Pirates have a real estate problem and a capital problem. 

We’ve got the capital, now we need the real estate!

Like highwaymen (land pirates) and kidnappers (wilderness pirates), for their business they need a work environment of vast uncharted spaces and complete lawlessness – for which the high seas often serve admirably. 

We’re ordinary fisherman … until we attack you

The pirates’ real estate problem is that, conducting their business in a place of no law – and hence no monetary or economic resources – they must nevertheless equip and base themselves in a place of monetary and economic resources – and hence of some law.  As James Blish put it in Cities in Flight:

And bring your built environment with you

The pirates eventually died out when sailing ships were replaced by fueled ships.  The fueled ships were faster than the sailing vessels – but they couldn’t themselves become pirates because they had to touch civilized ports regularly to coal up.  They could always get food off some uninhabited island, but for coal they had to visit a real port.

– Earthman Come Home, page 292

Aside from a supply problem, pirates also have a capital problem, in that whatever they steal – usually small and portable, like cash, gold, or gems – is valuable only if monetized – and once again, that drives the pirates backs into the realms of law.  These, however, must be different from their equipment bases – the base must be hidden, while the place one spends money has to be part of a lawful society.

There’s gotta be a place to go straight with our money, isn’t there?

Money conversion, in short, is an essence ancillary business to piracy.  You have to convert your loot and booty into legitimate cash, and like any other fencing operation, you’re willing to pay a heavy discount from notional fair value to change your dirty money into clean assets.

Missing from the diagram is how you invest your money

For instance, by buying real estate, which can suck up mountains of cash and turn them into annual revenue streams, with unexpected consequences as reported in this Associated Press story from Yahoo News:

NAIROBI, Kenya – Property prices in Nairobi are soaring, and Somali pirates are getting the blame.

Eastleigh, Nairobi: “Little Mogadishu” – note apartment high-rises for sale

This is bad news and good news.  Bad news directly in that soaring real estate values complicate affordability:

The hike in real estate prices in the Kenyan capital has prompted a public outcry and a government investigation this month into property owned by foreigners.

And bad news indirectly in that acquiring properties probably means the pirates have in fact consolidated their ill-gotten gains:

The investigation follows allegations that millions of dollars in ransom money paid to Somali pirates are being invested in Kenya, Somalia’s southern neighbor and East Africa’s largest economy.

Did piracy provide the construction loan for that high-rise?

 … but good news for civilizing pirates and reducing future piracy.

Even as housing prices have dropped sharply in the United States, prices in Nairobi have seen two- and three-fold increases the last half decade.

“There is suspicion that some of the money that is being collected in piracy is being laundered by purchase of property in several countries, this one being one of them,” said government spokesman Alfred Mutua. “Especially at this time when we are facing global challenges of security such as terrorism and others, it is very important for us to know who is where and who owns what.”

To be crystal clear, I am not condoning piracy – rather, observing that this is a harbinger of declining piracy.  For when pirates start sinking their capital into real estate – which, he reminded his blog readers profoundly, is immovable – they are on their way to going straight.  Turn booty into buildings and you have no choice but to rely on formal government to protect their asset values.  Moreover, while you can carry off your booty, you cannot carry off your real estate.

Portable wealth: where shall we transport it?

The investigation will also help the government catch tax evaders, he said.

Property, being collateral, can be seized.  Al Capone was convicted of tax evasion.

I wouldna been caught if I hadna spent the dough

Kenya may be the most attractive spot for pirates to launder their money because it shares a roughly 500-mile (800-kilometer) border with Somalia and has investment opportunities and a large Somali community of up to 200,000 people, Mutua said.

Investment opportunities abound?

Thus capital flows in an underground river of remittances: smuggle it into Kenya, then use stooges and front men to buy property on your behalf.  Result: asset transfer and asset legitimization.

In a neighborhood of Nairobi now called “Little Mogadishu” because of its Somali community, large business and apartment buildings have sprung up. A similar explosion of real estate development can be seen in higher-income areas of the city.

There’s no point being a pirate if you cannot spend your money and then retire from piracy.  Real estate and homeownership have the essential benefits necessary for retirement: security of tenure, improvability, and economic appreciation.

Somali pirates have been paid more than $100 million in ransoms the last two years (great map here), said Roger Middleton, a piracy expert at the London-based think tank Chatham House.

Jolly Roger Middleton thinks it’s $100m

That’s a lot of treasure to bury.  Income-producing real estate is a great place to bury it.

The average ransom is also up, from $1 million per vessel a year ago to about $2 million today.

In prior ages, pirates either had sovereign protection (e.g. Sir Francis Drake) or sought to cache their treasure far out of sight, to return to it later when they had rehabilitated their image or reinvented themselves as gentlemen. 

“Letter of marque” sounds much more distinguished, doesn’t it?

The Somali pirates also have their own sovereign protection, which they undoubtedly buy:

Kenya also does not have stringent laws against money laundering, though a bill to curb the practice is being debated in parliament. The U.S. State Department in its annual report by the Bureau of International Narcotics and Law Enforcement Affairs describes Kenya as major money laundering country.

The Pirate’s Dilemma – how do I legitimize what I have illegitimately obtained? – led to the irony of vast treasures so well hidden they were permanently lost.

Some day, lad, all this will be legal

Pirates in Somalia say they invest their ransom money outside their war-torn country, including in Kenya. One pirate who gave his name as Osman Afrah said he bought three trucks that transport goods across East Africa.  

From preying on transporters to becoming a transporter himself.  Set a thief …

A second pirate, who only gave his name as Abdulle, said he’s investing in Kenya in preparation for leaving the pirate trade.

Crime is a desperation anti-poverty strategy because the risks are so great.  No wonder rational criminals make their nest egg, then get out of the business as fast as they can. 

Making money from this …

… is much safer than making it from this

They also diversify:

“Pirates have money not only in Nairobi but also other places like Dubai, Djibouti and others,” said Abdulle. “I have invested through my brother, who is representing me, in Nairobi. He’s got a big shop that sells clothes and general merchandise, so my future lies there, not in the piracy industry.”

We have to see piracy as economic desperation. 

Not the typical real estate risk, is it?

This does not exculpate it but does explain it and suggest that reducing chronic structural poverty can also reduce piracy.

The investigation has drawn angry reactions from the Somali community, and business leaders said Somalis would not cooperate with the investigation and may go to court to try to stop it.

“This is very, very unfair discrimination,” said Hassan Guled, the chairman of the Somali business community. “We consider this order rubbish.”

Bah.  How then do you explain the doubling of prices?

Funded solely with savings, no doubt

Guled said Somalis living in Kenya have acquired property by pulling resources together and borrowing from banks.  

This is quantifiable, and if someone were to do it, I’ll bet that the total to be raised in such fashion couldn’t possibly equal the market capitalization of the property acquired.

Somalis here also depend on money sent by a large Somali population in Europe and America who cannot invest in those economies because of religious beliefs, Guled said.

In my religion, we worship money

As I posted more than two years ago in Filling a sieve?, the de-materialization of capital allows foreign aid to be eviscerated by being electronically stolen and routed straight out of the country into Swiss bank accounts.

Bellow Kerrow, a former member of parliament and a Kenyan national of Somali descent, said it is high demand, not money from piracy, that is behind the rise in property values. But Pius Khaoya, a real estate agent, said factors outside the economy are influencing property prices.

“The prices have gone through the roof and it does not tally with the performance of the country’s economy,” said Khaoya, who works for Crystal Real Estate.

Nor are the price rises generally distributed; instead they concentrate in Somali neighborhoods.  Occam’s Razor says it’s piracy money being repurposed.

The money has to land somewhere

A real estate agent who spoke only on condition he wasn’t identified so as not to draw the wrath of Somali customers said some Somali businessmen pay double a property’s worth just to easily and quickly complete the sale.

Preferably in cash.

It’s cash and carry

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Yesterday’s post covered half of my little talk – the challenges part – on the Infrastructure and Real Estate panel at Harvard Business School’s 2009 India Conference, one of the largest student-run events in the country, attracting several hundred people. 

“So far out there I can’t be contained behind a dais!”

My main text is in Times New Roman.

So with all those challenges, where is the opportunity?  Let’s call it the necessary opportunity.

4. Which comes first, the slum or the city?

Private structures or public infrastructure?

Because there ain’t no such thing as free infrastructure, slums exist and expand long before communities embrace them.  Eventually incumbency, physical durability, and sheer mass mean that municipal powers-that-be have to formalize slums in municipal and political self-interest and self-defense.

Jockin being interviewed by journalists: Mumbai, India

“Money + Votes = Power“

Dharavi’s elected representatives to the Indian Parliament and Senate

5.  When does a slum formalize?

When (a) slum land becomes really valuable if redeveloped, (b) residents secure anti-eviction protection, either judicial or political, and (c) development becomes so profitable it can fund the non-recoverable upgrading costs.

Chemist, Mukuru Sinai, Nairobi, Kenya

It also requires:

Good government has taken an interest. Many governments choose to ignore slums (or, like Mr. Mugabe, to bulldoze them). At Dharavi, both the national and state government are active partners in the redevelopment:

Govt. of Maharashtra has accepted the proposal submitted by Architect, Mr. Mukesh Mehta for the redevelopment of Dharavi which, after suitable modifications, will be implemented through the Slum Rehabilitation Authority (SRA), according to the norms of S. R. Act of 1971.

Among government’s four essential roles, aside from the enabling environment for capital, government has to provide capital to close the cost-value gap. Here India’s government has been pump priming for municipal infrastructure. As The Hindi reported two years ago:

The Central Government has already announced a grant of Rs.500 crores [a ten-million, so 500 crores is Rs 5.0 billion — Ed.] for the project, which will go towards the infrastructure. “I would like to integrate Dharavi with mainstream Mumbai and convert it into a cultural, knowledge and business centre. The main idea is to convert the whole population into a middle income community by 2010,” adds Mr. Mehta.

Meanwhile, Dharavi is still not redeveloped, because of the interlocking puzzle of politics, economics, law, and real estate.

Proof that slumdwellers can be developers: Oshiwira II, Mumbai, India

6.  Home Asset Finance and its role in slum upgrading

Between microfinance and mortgage finance is a netherworld that we have dubbed Home Asset Finance; lending to finance purchase or improvement for quasi-formal or quasi-legal structures. 

I figured this out last summer, when I taught a three-day course in housing finance for the very poor, at the Boulder Institute of Microfinance (held, confusingly, in Torino, Italy):

Flying blind, I structured the course into three modules:

Part 1: Economics and structure

Part 2: Roles in a mortgage loan system

Part 3: Current practice around the world

[Snip] 

I expected the participants to be heavily represented by Mission Entrepreneurial Entities — actual lenders who were doing business in microfinance loans, and who had elected the one-week housing-finance course (as part of the three-week comprehensive MFI course) to learn about housing finance and whether they should expand their activity into housing finance. 

[Snip]

As I said to them about five minutes into the course:

To a housing lender, a microfinance loan is a tiny amount, with an exorbitant interest rate, for an insignificant interval, and with no collateral – hence really risky.

Having paused just long enough for them to wonder, I went on:

Of course, to a microlender, a housing loan is a huge sum, with a minuscule interest rate, over a really long interval, and with no knowledge of the borrower – hence really risky.

With that out of the way, Day 1 dug into the practicalities of making a loan with secure collateral – fixed collateral that you cannot repossess.  Most of the participants were used to making loans on personal credit – I lend to you because I’ve checked you out – and on chattel – movable personal property like television sets, cell phones, and cards.  But housing is a whole ‘nuther ballgame, because you can’t move it. 

Savings passbooks, Mukuru Sinai residents cooperative Akiba Mashinani Trust, Nairobi, Kenya

The value chain of an asset-based loan is quite different from classical microfinance:

I’d printed up name tents for each of the major roles I wanted played:

Home seller

Home buyer

Loan originator

Appraiser

Underwriter

“Funding desk”

Securitizer

Security holder

One by one, we introduced our dramatis personae, and I took volunteers from the group.  It wasn’t hard; give people who know something a chance to ham it up, and you’ll be amazed at the results.  Sure enough, the Brazilian district attorney volunteered to be the home doctor; Muaffaq the Palestinian community organizer was ready to be the buyer, and Hemantha the Indian microbanker (from Hand-in-Hand) was happy to be the loan originator.  As we introduced each one, we asked:

What does he or she want from the transaction?

How does he or she get paid?

What are his or her incentives?

We are working with SEWA Bank in Ahmedabad on such housing-finance products.

My traveling office, at SEWA’s offices, Ahmedabad, India

7.  India, Mumbai, and Dharavi

Mumbai and Dharavi are a quintessential urban problem.  Mumbai’s combination of anti-eviction laws and Transferable Development Rights (TDRs) gives slumdwellers leverage.  Meanwhile, Dharavi’s scale and complexity make its redevelopment a highly complex challenge.  We work with SPARC and the National Slum Dwellers Federation on places like Dharavi.

Mission Entrepreneurial Entities are the change agents. 

Change-making personified: Jockin Arputham of Slum Dwellers International

Twenty-first century cities will be competitive precisely to the degree they harness the brainpower and entrepreneurial energy to be found in their slums.  To do that, cities must, in self-defense, formalize and embrace the informal.

Dry-goods store, Mukuru Sinai, Nairobi, Kenya

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“Who knew slums could be funny?”

My fellow panelists were:

Abha Joshi-Ghani, Urban Sector Manager for the Finance, Economics, and Urban Department (FEU) in the Sustainable Development, World Bank.

Songsu Choi, Lead Urban Economist, South Asia Region vice presidency of the World Bank,

Kenneth Munkacy, Senior Managing Director, GID International Group

Dennis Pieprz, president of Sasaki Associates, who’s worked on Dharavi.

Kenneth Munkacy, Songsu Choi, Abha Joshi-Ghani, Dennis Pierpz, David Smith

Our panel, being flanked by Mary Ellen Hammond, HBS ‘09 (left) and Tulika Khemani, HBS ‘09 (right)

Since the conference was all about India, and our particular topic was Real estate and infrastructure, I decided to assemble a handout concentrating on the intersection between the two, and to my surprise, the resulting little piece neatly encapsulates many of the main themes informing AHI’s work. 

My main text is in Times New Roman.

Storefront shop, Mukuru Sinai, Nairobi, Kenya

1. The 21st century’s great problem; see Century of the City

Making cities work is the 21st century’s great problem. 

Between 1995 and 2025, the world will undergo urbanization never been seen before and that will never be seen again. 

[The authors of] a fascinating new PNAS paper, Growth, innovation, scaling, and the pace of life in cities, by a
quintet of authors bookended by Luis M. A. Bettencourt and Geoffrey B. West … make no bones about their
interest in cities and their reasons for tackling the problem now:

Humanity has just crossed a major landmark in its history with the majority of people
now living in cities.  Cities have long been known to be society’s predominant engine of
innovation and wealth creation, yet they are also its main source of crime, pollution, and
disease. 

I really like a crisp, clear expression of the challenge: cities have always been where wealth was born, yet
bringing so many people together in proximity has all those negative externalities.  When one vector (wealth)
goes one way, and another (disease) goes the other, we want to know which (if either) will prevail, or whether
they can reach a happy medium.  Moreover, the problem is urgent:

The inexorable trend toward urbanization worldwide presents an urgent challenge for
developing a predictive, quantitative theory of urban organization and sustainable
development. 

We may pine for the country villa, but we create the means of building it in cities. 

Musket, silk clothing, wrought-iron bench — all from cities

The world’s success or failure in its transformation to cities will define the twenty-first century. 

A slice of downtown Sao Paulo

As Rakesh Mohan put it when I was at Bellagio:

If the world is urbanizing, it’s because people think it’s a good idea.
 

Despite the problems of urban environments, overall welfare has increased in cities in every dimension
we can think of.  Despite massive inequality, even Mumbai pavement dwellers have access to municipal
schools.  They still have a benefit compared to where they came from; they all say, “We are much
better off than our relatives back home.” 

Reversing my frequent quote from Fields of Dreams, if they come, you must build it. 

We’re here for the jobs

2. Cities will compete on their relative efficiency

To quote Rakesh Mohan, Deputy Governor of the Reserve Bank of India:

With increasing free trade in services, the price of traded products has almost stabilized across the world.  Goods now have very similar prices everywhere; therefore, no city has any advantage over any other in traded goods.  Comparative advantage of nations will increasingly lie in the relative efficiency of their cities.

While it was not exactly Saul on the road to Tarsus, my hearing of that talk represented a major epiphany in my thinking about slums and cities. 

Gives you a new perspective, doesn’t it?

After all, a city is defined by its housing:

Cities are homes plus jobs plus density (which means verticality). 

Without housing, there would be no cities – for what is a city without housing?

All of these are parts of a city, but without housing, at night they are just so many dark shells.

Housing is what makes cities bright at night. 

It’s not their jobs that keep those lights on at night

City efficiency demands slum upgrading, for it is impossible to have an efficient city with enormous slums, as they generate massive negative externalities, including:

Pollution.  Sao Paulo’s slum upgrading was forced upon it by the encroachment of squatters on the slopes around the Guarapiranga reservoir.

Traffic.  That many people living in that close proximity without access to proper infrastructure means that they crowd the roads or the trains or the ‘taxis’ that crowd the roads and highways of every African city I’ve visited.

Disease and health.   Air and water respect few zoning boundaries.

Crime.  Slums are a place of refuge for clandestine occupancy.

Broken window, health clinic, Cite Soleil, Port-au-Prince, Haiti

Making cities efficient requires improving their slums.  People move to cities to make money, and slums arise when private investment outruns public infrastructure.  Mohan again:

If the world is urbanizing, it’s because people think it’s a good idea.  Yet our urban planning has a ‘third-class carriage’ mentality: I’m inside, don’t you dare come in, you’re much better off where you are. 

Clothing for sale in the open air, Mukuru Sinai, Nairobi, Kenya

3. What defines a slum?

Readers know that this question continues to occupy me, because in its diagnosis lies an understanding of the next quarter-century of living for over a billion people. 

Many different indicators …

Spontaneous community of people pursuing urban work (even if informal).

Low-value land in close walkable proximity to urban jobs (even if informal).

Where private investment has outrun public infrastructure.

Wealth is extracted from slum dwellers and not invested in the community.

If we are to improve slums, we have to see them for what they are: robust, vibrant, complex, interdependent triumphs of human entrepreneurialism – and at the same time concentrations of poverty, disease, and lawlessness.

A moment of wariness, Vila Nilo, Sao Paulo, Brazil

Having laid out the challenge, I ask, where is the opportunity?

[Continued tomorrow in Part 2.]

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From BBC Site: People walk around the charred remains of a market in Nairobi’s Kibera slum

…but the true damage is less visible, for whereas property can only be burned down, capital can flee – and it flees much, much faster than any government can stop it.  That’s because, in the dance between capital and property, property is the slowest asset, capital the quickest.  Capital is also smarter, since it is in effect the quantified judgments of millions of selfish individuals, each of whom is seeking an edge.

I’m just trying to improve my position

Although Kenya’s flirtation with civil war has ended not unhappily [Why the caution? – Ed.  Because a marriage of convenience is unstable – Auth.], the damage it has done to Kenya will endure for years, as demonstrated by this Nairobi Business Daily article from April:

The Housing Meltdown

Lending to the real estate industry dropped for the second consecutive year after peaking in 2006, signaling that the excess supply of houses in the market may have reached a tipping point.

If economic growth does not pick up pace to boost demand, house prices could start coming under pressure and falling.

Because there are a dozen ways to wreck a property market, a rising property market is one of the best indicators of a healthy society. 

In the last three months [January to March, 2008 – Ed.], the real estate market has suffered as both local demand and that from Kenyans abroad fell in a hostile political environment that kept most buyers at bay.

Here there are two capital dynamics at work:

New foreign capital flowing in (or not)

Domestic capital investing (or flowing out)

Keep it in circulation

Property is the ultimate trust asset, because without law, you cannot protect it from confiscation.  You can’t move it, and its value can be taken hostage (via squatters).  (In foreclosure actions, lenders want “to recover vacant possession” of the premises, without which nobody else can move in.)

Kenyans abroad have been major drivers of demand in the local housing market, but as easy money continued fuelling new housing developments and encouraged buyers to take up mortgages, demand from the diaspora has not kept pace with the excess supply.

Too little is researched on the powerful effect on expatriate capital being reinvested in the home country.  Remittances, capital’s underground river, are not just limited to low-income migrant workers.  For much of the global south, their greatest income-earning possibilities are in the global north.  They leave home to get an education, to start a career, to build specialized knowledge.  Some of them come home to start businesses.  Others send their money back, for relatives or in anticipation of one day returning. 

Mr Maina Mwangi, the head of property at Knight Frank, said that as the number of Kenyans in the diaspora and foreigners buying property increased in the recent past so has buying without relying on mortgage loans grown.

“Kenyans in the diaspora and foreigners move in and buy straight from their savings without applying for mortgages,” said Mr Mwangi.

Sending money home

Capital markets punish risk with higher costs of capital, and the results are quantifiable, and immediate.  As demonstrated a fascinating recent paper on the South’s Civil War chances of winning, calculated using the European market price of Confederate bonds, the Confederacy was initially perceived to have a 42% chance, falling to 15% after Vicksburg and Gettysburg:

We provide some quantitative evidence on this question by introducing a new methodology for estimating the probability of winning a civil war or revolution based on decisions in financial markets. Using a unique dataset of Confederate gold bonds in Amsterdam, we apply this methodology to estimate the probability of a Southern victory from the summer of 1863 until the end of the war. Our results suggest that European investors gave the Confederacy approximately a 42 percent chance of victory prior to the battle of Gettysburg/Vicksburg. News of the severity of the two rebel defeats led to a sell-off in Confederate bonds.

When Vicksburg fell, the South was cut in half along the Mississippi

Gettysburg: the costliest battle in American history

While international capital can divest, people who make their money inside a politically or socially unstable country tend to get their chips off the table as quickly as they can: by shipping it overseas, into a nice unattachable international bank account.  And when domestic capital is flowing out, to pour in international aid is no better than filling a sieve.

This out-turn has had the effect of tempering developers’ demand for loans and encouraged banks to be more vigilant about reckless lending in a hostile housing market.  

An entirely classical credit tightening spiral: with less money, developers can be more choosy, and banks can be equally choosy. 

Locally, land around urban centres has become expensive translating into largely un-affordable houses, especially for middle class families.

The value of urban land reflects the value of property that can be constructed.  For its importance to Kenya, downtown Nairobi is very small, and the traffic is insane (most of the east-west truck traffic highway from the Indian Ocean to the South Atlantic goes through one traffic circle in central Nairobi).  Proximity has scarcity value.

It creates a double-whammy: land prices rose just as demand fell off the table.

A one-two punch

Coupled with high pricing of houses, expensive bank loans and lengthy legal processes involved in buying a house, many Kenyans are turning to affordable financing options such as taking development loans from co-operatives.

Or consuming less housing.

Central Bank of Kenya’s latest year-to-year mortgage loan figures indicate that the value of real estate loans advanced by commercial banks dropped by four per cent from Sh23.9 billion last year to Sh22.9 billion by February 2008.

It’s evident that the slowdown was occurring even before the violence.  Markets are known to anticipate disruption.  Demand cooled after the November, 2005 rejection of the Constitutional referendum. 

Anti-Constitutional campaigner, 2005.

Because many voters are largely illiterate, the Yes votes used bananas as their symbol; the No side used oranges.

The highest mortgage loan advancements were recorded in 2006 when it stood at Sh27.2 billion down from Sh20.1 billion registered in 2004.

According to the statistics, the biggest drop was between 2006 and 2007 when the value of real estate loans by banks dropped by 15 per cent – a four year record – to stand at Sh23.9 billion down from Sh27.2 registered the previous year.

An economist at Central Bank told the Business Daily that the development was an indication that the number of people servicing their mortgages had overtaken the number of new investors taking up mortgage loans.

“For a net drop in lending to be witnessed it means that ‘less people are taking up new mortgages while more and more are struggling to service their mortgages,” he said.

All of which is both a cause of and a consequence of capital slowdown – all brought about by political uncertainty and instability.

Property experts said that the number of investors buying houses on an arrangement where one investor (normally a land owner) donates land and the other brings in capital for building materials – known as equity financing – is rising.

That’s a very interesting development, because both parties are routing around the money economy.  Work-arounds always signal that something else has failed. 

We had to accommodate a problem

Other players see the wait-and-see attitude adopted by a number of investors after the elections as the reason for the drop in the value of mortgage loans.

I’d absolutely wait – wouldn’t you?

I think something bad might happen

More recently, a number of mortgage companies have secretly classified certain areas and some economic activities as high risk.

That, gentle reader, is called red-lining, and in the United States it’s been illegal for 35 years – partly because it is economically comprehensible and quite possibly economically justifiable, if one is a pure cynic.  [Maybe you'll post about that sometime? – Ed.] 

Okay in Monopoly, not okay in America

But then, in the United States we don’t have the risk of politically orchestrated violence.  It’s more defensible in a country where the rule of law can sometimes appear rickety, and usually appears to be provided on commission. 

From the guideline, land in areas which witnessed disputes and certain economic sectors such as tourism and agriculture are considered high risk due to the ability of violence to diminish their returns.

That doesn’t sound prejudiced, it sounds prudent. 

Not gonna lend there, wouldn’t be prudent

Mr David Harber, the managing director of Kenya Valuers and Real Estate Agents, said that skirmishes witnessed in late 2007 and early 2008 could have led to the drop in lending to real estate.

Did.

“The events just before and after elections must have had an effect on the number of people taking up loans to build or buy new houses,” said Mr Harber.

The evidence mounts from all sides: Kenya’s in a recession.

The number of building plans approved in Nairobi dropped from 312 in November last year to 216 in December 2007 and by mid January 2008 only 83 approvals had been made.

The Nairobi City Council’s development control section reported that the value of building plans submitted to the council dropped by Sh 13 billion in three months-from Sh 14 billion in November last year to Sh 1.21 billion in mid January 2008.

That’s the real number, and it’s a dimension of the cost.  Building permits are down by 91%.

Nine out of ten are already gone

Property experts are predicting that the trend may continue.

“As more investors leave the predominant investment targeting the middle income and focus on low-middle and upper income groups, such a trend will most probably continue,” said Maina.

Though a strong economy is usually thought of as benefiting the rich, in fact it’s always the poor who suffer first in a downturn or collapse.  As we’ve seen in Zimbabwe, with its slow genocide by bulldozer now accelerating into full-blown genocide by kleptocrat, it’s not just the violence but the utter economic collapse of what was once the breadbasket of Africa that is wreaking the most havoc.  And when North Korea collapses, it will be from starvation.

When the Constitutional settlement was announced, I posted Let that be your last battlefield.  Even if it is, Kenya will suffer economic casualties for at least half a decade. 

The tear gas has stopped, but not the damage

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For nearly two months I’ve been hoping to be able to write this post as I, like much of the world, watched in anxious passivity as Kenya brought itself to the brink of a tribally based civil war … and then, apparently, brought itself back from the cliff.  As reported in the Boston Globe:

Kenya to build coalition government

NAIROBI – Kenya’s presidential rivals yesterday [That is, 28 Feb – Ed.] agreed to share power in a coalition government aimed at ending postelection chaos that has killed 1,000 people and brought this once-promising East African nation to the brink of collapse.

Under the terms of a deal signed by President Mwai Kibaki and opposition leader Raila Odinga, their parties will:

1.      Divide Cabinet positions 50-50, and

2.       Amend the constitution to create a prime minister position for Odinga, who will share power with the president.

All along, this outcome was, if not the best possible result, the best result actually possible.  International observers are unanimous that the election was massively flawed, and I’ve heard enough from my Kenyan friends to believe that it was flawed on both sides.  With each party having strong entrenched tribal heartlands, the ballot-box stuffing could have occurred in equal measures. 

Public reaction to the deal varied, often depending on ethnicity and political persuasion.

In Odinga strongholds, including the western city of Kisumu and the Nairobi slum of Kibera, crowds danced and sang in the streets.

Sympathizers of Kenya’s opposition leader Raila Odinga celebrated in Kisumu as they heard a radio transmission about the pact. (Yasuyoshi Chiba/AFP/Getty Images)

To any protagonist, compromise is intrinsically less than ideal – and here, it’s clear that the opposition gained more than it lost, a fact of which everyone is aware (the happy people pictured are Odinga supporters). 

The agreement marks a significant step toward resolving Kenya’s political crisis, and most citizens, who had feared that failed peace talks would trigger more violence, gave a collective sigh of relief. Likewise, the news brought praise from the United States and other Western governments, which had come to count on Kenya as an economic partner and source of stability in East Africa.

With hindsight, and even as it was taking place, the explosion into flames of a country many people had seen as a model of multi-ethnic civility shocked not only the outside world, but also the Kenyans themselves. 

Nairobi, January 4, 2008

As I wrote in Always the poor suffer first, I found myself personally affected:

From the BBC site: People walk through the charred remains of a market in Nairobi’s Kibera slum

I’ve been to Kibera; I’ve seen how people live and what they aspire to:

I’ve done work designing financial and programmatic models to finance slum upgrading in Kenya.  The models were predicated on government making commitments, and keeping them.  When the election came up, with its talk of slum improvements, I was among those very hopeful:

Something potentially remarkable is happening in Kenya right now, and it’s happening because of slums, or more precisely Kibera, Africa’s largest slum.  Kibera’s residents, long ignored in economic and policy terms, may just decide Kenya’s next president. 

This increased focus on Kibera is heartening in many ways.  Kibera’s people need a voice, and slums are vote banks.  As I wrote in a post entitled urban cryptobiotica:

Slumdwellers can speak; in the voting booth wealth disappears.  People who live in slums are just as smart as any of us.  Even though individual slumdwellers are as nothing politically, when they join together and take control of their vote bank potential, they become a force that the highest officials respond to.  Many date the fall of apartheid from the Soweto riots.  Here in the US, Watts led directly to the National Housing Act. 

In Mumbai, when Jockin called out the slumdwellers, they stopped the airport from running. 

Mumbai airport today, with slums that lap right up to the runways

It was a demonstration of distributed network intelligence, and it worked.

Just as government is a factory that produces two products (money and laws), politics is a game with two counters, money and votes.  Individually, slumdwellers can be ignored; they are effective only when collective. 

When slums become democratic, slums produce leaders.

Given Kenya’s sordid history, with the kleptocratic Daniel arap Moi in power as recently as 2002, to have a semblance of functioning democracy is real progress.

Real democracy, even if flawed, creates political pressure, and that creates political vaporware, such as Mr. Odinga’s pledges.  From elections come political capital, and political equity.

Then came the power grab, and Kenya’s eruption into looting, shooting, and killing.

Nairobi, January 4, 2008

The scenes reminded me of one of Star Trek’s more didactic and yet powerful allegorical episodes.  Entitled Let that be your last battlefield, it featured two races of aliens sharing a single planet, each half white and half black, but on different sides of their faces.  One of them, Commander Bele (rhymes with real), played with sinister superiority by Frank Gorshin, explains what should have been self-evident to every thinking being:

Obviously of the same race as Lokai, however, the sides of Bele’s black and white skin are reversed. The difference is pointed out by Bele to a perplexed Captain Kirk who asks what is the difference between them, to which he replies, “Isn’t it obvious? Lokai is white on the right side. All his people are white on the right side.”

Commander Bele, obviously superior because he is white on the left side

Bele explains he is a police commissioner from Cheron and on a mission to retrieve political traitors. His current quarry is Lokai who he has been chasing for what Bele claims to be 50,000 Earth years. Bele then instructs Captain Kirk to take him to see his “prisoner”. Bele is taken to Lokai, but Lokai reacts fearfully to Bele’s presence and strongly demands he be taken away. The two aliens begin arguing about slavery and racial segregation which almost come to blows.

Broadcast as it was in early 1969, with the memory of burning Watts, Detroit, Harlem and other cities vivid in viewers’ imaginations, its liberal anti-racist message was overt.  Bele and Lokai agree on only two things: they hate each other, and the bystanders are cowards:

Bele: You’ve combed the galaxy and all you’ve come up with is mono-colored trash, bleeding hearts and do-gooders. You’re dead, you half-white.

Lokai: [to the crew] You useless piles of bland flesh.

Kirk eventually takes them back to their home planet, where they discover:

Once there, the two aliens find the planet’s population completely wiped out by a global war fueled by insane racial hatred.

Both Lokai and Bele stare silently at the destruction on the monitor and realize they are the only ones left of their race (or, as they see it, their races).

Whose fault was it?

Instead of calling a truce, the two beings begin to blame each other for the destruction of the planet and a physical brawl ensues. As the two aliens fight, their innate powers radiate, cloaking them with an energy aura that threatens to damage the ship. With no other choice, Kirk sadly allows the two aliens to chase each other down to their obliterated world to decide their own fates, consumed by their now self-perpetuating mutual hate.

The story closes with Bele and Lokai chasing one another against a backdrop of burning buildings (taken, as I recall, from the Watts riots):

[Lokai and Bele have transported to their decimated world]

Spock: All that matters to them… is their hate.
Uhura: Do you suppose that’s all they ever had, sir?
Kirk: No. But that’s all they have left.

For weeks I could never quite banish this episode from my mind, as the world watched while Kenya’s elite – and make no mistake, though Mr. Odinga is of a different racial tribe, he comes from the same oligarchic elite that has given Kenya all its leaders since independence – risk their nation’s future as they fought for control of it.

The feelings got more painful last week, when I was in Colombo, Sri Lanka, working with Slum Dwellers International’s board on the design of their International Urban Poor Fund.  To help everybody understand what the Fund entails, we did a role-playing exercise where the federation representative from each of six countries presented a funding request.  One of them, by Ezekiel from Kenya, was for the rebuilding of Toi Market, which had been a heartening success story until it was engulfed in the riots and flames.

Friday morning, as we were waiting for the session to start, I displayed via my wi-fi laptop and the LED projector the New York Times front-page story

Standing behind chairs, President Mwai Kibaki of Kenya, left, and Raila Odinga prepared to sign a deal on Thursday in Nairobi.

You can imagine how quiet it was as a roomful of slum dwellers from fifteen countries read.

Key details of the coalition government have yet to be determined, including how exactly the president and prime minister will share powers, how to divide Cabinet posts, how disputes will be resolved, and what happens if the coalition falls apart. Parliament is due to convene on March 6 to begin revising the constitution.

In the final hours of negotiation, Kibaki made significant concessions to the opposition, agreeing to a constitutional amendment that just one day earlier he had ruled out.

Give credit to Kofi Annan for talking them into it, and to the United States for leading the constructive pressure that made them agree:

His change of heart came amid intense pressure from the United States and others in the international community, who voiced warnings about possible sanctions and isolation for those perceived to be blocking a deal.

In addition, neighboring countries, including Uganda, Rwanda, and Tanzania, pushed Kibaki to settle because their economies rely heavily on Kenyan ports and have suffered during the unrest.

Sense prevailed:

After signing the agreement, Kibaki called on Kenyans to forget the ethnic clashes of the last two months and live together in peace. “Kenya has room for all of us,” he said.

Though there is a notional settlement, it may collapse:

But many Kenyans also said they were taking a wait-and-see attitude to determine whether the rivals are genuinely committed and willing to work together. They noted that their nation still faces sizable challenges, including a shattered economy, rising ethnic tensions, and 350,000 people displaced by violence since the Dec. 27 elections.

So far the swords have barely been lowered, much less beaten into plowshares.  Kenya faces enormous challenges, and a need for capital and commitment from its friends:

“They are solving their political problems, but not our problems yet,” said Alfonse Mutuku, 24, who lives in a displacement camp near Limuru, north of Nairobi.

Money cannot buy peace, but sometimes money can give peace a chance.  As I wrote two months ago, when hope was fighting with observation:

Democracy is a process, not an event.  Democracy empowers the poor.  Empowerment occurs by fits and starts.  It involves venality and crass self-interest and scheming.  Like lots of other things, it’s messier in the event than the memory. 

ODM supporter celebrating as a shop burns, Saturday

Given Kenya’s sordid history, with the kleptocratic Daniel arap Moi in power as recently as 2002, to have a semblance of functioning democracy is real progress.

Real democracy, even if flawed, creates political pressure, and that creates political vaporware, such as Mr. Odinga’s pledges.  From elections come political capital, and political equity.

Kenya’s road may seem longer today, two months after riots tore the country apart.  I think not.  As Churchill said, after a bright spot in a multi-year global nightmare:

Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning

Good luck to Kenya, and to Kibera’s and Kisumu’s people.

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