Learning From Nigerian Money Changers


Earlier this month, I was in Nigeria for some meetings. One of the most striking things about the country’s economic situation was the parallel currency market. Despite a seeming end to the controversial dollar peg in June, the naira continues to sell for different prices in different places.

Officially, it takes 315 naira to buy one US dollar. However, I was told during my trip that the underground exchange rate was, drumroll please…around 465. That’s not a typo. The official exchange rate and black market rate supposedly differed by almost 50%.

Skeptical that such a big disparity actually existed, I decided to change US$50 into naira. I went to a particularly touristy spot at the Eko Hotel on Victoria Island, a location with lots of souvenir stalls selling everything from locally-produced jewelry to African masks and carvings. Upon arriving, I asked a vendor where I might change some money. He smiled and introduced me to his boss, who asked, with an ear-to-ear grin, “US Dollars?”

He offered me 450 naira for each dollar; I protested, suggesting the rate should be closer to 500. We settled on 470.  I handed him US$50, and he handed me 23,500 naira – almost 8,000 more naira than I would have received at a bank.

Aside from providing intellectual fodder for curious foreigners, the dysfunctions in the foreign exchange market are also impacting importers as they struggle to secure greenbacks to buy foreign goods.  Further, investors have been reluctant to buy assets in a currency that is overvalued on official exchange rates and appears likely to fall.  In part because of the shortage, inflation is now running around 18%.  And the International Monetary Fund expects the Nigerian economy to shrink 1.7% this year. High inflation, low-to-negative growth – not a good combo!

There are many reasons why the currency is losing value, including the country’s dependence on oil for government revenues and foreign exchange.  As an oil price-taker, Nigeria is subject to global developments over which it has little control. But the spread between the official and underground rates is the result of a conflict between government policies and market-driven prices.  And my experience changing money taught me the forces of supply and demand—not policies—were winning the battle.  Unsurprisingly, the volume of foreign exchange traded at the official price had declined by 90% as the difference between market and official prices widened.

The International Monetary Fund expects the Nigerian economy to shrink 1.7% this year. 

Nigerian President Muhammudu Buhari is not new to wrestling with the naira. When he led Nigeria in the 1980s, he refused to devalue the currency as part of an IMF restructuring plan.  Soon thereafter, a coup removed him from office. He’s back, this time as the result of a democratic election and peaceful transition of power.

Clearly, Nigeria’s economy is in desperate need of reform. How should the leadership address the country’s difficulties? In recent decades, one school of thought, known as the “Washington Consensus,” dominated.  It emphasized the liberalization of markets—including those for foreign exchange—privatization of state-run firms, and austerity measures to control runaway budgets.

As the global financial crisis eroded faith in market liberalism, consensus around these prescriptions faded. In June, three IMF economists published a paper—entitled “Neoliberalism: Oversold?”—arguing that the costs of austerity and capital account liberalization can outweigh potential benefits.  Besides potentially generating instability and hurting growth, they can also drive inequality, which, the economists argued, can further harm economic performance. Most importantly, however, the authors emphasize there is no perfect one-size-fits-all set of reforms.

So is Nigeria moving towards more or less government involvement? The short answer is yes. Rather than cutting budgets, Buhari has boosted infrastructure spending to counteract the downturn. And he has tried to control the currency market rather than allowing market forces to fully determine foreign exchange rates.  But Nigerian leaders have also signaled intentions to sell state property, including presidential jets and energy assets. Buhari’s government is also working to attract foreign capital, in part by allowing private investors to manage infrastructure.

So perhaps the best description of the Nigerian approach is the one offered by the finance minister, who stated at an IMF/World Bank meeting that “we have our own local remedy” for addressing the country’s economic problems.

“We have our own local remedy”—Nigerian finance minister 

Outside of government, business leaders remain firmly in the camp of market-oriented liberalization, infrastructure investment, and less government bureaucracy. Noting the need for the country to raise more than $15 billion in the coming years, Nigerian billionaire Aliko Dangote argues that the country should sell state assets and take out loans from China or elsewhere.  Bola Onadele, the CEO of the Nigerian securities exchange FMDQ, believes the naira needs to float completely.

My money-changing experience in Lagos reminded me of Argentina in late 2015, where the “blue market” rate for dollars was 14.5 pesos versus the official rate of 9.9 pesos to the dollar. The wide spread was unsustainable, and in December of 2015, following a political upheaval that led the country towards more market-oriented economic management, the Argentine government removed capital controls.  With business-friendly reforms in place, Argentine President Mauricio Macri is now courtinginternational investors, who have already bought up billions of dollars in newly issued government bonds. And the IMF is predicting the Argentine economy will expand 2.8% in 2017. Global investors are taking notice, and the Merval index is up more than 30% in dollar terms since the December devaluation.

Like Argentina, Nigeria will likely have to suffer through the pain of fully floating its currency in order to recover. This may generate more inflation, possibly even hyperinflation. Recall that many Southeast Asian countries suffered through massive devaluations during the Asian Financial Crisis only to emerge a few years later with high growth and strong economies.

That’s not to say that policymakers shouldn’t take short-term pain into account when choosing a course of action, since it can generate instability, with enormous ramifications in the long run.  Most important, they need to remember that local context matters. For most situations, cookie-cutter approaches are doomed to fail. 

Organs, Weapons, and Weed


When governments prohibit economic activities, underground economies often pop up. These range from black markets for officially prohibited items like military-issue weapons to gray markets serving shoppers wanting to avoid regulations.

One of the most controversial underground economies is the market for organs. In 2013, for instance, five Kosovars, including a urologist and an anesthesiologist, were convicted for trafficking in organs sourced from desperately poor individuals. According to the New York Times, “many were never given any compensation and were released without adequate medical care.” A Turkish surgeon connected to the case, known as “Dr. Frankenstein” in the Turkish media, remains free. In Europe, organ trafficking has also arisen in connection with the refugee crisis. Migrants who can’t pay for their journey have been murdered for their organs, which can make the traffickers €15,000.

One of the most controversial underground economies is the market for organs.


And sadly, organ trafficking is not confined to Europe. For example, according to the BBC, Iraq has become “a new hub for the organ trade across the Middle East.” Poverty has driven Iraqis to selling their organs illegally. A kidney can go for $10,000 dollars. Similar practices are reportedly widespread in India, Pakistan, the Philippines, and Egypt as well.

Some of the most gruesome tales of organ harvesting come from China. A report by human rights activists released this summer claimed that there are as many as 100,000 transplants a year in the country, and many of the organs are harvested from the bodies of executed political prisoners. The government only officially acknowledges 10,000 transplants per year. Beijing is trying hard to convince the world that it has stopped the practice, but not everyone is persuaded.

Some believe that the prohibition on organ sales is immoral, since it creates artificial scarcity and therefore costs lives. Others are skeptical, arguing that the poor would effectively be coerced into selling pieces of their bodies. For better or worse, as long as people with healthy organs need cash and people with cash need healthy organs, underground markets will likely pop up.

The black market for weapons is another highly consequential underground economy. Just look at Ukraine. Thanks to the conflict between the government and separatists, the country “has turned into a supermarket for illegal weapons.” Smuggling is on the rise, and concerns are growing that there could be a glut of weapons leaving the country when the conflict is over. And look at what happened in Libya, where the fall of Qaddafi’s regime led to a massive outflow of weaponry that flooded Mali and Nigeria.

In Somalia, it’s believed that as much as 40% of the guns the government imports are ending up on the black market. And in Iraq, hundreds of thousands of weapons the US issued during the war are now circulating, unaccounted for. According to the New York Times, “the effectively bottomless abundance of black-market weapons from American sources is one reason Iraq will not recover from its post-invasion woes anytime soon.”

Underground markets for non-prohibited goods also pop up to skirt restrictions on how they are traded. Just look at what’s happening as marijuana is legalized in the United States. In our nation’s capital, for instance, recreational use is allowed, but non-medical sales are not.

The result: “a gray market...sprung up in the city, daring entrepreneurs to accept ‘donations’ to various causes in exchange for gifts of pot or even engage in straight up bartering for the plant,” according to the Washington Post.

Likewise, because the federal government still considers marijuana an illicit drug, businesses in states like Colorado, where non-medical sales are legal, cannot access banking services, and have to deal in cash. These activities are not strictly illegal, but clearly operate in a gray area.

Similar gray-area situations include parallel markets for paper money in countries upholding currency pegs. In places affected by political and economic turmoil—including Nigeria, Egypt, Angola, and Uzbekistan—the street prices of currencies regularly diverge from official prices when governments try to manage their value. There is little incentive to buy at the unattractive official rate when peddlers may offer significantly more local currency for a foreigner’s dollar.

We tend to think of markets as the open, above-ground institutions described in economics classes. But we miss a lot by ignoring the shadow economies that exist all over the world. European countries found this out when they added illicit activities to their national accounts, boosting the GDPs of Italy and Spain by roughly one percent. To navigate uncertainty in today’s complex, interconnected world, we must avoid ignoring phenomena like underground markets that may not fit into our standard framework.

Weather To Vote


In democracies, elections are supposed to capture the will of the people. But what if a seemingly irrelevant factor like weather could determine the outcomes of major electoral contests and referenda? This possibility has reared its ugly head a number of times in recent months.

Take Britain’s EU referendum, for example. On the day of the voting, heavy rain fell on “Remain” strongholds like London, which received a typical month’s worth of precipitation. The bad weather caused flooding and even forced some polling stations to move. According to the Guardian, “thousands of commuters were stuck at Waterloo station as trains were either delayed or cancelled because of flooding, with several people tweeting that they would miss the 10pm deadline to cast their ballot.”

What if a seemingly irrelevant factor like weather could determine the outcomes of major elections and referenda?

Even the proverbial lighting struck (literally!), damaging power lines and disrupting train service. Despite delayed commutes, electoral officials refused to extend voting hours. In the end, Leave won with 51.9% of the vote, beating its rivals by 1.3 million ballots.

More recently, Colombians shocked the world by rejecting the peace deal that was supposed to end the half-century civil war between the government and left-wing FARC rebels. Prior to the voting, polls projected a two-thirds majority would accept the deal, but it was ultimately rejected by 50.2% of voters, a margin of 54,000 ballots.

One possible factor in the “No” side winning out was Hurricane Matthew. It swept overthe country’s Caribbean coast, dumping heavy rain and suppressing turnout in a region favorable to the deal. Weather also delayed the opening of some polling stations, and despite repeated pleas from voters, electoral officials rejected calls to extend hours. Overall turnout was just under 40%, but in the rain-hit north, only 25% voted. Among those who did vote in that region, the deal won approval by a margin of over 20 points. Analysts point to the low turnout of key supporters as an important driver of the outcome.

Overall turnout was just under 40%, but in the rain-hit north, only 25% voted. Among those who did vote in this region, the deal won approval by a margin of over 20 points. 

Just how strong is the weather effect on elections? Fortunately, there are some estimates, and they point to a clear relationship between more rain and fewer voters. Studies in the United States and the Netherlands found that 2.5 centimeters of rain correlated with a 1 percent reduction in voter turnout. Researchers also found that bad weather in the United States tends to help Republicans, with 1 inch of rain delivering them an additional 2.5% of votes; by their math, Al Gore might have won the 2000 presidential election if the weather had been more cooperative. Because the Democratic Party has a disproportionate share of marginal voters, it is more likely to be hurt by bad weather.

In addition to affecting turnout on election day, bad weather can also constrain future voting behavior. In one study, economists found that “a 1 percentage point decrease in current turnout reduces future turnout by 0.6–1.0 percentage points.” It seems voters who stay home due to rain form a habit of staying home during elections.

Al Gore might have won the 2000 presidential election if the weather had been more cooperative. 

The relationship between weather and turnout is proportional: the more extreme the weather, the more extreme its impact on turnout. Take the case of Hurricane Sandy, which devastated the east coast of the United States a week before the 2012 presidential elections. A 2015 study found that “turnout declined on average 2.8%…between 2008 and 2012 in counties in which disaster declarations were issued for Hurricane Sandy.” The non-disaster counties only experienced a 0.8% decline in turnout, meaning Sandy might have been responsible for up to a 2.0% drop in voter participation.

As the southeastern United States reels from the impact of Hurricane Matthew, it is worth asking what effect it might have on the presidential election. Officials last week told 2 million residents of Florida, Georgia, and Carolina to evacuate. “This storm will kill you,” Florida governor Rick Scott warned. The timing was unfortunate, because the original deadline for voter registration in his state was today, October 11.

Despite his exhortation for 8% of the state’s residents to evacuate and the disruption to mail and government services last week, Governor Scott refused to extend the deadline. But surely the number of last minute registrants can’t be that high, right? Not really. In 2012, over 86,000 people registered in Florida in the last eight days before the deadline, with Democrats outnumbering Republicans 2-to-1.

It’s also worth recalling that President Obama won Florida by only 74,309 votes in that year. It’s no surprise, then, that the Florida Democratic Party sued for an extension of the deadline by a week. And on Monday evening, a federal judge granted an extension, but only until 5pm ET on Wednesday, October 12. There will be additional hearings to determine if the deadline should be extended further. With 29 electoral votes at stake in a state with a history of controversy in presidential politics, it’s wise to watch Florida closely in the coming weeks.

As the southeastern United States reels from the impact of Hurricane Matthew, it is worth asking what effect it might have on the presidential election.

The impact of heavy rain around crucial referenda and the Florida voter registration deadline reminds us that seemingly irrelevant factors like weather matter. They can cast the “deciding vote” in the most critical of times. (Another example is the influence of climate change on the Syrian civil war.) Bottom line: To successfully navigate today’s radical global uncertainty, it’s crucial we consider the potential impacts of apparently tangential developments.

Will This Bankruptcy Grinch Ruin Christmas?


Last week, I went to the BJ's Wholesale Club near my house. Unsurprisingly, Halloween decorations, candy, and costumes greeted me as I entered. But the next two aisles, to my amazement, were filled with Christmas stuff. At the time, it was still September!

While there are surely children eagerly writing up their lists for St. Nicholas, isn’t it a bit early for parents to ponder whether their children deserve shiny toys or lumps of coal? Whatever they decide, when it comes to actually purchasing the presents, there are few doubts about availability. This is a testament to the spectacular sourcing abilities of companies like Amazon, Target, and Walmart.

But there have been times when shortages of “hot toys” sent parents scurrying in search of the season’s must-have gifts. Just think of Cabbage Patch Kids, Tickle Me Elmo,Beanie Babies, or Furby.

Demand-driven shocks are one possible source of potential disappointment; another is a supply disruption. In this regard, it’s worth noting the world’s 7th largest shipping company just collapsed. Two months ago, banks withdrew support for Hanjin Shipping, South Korea’s largest shipping firm, forcing it to file for bankruptcy and temporarily disrupting global supply chains.

Worried that they wouldn’t be paid, ports all over the world refused Hanjin’s ships, leaving them—and their half-million containers carrying $14 billion worth of cargo—floating at sea. Further complicating the situation were fears that ships, serving as security for the debt, might be seized upon docking at ports. Crews, cargo, and collateral were left in limbo.

It’s worth noting the world’s 7th largest shipping company just collapsed.

One ship, the Hanjin Louisiana, was stranded for a month before it docked in Singapore. According to the BBC, “the crew had worried about running out of food.” In another case, the Wall Street Journal reported Seattle dockworkers “staged a brief work stoppage in solidarity with the crew of the Hanjin Marine, after crew members dropped a banner off the side of that ship that read, ‘We deserve shore leave.’”

The Hanjin Louisiana was stranded for a month before it docked in Singapore.

Hanjin received new funding in September, and ships have started unloading; the South Korean government expects most of the process to be completed by the end of October. Despite this progress, the future of the company, and the extent of the economic damage caused by its collapse, are unclear.

Domestically, the disruptions have effectively frozen the South Korean port of Busan, raising the specter of 11,000 job losses. (Proportionally, this would be similar to having 66,000 jobs at risk in the United States.) Locals worry that the city may lose its place on the routes of major shippers as traffic shifts to hubs like Singapore. Other impacts might include higher shipping rates for exporters, thereby decreasing South Korean competitiveness and potentially snowballing into larger implications for the economy.

What drove the bankruptcy filing? In short, a perfect storm of rising supply accompanied by falling demand. On the supply side, capacity of the world’s container ships grew 240% over the last decade, averaging increases of 9% per year. Why did supply grow so rapidly even after the global financial crisis? The short answer is that it takes a long time to build a ship and shipbuilders had large backlogs of orders to fill. At the dawn of crisis, “orders for new vessels were as much as 50 percent of the existing fleet,” according to Reuters. And when you consider the Chinese economic slowdown wasn’t globally acknowledged until 2013 or so, the picture begins to make more sense.

Capacity of the world’s container ships grew 240% over the last decade.

This increasing supply coincided with falling demand. The World Trade Organization ispredicting that 2016 will be the worst year for global trade since the financial crisis, with growth estimated to be around 1.7 percent. And it’s not likely to rebound quickly: analysts are not expecting demand for container shipping to grow more than 2 percent per year over the next two years.

With supply rising and demand slowing, shipping rates have plunged. According to Reuters, “Container rates from Shanghai to the U.S west coast have more than halved” since 2010. Despite expectations that ten percent of capacity will either be idled or scrapped next year, supply is still expected to grow 5 percent, exacerbating the industry’s difficulties.

It was in this environment of dire overcapacity that Hanjin Shipping found itself drowning in debt; in 2015, it owed $5 billion while earning just $6 million in net profit, following years of losses. Between January 2011 and February 2012, the company’s stock price fell 58% in won terms. Through April 2015, it lost another 53%. And since then, it’s plummeted another 86%. Overall, the stock has fallen 97% from its peak.

Why should we care? Well, to begin, Hanjin is a global shipping behemoth, and disruptions to its operations can ripple through our tightly coupled system of global trade. The company holds 3.2% of the world’s shipping container capacity, moving 10% of containers between Europe and Asia. Companies affected by the disruption includeSamsung, LG, Nike, Ralph Lauren, and Hugo Boss. According to the CEO of Seaspan, “The fallout of Hanjin Shipping is like Lehman Brothers to the financial markets...It’s a huge, huge nuclear bomb. It shakes up the supply chain, the cornerstone of globalization.”

Hanjin’s difficulties will produce both winners and losers. Other shipping lines are clear winners as they benefit from a sharp increase in rates. These higher rates will hit shipping customers, but not all will be affected evenly: according to one analyst, large customers are facing little disruption to services since their shipping is diversified across multiple lines, but for smaller ones, “this could be devastating.”

And as the shipping world acknowledges overcapacity and consolidates, large customers could soon find themselves as vulnerable as small companies. Might this trend be motivating Amazon to vertically integrate its global supply chain? Jeff Bezos’s company recently leased forty Boeing 767-300s to build out “Prime Air,” effectively firing a shot across the bow of FedEx and UPS.

Meanwhile, according to the Wall Street Journal, Amazon is also “buying long-haul truck trailers to ship by ground, building delivery drones to conquer the sky and looking to manage shipping by sea.” Might Amazon be in the market for an ailing shipper? Courts are exploring a sale of Hanjin, and while most would point to rivals like Maersk Group as a potential buyer, it might make sense to think more broadly.

So what do these dynamics mean for holiday shoppers? It’s still too early to say, but prices could be higher if retailers pass along higher shipping costs. If they don’t, retail margins might fall.

But even if Christmas stockings are not affected, the potential ripples of this far-off event are a useful reminder of how interconnected our daily lives are with global developments. The bankruptcy of a Korean shipping company doesn’t grab the attention of Western consumers. It should, because it’s paying attention to seemingly irrelevant developments like this that can let us navigate today’s uncertain and choppy waters.

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