primary markets for such instruments.

This is why the current proposals to enable Pension Funds invest in infrastructure and private equity should be a win-win for both pension fund contributors and the economy as a whole. Infrastructure and Private Equity investing – if properly managed – should lead to greater diversification and mitigate some of the concentration risks in most pension portfolios. It should also be beneficial to the economy as the country will be creating a domestic capital pool for some of the electric power privatizations and investments that should be coming on-stream in the next 1-3 years. In addition, allocations to private equity should also help catalyze the emergence of a domestic private equity and venture capital industry that will provide much needed funding to early stage ventures, Small & Medium Enterprises (SMEs) and larger pre-IPO companies.

However, while the motives seem honorable and the benefits seem clear we must be mindful of potential pitfalls, with a key pitfall being the dearth of project finance structuring competence among Nigerian financiers. PENCOM should work with key DFIs such as the IFC to build pension managers’ capacity to properly evaluate infrastructure projects as well as private equity and infrastructure funds. The regulator has taken a step in the right direction by mandating minimum standards for such funds and projects, but it will need to go further to encourage best practices and ensure that fund managers do not engage in a race to the bottom to see who can throw the most money at the worst deals. These are solid proposals but the regulators, fund managers and the broader financial industry should work together that the pension contributors and the economy reap the most benefit possible.