The ‘Flight to Quality’ Editorial

During uncertain economic times, investors, in most cases, look for something of value – something that is presumed safe – and in this safe investment is where they put their money. For example, the price of gold has gone up and up and up these past few years because people are protecting their nest eggs by buying gold, melting gold, selling their gold and getting cash from it … and so on. Does this make gold a safe investment? It, of course, depends on which part of the world you are. Gold, in the mines of the Democratic Republic of the Congo holds different values from the gold in Fort Knox. But we shall discuss this later.

There is a point to all this: First, people around the world continue to invest in these United States. The US treasury securities are considered one of the world’s safest investments. China, Japan, the United Kingdom; the Oil Rich Countries of the Middle East and others invest money in the US. Secondly, there is so much money to go around. US multinational corporations and also the Bank of China are, euphemistically speaking, awash with cash. It is actually safe for one to state in hyperbole that the World is Not Enough to Handle the Cash!

According to the New York Times, China, for instance, holds large amounts of the US dollar probably as a result of the Balance of Payments in its trade with the US and the World. Because buying from China is cheaper than buying from Germany, people do business with the Middle Kingdom and so allow it to have this ‘loose’ money hanging about.

Unfortunately for China, there are not too many places to put this money around the world. Europe is having too many problems to talk about right now – Berlusconi has just resigned from a major European economy; and Greece, Ireland and Iceland are still blights on the Economic Horizon; Brazil is much too small an economy to absorb even just US$100 billion dollars [for the record, even the US would gag at this prospect]; Russia, with its rapidly growing economy might flush these monies through its system and choke on itself; India’s over 1 billion people would still not be enough to consume this investment in a heartbeat and survive; and Japan has growth problems of its own and actually owes a lot of money [and also recently had a nuclear reactor melt on it]. And so we are back to why US is still a factor when it comes to foreign direct investment. In simple terms, the US has the capacity, the infrastructure and is in the perfect position to receive more money, more investments and even more trading partners than any other place on Planet Earth.

At an aside, hearing American politicians say what they have to say about their own country is a little jarring. They forget that their country holds the hopes and dreams of an entire planet and thus, irresponsibly, make comments about an investment that they do not necessarily fully comprehend – an investment that is not necessarily just theirs to play around with. During the ‘discussions’ in Congress to increase the debt ceiling [a perfunctory thing] in 2011, the gridlock caused delays; the name calling was venomous – and for this, the country received a downgrade from the stellar AAA to the less shiny AA+. This editorial thinks that this was just a slap on the wrist especially since Standard & Poor focused on the political climate and not necessarily the quality of the ‘good’ itself.

But all this is crucially staged as conjecture. It is important to show that the US’s attractiveness as an investment stems not just from its wealth and that country’s capacity to consume – but from political aptitude and will. America’s big problem is not development or growth but the polarization between the Republicans and Democrats. The recalcitrance stemming from too many interests between the two parties is what received the above punishment in the downgrade. On the other hand, Afro Caribbean countries have a very different problem. The political leaders have too few interests and these are what they are fighting over. Like their American ‘allies,’ they are focused on the inside and not seeing the big picture. Like the Americans, they do not realize that the world is watching for opportunity. These poor countries cannot see that people are hoping and praying that they will be presented with another sphere of influence, another market and another chance to make extra dollars. Like they do when they look at America, the Chinese [and conversely, the Americans and Germans and Japanese and Italians] would jump at the opportunity to do business with a country that even tries to make the smallest of changes. Take a look at what’s happening in Rwanda and also research into how many firms are trying to get into Libya.

The truth is these poor nations may not necessarily have to do too much to attract foreign direct investment. Like already mentioned, there is cash to go around. Third World nations like Haiti or Eritrea just have to have the political will to set aside their blinders and focus on providing infrastructure; showing a modicum of respect for the law, encouraging a certain level of capital market presence and of course, even pretending to have ‘stable’ leadership. Combined with a way to pitch their country to the highest bidder, small morsels – billions of dollars – could find their way to ‘Afro Caribbea.’. There are no two ways about it. There is opportunity and capital needs a flight to quality. What behoves anyone is why these above mentioned countries are not digging up runways with their bare hands and hoes! Isn’t this what happens when people dig for gold in Congo?

Dennis Matanda,
Editor