Tag Archives: transparency/corruption

Mexican congressman to colleagues: “Privatize This”

So, as you may or may not have heard, Mexican Congress has just passed some rather historic oil reforms, much to the consternation of a lot of people. Herein, one congressman’s protest at the lack of transparency surrounding this historic occasion (with thanks to @NetasMX):

2013.12.MX oil reforms

The Ties That Bind Russia

2013.12.03.leninIn keeping with the just-released 2013 Transparency International Corruption Perceptions Index, I’m always in the market for new ways to describe the obstacles one encounters when trying to get things done in developing countries.

Enter this very enlightening piece from Peter Pomerantsev in the London Review of Books. The premise is what Russians refer to as the “Sistema”:

There are any number of paths and initiations into sistema, the liquid mass of networks, corruptions and evasions – elusive yet instantly recognisable to members – which has ordered the politics and social psychology of Russian civilisation since tsarist times.

And here’s the super gut punch:

This is the genius of sistema: even if you manage to avoid the draft, you, your mother and your family have become part of the network of bribery, fear, simulation and dissimulation. You have learned to become an actor playing different roles in relation to the state, the great intruder you wish to avoid or outwit or simply buy off. You are already semi-legal, a transgressor, but that’s fine for sistema: as long as you only simulate, you will never do anything real, you will always look for compromise and you will feel just the right amount of discomfort. You are now part of the system. If a year in the army is the overt process that binds young Russians to the nation, a far more powerful induction comes with the rituals of avoiding military service.

Read the rest here.

And if you read carefully, you’ll see a discussion of rules and laws that harks back to the very first thing I wrote on this blog, here.

The First Rule Of Fighting Narcos: You Do Not Talk About Fighting Narcos

Regular readers know it isn’t very often that I re-publish in full something from elsewhere, but this is too important and I have no doubt that the majority of you are not in the habit of reading the Dallas Morning News with any regularity.

Alejandro Hope, who blogs here, tweets here, and works here, had the following op-ed in the Dallas Morning News at the end of last week which should not be missed and which would not be fair to simply excerpt here since every sentence matters. The long and short of it, which David Agren first touched on here, is built on the premise of not talking about drug war-related murders as part of a multi-prong public relations strategy.

If that sounds vaguely familiar, allow me to refresh your memory with this:

You think I’m joking? Read on:

Alejandro Hope: In Mexico, obfuscating crime numbers

Two months ago, a gunbattle erupted between rival drug gangs in Reynosa, Mexico, right across the border from McAllen. The shootout lasted several hours, killing as many as 40 people, according to a newspaper on the U.S. side of the border. Even in Mexico, scarred by seven years of relentless violence, this was big news.

But not big enough to make headlines in Mexican media. With some exceptions, coverage of the Reynosa firefight was scanty. Mostly, newspapers buried it in the police section, while TV and radio news shows virtually ignored it. Social networks were abuzz with information, but almost none was picked up by media outlets.
This was not an isolated shutdown. As a result of threats and violence from criminal gangs, many local news organizations in Mexico have long limited their reporting on the drug war. Now the practice has extended to the national media.

According to a recent report from the Observatory of Violence in the Media, an independent watchdog group, coverage of organized crime and violence in the Mexico City press took a dive during the first three months in office of President Enrique Peña Nieto: The use of the words homicide, narcotrafficking and cartel declined by half from the year before. Similar results were found for TV and radio.

The national media pullback is not the product of intimidation by criminal gangs; it is a response to government policy. Since Peña Nieto took office in December, his administration has made every effort to keep violence out of the limelight. This has not been a heavy-handed operation. Some journalists and outlets may have been pressured; most have not. Rather, the government has tried, successfully, to shroud the issue in silence and confusion.

Some of the administration’s new policies have been positive: For instance, alleged drug gang members are no longer paraded in front of the media, which had been an almost daily ritual while Felipe Calderón was president, one long condemned by human rights groups.

However, other practices are more questionable. According to official sources, 52 top or midlevel operatives of the various drug gangs have been arrested or taken down since December. No one outside government knows their names or any details about their so-called neutralization. All information flows are tightly controlled by a greatly empowered Interior Ministry. The fog of war has thickened.

Most troubling, there is a policy of deliberate obfuscation on crime data. A number of government agencies jointly produce a monthly report on the security situation. According to the latest release, homicides declined from December through April by 14 percent from the same period a year earlier, and by 18 percent compared with the final months of the previous government.

Those numbers are highly problematic. First, they do not refer to total homicides, but to so-called organized-crime-related homicides. The practice of singling out drug gang hits from run-of-the-mill murders — begun by, and later suspended for public consumption under, Calderón — is deeply flawed. Including or excluding an incident is an inferential process, not the result of sound police investigation. If a homicide meets a set of arbitrary criteria, it is counted as organized-crime-related, no further questions asked.

Nor do the data meet consistency standards. Total homicides, as reported by state law enforcement agencies, have declined at a much slower pace. If the government’s numbers are correct, then, by implication, other types of murder must be increasing. Has there been a rise in domestic violence or bar fights? Unlikely. A far better explanation is a change in the criteria for defining a homicide as organized-crime-related.

Second, homicides have indeed gone down from the 2011 peak. But the drop happened before Peña Nieto took office Dec. 1. After 18 months of decline, the curve flattened in late 2012. Last month, Mexico recorded an average of 50 homicides a day — the same number as in October and every month since, plus or minus 4 percent. The rapid decline reported by Mexican authorities is a statistical artifice.

Mexico still faces serious security challenges. The situation has improved somewhat since 2011, but the amount of violence remains staggering. With one-third the population of the U.S., Mexico has 50 percent more homicides. A meaningful reduction in crime will take many years and many reforms. But the task is made even more difficult when public debate and oversight are inhibited by the absence of reliable information.

The Peña Nieto administration wants, legitimately, to change the narrative about Mexico, both at home and abroad. But the best way to improve the country’s image is by changing its reality, not shutting down information flows, fudging numbers and pretending that violence can be willed out of existence.

Alejandro Hope is director of security policy at IMCO, a Mexico City-based think tank. His email address is alejandro.hope@imco.org.mx. Follow him on Twitter at @ahope71.

Map Of The Day: Mexico Drug War Update

The Washington Post published this the other day:

Mexico Drug War Cartel Map

Accompanying it is a rather lengthy article (here), not to be missed, detailing the evolving intelligence challenges since Enrique Peña Nieto took office.

Also not to be missed is David Agren reporting in USA Today on the Peña Nieto Administration’s apparent new strategy which can be essentially summed as: “If we stop talking about the murders, that must mean they’re not happening anymore.”

Do not be fooled.

 

Chart Of The Day: How 37 Banks Merged Into 4

Thanks to Alan Haggard, we have this quite striking chart today:

How 37 banks merged into 4

Assessing Televisa’s Political Risk in Mexico

Televisa Since Dec 1Mexico watchers up to date on the landmark reforms underway in Mexico can skip straight down to the section below where the block quotes begin.

For the rest of you not up to speed, the Mexican government is getting ready to put most of the new non-oil reforms up for a vote quite soon. The Economist has a pretty good recent summary here, and if you have more time I would highly recommend checking out extensive coverage of the annual Americas Society / Council of the Americas event just closed in Mexico City here.

And for those of you new to Diverging Markets, let me sum up my basic attitude toward the Peña Nieto Administration as being what I call “optimistic distrust.” This means that I have no ideological or financial stake in any of this (though I’m still waiting for the right moment to short iShares’ Mexico ETF), but given what I know of Mexican political history and Mexican society I am highly skeptical about a lot of the big reform promises made thus far for reasons repeated throughout here; at the same time, given that I spend more time in Mexico than anywhere else, I would absolutely welcome having my skepticism proven wrong. But the caveat here as always is that Mexican leadership has become increasingly adept at telling foreign investors what they want to hear and the Peña Nieto Administration in particular has proven itself quite remarkable in this capacity. Put another way, don’t believe everything you read about this country.

Now let’s get to Televisa. The chart above shows this stock’s performance since  Peña Nieto took office on December 1 last year, and its movement in the past week is not encouraging. One of the reasons is likely a disclosure Televisa recently made to the U.S. Securities and Exchange Commission in a form that was previously unknown to me, called form 20-F. According to Investopedia, this is a form meant for foreign companies who list American Depositary Receipts in U.S. markets. The entirety of Televisa’s recent 20-F is worth reading, but in particular the “Risk Factors” section under Item 3, which is chock full of warnings.

Here’s a slice of it from the bottom of page 9 to get everyone’s juices flowing:

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Taxation With Representation, By Mustafa Mond

I am pleased to present a new guest contributor today, who goes by the tag of Mustafa Mond, presumably inspired by Aldous Huxley’s Brave New World.

In recognition of today as that annual rite of American citizenship–Tax Day–Mr. Mond has graciously offered us a piece of his mind.

Ladies and Gentlemen, Mustafa Mond: 

Democracy-Taxation-With-Representation-Mustafa-Mond

The first person to correctly identify all the references here will receive a prize to be determined at a future date.

Everything You Know About Africa Is Wrong

Morten Jerven, economic historian of Simon Fraser University in Vancouver, has me hooked just with this single comment:

The demand for numbers is overwhelming. The data will be created, invented or otherwise imputed to fill the gap. When the data basis is meager and the aggregates rely on a lot of guessing and assumptions the statisticians have little defense and are vulnerable to pressure. This is not only a matter of costly waste of donor money. Discrepancies such as those found here can be vital differences in countries where large parts of the populations are living in, or are close to living in, absolute poverty.

The main lesson is that numbers do inform scholarly conclusions, impact donor decisions and inform policy choice. In most cases data users do not know or choose to ignore that they are being misled by development statistics.

Yes, live long enough and you will indeed see CNN not just paying attention to Africa, but actually getting it right.

And this is actually not just about Africa; to varying degrees it’s about economics and finance across the developing world. What differentiates the reliability of data in one market over another depends in large part on the skillfulness of the technocrats and p.r. spinmeisters in charge.

Charts Of The Day: The Bitcoin-Argentina Connection

On increasing chatter I’ve been hearing about bitcoin, pending devaluation in Argentina and the possible use of bitcoin to circumvent capital controls in Argentina, I had to look at the data.

Bitcoin, for those who aren’t aware, is a virtual currency that exists solely online (I have one previous discussion of it here). I’m not going to put up any links on its origins here because you can honestly just google it and find more than enough info, but the Wikipedia page gives a decent unbiased explanation.

And the operative word in that previous sentence is “unbiased”. Because there’s a rising political element to bitcoin that I really don’t want to get into, but to sum it up, there is a palpable libertarian bent to its propagation if you can sift through all the hype and speculation, good and bad, about its use.

Personally, I think it’s an interesting experiment and am wholly agnostic about its success or legitimacy, but love seeing regulators squirm at the implications of it. To borrow from former US Defense Secretary Donald Rumsfeld, the “unknown unknowns” here are nothing less than staggering.

Actually, here is an interesting profile of bitcoin’s user base for those of you already familiar with it.

And for those of you ready for the advanced class, this is a handy diagram:

2013.03.27.How a bitcoin transaction works

Anyway, on to the data.

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A Dissection Of Market Manipulation In The Diamond Industry

Priceonomics put up a stunning take last week on the market mechanics of diamonds which spurred a lot of reactions. Worth reading in full, and here are some excerpts to give you an idea:

“Americans exchange diamond rings as part of the engagement process, because in 1938 De Beers decided that they would like us to. Prior to a stunningly successful marketing campaign 1938, Americans occasionally exchanged engagement rings, but wasn’t a pervasive occurrence. Not only is the demand for diamonds a marketing invention, but diamonds aren’t actually that rare. Only by carefully restricting the supply has De Beers kept the price of a diamond high.”

And this:

“In finance, there is concept called intrinsic value. An asset’s value is essentially driven by the (discounted) value of the future cash that asset will generate…A diamond is a depreciating asset masquerading as an investment. There is a common misconception that jewelry and precious metals are assets that can store value, appreciate, and hedge against inflation. That’s not wholly untrue.

Gold and silver are commodities that can be purchased on financial markets. They can appreciate and hold value in times of inflation. You can even hoard gold under your bed and buy gold coins and bullion (albeit at a ~10% premium to market rates). If you want to hoard gold jewelry however, there is typically a 100-400% retail markup so that’s probably not a wise investment.

But with that caveat in mind, the market for gold is fairly liquid and gold is fungible – you can trade one large piece of gold for ten smalls ones like you can a ten dollar bill for a ten one dollar bills. These characteristics make it a feasible potential investment.

Diamonds, however, are not an investment. The market for them is neither liquid nor are they fungible.”

And this:

“We covet diamonds in America for a simple reason: the company that stands to profit from diamond sales decided that we should. De Beers’ marketing campaign single handedly made diamond rings the measure of one’s success in America. Despite its complete lack of inherent value, the company manufactured an image of diamonds as a status symbol. And to keep the price of diamonds high, despite the abundance of new diamond finds, De Beers executed the most effective monopoly of the 20th century.”

Read the rest here.

Is Asia’s Foreign Exchange NDF Market The Next Domino To Fall?

2013.03.15.ASEAN mapThat’s the basic question I take away from this recent article from the FT’s Jeremy Grant, which uses a wrongful dismissal lawsuit ex-UBS traders are bringing against their former employer as a gateway to discussing price transparency in the Asian non-deliverable FX market.

The important bit doesn’t come until the second half of the article:

“Quite how this “shadow” fixing system has emerged in Singapore, alongside the official rates set by southeast Asian central banks, is a bit of a mystery. Bankers say it was because traders didn’t historically trust the onshore fixing. It is easy to forget the depth of anti-market feeling in Malaysia during the Asian crisis.”

Actually, how it emerged in Singapore was rather straightforward. Continue reading

InfoGraph of the Day: Chinese Companies and Risk in Africa

This is really impressive and makes me really rethink my previous notions of a political risk framework, particularly in the context of Africa. No more preface necessary:

2013.03.14.China risk in Africa

Sourced from Africa-Asia Confidential.

Know Your Audience, China-Africa Edition

2013.03.07.Fitch-net-FDI-inflows-sub-Sarahan-AfricaThis has been building for a long time. The latest is this CNN interview with Dambisa Moyo, she of “Dead Aid” fame, entitled, “China Can Transform Africa“. A couple of comments caught my eye:

“Ultimately, the responsibility of how China engages in Africa is really at the domain of the African governments. We would not be worried about the risks of neo-colonialism or abuse, environmental abuse and labor issues, if we trusted the African governments to do the right thing.”

“I’m an eternal optimist. I’m probably the wrong person to ask, because I do believe that the structural and fundamental structures of Africa right now are poised for a very good few decades. If you look at an economy through the lens of capital, which is basically money; labor, which is basically how many people do you have and what skills do they have; and productivity, which is just, how efficiently they use capital and labor, the trend is very clearly in favor of Africa.”

I don’t disagree with anything in this statement or really anything else Moyo says in the interview. What occurs to me though is the big “IF” that is buried in there: “…if we trusted the African governments to do the right thing.” Moyo objects to the broad characterization of Africa as a giant war zone replete with disease and hopelessness and corrupt dictators, and I object to that too. But the bottom line remains that so much of forward development, not just in Africa, but Latin America too, hinges on trusting governments to do the right thing. Maybe this is a glass half-empty/half-full debate, but I personally don’t think we need any more evidence of governments being unable to do the right thing, whether in Africa, Latin America, the US, Europe or really anywhere.

Actually, elsewhere on the CNN website, this is a pretty realistic breakdown of the continent.

Related to this, Bill Clinton was apparently in Nigeria recently to give a speech about the challenges Nigeria faces. Some quotes from that story:

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Drop Everything, Read This Now: Too Big to Jail, Too Big for Trial

Two items of highly recommended reading when you have a chance—one is the cover story from the current issue of the Atlantic Monthly, “What’s Inside America’s Banks?” by Frank Partnoy and ProPublica’s Jesse Eisinger; and the second is Matt Taibbi’s latest, “Gangster Bankers” in Rolling Stone.

Excerpting really won’t do either of these justice, so just put aside a few minutes while on the commute home or while waiting for the kids to finish ballet or during a flight delay or whatever other spare minutes you find yourself with and just read these. Both of them.

There will be a quiz on Friday.

And while you’re reading them consider this: isn’t strange that some of the very same investors who seem to have no problems buying in to the opacity of the US and European banking systems get cold feet when you bring them an openly high risk-high reward investment proposition in a less conventional market?

Sort of reminds me about some of these studies that show how psychopathic tendencies are linked to an inability to process fear.

Anyway forget about what the ratings agencies say. There’s risk everywhere. I guess the difference is that people prefer risks closer to home, even if they don’t understand them. Though by Partnoy’s and Eisinger’s accounting, it appears the tables are turning on this front too…

Here’s the link again to the Atlantic article and here’s the link again to the Rolling Stone article. You know, in case you didn’t believe me the first time. Or thought I wasn’t serious. I could not be more serious. Seriously.

Also, I am officially in love with Elizabeth Warren:

A Very Frank Discussion of Corruption and Risk in Frontier Markets

2013.02.22.Frank discussion of corruption and risk in Frontier MarketsHuge kudos to Andrew Henderson of Nomad Capitalist and Chris Tell of Capitalist Exploits for this discussion of investment prospects primarily in frontier markets. The focus is mainly on Mongolia, but they also cover Fiji, Myanmar and Cambodia. The podcast is worth listening to in its entirety, but the discussion of risk and corruption in particular grabbed my attention for its rare candor. I don’t think Henderson consulted any of the things I’ve previously said about due diligence and liquidity risk, but some of his questions may as well have been lifted directly from some of my thoughts on these themes, most recently here and here.

Since I can’t find any transcription of the interview anywhere, I thought I’d transcribe the salient points directly since this is definitely something I’ll be referring back to: Continue reading

Street Markets 101: Che Misterio Navigates Argentina’s Black Market for Dollars

2012.10.18.Che MisterioI am humbled, honored, grateful and excited to once again present Che Misterio in Argentina, who continues endangering his life for the purpose of shining a light on one of the blindest of economic blind spots in the world today: Argentina’s black market in foreign exchange. Che previously enlightened us in this space on the topics of Big Mac inflation and street level economics. The following was first published on Seeking Alpha under my name in a version suited to that publication’s editorial format, entitled, “How to Navigate Argentina’s Black Market in Foreign Exchange”. Below is the original as submitted by Che Misterio.

Ladies and gentlemen, Che Misterio:

Where Next for Argentina?

By Che Misterio

It is no secret that Argentina is now a two-tiered society. There are those with hard currency for whom the standard of living is quite cheap, and who are therefore immune to chronic inflation as their dollars and euros appreciate even quicker than prices. And then there are those without hard currency, and they live a precarious existence, to say the least: they cannot save their pesos, and even if they could it would be pointless as inflation rages on despite government insistence to the contrary; flagging confidence in the national currency and ever tighter regulations on foreign exchange means the only way to acquire a meaningful amount of hard currency is to pay an expensive premium on the black market.

I am grateful to belong in the first tier. I exchanged some euros recently on the black market, despite the terms being rather nebulous. For those unfamiliar with the street level workings of Argentina’s informal economy, this does not involve some suspicious character in dark sunglasses manning a backstreet stall flanked by security guards with black ear pieces protecting the stash. This was in an otherwise regulated bureau de change on a busy street, staffed by a man of average height, weight, complexion—what those in show business refer to as “the everyman look.”

The opening conversation went something like this:

“Hi, I’d like to change euros please”
“Where are you from?”
“Here.”
“We don’t change euros.”
“But Roberto changes euros, no?”
“Please wait here.”

“Roberto” was the code word a friend of mine had given me for signaling to this bureau de change that I wanted to transact at the black market rate. The man turned his back to me and knocked on the tinted glass of the door behind him. The door made a slight clicking sound as the magnetic lock loosened and the door opened. The man disappeared through the doorway and the door closed and locked, leaving me alone to wait. Two minutes later, the door re-opened, and he beckoned me to enter.

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Hype, Truth and Something In Between, Nigeria Edition

2013.02.07.Nigeria truth hypeDiscussing the prospects of investing in Africa seems to invite a rising level of dissonance between people with something to sell—be it product or ideology—and people with some perspective still stuck in the colonial era.

So when I saw that US News published something entitled, “Why Africa Is Essential to America’s Future,” I came into it expecting the former, but was surprised at how much space the author took to remind everyone of all the reasons to be scared:

There are wars and rumors of wars every day. Sudan and South Sudan not only have difficulty accepting one another, they both have internal schisms to bridge. Somalia is still a divided and dangerous land. The Eastern Congo is plagued by marauding and competing armies and bands that call themselves armies, though they are little more than semi-organized thugs, robbers, rapists, and murderers, often sponsored by governments, local or national. Madagascar continues to be run by a coup-inspired government that has allowed its country to be open to international pilferage leading to the obliteration of their green environment and unique wildlife. Continue reading

How Zimbabwe’s public account is worth less than an iPad

2013.02.04.100-trillion-dollar-note-zimbabweOr iPod, or dinner and drinks for four in certain cities, or most plane tickets…

Fareed Zakaria, on his weekly GPS show, ran a segment on this story yesterday. I’ve been trying to find the video clip of this particular segment but for some reason it isn’t listed on the GPS blog. I did however find a transcript of the segment for some reason published on a website called “Electric Light and Power“. In any event I thought it worth keeping track of, so here it is cut-and-pasted:
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Cristina Fernández Kirchner, Money Manager Extraordinaire

Argentina’s La Nación had a rather thorough vetting of the Kirchner family assets profile yesterday. Pictures always speak loudest so let’s start with a visual. Here’s a nice chart showing the growth of CFK’s net worth (translated and interpolated by Inca Kola):

Kirchner’s current net worth, estimated here at 89 million pesos, is either US$18.7 million at the official rate or US$14 million at the black market rate. While the Kirchner government has a vested interest in keeping the exchange rate artificially strong to project the illusion of sovereign fitness, this also gives Kirchner herself the appearance of having a higher net worth in USD terms than is realistic.

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How Emerging Markets Private Equity due diligence is different

Kroll Advisory Solutions recently released a survey of 50 emerging markets private equity firms in the UK focusing on due diligence procedures. There’s a lot of fun stuff in here, but to me these two Venn diagrams offer the most pronounced difference between investing in developed markets versus the rest of the world:

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