A Summit of Opportunity

Why Africa's rising economies are a win-win for U.S. business.

This week's U.S.-Africa Leaders Summit presents Washington with a historic opportunity not only for broad relationship-building but also for deepening its economic ties to the continent. It would be a mistake to assume that the benefits will all flow from the United States to Africa. There is huge economic potential in this gathering for the U.S. economy, too.

Africa is no longer just a continent in need -- indeed, it has become a place of opportunity. Investments from companies like GE and Caterpillar and other private investors such as Blackstone and Carlyle, at $130 billion in 2012, now surpass remittances and official aid as the largest type of capital inflow. Africa stands out for the relative youth of its people -- a potential demographic dividend. By 2035, the continent is set to have the largest working-age population in the world, larger than those of China and India, meaning that, for the foreseeable future, Africa will not face the potential drag on growth from shortages of labor that may be in prospect for other economies whose populations are aging.

But formidable challenges await African leaders, including bolstering education, creating jobs, and lifting more people out of poverty.

Still, the continent holds significant economic potential. African economies offer a higher rate of return on foreign direct investment than most emerging economies. Since 2000, the continent has been the second-fastest-growing region in the world; in 2012, the continent was home to six of the world's 10 fastest-growing economies. The continent's real GDP, at $2 trillion in 2013, was larger than India's and Russia's, and on par with that of Brazil.

But the United States has largely missed out on the economic opportunities Africa offers. Over the last decade, American foreign direct investment into Africa amounts to less than one-third that coming from Europe, and it also lags investment from the BRIC quartet of Brazil, Russia, India, and China. Meanwhile, U.S. trade with Africa is less than one-fifth the volume of its trade with Europe, and only 60 percent the level of China's trade with Africa.

Moreover, Africa's rising middle class offers U.S. businesses a huge, untapped new export market for their goods and services. Today, Africa's undoubted wealth in natural resources such as oil, gas, and minerals only accounts for one-third of the continent's GDP growth. But, as incomes rise, consumption is a gathering force in Africa. The continent is changing from one whose economic activity is centered on the export of natural commodities to one where domestic spending is playing a larger role. The continent is already home to nearly 100 million people who have enough income to spend on things they want rather than simply on things they need -- the basics such as food and clothing. By 2020, that tally is set to rise to 128 million, according to our research. This new consumer army will be spending a projected $1.4 trillion a year by then. More than half of African households will have discretionary spending power. Nigeria, now Africa's largest and most populous economy, will have 160 million people in consuming-class households, more than the current populations of France and Germany combined. African industries that cater to consumers will have estimated annual revenue in 2020 of $1.38 trillion, compared with $540 billion in the case of resources industries.

As Africa's trade ties with the world deepen, now is the time for the United States to get in the game. In 2012, the continent's flows of goods, services, and finance were worth $1.5 trillion, or 76 percent of GDP. Although commodities continue to dominate Africa's exports, there are distinct signs of Africa's trade rising decisively up the value chain. Exports of knowledge-intensive goods and services (which have a high R&D component or use highly skilled labor) are growing. Indeed, Africa's cross-border Internet traffic -- made up of everything from international Skype calls and email traffic to e-commerce and video streaming -- grew 70-fold between 2005 and 2013, faster than in China or Latin America, although it still lags behind the rest of the world.

Initiatives are already underway to deepen economic ties between the United States and Africa. One example is the Power Africa plan unveiled in 2013, an initiative to double the number of people with access to power in sub-Saharan Africa. Its aim is to enable public and private capital to expand power generation and electrify the continent. In its first five years, Power Africa offers more than $7 billion in financial support and loan guarantees. To date, that government investment has catalyzed more than $14 billion in private project finance. The summit could be an opportunity to expand and broaden this initiative, given that about 550 million people in Africa still lack access to power, according to the World Bank.

Another initiative is the African Growth and Opportunity Act, signed into law in 2000, aimed at offering incentives to African countries to open their economies and embrace free markets. Equally important will be measures to help the continent develop a new generation of business and political leaders, building on the Young African Leaders Initiative. One useful step for the United States to take would be to ease the path for more African students to attend universities and graduate programs; this may require looking carefully at current immigration rules.

But the United States shouldn't stop there. U.S.-Africa trade and investment should expand from its current focus on oil and other commodities to include trade in manufacturing and services. American companies have been slow to grasp the investment opportunities available in Africa beyond the natural resource sectors. For instance, the continent will need over $300 billion in infrastructure investment, an area in which U.S. companies can play a major role. Development-finance organizations need to think creatively about risk-mitigation mechanisms to give the private sector the confidence to invest in this dynamic market. New partnerships could be struck to develop Africa's efforts to boost skills.

For its part, African countries can do more to reach out to U.S. investors and help them navigate regulations and local customs. The summit is an ideal opportunity to explore this area and what can be done better. Many African countries -- from Angola to Zambia -- have set up dedicated investment agencies. Many, such as South Africa, also have public-private partnership agencies. Both of these are useful ways of enhancing engagement with U.S. businesses. African leaders should use the summit as an opportunity to hear any concerns -- macroeconomic, regulatory, or security-related -- from U.S. companies that may be preventing them from committing funds to Africa.

The historic Washington summit is an opportunity to address the relative lack of engagement with Africa on the part of the United States and the unevenness of economic development in Africa -- despite its enormous potential. Summits can too often be mere talking shops and photo opportunities. The importance of this gathering will only materialize with concrete action. Both sides have work to do.

Photo by ISSOUF SANOGO/AFP/Getty Images


A Short History of Vultures

Long before Argentina’s latest default, there was Elliott Associates L.P. v. Republic of Panama.

When Argentina defaulted on its debt for the second time in 13 years this week, the financial world was shocked, both by the default itself and, perhaps even more so, by the fact that a small minority of debt holders was willing to torpedo Argentina's debt restructuring. But while the fight between Buenos Aires and its creditors may be in the headlines now, it's not a new story. It began 18 years ago with a perversion of international law in a New York City court and a then-obscure hedge fund that was called a vulture.*

One firm in particular deserves the blame for Argentina's current situation -- or kudos for its innovation, depending on how you look at it. In 1977, Paul Singer founded the hedge fund Elliott Associates L.P. with $1.3 million from friends and family. For nearly two decades, the firm grew by investing in various equities markets. But in 1995 Elliott Associates transformed from just another New York City hedge fund to a pioneer in the world of international finance. And today, 19 years later, the newest iteration of the same fund has played a crucial role in bringing Argentina to default.

In October 1995, Elliott Associates L.P. purchased approximately $28.7 million of Panamanian sovereign debt for the discounted price of $17.5 million. The banks holding those bonds, a group that included heavy hitters like Citi and Credit Suisse, had given up on repayment from Panama. To cut their losses they sold their holdings to Elliott.

When Panama's government asked for a restructuring of its foreign debt in 1995, the vast majority of its bondholders agreed. Not Elliott. In July 1996, Elliott Associates, represented by one of the world's most high-profile securities law firms, filed a lawsuit against Panama in a New York district court seeking full repayment of the original $28.7 million -- plus interest and fees. The case made its way from a district court in Manhattan to the New York State Supreme Court, which sided with Elliott. Panama's government had to pay the firm over $57 million, with an additional $14 million going to other creditors.

It was a groundbreaking moment in the modern history of finance. By taking the case to a New York district court, Elliott broke with long-standing international law and custom, according to which sovereign governments are not sued in regular courts meant to deal with questions internal to a nation state. Further, the presiding judge accepted the case -- another break with custom. It set the stage for two decades of such cases, including Argentina's default this week.

When Elliott's case against Panama upended established international norms about how to negotiate sovereign default, journalists and researchers didn't pay much attention. But Wall Street did. Following Elliott's victory, other funds emerged trying the same strategy. Dart Container Corp and EM Ltd., both linked to Kenneth Dart, one of the most famous names in the world of vulture funds. NML Capital, a Cayman Islands-based fund associated with Elliott also got into the game.** Gramercy Advisors, a Greenwich, Connecticut-based firm, focused on Ecuadorian and Russian debt.

As these firms emerged, so did a new moniker: vulture funds. The name may sound disparaging, but it was not invented by Argentina or other debtors. Wall Street's older firms came up with the name.*** They could find a profit out of slim pickings.

The emergence of the vulture funds with the 1996 Elliott Associates, L.P. v. Republic of Panama case opened up a new legal option to force sovereign governments to pay the full value of their debts (plus interest), rather than the discounted amounts arrived at through negotiations arbitrated by the International Monetary Fund and other international institutions.

The strategy born in 1996 is the same today, but the prize is much bigger. The face value of the discounted Argentine debt that Elliott bought after the country's 2001 default for $48 million is today $630 million. The fund wants repayment for the full value of the debt to all of Argentina's creditors, as it did in 1995 with Panama.**** This amounts to $1.5 billion, which could rise to $3 billion including interests and fees.

The 1996 decision was a departure from how the international banking system handled debt restructuring of what were mostly poor countries (albeit often with very rich elites) in the sovereign debt crises of the 1970s and 1980s. The International Monetary Fund (IMF), the Paris Club, and other international sovereign debt-related institutions had come to the understanding with creditor banks in the late 1970s and early 1980s that they could not expect re-payment in full. In fact, in 1996 the IMF and World Bank implemented a special debt relief program based on the recognition by lenders that at least 46 highly indebted governments would not be able to repay their debts. In the Panama case, as in Argentina's today, the banks had already accepted that they would withstand major losses.

The original debt holders -- major banks like Citi, Credit Suisse, and others -- had the resources to take Panama to court to try to enforce repayment. But they did not, because, at the time, those were not the rules of the game. The banks felt comfortable relying on the intermediation of the IMF and other international financial institutions. International law is weak law, and so is comity, the customary practice in the international system that assumes mutual respect among sovereign governments. These powerful banks recognized the importance of this kind of law for the functioning of the inter-state system, and hence, in the long run, for their own profits. Further, the banks recognized that sovereign debt differs from corporate, mortgage, or any other kind because of its ability to drag down a whole economy, including its healthy components.

When Elliott forced repayment on Panama, there should have been a robust public debate about the firm's claim against a sovereign country in a local court and about the judge's decision to accept that claim. After all, a sovereign's money is technically its citizens'. Making the Panamanian government pay for the full value of the debt, plus interest, even as the major creditors accepted a discounted payment, meant handing citizens' money to a hedge fund rather than investing in, for example, Panama's roads, schools, or social welfare programs. Proponents of repayment argue that, done in good faith, it should have resulted in better credit ratings and therefore more investment in Panama -- or Argentina. But because creditors had already agreed to accept the losses, this already questionable argument becomes irrelevant.

Elliott and other vulture funds have employed the same legal innovation used to squeeze Panama in 1996 again and again. Mostly, the funds have been successful. In 1998 alone, vulture funds took Ecuador, Ivory Coast, Poland, Congo, Vietnam, and other countries to court demanding payment on defaulted debt.***** Further, in what became a de facto, if not necessarily legal, precedent that affects the current Argentina case, the firm has gotten legal injunctions preventing creditors in Canada, the Netherlands, Germany, Luxembourg, and Belgium from collecting before Elliott did. In the current case, the judge in a New York City court enabled Elliott to prevent Argentina from paying the other creditors -- who account for over 90 percent of its debt holders -- without paying Elliott.

Elliott's 1996 victory was significant, but there have been other important cases since, including the firm's most recent win against Argentina. In 2012, Judge Thomas Griesa of the Southern District Court of New York ruled that whenever Argentina paid the majority of its creditors it would have to pay its holdouts, too. The U.S. Supreme Court rejected Argentina's appeal. This case has been yet another massive step toward enabling private firms to sue sovereign governments in regular courts, rather than going to international financial institutions for arbitration.

Occasionally, vulture fund strategy did not work and courts stood up for sovereign governments. In 1996, soon after its successful move on the Panamanian government, Elliott bought $20.7 million of Peruvian debt for $11.4 million. As usual, Elliott sued for the full value, plus interest. Initially, the New York southern district court ruled in Peru's favor. The judge found that creditors had some responsibility for taking on bad debts. But the U.S. Court of Appeals in New York City reversed the verdict and, in the end, the parties settled the case.******

There may be hope, though. On July 31 there was a first step towards reversing the precedent that began in 1996. Argentina indicated that it might take its fight with the vulture funds to the International Court of Justice in The Hague. That, rather than a New York court -- or even the United States Supreme Court -- is the proper venue for taking on a small number of funds that are keeping the vast majority of its creditors from being paid and holding a country ransom.

* Correction: Elliott has not "called itself a vulture." An earlier version of this article stated that it did. (Return to reading.)

**Correction: Elliott's Cayman Islands-based subsidiary is called NML Captial. An earlier version of the article stated that Elliott's subsidiary is MNL Ltd. (Return to reading.)

*** Correction, Oct. 9, 2014: So-called vulture funds did not embrace the moniker. An earlier version of this article stated that they did. (Return to reading.)

**** Clarification, Oct. 9, 2014: Elliott owns approximately half of Argentina's $1.5 billion in debt. An earlier version of this article suggested that Elliott owned the full value. (Return to reading.)

***** Correction, Oct. 9, 2014: Elliott has not sued Ecuador, Ivroy Coast or Poland. An earlier version of this article attributed those 1998 lawsuits to Elliott. They were brought by other investment firms. (Return to reading.)

****** Correction, Oct. 9, 2014: While a district judge found in Peru's favor in 1996, a Circuit Court reversed the decision. An earlier version of this article reversed this sequence of events. (Return to reading.)