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Theo worked with Owen Barder and the CGD Europe team. His work focuses on finance for development, with an emphasis on novel contracts and financing structures that enable development actors to deliver social returns by collaborating effectively with the private sector. Theo grew up in India and Ethiopia and has a Bachelor’s in economics, finance, and politics and an MSc and PhD in economics. During his PhD, he was an Overseas Development Institute (ODI) Fellow in the Pacific, where he worked as an economist for the Government of Vanuatu. Before joining CGD, he worked at the Ministry of Planning and Investment in Hanoi.
Prioritising poor countries to receive our foreign aid might prevent us from getting it to poor people. As my colleagues Owen Barder and Matt Juden discussed, the latest data shows that although 2014 was a record year for aid spending, there was a significant fall in the share going to least developed countries, which face the most urgent development challenges.
This trend is worrying. It also highlights deeper issues with the way aid is spent.
Imagine a country with national income of $100 and 10 people. If they earned $10 each and the poverty line were $1, then Success! Poverty free! But if there were a second country in which one person earned $100 and her nine compatriots earned nothing, the country would have a poverty headcount of nine out of ten, or 90 percent. Not so great. Yet because both places have identical incomes per person, neither might qualify as “poor countries”. If, instead, we gave more money to places where they were poor people, then our aid budget would (rightly) go to the country with nine destitute people in it.
Comparing the distribution of aid in 2014 to the distribution of the global poor give us a rough cut at what this would look. This means asserting a poverty line and finding out what share of the population fall below it. Though the World Bank makes this data available, actually using its PovCal database quickly causes one to lose the will to live — it only shows a single data point for a single country at a time. Instead, I’ve used a version of that data which my colleagues Justin Sandefur and Sarah Dkystra painstakingly generated to calculate the number of poor people under three poverty lines: the $1.25 a day standard and two arbitrary ones of $5/day and $10/day. (The international poverty line is now $1.90 a day; I’m using the previous one which applied to prices in 2005, the same units as Justin and Sarah’s data).
This really is a rough cut: we don’t have poverty statistics for all the countries that get aid, nor are all the headcount figures equally current. Because a lot of aid goes to multicountry facilities or to unspecified developing countries, the analysis of what’s left covers $80 billion of the $160 billion in aid spent in 2014.
With those caveats in mind, there are big gaps between where aid gets spent and where the poor live. In the graph above, countries to the right of the diagonal line receive a share of aid that is less than their share of people living in poverty. Asia is the standout case of this mismatch. Surprisingly, sub-Saharan Africa is the opposite case: though people are very poor, this region has a smaller share of the global poor simply because Asian populations are an order of magnitude larger.
The distance from the diagonal line summarises which places would “win” or “lose” if we moved from how aid was spent in 2014 to spending aid based on where people live below the poverty line. At the regional level, allocating aid to tackle per-person poverty means a realignment in development support, mainly away from Africa and towards Asia. (Several years ago, Andy Sumner made a closely related point in a great CGD working paper).
What’s driving the reallocation? The chart below shows the top ten and bottom ten changers — those places where aid would go up the most or down the most if we shifted to an poverty-headcount rule for aid allocation. (I’ve manually excluded Syria from this list; it would appear to lose out, but only because the headcount data precede the civil war). The reason is simple: the combination of vast populations and double-digit poverty headcounts in India and China mean that these countries dominate the global distribution of poverty.
This kind of data-driven counterfactual thinking is interesting, and it helps us put some structure on what a different aid regime might look like. But is it good policy? There are two arguments against using the distribution of poverty to more closely guide the distribution aid.
The second is that we shouldn’t program aid purely to target the poor. As my colleague Owen Barder put it, if we can educate two girls in country X for the price of educating one girl in country Y, then we should spend more in country X. In other words: allocate based on impact. An extension of this is that we shouldn’t spend aid in places where the poor are likely to be lifted out of poverty; since China has a space program, the thinking goes, the Chinese poor are likely to be lifted out of poverty faster than those in, say, the Democratic Republic of Congo. (Adrian Wood makes this point well, showing how accounting for economic growth in aid allocations implies spending less today where people are less likely to be poor tomorrow).
I’m sympathetic to both arguments. But I’m not persuaded. For one thing, resource allocations based on “policy scores” are famously problematic. Even if we could measure what it means to have good policy, allocating aid where it’s most potentially effective leaves the neediest communities behind because they happen to be in places that are badly run and unlikely to improve.
More importantly, thinking about impact actually bolsters the case for taking the distribution of poverty more seriously in our decisions about how to spend aid. The incidence of poverty is calculated in purchasing power parity terms, which, roughly speaking, means that we’re considering consumption, not money. Moving towards an allocation of aid that is more closely based on differences in consumption makes sense: shouldn’t improving the consumption of the most destitute be a major part of the impact we want our aid dollars to deliver?
Domestic capacity has to play a role in the conversation. But if individual poverty is the outcome we really care about, then individual poverty should be an important determinant of how we spend aid. That could imply a shift towards a new model of how to prioritise our spending. And that, in turn, may mean spending less in (some) countries that happen to be labelled as poor.
Thanks to Matt Collin and Lee Crawfurd for helpful comments and to John Osterman for his work on the graphs.
There’s growing recognition that the situation in Syria can’t be “fixed”. Western governments have instead lowered their sights to negotiating some kind of detente. That means that many more people will leave their homes in search of safety overseas. A key question coloring Europe’s debate over immigration policy is whether those new arrivals will hurt the wages of existing workers.
Early waves of Syrians arriving in Turkey clustered in a few areas, reflecting the routes they took and the locations of camps that provided services and shelter (roughly Turkey’s Anatolian and Mediterranean regions).
That clustering allows the authors, Yusuf Akgündüz and Wolter Hassink of Utrecht University and Marcel van den Berg of Statistics Netherlands, to pin down differences in wage rates associated with the arrival of Syrian families. Loosely speaking, they net out factors that are the same over time within provinces which received very many and very few new Syrian families in order to compare variation in outcomes across those areas.
The simplest economic model suggests that increasing a supply of something (like the number of workers) while holding demand (like the number of jobs) fixed pushes down prices — in this case, salaries.
That makes sense if new workers and existing ones are purely substitutes for one another. But if recent arrivals from Syria work alongside existing employees, they may be more like complements, boosting overall productivity, taking jobs existing workers don’t, and growing the economic pie enough to leave average salaries unchanged even as the number of productive workers increases.
In a neat result, the authors find that the influx of new workers didn’t hurt the wages of existing employees. They also confirm that this isn’t simply because of lower internal migration, a hypothesis that has been floated to explain the absence of deleterious effects of new arrivals. In their words “the decrease in internal migration is only about 0.4 percent of the population while the number of refugees arriving amounts to about 5 percent [in the six regions where camps and other resources were located]. There thus seems to be considerable net population growth without a corresponding effect on employment rates.”
It’s not all rosy, of course. As we might expect, a large influx of new arrivals — 500,000 people — had an effect on local prices. The authors do find that the cost of housing rose slightly, and that the rate at which food prices rose went up by about 0.2 percentage points, which works out to the equivalent of an extra 20 cents for $100 worth of shopping. This cost growth shouldn't weigh too heavily in our mental accounting. For one thing, traders and producers will react, bringing it back down. For another, many of those traders and producers are Turkish, and more Syrian arrivals means more customers. (There’s also some evidence of a small bump in unemployment, but this effect isn’t distinguishable from statistical noise).
This analysis doesn’t nail everything down. In particular, it only studies labour market data from 2011 to 2013 (national statistical organisations release these datasets with lag, so economic literature lags the demographic reality). It’s also possible that the earliest waves of Syrians to arrive in Turkey are systematically unrepresentative. They may be more likely to match with local firms, for example. And the world is complicated: at some level of influx, local resources and government services may struggle to cope.
Yet this paper suggests that we should remain sanguine in the face of evidence-free rhetoric about the “costs” and “risks” of newly arrived Syrians across Europe. It turns out that a large volume of new workers didn’t move the needle on local wages.
The findings should also give leaders in other European countries serious pause about the generosity of their own policies. If the same number of Syrians as a share of the population were to arrive in the UK as were in Turkey in 2013 (the end of the paper’s period of study), it would work out to about 360,000. That’s a lot more than the 20,000 over five years that David Cameron has seen fit to allow in so far.
Overseas development assistance amounts to about $135 billion dollars annually, but the cost of paying for the Sustainable Development Goals will be in the trillions. As a result, blended finance is something of a buzz phrase these days. It refers to financing structures and solutions that mix private capital with public support to get investments — think access to reliable electricity, more and faster-growing SMEs, or better primary health care — off the ground. Australia and Canada are enthusiastic about building new Development Finance Institutions to help do this, and other countries are ramping up the scale of theirs (the UK government just gave the CDC group, its national development finance institution (DFI) a $1 billion capital increase).
I left a workshop on blended finance last week in Paris (organised by the World Economic Forum and the OECD) excited about the potential of these new structures and instruments to deliver social returns. But I was also struck by the challenges DFIs and their advocates must overcome in order to fully realize that potential. Here are four.
1. Risk transfer isn’t the same as risk mitigation
Let’s say that the International Finance Corporation (IFC) lends $25 million to a company building a hydroelectric dam in Vietnam (it might, as many DFIs do, sweeten the deal by agreeing to get repaid later than other lenders or offer a cheaper interest rate). This coverage has a potential cost. If the government reneges on an agreement to pay a certain price per kWh for the dam’s electricity, the project could default. The IFC moves that risk on to its own balance sheet by participating in the deal.
The argument cited in favour of this transfer is that the IFC provides a “political umbrella” or, more evocatively, a “protection racket.” Partners are more likely to play nicely, the reasoning goes, because the institution has access to the right corridors of power and, by being part of the World Bank Group, can threaten wider action than what’s written into contracts or debt covenants.
The problem is that any lowering of risk that comes from a DFI’s clout doesn’t generalise. Public investors might pick deals under the false impression they can mitigate risk, when really all they do is move it to their own balance sheets. When this works, it gives a leg up to investees based on opaque, backroom suasion; when it doesn’t, the deals go sour.
2. Don’t confuse addition for additionality
If that hypothetical $25 million loan from the IFC were supplemented by $75 million in debt and $50 million in equity from private sources, it could seem like IFC had “crowded in” $125 million in “additional” capital — a seemingly impressive 5:1 leverage ratio.
But that calculation implies that the investment wouldn’t have gone ahead if the DFI hadn’t been involved. We should be skeptical. Could this deal have happened without a DFI? Could it have gone ahead at a lower price than the DFI is paying for it, either implicitly through providing a political umbrella or explicitly through offering concessional terms?
Even though DFIs report additionality measures and leverage ratios, these are a kind of convenient fiction. They don’t account for what would have happened in the absence of the DFIs’ involvement; they measure addition, not additionality. (There are ways to measure additionality, but this “counterfactual thinking” doesn’t seem to have been mainstreamed into evaluation or reporting tools as yet).
3. Measurement matters
Many development investors articulate the social outcomes they want firms to deliver. The CDC group’s 2012–2016 strategy, for example, calls for creating more jobs in its target markets.
The trouble arises when these actors measure the outcomes they’ve committed to. There’s been an entire revolution in applied economics around impact evaluation, much of which has made its way into monitoring and evaluation best practice. But DFIs are still measuring quantities like net job creation using well-intentioned but flawed tools such as simple baseline-endline surveys, backing employment out of input-output tables, or other back-of-the-envelope approaches.
Some participants at the workshop pointed out that DFIs don’t have the budgets to pay for rigorous evaluation. That’s a real constraint. But just as we increasingly insist on reliable numbers in evaluating development work that’s publicly funded by grants, we must get in the habit of demanding the same from development that’s publicly financed by equity and debt — and be willing to pay for it.
4. Don’t forget about capture or distortion
It’s natural that development finance practitioners focus on the risks on firms, like macroeconomic risk from volatile exchange rates or regulatory risk from unexpected new laws. But development finance also creates risks that fall on other stakeholders: the public sectors of the countries DFIs represent (and so their taxpayers), and the markets in which their investees work.
The risk of capture arises because DFIs are tempting targets for companies looking for government support. Adverse selection plays a role — the kinds of companies seeking support might not be the most dynamic or the most deserving. And this is exacerbated when it’s institutionalised, like when Germany’s DEG includes supporting the internationalisation of German firms as a strategic objective, or when the Overseas Private Investment Corporation (OPIC), an American DFI, limits its support to projects that are at least a fourth American-owned.
International development has endured a long, bruising fight over tied aid. It’s still ongoing in a few important sectors, like US food aid. We should work hard to avoid tied finance.
Just as capture is a risk that doesn’t fall on the firm but does fall on the public sector, distortion is a risk that falls on the market that firms operate in. Public support for firms can make markets worse off overall because it depends on a small group of experts allocating cheap capital and other help to hand-picked recipients. “Picking winners” can mean that we can end up subsidising inefficient incumbents that stifle competition and discourage more investment in their sectors — precisely the opposite of the long-run results we’re working for.
Tackling these pitfalls early on will help our DFIs evolve into a vital part of our development toolkit for delivering better services, creating new jobs, and increasing productivity at the world’s economic periphery. Failure would be bad, not only because of the market distortions that would result, but also because it would leave taxpayers footing the bill for failure, making a potentially valuable poverty-fighting tool politically untenable.
Bridge International Academies is an innovative education start-up working to provide schooling in some of Kenya's poorest urban areas (and, more recently, Uganda and Nigeria). The company is intensely focused on keeping overheads low, standardising everything from school buildings through lesson plans. This means it can charge $6 a month for primary and kindergarten classes in areas where household incomes are about $100 a month.
Like any business model built on razor-thin margins, Bridge's ability to earn a return for its owners and repay its creditors depends on scaling up fast–Bridge's expansion plan in Kenya calls for building 237 new schools to enroll an extra 300,000 pupils (it opened 47 new schools this year alone). Kenya's Ministry of Education dealt that business model a blow in late September when it stopped Bridge from opening new schools until regulations on 'non-formal schools' are finalised. Regulatory risk is nothing new, but Bridge’s case is special: its scale-up was backed by some of the world’s largest development finance institutions, including a $16 million equity stake from the IFC and the CDC Group and a $10 million subsidised loan from OPIC.
Bridge’s performance is hardly going to make or break these DFIs’ balance sheets, of course, and there’s a strong likelihood that the company will overcome this hurdle. But its current challenges are an interesting example of the potential problems with an important new trend. Support from rich countries for development-focused private investment overseas is here to stay, and will be a crucial ingredient in meeting the ambitious Sustainable Development Goals. The outcome document for the Financing for Development conference in Addis this July mentions 'private sector' as many times as it mentions 'international cooperation'. Donors are increasingly on board. In July, the UK announced a £735 ($1.11bn) million injection of capital for CDC, the first such increase in two decades.
Though there’s a great deal to like about Bridge's model, financing start-ups through our development budgets depends on a small group of experts picking winners overseas, offering subsidies to some firms but not others. The motivation for these interventions that is frequently cited is that firms that are poised to deliver dramatic social impact (like Bridge) struggle to attract the funding they need from risk-shy banks or private investors. An alternative interpretation is that local banks or investors aren't willing to offer cheap credit or take a risk on firms because they understand the risks they face. It may well be that local investors were reluctant to work with Bridge because they recognized that its business model faced precisely the regulatory risk that’s stymied its plans to scale up.
How could we support private firms but avoid these pitfalls? As my colleague Owen Barder and I argue in a working paper, donors could identify and pay for transparently-measured and mutually-agreed outcomes. In education, this could be a simple indicator, like median or average test scores. (There's a healthy debate about the role of testing in education, but scores are already used as a metric in Kenya and many other emerging markets – indeed, whether or not its students do well on basic literacy and maths tests is one of Bridge's measures for its own performance.)
Looking at Bridge’s expansion plans, we calculated a plausible figure for the implicit subsidy to the company from OPIC’s loan at below market rates. We proposed that instead of directly supporting a specific firm to deliver educational outcomes, donors could use that money to pay for success–subsidising private firms based on the educational outcomes they demonstrate, rather than investing in them up front or lending them money for outcomes that they might deliver. Though the two approaches have the same cost on paper, paying for educational outcomes keeps the risks of failure on firms rather than on the public sector’s balance sheet–a point that seems salient in light of Bridge's current challenges. And because any firm could compete for these payments, we would be supporting a sector rather than any specific incumbent.
CGD is working on how innovative financing contracts might supplement or substitute for some of the tools we rely on to work with private firms: paying for everything (grants), making soft loans (debt), or betting on specific firms to deliver social outcomes (equity). We all want Bridge to overcome the hurdle it’s facing and succeed; it’s impossible not to be impressed by the people working there and by the work that they do. But much more than that, we should want to support the development of financial instruments that don't implicitly substitute our judgment for that of local markets. We shouldn’t erode support for international development by asking taxpayers to subsidise business plans that don't pan out. And we should invest more in innovative new contracts that might keep us from footing that bill with money that could be hard at work delivering social outcomes elsewhere–in this case, through another private or public school.
What do Teodoro Obiang Nguema Mbasogo, Bashar al-Assad, Muammar Gaddafi, and the House of Saud have in common? Leif Wenar, chair of philosophy and law at King’s College London, has a three-letter answer: oil.
His new book, Blood Oil: Tyrants, Violence, and the Rules That Run the World, is a radical proposal for how and why a moral coalition of countries should stop buying commodities that bankroll toxic regimes in order to bring about change in poor, undemocratic countries and position themselves to be on the right side of history.
Leif joined us at CGD’s office in London on Tuesday as part of a series of policy breakfasts co-hosted by CGD and the Omidyar Network. We organise these events to highlight how transparency and accountability in our institutions, governments, and commerce with the rest of the world can deliver sustainable wins for development. The events bring together people from government, the boards of private-sector firms, and the spectrum of advocacy and research organisations. (We want everyone from civil servants to board chairs to speak their minds, so our policy breakfasts happen on the Chatham house rule — we’ll talk about what was said, but not about who came or who said what).
Which one is not like the others?
Leif’s analysis is concise. Natural resources aren’t like manufacturing and they aren’t like agriculture: all you need to make money from, say, rare earth metals, or crude oil, or gold is a (willing, often foreign) mining company. This frees you from the pesky business of providing services, satisfying the needs of a population, or otherwise developing and delivering on a social contract (“You’ll let me run the country, but I’ll give you roads and not arbitrarily jail you and your kin”). This makes natural resources, to use his words, one of the largest sources of unaccountable power in the world. No country that gets most of its state revenue from oil has ever transitioned from autocratic rule to democracy. And because the prize is so rich, commodities are worth fighting over: the evidence strongly suggests that commodities like precious stones or oil make civil conflicts more likely and make them last longer.
Leif’s analysis is eloquent, and the diagnosis is neither new nor unproved. The phrase resource curse entered the lexicon in the early 90s, when the economist Richard Auty coined it to describe the pernicious effects on governance and growth of what should be a blessing to the public treasury. In the paper that launched a thousand studies, Jeffrey Sachs and Andrew Warner found a strong correlation between the share of natural resources in a country’s exports and sluggish economic growth.
Leif’s diagnosis is that when we buy commodities sold by dubious actors we fatten the bank accounts of the very regimes, autocrats, or militias that we should be working the hardest to undermine. His argument for change springs, perhaps unsurprisingly, from ethics. Resources belong to the people of a country; if they can’t possibly agree to how they are being sold (and reap none of the benefits), buying those commodities is tantamount to trafficking in stolen goods.
When we buy crude oil from Equatorial Guinea, one of the “world’s best examples of the resource curse", the argument goes, we are abetting President Obiang’s theft from his fellow Equatoguineans. And recognising these regimes’ right to sell us these resources is a weirdly Janus-faced policy, giving back with one hand what the other works to take away with sanctions, moral suasion, international pressure, or even military action.
Fixing this means opting out of this trade. Blood Oil proposes that we reject tainted rulers’ property rights over the natural resources they must to sell to prop up their states. The policy, in short, is to make it illegal to buy these commodities from any country where people could not possibly agree to their sale.
Consider crude oil. If a coalition of Western countries stopped buying oil from countries that failed a transparently measured test of internal freedom, it would bisect the international oil market. ‘Clean’ oil could be exported from some countries and ‘dirty’ oil from others (thus his branding of the policy, ‘clean trade’). According to Leif’s parsing of the data of the global oil trade, about 51 percent of crude oil comes from countries that would probably fail such a test; if China and India signed on to clean trade, it would put the dirtiest regimes under nearly insurmountable pressure.
Most of us at the policy breakfast bought the moral case. But there are practical concerns about how to make this work as a policy. For example, how could we tackle transshipment of dirty oil through clean jurisdictions? And wouldn’t buying exports from countries that aren’t in our coalition be like buying transshipped oil? Leif’s book treats many of these concerns, and others. For example, we could tax exports from places that import dirty commodities.
There are certainly other aspects to the implementation of this plan that gave us pause — starving some states of income might make things much worse in the short-term for ordinary people, while the elite remain barricaded and insulated. (It’s worth noting, though, that a key difference between clean trade and sanctions is that clean trade would target the kinds of exports that dubious regimes rely on, while sanctions tend to penalise much broader classes of exports, potentially impoverishing many more ordinary people).
But perhaps the most compelling argument for clean trade is that we’ve done something like it before, and done so in the face of enormous costs. Parliament’s Slavery Abolition Act of 1833 freed nearly 800,000 slaves in the face of vociferous opposition. This wasn’t politically expedient, and, because the disgusting truth is that slavery was good business, it was astonishingly expensive: buying off slave owners for emancipating their “property” cost taxpayers £17 billion in today’s terms, an incredible 40 percent of the entire 1834 government budget. And though this is a high point, it fits into a longer, hopeful reading of history as our gradual curtailment of a state’s absolute rights, like our agreement that genocide is a crime wherever it happens, or the international recognition of the Rights of the Child. (The two countries that haven’t ratified the CRC? Somalia and, incredibly, the United States.)
* * *
Blood Oil promises to be a potent cocktail, one part astute analysis of the political economy of autocracy, and one half a radical proposal for what we can do to combat it. There are challenges to implementing the programme Leif proposes. Despite these, it may also be something quite simple: the right thing do. That alone is an argument for engaging with his thesis. As he memorably put it during the policy breakfast, “the resource curse is a problem as serious as slavery and colonialism. It demands serious solutions.”
At CGD, we try to have a laser-like focus on how we can shape the rules of the international game to deliver sustainable wins in development. Leif’s scholarship chimes with many of our other initiatives, like preemptive contract sanctions (corrupt and autocratic rulers get a special subsidy from being able to write contracts that our legal systems honour, and this is a subsidy that we should end) and Oil to Cash (fighting the resource curse by using Alaska-style direct payments of resource rents to citizens).
No surprise, then, that we think Leif’s book and the policy fixes it proposes will be both a call to arms and a programme for change. We look forward to working more with him to see how CGD can help to translate these compelling and original ideas to action.
“Private sector” appears 18 times in the outcome document from last year’s UN financing for development conference in Addis Ababa—exactly the same number of times as “international cooperation.” As we approach the first anniversary of the world signing up to the SDGs, where are the ideas that bring private sector ingenuity and capital to delivering them? In the coming weeks, we’re going to tell you about six.
They are the result of a challenge that CGD laid down to UBS, a Swiss bank: can its staff use their financial expertise to address urgent problems in international development? CGD’s senior fellows worked up a list of tough development problems for an internal Grand Challenge competition. We asked them how clever financial engineering and smart product design could help us:
Crowd investment into neglected diseases?
Help investors divest from carbon to fight climate change?
Catalyse investment in infrastructure?
Make it easier to save for the future?
Transform education by using data to reward learning outcomes?
More than 1,200 UBS staff from across the world took part by forming 300 teams and coming up with 250 ideas. UBS executives and CGD senior fellows whittled those down to just six finalists, and a group of CGD senior fellows gave these six teams focused feedback on how to ramp up the development impact of their business cases for new products, services, or funds. These were all compelling and clever, and we’ll tell you about them in a series of blogs. But there could be, as they say, just one winner: a single team won out in a tough jury session held in Zürich in June.
The winning concept is nattily-named Spavest (for SPend, sAVe, invEST—we know, we know...). It’s an automatic savings app that sits on top of normal transactions to make building up a healthy pot of savings much easier for anyone using electronic payments. Each time someone enrolled in Spavest pays for something, a small percentage of the transaction is shaved off and deposited in a long-term savings account.
Rather than creating liquid assets to protect against ill-health or unexpected expenses which derail family finances, Spavest’s app helps households save for retirement or other long-run goals. That means the savings can be accrued slowly and pooled into cheap, safe investments like index funds.
That’s a smart solution to a surprising new problem. Saving is psychologically taxing, and we all struggle to save enough (this is true of people who are relatively poor in richer and poorer countries alike). That’s now creating a downside risk for otherwise dynamic emerging economies: many developing countries are, in fact, ageing quickly. Birth rates are at or below the 2.1 replacement rate that populations need to sustain themselves across emerging Asian and Latin American markets.
As a result, the number of elderly people to workers (the “old age dependency ratio”) is rising. Despite rising incomes, this shift creates a mismatch between elderly populations and the resources for their care. Even if we account for better productivity and later retirement, governments and social safety nets have not kept up.
Spavest and related interventions sit in the wedge between demand for savings and supply of cheap, scalable, sustainable, and psychologically easy ways to save. Packaging the idea as an app takes advantage of the growing number of smartphone users in frontier economies. The GSMA, a mobile operators industry group, predicts that four-fifths of smartphone connections will come from the developing world by 2020. And people in a growing list of countries are already leapfrogging some banking services on even simpler technology, making electronic payments through M-pesa and related protocols.
Let’s be clear: Spavest probably won’t start out by targeting the 'bottom of the pyramid'. For one thing, along with China and other emerging economies, the current business plan would roll out the service for lower-income people in the UK and the US. And in frontier economies, its primary users will be people comparatively well-off enough to own smartphones. Though research by Pew finds that smartphone use is quickly rising in emerging economies (and you can pick up a barebones model for less than $20 in some places), the very poorest of the poor generally don't use mobile payments or have the slack in their budgets to accrue savings.
But that’s okay. People just a rung or two up the ladder also struggle to save, continue to share unequally in the fruits of economic growth, and deserve to reap the benefits of precisely these kinds of innovations. The premise of working with the private sector to deliver development wins cannot be that every intervention tackles every market segment, or that we focus only on innovations which need continuous subsidies to be viable.
Over the coming weeks, Spavest’s originators will take their idea through more rounds of feedback and iteration with CGD’s senior fellows. After that, there’s a real chance that Spavest will be piloted in some key test markets.
In the end, there are two simple reasons that the global public sector—donor agencies, private foundations, national governments, and multilateral agencies—should want to work with private firms: finance and function. Our ambitious Sustainable Development Goals are underfunded, with an estimated gap of over $2 trillion a year between what is needed and the public funding that’s on the table. Even if the global public sector had deep enough pockets, though, there are innovations that tackle development problems that private firms are better placed to develop and deploy. Governments might pay for roads, but we’d be in trouble if bureaucrats built them.
So bringing the public and private sectors together is about “how?” much more than “how much?” CGD’s new workstream on innovative finance focuses on how to effectively balance the public sector’s patience with the private sector’s appetite for risk and capacity to fail, learn, and iterate.
The financial sector hasn’t covered itself in glory through the financial crisis and other scandals. But the artificial dividing line between the issues people who care about fighting poverty rightly obsess over and the solutions that firms like UBS can develop impacts billions of people every day.
Really delivering on the SDGs means gaining a level of comfort and a level of expertise in crossing that divide. Done right, we will unlock much more capital and much more innovation for the global poor.
Over the coming weeks, CGD’s senior fellows who coached finalists in the Grand Challenge will be posting brief blogs about the proposals, and on what else could be done. You can read about the business cases here.
UBS provides unrestricted support for CGD's independent research on innovative finance for development. UBS also supports CGD's participation in its Grand Challenges program.
Emergencies cause poverty, drive displacement, and exacerbate insecurity. Aid to tackle natural disasters is generous, but mainly arrives when needs are acute rather than when it would do most good. Responding effectively is hard because budgets are uncertain and funding gets promised but not delivered. Please join us for the launch of a new CGD report Payouts for Perils: Using Insurance to Radically Improve Emergency Aid setting out how we can use the principles and practice of insurance to save lives, money and time when catastrophes strike.
Australia’s recent election has ended in a stalemate, with neither party scraping together enough seats to form a majority government. But amidst the flurry of election promises, one topic was conspicuous by its absence from both major parties’ platforms: the expensive, embarrassing problem of the country’s offshore detention centres for migrants and refugees. The centres made headlines again recently when Omid Masoumali died after setting himself on fire, reportedly protesting his detention.
While the policy of detaining migrants offshore is controversial, it has endured in various forms since 2001. But there is a way to make it better for everyone involved: the Humanitarian Investment Fund, or HIF, is a simple piece of financial engineering that can turn the costs of detention into productive investments in resettlement. It would leave detainees, taxpayers, and the government all better off.
Various governments have built on elements of the ‘Pacific Solution’ that calls for detaining migrants and asylum seekers in centers on Papua New Guinea and elsewhere before returning them or resettling them, sometimes in third countries like Cambodia. More than 1,500 potential refugees were housed offshore last year. Overall, more than 40 percent of detainees are held for a year or more, and the average time in detention has increased to over a year.
It’s all eye-wateringly expensive. Costs per person are hard to pin down, but calculations based on Parliamentary reports suggest that it cost an average of $440,000 AUD to keep a single person on Nauru over the 2014 fiscal year. What could that money have bought if it were spent differently? The Netherlands reports the highest first-year costs in the OECD for integrating refugees, at $31,933 USD a head (about $39,300 in 2014). So a single year’s detention on Nauru cost more than 11 years of support in the OECD’s most expensive resettlement regime. Put differently, we could have resettled 11 people in the Netherlands for the price of detaining just one on Nauru for a year.
That’s what the Humanitarian Investment Fund (HIF) would do, reorienting sunk costs towards investments in refugees’ futures. (You can read a detailed write-up here.) Rather than paying to keep people in detention, the HIF’s financial model shifts these expenses to an endowment that can be traded to give refugees asylum in any country they want to settle in, and which will accept them. Detainees would represent capital to help a willing third country offset any perceived short-run costs of providing public services, or temporary support like language classes.
Smart investments instead of sunk costs
The current policy misses a trick or three, and the Humanitarian Investment Fund model could turn these losses into smart investments.
Better value for money for taxpayers. The offshore programmes in Nauru and PNG cost a reported $1.2 billion AUD last year (more than $900 million USD). Enabling people to resettle in third countries in exchange for a small share of those costs would leave a lot of money on the table to spend on Australia’s aid programme, or on public services at home.
Better for people being detained, some of whom are children. People are held in camps for long periods, sometimes under conditions that are hard for Australia’s watchdog agencies to monitor, leading to risks of abuse or neglect. Australia’s Human Rights Commission found that “children detained...on Nauru are suffering from extreme levels of physical, emotional, psychological, and developmental distress.” The HIF model would move people off this caseload much more efficiently.
Better for Australia’s relationships with other countries. The current policy resettles some detainees in third countries with which the government has struck aid-for-migrants deals, including in Cambodia and PNG. Australian filmmaker David Fedele summarises the situation in an op-ed: “Papua New Guinea is currently struggling to look after its own people…There is no true social security system for its population, and excruciatingly high living costs, unemployment and crime.” As a result, there’s mounting frustration and even uncertainty about the system’s legality. And the deals cost even more in aid, such as the $55 million AUD paid to Cambodia.
Reasonable people have strong opinions about whether Australia should house and support more refugees, and facilitate their arrival on-shore. But it seems unreasonable to argue that pouring money into detention, restricting choices for refugees, and damaging the country’s relationships with other nations is the right public policy for Australians.
From offshore to opportunity
There are some reasons why Australia’s political leaders might not want to pivot from the detention model. One argument is that the current strategy acts as a deterrent, preventing many more people from making the risky crossing to Australia. To the extent that’s accurate, the strategy is not working: asylum applications went from 4,300 in 2003 to an average of over than 12,000 a year between 2012 and 2014. Another argument is that countries like PNG and Nauru depend on the aid that Australia is providing in exchange for hosting detainees. But switching from detention to investment through a model like the HIF would be efficient, generating large savings that could also be spent on more effective aid for these countries.
Deterrence is not working, detention is bad for detainees, and the camps are ruinously expensive for taxpayers. So reallocating funding to a HIF model makes sense: it would dramatically increase the number and quality of resettlement options. It would reduce the costs that current policy inflicts on people fleeing conflict overseas. It would help refugees transition out of camps quickly, saving time and money. And it would further establish Australia as a humanitarian leader, capable of using its diplomacy, resources, and stature to give those escaping hardship a fair chance at safe, productive lives.
Thanks to Forrest Rilling, Hannah Postel, and, particularly, Rajesh Mirchandani for helpful comments.
In his post, John Simon, a former CGD visiting fellow, politely disagreed with our suggestion that donors are mainly using the wrong instrument to support private-sector investment. John made some excellent points (which we urge you to read in full). And, as we stressed in our first post, we all agree that private investment is crucial for delivering social returns in developing countries.
However, we still believe that donors should work with the private sector by using contracts that reward success, instead of instruments like guarantees, soft loans, or equity stakes. Those instruments work best if DFIs have better information than the private sector about risks and rewards and can choke off competition by picking winners.
Below, we summarise what seem to be John’s main arguments (our takeaways) and then reply to them based on our paper.
Our takeaways from John’s post
DFIs have better information than the private sector because they get information from their government’s diplomatic corps or intelligence agencies, and — particularly in frontier markets — because they specialise in markets where the private sector has not made a similar effort to understand the terrain.
Most DFIs don’t get this kind of privileged information. In any case, there are many private sector firms that provide the same edge.
If donors really do know about profitable investment opportunities in emerging economies, wouldn’t publishing it be cheaper (and better for competition) than setting up a DFI to try and trade on it?
DFIs’ investments are ‘safer’. Because they’re attached to powerful governments, other parties involved in deals with DFIs are less likely to default or renege.
This may be true in some cases. But it isn’t a feature of DFIs — it’s a subsidy they get from the reputation of the governments that fund them.
More generally, governments often use their power on behalf of national firms to push their overseas partners to honour a contract, without participating in their deals. (We’re not saying this is good or fair).
Since it’s not something DFIs do themselves (or can bring to bear equally for all their deals), we don’t think it’s an argument for or against which kind of financial instruments donors should use.
Writing pay-for-success contracts is much more expensive for donors or DFIs than issuing loans and guarantees.
The costs of “paying for success” will go down as donors do it more often.
And since paying for success means that donors won’t need to evaluate business plans in advance, the total costs may well end up being lower than other instruments.
As the effort by donors shifts from rowing the boat to steering it, in the long run, the transactions costs could well turn out to be equal, or even lower.
As John says, OPIC in the United States and CDC in the United Kingdom both do well financially, so there is no question of needing a public subsidy. So too does the IFC, the World Bank’s private lending arm.
Since DFIs are generally profitable, not loss-making, the question of public subsidy does not arise. Moreover, their record of financial success in markets where private investors are scarce is proof they do add value in finding and promoting profitable investments in these tough environments — investments the private sector often misses.
We wish these organisations — and their investees — well.
But if DFIs were always profitable, it casts doubt on how much they are crowding in additional investment, so much as displacing private investment.
And if DFIs create additional investment by offering cheaper financing or better terms, they are subsidising the private sector.
We argue that ‘paying for success’ is a better way to allocate that subsidy.
* * *
There’s already long list of white elephant projects in development. Paying for success doesn’t eliminate the chance we’ll fund these kinds of projects, but it does mean taxpayers are less likely to bear the costs of donors’ irrational exuberance. It also makes it easier to use subsidies that encourage competition, rather than “picking winners.”
Our paper and blog post are not intended as an attack on DFIs. Far from it: we strongly believe that there should be more private investment in developing countries. But we continue to believe that donors must be thoughtful about how they do this: not only to get the best possible value for public investment, but also to have the biggest possible impact on growth and jobs in developing countries, and to do the best we can to help the world’s poor. John’s defence of DFIs does not shake our conviction that donors could be doing this better.
After Brexit, can the UK pursue its own national interest while still benefiting global development? We think an innovative, practical plan leveraging skill creation and mobility will do just that—offering mutual benefits to all relevant parties.
In the UK, the need for healthcare services is growing rapidly. With an aging population, nearly 1 in 4 UK citizens will be over the age 65 by 2034. That means a slow-moving but unavoidable rise in the need for healthcare services.
This creates a problem for the UK’s already cash-strapped National Health Service (NHS). If demand rises without an increase in supply, then prices go up. This demographic and fiscal problem is particularly grave for nursing care. There are about eight nurses per 1,000 people in Britain—falling behind most other European countries and the OECD average overall. A recent stocktake of NHS England nursing supply showed there are currently over 21,000 full time positions unfilled. Nurses provide critical assistance to people with chronic needs, offering broader care for less money than doctors and medical specialists. Without more nurses, caring for Britons will be much more expensive, or more meanly rationed, or both.
Lilongwe, the capital of Malawi, is 8,000 kilometers from London as the crow flies. Malawi faces a very different challenge: providing healthcare to its much younger, lower-income population. With fewer than four nurses or midwives per 10,000 people, the country has less than a tenth the number of health care workers suggested by the WHO to achieve even rudimentary health standards. Despite its growing population, Malawi doesn’t have enough nurses to provide basic health coverage. It faces a “deficit” of almost 60,000 healthcare workers that’s expected to increase.
Global Skills Partnerships for a win-win-win
Malawi and the UK have very different problems in keeping people healthy—but they may also share a common solution. Our colleague Michael Clemens has proposed a simple mechanism to target the skills deficit in the UK, tackle a shortage of health workers in Malawi, and leave Malawians much better off in the bargain.
A Global Skills Partnership (GSP) is a bilateral arrangement linking skill creation and skill mobility. The two countries participating in a Partnership craft a pre-migration agreement: targeting a specific skills gap, deciding how to allocate and finance training for potential migrants, and agreeing on employment terms and conditions for participants. (Healthcare is an obvious example because the needs are so great, but this could apply to a long list of occupations.)
An implementation of such a Partnership would leverage the UK’s impressive aid budget to invest in training and education centres for health workers—particularly nurses—in Malawi. Some of those nurses could choose to work in the UK for reasonable, extended periods, perhaps three to five years.
That raises the number of trained nurses in Malawi, a country that badly needs more health workers. It creates an opportunity for nurses from a lower-income country to dramatically improve their incomes and augment their skills by working overseas, boosting Malawi’s economy. It enhances incentives and resources for better education outcomes in Malawi by raising returns to education by raising future earnings. And it would enable the NHS to meet urgent needs in the UK.
Without an explicit bilateral agreement, there’s a perceived risk that all the benefits of an increased training and supply of nurses go to the UK, leaving Malawi worse off. A Global Skills Partnership addresses this concern so that benefits accrue to both sides. Here’s a summary of a GSP’s benefits:
Who benefits?How do they benefit?The UK
Trained workers to fill nursing shortage
Lower public training expenses
Planned limits on migration
Reduced training expenses
Professional employment opportunities
Access for low-income students
Large rise in earnings
Subsidised training for nurses
Greater supply of trained nurses
No fiscal drain from graduates’ migration
Stronger in-country training institutions
Remittances from nurses who migrated
Costs of the programme could be covered by the foreign aid budget. There’s political interest in spending money in ways that—directly or indirectly—benefit the British taxpayer. A bachelor’s degree nurse training programme costs in total about $100,000 in the UK or $2,000 in Malawi. Starting wages for nurses in the UK are about $27,000 per year or less than $600 per year in Malawi. It doesn’t take fancy maths to see the cost savings from training nurses in a developing country while benefiting from wages in a wealthier country: this is astonishing value for money for UK aid to increase the supply of nurses in both the UK and Malawi.
A(nother) good reason to fix bad rules
Because the Global Skills Partnership enables labour mobility that benefits everyone involved, it would also give us a chance to revisit UK immigration regulations that currently aim to restrict foreign workers and leave us all worse off.
Pressures to reduce migration have caused the rules for recruiting nurses from outside the European Economic Area to be tightened further. New hurdles have been introduced, like increasing the minimum salary and adding a £1,000 per year fee for every year of an international health worker’s visa.
Nursing is on the UK’s Shortage Occupation List, but recruiting non-EEA workers requires a Resident Labour Market Test to prove that the skills can’t be sourced locally—even though these skills are in short supply by the government’s own definition. All this red tape gums up an already expensive, time-consuming, and opaque process. More than two-thirds of targeted recruitment campaigns in EEA countries (places where workers wouldn’t need visas) have failed to attract the number of nurses hoped for.
Britain’s reconsideration of its relationship with the EU may have many pitfalls. But it is also an opportunity to rethink how aid is invested, revisit and fix broken labour, and recruitment policies—and to invest in innovations like Global Skills Partnerships that generate wealth overseas while plugging critical skills gaps at home.
Philip Hammond, Chancellor of the Exchequer, has assured people that post-Brexit labour policy will be about the “cream of the crop,” making sure that high-skilled workers won’t face excessive red tape or heavy-handed visa rules if they want to work in the UK. The “migration problem,” in Hammond’s words, is not with “computer professors, brain surgeons, or senior managers.”
A migration policy built on that creaky premise misses at least three key points:
Gains from trade
Huge welfare gains
While it is tempting to think that the UK would fare well to try skimming the “cream” of internationally-mobile, highly-skilled migrants, this notion is short-sighted, expensive, and will harm the UK economy. The UK’s Brexit vote was in part a vote for greater control over immigration—not a decision to end it altogether. So what can be gained from rethinking Britain’s post-Brexit migration policy?
Gains from trade
To paraphrase the economist Bryan Caplan, brain surgeons end up picking apples in a labour force of brain surgeons. The insight is one of the oldest in economics: we all gain from doing different things, and exchanging with one another.
It’s tempting to believe that a labour policy that prioritises the best-educated boosts collective productivity—but doctors, lawyers, and other specialists need to share a society with people who have complementary skills so that everyone can focus on what they do best.
As it happens, apples are a case in point. British agriculture contributes nearly £4 billion a year to the economy and depends heavily on foreign workers. According to a recent survey by the National Farmers’ Union, two in three farmers said that they expected to have a harder time finding workers by 2018, a figure that goes up to more than eight in ten for the very productive farms that now rely on 21 or more seasonal workers.
Deals may already be in the works to ensure that the agricultural sector can get access non-UK workers. But economics isn’t industry-specific. The same risks of tighter labour supply, higher costs, and higher prices (or just becoming uncompetitive) apply to other sectors without agriculture’s well-organised lobby.
What about the fear that allowing lower-skilled workers—such as farm workers—into the UK will displace British people from doing these jobs? On the face of it, it seems reasonable to worry that letting in low-skilled workers would put some local workers out of a job.
This argument is temping, but wrong. It starts with the hidden—and incorrect—assumption that there are only so many jobs to be done in the economy. This can’t be true. After all, there are 25 million people more in Britain today than there were a hundred years ago, but we don’t have 25 million unemployed people. As the number of people has risen, so too has the amount of work.
Additional people—whether they are British-born or come from abroad—don’t just take work, they also create demand elsewhere in the economy. They need food to eat, houses to live in, haircuts, bank accounts and mobile phones, all of which mean more jobs for other people.
Not only that, low-skilled immigrants will often take the most dangerous and undesirable jobs, and enable native workers to move into higher-productivity, more desirable occupations.
This isn’t a wonky, theoretical argument: the data show that it happens. A clever piece of analysis using Danish data shows that inflows of foreign workers not only grow the overall economic pie, but do so in part by enabling people to move into higher-productivity occupations. The sous-chef’s place is taken by a new colleague. The former sous-chef becomes the executive chef. The executive chef opens a new restaurant.
So we know, both theoretically and empirically, that the arrival of low-skilled immigrants will increase the number and the quality of jobs available existing workers. But this does not appear to connect with the lived reality of any particular British worker. They tend to see the direct effect of immigration as greater competition for jobs that they could have expected to get; it is harder for anyone to see the indirect effects of immigration, which include a larger number of more productive, better paid jobs in the economy.
And the transition to a new job, even if it is likely to be a better paid one, is never painless. Many societies do a lousy job of implementing policies that could ease this transition—even though they could be easily financed from the economic benefits of the immigration. This difference in the visibility of the effects and the poor handling of transition helps to explain why people blame migrants for unemployment and other economic misfortunes.
Huge welfare gains
The two points above suggest compelling, self-interested reasons to extend opportunities not only to the highest international earners but to low-income migrants as well. What’s more, smarter labour and migration policy is a win-win that pays huge dividends for people who did not win life’s lottery by getting themselves born in a high-productivity country.
As our colleague Lant Pritchett recently pointed out, the total lifetime value of the very best in-country foreign aid programme available is worth less than a quarter of the benefit a worker from a poor country gets from working in a high-productivity country for a single year. Allowing people to work in countries like the UK, even temporarily, not only fills a niche in labour markets and makes existing workers more productive: it is amongst the most effective development interventions available.
For example, New Zealand’s Recognised Seasonal Employer (RSE) programme was introduced nearly a decade ago to recruit workers from near-by Pacific Islands such as Vanuatu to fill seasonal labour shortages. A World Bank evaluation of the programme shows that the incomes, spending, asset ownership and savings of the short-term migrants leap up as a consequence of being employed overseas. They also benefit their home communities by helping to supply public goods like water supplies and street lighting. In the authors’ own words, this temporary mobility scheme is “among the most effective development policies evaluated to date.”
These are not sought-after jobs that locals are queuing to fill. Another paper by the same authors concludes about the RSE scheme that there’s little displacement of local workers, and migrant workers were in some cases over 50 percent more physically productive than local workers. Though some people raise concerns that temporary workers will stay for longer than they are permitted, less than one in a hundred people employed through the RSE scheme overstayed.
Chancellor Hammond has said the government would look for “appropriate” ways to assess the UK’s agricultural labour needs. But the logic of gains from trade, complementarity of workers, and a huge development dividend doesn’t end at the farm gate.
There is already a UK system in to recruit skilled workers: the tier 2 visa system could be adapted and streamlined for skilled European workers (who do not currently need a visa). But a new system must be crafted to fill the coming gap in the British labour market that is crucial to the UK’s economy—and won’t be filled by local workers. We need doctors to keep us healthy, and we also need apple-pickers to get apples to our tables. If some of those workers could be from lower-income countries, so much the better for all of us.
Thanks to Owen Barder for smart additions to an earlier draft.