May IEO Eyes Africa, Economic Growth in Developed Countries and Greece


Africa is a region that is either categorically discarded or largely overlooked by most Western investors. More alarmingly, Africa is often talked about as if it were a country and not as a region comprising 53 countries, writes Prof. Sanjay Peters in the May edition of the International Economic Overview, a publication aimed exclusively at IESE Alumni.

This month's issue of IEO spotlights the upswing in foreign investment in Africa, projected growth in developed countries and the implications of the Greek bailout for the rest of Europe.

Investing in Africa

"Foreign investors from the West generally regard Africa as a high-risk environment - for valid reasons," writes Prof. Peters. "African economies are generally volatile. Most European firms, with the exception of those in Francophone Africa and British firms in their former colonies have very limited or no experience in doing business in the region. Therefore, their ability to forecast is constrained by a lack of expertise."

Noting that investment in many African countries is increasing, Prof. Peters writes that "firms from the EU will need to learn to become more agile, and adapt their strategies accordingly, when doing business in Africa."

To date, China has led the world in this arena: "When the rest of the world would not touch Africa with a 10-foot pole, China appeared on the scene and has been actively investing there for the past decade. China's presence is, in fact, what has prompted the interest of foreign multinationals from the West in Africa," writes Prof. Peters.

As African countries pursue economic growth through foreign investment, they should take care to avoid projects that result in long-term economic and social instability, he said. For example, valuable land in countries such as Ethiopia is currently being leased by private companies for 20-30 years, as citizens in the same vicinity die of hunger and malnutrition.

"Approximately 50 million hectares have already been bought or leased across 20 African countries by foreign hedge funds, sovereign wealth funds, investment banks and commodities traders. Many of these deals put Africa at a gross disadvantage," he said.

Instead, he said, African governments should "lead partnerships to improve adherence to national environmental, labor and product-quality standards, closely monitor engagements, and ensure that benefits are more evenly spread."

2010: A Look Ahead

In his commentary, Prof. Antonio Argandoña offers an overview of economic conditions early in the second quarter of 2010, with a special focus on developed countries.

"It appears that the recession has bottomed out in developed economies," writes Prof. Argandoña. "The severe depression we feared a year ago has not occurred. The global financial system was on the brink of collapse in September 2008 and was also averted. We are recovering from the colossal drop in world trade. Economic activity is on the upswing, but with notable differences between countries: the United States is ahead, with Europe and Japan bringing up the rear.

Key factors blocking growth recovery in the U.S., Europe and Japan, however, include: household and business debt, fragile financial institutions, public deficits and slow job creation. Against this grim panorama, the only players who will be able to pull economies out of the quagmire are companies.

"This is not because they have faith in the future of the economy, but because they summon the courage to implement expansion projects, overcoming fear and any financial, economic or political barriers," says Prof. Argandoña.

Life After Greece

What impact will the bail-out of Greece have on for European countries in the future? Prof. Rolf Campos analyzes this question, pointing out that Greece is not the only European country that has had to resort to outside aid in recent years. Hungary, Romania and Bosnia experienced similar situations (the imbalance of payments accompanied by a public deficit problem), which led to agreements with the IMF.

Yet Greece's situation is far worse than other similar countries that have signed agreements specifically designed to address external imbalances, writes Prof. Campos, since debt markets did not take into consideration that Europe would help out Greece in case of insolvency.

"From the investors' point of view, Greece had an implicit insurance against insolvency, which allowed the situation to reach a far more dangerous point before the alarms went off," he writes.

There are "compelling reasons" for Europe to come to Greece's rescue, particularly because not helping the country out would remove the implicit insurance that other countries in the Euro Zone rely on.

"However, the relatively generous rescue package to Greece discourages reforms that could prevent further imbalances. Moral hazard will result in the most problematic members of the Euro Zone treating with less urgency the reforms which they would be forced to make were it not for the implicit insurance of the rest of Europe. This is the price to pay for helping Greece, and it must be added to the monetary cost of the aid package."