Friday, July 2, 2010

The EAC: East African Community

Burundi, Rwanda, Tanzania, Kenya, and Uganda are turning into a single-visa zone for foreigners. They're already in the process of eliminating work visa requirements for each others' citizens, and ultimately they're aiming for a common currency. This will hopefully stabilize these countries economically and politically (less ethnic violence when all five governments have an interest in each other, and much less probable bad unilateral economic policy decisions.) We'll also have data on another experiment in political and economic cooperation. There is already a West and Central African Franc, although I'm not aware of any studies showing whether this has been good or bad for that currency zone.

Nationalization could be seen as the opposite of this process, in that it makes economics and the security of assets in the country less predictable. It would be interesting to compare the fortunes of eager-to-nationalize states like Zimbabwe, Bolivia, and Venezuela, based on Peruvian economist Hernando de Soto's argument that economic take-off of developing economies is based on transparent property-ownership conventions that encourage value creation. Are there studies correlating nationalization with foreign capital inflows and growth rates? Granted, Zimbabwe's ruination was also caused by a monetary approach that should have gone out with the Weimar government, but looking across all nations, we could still see an effect. You could even make the argument that internal nationalization would have the same effect on private capital within the country. Late-in-the-game price controls on new pharmaceuticals are the classic game theory example of sunk-cost gotcha's.

No doubt these governments and many progressives in the developed world would argue that they have the right to nationalize assets in their country, but unfortunately, in the world of trade and investment this is beside the point. If your assets aren't safe in a certain country, you're not going to put money there. Maybe these governments (or more accurately, their insulated leaders) are willing to endure the pain of international investment pull-back in order to achieve independence from foreign influence, but there is a large trade-off between absolute independence and growth rate requiring foreign capital. How much is absolute economic independence worth?

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