Others on the Edge of Globalization

Stephen DeAngelis

May 24, 2007

The cover of 28 May 2007 issue of BusinessWeek asks the provocative question, “What’s the Most Extreme Emerging Market on Earth?” As my recent posts on Kurdistan have indicated, I believe there are opportunities on the Edge of Globalization. The extreme markets referred to by BusinessWeek represent countries that are themselves on the Edge. Although the magazine singles out Colombia, the magazine notes that investment capital is ending up in some surprising places [“Extreme Investing: Inside Colombia,” by Roben Farzad]. Among those surprising places is Kazakhstan, whose Almaty Regional Financial Center has grown 49 percent since opening last October. Then there is Botswana, where the Botswana Gabarone Domestic Companies Index has shown a 100 percent one-year growth and a whopping 226 percent five-year growth. The Karachi Stock Exchange 100 has also shown strong returns (15 percent one-year growth and a remarkable 574 percent five-year growth). This in a country (Pakistan) that remains embroiled in domestic turmoil as well as transborder strife with its neighbors. In a less unstable region, but still on the edge, the magazine points to Romania, where the Bucharest Exchange Trading Index has a 17 percent one-year growth rate and an amazing 612 percent five-year growth. The question is: how does a country on the Edge of Globalization make the journey from security hot spot to investment hot spot?

To find out about Colombia’s journey, Farzad traveled to Colombia. He writes:

“Traveling to Colombia to chronicle the investment miracle unfolding there seemed perfectly reasonable a few weeks earlier. The stats all scream ‘Go! Go! Go!’: Colombia’s stock market has soared fourteenfold since October, 2001. Foreign direct investment and capital inflows have more than doubled, while real estate prices have tripled in many areas.”

This might be called “trickle down FDI,” since, as Farzad notes, these new hot spots are considered third tier investment destinations — which reflects their former status as third world countries.

“Colombia’s surprising rise has been fueled by two larger trends: the enormous amount of money sluicing through global markets and investors’ increasing risk tolerance. First, cash poured into the so-called BRIC countries—Brazil, Russia, India, and China. Next it flooded riskier secondary destinations such as Turkey and Poland, and last year, with ferocity, Vietnam. Now money is gushing into third-tier hinterlands fraught with political and economic problems, where even the rule of law isn’t a given. … Call them extreme emerging markets. The Standard & Poor’s/IFCG Frontier Index of 22 such destinations, which includes investing curiosities like Lebanon, Côte d’Ivoire, and Bangladesh, has gained nearly 400% in the past five years. The question is whether these nascent markets have what it takes to parlay the fickle enthusiasm of hedge-fund traders and other investors into long-term economic development.”

That is exactly the question I’ve been posing about Kurdistan and, eventually, the rest of Iraq. Farzad notes that Colombia, still considered the drug capital of the world, is so extreme that it doesn’t even make it into the Frontier Index — apparently it’s still considered over the Edge. Nevertheless, the foundations of development are starting to fall into place in Colombia.

“Killings and abductions are down sharply in the big cities, and that has been a boon for all manner of investments, from stocks to real estate. ‘I guarantee that if you graph the decline in kidnappings to investment gains, the correlation would be one-to-one,’ says Ben M. Laidler, head of Andean research for UBS Pactual. On a continent whose economic history is the stuff of a blooper reel, Colombia’s strong fundamentals stand out. Its $130 billion economy, a world leader in the production of coffee, petroleum, textiles, and flowers, is growing at 6.8% a year, two full points faster than the Latin American average. In the past 10 years, Colombia has slashed its inflation rate from 18% to 5%, and since Uribe was elected, unemployment has dipped from 16% to 13%. The nation has never defaulted on its debt or experienced hyperinflation. And entrepreneurial thinking is spreading.”

In numerous posts I’ve written about Development-in-a-Box™, I’ve noted that sustainable development requires security, sound fundamentals (based on international standards), and an employable workforce. Those pieces are falling into place in Colombia. In yesterday’s post, I noted that development activities must take place simultaneously with security activities. That is what’s happening in Colombia. Although killings and abductions might be down sharply in the big cities, Colombia still suffers from unrest. Take, for example, the coastal city of Buenaventura [“Cocaine Wars Make Port Colombia’s Deadliest City,” by Simon Romero, New York Times, 22 May 2007].

“Visitors to this city can be forgiven for thinking no place is safe here. Gunfire often echoes through the slums surrounding its port, the country’s most important on the Pacific coast. As larger cities have calmed, Buenaventura has emerged as the deadliest urban center in Colombia’s long internal war. Soldiers search almost every car at checkpoints on the winding road from Cali. Guerrillas recently fired mortar shells at the police headquarters. The stately Hotel Estación, a neo-Classical gem built in 1928, where executives come to hammer out deals to import cars or export coffee, is guarded by dozens of soldiers in combat fatigues.”

Buenaventura is a reminder that the benefits of globalization are not equally felt, even within investment hot spots.

“Some economists hold up Buenaventura as an example of the risks of exposing certain areas of developing economies to market forces. María del Pilar Castillo, an economist at Valle University in Cali, said many residents lost economic security when the city’s port was privatized more than a decade ago, cutting its work force and reducing benefits. With taxes on the imports flowing through Buenaventura’s port largely going directly to the central government, the city reaps few benefits from international trade, even as Colombia’s economy grows more than 6 percent a year. So the poor in Buenaventura, with an unemployment rate of about 28 percent, resort to the drug trade.”

Giving Buenaventura’s residents a brighter future in large measure depends on keeping foreign direct investment flowing. That means that Colombia’s stock exchange must remain vibrant and that, in turn, will require outsiders gaining a more positive perception of the country. As Farzad writes:

“Medellín, once the murder capital of the world, … is regaining its status as a commercial hub, hosting regional offices for a growing roster of multinationals including Philip Morris, Toyota, and Renault, as well as globally minded Colombian companies that make up 70% of the country’s stock market value. More high-rises are under construction here than in Manhattan and Los Angeles combined. But all of it—the stock market gains, the development, the rising living standards—rests on confianza [confidence]. Foreigners’ view of Colombia as a lawless, violent, riven land won’t change quickly. As Commerce Minister Luis Guillermo Plata acknowledges, ‘Why would I invest in a country if I can’t go there?'”

It is not only the confidence of outsiders that is required, but the confidence of those in the country — especially the entrepreneurs. I was impressed with the fact that Farzad noted that entrepreneurial thinking is spreading in Colombia. One of the things I want to do in Kurdistan is help generate more of that thinking, particularly among younger business people like those Farzad found in Colombia. He was impressed with the optimism he found there, even among many of the poor. That optimism — that hope — is what Development-in-a-Box is all about.