Failed States = Frontier Investment Opportunities?

Via Impact Lab, a look at the latest failed states index and possible candidates for real frontier investment opportunities:

“…The 10 states that fill out the top ranks of this year’s Failed States Index — the world’s most vulnerable nations — are a sadly familiar bunch. Shattered Somalia has been the No. 1 failed state for three years running, and none of the current top 10 has shown much improvement, if any, since Foreign Policy and the Fund for Peace began publishing the index in 2005. Altogether, the top 10 slots have rotated among just 15 unhappy countries in the index’s six years. State failure, it seems, is a chronic condition.

This year’s index draws on 90,000 publicly available sources to analyze 177 countries and rate them on 12 metrics of state decay — from refugee flows to economic implosion, human rights violations to security threats. Taken together, a country’s performance on this battery of indicators tells us how stable — or unstable — it is. And unfortunately for many of the 60 most troubled, the news from 2009 is grave.

At the top of the list, Somalia saw yet another year plagued by lawlessness and chaos, with pirates plying the coast while radical Islamist militias tightened their grip on the streets of Mogadishu. Across the Gulf of Aden, long-ignored Yemen leapt into the news when a would-be suicide bomber who had trained there tried to blow up a commercial flight bound for Detroit. Afghanistan and Iraq traded places on the index as both states contemplated the exit of U.S. combat troops, while already isolated Sudan saw its dictator, Omar Hassan al-Bashir, defy an arrest warrant from the International Criminal Court and the war-ravaged Democratic Republic of the Congo once again proved itself a country in little more than name.

Even good news for these plagued states came tempered by hard facts. A coalition government in Zimbabwe whipped history’s second-worst bout of hyperinflation, fostering the country’s first year of positive growth in more than a decade, and Sri Lanka crushed its Tamil Tiger insurgency. But Robert Mugabe’s security goons still rule Harare unchecked, while the Sri Lankan government stands accused of committing gross human rights violations.

Given time and the right circumstances, countries do recover. Sierra Leone and Liberia, for instance, no longer rank among the top 20 failing states, and Colombia has become a stunning success story. Few remember today that the Dominican Republic once vied with its neighbor Haiti for the title of “worst Caribbean basket case.” But the overall story of the Failed States Index is one of wearying constancy, and 2010 is proving to be no different: Crises in Guatemala, Honduras, Iran, and Nigeria — among others — threaten to push those unstable countries to the breaking point.

1.  Somalia – FSI score: 114.3 (out of 120)


Somalia has topped the Failed States Index for the last three years — a testament not only to the depth of the country’s long-running political and humanitarian disaster, but also, as James Traub writes, to the international community’s inability to find an answer. After two decades of chaos, the country is today largely under the control of Islamist militant groups, the most notorious and powerful of which is al-Shabab. A second faction, Hizbul Islam, rivals the former in brutality — it recently executed two Somalis for the crime of watching the World Cup. Off the coast, pirates such as the men pictured here torment passing ships, often holding them hostage for a high price. In 2009, Somali pirates earned an estimated $89 million in ransom payments.

2.  Chad – Score: 113.3


Chad’s troubles are often written off as spillover from the conflict taking place in next-door Darfur, Sudan. But this central African country has plenty of problems of its own. An indigenous conflict has displaced approximately 200,000, and life under the paranoid rule of Chadian President Idriss Déby is increasingly miserable. Déby has arrested opposition figures and redirected humanitarian funding to the military in recent years. Matters might soon get worse as the U.N. peacekeeping mission in the country’s east, where the bulk of the refugees reside, begins to depart on July 15. Pictured here, local Chadians in the village of Dankouche struggle to share scarce resources such as firewood with a nearby Sudanese refugee camp.

3.  Sudan – Score: 111.8


The next year will prove a decisive one for Sudan, perhaps more so than any other since the country’s independence in 1956. In January 2011, the people of South Sudan will vote in a referendum on whether they would prefer to remain an autonomous region — or secede as an independent state. All analysts predict it will be the latter, but they are equally certain that it won’t be so easy. President Omar Hassan al-Bashir is likely to cling close to his control of the South, where much of the country’s oil riches lie. This is to say nothing of Darfur, where peacekeepers recently reported an uptick in violence with hundreds killed. In this scene, children crowd around a U.N. helicopter in the South Sudanese town of Akobo.

4.  Zimbabwe – Score: 110.2


Life in Zimbabwe has undoubtedly gotten better since a power-sharing agreement between Robert Mugabe, who has ruled this southern African country since 1980, and Morgan Tsvangirai, his most prominent opponent and the current prime minister, entered into force in February 2009. Inflation is down from 230 million percent, goods are back on the shelves, NGOs are able to work again (though they are often still harassed), and the country is able to tap into foreign credit lines from regional banks and China. The bad news is that Mugabe has kept up his dictatorial rule as if nothing had changed; for example, he celebrated his 30th anniversary in office to the spectacular fanfare seen here, where children display militant loyalty to the ruling party. Mugabe and Tsvangirai operate autonomously, holding occasional talks to resolve disputes over cabinet appointments, land expropriation, opposition arrests, and media freedom — among other things. With little sign of progress for months, both leaders are now looking forward to fresh elections as the “only way out” of the political stalemate, as Tsvangirai has put it.

5.  Democratic Republic of the Congo – Score: 109.9


The Democratic Republic of the Congo is the epitome of a country cursed by its resources. Blessed with perhaps the world’s single most abundant, diverse, and extractable supply of minerals, Congo has been exploited from the moment its riches were known — first by Belgian colonialists, then by miserable kleptocrats, and today by the Army and various rebel groups and militias. Meanwhile, miners, such as those seen here, work for meager wages. For all the country’s mineral wealth, today it has little to show for it save one of the world’s most desperate humanitarian situations. Although the International Rescue Committee’s estimated death toll of 5.4 million since 1998 has been contested, no one doubts that hundreds of thousands, if not more, have died — not from fighting but from disease.

6.  Afghanistan – Score: 109.3


To anyone who has followed the news over the last decade, Afghanistan needs no introduction. An ongoing U.S.-led military operation there is working town by town and safe haven by safe haven to defeat the Taliban, the Islamist movement that ruled the country until its overthrow after the September 11, 2001, attacks. But the weak and fraying government of President Hamid Karzai, reelected under dubious conditions last August and presiding over a deeply corrupt administration, has thwarted those efforts. Now, with the self-imposed U.S. deadline to begin pulling out troops just a year away, many are wondering if conditions will permit the international forces to leave. Here, women in the capital city of Kabul stand patiently — even as a nearby explosion sends passersby into a frenzy.

7.  Iraq – Score: 107.3


Iraq rocketed to the top of the Failed States Index after a 2003 U.S. military invasion ousted the dictator Saddam Hussein and set off a period of violent turmoil. Amid the explosion of sectarian killings and reprisals that followed, more than 2 million Iraqis fled the country, and many have yet to return. Although Iraq has calmed dramatically since the violence peaked in 2007, the country remains deeply polarized along ethnic and religious lines. Recent parliamentary elections were among the freest in the Arab world, but were marred by suicide attacks and allegations of fraud, and a new government has yet to be named. Any number of factors could prove destabilizing going forward: tension over oil rights, latent Sunni-Shiite hostility, the pullout of U.S. combat troops by Sept. 1. An April 23 attack in Baghdad is pictured here, on a day when 58 died in similar assaults throughout the country.

8.  Central African Republic – Score: 106.4


The Central African Republic should have calmed down by now; peace deals in 2007 and 2008 brought rebels into the government’s fold. But banditry and violence are still common, and lately the country has played unintentional host to the Lord’s Resistance Army, a legendarily brutal group of rebels that has been pillaging and abducting new “recruits” and hapless children after being chased out of nearby Uganda. Meanwhile, François Bozizé, a former army chief of staff who came to power in a 2003 coup, has drained the country’s wealth for the benefit of his small cadre. The country has known little if any modernization since its independence from France a half-century ago.  Here, a man watches a burning village set aflame with the intention of warding off snakes and scorpions — and boosting fertility.

9.  Guinea – Score: 105.0


The last 18 months have been a roller-coaster ride for this small West African country, with far more downs than ups. After Guinea’s longtime president died in December 2008, a group of renegade soldiers seized power, naming a rogue Army captain, Moussa Dadis Camara, as president. Camara quickly proved to be a delusional, erratic, and violent ruler. In September 2009, Guinean troops massacred 150 opposition protesters at the country’s national stadium, provoking international outrage. Months later, Camara was shot by one of his own guards, who claimed that the junta leader was forcing him to take the fall for the massacre. The injured Camara was flown out of the country for medical care and his deputy, Sékouba Konaté, took charge together with a civilian prime minister. Elections to seat a permanent government are promised for June 27 — the first good news this heavily militarized country has had for a while. In this photo, tanks prepare to bring a 2007 general strike to heel.

10.  Pakistan – Score: 102.5


Pakistan has more than once been described as the world’s most dangerous country. Its wild northern reaches remain host to various branches of the Pakistani Taliban and likely to al Qaeda (Osama bin Laden is thought to be among them), while other militant groups make gains closer to urban areas. The bomb that went off here left six dead in Quetta, in the country’s southwest. More than 3 million Pakistani civilians were displaced by “counterinsurgency” operations in 2009 — the largest single movement of people since the Rwandan genocide. Meanwhile, President Asif Ali Zardari’s democratically elected government looks hapless — unable to gain any measure of civilian control over a nuclear-armed military obsessed with planning for a war with India, or an intelligence service that stands accused of abetting the Afghan Taliban.

11.  Haiti – Score: 101.6


As 2010 began, Haiti was finally making progress: Donor funds were flooding in, the government was on its feet, and there was more optimism than at any point in the last two decades. And then, in the span of a few seconds, everything fell apart. The 7.0 magnitude earthquake that hit Haiti on Jan. 12 created one of the worst humanitarian disasters in recent memory. Today, some 230,000 Haitians are thought to have died, with more than 1 million homeless and 2 million in need of food aid. For the country’s people — such as the man seen here drinking street water from a makeshift straw — as well as its government and donors, the temblor has been an epic tragedy, setting back years of painstaking development efforts.

12.  Ivory Coast – Score: 101.2

ivory coast

They signed a peace deal in 2007, but today, the Ivory Coast’s northern and southern regions are more divided than ever over how to share the country’s resources. Elections to replace the current government, which took office in a 2003 power-sharing agreement, were scheduled to have taken place in 2005. A half-decade later, the country has yet to finalize an electoral list, and violence once again looms. Nor has the country been rebuilt; the houses pictured here were ransacked back in 2002. This young boy is malnourished — as one in every five children in the Ivory Coast are.

13.  Kenya – Score: 100.7


Kenya, like the Ivory Coast, has lately shown that power-sharing arrangements can be as divisive as the conflicts they are meant to end. In Nairobi, the country’s president and prime minister have been perpetually at odds since their forced marriage in 2008. The government has done little to investigate or make amends for that year’s explosion of election-related violence. An exasperated Kofi Annan, the former U.N. secretary-general who helped resolve the electoral dispute, has given the International Criminal Court names of people who are implicated — because Kenya seems unwilling to try them itself. Meanwhile, for the average Kenyan, all this has proved a distraction from everyday concerns. Villagers in northeastern Kenya, pictured here, carry water amid a drought of the sort that often threatens regional famine.

14.  Nigeria – Score: 100.2


Nigeria’s infamous political instability was in the news with unfortunate frequency in recent months, as the country’s president fell ill, disappeared for medical care, and eventually passed away, leaving control to his vice president, Goodluck Jonathan. Meanwhile, a combination of  intercommunal violence in the country’s middle belt (corpses from which are seen buried here), a flailing amnesty program in the oil-rich Niger Delta, police brutality, scathing poverty, and rampant corruption has kept this West African country in the ranks of the world’s most dysfunctional states.

15.  Yemen – Score: 100.0


Decades of conflict and insecurity have made AK-47s a status symbol in Yemen on par with the country’s traditional dress. Attempted Christmas Day bomber Umar Farouk Abdulmutallab trained in Yemen, and despite U.S. military aid, there is little sign that the central government is capable of rooting out militant groups such as al Qaeda in the Arabian Peninsula. Throw in declining oil revenues, failing water supplies, an internal rebellion or two (the destruction from which is manifest here), and an influx of Somali refugees, and the question becomes when, not if, Yemen’s ticking time bomb will go off.

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.