How to FX Brexit…

From the RagingFX Trading Desk…

The jury is finally out. Parliament has for the second time voted down Theresa May’s tentative Brexit agreement. Despite recently acquired legal assurances from Brussels of a limited back stop with Ireland, a major sticking point, the British Parliament would have nothing more to do with May’s two years of haggling with EU negotiators. What lies ahead is most certainly the growing uncertainty of the British economy.

Just as most FX traders have been baffled by the recent strength in the dollar, they have also shaken their heads in disbelief at Sterling’s rise. On the dollar, some argue that the dovish outlook from Powell and the disappointing 20,000 NFP numbers from last Friday hide the fact that the USD is fairing out better than its peers, …hence the show of strength is really ‘relative’ strength from an overall decline.

To some degree, could the same be said about Sterling’s recent strength? The UK economy is firing on all pistons fueled by historically low unemployment numbers and an increase in tax revenues from earlier this year. But, here is where the difference lies. Sterling’s ‘relative strength’ comes from an artificial demand founded upon frenzy, stockpiling efforts from both consumers and government buyers living in fear of a ‘no deal’ Brexit.

After March 29 when Article 50 is to be invoked, the British economy will return to a lower equilibrium point. The irony is that it no longer matters if Brexit is approved or not; nor if there’s a ‘no deal’ Brexit, a second referendum, or new elections. The damage to the UK economy has already been done, because it will take months to work through the artificially bloated inventory of goods, especially among soon-to-be tight fisted consumers living in fear of losing their jobs to a forthcoming recession. Add unprecedented political uncertainty of the likes not seen for decades and Sterling strength will undoubtedly be short lived.

On the near term, we expect Cable to trade with high levels of volatility within a 1.30 to 1.35 range to start. Over the mid term… look for eventual spikes to give way to a predominant downtrend where it will potentially test a 1.14 low.

Comments?

© 2019 Tom Kadala

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Hanging in the Balance for FX Traders… Brexit, Trump’s Tariff Threats, and the EU’s unprecedented Plea

From the RagingFX Trading Desk…

Dominating headlines for this week include Brexit, China, and Germany. Here’s is our take for the weeks ahead…

On the Brexit front we anticipate an extension to the March 29, 2019 hard deadline for at least another year. The EU will be holding their elections in May, which will hamper a second referendum attempt. Keeping the status quo, at this juncture, we believe is what is best for both sides, which will most likely secure Theresa May’s role as PM for the near future.

This past weekend Germany caved after witnessing Theresa May’s historic Parliamentary loss of support for the current Brexit proposal. Merkel’s supposed successor, Karrenbauer, issued an unprecedented, emotional plea from the CDU asking the UK to reconsider reentry. The $120b investments and more than twice that in trade exchange value between both countries are weighing heavily on the minds of German leaders.

If you agree that Germany holds the purse strings for the EU, this gesture has significant ramifications politically. If cooler heads prevail, both sides will seek remedies behind closed doors that should buy more time for negotiations.

What does all this mean for FX traders?

Going forward, we see a global recession triggered by the tariff war between the US and China. This morning the latest IMF global predictions concur. China’s debt levels will continue to rise as the government continues to release more funds into the economy. The resulting inflation will depreciate the Renminbi against the US Dollar. In addition, the slowing Chinese economy will dampen commodity demand, which in turn, will hurt emerging markets, all of which will eventually lead to urgent bail outs of their respective dollar denominated liabilities. Those governments saddled with Chinese loans may have little recourse, since the IMF will not recognize Beijing’s competing alternative, the Asian Infrastructure Investment Bank.

In this economically declining scenario, the USD will remain strong at least for a few more quarters due to the current economic momentum. On the mid to long term, we would not be surprised to see the Euro reach parity with the USD as the EU seeks to rebalance its tariff-stricken industries.

© 2018 Tom Kadala

A FOREX Perspective on the US-China Tariff War

When the White House launched its first round of global tariffs to protect the steel and aluminum industries, they realized quickly that they had missed their intended target, China. After issuing a list of exemptions, they unleashed a second round of tariffs for $50b, this time aiming straight at China’s economy. The response from China came as expected in the form of a tit for tat. Trump then doubled down with a $100b tariff threat at China, where a similar response is expected soon.

What is happening behind the scenes?

Let’s start with a closer look at the import and export numbers between both countries. In 2017 China imported $130b of American goods, while the US imported over $506b in Chinese goods. The trade deficit of $376b no doubt can be viewed as a cause for concern. However, more revealing is the $130b figure because it represents the maximum the Chinese can retaliate against US imposed tariffs. Already with $150b on the line, the Chinese will have a net of $20b more in US tariffs to match. In essence the tariff war chess game between the US and China has reached a maximum ante even before negotiations have begun.

Two questions remain… What else can the Chinese do to match the US tariff burden? …and how exposed is the US economy if the Chinese tariffs are imposed?

Some have suggested that China could stop buying US debt. Such a move is unlikely because the dollar is expected to strengthen for two key reasons. First, US interest rates are on the rise in response to historically low US unemployments levels and, more so, from a broadened US economic recovery. Secondly, and perhaps least talked about is the repatriation of corporate funds overseas. Portions of a 3.5 trillion dollar corporate earnings kitty are being readied to return to US shores beginning in Q2, As this unprecedented flow of funds are transferred into US bank vaults, the impact from the increased demand for USD currency will be felt globally.

For now, China has no reason to sell its dollar denominated investments. The potential combination between increasing interest rates and currency appreciation is a formidable investment with low risk. As for US companies that will be impacted by Chinese tariffs, the net effect from having to pay a higher price for Chinese goods will be partially offset by their stronger USD earnings.

In light of this scenario, we expect the next wave of Chinese tariff retaliations may come in the form of a weakening of the Renminbi, hence, reviving the appeal for Chinese exports, while also maintaining the status quo with weakened non-USD currencies. A stronger US dollar against a weaker Renminbi could potentially be devastating for net exporting countries such as Germany. We expect the economic set backs could temporarily drive the euro below parity with the USD, while their economies adjust accordingly.

With the US corporate tax at a very competitive 21% rate, one could expect net exporters such as Germany to migrate their manufacturing bases and corresponding supply chains to the US. This trend has already begun and is expected to accelerate, especially if the US-Chinese tariff war continues unchecked.

© 2018 Tom Kadala

Powell’s Debut Rattles FOREX Currency Markets

Powell’s first news conference was definitely a switch from the scripted presentations given by his predecessor, Janet Yellen. Despite the difference in style, the message was clear: interest rates are on the rise, unemployment is at historic lows, and what remains to be seen are wage increases followed by an increase in productivity, otherwise, we can expect another recessionary pull back.

What does that mean for Forex traders?

Today we saw the dollar weaken against most currencies. At first it may seem counterintuitive for a currency with a rate increase to fall favor with traders, however, this anomaly is actually a repeat performance from previous USD rate rises. There are numerous academic arguments to support the pull back, however, our favorite is what we have heard from top traders at Goldman Sachs, “it’s just what happens.”.

From a more academic perspective, the 10-year T-Bills at 2.9% are teetering upon a psychological level of 3% where traders and investors believe the US stock markets may stall the longest bull market on record or even reverse it. Their argument is largely supported by the increasing default exposure from emerging countries such as Turkey, which have funded their long term projects with US Dollar denominated short term debt. As rates increase, their dollar denominated interest payments increase accordingly and become harder to pay back. The same is true with US credit card holders. In addition, as US consumer debt levels continue to surge, default levels may reach new levels at home, which could potentially stall the consumer retail engine that represents 70% of the US GDP.

With this unsettling USD backdrop, the GBP (British Sterling) is gaining unexpected strength against both the Euro and the USD. Recent developments between the two Brexit negotiators, Davis and Barnier, arrived yesterday with the usual British pomp and circumstance but in reality only delivered an extension of one year to the status quo. Some progress may have been made on some fronts, but the number of unresolved issues hasn’t changed significantly. Only the final Brexit date was moved to 2020. All of these shenanigans may be negotiating tactics of sorts, but at the end of the day, the feeling one can get from the very strained discussions between Westminster and Brussels is that eventually a referendum will be reintroduced in favor of the ‘Remains’.

Brussels’ negotiating tactics involve a high level of tolerance with little meaningful progress. They are letting this inevitable scenario play itself out. Unfortunately for Britain, when their leaders finally do choose to rejoin the EU (in whatever capacity), they will have gained less for their economy than what they had in place prior to triggering Brexit.

© 2018 Tom Kadala

Have Trump Tariff Threats become a Bargaining Chip for Unilateral Trade Agreements?

Market reactions to Gary Cohn’s resignation as the White House chief economic advisor were swift and uncanny. One can only guess that every Goldman Sachs trader, Cohn’s former firm, were tipped off well in advance of his final decision to resign. The warning probably gave the firm’s traders enough time to prepare a severe sell off once the markets closed. Border line to insider trading, such a move might trigger an SEC investigation, but it’s unlikely. Like the NRA, Goldman Sachs ‘walks on many swamps’ in Washington, …and has for decades.

It’s not the first time that Goldman Sachs comes to Washington for a brief stay and leaves significantly wealthier. Henry Paulson was a classic example of a ‘wolf-in-sheep’s clothing’ during the financial crisis of 2009. One thing for sure, like the well trained traders that they are, Goldman Sachs alum know when to leave Washington just as they know when to exit a trade. Hence, Cohn’s resignation was just another timely departure. In December he achieved a key objective. namely, passing the Tax Reform bill. …and now that all that is done, it was time for him to leave.

Post Cohn, what next?

Intended or not, Cohn’s departure may be part of a much larger Trump/Navarro scheme.

Consider this possibility… What if the steel and aluminum tariff threats were actually a foil to coerce affected nations, which there are many, to request/beg for a unilateral trade agreement with the US? A prime example of this relatively ruthless negotiating strategy is the upcoming NAFTA renewal agreement involving both Mexico and Canada.

Surely politicians are expected to respond with counter protectionist measures and tough talk, but at the end of the day, the underlying message that will continue to resonate the most will be the implementation of a solution that will remove the tariffs completely, such as one that is conveniently wrapped into a unilateral trade agreement.

In essence, Trump/Navarro created the threat that would drive the outcomes they sought.

You may recall that early on during his first year in office, Trump bowed out of the Trans Pacific Partnership (TPP) agreement due to its multilateral structure. He accused it of being opaque and prone to unfair practices. Now with the stroke of one threat, he may very well have achieved his goal of undoing multilateral agreements altogether and replacing them with more transparent and comprehensive deals.

© 2018 Tom Kadala

Should the Obama Administration take Mexico for Granted?

Why is the US Congress always occupied with east-west issues such as with Afghanistan, Iraq, Syria, Palestine and Ukraine, while practically ignoring its neighbors south of its borders (i.e. Mexico)? To place it into perspective, consider the number of times Secretary of State, John Kerry or even President Barack Obama have met with Mexico’s President Enrique Peña Nieto. …maybe once or twice per year which barely compares to the hundreds of stops made in the Middle East alone.

The term ‘shuttling between capitals’ to negotiate trade deals and peace treaties with the US seems never to apply to Mexico or Central/South America, and yet Mexico is the US’s second largest trading partner moving over USD$500 billion in goods and services across its borders. With so much hanging on the balance, especially with immigration reform and border security between both countries, is it prudent for the US to take its neighbors south of the border for granted? …and what can Mexico say differently to place its agenda on a priority list for high level officials in Washington?  

Foreign Affairs Forum
At a recent forum at the Council on Foreign Relations in New York City called, Mexico as a Global Player sponsored by the Foreign Affairs publication as part of a series on Mexico titled, Mexico’s Muscle, Revealing the Strength, the Minister of Economic Growth for the State of Mexico, Adrian Fuentes Villalobos, along with a cadre of supporting experts from both countries, sat on various panels where they proposed the idea of a NAFTA Version 2.0 (North American Free Trade Agreement). This enhanced version of the 1994 NAFTA agreement would seamlessly combine Canada, US, and Mexico into a North American partnership, one based on shared job creation and prosperity building.

Over the past twenty years, NAFTA used up most of its political capital in Washington and depending upon who you ask has rendered mixed results. The Huffington Post, for example, underscores the net loss of 1 million American jobs plus a net US trade deficit of USD$181bn, while Mexican-sponsored research groups show a contrasting view that highlights the creation of 6 million jobs between both countries along with a 500% increase in trade capacity. Despite their differences of opinion, one indisputable benefit was the development of a manufacturing hub for heavy industry located in the center of Mexico.

What was once a sparsely populated territory has now been transformed into a series of industrial parks that when viewed from 30,000 feet high appear organized like the floor of a modern plant. Top multinationals such as GM, Chrysler, GE, BMW, Boeing, Nescafe, DuPont, and Embraer, to name a few, have established a presence in the region with their key suppliers located nearby. As testimony to their commitment and confidence in its future prospects, many companies are continuing to invest hundreds of millions of dollars to accommodate their imminent rapid growth. Foreign investors including global banks have had a key role in boosting Mexico’s FDI (Foreign Direct Investment), which has doubled to USD$35.2bn in 2013 when compared to the year before.

For a country that has carefully mapped this massive expansion and has been responsive to the strategic needs of global manufacturers, one would expect that by all reasonable standards, Mexico’s achievements thus far would have earned it international recognition, and yet, when it comes to members of the US Congress, nothing could be further from the truth. For a slew of political reasons, elected US officials have conveniently stuck to two key issues when discussing US-Mexican relations, immigration reform and border security. With good reason, members of the panel spoke of their efforts to change the dialogue with the US but have done so with little success. The US Ambassador from Mexico to the US, Eduardo Medina Mora, described his personal hidden frustrations as he described his daily reminders to members of Congress on the many potential benefits Mexico can offer to the US. Clearly, the two pending bills have greatly polarized US-Mexican relations, which has resulted in a decoupling between Washington politics and the multinationals operating in Mexico.

The newly elected President Enrique Peña Nieto recognized his country’s political shortcomings early on after being sworn into office and in a series of extraordinarily bold moves pushed through four noteworthy bills to help bring his country closer to a US framework. These include:

  1. An energy reform bill that for the first time allows foreign direct investments to improve the country’s energy portfolio and infrastructure.
  2. A telecommunications bill that has broken a long-held monopoly among cell phone and television operators.
  3. An education reform bill that among other challenges will reward teachers on the basis of merit.
  4. A labor bill that makes it easier for companies to hire and fire employees.

In each case, President Enrique Peña Nieto had to take on powerful labor unions and business tycoons to successfully dismantle their influential centers. His efforts won him praise both domestically and internationally. His ingenuity and leadership earned him the respect from his country peers at the G-20 economic meetings. However, despite President Peña Nieto’s notable achievements, Mexico still has never been recognized as a priority by either the Obama Administration or members of the US Congress. Not all was lost. In response to Mexico’s relentless requests to gain access to high level officials in Washington, the White House finally acquiesced in May of 2013 to form the HLED platform, which stands for, you guessed it, High Level Economic Dialogue. Truly an unimaginative acronym and more than likely a US stalling tactic, the HLED limits Mexico to one annual meeting with cabinet-level officials in Washington.

According to one of the panelists, what Mexico needs is a revised narrative, one that addresses key mutual benefits that elected US officials can pitch to garner the support of their constituents. Just asking the US to change their dialogue away from immigration reform and border security, may not be enough. I believe something more is needed and have taken the liberty to lay out a few suggestions below (see appendix) that could help a Mexican delegation send the same intended message to the Obama Administration but, hopefully, in a more compelling manner.

I would be remiss not to mention the current threat from drug cartels in Mexico and the illegal immigration of Central and South Americans that travel through Mexico to reach the US border. No doubt it is one of the key concerns that weigh on elected officials’ minds and the American people. However, as history has shown us repeatedly, a strong economy is a far greater deterrent than an over-extended border protection scheme. By boosting medical tourism along the US-Mexican border, expanding the State of Mexico’s manufacturing hub, and educating both US and Mexican youth to meet increasing STEM job demand, drug cartels will be forced to circulate elsewhere.  As for non-Mexican immigrants, they should find employment in their own respective countries caused by a spillover effect triggered by NAFTA Version 2.0.

Hopefully the acronym HLED will some day soon be changed to read The North American Partnership or TNAP – (NAFTA Ver. 2.0). There members would agree to meet at least monthly with US cabinet officials. Maybe then, Mexico will know it is no longer being taken for granted.

###

 (APPENDIX)

A Revised Narrative for the Mexican Delegation

In an effort to change the narrative presented at the event, I have listed three key strategic points that on their own merits should help gain the attention of US political leaders.

I. Establish tiered industrial zones within Mexico’s manufacturing hubs that focus on a balanced trade-off between a range of country content ratios of finished products (i.e. US versus Mexican content) and corresponding tax policies.
Currently, the Mexican delegation claims that the US content for products manufactured in the State of Mexico is 40%. If the State of Mexico developed trade-friendly policies that applied favorable tax rates based upon US content, then further  tiered them for companies with lower US content, US leaders would view the gesture favorably and be forced to respond accordingly. For this scheme to work, however, Mexico should maintain a bi-lateral, transparent, third-party auditing process to ensure the policy is attracting the right kind of companies. At the end of the day, the same US companies who enjoy the maximum benefits will become the Mexican delegation’s greatest advocates in Washington. They will do a more effective job selling Mexico’s North American partnership to members of Congress and the American public than anyone else.

II. Open dialogue to develop trade policy between medical tourism in Mexico for US baby boomers in exchange for STEM education assistance for Mexican youth.
Just south of California, Tijuana has become the capital of the world for medical tourism with over 1 million annual visitors who generate over USD$1bn in economic benefits to the area. With the predicted shortage of doctors in the US, the retiring of 77 million baby boomers, and the introduction of Obama Care, the US may no longer have the manpower to take care of its aging population’s medical needs. Rather than leaving this situation to chance, US leaders would do well to help develop affordable pathways for the most common procedures by leveraging the abundance of Mexican doctors. Another potential idea would be to use approved Mexican medical procedural rates as a basis for insurance policy reimbursements, hence giving policyholders real options rather than just high deductibles.

In exchange for Mexico’s cooperation, the US can agree to help develop stronger STEM education curriculum (Science, Technology, Engineering, Mathematics) for its young adults who comprise over half of the Mexican population. Clearly Mexico’s immediate needs lie in educating their youth to fill a growing demand for engineers, whose efforts in turn will also help fuel the US economy, especially if the US content of manufactured products remains around 40% as stated earlier in point number one.

III. Highlight the expected reduction in border crossings over the next 5 years  based on a trending reduction in fertility rates in Mexico and improvements in  job prospects for Mexican youth.
Data shared at the event claimed that by 2020, Mexico’s fertility rates will decline from 2.67 children per child-bearing mother today to 2.2, which is comparable to the US current rate of 2.06 and the ‘replacement level’ of 2.1. The Mexican delegation should circulate these findings along with studies highlighting the reduced need to protect the US border from future Mexican immigrants because there will be fewer interested candidates. The billions saved trying to protect 51 guard posts along the longest border in the world (2,000 miles) could be allocated elsewhere including for launching Mexico’s vision for NAFTA Version 2.0.

© 2014 Tom Kadala

How to Introduce Entrepreneurship within a Young Democracy – (a case study)

During a recent Charlie Rose interview, Christine Lagarde, the president of the IMF (International Monetary Fund), shared her views with a packed audience of international economists in Washington D.C. on how young democracies such as South Africa or Malaysia commonly have fragile dual economies operating in parallel, one run by the ‘haves’ or wealthy, while the other by the ‘have nots’ or the impoverished. The wider the gap between them the greater the chance social unrest will follow, such as what happened in Egypt with the Arab Spring in 2011 and most recently in Brazil 2013. Other areas that could potentially erupt include Ukraine, Argentina, Greece, Indonesia, Pakistan… In fact the list of countries is so long that one might wonder, what exactly could the IMF or similar international financial institutions do differently and can lessons learned from one country be leveraged elsewhere?

To further explore new insights with countries operating within dual economies, I recently led a facilitated discussion with 38 university students at the Universidad del Caribe (UNICARIBE) in Santo Domingo, Dominican Republic. This island is a foothold for over 10 million inhabitants and a micro version of a typical young democracy. My goal was to hear how young Dominicans felt about their dual economy and extract a list of recommendations to pass along to political leaders and international creditors. I also hoped their ideas might offer new insights to other country leaders.

Universidad del Caribe is not your typical university. With over 19,000 enrolled students and 330 instructors, the university covers an ambitious range of degrees and disciplines at their two building complex. Students work by day and attend classes, one to two days per week. Campus spirit is notably strong fueled by an enthusiastic faculty comprised of volunteers, many of whom hold other jobs to make ends meet.

Life for a young impoverished Dominican is a daily challenge. Most will spend their lives operating undetected by government scrutiny in an underground economy where basic financial stop gaps such as access to credit for emergencies or a reasonably priced business loan are rarely accessible. Their greatest asset is their ingenuity and vibrant personality, which shines in much of what they do. Job security does not exist. They earn what they can from odd jobs, pay no taxes, and cut corners wherever and whenever by, for example, stealing electricity off the national grid. Providing for family needs consumes their meager incomes leaving them with little to no savings. In short they have few options within their reach to improve their livelihood.

On the other side of the economic spectrum, the Dominican middle class have their own set of problems. As avid consumers they buy beyond their means and spend much of their time fighting frivolous lawsuits or fulfilling new government requirements. Aside from having to pay income taxes, they are also saddled with higher utility bills required to offset the electricity stolen by freeloaders.

Surprisingly, the number one aspiration for a young Dominican adult is not to earn a college degree or to own their own business but rather to align himself or herself with a political party early on in life. In their minds, the only way to obtain job security is by serving a well-connected political group. Competition for these positions can be fierce, not because of an over-supply of skilled workers, which are scarce to begin with, but more for the oversubscribed pool of politically connected job seekers.

Open positions require a minimum of three years working experience, which leaves first time entrants with no other alternative than to join a political party.  This type of politically-motivated workforce, one based on connections rather than qualifications, tends to create a vicious circle. On the one hand, managers and leaders, also mentors, will send the wrong message to younger Dominicans who will see little value in advancing their own education or training, since the better paying jobs can be won with less effort through political connections. On the other hand, less qualified government officials are less inclined to require professional certifications from contractors to ensure that state-of-the-art services are rendered. The end result is a less competitive workforce.

The upkeep for a politically motivated workforce can become prohibitively expensive for any government. Venezuela and Cuba are two good examples where individuals are forced into political alliances for fear of being denied even basic services. Over time the workforce becomes lazy, and their leaders complacent. To please their international creditors, government officials devalue their local currency, which only makes matters worse with higher inflation rates. Eventually, both public and private sectors become trapped by the weight of their own unwillingness to progress. Adding to the malaise are party leaders who fail to recognize the immense value their Informal Sector could otherwise render with existing resources. Instead they would rather keep a tight lid on their potentially vibrant young workforce who due to their discouragement will enter a life of crime making matters even worse for their government and the rest of society.

With these facts on hand, I asked the discussion group what they thought was the root cause for their dysfunctional dual economy. Some cited a lack of women’s rights as they affect the welfare of the family unit. Others pointed to the criminal justice system for sending hardened criminals back on the streets without offering them a job or alternative form of income.  After a lively exchange, the unanimous vote for the root cause focused on the country’s weak judicial system.

According to the participants, on paper the justice system appears formidable, while in practice, it is virtually spineless. Laws are readily legislated, approved, and published to please voters; however, in the courtroom, these same laws are rarely enforced as written or at all. For the right price, a political leader or powerful investor can influence a judge’s decision to their advantage.

Despite their impoverished status, these 38 student/workers recognized the importance an independent legal system. Participants noted that whenever politicians or influencers are allowed to operate above the law, trust between the government and its people erodes. This same feeling of distrust infiltrates society and its family units creating a precariously, wider gap in their dual economy. This revelation raised an important question.

In a dual economy governed by a biased legal system, what can the government and international financial institutions such as the IMF do differently to create a brighter future for the Dominican Republic?

To counter the gap-widening effects caused by a weak judicial system, the group suggested the formation of a student entrepreneur association based out of the University del Caribe.  Members would join the Association then be matched through an interviewing process according to skills, experience, and interest to a cluster of no more than ten students each. Each cluster would be be guided and arbitrated by a university appointed mentor. At least one member of a cluster would have a specific entrepreneurial venture in mind or a launched startup in its initial stages. Members of a cluster would become the new startup’s board of advisors and help in their varying capacities to further the entrepreneur’s venture. As the venture grows, members of the board of advisors can opt to work for the new entity or start their own venture within their same cluster. The University would act as an independent arbitrator to ensure members adhere to a clear set of rules and contracts.

On an interesting side note, one individual admitted that if a cluster were to help him launch his dream construction business, he would most likely leave the cluster and not return the favor. His revealing comment confirmed the inherent distrust among his peers, which our facilitated discussion found to be primarily caused by the lack of an independent judicial system in the country. His comment re-enforces the University’s role as the cluster’s so called ‘mini judicial system’, one that is independently operated. Initially the process will most likely be an uphill battle but after a few success stories should convince others of the many benefits that can be gained from trusting each other.

Although our time ran out, other questions remained unanswered that could serve for future facilitated discussions. For example, how should the contract among members be drafted and how should the spoils and liabilities of a successful launch be structured to ensure a sustainable business? Of course, securing funding for mentors, garnering support from government officials, attracting outside investors, and designing an eco-system for future entrepreneurs are important topics too. After the discussion ended, the enthusiasm from both the students and faculty was evident by the clusters that began to form immediately among them.

As I listened to their animated voices, I could not help but think how a this two-hour discussion with a sample of prospective local entrepreneurs could potentially change the course of a nation. Hopefully, members of the IMF and other international financial institutions can learn from this case study and consider including a similar cluster program as a funding requirement for young democracies.

© 2014 Tom Kadala