Daniel Altman, Harvard-trained economist and journalist, has created what he calls a Baseline Profitability Index. In short, the index aims to rank markets for foreign investment based on asset growth, preservation of value, and repatriation of capital to help investors decide where to “really put their hard-earned cash”. Altman’s BPI seems to be an index of indices: he’s used the World Bank’s Worldwide Governance Indicators, Transparency International’s Corruption Perceptions Index, the Property Rights Alliance and Americans for Tax Reform’s International Property Right Index, Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer’s index of investor protection, and Menzie Chinn and Hiro Ito’s index of financial openness. All thrown in the same pot, the magic potion is stirred (according to Altman the alchemist’s algorithm) and out pops the BPI.
The full ranking (published in Foreign Policy) includes 102 countries, 17 of which are African (14 are sub-Saharan African). The top 50, listed below, include 12 African countries, with three of the top ten being the African countries of Botswana (second), Rwanda (fifth) and Ghana (tenth). South Africa ranks 41st, scoring high on the Preservation of Value-category but performing worse than all other African countries (except Nigeria) on the Repatriation of Capital. I’m not sure what the reason for such a low ranking is (and, to be honest, it is surprisingly low), but it could possibly be due to South Africa’s still-existing capital controls or the threat of expropriation (in mining, for example) over the last few years (although the threat has considerably weakened since the ANC’s policy conference in December 2012.) Interestingly, two African countries that have received a lot of press coverage over the last few years – Kenya and Nigeria – are amongst the worst performers on the list: Kenya comes in at 67th, while Nigeria can only reach 95th. Altman’s index has a clear warning for investors with dollars in their eyes: don’t only consider potential growth of these markets, but the preservation of value and repatriation of capital too.
There are a few surprises, too. Germany, one of the few European countries to witness positive growth over the last few years, doesn’t feature in the top 50 (it’s 53rd). In fact, Eastern Europe seems to be a lucrative destination: Estonia, Lithuania, Poland, Bulgaria, Latvia and Slovakia all feature in the top 30. Only two of the so-called BRICS are in the top 50: China (21st) and South Africa (41st). Surprisingly, Brazil (91st) and Russia (98th) languish at the bottom. Is Burkina Faso really a better investment opportunity than Brazil?
As with any list, there are weaknesses. Why are other African gems (like Tanzania, or Malawi, or Namibia, or … yes, Zimbabwe) not included on the list? Presumably it’s data constraints, but this should be corrected in a future BPI. Also, could a 2000 ranking not be calculated from the same data sources? Tracking the change over time, especially for African countries, could be interesting and, perhaps, suggest some policy implications.
Altman’s list provides more evidence of the profitability of African markets. But it also shows that investors should not be be blinded by the bling of big bucks. A careful assessment of risk and return remains the cornerstone of a sound investment.