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Political risk, peace and security as a necessary condition for doing business in the region; the practical lessons of political and social instability/integration in the region. Presented by Dr. Adan Bika 16 th April, 2014. Where did we come from?.

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Political risk, peace and security as a necessary condition for doing business in the region; the practical lessons of political and social instability/integration in the region.

Presented by Dr. Adan Bika

16th April, 2014

Where did we come from?

Political risk faced by firms can be defined as “the risk of a strategic, financial, or personnel loss for a firm because of such nonmarket factors as macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income, labour, and developmental), or events related to political instability (terrorism, riots, coups, civil war, and insurrection).

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The sub-region of eastern Africa/horn of Africa has, like the rest of the continent celebrated their fiftieth anniversary of independence, as such it is a fitting moment to reflect on the half century of experiences. Successes are many but, also failures abound. East Africa experienced a unique situation because of its strategic geo-political importance (close to Middle East oilfields and on the seaway between east and west through the Suez Canal) the number of colonial powers in east Africa outnumbered those of the rest of the continent;

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all wanted a base along the seaway. It also attracted the attentions of the then superpowers during the cold war soon after independence. The newly independent states were drawn into the cold war ideological rivalry. It is notable that one of the proxy wars during the long standoff between the communists and capitalists was fought in the region (Somalia vs. Ethiopia).It also became the theater of civil wars, some that lasted for several generations and its legacy is still with us today. The consequences of these are the lack of cooperation and non integration in the region. The tensions created undermined and eventually collapsed the east African community,

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with its array of common services (transport, communication, education etc) which, hitherto was the most advanced integrated place in the world was lost till the recent revival of the organization.

It also drove a wedge between neighbors as borders became the focus of security operations. The legacy created includes proliferation of small arms, resultant cattle rustling and increased in crime. Compounded by porous borders, it has become apparent that peace and security can only be found within Regional Corporation.

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Colonialism also bequeaths the regional states with economic, political and social frameworks that are designed to be aligned to the metropolis complete with different official languages. For instance till recently they were no direct flights between east and West Africa. Travelers between the regions have to transit through Europe. Nonmarket factors such as macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income, labor, and developmental), are all different and there was little attempt to harmonies them. Infrastructure to support trade was non-existent at the border. In most cases the insecurity at the frontier mainly encouraged by thin government presence encourages contraband culture with resultant violence.

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The region had the distinction of having a Failed state (Somalia) with total state collapse and fragmentation. It is also in the east African region where secessions have taken place (Eretria and south Sudan).Even the more stable states had experienced political violence sometimes. The region held the distinction of hosting the largest refugee population till the advent of the Arab spring. Terrorism/piracy have replaced the old cold war situation mainly for the same reasons, the waters off the Indian Ocean and the red sea became very dangerous recently threatening to undermine international trade.

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Famine had in the past been experienced in the region, the most notable was in Ethiopia (1973-74 and 1984, Somalia 2011) In the post cold war era one Inter-state conflict had been fought (Ethiopia vs. Eretria) the likelihood of a such political events occurring may reduce the desirability of investment by reducing its anticipated returns and Governments may face complications in their ability to execute diplomatic, military or other initiatives as a result of political risk.

Where are we now?

An African adage goes that “when two elephants fight, the grass wills sufer”.while the cold war was on other pressing regional issues took a back seat, but, at the end of the cold war attention was given to regional issues. To tackle drought, famine and desertification IGAD was formed. The EAC was revived.OAU was re launched as AU and this created a fundamental shift in philosophy, firstly, the continent have taken a position that governments cannot be changed through violence. This has reduced coups and armed insurrections. Secondly, the OAU Doctrine of non-interference in internal affairs of states has been modified in line with international position of R2P.

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Neighbors and the world realized they cannot ignore Somalia. The regional states realized that without cooperation they cannot tackle peace and security issues. IGAD took a lead in Sudan and Somalia peace process. Neighbors are now paying attention to problems in their neighborhood. Now most people believe Africa is rising and the acceptance that African problems can have African solution has gained currency. African citizens expect high standard of performance and accountability from their governments and self confidence of Africa is established. Today, Africans are effective negotiators on the global stage.

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Trade reforms are well underway in all regional states and there are robust debates on being competitive and necessity of removal of trade barriers. Today, states are working to reduce the time it takes to register businesses and are deploying technologies in some cases lead the world (m-pesa, Dahabshill).African pursuit of sound policies is vindicated by the many states in the region having double digit growth over the last decade. The most surprising is Somalia where political collapse did not wipe out its economic life, in the more stable parts the business community had striked a first in the region i.e. telecommunications, money transfer and mobile telephony.

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The value of inter regional trade has been realized and the foremost champions are the regional heads of states and governments. Regional integration infrastructure between states is being launched jointly. Efficiency is increasing, for instance containers move from Mombasa to Kampala in four days whereas before they take eighteen days. Ethiopia-Djibouti-high speed trains-----Barbara corridor. LAPSSET----Standard gauge railway. Regional business is leading the way in integrating the region with support of all states by establishing across the region. Financial services is following suit. Educational institutions are establishing across various states.

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Investments in Peace and security are growing in the region. States in the region have realized that they can be no development without peace and security. Regional cooperation to enhance security at the border is now a regular feature of these security efforts. Terrorism has now become a major threat in the region. Two decades of civil war in Somalia, mostly ignored by the international community and neighbors alike had given room for terrorism to take root. However, the biggest concern remains the large youthful population in the region whose energy must be gainfully and positively channeled to spur economic development.

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These require deliberate policy to place the youth on the correct path. Whether the youth will be an asset or liability depends on the states. With the threat of terrorism in the region, lessons can be drawn from other regions on the consequences of inaction on the youth issues. On the governance front the trend has been Decentralization and federalism. Four states in the region are federal republics (Ethiopia, Sudan, south Sudan, and Somalia)the rest have adopted a devolved system of government. Like all human social formations both of the two systems have pros and cons. one of the major positive sides is the contribution to stability by dispersing resources and decision making across the states.

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This means that large sections of citizens have a stake in the system. It also contributes to citizen’s participation in the affairs of the state and Democratization will be enhanced. With the Rise of middle class in the states the stability of the states will be ensured. In a decentralized system political risks might look at how the local political climate in a given region may affect a business endeavor. Micro political risks pose both portfolio investment and foreign direct investment risks that can change the overall suitability of a destination for investment. On the other hand the relative contribution of the business firms to the local economy is a big factor on support they get at local level.

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A low level of political risk in a given country does not necessarily correspond to a high degree of political freedom. Long-term assessments of political risk must account for the danger that a politically oppressive environment is only stable as long as top-down control is maintained and citizens prevented from a free exchange of ideas and goods with the outside world. Mineral and petroleum Resource discoveries across the region have been made in recent years. These are a big opportunity for the region. But, caution must be taken not to fall in what has been termed the resource curse. The lesson of history is freely available, there is no reason why policy makers should not take advantage of the lessons of history.

Where are we going?

The investments in early warning systems are growing in the region. IGAD has over the years invested in climate prediction and forecasts, conflict early warning and response mechanism and tracks policy issues of concern at regional level for member states. The coupling of local, national, and regional political events often means that events at the local level may have follow-on effects for stakeholders on a macro-level.

The level of reform is impressive, already, states have accelerated the integration principles, soon free movement of goods and peoples will be realized, terror will be defeated, and the region will take its rightful place in the community of nations. The East Africans feel one and act one.

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How to get politics right especially at election time has been a feature of IGAD within member states. The kind of credibility earned by IGAD allows it to host dialogue when things go wrong. Member states are always active, our heads of states both at the summit and as individuals have shown personal commitments to conflict resolution measures. Risk includes government currency actions, regulatory changes, sovereign credit defaults, endemic corruption, and government composition changes. They have shown the willingness to handle this in a robust fashion. Where things are not moving at a brisk pace, the citizens are there to spur action. This is an irreversible trend where citizens and media demand explanations.

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It is said that experience is a good teacher, the experience gained by states have made them adopt private sector principles. Governments are debating cutting waste, red tapes, and take firm control of security. They have realized that Political risk analysis is also relevant for government project decision-making, whereby government initiatives (be they diplomatic or military or other) may be complicated as a result of political risk. Government political risk analysis requires a keen understanding of politics and policy that includes both the client government as well as the host government of the activity. Political risk for business may involve understanding the host government and how its actions and attitudes can affect a business initiative.

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East Africa will not stand aside when a neighbor falls on hard times, the attitude that we are our brother’s keeper is firmly entrenched. With this support, political risk will be manageable. As our heads of states always state singularly and collectively, “East Africa is open for business”. Not that problems are over, but, they are mechanisms, resources, and the will to manage them.