Book review: Improvisational economies and a globalized building

Robert Neuwirth is bringing new insights to familiar (for him, unfamiliar for most of us) territory in his book, “Stealth of Nations“. His previous work, “Shadow Cities” was a plea to take squatter cities and informal settlements seriously, rather than dismissing them as slums. (My review of Shadow Cities is here.) His mission in this new book is for us to reconsider the “informal economy”, which he rebrands “System D”.

“System D” is an abbreviation for “l’economie de la débrouillardise”, a tern coined in French-speaking Africa to refer to a system of “resourceful and ingenious” people who make their livings outside the formal, taxed and regulated economy. Neuwirth rejects the term “informal” because the coiner of that phrase, British anthropologist Keith Hart, included the criminal underground in his term, “the informal economy”. Neuwirth wants to celebrate the energy and ingenuity of people who make their living outside formal economic structure, but distinguish those he celebrates from those who are selling drugs or running prostitution rings. The heroes of System D may avoid taxes, smuggle goods or operate without permits, but Neuwirth sees them not as criminals but as hardworking people trying to make a living in systems that are broken and corrupt.

Neuwirth’s great strength is as a traveler and storyteller. Like “Shadow Cities”, “Stealth of Nation” is packed chock full with stories from the communities he’s visited in Brazil, Paraguay, Nigeria, China and the United States. We meet street merchants selling pens and cakes in São Paolo, a handbag manufacturer in Guangzhou and the baker of high-end (if unlicensed) olive oil cake in New York City. He takes a particularly deep dive in Lagos, a megalopolis he describes as “a System D city”, where virtually no infrastructures are provided by the state, and where basic services like power, drinking water and public transit are provided by private industry and workers’ collectives, who build systems that function with limited licensing, taxation or oversight.

This wealth of narratives helps make the case that System D is massive and pervasive. Working from numbers from the World Bank and using the insights of Austrian economist Friedrich Schneider, Neuwirth offers an estimate that System D is responsible for roughly $10 trillion in goods and services bought and sold annually. That makes “Bazaristan” the second largest economy in the world, behind the United States. He further argues that System D provides employment for a majority of adults in many developing nations. Whether or not we approve of the activities of System D, Neuwirth argues, we need to take it seriously because of the large number of individuals it impacts.

Neuwirth’s inquiry is extremely broad in scope, both in terms of the subjects he considers and the timescale he examines. Chapters look at phenomena like piracy and counterfeit goods, and smuggling across international borders, which Neuwirth examines primarily via Paraguay’s Ciudad del Este, a urban center that exists primarily so Brazilian citizens – and merchants – can avoid paying taxes. To provide a historical context for these sorts of trade, Neuwirth calls on classical economists, including Adam Smith, as well as histories from the 18th century to demonstrate the ongoing demonization and dismissal of System D merchants. For me, these excursions into the past are less enjoyable that the wealth of contemporary examples he provides, though they’re helpful in establishing that System D is a very old system as well as a new one.

The danger in both of Neuwirth’s books is that he loves his subject so much, he occasionally celebrates it uncritically. “Shadow Cities” occasionally read to me as a marketing brochure for Brazilian favelas, suggesting we abandon traditional urban planning and invite urban entrepreneurs to rewire the electrical grid to meet their needs. “Stealth of Nations” is more careful, and Neuwirth engages with the ways in which Lagos can be a nightmare for the people who live there, not just a creative laboratory for urban innovation. At the same time, he urges us to take seriously the miracle that Lagos works at all, a miracle that can be hard to see underneath the diesel smog, caught in an hours-long go-slow.

This appreciation for the complex systems that compose System D can push Neuwirth towards a sort of conservatism that’s familiar to readers of Jane Jacobs. Neuwirth’s Robert Moses is Lagos State governor Babatunde Fashola, who Neuwirth lambasts for clearing street merchants from busy intersections and setting up formalized markets in inconveniently located parts of the city. Neuwirth is right to point out that Fashola, and other urban planners, have a tendency to undervalue the contributions of street merchants, and tend to propose unworkable alternatives to current systems. But celebrating contemporary Lagos in the ways that Jacobs celebrated the Lower East Side seems to miss two critical points. First, to the extent that Lagos works right now, it just barely works – Neuwirth acknowledges as much when he points out that some of Lagos’s most impenetrable traffic jams are caused by the tendency of merchants to turn roadways into markets. Second, Lagos is growing at a ferocious pace, and Fashola seems to be taking seriously the challenge of allowing the city to continue functioning as a megalopolis, likely to soon be one of the world’s largest cities. One possible response to Neuwirth’s criticism is to point out that Fashola was just re-elected with 81% of the vote in a poll most observers saw as free and fair.

Neuwirth is a journalist and documentarian, not an economist or an urban planner, and it may be unreasonable to ask him to solve the thorny problem of bringing System D and the formal economy into closer partnership. Neuwirth examines Hernando de Soto’s work on formalizing System D through property rights. De Soto’s most helpful intervention is the observation that the poor have wealth – homes, businesses, assets – but few ways to access them. By creating a paper trail, establishing ownership over houses and other real estate, de Soto argues that the poor can access their wealth, borrowing against their homes and using the loans to start new businesses. Neuwirth looks at de Soto’s native Peru and concludes that formalization hasn’t done much to help System D. The problem is the banks, who are perfectly willing to accept deposits from System D entrepreneurs, but unwilling to lend to them. Neuwirth’s anger is rightly placed, and his solution – that communities and governments need to demand that banks serve the communities they are located in, not just their shareholders – is timely and correct, even if difficult to implement.

The solutions Neuwirth offers for strengthening and legitimating System D are, by his own admission, modest in scope. Merchants should work together to regulate their activities, settling disputes within mediation mechanisms. They should take responsibility for the physical spaces they inhabit and work to make them clean and safe. They should consider systems that review product safety and ensure the quality of goods sold. Neuwirth isn’t opposed to regulatory involvement in this space – he looks closely at the “pure water” industry in Nigeria, where entrepreneurs drill wells, pump water and purify it under government standards before selling it in single-use sachets to thirsty customers. The system could be a health nightmare if minimum health standards are not enforced. The Lagos government can’t provide clean drinking water to its citizens, so it has found a way to work with System D to ensure that people have water and the water doesn’t kill them – for System D advocates, there’s potential in that story and a model other governments might follow.

But the pure water story also reveals the apparent limits of System D. “Pure water” usually won’t kill you, but it’s an environmental nightmare, as millions of nylon bags clog the Lagos sewers. It’s a wonderful thing that Lagosians can drink safe water, but a system where thousands of school-age girls sell sachets of water because you can’t drink the water out of the pipes isn’t a system any sane planner would advocate for. System D can get Lagos’s citizens to work, but it’s never going to build affordable and environmentally sound public transportation. If merchants follow Neuwirth’s advice, they may collectively buy bigger diesel generators, but they’re unlikely to fix Nigeria’s laughably inadequate power grid.

The people Neuwirth celebrates are – rightly – frustrated by their governments. They avoid paying taxes both because those taxes can be arbitrary and unaffordable, and because they see very few government services in exchange bought with those revenues. But governments need revenues to build infrastructures. And, as economist Paul Collier argues, they need taxes – and need to put those taxes to use in productive ways – in order to have legitimacy. System D seems like a local maximum in an equation – when it works well, it’s amazing what entrepreneurial people can accomplish against impossible odds. But the solutions created are convoluted and incomplete, and it’s reasonable to worry that System D may prevent more formal systems from providing more complete solutions to societal problems.

I don’t actually disagree with Neuwirth on this point – I wrote an essay some years back about incremental infrastructure, an idea I’d had from studying African mobile phone markets, that suggested that systems like power grids and roadways might be built by the cooperation of entrepreneurs when governments failed. My proposal suffers from the same weaknesses I’m criticizing Neuwirth for: it’s hard to see how a collective of merchants builds a railroad, and sometimes a railroad is what’s really needed for economic development.

But that’s an awfully big problem to demand that Neuwirth tackle – if you want to understand precisely how complicated that problem is, try this thought piece from Collier, proposing a possible solution to railroad construction in sub-Saharan Africa. Neuwirth’s job isn’t to solve the problems of System D. What he does – compellingly, readably, engagingly, and frequently, brilliantly – is give the reader a picture of how the world’s economies actually work, and a convincing argument that we need to respect and understand these economic systems. It’s a good read and an important book.

When you pick up Neuwirth’s new book, also consider grabbing a copy of Gordon Mathews’sGhetto at the Center of the World”, a remarkable ethnography of a single building in Hong Kong, Chungking Mansions. Chungking Mansions is a nondescript and somewhat run-down tower block in one of the more crowded corners of Kowloon. Inside is a remarkable market, where Chinese, Pakistani and sub-Saharan African merchants interact with one another in a microcosm of global trade. Mathews refers to this economic phenomenon as “low-end globalization”, and his book unpacks the history, mechanics, personalities and motivations in a way that is absolutely fascinating.

Chungking Mansions exists because of a peculiarity of Hong Kong’s visa policies. Tourist visas to Hong Kong are easily obtained by citizens of many nations – residents of countries like Ghana, Nigeria and Kenya often have difficulty obtaining visas to Europe, the US or China, but are able to travel to Hong Kong for anywhere between 7 and 90 days, depending on the discretion of the immigration officer. As China became a major manufacturing power, Chungking Mansions became a critical interface between Chinese factories and developing world markets. The upper floors of the building feature low-cost guesthouses that cater primarily to traveling merchants, and restaurants that offer home cooking for the African and South Asian migrants who work out of the building.

On the ground floor, dozens of stalls feature Pakistani merchants selling Chinese-made mobile phones to African middlemen. Mathews documents the trade in intimate detail, explaining the ownership of the individual stalls (they are generally rented from Chinese owners who are rarely present in the building, but have a powerful owner’s association that governs the working on the market), the provenance of the phones sold (including the difference between original phones, 14-day phones – original phones returned to the vendor by dissatisfied customers, good fakes and bad fakes) and the economics of importing phones into sub-Saharan Africa. Mathews posits (without much data to back this claim) that up to half the mobile phones in Africa come through Chungking Market and enter African markets through the luggage of entrepreneurs.

I found Mathews’s account so compelling that Chungking Mansions was my first stop when visiting Hong Kong a few weeks ago. Based on his explanation of Chinese perceptions of the building (as a dangerous place filled with drug addicts and criminals), I expected a much shadier place than I actually found. Chungking Mansions is immediately familiar to anyone who’s bought electronics in the developing world – it’s cleaner and better organized than markets I’ve been to in Nairobi and New Delhi, but in some ways, functionally the same place. Walking through the stalls, I experienced a tesseract, a folding of space that let me move between Hong Kong, Pakistan and West Africa over the course of a few meters. I dropped into one of the few non-phone stores, a clothing store featuring street fashions, including a wide array of Yankee caps. I gave the merchant grief about not stocking Red Sox hats, quickly figured out that he was Ghanaian, greeted him in Twi, and was warmly embraced and invited upstairs for fufu and groundnut soup. It wasn’t at all hard to figure out why Mathews had fallen in love with the place – if you’re interested in how globalization is transforming economies, Chungking Mansions really is one of the centers of the world.

I had the chance to meet Mathews when we lectured together at the University of Hong Kong a few days later. He’s as wonderfully crazy as you’d imagine him to be, and told me that he’d written the book in a bar across the street from his research site. “The key is that the bar has roasted peanuts in the shell. I’d shell a peanut and think, then write a sentence, then sip my beer. That writing pace is just perfect as long as you remain under three beers.” Rarely have I learned so much from a single ethnographer – how to smuggle phones into Ghana in my luggage, the best strategies for overstaying my Hong Kong tourist visa, how to befriend Nepali heroin addicts, and how to pace my writing.

I’ve been pushing Mathews’s book on the ethnographers I know because it’s an amazing example of the power of the deep dive. It’s possible that no one on the planet understands Chungking Mansions as thoroughly as Mathews does based on his decade of research. But his insights are profoundly helpful not just for understanding this one wonderful and strange building, but for understanding globalization as it is actually practiced. Where Neuwirth takes a broad view, considering economies on four different continents, Mathews rarely leaves the confines of a single building and still manages to tell a story that’s global in scope and impact.

Top African Gold Prospects: Brock Salier

Brock Salier Brock Salier, a mining analyst with GMP Securities Europe, sees plenty of gold coming out of Africa in the coming months and years. In this exclusive Gold Report interview, he says increasing political stability, good geological prospects and governmental recognition of the benefits of mining operations are reasons to look there for growth.

The Gold Report: Brock, you cover many companies based in Africa. What do African countries offer that other jurisdictions do not?

Brock Salier: I would have to say geological prospectivity. African countries are relatively underexplored and underdeveloped. That means African exploration and mining companies have far greater likelihood of discovering new ounces and of expanding production at existing mines.

The other key is sovereign risk, which is relatively good in Africa. We define sovereign risk as the number of assets that have been nationalized or taken away from mining companies. When I compare Africa to Southeast Asia and the former Soviet Union, Africa scores much higher.

TGR: Are brokerages like GMP being forced to look at countries operating in Africa for growth?

BS: Quite the opposite. We have a choice of jurisdictions and we’ve chosen Africa as one of our focus areas. For us, the African asset base is attractive. We see more listed companies operating there and a lot more success stories relative to elsewhere.

TGR: Are there any traditional gold mining countries that you might take a flier on, perhaps Ivory Coast?

BS: Absolutely. We’re actively working in Côte d’Ivoire. Despite recent civil unrest, the country has transitioned to a new democratically elected head of state. The geological prospectivity is so high that mining companies are flooding in. The asset quality is stunning. I would target the Ivory Coast as a favorite investment location.

Liberia and Sierra Leone are relatively underexplored compared to Ghana and Burkina Faso, both of which have democratically elected heads of state. Despite very recent civil unrest, Liberia and Sierra Leone are now stable, open for investing and have some really exciting targets.

Neighboring Ghana is much better known for its gold, yet it’s also much more explored and the explorers have smaller licenses; the producing assets are more mature. The Democratic Republic of Congo (DRC), which has had an up-and-down history, is one of our favorite investment destinations because of the geological prospectivity.

TGR: What accounts for the increased stability in West Africa and what are your preferred jurisdictions there?

BS: Wealth generation has played a role in the region’s stability. The wealth generated in Ghana in the last 20 years has made many of that country’s neighbors want to emulate its success. To have ongoing, direct foreign investment, you need a sustained, peaceful state. There is an incentive for them to push toward stability.

From a geological perspective, my preferred destinations are Mali, the Kénieba inlier in Senegal and Burkina Faso. The Ivory Coast is another exciting destination, given its geological proximity to the highly mineralized Ghanaian gold belts and historic underinvestment. In the last 12 months, Liberia has seen a huge influx of gold juniors. I wouldn’t be surprised to see exploration success increasing there.

TGR: In some regions, we are seeing project nationalization in various forms. Will that find its way into the African countries?

BS: I genuinely believe nationalization is not a major issue in Africa. Looking at the historic incidence of nationalization, it’s not common in Africa. It did happen in the DRC with First Quantum Minerals Ltd. (FM:TSX). In the DRC’s case, there is such a strong desire to create an environment suitable for foreign investment, it genuinely does not want to send a message of nationalization to the foreign community.

TGR: In your company models, you typically value gold companies using a gold price of $1,575/ounce (oz) of production and $80/oz in the ground. The gold spot price has been volatile lately, and your price per ounce of production might be considered high by some analysts. Do you plan to make any adjustments?

BS: It’s important to point out that we use a gold price assumption rather than a forecast. We typically choose $1,575/oz as a stable price and then look at the sensitivity. We suggest that investors take their own view on the gold price.

Having spent a lot of time on new development projects in Africa, I see a lot of support at $1,100–1,200/oz because of supply constraints. The assets are maturing. The grades are falling. The diesel price is escalating, along with taxes and royalties in some places. Costs are higher.

TGR: Brokerages in Toronto typically use a 5% discount rate for companies operating in Canada. You use a discount rate of 6% for companies operating in Africa. Does that extra 1% account for the additional risk in Africa?

BS: Ironically, most European brokerages use a 10% discount rate for African gold projects. We use 10% for base metal projects, but 6% for gold projects because gold companies are far more scalable than other commodities. There are more deposits to be found. It’s easy to develop gold deposits.

In response to the 5% vs. 6% question, we capture that difference in net asset value (NAV) multiples. When we value African gold companies, we use a variety of NAV multiples. While we use a higher discount rate, we account for that by using a different NAV multiple.

The key thing for any investor looking at a gold analyst’s research is to make sure the discount rate and the gold price are consistent. We use the same discount rate and gold price across the firm. Then we look at our valuations relative to our coverage universe.

TGR: Would you consider your model aggressive?

BS: I would say not, because of the huge support in the gold price and the huge demand for gold mining companies. Gold equities are outperforming other mining equities because there is a lot of investment support and gold companies are the easiest to understand and take into production. They’re the most scalable. On that basis, gold equities definitely trade at a premium to many base metal and bulk commodity producers.

TGR: Let’s get into your coverage sector. You cover African Barrick Gold Plc (ABG:LSE), which operates the Bulyanhulu gold mine in Tanzania. In your Oct. 20 research report, you basically said that African Barrick is seeking a takeover target. What sort of catalyst would that be for the company’s shares?

BS: The key catalyst to any gold producer is increased production on an accretive basis, meaning increased production on a per-share basis. African Barrick struggled to increase production in Tanzania with mature assets. Given its strong cash balance, I believe the company will be able to buy production without issuing new shares. That could prove to be a tremendous, positive catalyst for the stock.

TGR: Which juniors would be likely targets?

BS: We believe a company like African Barrick will look for juniors in a stable country, with numerous future growth opportunities, existing production and growth projects. As outlined in our initiation report the two that stand out are Teranga Gold Corp. (TGZ:TSX; TGZ:ASX) and Avocet Mining Plc (AVM:LSE). Both have existing production in the 120–250 thousand ounces per year (Koz/year) range, lots of exploration upside and, most importantly, would be affordable with capitalizations well under $1 billion (B).

TGR: Will African Barrick ever get to the large-cap producer status of some of African players like IAMGOLD Corp. (IMG:TSX; IAG:NYSE) or Gold Fields Ltd. (GFI:NYSE)?

BS: If it did acquire a junior producing 200 Koz/year, production could very quickly lift over 1 million ounces per year (Moz/year). That immediately takes it to production well above a company like Randgold Resources Ltd. (GOLD:NASDAQ), a far higher-rated peer in London.

Looking to the future, it would be all about additional acquisitions and exploration. We’ll have to wait and see what acquisition strategy it executes.

TGR: Let’s move on to Banro Corporation (BAA:TSX; BAA:NYSE), another Canada-domiciled company. Banro reported its first gold at Twangiza in early October. Banro is a preferred stock you cover. What are the catalysts for Banro?

BS: Banro is an extremely lucky developer and producer in that, in addition to the Twangiza mine, it has two large, undeveloped gold assets that, geologically, should become mines: Namoya and Lugushwa.

In our recent initiation we noted that the key catalysts for Banro are taking its second and third projects, Namoya and Lugushwa, into production. In the short term, the milestones are those that enable progress toward production. We expect the final engineering study for Namoya around year-end, with construction to start early next year. Lugushwa is expected to release a revised resource around year-end and we expect a preliminary economic assessment shortly thereafter. That means analysts will be able to value Lugushwa on a discounted cash flow (DCF) basis for the first time.

TGR: It will take about $120 million (M) in capital expenditures (capex) to bring Namoya into development. When is production slated to start?

BS: We expect the company will start construction around March 2012. There will be a 12-month build, so it can get a targeted first gold pour around March 2013.

TGR: Does Banro have enough money to fund that capex for 12 months?

BS: Namoya’s capex estimate is around $120M. We recently published a report in which we estimate that Twangiza should generate $140M of free cash flow to fund Namoya. Obviously, the budgets are difficult to tie down. But broadly speaking, Banro should be able to cover the capex at Namoya.

TGR: How is production going at Twangiza?

BS: The company has only just announced its first pour; we’ll have to wait and see. When I visited, I was impressed with the engineering team and the design and build, which was being done extremely quickly in an arduous environment. No doubt there will be teething issues, but I’m confident that ramp up should happen in line with target at year-end.

TGR: You mentioned that the DRC nationalized some of First Quantum’s assets, and Banro had its exploration concessions seized back in the early part of the last decade. What kind of relationship does Banro have with the DRC government?

BS: Banro works extremely closely with the government. The government is very happy to see new mines in the eastern part of the country for the first time in modern history and the first modern gold mine to be commissioned as well. The DRC is seeing a big influx of skills, as well as taxes and royalties being paid. In the long term, driven by the copper industry, the DRC sees how well it can do from mining and how it can help the country. My view is that the government intends to maintain a peaceful outlook and to keep the mining industry going.

TGR: GMP follows exploration companies like Loncor Resources Inc. (LN:TSX.V; LON:NYSE.A), Roxgold Inc. (ROG:TSX.V) and Orezone Gold Corporation (ORE:TSX), plays that are not getting support in the market.

BS: Valuation is very difficult. As a geologist by training, I pick producers where I think the resource is, or has potential to be, big enough to be mined and where the geological conditions support additional discoveries.

Loncor, Roxgold and Orezone have already drilled what will eventually be delineated as mineable projects. All have a very good likelihood of finding new projects, although that is always more speculative.

It is difficult to value an exploration company on a DCF basis, so we use the enterprise-value-per-ounces-delineated method and compare that to the peer group. Most listed African pre-producers trade at an average of $80/oz. Then we put a higher valuation on those deposits that have more readily mineable ore—such as higher grades or open pit mineable—and a lower valuation on those with lower grades or more difficult jurisdictions or mining conditions.

TGR: Loncor is a preferred stock you cover; its Makapela project in the eastern DRC doesn’t have a resource yet. How big do you think that resource could get?

BS: I think Makapela will define more than 1 Moz. The company still has a lot of drilling to do and we should see results in mid-2012.

The beauty of Makapela is that there are almost certainly subparallel zones there. Thinking about the next one to three years, I’m convinced it will find more zones and grow over time. From what we’ve seen so far, the potential for more than 1 Moz is there. And, the grades at Makapela are stunning.

We often use the adage that grade is king, and certainly at 9 grams per ton (g/t) even over the narrowest 4–5 meter (m) width, Makapela is very easily mineable mechanically and economically. That should give good returns.

TGR: How does Makapela compare to projects belonging to Roxgold and Orezone?

BS: It’s very similar to Roxgold’s resources. Roxgold recently found slightly narrower veins, but extremely high grade. It’s very different from the resources you typically find in Africa, which are more likely to be around the 2 g/t range, open pit mining and much larger deposits.

One of Loncor’s advantages is its joint venture with Newmont Mining Corp. (NEM:NYSE). That agreement targets a 5 Moz, lower-grade, perhaps 2–3 g/t, open pit deposit. Between Makapela and the joint agreement, Loncor has a strong twofold strategy.

TGR: And Orezone?

BS: Orezone fits in a new breed of deposits we’re seeing in Burkina Faso, alongside Volta Resources Inc. (VTR:TSX). Those companies have relatively lower grades at 1 g/t, but huge size. All of them have potential for 3–5 Moz. The attraction of those deposits is not the grades, but the sheer scale.

TGR: Very few people know much about Burkina Faso. Can you give us a brief overview of its stability?

BS: I was in Burkina Faso last week. It had issues earlier in the year, when civil unrest in Côte d’Ivoire interrupted the supply chains for staples such as fuel and food into Burkina Faso. As a consequence, food prices went up, and the local populace grew uneasy. Now, the supply lines have been re-established and the populace is very supportive of the long-term head of state, Blaise Compaoré. The mining industry is flying ahead. Burkina Faso is one of the best destinations in Africa to invest in from stability and geological prospectivity bases.

TGR: Some of our readers like base metals plays, and you follow a small copper play in the DRC called Tiger Resources Ltd. (TGS:TSX; TGS:ASX). What brought you to that name?

BS: In this economic climate, I believe it’s important to pick mining stocks that don’t have large, upfront capital requirements. That can often be an insurmountable hurdle if the share markets aren’t open for fundraisers.

We recently initiated coverage on Tiger Resources, which alongside all the copper producers in the DRC, has the advantage of a small, exceptionally high-grade starter resource. For less than $30M capex, the company built a plant producing 30,000 tons per annum of copper in concentrate. Similar to Banro’s expansion model, Tiger self-funds a large component of its expansions. We love the geology of the DRC. We think it’s far more prospective than the much-lower grade copper deposits in Botswana, and for Tiger that means there is a lot more opportunity for Tiger to pursue a merger or acquisition, now that it’s an established producer.

TGR: Do you have any other preferred stocks you would like to share with our readers?

BS: One of my preferred stocks is Sable Mining Africa Ltd. (SBLM:LSE). Its current market cap is $150M. It has a strong balance sheet, $110M back in March. As we outlined in our recent initiation report, it’s about to start drilling on what I think are the most exciting and largest iron ore exploration targets in West Africa. Looking at its two targets in Liberia, I see potential for some of the largest iron ore discoveries to be delineated in the last decade. They are both within 70 kilometers (km) of existing railway, so there is good infrastructure as well.

TGR: That is a significant distance. Will Sable be building rail?

BS: Absolutely. Many of the iron ore deposits being discovered in West Africa are 150km or more from the nearest port or existing rail project. So, while a 70-km railway sounds like a lot, compared to other West African projects, it is far closer than most. The attraction is the potential for in excess of 10 billion tons (Bt) of iron ore, which is a phenomenal amount and more than warrants building 70km of railway.

TGR: Sable also has some coal projects in its portfolio. What can you tell us about those?

BS: Its South African project is almost ready for a bankable feasibility study to fund construction. Its project in Zimbabwe is even more exciting. Its portfolio there has the potential for 4 Bt of thermal coal with coking coal. Although Zimbabwe is going through a period of reform, we believe the current investment climate is suitable for exploration, which enables Sable to undertake exploration and feasibility studies. As such, for Sable investors, the key value lies in the iron ore portfolio.

TGR: What is the upcoming news flow for Sable?

BS: The company has spent some 18 months acquiring projects, undertaking geophysics and establishing road infrastructure to drill the targets. This means there has been limited news flow, but with the drilling starting in January across the iron ore portfolio in Liberia, we expect the news flow will significantly pick up.

TGR: Is there a good spot on the Internet where people can go to see new resource stories coming to market?

BS: It’s very difficult to track. Probably the best source for people in North America is the Producers and Developers of Canada International Convention Trade Show & Investors Exchange, which is a huge attraction for these stories.

TGR: Brock, thank you for your time and insights.

Brock Salier is a mining analyst with GMP Securities Europe.

Business cycle conditions in India: It's mostly cycle, not trend

There is a lot of gloom in India today about the broad-based failure of the UPA strategy of combining left-of-centre populism, fiscal profligacy, theft, and a lack of interest in the foundations of India’s growth. We learn from history that we learn nothing from history; India has clearly learned very little from its escape from the Hindu rate of growth. The moment we got a little bit of growth, the old style socialism and theft reared up again. In one of the many pessimistic articles of this theme, Shekhar Gupta in the Indian Express says:

What is the Hindu Rate of Growth two decades after reform? It certainly can’t be the 2-3 per cent of India’s socialist Brezhnev decades. The new Hindu Rate of Growth is 6 per cent, and on all evidence, from macroeconomic data to the empty billboards of Mumbai, we are headed there next year.

In thinking about GDP growth, it’s always useful to think about both growth and fluctuations. Growth is about the underlying trend growth rate.  In the olden days, this was all you needed to worry about. The economy trundled along at roughly the trend growth rate (the Hindu rate of growth of 3.5 per cent), being kicked up or down by good or bad monsoons. In that period, macroeconomics in India required thinking in completely different ways, when compared with standard Western textbooks.

But from the early 1990s onwards, India changed. The market-oriented reforms, which began with the Janata Party in 1977 and gathered momentum in the 1980s, had started creating a market economy. And every market economy in the world experiences business cycle fluctuations. So, in addition to the trend, we got a cycle about the trend. There were good periods and bad periods, and the story running in there was much like that found in mainstream Western textbooks, with a prominent role being played by profitability, inventories and investment by firms.

From this viewpoint, it’s useful to decompose two elements of what we are seeing after 2009. On one hand, trend growth has been influenced by decisions of the UPA. Any perceptive observer also tends to rage at the lost opportunities, of policy decisions that should have been taken, which would have accelerated trend growth. But the second big story is that of fluctuations. Corporate investment is a major driver of business cycle fluctuations in India, and there has been a certain deceleration in this. This may have set off a downturn.

The bulk of the drama that we’re now seeing, and what will play out in 2012, is business cycle fluctuations. This is about fluctuations, not the trend. When trend growth is 7 per cent, the fluctuations make GDP growth range from 4 per cent to 10 per cent. Even if trend growth does not change by even a bit, business cycle fluctuations can take us from a high of 10 per cent to a low of 4 per cent, which is a huge swing of 6 percentage points.

Many elements of economic policy are pro-cyclical: when times are good, they make things better and when times are bad, they make things worse. The financial system tends to suffer from pro-cyclicality: when times are good, bankers lend exuberantly (thus expanding the boom) and when times are bad, bankers tend to be cautious (thus accentuating the bust). It is important to look for a framework for stabilisation, of tools that will counteract business cycle fluctuations. India has crossed one major milestone, in getting to a floating exchange rate. The floating exchange rate is stabilising, in and of itself. In addition, it opens up the possibility of stabilising monetary policy.

As of today, by and large, I think of both fiscal policy and monetary policy as being part of the problem and not part of the solution. While floating the exchange rate (decisions from 2007 to 2009) opened up the possibility of sound monetary policy, the logical next step did not materialise. As of yet, we do not have a sound monetary policy regime. We’re going to require far-reaching surgery to laws and institutions, in order to craft frameworks for fiscal policy and monetary policy that do stabilisation. Until these changes are made, Indian GDP growth will have the high volatility that is characteristically found in countries with weak institutions.

A lot of our work in the Macro/Finance group at NIPFP is rooted in this conceptual framework. In particular, you might like to see two relatively non-technical articles: New issues in macroeconomic policy and Stabilising the Indian business cycle.

Economic Events on December 12, 2011

At 2:00 PM Eastern time, the Treasury budget for November will be released, providing an account of the federal government’s budget surplus or deficit for that month.