Specialisation and free trade resulted in great economic progress. The backlash against it now is misguided and destructive

specialisation and free trade

Wandering the streets of Dar es Salaam on my morning walk yesterday evoked some deeper thoughts about everything that’s been going on in the world in recent years. 

  • Brexit. 
  • Trumpism. 
  • Rising economic nationalism. 

All are potentially value destructive.

I get the anger from those left behind. But, Economics 101 says if we all focus on producing what we have a competitive advantage in, and then trade amongst each other in a free and fair system (which arguably hasn’t been the case), the economy as a whole will tend to naturally maximise the available utility or benefits to be derived from the available scarce resources. 

Similarly, if each person’s unique talents and skills are put to their highest value use and we then trade and cooperate with each other, we all win. 

If you’re an experienced business person, you might be better than your junior hires or colleagues at all tasks required within your firm in absolute terms. But you need to focus on those areas where you are furthest out ahead of the field and can add the most relative value. Delegate the rest. It’s perhaps not immediately obvious that the net overall effect will be positive. But it will. 

I’ve been here in Tanzania for over two months now, observing life and economic interactions each day, and I see the magic hand of specialisation and trade happening at almost every corner of the commercial capital, Dar es Salaam.  

For example, money transfers using your mobile phone are quite popular here in Tanzania. It’s an efficient, fast and reliable way of sending funds–to family and friends or those who you do business with–from $1 to the thousands. You can also use the money sent to your mobile number to make online or mobile payments for goods and services. Cashless transactions can be done from anywhere. 

However, sometimes you still need physical cash. In that case, you can go to a small shop or kiosk where an agent (“wakala” in Swahili) accepts mobile money transfers in exchange for cash from the “float” they maintain, just like a small bank branch. 

The big mobile companies, instead of setting up shops and employing people to handle encashment requests, leave it to small entrepreneurs. These business-minded people can then set up their own little kiosk to convert mobile money to cash and charge the receiver a small transaction fee. That’s what they specialise in.

a kiosk in Africa

Here’s one that is an agent for all four major mobile networks.

But sometimes the specialisation doesn’t go far enough. In Tanzania there is currently too much competition for any of the mobile networks to be making good returns on capital. There are, I believe, seven mobile carriers, each duplicating the necessary infrastructure, and none of them earning an adequate return on capital. The industry needs consolidation.

In Kenya, on the other hand, Safaricom is almost a monopoly. It has over 70% of the market and thus strong pricing power, and it delivers great returns for shareholders. Arguably it’s too powerful. But that’s a discussion for another day.

Further on the specialisation theme, another thing that is big business in the mobile phone industry nowadays is telecommunications towers.  

In recent years, private equity firms purchased large blocks of towers from mobile network operators who still own the telecom equipment but no longer have to concern themselves with managing the sites and the actual tower structures. This has created greater efficiencies for all. 

At the base of the tower you see a generator for back-up power, which is very important in Africa, where grid power can be unreliable, and an air-conditioning unit to cool the sensitive electronic equipment in the tropical heat. 

telecommunications tower
warning signs front of telecommunications tower

All this equipment is installed and maintained by specialist contractors employed by the specialist mobile telecom tower companies, such as Helios Towers (HTWS London Stock Exchange), which my friend Swen Lorenz has written a superb in-depth report on. The mobile network operators can then focus on what THEY do best themselves: sales, marketing and rolling out the networks.

The mobile phone tower sites are also secured and watched by a security services company to prevent vandalism and theft. That leads me to another example of specialisation at work here in Tanzania. 

For security, many Tanzanian businesses employ Maasai warriors as watchmen. In the bush, they are nomadic pastoralists. They have herded cattle and goats for many, many generations and have become highly adept at protecting them from predators, such as lions. They almost seem to have a sixth sense. Most safari lodges employ Maasai to protect guests from wild animals in the bush. 

In the city, they stand watch and act as security guards. It is what nearly all Maasai men do.

There are many reasons. They are generally tall, fit, and have the ability to endure harsh conditions out in the open at night. They are fiercely proud of their warrior roots and traditions. And they are very loyal. Above all, they keep to themselves and are not easily influenced or bribed by potential bad actors. 

In other words, they are dependable and you can rely on them to deliver the specialist skill they are employed to do. 

My point is, there are very good reasons why specialisation has evolved in life and in business. The same applies to different countries and economies around the world. 

Maasai men

The Swiss build watches and make pharmaceuticals, as well as provide discreet banking services. The Danes farm pork, produce butter, and are experts in container shipping, among other things. Norwegians are experts in offshore oil exploration and shipping. 

The Germans are great at engineering and manufacturing automobiles. Italy and France are centres of culture, fashion, design, gastronomy and viticulture. The UK has some of the richest most successful sporting competitions in the world, the Premier League and Wimbledon, and excels in financial services. 

The USA is the home of technology innovation, movies and entertainment, financial engineering on Wall Street, and large-scale business systems and franchising. The Japanese, Taiwanese, Koreans and Chinese are all excellent at manufacturing, electronics, and building infrastructure, among other things. Aussies and Canadians are great at mining. And so on it goes. 

The trend away from free and open trade and movement of people between countries that has emerged in recent years with Brexit, anti-China sentiment, and the Donald Trump presidency, to name but three driving factors, is concerning to me. 

I totally get that no one wants to subjugate themselves to faceless bureaucrats, lawmakers or leaders of a far-away country and lose control over their own destiny. But …

The reality is that the countries and people of the world are,
more than ever, in a symbiotic relationship

To try and undo decades of specialisation and open and free trade among countries, plus make it more difficult for people and capital to move around the world without hinderance seems extremely short-sighted to me. We will all be worse off collectively for it. 

If disengaging from the rest of the world and becoming nationalistic, isolationist and insisting on doing it all oneself were a recipe for wealth and prosperity, North Korea would truly be a paradise, and not just in the imagination of its “Dear Leaders.” 

Unfortunately, it seems “North Korea disease” is infecting the brains of many world leaders and policymakers right now.

It’s one of the greatest fears I have for the world’s progress over coming decades. Already we’re seeing the devastating economic consequences brought about by closing  borders to most travellers, especially in countries or regions that are heavily dependent on tourism such as Mauritius, Bali, and Thailand, to name but a few. China and Australia are engaging in a fully fledged trade spat, and the USA and China have not seen frostier relations since the 1989 Tiananmen massacre.

It’s definitely worth factoring this into our investment decisions. If renewed trade barriers and restrictions on travel are to be the new norm, you will need to avoid investing in those places that are vulnerable to these shifts. 

Here in Tanzania, tourism is clearly down this year. But as I’ve written before, gold and agricultural exports are up strongly. Oil import costs are also down. The country enjoys a relatively balanced economy. 

There’s also a big (60 million people), vibrant domestic market. And with an absence of lock downs or panics over coronavirus, the economy is in good shape all things considered. But stock market valuations are still very low. I am glad to be investing here. Over 40% of my African Lions Fund is deployed in this market at the moment.

Until next time,

Good Investing!

Tim Staermose

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