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Foreign direct investment, financial flows, private-sector development, humanitarian assistance, Africa
Vijaya Ramachandran is a senior fellow at the Center for Global Development. She works on the impact of the business environment on the productivity of firms in developing countries, and is the coauthor of an essay titled "Development as Diffusion: Manufacturing Productivity and Africa's Missing Middle,” published in the Oxford Handbook on Economics and Africa. Vijaya is also studying the unintended consequences of rich countries’ anti-money laundering policies on financial inclusion in poor countries. She has published her research in journals such as World Development, Development Policy Review, Governance, Prism, and AIDS and is the author of a CGD book, Africa’s Private Sector: What’s Wrong with the Business Environment and What to Do About It. Prior to joining CGD, Vijaya worked at the World Bank and in the Executive Office of the Secretary-General of the United Nations. She also served on the faculties of Georgetown University and Duke University. Her work has appeared in several media outlets including the Economist, Financial Times, Guardian, Washington Post, New York Times, National Public Radio, and Vox.
The world’s development challenges are far too vast for the old way of doing things. To generate the trillions of dollars necessary to achieve the Sustainable Development Goals, international institutions, policymakers and the private sector need a new approach that unlocks the power of private investment. IFC Executive Vice President and CEO Philippe Le Houérou will address how his institution’s new strategy of “creating markets,” especially where they are weak or nonexistent, can help redefine development finance in an uncertain global economic environment. Following Le Houérou’s remarks, he will be joined by a stellar panel for a discussion of the private sector development agenda.
Over the weekend, Lego—the Danish company that makes awesome toys, including this Star Wars tie fighter belonging to a colleague—announced that it would no longer promote its products through The Daily Mail. Lego tweeted, “We have finished the agreement with The Daily Mail and are not planning any future promotional activity with the newspaper." Whatever the reasons may be for Lego’s announcement, it is seen as a major success for the Stop Funding Hate campaign, which asks businesses not to advertise in tabloids such as The Daily Mail, The Sun, and The Daily Express.
There are two good reasons to harness the market power of iconic brands. First, policymakers and researchers with evidence-based arguments on migration are struggling to combat the hateful rhetoric of the tabloids. Second, the private sector has an important role to play in ensuring global economic prosperity. Among other things, it should use its power to fight the misinformation, ignorance, and hate directed towards the world’s most vulnerable people.
Stop Funding Hate argues that it is committed to freedom of expression but that it is “horrified by the upsurge in media hate speech” that accompanied the EU referendum in the UK. In the lead up to the referendum and in its aftermath, the UK tabloid press has waged an unrelenting war on refugees and migrants with headlines like “Send in Army to Halt Migrant Invasion,” “Rescue Boats? I Would Use Gunships to Stop Migrants,” and “They Got What They Deserved." With little to no evidence to back them up, the tabloids have argued that migrants are thieves and criminals, taking benefits away from honest citizens, and causing irreparable harm to British culture and traditions.
Since Stop Funding Hate launched its campaign in August, over 40,000 people have signed a petition calling for Virgin Media to withdraw its advertising from The Sun. Its original campaign video has been viewed more than five million times. Stop Funding Hate is now asking major UK retailers such as Marks and Spencer and Waitrose to make ethical choices about where they advertise, pointing out that the Christmas message of goodwill towards all is in sharp contrast with the hate-filled headlines of many tabloids. On social media, concerned citizens are asking British Airways and Virgin Atlantic not to distribute The Daily Mail on transatlantic flights. The UN High Commissioner for Human Rights has also raised concerns about the “vicious verbal assault on migrants and asylum seekers in the UK tabloid press.”
Perhaps the most important role for the private sector is to advocate for safe and legal migration flows to help grow the economies of both rich and poor countries. Using their market power to combat misinformation is also welcome in today’s world.
Long lines formed at banks across India today, following Prime Minister Narendra Modi’s announcement on Wednesday of a bold measure to reduce the role of unaccounted for cash or “black money” in the country’s economy by “de-monetizing” higher-denomination currency notes. The new policy, which became effective at midnight on November 9 after a short four-hour notice, bans the use of 500 rupee and 1,000 rupee currency notes (worth approximately $7.50 and $15, respectively) and requires holders of these notes to either deposit them with banks or exchange them for smaller denomination notes by December 30. More details of the plan can be found here and here.
The measure reflects growing concern that high denomination currency notes are often used to conduct illicit finance—including money laundering, tax evasion, and terrorist financing—because they allow for large and anonymous payments. For this reason, thought leaders including former Standard Chartered CEO Peter Sands and CGD’s Board Chair Larry Summers have argued that policymakers should eliminate high value currency notes such as the $100 bill, and in May 2016 the European Central Bank eliminated the €500 note. Kenneth Rogoff has taken the argument a step further by suggesting the elimination of cash altogether.
Interestingly though, the Indian government has already committed to printing new higher denomination notes (including Rs.500 and, for the first time, Rs.2,000 notes) at the beginning of the next financial year (April 1, 2017). These new notes will have security features that make counterfeiting more difficult. This makes it clear that the government’s strategy is to flush the system of counterfeit and black money rather than remove higher denomination notes. For the time being though, the Rs.100 note (worth approximately $1.50) will be the highest denomination note in the Indian economy.
(As an aside, it is interesting to consider why the government chose to announce this policy before printing new replacement notes. Some pundits have argued that Modi and the Bharatiya Janata Party rushed implementation of the measure to undercut efforts by opposition parties to use black money in the form of illegal handouts ahead of next year’s assembly election in Uttar Pradesh.)
While this measure may have the positive (though potentially temporary) effect of forcing illicit activity out of the regulated economy, the process could be disorderly, with the poorest members of society bearing the brunt of the disruption.
What happens now?
All banks in India were closed yesterday, so they could restock their ATMs with small denomination notes. With banks now reopened, Indians now have 50 days to deposit their Rs.500 and Rs.1,000 notes or exchange them with notes of smaller denominations. An ATM withdrawal limit of Rs.2,000 will be in place until November 18, at which point it will be raised to Rs.4,000.
The measure will eliminate, for a time, the use of counterfeit notes in these denominations. It will also present a stark choice to those who have used these notes to hoard black money: either convert their funds into “white” (or legal) money that can then be taxed, or lose the wealth stored in these denominations. The Ministry of Finance has already called on banks to keep records of new deposits and exchanges, which will presumably deter individuals who raised these funds illicitly from seeking to deposit or exchange them.
When we consider that GDP per capita in India was $1,456 in 2013, while GDP per capita in the United States was $52,660, and adjust for this difference in income, we find that the Rs.500 note represents roughly the same share of an average Indian’s income that a fictional $300 bill would represent to the average US person. With some policymakers in the United States considering eliminating the $100 bill, it is not outlandish for the Indian government, using the same logic, to consider eliminating bills worth Rs.500 or more.
However, the negative effect on poor households of such a ban may be significantly higher in India, given the economy’s heavy reliance on cash: the total value of cash in circulation in India is approximately 12 percent of GDP compared to 7 percent of GDP in the United States. Indeed, the value of the banned notes represents more than 10 percent of India’s GDP, whereas the total value of $100 bills in the United States is equivalent to 5 percent of US GDP (the relative importance of higher denomination rupee notes to India’s domestic economy is actually much greater, since roughly two thirds of all $100 bills are held outside the United States, often as a reserve currency, according to the Federal Reserve). In addition, since the smooth transition towards the new notes relies on access to banks, those who lack this access are at the highest risk of running out of cash.
Source: Quartz, India
Source: Federal Reserve
Prime Minister Modi has promised that the government will mitigate the short-term repercussions of the plan by allowing firms to accept Rs.500 and Rs.1000 notes in cases of emergency, including at government hospitals, pharmacies, and booking counters for railway or bus tickets. However, there are plenty of reasons to be concerned about how this surprise move will affect India’s poorest citizens.
What happens next?
Whether these measures can significantly reduce illicit finance and tax evasion in India without negatively affecting the country’s poorest will depend on how well the Indian government, and particularly the Reserve Bank of India, manage the process over the next 50 days. The government should be commended for its boldness but it should also recognize that this is merely one step towards reducing the role of cash in the economy and moving to a more modern financial system that relies more heavily on digital payments.
In September 2015, world leaders agreed on a new development agenda, Agenda 2030, that would leave no one behind and that would eliminate extreme poverty and hunger. What are the most effective ways of reach those objectives? Is agriculture still the most effective way to reduce poverty, in a rapidly changing world with a growing demand for food and rapid urbanization in many developing countries? More broadly, what is the role of rural economies – including but beyond agriculture, rural societies, and rural landscapes in turning the agenda into reality?
Attention presidential transition teams: the Rethinking US Development Policy team at the Center for Global Development strongly urges you to include these three big ideas in your first year budget submission to Congress and pursue these three smart reforms during your first year.
In Haiti, already the poorest country in the western hemisphere, Hurricane Matthew’s devastation is still being calculated. We know that hundreds of people have died, and the damage to Haiti’s already-fragile infrastructure is immense. So what can people in rich countries do to help? Based on the latest research on humanitarian disaster relief and on the lessons learned in the wake of the 2010 earthquake in Haiti, here are some do’s and some don’ts for policymakers and individuals.
Give money, not stuff
If you are looking to help as an individual, give money, not stuff. Sorting, shipping and distributing donated items is expensive. That means your donations won’t do anywhere near as much good as it might seem. Money is also much faster to arrive, helping people sooner and more flexibly than a donation. The most needed staples in hurricane-hit areas are already available in Haiti. What’s needed is timely funds with which to purchase and distribute them. In the worst cases, donations can be highly damaging to the local economy, as was the case after the 2010 earthquake, when the huge amounts of food received depressed local prices and hurt farmers. Your donated t-shirt might not do so much damage, but a small part of your pay check would be much more valuable.
Support local organizations
Haiti’s ambassador to the US, Paul Altidor, has called for those who wish to help to engage with local organizations and municipalities in order ‘to avoid mistakes from the past’. After the earthquake in 2010, the hundreds of international organizations on the ground were not at all transparent to the Haitian administration or to each other, meaning that efforts were duplicated and people ended up getting in each other’s way.
There are a number of excellent Haiti-based organizations, like Zanmi Lasante and TiKay Haiti, who are best placed to understand and address local needs, but who struggle for funding. Just 0.6 per cent of the $6.43 billion donated in the wake of the 2010 earthquake found its way to local organizations. Unlike many international organizations, these Haitian charities are known by, and work closely with, local municipalities. This is important to the long-term development of Haiti. As Ambassador Altidor points out: ‘It is imperative that we take caution when offering assistance not to contribute to the destruction of local institutions by bypassing or undermining them.’
Don’t get on a plane
Unless you’re asked to come to Haiti by a reputable organization with a long-term presence on the ground, you will probably just be in the way. The cost of your plane ticket will do more good as a donation.
Policymakers: Be transparent
In the wake of the 2010 earthquake and its associated relief effort, it has been almost impossible to trace the final destination of humanitarian funds raised. We know, because we tried. A lack of transparency about how funds were used means that international NGOs and private contractors were not accountable to the people they were supposed to be helping, or to the Haitian government. How then can we learn any lessons about what was cost-effective? This time, we must do better. The International Aid Transparency Initiative (IATI) and UN OCHA’s Financial Tracking Service are mechanisms that facilitate transparency. Organizations receiving public funds should be obliged to publish adequate data to IATI.
Buy insurance for next time
Recent work from CGD shows that Catastrophe Insurance could radically improve the way that humanitarian relief is organized. Using insurance principles instead of the current ad hoc system would save lives, save money, and provide incentives to invest in disaster preparedness. Haiti doesn’t need to face a debacle like the response to the 2010 earthquake. Donor countries can fix this problem, if they decide they want to do so.
On January 12, 2010, Haiti experienced a 7.0M earthquake, killing over 200,000 people and making several million homeless. In the years that followed, the US committed over $3 billion in taxpayer funds to help Haitians cope with this enormous disaster. Between 2012 and 2014, my coauthor Julie Walz and I spent countless hours trying to figure out where all the money had gone.
USAID’S tradition of not reporting data from their subcontractors meant that the trail grew cold quickly. My final attempt (in 2014) at tracking the money showed that almost half of the transactions data had missing values for the Data Universal Numbering System (DUNS), which serves as a unique identifier for vendors and transactions. In addition to the missing DUNS data, 35 percent of vendor names (corresponding to $16 million in disbursements) and 34 percent of award numbers ($18.4 million) were not reported. Four years after the quake, USAID either did not know who its vendors were or had not bothered to record the data. USAID has recently added more vendor information to its database.
A new report by the Government Accountability Office (GAO) shows the same dismal pattern on a much wider scale with regard to data quality. Since 2013, the Department of State has collected and published quarterly data on ForeignAssistance.gov from the 10 agencies that provide the majority of US foreign assistance. Comparing data for fiscal year 2014 from USAID’s Foreign Aid Explorer and State’s ForeignAssistance.gov, the GAO finds that State did not report over $10 billion in disbursements and $6 billion in obligations. Even award titles are not listed correctly for many of the transactions that GAO reviewed.
The GAO also finds that State was not fully transparent about the limitations of its data. Neither had it updated ForeignAssistance.gov with verified annual data to ensure quality. These problems are not new; my colleague Sarah Rose talked about them in a CGD blog post over two years ago. Figure 1 shows the discrepancies for 2014.
Figure 1. Comparison of Foreign Assistance Funding Data Reported by 10 US Agencies—published on ForeignAssistance.gov and Foreign Aid Explorer, FY 2014
In addition to the data limitations identified by GAO, another big gap in US foreign assistance data transparency that ForeignAssistance.gov isn’t even trying to address is the reporting on sub-contractor awards. This is supposed to be done in the FFATA Sub-Award Reporting System (FSRS), which should eventually feed into USAspending.gov.
The GAO recommends that State should provide guidance to the relevant agencies on identifying data limitations and clearly disclose those limitations on the website; and in consultation with the OMB director and the USAID administrator, undertake a review of data quality and develop guidance on improving the quality of aid data. These are sound recommendations in an ongoing effort to improve transparency in US foreign assistance, which is not an end in itself. Rather it is a means to understanding what works and how to best assist beneficiaries.
Last November, a CGD working group of experts convened to address the unintended consequences of anti-money laundering (AML) policies for poor countries, where they recommended that the Financial Stability Board (FSB) should take the lead on addressing problematic de-risking by banks. Below, we outline our takeaways on the FSB’s progress thus far.
De-risking has potential negative consequences for senders and receivers of remittances, businesspeople operating across borders, and charities working in conflict zones. Given that the FSB’s mandate is to coordinate and review the work of financial standards-setters and regulators, the CGD working group felt that it was particularly well-suited to address the full range of causes of problematic de-risking behavior by banks and the subsequent decline in correspondent banking relationships between rich and poor countries.
The FSB has in fact taken on the challenge. Late last year, it issued an action plan to undertake the following tasks:
Examine the dimensions and implications of the decline in correspondent banking.
Clarify regulatory expectation relating to AML compliance in correspondent banking relationships.
Build domestic capacity in jurisdictions that are home to affected respondent banks.
Strengthen the due diligence tools available to banks.
In March 2016, the FSB established the Correspondent Banking Coordination Group (CBCG), comprised of senior representatives from international organizations and standard setters and national authorities in the FSB and its Regional Consultative Groups, in order to implement its action plan. Last week, it issued a progress update indicating its work in each of the four key areas.
Process is important. The FSB is a key player in shaping the global financial architecture and its involvement in this area is both timely and significant. Its ability to convene the key players at the national and international level has raised the level of dialogue around the problem of de-risking.
The FSB report’s emphasis on four key areas is exactly right. And we feel compelled to point out that they are very similar to our recommendations! In particular, we like the emphasis on data collection and data sharing.
Significant progress has been made since the FSB began working in this area. Recommendations made by us and by the FSB in November 2015 to enable banks to include Legal Entity Identifiers on payment messages are now well in progress. Other big players are also addressing the issue, with new pieces of work especially from the IMF and the US Treasury.
There’s a lot more to be done! Notably, the FSB has talked about the need for systematic data collection and sharing between governments of information relating to the number of correspondent banking relationships between jurisdictions and the types of further customers served by these relationships, like money transfer organizations. So far, there’s been no sign of that sort of systematic data collection and sharing. The emphasis, rather, has been on one-off surveys that are useful right now, but don’t create a system for assessing the effect of AML enforcement on payment flows going forward.
All in all, the FSB is doing a great job of progressing the effort to address the issue of de-risking and the unintended consequences of anti-money laundering. But much more is needed, not just from the FSB and other standards-setters, but also from national governments. That’s why, here at CGD, we are continuing our research and dialogue with key policymakers.
Development Finance Institutions (DFIs)—which provide financing to private investors in developing economies—have seen rapid expansion over the past few years. This paper describes and analyses a new dataset covering the five largest bilateral DFIs alongside the IFC which includes project amounts, standardized sectors, instruments, and countries. The aim is to establish the size and scope of DFIs and to compare and contrast them with the IFC.
This paper addresses the response to historically high rice prices in 2008 first by presenting a historical review of trends in the West African rice sector and, second, by assessing the effect of world rice prices on domestic prices, primarily at the consumer level.
Since the 2010 earthquake, there has been very little direct procurement of goods or services from local businesses, missing a huge opportunity to spur long-term growth. Local procurement not only purchases immediately needed goods or services but helps grow the private sector, create jobs, and encourage entrepreneurs. Spending more money locally can multiply the effect of US assistance.
The transparency and accountability of US spending in Haiti needs to be improved. Despite the large amount of public money disbursed for earthquake recovery in Haiti, it is nearly impossible to track how the money has been spent and what has been achieved.
Last month, the Indian Express reported that India might not accept aid from the United Kingdom after April 2011. India has been the largest single recipient of British aid, receiving more than €800m (about $1.25b) since 2008. This announcement is perhaps symbolic of the fine line that India is walking between being a “developed” and “developing” country. It is the eleventh largest economy in the world, growing 8-9% annually. But it is also home to one-third of the world’s poor—there are more poor people in India than in all of Sub-Saharan Africa.
Nonetheless, over the past decade, India has quietly transitioned to a donor country, emerging on the world stage as a significant provider of development assistance.
In the mid-1980s, India was the world’s largest recipient of foreign aid. Today foreign aid is less than 0.3% of GDP. Seven years ago India announced that it would only accept bilateral development assistance from five countries (Germany, Japan, Russia, the UK, and the United States) in addition to the EU. Now it appears that the list is dwindling. India also declined international assistance after both the 2004 tsunami and the 2005 earthquake in Kashmir.
These changes seem to reflect fresh attention to aid as an instrument of foreign policy. India’s flagship aid initiative has been the Indian Technical and Economic Cooperation (ITEC), which provides training and education to scholars and leaders from developing countries. There are more than 40,000 alumni of the ITEC program around the world; the hope is they have a friendly disposition to India that will be reflected in policies and bilateral relationships. However, India is no longer containing itself to “soft power” influences. Driven by competition with China and its own unprecedented growth, India has begun to focus on not only diplomatic influence but also on oil reserves and markets for goods, especially in Africa. During the April 2008 India-Africa Forum Summit, India pledged $500 million in concessional credit facilities to eight resource rich West-African nations.
Some observers argue that India would do best not to completely abandon its “soft power” approach. Much of India’s success in its relations with the developing world has been built through its traditional aid program and a shared colonial history with countries in Africa and elsewhere. India should think twice before sacrificing this goodwill for mineral or other resources.
More problematically, like China, India lacks an official definition of what counts as development assistance. No official records of aid disbursements are kept, either by the Ministry of External Affairs or the Ministry of Finance. Aid flows through various channels and various agencies in an ad hoc manner. And India has yet to join the OECD’s Development Assistance Committee (DAC), which would require better record keeping and compliance with international standard definitions. India’s foreign aid program will likely be more successful if it engages with other donors, provides clear and transparent records of its activities, and participates as a full-fledged member of the global aid system, including joining the OECD-DAC. Public information and records will not only allow India to receive due credit as an emerging player, but will also facilitate cooperation with other donors. If India’s goal is to be recognized as a significant donor, it must start acting like one.