The Cable

Ebola Wreaking Havoc on African Economy

The death toll in the worst Ebola outbreak in history topped more than 1,200 as of Tuesday, according to the World Health Organization. The good news is that, for now, new cases appear to be limited to Guinea, Liberia, Sierra Leone, and Nigeria. The bad news is that even if the outbreak doesn't spread beyond West Africa, the economic and political fallout in this fragile part of the world will likely last years, experts said.

The outbreak is hitting some of the poorest and most politically unstable countries on Earth. Endemic public health problems besides Ebola afflict the region. Infectious diseases, including polio, which has yet to be eradicated in Nigeria, plague the area. A 2009 study by Oxfam found that illiteracy rates in West Africa are the highest in the world. The region is also dealing with the threat from Islamic extremism, most notably Boko Haram in Nigeria. Sierra Leone and Liberia, racked by years of civil war, are trying to transition from post-conflict societies to stable government.

The outbreak comes at an inopportune time for the region. Prior to the outbreak, the Nigerian economy was being celebrated as the largest in Africa, with a GDP of $510 billion, compared with second-place South Africa, with a GDP of $353 billion. Sierra Leone is attempting to draw foreign investment to its diamond industry and saw its GDP grow 20.1 percent from 2012 to 2013. In 2013, Guinea's GDP grew a modest 2 percent.

All of these positives are now overshadowed by the bleak prediction of Ebola's ramifications in the region. The World Bank estimates that Guinea's GDP will shrink between 3.5 and 4.5 percent this year as Ebola roils the agricultural sector and discourages regional trade. Liberia's finance minister, Amara Konneh, lowered the country's GDP estimates by 5.9 percent because of the outbreak. Bismarck Rewane, CEO of the Financial Derivatives Company, a Lagos-based financial advisory and research firm that manages $18 million in assets, told CNBC Africa on Monday, Aug. 18, that Nigeria could lose at least $3.5 billion of its $510 billion GDP. Moody's has already warned that the virus could hinder the region's energy sector.

Matt Robinson, senior credit officer at Moody's in London, wrote last week that the Ebola pandemic would bring "significant economic" disruptions. "If a significant outbreak emerges in the Nigerian capital of Lagos, the consequences for the West African oil and gas industry would be considerable," his note read. "Any material decline in production would quickly translate into economic and fiscal deterioration."

The total economic consequences won't be known until the outbreak truly subsides. If history is any indication, the blow is likely to be enormous and disproportionate to the death toll. For instance, the 2003 SARS outbreak, which killed 800 people, inflicted some $50 billion in damages to the global economy, according to the Economist. Ebola could be even worse.

Steve Hanke, a professor of applied economics at Johns Hopkins University who closely tracks global instability, said the pandemic could grind regional commerce to a halt. That, combined with concerns about those governments' ability to prevent Ebola from hindering regional commerce, threatens to derail the area's recent progress.

"If the outbreak keeps going, it could be devastating," Hanke told Foreign Policy. "The one thing that keeps things going is private trade and commerce. If you start shutting that down, the economic impacts could be enormous."

This holds true for Nigeria, whose economy stands to shrink by less than 1 percent because of the outbreak. David Fidler, an associate fellow at the Center on Global Health Security at London's Chatham House, said that even a small economic disruption in a country as fragile as Nigeria could have far-reaching effects on Nigeria's travel, agricultural, and energy sectors. According to the International Monetary Fund, the energy sector accounts for 96 percent of Nigeria's export revenue.

"The spread into Nigeria is bad news," he said. "It creates the perception … that their government, the economy, and society lack sustainable capacity to engage in economic activity, to usefully take in investment."

Fidler said the government's struggles to contain the Ebola outbreak, which has infected 15 people and killed four people there, could lead some investors to conclude that the country isn't a safe place for their money. Nigeria has seen its GDP growth rate increase from 3.64 percent in the first quarter of 2013 to 6.77 percent in the same quarter of 2014, but Ebola -- along with the Boko Haram threat -- could lead to a slowdown.

"This is not what you want on a brochure asking people to come do business," Fidler said.

Bongo Adi, a professor of business at the Lagos Business School, told Foreign Policy that the Nigerian business community and the general public are gripped by fear. He said that Nigerian consumer demand, which he estimates already dropped 3.4 percent this year because of the Boko Haram crisis, is "expected to fall further."

Adi added that the country's paranoid response to the outbreak is only making matters worse. Nigerian social media has spread rumors of the effectiveness of consuming a saltwater drink known as the "blood of Christ" to prevent the disease. Government officials have been just as bad: Last week, Nigeria's health minister was forced to recant a claim he made on national television that there was a miracle cure for Ebola circulating through the Nigerian diaspora.

"Perhaps worse than the real Ebola epidemic, is the swath of … rumors that have grown out of it," Adi said.

Further complicating matters is Nigeria's overpopulation, especially in and around Lagos -- where some 21 million people live -- and in the Niger Delta, the country's oil-producing region. In both places, too many people and poor sanitation have allowed diseases largely eradicated in less crowded living conditions to thrive.

"We are talking about environments where diseases such as typhoid and cholera -- all diseases borne via the food and water chain -- are still endemic," Adi added. "In the event that [Ebola] makes it into the food chain -- a very likely scenario given the level of infrastructure decay, poor sanitation awareness, and unhygienic practices -- the damage would expectedly be of colossal proportions."

According to Chatham House's Fidler, combating sophisticated medical problems like Ebola in West Africa could make attracting foreign investment even more difficult. This would continue a troubling trend for the region; according to the 2013 World Investment Report by the United Nations Conference on Trade and Development, direct foreign investment into West Africa fell by 5 percent in 2013, from $17.6 billion to $16.8 billion.

"There are wider multiplier effects" in post-conflict countries, he said, referring to weak political institutions, public health infrastructure, and corrupt and inept militaries. "It just feeds stereotypes about African countries not being able to tend to their own affairs."

Photo via AFP

The Cable

From Electricity to Sewage, U.S. Intelligence Says the Islamic State Is Fast Learning How to Run a Country

The Obama administration's escalating air war against the Islamic State is running up against a dispiriting new reality: The militants are becoming as good at governing territory as they are at conquering it, making it considerably harder to dislodge them from the broad swaths of Syria and Iraq that they now control.

U.S. intelligence officials say the leaders of the Islamic State are adopting methods first pioneered by Hezbollah, the Lebanon-based Shiite militia, and are devoting considerable human and financial resources toward keeping essential services like electricity, water, and sewage functioning in their territory. In some areas, they even operate post offices.

The militants have built new court systems to enforce their harsh interpretation of sharia law, which punishes thieves by amputating their hands and has sentenced numerous Christians and other religious minorities to death because of their beliefs, the officials added.

At the same time, the Islamic State has generally allowed the local bureaucrats in charge of hospitals, law enforcement, trash pickup, and other municipal services to stay in their jobs, according to intelligence officials. In some areas, sitting mayors and other top local officeholders are keeping their posts.

Taken together, the moves highlight the fact that the Islamic State, already the best-armed and best-funded terror group in the world, is quickly adapting to the challenges of ruling and governing. That, in turn, dramatically reduces the chances that the extremists will face homegrown opposition in what amounts to the world's newest territory.

"ISIS is the most dangerous terrorist group in the world because they combine the fighting capabilities of al Qaeda with the administrative capabilities of Hezbollah," said David Kilcullen, a counterinsurgency expert who spent several years working as a top aide to Gen. David Petraeus during the height of the Iraq War. "It's clear that they have a state-building agenda and an understanding of the importance of effective governance."

In some areas under their control, the Islamic State is opening hospitals, building new roads, launching bus services, rehabilitating schools (at least for boys), and launching small-business programs designed to juice the local economies. In Syria, where bread is a core staple, the militants focus on managing local wheat mills and bakeries to ensure that supplies remain high enough to feed a population that was in some areas on the edge of starvation.

The group's focus on good governance, at least by militant standards, starts at the top. In his first public comments after conquering Mosul, the Islamic State's self-proclaimed caliph, Abu Bakr al-Baghdadi, called on "scientists, scholars, preachers, judges, doctors, engineers and people with military and administrative expertise" to help govern the land his group controls. Those weren't just words: Shortly after taking control of Mosul, Baghdadi transferred the Islamic State's hospital administrator for the Syrian city of Raqqa to Mosul to take that same job there, Kilcullen said.

In Raqqa, which has been under Islamic State control for months, traffic police remain on the streets and local citizens pay taxes to the militants, who in turn give them receipts stamped with the group's logo. A local goldsmith told the New York Times that the taxes are far cheaper than the bribes residents had to pay when Syrian strongman Bashar al-Assad was in control. "I feel like I am dealing with a respected state, not thugs," the goldsmith said.

The Islamic State also launched a "hearts-and-minds" campaign of sorts. In one of the more jarring examples, the group held a "fun day" in Mosul where the militants passed out soccer balls and held Quran memorization and recitation contests. The Islamic State, Kilcullen said, "is thinking like a state."