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DEMOCRACY, DICTATORSHIP AND DEVELOPMENT: Lessons from Malaysia and Singapore

South East Asia’s Tiger economies have long triggered questions about why and how Kenya was left behind in the post-colonial maendeleo race. Instructively, it is the Tigers’ own ‘left-behind’ stories that may be illuminating – and none more so than the rivalry between Malaysia and Singapore. It is a cautionary tale with many familiar themes: tribalism and corruption, dictatorship and democracy. By DAVID NDII.

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DEMOCRACY, DICTATORSHIP AND DEVELOPMENT: Lessons from Malaysia and Singapore

Three weeks ago, police raided the residencies of Malaysia’s immediate past Prime Minister, Najib Razak and seized US$ 28.6 million in cash and, among other things, 37 bags stuffed with jewellery and 294 boxes containing designer handbags. The authorities say that it will take time to ascertain the value given the size of the haul, but going by former first lady Rosmah Mansor’s known tastes – she is derisively nicknamed “bag lady”— we could be talking upwards of US$ 10m worth of handbags alone. Her favorite Hermés Birkin tote bags come with price tags ranging from US$10,000 to north of US$ 300,000. The exposé gives us a preview of what we can expect when our mansions give up their Eurobond secrets.

Razak lost the election to an anti-corruption coalition fronted by his 92-year old predecessor and mentor, Mahathir Mohammed, ending 61 years of Barisan National coalition government. At the heart of the political drama is 1MDB, a sovereign bond heist similar to our Eurobond mystery that I have written about in the past.

1MDB is a special purpose investment vehicle set up and controlled by Razak in 2009 to attract private investment for infrastructure projects around Kuala Lumpur. Far from attracting investment, it went on a borrowing binge, chalking up US$ 12 billion in debt in a couple of years, including US$6.5 billion of international bond issues. More than US$ 4 billion was stolen and laundered in the world’s leading financial centres, including Singapore, Switzerland and the USA.

The evidence led straight to Razak, his family and cronies including a smoking gun— US$680m traced to his personal bank account. In an effort to suppress the scandal, Razak fired his deputy, replaced the attorney general and central bank governor with his lackeys, clamped down on the media and internet, whipped up ethnic nationalism, put a top secret lid on the investigation and got himself cleared by his new compliant attorney general.

1MDB is a special purpose investment vehicle set up and controlled by Razak in 2009 to attract private investment for infrastructure projects around Kuala Lumpur. Far from attracting investment, it went on a borrowing binge, chalking up US$ 12 billion in debt in a couple of years, including US$6.5 billion of international bond issues. More than US$ 4 billion was stolen and laundered in the world’s leading financial centres, including Singapore, Switzerland and the USA.

It did not work.

Foreign authorities which had initially steered clear were forced to open investigations as complicity of investment banks in their jurisdictions became impossible to ignore. Goldman Sachs came under scrutiny for charging an incredible nine percent of the bond value as transaction fees, more than 10 times the market rate. Goldman Sachs was a big benefactor of both Obama and the Hillary Clinton campaign.

Money laundered in the US included financing of the Hollywood blockbuster, Wolf of Wall Street, starring Leonardo di Caprio, a luxury yacht, a Picasso and a US$27m diamond necklace. When they finally moved, the US authorities refused to name Razak in the indictments referring only to “Malaysian Official 1”. Malaysia, and Razak personally have been strong US allies in the anti-terror campaign.

Malaysia is one of those Asia’s tiger economies that, as we say, left us behind. What we often don’t realize is that the Asian Tigers have their own leaving-each-other-behind stories, none as dramatic and instructive as that of sister nations Malaysia and Singapore.

On attaining self-rule from the British in 1957 Singapore’s founding fathers championed political union with sister British colonies in the Malay peninsula— just as was mooted between Kenya, Uganda and Tanzania. Malaysia was resource rich with large oil and gas reserves, other mineral resources, and well-developed plantation agriculture. Singapore was a resource poor city-state with only a port in a strategic location. Singapore’s leaders, led by Lee Kwan Yew, saw unification as the best way to secure Singapore’s security and prosperity.

Singapore’s overtures culminated in political federation in 1963. It was a fractious marriage from day one. Two years later, Singapore was bundled out of the federation. In his memoir, Lee Kwan Yew writes about this as a most traumatic experience. Reading between the lines, the rejection and the political vulnerability it precipitated, motivated Singapore’s leaders’ drive to succeed.

On attaining self-rule from the British in 1957 Singapore’s founding fathers championed political union with sister British colonies in the Malay peninsula— just as was mooted between Kenya, Uganda and Tanzania. Malaysia was resource rich with large oil and gas reserves, other mineral resources, and well-developed plantation agriculture. Singapore was a resource poor city-state with only a port in a strategic location. Singapore’s leaders, led by Lee Kwan Yew, saw unification as the best way to secure Singapore’s security and prosperity.

Half a century on Singaporeans enjoy one of the highest standards of living in the world with the ninth highest average income (US$52,000), the wealthiest Asian country with an average income one third higher than Japan (US$38,000), close to double that of South Korea (US$28,000) and five times that of Malaysia (US$10,000). Today, one of Malaysia’s vexing economic challenges is brain drain as its techies and professionals cross over to Singapore for lower level but better paying jobs. Malaysians cannot help but ask themselves how Singapore left them behind.

In popular discourse, the view that democracy is a luxury that poor countries cannot afford, that what we need are progressive autocrats has considerable following. Singapore’s Lee Kwan Yew and Malaysia’s Mahatir Mohammed are both held up as pin-up benevolent dictators. If benevolent dictatorship is the holy grail of economic transformation then how is it that resource poor Singapore ends up five times wealthier than better endowed Malaysia? Malaysia and Singapore’s divergent economic paths can be summed up in two very familiar words: tribalism and corruption.

The rocky marriage began with Malaysia adopting Islam as the state religion, despite the protestation of the significant non-Muslim minorities. Malaysia’s leaders adopted socio-economic policy that privileged natives (the “bumiputura”, or sons of the soil) over the immigrant, predominantly Chinese and Indian population. The Chinese (23 percent) and Indians (seven percent) minorities make up 30 percent of Malaysians. Singapore is the opposite, majority Chinese with Malays (15 percent) and Indians (7.5 percent). As with our Africanization and South Africa’s Black Economic Empowerment (BEE) policies, the affirmative action lent itself to unjust enrichment by the state elite. Once they were bundled out of the union, Singapore’s political leadership set their country on the opposite course— adopting equality, inclusivity and meritocracy as its foundational values.

Mancur Olson observes in Democracy, Dictatorship and Development, the paper that featured in my last column, that while “poor countries can grow extraordinarily rapidly when they have strong dictators who happen to have unusually good economic policies, such growth lasts only for the ruling span of one or two dictators.”

Lee Kwan Yew was Prime Minister of Singapore for 31 years (from independence in 1959 to 1990, and he continued as 1st Senior Minister of Singapore for another 14 (1990-2004) and as Senior Mentor Minister of Singapore, a post created for him for another seven (2004 – 11). Thus Singapore had the good fortune of having the leadership and counsel of an exceptional leader for 59 years—his constituents for 60. He led the Peoples Action Party (PAP), which he co-founded, to eight successive election victories. He was no academic slouch, having graduated from the London School of Economics and from Cambridge with a “double first” law degree.

Dr. Mahathir Mohamad (doctor as in physician) was Malaysia’s Prime Minister for two decades from 1983 to 2003. Although he is more closely associated with Malaysia’s economic rise than anyone else, Malaysia’s rise was well underway when he assumed office. The economic miracle did not survive him. During the first decade of his tenure, Mahathir implemented economic plan he inherited. During the second one, he launched his Vision 2020, which aimed to propel Malaysia to a high income country through mega-projects. His flagship Silicon Valley copy paste Multimedia Super Corridor did not fly.

Mahatir’s more enduring legacy is deepening authoritarianism. He pushed through constitutional changes that centralised power, undermined the monarchy, and weakened the judiciary. He also mismanaged his succession, following the acrimonious fallout with his long term deputy and heir apparent, Anwar Ibrahim. While not personally corrupt, he promoted crony capitalism. His protege Razak repurposed the authoritarianism for corruption.

History has been unusually kind to Mahathir Mohamad. He now gets a second bite at the cherry. Perhaps the greatest irony of his comeback is that after all he did to undermine it, it is through democracy that he has succeeded in his second run for the premiership. And much of the credit for the survival of democracy in Malaysia goes to his erstwhile heir-turned-nemesis, Anwar Ibrahim. Indeed, Anwar Ibrahim, who has been in jail, is the de facto leader of the political movement that has propelled Mahathir to power. One of his campaign pledges, on which he has delivered, was to secure Ibrahim’s pardon. Although he has apologized, and he will in all likelihood be succeeded by him, Ibrahim’s political persecution is one blot on his legacy that he will find difficult to erase.

It has helped that Malaysia is a parliamentary system. Had the dictatorial power that Mahathir amassed been in a presidential system, bringing Razak down would have been considerably harder. In presidential South Korea, it took weeks of massive demonstrations to bring down President Park Geun-hye. Closer to home, it took the army to remove Mugabe after close to two decades of rigging himself back in power in presidential Zimbabwe, while parliamentary South Africa has now ousted two presidents in its 24-year post-apartheid history.

The benevolent dictatorship school of development posits benevolent dictatorship and democracy as mutually exclusive. But what we see in both Singapore and Malaysia is progressive autocrats and working electoral democracies. Lee Kwan Yew did not change the constitution and elevate himself to an imperial president like Jomo Kenyatta, who never once faced an opponent in an electoral contest.

Lee Kwan Yew developed Singapore politically and economically. In 1998 he proposed the Group Representation Constituency (GRC), a kind of multimember constituency to protect the minorities participation in parliament. In GRC people are elected as a group that must include individuals from the minority groups. We could easily solve the one-third gender rule problem with something similar. I have advocated adoption of a modified proportional representation at the county level (the parliamentary seats in a county would be pooled and allocated to parties based on popular vote).

The benevolent dictatorship school of development posits benevolent dictatorship and democracy as mutually exclusive. But what we see in both Singapore and Malaysia is progressive autocrats and working electoral democracies. Lee Kwan Yew did not change the constitution and elevate himself to an imperial president like Jomo Kenyatta, who never once faced an opponent in an electoral contest.

And the spirit of inclusive politics lives on. Singapore has recently elected its first woman president. Halima Yacob is Malay, Muslim, and only the second Malay president after the country’s first president, Yusof Bin Ishak, who died 47 years ago. Two years ago the constitution was amended again to ensure that minorities ascend to the presidency. Specifically, it provides that the presidential election will be reserved for a racial group if a member of that racial group has not held the presidency for five consecutive terms. This is how Halima Yacob became president. This is another political innovation that we could adopt to make the presidency inclusive. It is worth noting that the president is responsible for the group representation constituencies. The president’s other functions include control of the country’s financial reserves, and oversight of the anti-corruption agency.

African leaders are fond of benchmarking pilgrimages to East Asia. Some even claim to be inspired by Lee Kwan Yew – how so, one wonders. Lee Kwan Yew left office with no personal wealth to speak of. He did not own a single business. Those claiming to be so inspired by him are as rich as kings. They see political power as entitlement to wealth. Given their materialistic obsession, they only see hardware. They can hardly be expected to see the political software that drives the economic success they wish to copy. They see bullet trains, they want. They see Cyberjaya (a failure), they want.

And the spirit of inclusive politics lives on. Singapore has recently elected its first woman president. Halima Yacob is Malay, Muslim, and only the second Malay president after the country’s first president, Yusof Bin Ishak, who died 47 years ago. Two years ago the constitution was amended again to ensure that minorities ascend to the presidency. Specifically, it provides that the presidential election will be reserved for a racial group if a member of that racial group has not held the presidency for five consecutive terms. This is how Halima Yacob became president. This is another political innovation that we could adopt to make the presidency inclusive.

As Olson observes in the paper referred to earlier, “dictatorships are by their very nature susceptible to succession crises and uncertainty about the future”. Nothing illustrates this better than the anxiety, political intrigue and foreboding that gripped Kenya in the mid-1970s as Jomo Kenyatta’s death became an inevitability. By maintaining a parliamentary democracy, however dominant their political parties/coalitions were, both Lee Kwan Yew and Mahathir Mohammed ensured that they did not subject their countries to the political and economic costs that this uncertainty portends.

Far from resolving the transfer of power problem, our multiparty politics, and presidentialism in particular, has aggravated it. Until we solve this one, those benchmarking trips to East Asia will continue to bring home bridges to nowhere.

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David Ndii

David Ndii is one of Kenya's leading economists and public intellectuals.

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Shopping Mall Economics: A note on the value of the Kenya shilling

What does a recent spat between the IMF and the Central Bank’s Prof Patrick Njoroge, himself a veteran of the Fund, tell us about the state of the Kenya shilling? By DAVID NDII.

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Shopping Mall Economics: A note on the value of the Kenya shilling

Is the Kenya shilling overvalued or not? According to the IMF it is currently overvalued by 17 percent. In an unusually combative response to his former employer the Central Bank governor says that is only off-kilter by 5 percent and accuses the IMF of making Kenya a “guinea pig in its new approach.” The offensive claim, contained in the IMF’s latest report on the country dated October 2018, states as follows:

“The EBA-lite methodology for the exchange rate suggests that the external position is weaker than fundamentals. The current account approach shows that the current account deficit (both actual and cyclically adjusted) are above the norm (the CA gap is -2.5 percent), suggesting an overvaluation of about 17.5 percent of the real exchange rate. This can only marginally be explained by the policy gap. The REER approach also shows a similar-size of overvaluation, equivalent to about 18.0 percent. Again, the policy gap is marginal. Given the continued appreciation of the real exchange rate, the external position is assessed to be weaker than fundamentals. Regarding the last approach, the external sustainability approach, it was not possible to use it as the international investment position data is not yet produced by the authorities.”

This needs a fair amount of disambiguation. EBA is a needless acronym that stands for external balance approach for exchange rate assessment. The methodology is described in an IMF paper published in 2013 as an update of a previous methodology known as CGER. CGER is another needless acronym for consultative group for exchange rate assessment. This EBA thing appears to be what the CBK governor is referring to as a new approach.

The methodological spat is a red herring. Economic models are tools, not oracles. What we have here is workmen quarrelling over tools. Our top three economic mandarins are former IMF staffers. Surely, they can sit together with their colleagues and their models and converge on an assessment as to whether the shilling is overvalued or not?

The IMF refers to three methodologies: the Real Effective Exchange Rate (REER), the current account and external sustainability approach. Of the three, the REER is the most intuitively understandable and also the one for which we have data. But what is this animal the REER?

The methodological spat is a red herring. Economic models are tools, not oracles. What we have here is workmen quarrelling over tools. Our top three economic mandarins are former IMF staffers. Surely, they can sit together with their colleagues and their models and converge on an assessment as to whether the shilling is overvalued or not?

Suppose bananas are retailing at KSh 100 shillings a bunch in Kenya. The Kenya/Uganda shilling exchange rate is one to ten. At this exchange rate and banana price, 20 percent of bananas are coming from Uganda. Suppose price of Kenyan bananas goes up to KSh 125 a bunch (e.g. because of increase in taxes), and exchange rate remains the same. Ugandans can continue to sell bananas in Kenya profitably at KSh 100 while many Kenyan producers cannot. In fact, Ugandans are likely to hike their price to let us say KSh.110 making Kenya an even more profitable market than their home market. Uganda bananas will flood the market and put Kenyan producers who are not profitable at Ksh. 110 out of the banana business. For the market to remain at the old equilibrium (i.e. 20/80 Uganda/Kenya market share) requires Kenya shilling to fetch USh. 8.00 so that to get USh. 1000 as before, the Ugandans will also have to sell their bananas at KSh125.

Its readily apparent that if our domestic prices go up faster than those of our trading partners, then foreign goods will keep becoming cheaper. But you cannot tell by just looking at the dollar shilling exchange rate. We need to factor in the price movements with every trading partner. The REER is an index that combines the relative exchange rate and price movements of all our trading partners.

If the REER is rising our goods are becoming more expensive. We can expect to import more and export less. If this happens our trade deficit will widen. If the trade deficit continues to widen, we run the risk of defaulting on our international obligations in particular debt service and repatriation of profits and capital. This is where the IMF comes in. The IMF’s mandate is to maintain international financial stability. The IMF is a financial cooperative whose job it is to ensure members do not run into external payments difficulties, and to bail them out when they do, in order to keep global finance and commerce going.

The spat between the IMF and the CBK is therefore about our external creditworthiness. The key indicator for this is the current account balance. The current account balance has two components: trade and income. The trade account I have already mentioned. The income account consists of payments for “factor services” such as interest (use of capital), payments for services of Kenyan troops abroad (labour services) and another component we call unrequited transfers (meaning money we have not earned) such as diaspora remittances and grants. The external account in turn, has a third component, the capital account where, as the name suggest, we record investment transactions.

The spat between the IMF and the CBK is…about our external creditworthiness. The key indicator for this is the current account balance.

This is how it works. Kenya Airways buys an aircraft using a foreign loan. The aircraft is entered in the trade account as an import and simultaneously in the capital account as a capital inflow. The following day it ferries passengers from Lagos to Dubai. The income is recorded in the trade account as a service export. At the end of the month it remits repayment on the loan. The interest is recorded in the income account as a factor service payment and the principal is in the capital account as a capital outflow.

The net of the current account and the capital account are added together to give the overall balance. An increasing overall deficit depletes foreign reserves, while a surplus leads to a build up of reserves. Current account surpluses mean that a country’s savings exceed its investment; it can, therefore, export capital, like China. A current account deficit means that a country is investing more than its savings, in other words, it is importing capital (either debt, FDI, remittances, grants etc).

Chart 1

The country’s creditworthiness thus depends not just on trade but also on other financial flows, that are determined by factors other than trade competitiveness, both economic and non-economic. Complicated stuff.

Both the IMF and CBK agree that the shilling has appreciated, but they disagree on the magnitude. The IMF also implies that the appreciation is a reflection of policy action while the CBK maintains that it is a reflection of market forces. The IMF view translates to accusing the CBK of misleading the public by espousing a monetary policy that claims to target inflation, while in practice it is actually targeting the exchange rate. The IMF’s “smoking gun” is the fact that the NEER has flatlined for the past six years (see Chart).

Recently the IMF re-classified the Kenya shilling from a “floating” (meaning market determined) to “other managed arrangement.” This means the IMF is convinced that the Central Bank is propping up the shilling. What reason would the Central Bank prop up the shilling especially if it undermines the country’s competitiveness and solvency?

Foreign currency debt exposure is one reason. The interest payments on the first Eurobonds issued in 2015 ($185 million a year) has increased by KSh 3 billion, KSh 16 billion to KSh 19 billion on account of the depreciation of the shilling. Translate that to the total interest payments this year which are in the order of $1.4 billion dollars. The shilling has weakened by about three shillings to the dollar since the beginning of the financial year. This translates to a KSh 4 billion squeeze on a government that is already living way beyond its means. The last thing the Treasury wants to hear is that the shilling should be trading at about 120 to the dollar.

Recently the IMF re-classified the Kenya shilling from a “floating” (meaning market determined) to “other managed arrangement.” This means the IMF is convinced that the Central Bank is propping up the shilling. What reason would the Central Bank prop up the shilling especially if it undermines the country’s competitiveness and solvency?

Another reason is pressure to keep low interest rates. Interest rate is the policy instrument in an inflation-targeting monetary policy regime such as we claim to have. Central Banks are given statutory independence to insulate them from such pressure so that they can raise interest rates when they need to, even when it is politically costly for the government. But that does not make Central Banks immune from the pressure to accommodate political objectives of the government of the day. Parliament’s capping of interest rates two years ago is ample demonstration that political pressure on Central Banks is real.

Keeping interest rates artificially low puts pressure on the exchange rate. A weakening currency creates inflationary pressures, which is what the Central Banks are mandated to control in the first place. The Central Banks end up trying to meet incompatible objectives, low interest rates, low inflation and a stable currency.

This is precisely what happened from mid-2009 to September 2011. The Central Bank bent over backwards to accommodate the government’s economic stimulus meant to respond to both the post-election violence and the global financial crisis. Interests rate were driven to the floor. From mid-2010 to mid-2011 the benchmark 90-day Treasury bill rate was kept below 3 percent. The IMF’s charts show how this ended— with a very hard landing. The shilling which had been propped up at about 80 to the dollar, started unravelling in April peaking at KSh100 to the dollar in September. The Central Bank was forced to jack up interest rates in a hurry. By the end of 2011, the T-bill rate was heading to 20 percent.

The IMF seems to believe that, left to market forces, the shilling will depreciate in real terms. The IMF’s REER chart covers eight years, from 2010 to 2017. A longer timespan does not necessarily support this contention (see Chart). My chart goes back to the beginning of the liberalized regime in 1994. What do we see? The shilling has been appreciating in real terms since it was liberalized. Overall it has appreciated 157 percent, by 9 percent per year on average. This could mean that the Government has been propping up the shilling all these years, or that market forces are not working the way the IMF expects.

Chart 2

Many Kenyans have observed that we have become an importing country. One also hears policymakers lamenting that we are losing our markets in the region and blaming all manner of things. There is no mystery to it.

My [assessment is that] the shilling has been appreciating in real terms since it was liberalized. Overall it has appreciated 157 percent – by 9 percent per year on average. This could mean that the Government has been propping up the shilling all these years, or that market forces are not working the way the IMF expects.

But is the Central Bank propping up the shilling? That we cannot be able to tell that easily. There are lots of moving parts. It can also be on account of some trading partners manipulating their currencies: China, for example, is regularly accused of maintaining an artificially weak currency. China has a big weight in our REER and it’s been growing over time.

The ultimate question is whether it is sustainable. There are two parts to this, financial and economic. The widening trade deficit has been plugged by remittances and portfolio inflows (money flowing into the stock exchange and government securities), not all of it honest money, and lately, government commercial borrowing, the ubiquitous eurobonds and syndicated loans. As long as these keep flowing, the show can go on.

Why are we told the economy is growing and yet we cannot feel it? This is the shopping mall economy. How long can we keep that going?

The economics is a different story. It is not good for employment and equity. It is part of the answer to the question that Kenyans keep asking: why they are told the economy is growing and they are not feeling it. This is the shopping mall economy. How long can we keep that going? Your guess is as good as mine. Governments are known to manipulate currencies and to distort financial markets generally. The IMF is known to (a) have more faith in market forces than warranted and (b) get the workings of those market forces wrong. What to do?

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70 Years After the UN’s Declaration on Human Rights, the Struggle Continues Against Poverty, War, Disease – and Whistleblowers

The UN’s internal benchmark of success is the amount of money raised, not the successful execution of a programme. War and poverty remain necessary for the functioning of a system of phantom projects characterised by waste, mismanagement and corruption. And since the Iraq Oil-for-Food scandal of the early 2000s, in which billions went missing and the perpetrators scot-free, senior management has waged a silent war against its own whistleblowers. Who will police the world’s watchdog? By RASNA WARAH

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70 Years After the Un’s Declaration on Human Rights, the Struggle Continues Against Poverty, War, Disease - and Whistleblowers

The resignation last month of the Executive Director of the United Nations Environment Programme (UNEP), Erik Solheim, after an internal audit found that he had misused funds from the organisation, has been construed as a sign that the UN is serious about tackling wrongdoing within its ranks. However, this high-profile case should not distract us from the fact that waste, fraud and corruption are rarely punished in the UN system, and that the majority of offenders get away scot-free.

Solheim is accused of spending nearly half a million dollars on unnecessary travel within a period of less than two years. The audit showed that between May 2016 and March 2018 he spent 529 days travelling and only stayed in Nairobi, where UNEP has its headquarters, for about 20 per cent of the time.

Much of this travel was wasteful. For instance, in July 2016, he travelled to Paris for a one-day official meeting but decided to stay on in the French capital for a whole month (at taxpayers’ expense). In the following two months, he travelled for 42 days to 24 destinations. One official trip to Addis Ababa was routed through Oslo in his home country Norway, even though the Ethiopian capital is just a two-hour flight from Nairobi. The audit report also showed that Solheim was not the only culprit – other senior managers at UNEP have been accused of spending a whopping $58.5 million on travel alone over a two-year period – and this, from an organisation that advocates for the reduction in the use of fossil fuels.

Solheim is accused of spending nearly half a million dollars on unnecessary travel in less than two years. Between May 2016 and March 2018 he spent 529 days travelling and only stayed in Nairobi, where UNEP has its headquarters, for 20 percent of the time.

This blatant abuse of taxpayers’ money is not new at the UN and Solheim’s conduct is hardly unique. The differences between Solheim’s case and others are: one, his case managed to reach the internal investigation stage, which only happens when there is political will to carry out such an investigation; two, the findings of the investigation were made public, which is usually not the case; the case against him was strong because the trail of misused funds could be traced through flight and hotel bookings, which is not normally the case when deceptive UN managers make UN money disappear without a trace.

One common way of diverting or stealing funds in the UN is to create phantom projects. Let me give you a personal example. Sometime in 2009, my boss at the United Nations Human Settlements Programme (UN-Habitat) called me into his office to tell me that he urgently needed to spend $100,000 of donor money before the end of the year because if he didn’t, he’d have to return the funds to the donor country. So he appointed me to manage a $100,000 project that would result in a book on cities for which he said he would hire consultants from abroad to research and write such a book. The consultants (some of whom were friends of the boss’s boss) were hired and a phantom book project was created.

Two months later, the book project was “closed” (without my knowledge, yet I was supposedly heading the project) even though no manuscript or book had materialised. When I realised that the project was fake and that money may have been diverted to a personal project, I reported the matter to the project/funds manager (a junior officer, essentially a bookkeeper, who had no say in how money in the organisation was spent and who only followed the instructions of her bosses). There was no response and within hours of my email, the process of eliminating me from the organisation began. I suffered retaliation, threats of non-renewal of contract and a whole range of psychological warfare tactics that eventually made me leave the organisation. I realised then that I had inadvertently become a “whistleblower”.

One common way of diverting or stealing funds in the UN is to create phantom projects. Millions of dollars have disappeared from the UN’s coffers through such opaque practices, the fiddling of books, and even downright theft, but few of the culprits are reprimanded, fired or even identified.

When I eventually took UN-Habitat to task through the UN Ethics Office – which was created in response to the Oil-for-Food debacle in Iraq, and which is mandated to look into whistleblower cases – I was enmeshed in a labyrinth of doublespeak and obfuscation that convinced me that the UN Ethics Office was created to muzzle and suppress whistleblowers so that the UN’s reputation would not be tarnished. I got no support from the office; on the contrary, I was told, both by the Ethics Office and UN-Habitat’s senior bosses, that the whole thing was a figment of my imagination. I have had to live with that “gaslighting” humiliation for the last nine years.

Millions of dollars have disappeared from the UN’s coffers through such opaque practices, the fiddling of books, and even downright theft, but few of the culprits are reprimanded, fired or even identified. (Even Solheim was allowed to quietly resign.) On the contrary, whistleblowers find themselves out of a job or demoted.

For instance, senior UN officials implicated in the scandalous UN Oil-for-Food Programme in Iraq are still walking around freely, enjoying their UN perks and benefits. A 2005 investigation led by Paul Volcker – who was appointed by the then UN Secretary-General Kofi Annan after a series of exposés about money being diverted from the programme appeared in the media – found that billions (yes, billions!) of dollars had been lost through a network that included Saddam Hussein, dubious foreign companies and individuals who paid bribes or received kickbacks to participate in the programme and UN employees who received bribes or chose to look the other way. Not one person identified as having fraudulently benefitted from the programme – it was supposed to help the Iraqi people cope with the sanctions imposed after Saddam invaded Kuwait – has been charged with this crime in any national court. (Saddam Hussein was eventually tried and executed by a kangaroo court, not for diverting funds from the programme, but for crimes he had committed against the Iraqi people.)

Meanwhile, the UN simply noted the findings of the Volcker investigation and UN member states continued with business as usual. Besides, by the time the findings of the Volcker investigation were made public, the United States and Britain, two of the five veto-holding powers in the UN Security Council, were embroiled in an illegal war in Iraq, which diverted the public’s attention from one of the biggest scams the world has ever witnessed.

The Oil-for-Food Programme put a huge dent in the UN’s reputation because of the scale of the theft, but this particular UN-managed initiative only got exposed because there were people within the organisation, such as Michael Soussan, author of Backstabbing for Beginners, and Rehan Mullick, a database manager, who were willing to blow the whistle on wrongdoing within the programme. Many smaller-scale thefts are taking place every day under the noses of UN bosses, and sometimes with their collusion.

The reason why such thefts and cover-ups are so common in the UN is that UN agencies are often deliberately vague about how they spend their money. A NORAD-commissioned investigation in 2011 found that most of the UN agencies surveyed had difficulty explaining where their money had gone or to which specific projects, and that information about expenditure was either limited or fragmented.

The Oil-for-Food Programme put a huge dent in the UN’s reputation because of the scale of the theft, but this particular UN-managed initiative only got exposed because there were people within the organisation, who were willing to blow the whistle on wrongdoing within the programme. Many smaller-scale thefts are taking place every day under the noses of UN bosses, and sometimes with their collusion.

When internal investigations are carried out, it usually means that things have gone out of hand (or that enough people in the organisation are pissed off and are complaining), which is what happened with Solheim at UNEP and also at the UN’s refugee agency in Uganda recently. An internal audit of UNHCR’s operations in Uganda found that the agency wasted tens of millions of dollars in 2017 by overpaying for goods and services, awarding major contracts improperly and failing to prevent fraud and waste. In addition, thousands of blankets, wheelbarrows and solar lamps meant for South Sudanese refugees went missing. The UN agency also entered into inappropriate arrangements with Ugandan government officials. For instance, it paid the Office of the Prime Minister $320,000, ostensibly to buy a plot of land to expand the government’s refugee-handling capacity; yet the Office of the Prime Minister could not produce a title deed to prove ownership and the land is now being used as a parking lot.

Part of the problem is that UN agencies are expected to monitor, evaluate and audit their own programmes and projects – the poacher as game-keeper. Donors to the UN expect the global body to report on the the projects they fund. This is problematic because it means that UN agencies can easily manipulate their monitoring and evaluation reports to suit their own agendas, needs and funding requirements. Besides, success is often measured by how much money was raised and spent, not on whether the project achieved its goals. There is, therefore, a desire to spend large amounts of money in the quickest way possible – even if it means travelling first class to a vague conference in a distant part of the world.

An internal audit of UNHCR’s operations in Uganda found that the agency wasted tens of millions of dollars in 2017…Thousands of blankets, wheelbarrows and solar lamps meant for South Sudanese refugees went missing. The UN agency paid the Office of the Prime Minister $320,000 to buy a plot of land to expand the government’s refugee-handling capacity. Yet the Prime Minister’s office could not produce the title deed to prove ownership. The plot is now a parking lot.

Moreover, a project is not “closed” because it was successful (which should be the ultimate aim of any project); rather, it remains “ongoing” even when the situation on the ground has changed (which explains why there are still UN peacekeepers in Haiti even though the civil conflict there ended years ago). No one wants to know how many people’s lives improved significantly as a result of the project or why the crisis that led to the project keeps recurring.

This explains why, year after year, the UN fabricates or exaggerates a humanitarian crisis in some part of the world. A few years ago it was Somalia; today it is Yemen. No one wonders why, if the UN has been so successful in stemming the scourge of war around the world the refugee crisis today is bigger than it was when the UN was established. To avert a humanitarian crisis in Yemen, would it not have been wiser to sanction Saudi Arabia for going to war with Yemen or to sanction the United States, the main supplier of arms to Saudi Arabia?

But these are the uncomfortable questions that UN bureaucrats – and the power wielders at the UN Security Council – do not worry too much about as they travel in luxury around the world to some god-forsaken country whose people will never be lifted out of misery because the UN will not have it any other way: too many UN jobs depend on people remaining poor, hungry and homeless.

What can be done to reverse this situation? Well, for starters, as the world celebrates the 70th anniversary of the Universal Declaration of Human rights on 10 December, there has to be an honest discussion about whether the UN has fulfilled its mandate of promoting peace, human rights and development around the world. A scorecard would indicate success in some areas (e.g. smallpox eradication and child vaccination programmes) but dismal failures in others (e.g. wars in Iraq, Syria and Yemen and genocides in Rwanda and Srebrenica). If the UN cannot prevent wars and suffering, then what is its purpose?

As the world celebrates the 70th anniversary of the Universal Declaration of Human rights on 10 December, there has to be an honest discussion about whether the UN has fulfilled its mandate of promoting peace, human rights and development around the world.

Secondly, we need to democratise the UN Security Council, which is currently the bastion of only five veto-holding countries – the United States, Britain, France, China and Russia – which also happen to be the world’s leading weapons manufacturers and suppliers and who, therefore, have a vested interest in conflicts outside their borders. These countries decide which countries can go to war and which can’t (which is why no sanctions were imposed on the United States and Britain when they went to war in Iraq). All permanent members of the UN Security Council should have an equal say in matters concerning global security, and should be working towards preventing wars, not starting them.

We need to democratise the UN Security Council, which is currently the bastion of only five veto-holding countries, which also happen to be the world’s leading weapons manufacturers and suppliers and who, therefore, have a vested interest in conflicts outside their borders.

Thirdly, the UN’s internal oversight system needs to be overhauled. The UN’s internal justice systems, including the UN Ethics Office, should be abolished in favour of an external, independent mechanism that can provide the checks and balances that the UN so desperately needs. This mechanism, possibly in the form of a tribunal, would also allow UN whistleblowers to present their cases without fear of retaliation. Such a mechanism would, hopefully, also permit perpetrators of crimes committed by UN personnel to be brought to justice in national courts, rather than the current system that gives immunity to UN employees implicated in crimes and wrongdoing (which means they cannot be tried in any court, not even in their own country).

The UN cannot – and should not be allowed to – police itself. Given all the scandals at the UN, I think it is time an independent entity be entrusted with the responsibility of watching the world’s watchdog.

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Fake It till You Make It Nations and Bling Bling Economics: Debt, Dictatorship and Underdevelopment

Once upon a time, financial recklessness was the preserve of resource-rich nations. Now, resource-poor African nations, their thoughtless leaders seduced into taking printed money circulated by the US Federal Reserve after the global financial crisis a decade ago, have become the new sultanates of debt distress. DAVID NDII ponders a different path.

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Fake It till You Make It Nations and Bling Bling Economics: Debt, Dictatorship and Underdevelopment

Not too long ago, Angola opened an embassy in Nairobi on a quite well-appointed address on Redhill Road in the diplomatic suburb of Gigiri, a road I use frequently. You couldn’t miss it. It had an outlandish gate and a black granite signboard with gold lettering. I was rather intrigued that Angola would need such a large embassy in Kenya. I have made a point of observing how much activity was going on there— very little. I passed there the other day and lo and behold, the outlandish gold lettered black granite signboard was gone, replaced by a more modest one announcing the Botswana High Commission. The Angolan foray would have cost no less than $10 million, and I would imagine that Kenya was not the only country that Angola had spread its diplomatic footprint. What has changed?

Angola has squandered the oil bonanza of the last decade. Angola is Africa’s second-biggest oil producer after Nigeria, with a daily output of 1.6 million barrels of crude and 18 million cubic metres of natural gas. There is an economic principle that windfall earnings should be saved. Angola did not save. Instead, it leveraged the oil boom to pile up debt. Angola is China’s biggest debtor in Africa, owing US$ 23 billion accounting for about a fifth of Africa’s debt to China.

If Angola had set a windfall benchmark at $50 per barrel, its nest egg for the five and a half year oil boom (April 2009 to May 2014) would have been in the order of $100 billion on crude oil alone ie. excluding natural gas. A conservative investment yielding 5 percent a year would be earning Angola $5 billion a year to invest in infrastructure or whatever else it chooses. This is how Norway got rich on oil. Norway’s sovereign wealth fund, the worlds largest, is now worth a trillion dollars. If Norway was to pay dividends from the fund to its 5.2 million citizens, each would get US$9,000 a year.

There is an economic principle that windfall earnings should be saved. Angola did not save. Instead it leveraged the oil boom to pile up debt. If Angola had set a benchmark of $50 per barrel of petroleum, its windfall for the five and a half year oil boom (April 2009 to May 2014) would have been in the order of $100 billion on crude oil alone… A conservative investment yielding 5 percent a year would be earning Angola $5 billion a year to invest in infrastructure or whatever else it chooses.

They say once bitten twice shy. Not Zambia. When I was a college student eons ago, Zambia was a case study on how not to manage an economy. Zambia rode the post independence commodity boom into middle income status by the early seventies. At $600, Zambia’s income per person was one-third higher than the Sub-sahara Africa average. In Nairobi, Zambia’s heydays are represented by its well-appointed embassy property on Nyerere Road, overlooking Uhuru Park. When commodity prices receded from the late seventies, Zambia plugged its finances by borrowing – and borrowed itself into poverty. Over the next decade, Zambia’s foreign debt increased seven-fold, from one to seven billion dollars. By the mid-90s when it got HIPC (Highly Indebted Poor Countries) debt relief, average income adjusted for inflation was half of the mid-1970s level.

Zambia rode the post independence commodity boom into middle income status by the early seventies. When commodity prices receded from the late 1970s, Zambia plugged its finances by borrowing – and borrowed itself into poverty.

Copper prices surged again in the 2000s peaking in 2011 at $4.60 a pound, about the same in inflation-adjusted terms, as at the 1970s peak. In 2012, against the backdrop of retreating copper prices, Zambia debuted in the Eurobond market, borrowing $750 million. It also borrowed heavily from China. Copper prices have fallen again and Zambia is in debt distress. The eurobonds are now trading at around15 percent yield, almost three times the debut bonds 5.6 percent yield at issue. What this means is that the bonds for which investors paid $94 are now trading at $34. It means that Zambia is now effectively locked out of any more borrowing in the sovereign bond market. Will Zambia turn around its finances before the bonds are due for re-financing? Doubtful.

Zambia is only slightly less dependent on copper now than it was in the 1970s. Copper still accounts for two-thirds of exports. Zambia has no shortage of low-hanging fruit in terms of diversification options: it has plenty of idle arable land and underexploited tourism potential. Chile was once as copper dependent as Zambia. In fact, copper still accounts for half of Chile’s exports. But Chile has diversified its economy and worked its way up to being the first Latin American country to be admitted to the OECD club of rich countries. Interestingly, Chile has become a wealthy country without following the Asian Tiger holy grail of export manufacturing, but rather by diversifying to services and agricultural exports. Its other key exports are agricultural including horticulture, wine and fish, especially farmed salmon.

Chile was once as copper dependent as Zambia. Copper still accounts for half of Chile’s exports. But Chile has diversified its economy and worked its way up to being the first Latin American country to be admitted to the OECD club of rich countries. Interestingly, Chile has become a wealthy country without following the Asian Tiger holy grail of export manufacturing, but rather by diversifying to services and agricultural exports.

Historically, financial recklessness on this scale was the preserve of resource-rich African countries. But the disease has spread all over the continent. Resource-poor countries such as Ethiopia and Kenya are now just as reckless as the resource-cursed. In the past, resource-poor countries simply did not have access to the money to steal or finance megalomania. When they tried to do so by domestic borrowing and printing money, the macroeconomic feedback loop quickly kicked in and wreaked financial havoc. Moi learned this lesson. Mugabe did not. He ended up with a hyperinflation for the ages, and the demise of the Zimbabwe dollar.

There are two reasons why resource-poor countries have also caught the disease: the 2008 global financial crisis, and China.

Since the global financial crisis, which began in 2007 and properly set in the next year, the financial markets have been awash with money churned out by the US Federal Reserve and other central banks, thereby depressing interest rates to near zero, prompting money managers to go looking for better returns in emerging markets in what is known in market lingo as “hunting for yield”. Aggressive salesmen were everywhere scouting for and massaging the egos of potential borrowers. When Kenya set out to debut in the Eurobond market it indicated that it would raise a $500m “benchmarking” bond whose proceeds were to retire a syndicated bank loan borrowed two years before, and which was the only foreign loan in Kenya’s books at the time. By the time the issue was going to the market, it had grown fourfold to $2 billion. By the time it closed, the government had borrowed $2.8 billion.

Within weeks of the successful debut, the treasury mandarins were talking of Sukuks (Islamic bonds) and Samurais (Japanese Yen denominated bonds), like children accidentally locked inside an ice cream parlour. Other than the syndicated loan repayment of $600 million there is no trace of anything financed with the money.

Since the global financial crisis, the financial markets have been awash with money churned out by the US Federal Reserve and other central banks, thereby depressing interest rates to near zero, prompting money managers to go looking for better returns in emerging markets. Aggressive salesmen were everywhere scouting for and massaging the egos of potential borrowers. Africa Rising.

China is getting more than its fair share of flak for Africa’s debt distress. The fear of the Dragon is over the top. Unlike the Western banks and markets which are embedded in the Western power structure, China will have little recourse when countries default. It cannot run them through the mill we saw “the troika” run Greece when it went into debt-distress in 2009. The head of China Export and Credit Insurance Corporation, known as Sinosure was recently quoted lamenting the poor quality of China’s infrastructure loans abroad. He went on to disclose that the agency is already a billion dollars out of pocket on Ethiopia’s new railway, whose preparation he termed “downright inadequate”. “Ethiopia’s planning capabilities are lacking, but even with the help of Sinosure and the lending Chinese bank it was still insufficient.”

It has also been reported that China may offload its infrastructure loans to the secondary market. The plan is to sell the loans to the Hong Kong Mortgage Corporation which will in turn repackage them, dice them up and sell them to investors, thereby releasing liquidity back to the primary lenders such as China Exim Bank to make more loans.   This is not funny. First, the lenders admit that they have made dud loans. Then they follow this with an announcement that they will sell the same to investors. It is a scheme such as this, which mixed up low risk and high risk (a.k.a sub-prime) mortgage loans into securities known as Collateralized Debt Obligations (CDOs) that precipitated the erstwhile mentioned global financial crisis. More poignantly, the Dragons debt trap diplomacy as it’s been called, begins to look uncannily like hunting for yield.

That is the supply side. On the demand side, you have African leaders who have no ideas of their own. From import substitution industrialization, to neoliberal orthodoxy in the 80s, to poverty reduction strategies and now infrastructure-led growth, they wander thoughtlessly from one aid paradigm to the next, all the while living up to Fanon’s prediction that they were destined to become “a transmission line between the nation and capitalism.”

The bigger problem is delusions of grandeur. Seemingly every one of these African big men has a Lee Kwan Yew complex. Even Uhuru Kenyatta, a man who couldn’t run an orderly kindergarten in a children’s park if his life depended on it, is prone to bouts of megalomania during which he comically dons military fatigues and goes around doing General Park Chung-hee skits.

On the demand side, you have African leaders who have no ideas of their own. From import substitution industrialization, to neoliberal orthodoxy in the 80s, to poverty reduction strategies and now infrastructure-led growth, they wander thoughtlessly from one aid paradigm to the next, all the while living up to Fanon’s prediction that they were destined to become “a transmission line between the nation and capitalism.

Africa has its economically successful nations: Botswana, Namibia, Mauritius, Cape Verde and the Seychelles. What do these successful African nations have in common? First, they are all small. Three of them are small island nations. Namibia is large geographically, but its population is only 2.5 million people. Second, they are also successful democracies. The five are consistently the highest ranked African countries in democracy league tables such as the Economist’s Democracy Index and the Freedom House Index.

Why are Africa’s small countries more politically and economically successful than the big ones?

Size matters. It is easier to build a small nation than a big one. Small islands are natural nations, hence it should not surprise that all the small island nations are successful. Madagascar is Africa’s sole big island nation, and it is not successful at all.

The big African countries are almost invariably very ethnically diverse. Recently, someone on social media asked me why benevolent dictatorship cannot work in Africa the way it worked in South Korea. My answer was a question: what tribe will the dictator be? He has not responded. Proponents of developmental autocracies fail to recognize that the East Asian countries are old nations, not the arbitrary colonial creations that African countries are. Korea is a culturally homogenous society with unified dynastic rule going back to 900 AD, and a political history, known as the Three Kingdoms, going back another millennium. The Thai Kingdom dates back 700 years.

Proponents of developmental autocracies fail to recognize that the East Asian countries are old nations, not the arbitrary colonial creations that African countries are. Korea is a culturally homogenous society with unified dynastic rule going back to 900 AD, and a political history, known as the Three Kingdoms, going back another millennium. The Thai Kingdom dates back 700 years.

Ethiopia is Africa’s oldest nation-state, and the only one that is not a colonial creation. It is also one of the largest and most diverse(100 million people, over 80 officially recognized ethnic groups). After the Derg’s reign of terror, Ethiopians adopted a constitution based on a loose ethnic federation. But Meles Zenawi could not resist the allure of the developmental autocrat. He borrowed and built like a man possessed but the economic miracle did not materialize, and Ethiopians, tired of autocracy without prosperity, took to the streets. The edifice has unravelled. The leadership is coming to terms with a historical fact that the rest will be reckoning with sooner or later: political development precedes prosperity.

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