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Sunday, April 22, 2012

Massachusetts MetroSouth Chamber of Commerce visits Cape Verde

Even though Africa is among the newly emerging economic zones around the world, it is not the top destination for American business people or US investors. Instead, the US is late to the party while the likes of China, Europe, Russia and India have already invested hundreds of billions. American sentiments, however, may be changing. Rather than seeing Africa as a single and unique entity in need of donations for starving children, local business groups in the US are starting to understand, through the connections of immigrants from various parts of Africa, that Africa is a multicolored fabric full of economic opportunities.

One example of how this works is highlighted by the visit (April 18-24, 2011)  of a trade mission lead by the Metrosouth Chamber of Commerce, to Cape Verde, West Africa which is considered one of the most stable democracies in sub-Saharan Africa. The business group included bankers, health care professionals, university administrators, and construction companies among others. It is interesting to note that the Chamber primarily represents businesses in the Greater Brockton area where about 25-30% of the population is of Cape Verdean descent.

This is certainly a step in the right direction and fully supported by the author of this blog. The news was covered by the local Cape Verdean media, although the focus was understandably on the Cape Verdean immigrants in the group. There was some interesting commentary by local Cape Verdeans which I make a point of highlighting in this article because some of the comments raised some very relevant issues that are important for US investors to be aware of:

  1. Is this a broad US initiative or a unique local initiative? It is clear that this is a local initiative on the part of the Brockton-based Chamber. However, it is well to note that as in US politics, all US business is local, despite the broader national context. So for example, national US chains like Walmart, Starbucks and others all have local presences and simply use a national formula across each location with consideration for local issues and the community they serve in each location. So while the action happens on a local level as in the case of the Brockton chamber, the broader context effectively means that others are watching. So this initiative could lead other chambers to follow, especially in US locations with Cape Verdean populations (most of which are in New England. I would expect, that the business Chambers in Boston, New Bedford, and Providence will be looking to see what results emerge from such a visit.
  2. Brockton is home to tens of thousands of Cape Verdeans ... what have these business leaders done to improve the lives of Cape Verdean immigrants living in these communities befire venturing to improve the lives of Cape Verdeans in Cape Verde? It is a powerful question and one that each business owner in the mission should think about. There is perhaps no better example of how some of these businesses have impacted the local Cape Verdean immigrant community, in particular HarborOne, the Community Bank. But the point is that Cape Verdeans in Cape Verde are very much in touch with there immigrant relatives in Boston and they are not unaware of how these same businesses are conducting themselves in their local US communities.
  3. Some of the commentary pointedly asked about the nature of the business ideas that were being brought to the table. For example, one entrepreneur wanted to start a Pharmacy. I will assume that the entrepreneur involved has the relevant background in this area. But the reader's point was whether the entrepreneur realizes that Cape Verde already has pharmacies. That is not to say that there is not room for another entrant in the market, but it does make you wonder how much the various participants are aware of the actual markets in Cape Verde, and the pros and cons for the particular idea. In other words, to what extent are the business people making a business case for their ideas to work in Cape Verde. It is all well and good to have ideas, but be sure that they are feasible in all regards.
  4. An issue was also raised about the "quality" of the investments. Brockton has a reputation in Massachusetts of not being the most wholesome of the cities in New England and was compared to an area in Praia that is not one of Praia's pride and joy. So naturally the question arises as to the financial capability of the investors. We are not talking about New York investment bankers or Warren Buffet here. While I will assert that as in any city, there are good parts and not-so-good parts - Brockton is no exception - the underlying theme here is the financing. Do these entrepreneurs have the financial capacity to make a real impact on Cape Verde with proposed projects and if not, where will they get the financing?
  5. Language. While this was not explicitly raised by the readers, all of the comments are in the local Kriolu language or in the official Portuguese. Besides the Cape Verdean immigrants among them, how many of these business people speak nothing but English. In other words, can they even understand the comments. The impact of language (and culture) is tremendous. What efforts are being made by the Americans to communicate with their prospective customers in Cape Verde. The Europeans have a substantial advantage in this regard.
The above discussion suggests that it is not sufficient to simply say that you are on a trade mission, there are important issues that are in the line of sight of the local population in Cape Verde that must certainly be kept in the collective conscious of the members of the visiting team.

Subsidy Removal Cartoon (c) Business Day
There are also some additional issues that are not covered in the readers' commentary. These issues are at a different level of consideration and in keeping with the nature of this blog. I choose to come at these issues from a broader macro-economic platform So here are my additional themes:
  • The Ease of Doing Business in Cape Verde: While improvements have been made over the years, Cape Verde is not among the easiest of places to do business. There are many obstacles along the path, some of which may be deliberately placed. For example, Cape Verde is a small nation where everyone has friends or family in high places. Sometime, a sticking point along the way may be a family member of an official who may be competing directly with the investor for the same interests. Guess who wins that stalemate? And there are real regulatory obstacles such as Cape Verde's labor laws (isn't it pretty obvious that if workers' rights always trump employers' rights, there won't be many employers? Minister of Employment, please take note). This is just one of many challenges in doing business with the ease most Americans have come to expect. However, despite the obstacles, it is possible to get things done, but a certain tenacity is required of on the part of investors, both foreign and local.
  • Basic Infrastructure: On the Saturday (April 21st) that the trade mission left Santiago for Sao Vicente and Sal, the capital city of Praia was hit by an electric blackout that lasted 15-18 hours. The article covering the blackout appeared in the same news coverage as the visitors trip. Such irony in real life is hard to make up! But the point is this, do the American business entrepreneurs understand the challenges with basic infrastructure that they will experience in Cape Verde. It is in the infrastructure where most of the opportunities are to be found because it is such a challenge: energy, water, agriculture, transportation, health, and finance are the keys in my opinion. If the capital is not looking for homes in these areas, then the returns on the capital will be suspect. Some of the visitors had these areas in mind. They must avoid missing the boat in terms of focusing on areas that are not feasible, or in terms of not analyzing the market to determine where the real needs are and thus where the real opportunities lie.
  • Disruptive Price Controls: I will guarantee you that not one of the non-Cape Verdean visitors in the American group is aware that the prices of the four pillars of infrastructure - water, energy, fuel and transportation - are regulated by ARE, Cape Verde's price regulator. Why do I guarantee this? Because, it is well accepted by economists the world over that the price controls are a sure-fire way to destroy an economy and since Cape Verde boasts of its status of an economic beacon in Africa, no American would expect that price controls would be part of Cape Verde's economic structure. Most Americans are also familiar with price controls which were practiced in the USA with disastrous economic consequences during the oil-crisis in the 70s. These infrastructure pillars are critical to the economy because they affect just about everything else. You need energy and fuel to power a business. The reason price controls have never worked and never will is because they disturb the equilibrium of supply and demand and disrupt competitive forces. They are not simply disruptive but they are devastating when practiced even in limited fashion. It acts like a cancer on the economy. However, it is not clear that there are any true economists (not simply students but actual practicioners) in Cape Verde since the practice of price regulation would have been long-ago been disbanded in this country. At best, true capitalists would invest with extreme fear in any country where price controls are so extensively practiced. At worst, for Cape Verde, they would take there money elsewhere.
  • Economic Linkages (or Lack Thereof): As with the natural linkages between supply and demand that are disrupted by price controls with devastating consequences, America investors should also be aware of the lure of tourism as practiced in Cape Verde. Tourism is touted as Cape Verde's economic driver. This is true today. There has been a massive inflow of capital into construction of hotels, second homes, and other activity related to tourism. In 2011, there were well over 400,000 tourists visiting Cape Verde. However, it is also being touted as Cape Verde's economic savior...but this is false. The tourism that is practiced in Cape Verde is "mass tourism" where hoardes of visitors are sequestered into all inclusive hotels on two islands - Sal and Boa Vista. The tourists spend virtually nothing outside the foreign-owned establishments. Low quality jobs are created, yet they are still jobs. But prices for locals on these islands are driven sky high. In the short term, there is a lot of money to be made by these investors. But what does this do for Cape Verde in the long term? I would argue that very little real long-term economic benefits are being reaped. What happens if and when the flow of tourists turns downward? What happens when the real estate markets turn south (there has already been a massive negative impact in past years with the down turn in global real estate). Few of the other islands have benefit from this tourism because little foreign capital is finding its way to the other islands. The Cape Verde government itself is missing opportunities to reap fees for the exploitation of the tourists islands which can then be used to inject development capital into the other islands...imagine that Cape Verde does not even charge room taxes! Nor departure taxes. Every other tourist destination in the world extracts its fees. But not Cape Verde. American investors should avoid the false lure of mass tourism because only seeds of resentment are planted in markets where no real lasting contribution is made to the economy. I would not want to be on the receiving end of the crops that are reaped in the longer term.
  • Financial Infrastructure: While Cape Verde has a financial market, Bolsa de Valores, it is not an actively traded market. There are three lessons here for American investors. First, raising the finances to invest in projects in Cape Verde means the financing will have to be raised in the US from sources which may be totally unfamiliar with Cape Verde (Cape Verdean banks may be a source of limited funds but they are small and naturally, very risk averse with extremely high loan rates). So you will need to educate others. Second, Cape Verde could be viewed as a stepping stone into other part of aware of other African markets especially the financial markets which are much more robust that Cape Verde, these could be sources of funds for broader African level investments including Cape Verdean initiatives. You should become more educated about the broader context of Africa. Finally, Cape Verde needs to create a "big bang" to get its financial markets running...clearly an injection of say $20 million US could create a huge fund that may be used to fund projects and achieve high rates of return for investors (assuming the government can eliminate the obstacles that real put a damper on Cape Verde's potential economic growth). Here is an amazing video (in English) that will give you a flavor of what I'm talking about.
The lesson in all of this for investors regardless of origin, and my American friends in particular - when you invest in Cape Verde, be sure you do so with your eyes wide open; consult with Americans that have been here before you - you are not the first - and learn from their experiences as you will have a uniquely American perspective on the actual opportunities and what it will take to capitalize on them; consult with other foreign investors for a global perspective on the issues and challenges associated with opportunities in Cape Verde; and at the end of the day, make sure your investment has a social impact.

And, please learn the language or at least try. Economics without a soul is not economics at all.


Rui Cardoso-Santos said...

I would like to think that, at least in part, MetroSouth's visit to Cape Verde is a result of the visit I made to MetroSouth last year, as Chairman and CEO of Cape Verde Investment Promotion Agency. My goal at the time was twofold: 1) To build awareness of our country's investment opportunities in American communities where Capeverdean participation and contributions were significant (cultural ties can be very important in business), and 2) to identify and target companies that by virtue of their dimension (smaller to medium companies, in US terms) and growth strategies could be a good match for the opportunities presented by Cape Verde's domestic markets and those opportunities that could very well be pursued by using Cape Verde as a gateway to West Africa. Now, as a self-employed strategic advisor, I could provide support US companies or investors looking at opportunities in Cape Verde and, beyond, in West Africa.

Angelo said...

Hi Rui,

Thank you for your comment. Your visit to the Chamber last year - I presume it was during your visit to the Hello Cabo Verde Expo - may have helped increase the level of awareness of Cape Verde on the part of the MetroSouth chamber.

However, I am curious and have never received a response regarding the lack of follow through by Cabo Verde Investimentos on direct expressions of interest by US investors and businesses who approached CVI with various projects.

I wish you the best in your new endeavor as a consultant. Hopefully your US clients will be better served than they were by Cabo Verde Investimentos.

Rui Cardoso-Santos said...

Hi, Angelo. Yes, my visit to MetroSouth was on the margin on Hello Cape Verde. I left CVI about one and half months after my return. By that time, and to my knowledge, there were no unanswered requests from any US investors. Do you know which investors did not get a response from CVI? Maybe I could help?

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