Unintended Consequences in Africa

29 October 2009

Thursday


khartoum_alsalam

The Alsalam Bank Tower under construction in Khartoum. Alsalam Bank Sudan won 'Best bank in Sudan' award for 2008 by Global Finance magazine.

It little known, little realized, and little understood in the West that during the past few years when Western governments have been attempting to put pressure on Sudan because of the events in Darfur that Sudan has not been and is not now just another basket case of an African economy. Throughout the period when it was most strongly condemned by Western governments, the Sudanese economy has continued to grow, and to grow vigorously. Some Sudanese cities are sprouting like oases in the desert, and many buildings are rising in the capital, Khartoum. Needless to say, the Sudanese government can afford its impunity vis-à-vis Western governments under these conditions.

Chinese engineers assemble steel at a construction site in Sudan’s capital Khartoum.

Chinese engineers assemble steel at a construction site in Sudan’s capital Khartoum.

Much of this growth and development has been the result of oil revenue and industries connected with the oil industry. Much of this growth, including the growth of the oil sector, is the result of China seeking energy resources and raw materials for its industries in Africa, including Sudan. There has already been a backlash in some African countries over the high profile of Chinese industrial concerns, but this has done little to slow the involvement of Chinese industry in Africa. There have been some compelling stories and pictures in the Financial Times about this development (not to mention the Korea Times).

Burj Al-Fateh Hotel

The 230 room Burj Al-Fateh Hotel in Khartoum, Sudan.

I like to imagine what it must be like for young Chinese engineers to suddenly find themselves in Africa, working on enormous projects, and in a climate and a society so different from that which they came from. Someday there will be books written about such experiences. I hope they’re taking detailed notes.

Somali factor

I was thinking about economic development in Africa today because of a fascinating article in today’s Financial Times about the Somali diaspora in Kenya. The Financial Times regularly includes extra sections devoted to particular geographical regions or topics. Today’s Financial Times came with an extra section on Kenya, and this included the article Somali factor drives up price of property.

mogadishu

Mogadishu street life.

We all know that Somalia has been without a functioning central government for more than a decade, and that large sections of Mogadishu are in ruins from years of war, but what we perhaps did not know was that the Somali diaspora scattered across Africa has brought its assets to other regions, and they have made a real difference in Kenya. There is a question as to the legality of this money, and we can be sure that at least some of it represents ill-gotten gains. There is in particular the charge that Somali money comes from piracy, and we know that the lawlessness of Somalia has allowed piracy to flourish in some coastal towns.

hawala diagram

A hawala version of informal value transfer systems.

But it seems that the Somalis are also active in the traditional money-lending institutions of east Africa. Because of the interest prohibition in Islamic societies, the banking business operates differently in the Muslim world, but banking services are not absent. There is a traditional form of money transfer that takes place throughout east Africa and the Arabian Peninsula by which a closely associated network of individuals, functioning almost entirely upon trust, move money from place to place for a fee with a simple phone call. This is known as the hawala system. For example, say an individual in Mombasa wants to send money to a relative in Muscat. He goes to a local hawala broker, a hawaladar, gives him the money and a commission, this broker then calls another local agent in Muscat and instructs him to give a like amount of money to the individual in question in Muscat, and the agents periodically settle up accounts. Since there is always money coming into and going out of each agent, the system continues to function with periodic adjustments.

hawala 101

Being in banking is usually profitable. We ought to recall that the renaissance banking houses of Italy made possible the financing of lavish renaissance art financed by wealthy families like the Medici, just as early modern banking houses in ultramontane Europe, like the Fuggers and the Rothchilds, financed the growth of European industry and culture north of the Alps. The Somalis, it seems, are tapped into the banking network “Middle World” (to use Tamim Ansary‘s phrase). These networks are sometimes called “Informal Value Transfer Systems” (IVTS), but they are only “informal” in so far as Western banks are not involved and such networks have no formal charter. In so far as the cultural conventions of the societies who use such networks extend, such networks are part of a formal commercial economy.

This Somali access to capital has had unintended consequences, especially for the Eastleigh neighborhood of Nairobi, where property values have been on the increase due to the influx of Somali money. The Somalis have also employed their access to capital to become among the most successful traders in east Africa, sourcing goods directly from east Asia. It is an impressive achievement for a people whose homeland has been devastated, not unlike the feat of the Jews in Western Europe in creating a wealthy diaspora community cut off from its traditional homeland. I personally find it counter-intuitive that these apparently wealthy Somali traders don’t find a way to establish order and security in Somalia, but history is like that sometimes. The only thing one can be sure of is that further unintended consequences will follow.

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