Jul

18

Investing in places where property rights are fundamentally not respected just isn't worth it because you can't calculate the risk.

This is completely true. In my country (Uganda) there is a lot of what you may call "arbitrary use of power". If you a Ugandan and are political connected enough, you can screw almost any foreign or local financier by summoning a "presidential directive". Here are some examples within the past 2 - 3 years:

1. Some guys lent money to a financier and used the mosque as collateral. When the mosque defaulted on the loan, the Moslem community appealed for "help" from politicians. The liquidation of the mosque was blocked.

2. In another instance, some foreign financiers lend money to some local "tycoons". When they defaulted on their loans, the courts suddenly declared that the foreign entities did not have enough paperwork to actually lend the local "tycoons" any money. So the "tycoons" didn't have to pay anything back. This didn't happen once, but *thrice* in the last 3 or so years.

3. Last year (2023) people woke up one day to discover that all licenses and permits to export timber were cancelled. So if you invested money into forestry for export, your return on investment was basically marked to zero.

So if you do business in these places:
a) Be well connected politically
b) Plan your exit at least as well as how you enter into business
c) Don't think long term
d) Restrict yourself to a business that is easy to move to neighbouring country.

A group of financiers however that has seen some success seems to be Venture Capitalists. They are well positioned in b) & d). VCs for example will not touch your business if it is not a Delaware C-Corp. This limits how much damage local politics can affect your business. Also, VCs tend to favour software businesses & service businesses over say manufacturing. This makes them easy to expand or ship operations at a whim. Some VC backed Startups for example just have 1 employee per country just for legal & administrative purposes.

Humbert H. writes:

Regarding publicly listed companies in sub-Saharan Africa, I do not think there are many that would fit the requirements of global institutional investors. This fact contributes to the challenges that private equity firms have in finding exits for investee companies.

Many of the listed companies in Sub-Saharan Africa are owned by the public pension funds in the corresponding country. For example, South African pension systems (PIC, GEPF, ESKOM) are significant shareholders in companies listed on the JSE therefore there is limited liquidity.

Every time I go there I am reminded how small the national economies of countries in sub-Saharan Africa are relative to Europe and the US. In 2010 Goldman Sachs published a paper called Lions on the Move which sounded a bullish tone; however, in my view most of what they predicted did not come to fruition.

Sub-Saharan Africa needs to produce higher value products with their raw material and natural resources on the continent as opposed to simply exporting their raw material and natural resources.

H. Humbert comments:

Historically, property rights were respected in Northern Europe and some of their former settlements/colonies, parts of Central Europe, China, Japan, Korea, small parts of Italy, and small enclaves in Southeast Asia and the Iberian Peninsula. These are relatively high-trust societies. Among many problems I have with mass migration is that it always flows from low-trust societies to high-trust societies, which can't be good for the latter. Migration and ever-decreasing penalties for property crimes even in the high-trust societies leave very few counties safe. Switzerland and Japan are likely to last the longest, Germany is doing pretty well although I think it's doomed long term, but the rest of the world is circling the drain. It's possible to reverse trends locally, as recently demonstrated in El Salvador and Argentina, but that's not common. In Russia and Ukraine, if you didn't give bribes or had "blat" (connections) nothing could be done. I don't know the current details, but they're obviously still highly corrupt, as there was no reason for high trust to be established. China (which is a historically high-trust society but corrupted by the Communist dictatorship) and India are complex and have elements of both high-trust and low-trust. If you look at the map of the world, between Russia, Africa, Latin America, and (arguably) a lot of Asia property rights are rare indeed.


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