Thursday, September 11, 2008


Asia's wealth is largely tied up in its cities.  Cities such as Hong Kong, Singapore, Shanghai, Batavia, and Bombay were important colonial entrepots.  The first two escaped repatriation and became modern autonomous prosperous city-states.  Since then, Dubai and Abu Dhabi have joined the list, while Ireland and the Baltic states are similar in some respects.  These states enjoy solid institutions and good governance.  Without large hinterlands to wield political clout, they have joined a globalized world and focused on core competencies.  The key advantange is institutional arbitrage; neighboring areas have strong economic fundamentals but generally poor governance.  This leads to natural strengths in finance, commerce, and shipping.

I've been on the lookout for the next such state because they fulfill key niches.  Many countries are poor and have bad governance.  The gap between the richest and poorest remains large and may be widening in some places--increasing the gains from managing convergence.  And there is plenty of global capital in search of the next bubble.  Djibouti has been on my list, and things there are looking much better.  

The area is fairly significant.  South of the straits you have Punt; to the north Arabia Felix.  Fans of Orson Scott Card's lesser known works recognize the area as the site of the original fallen society.  It's also where modern humans first left Africa.  A key hub along the Egypt-India trade routes, it's hosted Roman, British, French, and American troops.   
Aside from American strategic interests, you have bin Laden's relatives looking into building a bridge across the Red Sea with world-class cities on either end.  It's an extravagant plan, likely to never take off.  Plans for more daily travellers than the Golden Gate Bridge are perhaps a little extreme.  But Djibouti has considerable potential, and its tough neighborhood sets a low bar for becoming the most investor-friendly location in East Africa.  I imagine a top-notch port, currently operated by the Dubai firm which caused a furor earlier in America, tapping into global markets.  A wide-ranging rail and road system stretching deep into Sudan and south to Tanzania, allows land-locked countries to trade overseas.  Special Economic Zones could be manned by migrant workers from Somalia and Ethiopia.  Key industries could include petrochemical plants for Sudanese oil, food processing units for Yemen and Ethiopia, garment industries, and French call centers.  With regulation currently fairly light, devaluing the currency, improving international presence, and investing in infrastructure ought to be priorities.  Security will guaranteed by the French and Americans.  With time, it could become a corporate and financial hub for North/East Africa and the Middle East.  Cash in now.  

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