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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 need for infrastructure improvements is a top-tier economic, political, and social issue in nearly every African country. Although the academic and policy literature is extensive in terms of estimating the impact of infrastructure deficits on economic and social indicators, very few studies have examined citizen demands for infrastructure.
Clay Lowery, our group’s chair, is Vice President at Rock Creek Global Advisors, an international economic policy advisory firm, where he focuses on international financial regulation, sovereign debt, exchange rates, and investment policy. He is also a Visiting Fellow at the Center for Global Development and serves on the Policy Advisory Board at the European Institute. He was an Adjunct Professor at Georgetown University in international finance and a lecturer at the National War College.
Originally published in October 2013 and updated January 2015
Food security has arisen again on the development agenda. High and volatile food prices took a toll in 2007–08, and in many low-income countries agricultural yields have risen little, if at all, in the last decade. Moreover, food production in these poor countries is especially vulnerable to climate change. Meeting this demand is a global challenge. The Food and Agriculture Organization of the United Nations (FAO) is expected to lead the way in meeting this challenge and, with the arrival in 2012 of the first new director-general in 18 years, it has an opening to restructure itself to do so.
On January 12, 2010, an earthquake of magnitude 7.0 struck close to the densely populated city of Port-au-Prince, Haiti, killing over 200,000 people and reducing the city to rubble. Several million people lost their homes and their livelihoods. The response from the international community was overwhelming—at least $6 billion was disbursed in official aid and an estimated $3 billion was donated via the large international NGOs in private contributions. The United States alone pledged more than $3 billion for relief and reconstruction.
In Haiti, US Rectifies Missed Opportunity to HelpMichael Clemens
“[The United States] missed a big chance to do much more [for Haiti], at little cost. The US could have leveraged the power of international labor mobility to help Haiti in ways that happen to help America as well. In the immediate aftermath of the quake, the US made no adjustment at all to the barriers against exit from the disaster-hobbled country.”
Five years later, I still cannot figure out where all the money has gone. From websites such as usaspending.gov and the UN Office of the Special Envoy for Haiti (now closed), we know that non-governmental organizations and private contractors have been the intermediate recipients of most of these funds. Many are based in the United States. Despite the fact that these organizations are beneficiaries of taxpayer dollars, there are very few publicly-available evaluations of services delivered, lives saved, or mistakes made.
For example, USAID has disbursed at least $150 million to Chemonics, a private contractor, but there is no public record of how that money was spent, what projects were implemented, or how many people were served. This lack of accountability has made it nearly impossible for the Haitian authorities to know who is doing what in their country. It also means that five years after the quake, we really don’t know what worked, what didn’t and how we can do better next time.
The failure to publicly report how funding has been used has broader implications. The world is currently coping with the Ebola crisis. Hundreds of millions of dollars have been committed to countries where health spending is typically a few million dollars per year. We do not yet know whether these funds will be tracked adequately. And already, there is a lack of coordination—for example, in December, 60 out of 80 beds at a newly-constructed clinic in Sierra Leone were not being used because of a lack of staff.
Five years after the quake in Haiti, we really don’t know what worked, what didn’t, or how to do better next time.
There are a variety of technologies available that can improve disaster response, including tools from the crisis-mapping community. But what is really needed, is for all humanitarian and aid organizations to publish details of their planned and actual spending and activities, in real time, in an open, easy-to-access format. Reporting data to platforms such as the International Aid Transparency Initiative and UN OCHA’s Financial Tracking Service would enable donors and beneficiaries to identify where activities overlap and where gaps remain. USAID, which has released some data in the past year through its Foreign Assistance Dashboard, needs to do more—it should publish detailed information about the delivery of services by its major sub-contractors.
In Haiti, the band plays on. Several thousand people still live in tents that were supposed to be temporary housing for families displaced in January 2010. Haiti remains the “Republic of NGOs.” Five years and $9 billion later, Port-au-Prince does not have decent roads, clean water, or a reliable supply of electricity. And, sadly, when I mentioned to a colleague in CGD’s Europe office (where I am currently based), that I was writing about the earthquake in Haiti, she asked, “Everyone’s forgotten about that, right?”
A few days ago, my colleague Jenny Kendra was delayed on the London Tube. Jenny wrote “Major delays on the District Line due to a signal problem at East Putney. Stuck on Tube at present, not moving.” When Jenny finally got to the office, she mentioned that she would be compensated for the delay. Given our interest in service guarantees, we went to the TFL (London Underground) website to find out more:
Service refunds are provided for delays of 15+ minutes underground, and 30+ minutes overground.
Refund is equivalent to the fare paid for the delayed trip.
Reasons that qualify for a refund include signal failure, faulty trains, defective tracks, and unplanned engineering works.
Refunds are not applicable if service changes and engineering work were planned, the consumer took an alternative route, or the delay was due to causes outside the control of TFL (security alert, customer incident - ill person for example, weather incident).
Application for a refund must be made online, must be completed within 14 days of the journey, and requires a TFL account (which does not seem to ask for many personal details).
This type of guarantee might be very relevant for countries that are trying to attract investors. In a recent paper, we proposed the idea of Service Performance Guarantees (SPGs). As we wrote in an earlier blog post:
Foreign or domestic firms investing in the country or in a special economic zone would be offered the opportunity by the relevant government authority to purchase a contract guaranteeing the delivery of specified services up to a minimum standard and for a prescribed period, possibly around 10 years. These might include, for example, the quality and reliability of power supply, the time needed for customs clearance at ports or airports, the time for port turn-around, and the speed of processing and approvals of duty drawbacks as well as a range of other services and permits. The guarantees would be contractual legal agreements between the service provider and the firm. Contracts would be standardized rather than customized, except for the largest anchor firms (to extend the mall analogy).
Service performance guarantees would be covered by a “domestic reserve” funded from paid-in premiums and backed up by a further guarantee issued by an agency like MIGA or by USAID’s Development Credit Authority, which already has the authority to issue guarantees to domestic and foreign investors. IDA or another donor could issue a backup guarantee. These guarantees, together comprising the SPG mechanism, would be components of loans provided to the country to create or rehabilitate infrastructure or to help streamline business processes. An “external reserve” would be set aside out of the loan amounts to cover the back-up guarantee.
Calls on performance contracts that exceeded the domestic reserve of the fund would trigger calls on the external reserve and a payment from the development agency to the firms via the SPG. At the end of the prescribed period, any unused balances in the domestic and external reserve funds would revert to the country as a bonus for providing good services. Countries that have made improvements in their business climate but are yet to attract investors may be good candidates for SPGs. Special Economic Zones or Export Processing Zones, which typically offer a package of services to investors, might also be good candidates for a pilot.
The experience of service guarantees offered by the London Tube suggests that investors might need to be made aware of such guarantees. In 2010, only about 330,000 Tube passengers claimed compensation for delays, out of a potential 11 million, despite the availability of smartphone apps to make the process easier.
Jenny, however, received a refund of 2.20 pounds today.
What is the best way to promote access to reliable and affordable electricity for the estimated 600 million Africans that currently live without it? Should efforts focus on extending centralized grids? Should governments emphasize off-grid solutions? Or, is the magical formula a mix of the two? These are big questions for African policymakers and their global partners. It’s also at the heart of a raging debate concerning President Obama’s Power Africa initiative. Some have categorically argued that focusing on grids is the wrong way to go. But what if tens of millions of people actually live in areas where the grid already exists, yet aren’t connected to it for some reason?
Our forthcoming CGD research on infrastructure service availability, which utilizes new Afrobarometer survey data, may shed some light on this debate. Whenever Afrobarometer enumerators survey individuals in the field, they track whether there is an “electricity grid that most houses could access” in the immediate area. (We’ve included more detail on their sampling methodology below.) In their last survey round, they collected this information for 33 countries across North Africa and Sub-Saharan Africa. This includes five of the Power Africa countries (Ghana, Kenya, Liberia, Nigeria, and Tanzania). Unfortunately, they don’t ask whether the survey respondent actually has access to electricity as well. As such, we have to rely on other data sources, such as Demographic and Health Surveys, for national and sub-national access estimates.
Comparing grid coverage and household access rates, even in an apples-to-oranges way, may inform decisions about what types of policies to promote. For instance, should policymakers tackle regulatory or commercial challenges that hold back new electricity connections, such as high hook up costs or unsustainable tariff structures? Or should they expand household access through grid extension and/or off-grid solutions for under-served populations?
Here are some of our preliminary findings for the Power Africa countries:
Electrical grid coverage is surprisingly high in several countries. For instance, over 90 percent of surveyed Nigerians live in an area where the grid is present. In Ghana, that figure is over 80 percent. And it’s roughly 70 percent in Kenya. If extrapolated to the broader population, up to 230 million people could live near the electrical grid in these five Power Africa countries (out of roughly 300 million people total).
Yet household access rates remain very low. According to recent DHS data, only 56 percent of Nigerian households have access to electricity. It’s a little higher in Ghana (61 percent), much lower in Kenya (23 percent), and even lower yet in Liberia and Tanzania. Collectively, an estimated 165 million people live without electricity in these five countries.
This dynamic applies to both urban and rural populations alike. While grid coverage rates are lower in rural areas, they are still quite high in several countries. For example, nearly 90 percent of surveyed rural Nigerians live in areas where the grid is present. Yet, DHS data puts rural household access at a mere 34 percent. Liberia and Tanzania, which have both extremely low grid coverage and household access rates in rural areas, are the two exceptions.
Focusing on grid connections might be lower hanging fruit than pursuing capital-intensive investments in grid extension or off-grid solutions.It’s not perfectly clean to compare DHS and Afrobarometer survey data on household access and electrical grid coverage. Even so, the huge differential between the two suggests that hooking up households to the grid in their immediate area could put a big dent into African energy poverty. Based on our back-of-the-envelope estimates, there may be up to 95 million people living ‘under the grid’ and without access in five of the Power Africa focus countries. A great paper on Kenya by researchers at Berkeley comes to a similar conclusion.
None of this suggests that grid extension or off-grid approaches should be ignored. But, it does argue that any effort to combat African energy poverty should look hard at connecting people to the grid that is already in their proverbial backyard. And if our rough estimates are even remotely accurate, then the much argued need for leapfrogging over traditional grid structures may reflect ideological ambitions more than real world opportunities for promoting access at a grand scale.
Afrobarometer survey samples are designed to produce a representative cross-section of all voting age citizens within a given country. The sampling frame attempts to ensure that every adult citizen has an equal and known chance of being selected for an in-person interview. Afrobarometer samples typically include either 1200 or 2400 cases. A randomly selected sample of 1200 interviews allows national adult population inferences with a margin of sampling error of +/- 2.8 percent at the 95 percent confidence level. With a sample size of 2400, the margin of error is +/- 2.0 percent at the 95 percent confidence level.
Afrobarometer stratifies the sample by the main sub-national unit of government (e.g., state, province, or region) and by urban or rural location. This reduces the likelihood that distinctive ethnic or language groups are omitted from the sample. Afrobarometer occasionally oversamples certain politically significant populations within a country to ensure that the size of the sub-sample is large enough for rigorous analysis. Data sets include weighting factors at the primary sampling unit (PSU) level to account for individual selection probability. These sampling units typically correspond to national census units.
Afrobarometer enumerators identify the availability of five types of infrastructure in the respondents’ enumeration area: electricity grid, piped water, sewage system, mobile phone service, and surfaced roads. Afrobarometer protocols require that both enumerators and field supervisors jointly assess the presence of infrastructure services in the enumeration areas.
Afrobarometer data lack specificity on the electrical grid available in an area. We are unsure whether positively identified areas have high voltage lines and step down transformers necessary to facilitate household connections. If areas are lacking step down transformers, the cost of connecting houses would significantly increase. This is an issue that we plan to explore further with Afrobarometer project staff.
Demographic and Health Surveys also produce nationally and sub-nationally representative results based upon statistically rigorous sampling frames. When determining household electricity access, DHS enumerators rely upon individual responses and then apply those to all documented members of the household. In contrast, Afrobarometer only collects information on the primary survey respondent. It does not collect information on other members within the related household. However, since both Afrobarometer and DHS data is nationally representative, including for urban and rural cross-tabulations, we are broadly comfortable making rough comparisons across the two datasets. Nonetheless, there are inter-temporal differences in the survey coverage that merits consideration when interpreting our back-of-the-envelope results. Importantly, we do not attempt to extrapolate mid-point estimates of either grid coverage or household access rates in between survey years.
Many developing countries have made progress in political openness and economic management but lag in terms of attracting private sector investments, at least outside of narrow resource-based enclaves.These countries may have recognized potential but have not yet established the reputation needed to sustain investment through the inevitable political and policy shocks that take place in most countries. The concerns that deter investors are many but can be broadly classified into high costs that that prevent global competitiveness and high actual or perceived risks.
CGD is pleased to announce a screening of Fatal Assistance, part of our film series, Global Development Matters.
Haitian born filmmaker Raoul Peck takes us on a 2-year journey inside the challenging, contradictory and colossal rebuilding efforts in post-earthquake Haiti. Through its provocative and radical point of view, Fatal Assistance offers a devastating indictment of the international community's post-disaster idealism. The film dives headlong into the complexity of the reconstruction process and the practices and impact of worldwide humanitarian and development aid, revealing the disturbing extent of a general failure. We learn that a major portion of the money pledged to Haiti was never disbursed, nor made it into the actual reconstruction. Fatal Assistance leads us to one clear conclusion: current aid policies and practice in Haiti need to stop immediately.
Following the screening of the film, CGD Senior Fellows Vijaya Ramachandran and Michael Clemens will provide commentary, before opening the floor to questions from the audience.
The Obama Administration, whether by design or by accident, has opened the door for the first time in the World Bank’s history to the possibility of a real contest over the merits of its nominee to take the helm there compared to a nominee from the developing world. All three candidates have experience working on development (and that is a refreshing change from the tradition of financiers and political heavyweights at the helm). But their strengths are different. In the case of Kim, the U.S. nominee, and Ngozi Okonjo-Iweala, their training, their experience, their instincts, and their worldviews are completely different.
Jim Kim is an MD -anthropologist and most recently a university president who has devoted most of his career to finding better ways to deliver better health care to the world’s poor. He is steeped in the tradition of medical science: deeply committed to measuring and evaluating what works on the basis of evidence before intervening—an approach to learning that has recently been taken up enthusiastically among micro-economists inside and outside the World Bank. He believes in the power of popular movements to overcome financial and behavioral obstacles to better health regardless of poverty or hopeless politics in poor countries – as illustrated in the case of the work he led at WHO to extend treatment of HIV/AIDs to millions of people.
Ngozi Okonjo-Iweala is a Harvard and MIT-trained economist, former finance and foreign affairs minister and current economic czarina of Nigeria, and longtime staff member of the World Bank, where she rose to become for all practical purposes the deputy to Robert Zoellick before returning to her own country. She has devoted her career to changing economy-wide (“macro”) policies and practices around the world -- in countries like her own and in the rich world as well – in support of the kind of broad-based growth in poor and middle-income countries that empowers the poor to escape poverty. She has practiced good economics in the hard soil of tough politics in Nigeria, fighting high-level corruption at personal risk, recently working to eliminate gasoline subsidies that benefit the car-owning rich while sapping the public budget of resources to serve the poor. (Full disclosure: Ngozi is also a member of CGD’s board of directors.)
For the first time, these two and the third candidate (José Antonio Ocampo of Colombia now at Columbia University, nominated by Brazil* -- more on that in another post!), can be asked to publicly set out his or her vision for its next decade. Also for the first time, members of the bank’s board will interview the candidates. Government officials and development advocates will have a similar opportunity, assuming each of the candidates travels to the world’s major capitals to make their respective cases, as Agustin Carstens and Christine Legarde did recently in their competition to head the IMF.
Here are three questions worth asking each of the candidates to be the next president of the world’s premier development institution.
1.Should the World Bank bring its institutional and financial clout and expertise to the problems of the global commons (and a broader set of “global public goods” (GPGs) in economics lingo) that are especially costly to the livelihoods and welfare of the world’s poor: climate change; drug resistance; the missing Green Revolution in Africa; Would you as president seek a new mandate and new capital to deal explicitly with the development challenge a deteriorating global commons poses, as some have advised, asking the Bank to become a catalyst for global public goods. Would you as president seek capital from China, Brazil and other developing countries with ample currency reserves to support a new GPG arm of the Bank based in Mumbai, Sao Paulo or Shanghai?
The Bank is engaged in cross-border work – including some infrastructure and watershed programs that involve more than one country, and it manages several global programs including Climate Investment Funds and a small carbon-trading platform. But its global engagement is ad hoc, at the behest of one or another member country that sets up a special fund to support “global” programs. It lacks a clear mandate and instrument to do more. History, habit and politics have tethered its operational machinery to its bread and butter country-specific loans and grants for more than 50 years after all. Without leadership from the top, it may well miss the boat on a pressing set of 21st century challenges to the elimination of global poverty.
Kim has thought about challenges that transcend country borders in his work on drug-resistant tuberculosis. Okonjo-Iweala has thought about the issue in the context of "green venture funds" with public backing for “deal-packaging” and first-loss guarantees that would catalyze institutional and sovereign wealth fund investments in clean energy for the poor. She inspired and led the Bank’s work to recover stolen assets that crooked heads of state – often from oil and mineral-rich nations like her own -- have with impunity deposited in western banks..
2.What is your vision for the future of IDA, the bank’s fund for grants and concessional loans to the poorest countries? Should it be bigger in 10 years or smaller?
Under current rules low-income countries such as Pakistan, India, Nigeria and Vietnam are likely to have graduated from IDA by 2025. Remaining countries eligible for IDA will be mostly flailing and failed states suffering a toxic combination of internal conflict and corrupt or ineffectual leadership. Should the freed-up IDA resources be committed to countries like Somalia and Afghanistan, in the interests of global security, or go mostly to countries like Honduras, Liberia, and Rwanda, where they are more likely to improve lives in the short run and more likely to help end dependence on aid? Should some IDA resources be deployed to deal with global commons problems, where the traditional Bank country loan is not useful? Or should IDA funds be used to subsidize loans to countries like Brazil, Egypt and India which though “middle-income” have huge numbers of poor people?
Kim believes services can be delivered to people effectively in tough environments. He is not naïve about the dependence of service delivery on appropriate policy and politics but his starting point is that there is a way to get it done if the right management and execution lessons can be found, adapted and brought to bear. Okonjo-Iweala is also in her way a radical optimist on improving the lives of the poor. But she is probably equally focused on getting the macroeconomics and politics right to raise incomes of the poor. She led the difficult campaign to replenish IDA funds just over a year ago at the World Bank (the replenishment amounted to $30 billion or $45 billion depending on accounting definitions). In the short run at least she would be probably more aware of the tradeoffs over time and place and challenges that are implicit in the question posed above.
3. What is your vision for the role of the Bank in the dynamic emerging economies, and for their role in the governance and management of the Bank? Will you encourage the United States to support changes in governancesuch as a reduction in its veto power, and encourage the Europeans to give up their unreasonably large number of board chairs – in the interest of engaging China and other developing countries more actively in the development challenge for the next decade? Will you support the initiative of the BRICs to make the IFC, the private sector arm of the World Bank Group an independent entity with own president? Do you think the Bank needs more capital even if it comes from China and other countries, reducing the influence of the U.S and Europe, steady and benign supporters for over 50 years? Would you consider a change in the selection process for your successor, such as the introduction of double majority voting (under which your successor would need both a majority of weighted votes and a majority of country votes)?
The underlying shift in global influence and power toward the dynamic emerging economies (on which global growth and prosperity in rich countries now heavily depend) puts a premium on the World Bank president’s negotiating and consensus-building skills. Consider one source of tension: At the Inter-American Development Bank, Brazil and other developing country members have had the votes to avoid transferring net income from its regular income-earning loan facilities to its concessional facility. But with control of the World Bank in the hands of the traditional trans-Atlantic powers since its founding, that is a practice that has been routine at the World Bank. The most recent IDA replenishment included billions of dollars to come from the IFC’s and the IDBRD’s net income. Brazil and other developing countries reasonably argue that the transfers have been a non-transparent way for the rich economies to minimize their direct contributions to IDA, while indirectly raising the costs of borrowing from the regular facility. The option in the future is for China and Brazil to contribute directly to IDA. . . .and then of course to take their place at the table where IDA policies and programs are set.
This last set of questions goes to the heart of the issue of the role and standing of the World Bank in a shifting geopolitical landscape. Kim, as a Korean-American with experience working in Peru and Haiti and at WHO, has presumably thought about geopoliltics. Did he demonstrate at Dartmouth convening and consensus-building skills a World Bank president needs? Okonjo-Iweala grappled with geopolitics when, as Nigerian Finance Minister, she negotiated that country’s $30 billion debt relief package in Paris, Washington and New York. And she did so at the World Bank, when she held the high-level management position of Secretary of the Board. Does she have those consensus-building skills?
I know all three candidates enough to be confident they have qualities that could make them effective as president of the world's preeminent development institution. They all have shown in one realm or another that they are effective leaders of men and women. For me the key question has to do with their vision for the World Bank of the future. Will the next president focus on business as usual, but better? Or will she or he lead the bank in new directions for a new era?
*Correction: The Brazil chair nominated José Antonio Ocampo on behalf of the Dominican Republic; the DR is one of the countries Brazil represents at the Board of the World Bank
Economists are increasingly focusing on the links between rising inequality and the fragility of growth. The relationship between inequality, leverage and the financial cycle which sowed the seeds for 2007-08 global financial crisis, together with the disproportionate political influence of the rich, create a narrative of excess. Andrew Berg will discuss the effect of this narrative on the financial crisis in his new paper, coauthored with Jonathan Ostry and Charalambos Tsangarides.
The authors offer three key findings. First, more unequal societies tend to redistribute more. This makes it imperative that we understand the relationship between growth and inequality, in order to distinguish between market and net inequality. Second, this distinction allows us to see that lower net inequality is robustly correlated with faster and more durable growth. Finally, redistribution appears benign in its impact on growth; only in extreme cases is there evidence of a negative effect on growth. They conclude that combined direct and indirect effects of redistribution are, on average, pro-growth, when the growth effects of resulting lower inequality are taken into account.
The first-ever National Business Census began in Haiti this month. A census of formal and informal businesses has never been conducted and there is no comprehensive business database. Although a daunting task, the census will likely help to strengthen small and medium enterprises and increase local procurement.
The survey began September 3rd and will be conducted by 500 interviewers recruited by 42 supervisors from across the country – at a cost of 26 million gourdes (around $600,000). Wilson Laleau, the Minister of Trade and Industry, explained that this survey will enable the government to assist entrepreneurs with access to credit, help meeting standards, and entering new markets. Maintaining crops, inventories, and production is notoriously difficult with disasters such as Hurricane Isaac. A comprehensive census could improve access to credit and insurance coverage for natural disasters. Prime Minister Laurent Lamothe said: “Everyone recognizes the importance of such an activity… [a census is a] prerequisite to any policy to support the development of entrepreneurship in Haiti.”
This will not be an easy exercise. The Haitian private sector is very fragmented and most businesses are informal; the UN Special Envoy for Haiti estimates that the formal sector generates no more than 10 percent of employment. A main goal of the census is to help bring small business from the informal to the formal sector.
The informal economy in Haiti is composed of many layers, from micro-level vendors to small and medium enterprises (SMEs). Especially in Port-au-Prince and surrounding areas, it is comprised mostly of vendors selling food, household items, used clothing and shoes, or other goods. Most of the goods are what is known as “pèpè” or “kennidies,” as the shipping of donated goods from the United States to Haiti began during the administration of President Kennedy. These goods are often castoffs from US thrift stores such as Goodwill or Salvation Army. Small business owners purchase the goods in bulk, often not knowing what they are going to find when they open a shipment. Profits are marginal as vendors have little control over inventory and pricing, and the streets in Port-au-Prince are crowded with stalls selling nearly identical items. Odds are that these micro-businesses will never expand and enter the formal sector – and it is likely that these vendors are not the target of the census.
Improving business registration procedures is necessary to bring larger SMEs into the formal sector. According to the World Bank’s Doing Business database, Haiti currently ranks almost last -180 out of 183 countries - for ease of starting a business (worse than Haiti: Guinea, Eritrea, and Chad). The report identifies 12 procedures which require an average of 105 days and cost more than three times per capita income. Things were even worse before 2011, when creating a new business required approval of the president or prime minister’s office.
Business registration may also help to increase demand for goods and services provided by SMEs. Our analysis of aid flows in the aftermath of the quake showed that direct contracts to local firms were few and far between. Approximately $9 million went to Haitian companies; which is less than two percent of US reconstruction spending. Three-quarters of this amount was to three of the largest companies: Operateurs Portaires Reunis (OPR), GDG Belton and Construction, and Sol Haiti. OPR is a private company that became the de facto National Port Authority under the Preval government. GDG is the primary supplier of concrete and the second largest equipment rental company. Sol Haiti is part of the Sol Group, a Caribbean petroleum company that was formed through the acquisition of Shell’s assets in the region in 2005. These sectors – marine cargo handling, petroleum, and construction – were the main recipients of international contracts.
A public registry can connect local businesses to donors, consulting agencies, and NGOs. Several Haitian business directories currently exist, although they lack information about how listings are maintained and companies are verified. Building Markets (formerly Peace Dividend Trust) created a revolutionary marketplace to list and vet businesses. However, their operations in Haiti closed in June 2012, and their registry is (supposedly) maintained now by the Ministry of Commerce and Industry. If local procurement can be improved by a properly-maintained business census, Haiti stands a real chance of reducing its dependence on foreign aid and growing its way out of poverty
Yesterday, the UK’s Independent Commission for Aid Impact (ICAI) published a hard-hitting report on the Department for International Development’s private sector development work. Based on an evaluation of DfID’s private sector work in Tanzania, Uganda and Bangladesh, the report highlights two problems—(1) the pressure to demonstrate results against measurable indicators and (2) the lack of assessment of the cumulative impact of DfID’s work. The report gives DfID a grade of “amber-red” which means that “the programme performs relatively poorly against ICAI’s criteria” and that “significant changes should be made.”
In particular, the report questions DfID’s “target culture” which “arguably provides incentives to report large numbers for impact wherever possible.” DfID’s claims that the number of people whose incomes will go up in Tanzania as a result of its Agricultural Growth Programme is nearly 40,000. Given that the programme is relatively new, the ICAI report argues that the logic through which this would occur is “necessarily speculative.” On DfID’s Rural Support programme, the ICAI report found that the margin for error in reporting the number of beneficiaries was “very large—yet unacknowledged.”
This problem applies to other agencies as well. The World Bank Group sometimes makes absurd claims about the number of jobs generated by its projects and programs. The Bank’s Ghana Gateway project claims to have generated over 300,0000 jobs for Ghana’s citizens. The International Finance Corporation (IFC) claims that’s its various investments have created millions of jobs. There is no discussion of counterfactuals—of what would have happened if the Bank or IFC had not been there. Neither is there any mention of whether these projects create new employees or simply move them over from the informal sector, or of the estimation procedures behind the numbers.
DfID’s management would be well-served to read a 2011 blog post from David McKenzie, who is widely regarded as one of the foremost researchers on private sector development. David cites a 2010 IFC report which argues: “We know that it takes more than volume to meet the needs of the poor. That is why we carefully target our resources, selecting where our financing and advice can be deployed most effectively. And we set measurable goals to gauge our impact, and improve our performance. In 2009, our clients provided 2.2 million jobs, including nearly 514,000 in the manufacturing and services sectors.” David says “clearly this is in no way a measure of impact, and presenting it as such is both disappointing to both researchers working on credible measures of the impacts of different projects, as well as to the readers who are being presented this information as if it is in any way informative about the effects of the World Bank Group’s work.”
The development profession is under pressure to report outcomes and to link programmatic investments to measurable indicators. Broadly speaking, this is a good thing. But the measurement of the number of jobs created by a particular development intervention is very difficult and in many cases, impossible. My own recent research, coauthored with Leonardo Iacovone, suggests that there is much that is yet to be explained when it comes to understanding job creation in poor countries.
DfID is a very good development agency with a capable and dedicated staff. There is no doubt that its work is of great value in many poor countries. But it must not rush headlong into inserting jobs or other outcome measures into its projects, and it must not pressure other donors into doing so.
I look forward to DfID’s response to the ICAI report (which I will blog), and to a substantive conversation around the issue of job creation.
In 2012, the Center for Global Development (CGD) convened the Working Group on Food Security, bringing together 22 experts in food policy, nutrition, agriculture, and economic development from around the world. The group’s task was to review pressing challenges to agricultural development and food security and take stock of the Rome-based United Nations food agencies charged with addressing them. The working group decided to focus on the largest of those agencies—the Food and Agriculture Organization (FAO)—and has two key recommendations.
How do employers decide whether to provide their employees with HIV/AIDS prevention services? CGD Visiting Fellow Vijaya Ramachandran's data from 860 firms and 4,955 workers in Uganda, Tanzania, and Kenya shows that larger firms, and those with more highly skilled workers, invest more in HIV/AIDS prevention. Firms in which more than 50 percent of workers are unionized also are more likely to provide more prevention services.
IFC’s portfolio is not focused where it could make the most difference. Low income countries are where IFC has the scale to make a considerable difference to development outcomes. While an excessive portfolio shift might imperil IFC’s credit rating, the evidence suggests that there is considerable scope for increasing commitments to low income countries without significant impact to IFC’s credit scores.
Lifting the trade and investment embargo on Cuba is a laudable policy objective that would allow Cubans better access to American goods and services. It might also give American businesses a boost, including from places that could do with one, like rural Louisiana. Changing the law will be an uphill struggle unless November’s elections transform Congress. But even if Congress can agree, changes to the law might not be sufficient to convince investors to go to Cuba.
What’s the problem?
Over the past 12 months, we’ve been studying the unintended consequences of anti–money laundering (AML), counter the financing of terror (CFT), and sanctions enforcement. We find that banks have become extremely risk averse regarding these regulations. Regulators often underestimate what it will take to get transactions moving in the current climate of fear.
For example, remittance companies are finding it increasingly difficult to get and keep a bank account. In response, regulators and standards setters have issued documentafterdocument clarifying their expectations. Regulators believe that these statements should be sufficient to improve financial access for remittance companies. But despite repeated reassurances to this effect, the problem seems to be getting worse.
Similarly, non-profit organisations are finding it difficult to conduct essential work in areas that are perceived to be high risk. For example, Journalist Amy Maxmen reports that NGOs can’t get medicines into South Sudan despite medical supplies being excluded from sanctions. This is because banks are unwilling to process payments, fearing that there could be regulatory repercussions.
Businesses are still paying out large amounts of money for violations of the embargo on Cuba. Halliburton just settled a case for more than $300,000 relating to an investment in an Angolan oil and gas consortium that is 5 percent owned by a Cuban company.
Cuba is no longer a US-designated state sponsor of terrorism. It is also considered to be a fully compliant member of the Caribbean standards setter for AML/CFT regulation and was removed from the Financial Action Task Force’s list of risky jurisdictions in October 2014. Of course, Cuba must continue to take steps to responsibly integrate its financial system with those of other countries. But even if Cuba does continue to behave and US lawmakers agree to dismantle the embargo, it may take a while for investors and banks to do business in Cuba.
What can we do?
The Cuba embargo is made up of at least five statutes and one executive order. Many of the 30+ federal agencies that are involved in AML/CFT and sanctions enforcement in the United States are also involved in the implementation of this embargo. Unwinding this web of regulation will be a complex process. If it is not done in close consultation with the business whose behaviour it is seeking to change, then it may not work. Representatives of the financial services industry may need to be brought into the process to ensure that the changes to laws, standards, and guidance will be sufficient to alleviate the fears of banks and to get investment flowing.
The desire to normalise relations with Cuba should also motivate a more serious consideration of how rich countries enforce sanctions and AML/CFT laws. Our report contains five sets of recommendations for how to improve that system to facilitate financial inclusion while also strengthening the system to keep money out of the wrong hands.