The DENI Concept: Economics, Sociology or Mere Intuition?

3 February 2009 at 04:01 | 964 views

By John Mannah, Maryland, USA.

The Direct Expatriate Nationals Investment initiative (DENI) has circulated the internet for a while now, and I notice that a few good citizens of Sierra Leone have even started catching on to this concept by accepting to serve as representatives of this initiative in different parts of North America to promote it.

There are even advertisements calling for consultants to volunteer to travel to S/Leone and work for DENI. It is also part of the agenda of the S/Leone Diaspora Initiative. Thus by all intents and purposes, it is gaining currency and momentum. It is therefore but fitting to investigate what really this DENI is.

Proponents of the concept are promoting it as the eventual magic wand, the nirvana that will finally solve the perennial protracted international debt problems that have plagued African economies for past decades. They promise that DENI will help channel much needed investment capital into moribund and malfunctioning state owned enterprises (SOE’s).

To quote from the maiden document of DENI: “The program will be totally owned by the African governments and their very own nationals at home and abroad, all this in exchange for asset shares in privatized state-owned enterprises (SOE’s)”.

Ironically, DENI Sierra Leone, according to its proponents is not a mutual fund, a hedge fund, a trust fund, nor Ďa not for profit organization’. DENI will also not be promulgated via initial public offerings (IPO’s) by a credible investment bank, but by the DENI way.

The question then becomes what is the DENI way? This intrigue and ambiguity with the methodology by which the DENI proponents want to promote it has got me to look into DENI with some sense of maturity and professionalism so as to protect the public and financial interests of our beloved country Sierra Leone, especially when the principle was initiated from the United States, a country that the whole world is looking up to today for concrete answers to the socio-economic and financial problems facing the world today.

It goes without saying that the world’s hope is invested here today, and it is therefore imperative upon us who have seen and known better to make sure that anything that originates from the shores of this great country, especially as it relates to business and finance is formulated well, especially on sound economic and financial principles.

It was a few decades ago that economic principles based on capitalism and free enterprise or laissez faire triumphed over socialism or Marxism. This happened because the socialist economic dogma was repressive, dictatorial and inefficient. Academic economists have stuck with Adam Smith, rejecting Karl Marx as the messenger of social upheaval, political dictatorship and economic inefficiency. Financial economists, to therefore make finance and economics work better, have tried to provide useful advice to improve the myriad decisions that private individuals are asked to make. They have tried to do what all scientists do, observe certain aspects of the natural or social world, gather data to measure those aspects, construct theories to explain the data, and test the theories against reality to validate or invalidate them. This is what is called empirical analysis. This is how investment theory, based on sound economic principles has developed over the last century, from Adam Smith, to present day noble Laureates like Joseph Stiglitz, Paul Krugman, Kenneth Rogoff , Larry Summers, Harry Markowitz, and John Taylor to name a few. Researchers have developed refined and tested concepts like the Random-walk model, the efficient market theory and beta coefficients, and the mean-variance hypothesis among others. Optimal investment decisions therefore depend on the details of the environment: the financial assets that are available, their expected returns and risks, and the preferences and circumstances of the investors.

These details become even more important for long-term investors, as such investors must concern themselves not only with expected returns and risks today, but with the way expected returns and risks may change over time. They must also consider their income today and their income prospects for the future. Most investors want to own shares of well-managed companies. A recognized feature of such organizations is that they measure their performance against realistic goals and objectives. Most people also buy stocks because they hope they will appreciate in value, and a lot of people weigh the risks associated with different classes of investment instruments: speculative stocks, securities of seasoned blue-chip companies, corporate bonds, warrants, puts, calls, and so forth.

People do not therefore invest their financial resources out of sentiment, culture or tradition as proponents of DENI seem to be insinuating. Psychologically, we sometimes rely on intuition in the face of uncertainty. Intuition is however not enough in today’s competitive security markets.

Africa and S/Leone in particular has not attracted the necessary investments for its socio-economic development like other countries have, not because funds are not available for investments, but because of the precarious nature of its socio-economic and political environment. The S/Leonean economic environment is full of risk and uncertainty, and thus the dismal performance of businesses in such an environment.

The State Owned Enterprises (SOE’s) that the S/Leone government is trying to liquidate did not succeed due to the type of economic policies the governments of the day in the 1970’s and 1980’s practiced. The policy adopted by African governments including the then APC government of financial repression was counterproductive to financial development. The financial system under which these (SOE’s) failed was marred by excessive government control and intervention in the economy. Market failure also specific to the provision of credit was also prevalent. The failed National Trading Company (NTC) and the S/Leone Produce Marketing Board (SLPMB) and a host of others were a hallmark of this period.

It is against this backdrop that the IMF intervened with the Financial Liberalization program in African economies known as Structural Adjustments. The Structural Adjustment Programs (SAP’s ) require governments to: cut public spending, (including eliminating subsidies for food, medical care and education); raise interest rates, thus reducing access to credit; privatize state enterprises; increase exports; and reduce barriers to trade and foreign investment such as tariffs and import duties. These measures are supposed to generate export-led growth that will attract foreign direct investment and can be used to reduce debt and poverty.

Results of IMF and World Bank reforms however, have not been impressive for Africa and Sierra Leone for that matter. Africans and S/Leoneans therefore have every right to look for innovative ways to grow their economies and improve the financial performance of their businesses and people. This is what the outgone SLPP government understood, and therefore rolled up her sleeves and went to work with serious socio-economic reforms, and institution building. The Sierra Leone Stock Market is one of such institutions that will help attract the necessary investment for the socio-economic improvement of the Sierrra Leonean people.

The DENI program should therefore be organized around market based economics, in the form of a mutual fund, or investment fund, through the use of competent investment managers and brokers. A sizeable financial planning industry has arisen to help people do just that, save for retirement and other social or personal undertakings. This industry is highly sophisticated, specialized, and tends to use rule of thumb to guide the trade-off between risk and return. Conservative investors, for example are advised to hold fewer equities and more bonds than aggressive investors; younger investors are told that it is appropriate for them to take greater equity risk than older investors. Similar rules of thumb are used by consultants who advise pension funds and endowments. All of these principles are based on sound economic foundation and mathematical reasoning, not on parochial, philanthropic, sociological and emotional reasons.

Based on the above analysis, my hope is that proponents of DENI will go back to the drawing board and bring out a well thought out and defined plan of action so as to meaningfully guide the wider public as to what DENI really is for the good of all stakeholders and citizens of our beloved country.