Failed States: Potential Investment Opportunities?

Courtesy of Foreign Policy, their annual Failed States Index which looks at the world’s most fragile countries suffering from virulent economic crisis, countless natural disasters, and government collapse.   As the article notes:

“…Yemen may not yet be front-page news, but it’s being watched intently these days in capitals worldwide. A perfect storm of state failure is now brewing there: disappearing oil and water reserves; a mob of migrants, some allegedly with al Qaeda ties, flooding in from Somalia, the failed state next door; and a weak government increasingly unable to keep things running. Many worry Yemen is the next Afghanistan: a global problem wrapped in a failed state.

It’s not just Yemen. The financial crisis was a near-death experience for insurgency-plagued Pakistan, which remains on imf life support. Cameroon has been rocked by economic contagion, which sparked riots, violence, and instability. Other countries dependent on the import and export of commodities—from Nigeria to Equatorial Guinea to Bangladesh—had a similarly rough go of it last year, suffering what economist Homi Kharas calls a “whiplash effect” as prices spiked sharply and then plummeted. All indications are that 2009 will bring little to no reprieve.

…Figuring out which faltering states to help depends in large part on what they need. After all, as Tolstoy might have put it, every failing state is failing in its own way. Georgia, for example, jumped 23 places in this year’s index due to a substantial spike in that elusive indicator, “Invaded by Russia.” Somalia and the Democratic Republic of the Congo are failing because their governments are chronically weak to nonexistent; Zimbabwe and Burma are failing because their governments are strong enough to choke the life out of their societies. Iraq is failing, but its trajectory may be toward greater success, while Haiti is failing as well, and it is hard to imagine success around the corner.

It is also a harsh fact that a greater risk of failure is not always synonymous with greater consequences of failure. For example, Zimbabwe (No. 2 on the index) is technically failing more than Iraq (6), but the geopolitical implications of state failure in Iraq would be far greater than in Zimbabwe. It’s why we worry more about Pakistan (10) than Guinea (9), and North Korea (17) more than the Ivory Coast (11).

Then take the paradoxical case of Iran, which jumped 11 spots in the rankings this year. With an already faulty economy, a vampire state mismanaging it further, and a global recession on top of all that, it is no surprise that Iran is faltering. But the state is not failing—indeed, it is succeeding quite well—in one rather important respect: the pursuit of nuclear weapons. And it is this “success,” more than Iran’s myriad failings, that keeps it above the fold of other worrying news.

Despite this bad news, Foreign Policy does note that there are some failed states that work:

“…In the cool air-conditioning of the Silverbird Galleria mall in Lagos, Nigeria, it is hard to remember that you are in the 15th-most failed state in the world. The chic coffee shops and designer clothes oddly befit Africa’s newest financial hub, where business suits and talk of the latest market returns are ubiquitous. This elegant enclave on Lagos’s Victoria Island—less than an hour’s plane ride from the rebel-infested creeks of the oil-producing region—is no anomaly, either for Nigeria or for many failed states. Many such countries have shining capital cities or thriving commercial centers, while festering pockets of instability lurk elsewhere. Ethnic separatists might set rural areas ablaze while coastal elites build office parks. Even the worst failed states have enclaves that thrive.

The northern enclave of Somaliland has little to recommend it. Poverty is endemic; unemployment is on the rise; and six refugee camps are strewn across the regional capital of Hargeisa. Then again, says Human Rights Watch’s Christopher Albin-Lackey, “Compare it to Somalia, and Somaliland is paradise.” Since declaring autonomy in 1991, Somaliland has held elections, created a functioning government, and carved out a semblance of peace in a country where anarchy reigns. Geography and history have something to do with it. Somaliland, which forms the upper arc of Somalia’s boomerang shape on the Horn of Africa, was ruled by the British until 1960, while the rest of the country fell into Italian hands. But perhaps a more important factor is what Lackey calls “a real obsession with maintaining peace for the sake of peace” in a country that has known little of it. The suicide attacks in October on foreign and U.N. missions in Hargeisa make clear that one shouldn’t be too optimistic. As Somaliland approaches its elections in 2009, however, it has a far less grim outlook than neighboring areas to the south. Unlike the national capital of Mogadishu, at least Hargeisa has foreign missions.

For the last half decade, the Sudanese capital Khartoum has been a boomtown. In 2008, oil revenues were projected to reach an annual $7 billion, bankrolling roads, large-scale agriculture and dam projects, a revamped rail network, and even a new international airport that, at $1.3 billion, would be one of Africa’s largest. The country entered last year expecting to construct 11,000 luxury apartments and villas before 2013 for the growing ranks of the wealthy. Even now, investors from China, India, Malaysia, and the United Arab Emirates are interested. This growth has been focused in the north, long the locus of power in Sudan. “It is common to compare the riverine areas [in the north] to a middle-income country,” says François Grignon, Africa program director at the International Crisis Group. It’s everywhere else, where government and foreign investment are rare, that makes Sudan one of the world’s most failed states. In fact, the wealth in and around Khartoum helped prime the grievances that provoked conflicts in the south and west, analysts say. While all the fancy building was going on in the capital, the basics needed for survival—water, electricity, and security—were missing elsewhere.

Towering over the rest of the North-West Frontier Province, Chitral stands out for more than just its 3,700 feet of elevation. The scenic mountain district of 220,000 is a relative bastion of calm surrounded by Afghanistan’s most troubled regions on one side and Pakistan’s on the other. So safe is Chitral that when the snow thaws each July, the town’s polo courts (the world’s highest in altitude) host a renowned three-day tournament. “If Swat Valley used to be the Switzerland of Pakistan,” says the New America Foundation’s Parag Khanna, “Chitral really still is.” How did Chitral stay serene as Swat fell to the Taliban? Governance has little to do with Chitral’s success, Khanna says. It’s geography: Far from the agricultural heartland and natural resources, the district serves as a gateway into nearby Afghanistan and China. Due to snowpack, the area is isolated from Pakistan for much of the year, with just one road linking it to the rest of the increasingly chaotic country. The town’s people are equally distinct. Most are of Kho ethnicity and hence remain aloof from the province’s ethnic tensions. With any luck, remote Chitral will avoid the Talibanization afflicting the rest of Pakistan.”

This entry was posted on Tuesday, July 28th, 2009 at 5:48 am and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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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.