WHY THE US MUST GO TO WAR

BOOK REVIEW: PETRODOLLAR WARFARE
AUTHOR: William R. Clark
AVAILABLE: Amazon.co.uk

Two events this week could not have been better timed as I read the book “Petrodollar Warfare”.

One, Barrack Obama’s announcement that he would be withdrawing the bulk of the US soldiers from Afghanistan by this time next year and secondly, the ongoing Greek debt crisis that is causing sleepless nights for Eurozone’s finance ministers and putting the single currency under a lot of stress.

This book has as its central thesis that US is waging war and has done so across the world since the early 1970s, to protect oil sources.

Oil is the fuel that drives America economy who with less than five percent of the world population consumes one in every four barrels of oil produced, so it kind of makes sense that it cannot afford the the world’s oil reserves – mostly in the middle east, to fall into hostile hands.

But the even more potentially dangerous relationship is the connection between oil and the viability of the US dollar.

To step back into history.

After the Second World War world currencies were backed by gold, meaning every unit of currency was backed by a country’s gold reserves. However as a fallout of the Vietnam war the US went into so much debt, debt it found it could not honour because it did not have enough gold-backed dollars – in short the US actually went bankrupt.

To avert the catastrophe then President Richard Nixon pulled America off the gold standard, which allowed him print dollars to pay off his country’s obligations. However there were problems with this arrangement not least of all that the dollar was effectively worth less than before it reneged on the gold-standard but more importantly because it was the world’s reserve currency, everybody was saving their surpluses in dollars.

"To maintain the dollar’s preeminence the Nixon administration impressed upon Saudi Arabia and therefore OPEC (Organisation of Petroleum Exporting Countries) to sell their oil only in dollars. This did two things, it meant that oil sales supported the dollar and also allowed the US access to exchange risk free oil. To buy oil all America has to do is print more dollars. Free oil...

With an oil -backed currency, subsequent US administrations have thrown fiscal prudence to the wind and lived beyond their means, spending more than they collect in revenues and importing more than they export. The net result today, is that from being the biggest creditor nation, the US is now the biggest debtor nation and their budget is hundreds of billions in the red.

In classical economics the strength of a currency is determined by the strength of a given economy. Does the country export in goods and services more than it imports? Does the country produce more revenue than it consumes, is its budget in the black or at least balanced? Given these parameters were the dollar not backed by oil it would today not be worth the paper it is printed on.

So America propagates war to protect its oil supplies but even more importantly to safeguard the strength of the dollar.

The book wades through history in an attempt to prove this hypothesis and does quite a good job of it.

It shows that Saddam Hussein’s most recent problems and his demise were fuelled by his desire to see Iraq’s oil paid for in Euros not in dollars, forget about weapons of mass destruction. Recent sabre rattling by the US about Iran under the guise of protesting their nuclear development program, were actually because Tehran proposed a euro-denominated oil exchange and were willing to host it.

"The author also examines the neo-conservatism doctrine as practised by the Bush administration, which professed that there is no moral right except the right of the superior to rule over the inferior classes!...

While examining the concept of peak oil he raises the specter of the real danger of a world without oil and dismisses some alternative energy proposals doing the rounds.

It is a fascinating book whose only failing may be that the book’s flow is broken by continous references in the text to sources. The logic is compelling and gives a much needed alternative view to the world view propagated by western media and should be essential reading for all leaders of nations – actual or aspiring.

BIG BUSINESS CRITICAL TO REGIONAL INTEGRATION

TITUS Naikuni, the Kenya Airways CEO, could not help himself the other day. “Didn’t I tell you? Five years ago I said we would be a billion-dollar company in 10 years; now we are here,” he said directing his comments at a journalist during a recent press conference.

He was referring to the company’s turnover for their just-concluded year in March.

Well, he stretched the truth a little. Kenya Airways market valuation will have to jump five-fold to become a billion-dollar company.

The company whose tag is “The Pride of Africa,” turned over a Kshs85.8b just over sh2,200b of which about sh88.4b was the net profit. Put into perspective, the airline’s total sales last year is the equivalent of Uganda’s national budget for three months.

The airline does 380 flights a week, its 377 pilots fly their 31 aircraft fleet and last year they flew three million passengers to and from more than 50 destinations on the continent, Asia and Europe.

To sustain that size of company, lack of growth is not an option. CEOs like Naikuni, will be licking their lips at plans to have a Free Trade Area that stretches from Libya to South Africa within three years.

This was announced last week after meeting in Johannesburg of the leaders from the regional trade blocs, EAC, COMESA and SADC.

The merger of these three blocs will account for more than 500 million people and a $1 trillion economy.

I think it is safe to say that for the continent to unite, business has to thrive and with mutually shared economic interests, the politics will follow. As it is now, trade within Africa accounts for less than a tenth of all trade the continent does.

One can assume that the larger impetus for this merger is coming from South Africa, whose companies already have a head start. More importantly, the leadership understands that the only way to fulfil a pledge to create five million jobs over the next 10 years will only happen if South Africa Inc. grows.

The same pressure is felt in Kenya and even Egypt.

Governments have to create jobs to keep their citizens occupied and away from any seditious thoughts. Governments creating jobs by building a huge public administration, is a model that can only take you so far.

The more sustainable way is to create an enabling environment for your businesses to thrive, therefore creating more jobs and everybody is happy.

Companies do not expand beyond their borders out of some romantic sense of adventure. They do so because there is little scope for more growth in their own markets either because of increased competition or because the economy has reached maturity or both. Expanding beyond borders is a survival tactic.

An unintended consequence of this need for growth leads to political union, because companies for operational ease, would like to work in a uniform environment.

Borders come down, currencies are discarded in favour of a single legal tender and free movement of labour is allowed. Our own regional multinationals – all Kenyan by the way, leverage their economic muscle to influence policy to their advantage.

The potential for a region’s integration has a lot to do with the presence and viability of the region’s companies.

Companies like Kenya Airways will be the drivers of Africa’s integration.

However, the growing capacity of businesses to influence the affairs of state often has politicians up in arms, which raises a dilemma.

Governments see a stronger business community as a counter to their power and are often reluctant to help business grow. On the other hand, they need business to pay taxes and employ their citizens.

As long as politicians don’t run rogue and shoot up the whole place, the continuous interaction between governments and business ends up with businesses getting what they want, which is not always bad for the rest of us.

On the balance of things, the more companies we have like Kenya Airways, that become billion-dollar companies, the better for us.

UGANDA: FOCUS ON LABOUR PRODUCTIVITY

The dust is beginning to settle on Maria Kiwanuka’s first budget speech.

I like the heavy emphasis on infrastructure funding – most of it dominated by sh800b plus to get the Karuma power dam under way and of course roads, there are also plans to get a Malaba to Kampala standard gauge railway line up and running and there was mention of earmarking money for water transport.

As a landlocked country communications – transport and telecommunications, are critical to our survival and eventual prosperity. The cheaper these are the better it is for our businesses and the population in general.

Our infrastructure is woeful and that is plain for anybody to see, but what is even more abysmal is the little issue of our labour productivity, the amount of goods and services a worker can produce in a given time.

You have heard it before, the Ugandan worker is the least productivity in the region, that is compared to their Kenyan and the Tanzanian counterparts.

According to figures released last year it would take one Kenyan to do the work of six Ugandans or a Tanzanian to do the work of four Ugandans. It gets worse when you compare our worker to a South African or a western European.

Statistics by the International Labour Organisation (ILO) indicate the value added per worker in Sub Saharan Africa is a twelfth of that by a worker in the industrialised world.

To begin with a lack of productivity does not necessarily point to laziness – though we all know about our deficient work ethic, productivity is a product of capital, labour and technology.

On these three parameters we have serious deficiencies.

We are failing abysmally to mobilize capital – we have a savings rate of less than 10% of GDP, our labour is largely manual and unskilled and our use of technology, be it in terms of improved management and operational methods or application of advanced equipment, is pitiful.

To illustrate, a subsistence farmer working his land using a hoe under the hot morning sun is less productive that the average formal worker, using computers or employed on an assembly line – in terms of value added or income earned. The difference between the two is the differing application of capital and technology to their labour.

Your cousin in the village may think you are a lazy bum because you do not break a sweat when you work in your air conditioned office, but he will be using the wrong measure, sweat in this case, to judge productivity.

He would be better served by adopting better agricultural practices and organizing with his farmers into bigger groups to take advantage of scale to improve his own productivity – even get someone else to do the grunt work for him and increase his own productivity.

The last I read the US has the most productivity workers, adding $63,000 of value per person in 2006 – it is not a coincidence that America leads the world in innovation in all areas of life. Innovation increases productivity.

So looking at the budget from this perspective there is an indication that the planners are thinking about productivity – they may not be able to communicate it, but I can discern the intention.

On the labour side money was provided for A-level universal education, vocational and entrepreneurial skills training, more money for drugs and the rehabilitation of Mulago hospital and for capital there was the start of a venture capital fund as well as more money for transport and irrigation infrastructure in terms of technology commercialisation of improved seeds and planting material could count for that. I abbreviate of course.

Maybe we could do more in retooling our education curriculum, lowering the cost of finance and aggressively promoting research and encouraging technology transfer. In short government can and must do better to focus on the issue of labour productivity. To dismiss Ugandans as lazy is to abrogate its responsibility.

Productivity is particularly important for Uganda because we have one of the fastest growing populations in the world and at the same time one of the youngest – meaning we have too many dependants or non-productive members of society.

THE NEW FINANCE MINISTER’S LOADED BRIEF

Last week President Yoweri Museveni appointed Maria Kiwanuka, Finance and Economic Development Minister in what many consider an inspired appointment.
Kiwanuka a former World Bank economist turned media owner, it is hoped will bring a better understanding of business by government.

There in will be her biggest challenge in government.

If we learn anything from the cold war it’s that a country is only as strong as its private sector. The collapse of the Soviet Union and its satellite states put to rest the fallacy of central planning. What the free market does is harness the individual efforts of the population by allowing numerous experiments, failures and recoveries driven by the learnings from previous failures. This process throws up a sort of spontaneous order or what Adam Smith called the Invisible hand, where everyone working in their own self interest advances society.

This process cannot be planned, no central authority can initiate all the experiments and therefore replicate the learning that comes from these failures needed to advance society. The Chinese unlike the old bureaucrats of the Kremlin, have been very smart to understand this.

"The proper role of government is to ensure the sanctity of property rights and ensure that certain basic rules are adhered to....

So strengthening the private sector should be a government’s first target. Government’s strengthening of the private sector does not mean going into business, but creating the enabling environment that allows business to grow and thrive and part of this enabling environment is removing the walls of suspicion between the government bureaucrats and businessmen.

Government bureaucrats by virtue of their everyday jobs are not wired to think like businessmen. A bureaucrat does no work if there are no resources, a businessman on the other hand does not make a lack of resources be a reason for no activity. He goes out and finds or creates the resources. This is at the heart of the perennial tension between the two groups, everywhere.

If Kiwanuka with her experience in business, can lower the walls of suspicion between government and business she would have done more than her job.
Government needs to understand that to have private sector led growth we need to construct the necessary hardware – physical infrastructure and more importantly software – the institutions and attitude to business.

On the other side of the coin Kiwanuka will do a great service to this country if she can sell to her colleagues the benefits of formalizing their busineses.

It is estimated that up to 70% of our economy is in the informal sector, most of our businesses are unregistered, do not have bank accounts and die with the founders.

By formalizing more of our businesses, credit, training and partnerships with larger concerns will be more readily available.

Kiwanuka will do well to press for lowering the costs of business registration, according to recent survey it takes three times longer for a business to be registered in Uganda than in neighbouring Rwanda.

For the same reasons as above, the bigger concerns should also be encouraged to formalize their operations. For example she can initiate a drive to have more of them listed on the stock exchange.

In Kenya companies that list on the stock exchange enjoy a lower corporate tax rate, but beyond that they have access to a large pool of resources and easily attract investors and partners from across the globe.

"Our business may be content to remain small because the founders’ personal needs are catered for but that is not a sustainable model in an increasingly open market...

Our business men need to grow to remain viable and their growth is capped by the level of informality.

It is a tall order for anyone, but with her experience in a business that continues to thrive in Uganda’s hostile business environment, we are in order to expect that she will help t he business community’s plight better than any of her predecessors.

Being a government functionary is often a thankless job and she may have to forgo the gratification that comes with growing a business, her sense of achievement may come from intangible things she can make happen that may not even be attributed to her when history is written, but it is a job someone has to do and for now the responsibility is hers.