Africa-globe

My teacher John Davies was a fantastic fellow. He always knew how to disambiguate what was a difficult subject. JR (as we fondly called him) was fascinated by how financial markets behaved. He would spend the entire lesson writing formulae to show us how to construct an investment portfolio, or how to price a call or put option. The amazing thing is he would make us understand what he was talking about, and we grew to love it. I can vividly recall his classes, thirty odd years hence.

One of his pet theories was something he called a ‘money machine’. While teaching us about the efficient market hypothesis (there are hardly any efficient markets), he would admonish us that there was no such thing as a ‘money machine’. If indeed there was one, those who owned it would stand to make a lot of money by simply ‘minting’ more and more of the same. But in time, others would figure out how to make the same money machine and would also ‘print more money’, thereby bringing the price down.

Closer home, if you want to understand what I mean by a ‘money machine’, think of any new innovation. Think of the first fast food ‘takeaway’ in Kampala. The guy who came up with the idea must have made lots of money. But in short order, others jumped onto the bandwagon and the ‘money machine’ effect was lost. This is because barriers to entry were overcome easily. You can think of salons, mobile money shops and the like. The only way you can now make money from one of these businesses is if you up your service, are more efficient and give 110% effort to stay ahead of the pack.

Which brings me to the market for ‘foreign investors’ whom our government seems to be fascinated with. First there is such a thing as a market for investors (lets ignore that silly bit about foreign). Investors have one thing that they offer, and that is capital. But investors are risk averse so they will only invest in a place when they are sure that their risks are covered. But that is not enough for them to go and invest in a backwater because there is a pecking order for capital. If you want to understand how that pecking order works, look at for instance the World Bank’s ‘Doing Business’ reports. A smart investor will know more about where it is risky to invest and where it is not. The ‘Doing Business 2018’ report ranks South Sudan as no 187 out of 190 countries. Uganda and UAE are ranked 122 and 21 respectively. Based on the pecking order approach, capital will first move to the UAE before it moves to Uganda and then South Sudan. Even within that pecking order, the UAE must first reach a saturation point for any sector before the next best option is considered. That is how markets for resources work.

Similarly, if one were competing for consultants with a more advanced country (which is able to offer more attractive terms), the tendency is that the less endowed country would come of far worse. So probably the UAE would get better consultants than Uganda on any aspect of business. That is how markets work.

What then is the lesson for us? The lesson is that if you want to attract honest investors, improve the business environment. That is the most critical incentive capital needs. On the contrary giving out freebies like land, tax holidays and the like while failing to ensure that there is a legal system that works to protect property rights is a waste of time. Any country can give out land and tax holidays.  Genuine investors have the market figured. So the next time you shake hands with a  ‘foreign investor’ at state house, count your fingers after the act. You are probably dealing with a con.

Samuel Sejjaaka is country Team Leader at Abacus Business School. @samuelsejjaaka