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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.
At a recent CGD event, World Bank President Jim Yong Kim argued that the World Bank Group (which includes the IFC) is doing more in middle income countries (MICs) because “most poor people are in middle income countries.”
President Kim went on to say:
The first question that I asked as well, for our board, is we committed to ending extreme poverty in the world so… what percentage of people living in extreme poverty live in middle income countries? And now it’s probably 65 percent.
That matches what IFC Spokesman Frederick Jones said in response to our work on the IFC portfolio. And it sounds completely reasonable—indeed, based on our calculations, World Bank statistics suggest 24 percent of the world’s extreme poor live in low income countries, 58 percent in lower-middle income, and 18 percent in upper-middle income countries. So moving beyond low income countries (LICs) makes sense for an institution focused on ending extreme poverty. But does the IFC follow through by focusing on the countries that are home to the extreme poor? Not really.
It is true that the IFC (absolutely) invests more in countries that are home to greater numbers of poor people. Figure 1 plots absolute IFC commitments over 2011-16 against the number of people living at or below $1.90 per day (note the log scale). It shows that the average absolute IFC investment in middle and low income countries with more than 10m poor people is $641 million compared to average absolute IFC investment of $405 million in countries with less than 10 million poor people living at or below the $1.90 threshold.
Figure 1: Poverty and IFC investments
Figure 2 looks at the proportion of extreme poor in a country and IFC's investments as a percentage of recipient GDP. The average 2011-16 IFC investment as a percentage of 2010 GDP in countries with more than 20 percent poor people ($1.90) is 0.35 percent compared to average IFC investment as a percentage of GDP in countries with less than 20 percent poor people ($1.90) of 0.19 percent.
Figure 2: IFC investment in developing countries
However, a focus on poverty in middle income countries does not really explain IFC’s investments in Turkey, the largest recipient of IFC funding at $4.9 billion, home to 0.2 million poor people at the $1.90 threshold. Nigeria, which is home to 424 times the number of poor people at the same threshold, only got $1.5 billion in IFC financing over the same period.
And it is worth illustrating how poorly IFC investments are targeted if the aim is to focus on countries home to the world’s extreme poor. Figure 3 lines up countries along the x-axis according to their absolute number of extreme poor (countries with no people living under $1.90 a day come first). The y-axis reports cumulative IFC investments in those countries (note some countries are excluded for lack of recent poverty data).
The first thing to note is that the IFC has invested $4.5 billion over the 2011-16 period on countries home to no extremely poor people. And it has invested over $18 billion in countries collectively home to fewer than nine million extreme poor. More than half of the total value of IFC investments 2011-16 are in countries collectively home to just 45 million poor people—leaving countries home to 724 million extreme poor people to share the remainder. Put another way, countries home to those 45 million poor people get 18 times the IFC investment per extreme poor person than do the rest of IFC’s client base.
Figure 3: Cumulative IFC investment in developing countries
The defense that IFC is targeting where the extreme poor live nowadays is only partially vindicated. But President Kim did provide a possible explanation:
Now in terms of IFC risk… what the IFC representatives will say when I ask the question, is that, look, go back to the founding principles of the institution. You have to balance your portfolio with the risky investments and the not-so risky investments, and you know, to say to IFC, you have to put all your money into fragile and conflict-affected states or IDA states, if they did that they’d have to close down fairly soon. And right now we’re in a capital discussion. And so it’s just, you know, if you’re going to go into the low income countries, you need more capital, not less
That leaves another defense from the institution: that the IFC is focusing within countries on investments that better target poverty than the country-level statistics suggest. Once again we'd welcome the IFC publishing the necessary data to test that idea, but still question if a choice to invest more in richer countries focusing on a small share of poor people is the most powerful approach for an institution supposedly so focused on ending extreme poverty.
You can download the Stata code and raw data we used to produce these figures here.
Policies put in place to counter financial crimes have unfortunately had a chilling effect on banks’ willingness to do business in markets perceived to be risky—due in part to the high price of compliance. This has had costly consequences for people in developing countries, and in particular, has hurt migrant workers, small businesses that need to access capital, and recipients of lifesaving aid in conflict, post-conflict, or post-disaster situations the most. But what we’re seeing is that even as changes are being made to address this problem, financial institutions are developing solutions in the form of new cutting-edge technologies to help them comply better and faster with anti-money laundering regulations.
This week, we published a new study—the first comprehensive effort to assess six new key technologies and their potential to solve the de-risking problem. Financial institutions have turned to new technologies to address de-risking and increase the effectiveness and efficiency of their AML/CFT compliance. These new technologies may enhance transparency and information-sharing capabilities, facilitate automation and interoperability between institutions, and improve banks’ ability to accurately identify illicit activity. In doing so, they may offer a partial solution to de-risking by lowering compliance costs and improving risk management capabilities.
These technologies include:
Machine learning – a type of artificial intelligence that allows computers to improve their performance at a task through repeated iterations. Machine learning may be used to augment or transform a number of compliance functions, including those for developing more sophisticated customer typologies and for more accurately monitoring transactions. These uses could simultaneously cut down on false alerts and identify undetected illicit finance techniques.
Biometrics – use distinctive physiological or behavioral characteristics to authenticate a person’s identity and control his or her access to a system, and are more robust than other authentication factors, such as passwords and tokens, as they are generally more secure and easier to use. Biometrics are being used to address the “identification gap” that exists in many developing countries. This use, in turn, could make it easier for banks to conduct customer identification, verification, and due diligence, which may bolster the confidence of their correspondent banks. However, most biometric identification systems are being developed at the national level, meaning that work is required to develop an internationally recognized and interoperable identification system.
Big data – refers to datasets that are high in volume, velocity, and variety, and therefore require systems and analytical techniques that differ from those used for traditional datasets. Compared with relational databases, big data applications offer more scalable storage capacity and processing. They also allow many different types of data to be stored in one place, so compliance staff spend less time gathering information from disparate sources. Most important, they can greatly expand the range and scope of information available for Know Your Customer (KYC) and suspicious transaction investigations.
Know Your Customer (KYC) utilities – central repositories for customer due diligence (CDD) information. By centralizing information collection and verification, KYC utilities can reduce the amount of information that has to be exchanged bilaterally between correspondent banks and their respondents, thereby reducing the time banks spend conducting CDD investigations.
Distributed Ledger Technology (DLT)/Blockchain– a way of securely organizing data on a peer-to-peer network of computers. In a blockchain, which is a type of DLT, data modifications, such as transactions, are recorded in time-stamped blocks. Each block is connected to previous blocks, forming a chain. Modifications are confirmed and stored by all users on the network, which makes the ledger difficult to tamper with. Although blockchain technology is most commonly associated with virtual currencies, such as Bitcoin, the basic technology has a number of other potential use cases, including uses in regulatory compliance. In particular, DLT may be used for securely storing and sharing KYC information, as well as for cheaper and more secure international payments.
Legal Entity Identifiers (LEI) – unique alphanumeric identifiers, like barcodes, that connect to reference datasets held in a public database. Any legal entity that makes financial transactions or enters into contracts may request an LEI. In many countries, especially developed ones, LEIs are increasingly mandated by regulation. To date, more than one million LEIs have been issued worldwide. By serving as common identifiers, LEIs can enable different platforms, organizational units, and institutions to refer to entities clearly and without any ambiguity. This interoperability can, in turn, facilitate greater automation and information sharing. A further extension of the LEI would be to include it in payment messages to identify originators and beneficiaries, which would further enhance the transparency of international payments.
Scroll through the infographics above
In the face of de-risking, both the public and private sector have tried to find ways to lower the compliance burden without lowering standards. RegTech (regulatory technology) may be the solution to some de-risking woes. But for this to work, policymakers need to invest time in understanding how these technologies work, and what their benefits and limitations may be. This is the first step in coming up with a regulatory framework that maximizes the advantages of RegTech.
You can find the full study here. We welcome your comments!
“Regtech May be the Solution to Some De-risking Woes,” Says Center for Global Development’s Vijaya Ramachandran
Center for Global Development
Washington – Today, the Center for Global Development released a new study that finds that financial institutions have turned to new technologies, including artificial intelligence, to address de-risking and increase the effectiveness and efficiency of their AML/CFT compliance. These new technologies may enhance transparency and information-sharing capabilities, facilitate automation and interoperability between institutions, and improve banks’ ability to accurately identify illicit activity.
This study is the first comprehensive effort to assess six key new technologies and their potential to solve the de-risking problem: know-your-customer (KYC) utilities, big data, machine learning, distributed ledger technology (DLT), legal entity identifiers (LEIs), and biometrics.
“Some policies that have been put in place to counter financial crimes have unfortunately had a chilling effect on banks’ willingness to do business in markets perceived to be risky in part due to the high price of compliance. This has had costly consequences for people in developing countries, and have hurt migrant workers, small businesses that need to access capital, and recipients of lifesaving aid in conflict, post-conflict, or post-disaster situations the most,” said Vijaya Ramachandran, one of the study’s authors. “But what we’re seeing is that even as these policies are having an impact, financial institutions are coming up with solutions in the form of new cutting edge technologies to help them comply better and faster with anti-money laundering regulations.”
The study suggests that new regulatory technologies (“Regtech”) may offer a partial solution to de-risking by lowering compliance costs and improving risk management capabilities. The technologies include:
Machine learning is a type of artificial intelligence that allows computers to improve their performance at a task through repeated iterations. Machine learning may be used to augment or transform a number of compliance functions, including those for developing more sophisticated customer typologies and for more accurately monitoring transactions. These uses could simultaneously cut down on false alerts and identify undetected illicit finance techniques.
Biometrics use distinctive physiological or behavioral characteristics to authenticate a person’s identity and control his or her access to a system, and are more robust than other authentication factors, such as passwords and tokens, as they are generally more secure and easier to use. Biometrics are being used to address the “identification gap” that exists in many developing countries. This use, in turn, could make it easier for banks to conduct customer identification, verification, and due diligence, which may bolster the confidence of their correspondent banks. However, most biometric identification systems are being developed at the national level, meaning that work is required to develop an internationally recognized and interoperable identification system.
Know Your Customer (KYC) utilities are central repositories for customer due diligence (CDD) information. By centralizing information collection and verification, KYC utilities can reduce the amount of information that has to be exchanged bilaterally between correspondent banks and their respondents, thereby reducing the time banks spend conducting CDD investigations.
Big data refers to datasets that are high in volume, high in velocity, and high in variety, and therefore require systems and analytical techniques that differ from those used for traditional datasets. Compared with relational databases, big data applications offer more scalable storage capacity and processing. They also allow many different types of data to be stored in one place, so compliance staff spend less time gathering information from disparate sources. Most important, they can greatly expand the range and scope of information available for KYC and suspicious transaction investigations.
Distributed Ledger Technology (DLT) is a way of securely organizing data on a peer-to-peer network of computers. In a blockchain, which is a type of DLT, data modifications, such as transactions, are recorded in time-stamped blocks. Each block is connected to previous blocks, forming a chain. Modifications are confirmed and stored by all users on the network, which makes the ledger difficult to tamper with. Although blockchain technology is most commonly associated with virtual currencies, such as Bitcoin, the basic technology has a number of other potential use cases, including uses in regulatory compliance. In particular, DLT may be used for securely storing and sharing KYC information, as well as for cheaper and more secure international payments.
Legal Entity Identifiers (LEI) are unique alphanumeric identifiers, like barcodes, that connect to reference datasets held in a public database. Any legal entity that makes financial transactions or enters into contracts may request an LEI. In many countries, especially developed ones, LEIs are increasingly mandated by regulation. To date, more than 1 million LEIs have been issued worldwide. By serving as common identifiers, LEIs can enable different platforms, organizational units, and institutions to refer to entities clearly and without any ambiguity. This interoperability can, in turn, facilitate greater automation and information sharing. A further extension of the LEI would be to include it in payment messages to identify originators and beneficiaries, which would further enhance the transparency of international payments.
This important study comes ahead of the Financial Action Task Force meeting in Paris – set for next week.
“In the face of de-risking, both the public and private sector have tried to find ways to lower the compliance burden without lowering standards,” said Ramachandran. “Our study finds that Regtech may be the solution to some de-risking woes. But for this to work, policymakers need to invest time in understanding how these technologies work, and what their benefits and limitations may be.”
You can read the full report at https://www.cgdev.org/reader/fixing-aml-can-new-technology-help-address-de-risking-dilemma.
Even while policy solutions to address de-risking are being implemented, new technologies have emerged to address de-risking by increasing the efficiency and effectiveness of AML/CFT compliance by financial institutions.
IFC Spokesman Frederick Jones has replied to our blog (and paper) on the IFC’s risk appetite. Here it is in full:
We would like to take this opportunity to respond to the Center for Global Development’s recent analysis of IFC’s work, which looked at our investment in the poorest countries.
Among international financial institutions, IFC is by far the largest investor in fragile and conflict-affected countries and IDA countries, which are the world’s poorest. Including funds mobilized from others, IFC’s commitments in IDA countries have grown nearly fivefold since 2005, totaling $4.6 billion last year—nearly a quarter of our total annual commitments. In fragile and conflict-affected areas, our commitments grew to $886 million in 2017 from $638 million in 2014. Over the past 10 years, IFC has invested roughly $7 billion in FCS, and today, one out of every three dollars that major international finance institutions invest in FCS countries comes from IFC.
We fully agree with the objective to increase IFC’s investments in the poorest countries. With our new Creating Markets strategy, which will address inherent obstacles to private investment in the most challenging markets, our goal is to have one-third of our projects in the low-income IDA countries, and for fragile and conflict-affected countries to represent at least 6 percent of our investment portfolio by 2020, up from 0.2 percent a decade earlier. That is a far higher level of ambition than a simple comparison over time would suggest—today there are 31 low-income countries (LICs), mostly small, whereas in 2003, which serves as reference year for much of the CGD trend analysis, there were 66 LICs, including very large countries such as India, Indonesia, Nigeria, and Pakistan.
While the shift towards the poorest countries is IFC’s key strategic priority, it is important to note that two-thirds of the world’s poor live in middle-income countries. Investment in these countries is critical to reaching the Sustainable Development Goals and fighting key challenges, such as climate change. IFC projects in middle-income countries do not simply replicate what the market does anyway. They innovate, push boundaries and take risks in ways that the private sector alone would struggle to do.
Many factors can determine the risk of individual projects—sector-specific factors, the strength of sponsors, the financing instrument, product cycle, market developments, currency, governance and policy risks. The country composition of IFC’s portfolio, which is the focus of CGD’s analysis, does not in itself reflect IFC’s risk profile, nor our willingness to take risks. CGD concludes that IFC is not taking enough risks by looking at geographic trends. That approach incorrectly conflates country composition and portfolio risk. The majority of IFC’s projects have a risk profile below investment grade—consistent with IFC’s mandate and strategy in emerging markets.
We’re proud of what we’ve accomplished over 61 years. More than any other international finance institution, we’ve invested in private sector development in the poorest countries and those affected by conflict. It’s true that we need to do much more. And we will.
First off, thanks to Fred and the IFC for replying. The Corporation has a unique role to play in global development finance and we’re keen for that role to grow, so we’re happy that the report has generated so much conversation about IFC’s portfolio, both within and outside IFC. And second, we commend IFC for its plans to do more in poor countries and those that are classified as fragile states—it is where the Corporation can have the most impact and where it is most needed.
Third, we agree that the IFC has an important place in middle income countries, but we would argue for a greater focus on the countries that are home to two-thirds of the world’s poor—lower-middle income countries. We are disappointed to see (as reported in Figure 8 in our paper) a declining share of IFC investments as a percentage of recipient country GDP in both low-income and lower-middle Income countries. That is matched by data suggesting a declining share of total IFC commitments going to those countries compared to others: in 2006, $4.2 billion out of $6.9 billion of IFC commitments (three fifths) went to low and lower-middle income countries, in 2016 $2.6 billion out of $7.4 billion of IFC commitments (a little more than one third) went to low and lower-middle income countries (Figure 7 in our paper). Meanwhile, we estimate Turkey, China and Brazil between them, all upper middle income, received just shy of $10 billion in IFC investment between 2013 and 2016 alone.
Finally, we’re sure that IFC projects in middle-income countries do not replicate what the market does anyway and (so) that the country composition of IFC’s portfolio, which is the focus of our analysis, does not fully reflect IFC’s risk profile. We focused on country risk because that was what we could look at by collating and analyzing the information currently available on IFC’s website. But if overall IFC risk has stayed the same while country risk has declined, it does imply the Corporation has decided to take on projects in countries like China and Turkey that are risky compared to most investments in those upper-middle income countries rather than projects in low and lower-middle income countries that are comparatively safe compared to most investments in poorer countries—and we wonder about the tradeoff in terms of meeting development objectives.
And that discussion brings us back to our key point about transparency: the IFC now publishes the data we scraped in a more usable format, which is a great first step. And we would be very pleased to carry out a separate and more detailed analysis of IFC’s portfolio risk if the right data were publicly available. For an institution that relies on public funding (and is now involved in disbursing aid), the lack of user-friendly public data on its activities is a growing issue. But the good news is we think the IFC has the capacity—and perhaps even the willingness—to fix the problem.
Since the publication of our paper on the IFC’s project portfolio last week, we have received several helpful comments from readers. They plausibly suggest that the portfolio may be (even) less risky than we suggested, with even more space to pivot towards the low income countries where the IFC can make the most difference. But until the IFC publishes more information, we won’t really know.
Disbursements a better measure of risk than commitments?
Many people, including IFC staff, have commented that disbursements and outstanding amounts are a more important indicator of risk than commitments. Many private sector deals are committed to but never actually disburse or disburse and get quickly repaid. This might be because the borrower found other sources of finance which were less burdensome than the IFC or the economics of the investment changed for the worse and the loan ultimately did not go forward, for example. Those outcomes are probably more likely when the IFC is in competition with a number of private financiers, which is more likely in less risky environments. In turn that suggests if we used disbursement data, our point about the declining riskiness of the IFC’s portfolio would be further reinforced. But with available information we can’t be sure that is right.
Looking beyond country risk
A repeated (and accurate) point we heard is that there are other issues to consider beyond country risk. If IFC is making subordinated loans in highly levered corporate investments launching new businesses with new technologies, it is taking on a lot of risk. If it is making senior secured loans in standard investments carrying little debt that generate foreign exchange, it is not taking on much risk at all. How all of this balances out is hard to tell with the information that the IFC makes public. We know that the overall share of debt versus equity in IFC’s portfolio has remained fairly constant, but this is only part of the story. We were also told that it is often the case that multilaterals invest in senior secured debt in investment grade countries—and it’s hard to justify when there is so much private institutional capital willing to make such investments. But then again we were informed that the IFC may be investing more in the more challenging sectors and geographies of richer developing countries.
Is IFC’s lending to SMEs really indicative of greater risk?
Our argument that IFC’s lending to small and medium-sized enterprises (SMEs) might be an indicator of taking on more risk was also challenged. We learned that the IFC (and other multilateral lenders to private sector banks) are generally making senior corporate loans in to bank and non-bank financial institutions that on-lend. As a condition for those loans, they are asking their bank/non-bank clients to generate certain types of assets, such as SMEs or microfinance. But they are not taking on SME or microfinance exposures themselves; rather they are taking credit exposure to the lender as a senior lender. This is relatively low risk, especially if the exposure is to banks that are too big to fail in their domestic markets. We were told it is hard to find a development rationale for senior corporate lending to Too-Big-To-Fail banks in many emerging markets—but that kind of lending is a very large share of what development finance institutions do to “get money out the door.”
At the end of FY2016 total reserves against loan losses ($1.8 billion) represented 7.4% of the disbursed loan portfolio. That figure includes $965 million of specific reserves, which cover 74.6% of currently non-performing loans, indicating that outstanding NPLs pose little risk to IFC's profitability.
We’re grateful for these comments. The ones we can better evaluate suggest, if anything, that we have over-estimated the risk that the IFC is willing to take on. But other concerns are very hard to quantify given what we know about the IFC’s investments even after a lot of effort to compile data. We don’t know about final commitments or the covenants about on-lending, for example.
And that brings us back to why we started the scraping exercise to begin with: there is far too little information in the public domain about what the IFC and its sister organizations are doing with money that ultimately belongs to the taxpayers of shareholder countries.
As the private sector arm of the World Bank and the world’s largest development finance institution, the International Financial Corporation (IFC) is designed to catalyze investments in countries that investors might consider too risky to invest in alone. With loans and equity investments in the private sector, the IFC aims to make sure that developing countries get the financing they need, and provides a way for the private sector to play a major role in spurring growth and alleviating poverty in some of the poorest and most vulnerable countries in the world. But our recent analysis of IFC’s portfolio found that it is shying away from risky investments, raising serious questions about whether the IFC is focusing on the places where it can make the most difference.
Over the past 15 years, many of IFC’s traditional partners—countries like China or Turkey—have become wealthier with more developed financial sectors, reducing their need for investments from IFC. Today, most of IFC’s portfolio is in middle income countries, and increasingly, upper-middle income countries. Turkey, China, and Brazil, for example—all upper-middle income countries—received $3.8, $2.9, and $3.0 billion in investments between 2013 and 2016, making them three of the top four recipients of IFC money. For all that makes these countries important to the IFC, it doesn’t make the IFC all that important to the development prospects of these countries. Turkey’s output averaged around $900 billion over that period, for example, so IFC’s investments averaged a little under 0.1 percent of GDP.
The IFC could have a far bigger role in promoting development in poorer countries
If the corporation had only invested in low-income countries in 2016, its investments would have equaled 2 percent of those countries’ GDP. That’s considerable. But the trend has been away from a focus on the poorest. In fact, in 2003, over 25 percent of IFC investments were in low-income countries, but by 2016, it was a mere 2.6 percent.
Examining IFC investments by country risk shows the same pattern. In the early 2000s, IFC mostly invested in countries with below-median domestic credit depth—those on the riskier end of the scale. But over the last decade and a half, that shifted to mostly above-median credit countries. In 2016, two-thirds of all IFC investments were in the top half of countries by credit depth. Again, it’s the same trend: IFC still invests in many of the same countries it has for years, but those countries have become less risky, and less in need of IFC money.
On a more positive note
Another measure is somewhat more positive to the IFC: the percentage of investments in countries that the Fragile States Index puts in its lowest “alert” category (35 countries in the latest Index) increased from 9 percent of investments 2005-8 to 16 percent 2013-2016. But still, the most fragile states, like Sudan, Chad, and the Democratic Republic of the Congo, continue to receive very little financing.
At its most effective, IFC can use its scale and position to make investments others can't or won't, helping developing countries build their economies and make their markets more attractive to the world. But that requires a portfolio that is focused on the countries where it can have the most impact: poorer, riskier, smaller economies. The Corporation has been heading in the opposite direction, and it is time for a change of course.
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.
The immediate aftermath of a natural disaster, such as the typhoon that devastated part of the Phillipines on Friday, can bring out the best of the global community. There will come a time to discuss how we can do more to prevent the environmental changes which make such events more likely, but the immediate priority is to get water, food, and shelter to people who urgently need it. The early signs are that governments and the public will again give generously to appeals for aid, reaffirming our sense of shared humanity. The challenge is to ensure that this generosity reaches the people who desperately need it. Regrettably, this is not the first natural disaster in modern times, nor will it be the last, and there is much that we can learn from the way that humanitarian and reconstruction efforts were organized in the days, weeks, and months following previous mega disasters such as the 2004 tsunami in the Indian Ocean and the 2010 earthquake in Haiti.
We should not help the Philippines like we helped Haiti—we can, and must, help better. Lack of generosity is not the problem. Since the Haitian earthquake, almost $6 billion has been disbursed in official aid, in a country with a population of just under 10 million. On top of that, an estimated $3 billion has been donated to NGOs in private contributions. The United States pledged over $3 billion for relief and reconstruction. Yet almost four years after the quake, there is little to show for this: even the capital, Port-au-Prince, still does not have decent roads, running water, or reliable electricity. An estimated 200,000 to 400,000 Haitians still live in the tents provided by relief agencies soon after the quake.
Nongovernmental organizations and private contractors have been the intermediate recipients of most of these funds. Many are based in the United States or in Europe. But despite the fact that these organizations are beneficiaries of public funds, there are few publicly available evaluations of services delivered, lives saved, or mistakes made. Most Haitians are disillusioned with the overall lack of progress, and with the lack of transparency and accountability that has accompanied the relief effort.
Vijaya’s efforts to discover how the money was spent (see Haiti: Where Has All the Money Gone) found it impossible to trace. For example, USAID disbursed $150 million to Chemonics, an international development company, but as recently as last May there was no public record of how that money was spent, what projects were implemented, or how many people were served. This lack of accountability and transparency means that few lessons can be learned. It also means that is almost impossible for the Haitian authorities to manage aid flows. Pierre Erold Etienne, Director-General of the Haitian Ministry of Finance noted that
We have only very little, overall information on aid.… We are required to be transparent. We publish the financial information relevant to the execution of our budget. All we ask is for the same transparency from our donor friends, which should help both us and them.
The scramble in the aftermath of the earthquake in Haiti was reminiscent of the problems experienced five years earlier in Indonesia following the tsunami, where a series of well-meaning but disjointed efforts led to bottlenecks in the distribution of desperately needed supplies. In Banda Aceh, there were reports of children developing the symptoms of measles after being vaccinated three times by three separate aid organizations.
The world can and must do better than this in the Philippines, and there is reason to be hopeful. There has been impressive progress in using information technology to improve disaster response, especially the vibrant crisis-mapping community. These advances will surely assist the effort in the Philippines in the coming weeks. But activists mappers alone cannot fix all the problems in the humanitarian system. The next step—one that should begin with the crisis in the Philippines—is for all humanitarian organizations and aid agencies to publish details of their planned and actual spending and activities, in real time, in an open, machine-readable format. This simple step would enable outside donors and intended beneficiaries to identify where activities overlap and where the gaps remain, and it would enable everyone to see where the money is going.
For starters, USAID, which is likely to be a major provider of aid to the Philippines, can do a much better job tracking expenditures. USAID is already required by law to report on the activities of its primary contractors. But the actual work is often done by subcontractors. They in turn are required to report project-level data to primary contractors, but that information is not publicly available. This should be easy to fix: USAID should announce that, starting with the Philippine relief and reconstruction effort, it will require all USAID contractors to disclose project-level data in a machine readable format in a timely fashion. This will not only help avoid overlaps and gaps in coverage in the short term but also make it possible to learn lessons about what worked for application in future disasters.
There are three international frameworks for sharing information about humanitarian response: the Financial Tracking System (FTS) of the UN’s Office for Coordination of Humanitarian Affairs (OCHA), the International Aid Transparency Initiative (IATI), and the European Disaster Response Information System (EDRIS). These standards are partly interoperable, and there are welcome efforts to ensure that they work closely together. The efforts to integrate these systems should be accelerated and given serious political backing; in the meantime all governments and humanitarian organizations should report all their activities, in detail and in real time, at least to the FTS, to enable humanitarian aid to have the biggest possible benefit.
The appalling events caused by Typhoon Haiyan could provide an impetus to the growing movement for a more transparent, effective, and better organized system for humanitarian relief and reconstruction. In the meantime, our thoughts are with the victims of these terrible events, and with the many brave humanitarian workers who will be working round the clock in the coming days and weeks to help them.
Translated by Jessica Anne D. Hermosa for CGDev, 15 November 2013
Tuwing tumatama ang isang malaking kalamidad, tulad ng bagyong puminsala sa mga lugar sa Pilipinas noong Nob. 8, madalas umusbong ang kabutihan ng mga tao mula sa lahat ng sulok ng daigdig. Magkakaroon din ng panahon upang pag-usapan ang mga hakbang upang maiwasan ang mga pagbabagong pangkalikasan na
nakapagdudulot ng mga kalamidad, ngunit ang tanging prioridad sa ngayon ay ang paghatid agad-agad ng tubig, pagkain, at masisilungan sa mga taong lubha ang
pangangailan. Ganito kaaga pa lamang ay nakikinita na na muling magiging mapagbigay ang publiko at ang iba't ibang mga gobyerno bilang patunay ng
kapatiran. Ang mahalaga ngayon ay ang paninigurado na makakarating ang tulong na ito. Sa kasamaang palad, hindi ito ang kauna-unahang kalamidad sa ating
panahon ngayon at ni hindi ito ang magiging panghuli. At dahil diyan, napakaraming leksyon na ang maaring mapulot mula sa nakaraan tulad ng sa tsunami sa
Indian Ocean noong 2004 at sa lindol sa Haiti noong 2010.
Huwag nating tulungan ang Pilipinas tulad ng ating ginawa sa Haiti--imbes na dito, dapat ay mas mainam pa ang ating paaran ng pagtulong. Walang kakulangan
ng donasyon, hindi ito ang problema. Sa Haiti, isang bayang may maliit na populasyon na 10 million, mahigit kumulang na $6 bilyon na ang ibinahagi bilang
opisyal na donasyon ng mga bansa magmula nang lumindol doon. Maliban pa rito ay ang $3 bilyon na pribadong donasyong tinanggap ng mga NGO. Ang Estados
Unidos naman ay nagpangako ng mahigit sa $3 bilyon para sa relief at reconstruction doon. Subalit, ngayong halos mag-aapat na taon na pagkatapos ng lindol
ay hindi pa rin kapansin-pansin ang epekto ng mga malalaking halagang ipinamigay para sa Haiti. Sa kanilang kabisera na Port-Au-Prince ay ni wala pa ring
maayos na daan, umaagos na tubig, o maasahang kuryente hanggang ngayon. Mga 200,000 hanggang 400,000 na Haitians ay nakatira pa rin sa mga trapal na
barong-barong na ipinimigay pa ng mga ahensya noong katatama pa lamang ng lindol.
Mga NGO at pribadong kumpanya ang mga tumanggap ng tulong na pinansyal at marami sa kanila ay naka-base sa Estados Unidos at Europa. Ngunit kakaunti lamang
ang mga pampublikong dokumentasyon na nagkikilatis ng kanilang mga naihatid na serbisyo, nasagip na buhay, o kamaliang nagawa kahit na mula sa pampublikong
pondo naman ang kanilang mga natanggap. Maraming Haitians ngayon ay namumuot na sa kawalan ng pag-unlad, impormasyon, at panunungkulan na inaasahan mula sa
mga relief efforts.
Sinubukan ni Vijaya Ramachandran alamin kung papano ba ginasta ang mga donasyon (basahin dito: Haiti: Where Has All the Money Gone) ngunit naging imposible itong
gawin. Halimbawa na lamang ang $150 milyong inabot ng USAID sa Chemonics, isang internasyonal na kumpanyang nakatuon sa mga proyektong kaunlaran: wala pa
ring pampublikong impormasyon noong May 2013 kung paano iwinaldas ang donasyon, anu-anong proyekto ang pinondohan, at ilang mga tao ang natulungan. Dahil
sa kawalan ng impormasyan at pagsagot sa tungkulin, mahirap ngayon pumulot ng halimbawa para sa mga susunod sanang mga proyekto. At dahil dito, sadyang
imposible na rin para sa mga opisyal sa Haiti na pamunuan ang pagdating ng mga pondo. Ayon kay Erold Etienne, Director-General ng Ministry of Finance ng
We have only very little, overall information on aid.… We are required to be transparent. We publish the financial information relevant to the execution
of our budget. All we ask is for the same transparency from our donor friends, which should help both us and them."
(Napaka kaunti lamang ng aming hinahawakang impormasyon ukol sa mga ipinamigay na pondo para sa Haiti. Kami ay inuutusang maging bukas sa pagbigay ng
impormasyon. Kami ay naglalathala ng impormasyong pinansyal para sa budget. Ang aming tanging hiling ay maging kasing bukas ang aming kaibigang nagaabot ng
donasyon sa pagbigay ng impormasyon.)
Ang kaguluhang ating namalas pagkatapos ng lindol sa Haiti ay may pagkakapareho sa mga problemang naranasan sa tsunami sa Indonesia limang taong nakalipas.
Sa Indonesia, nagkaroon ng maraming taos-puso ngunit magulong pag-aksyon na nagdulot ng katagalan sa pamimigay ng mga lubhang kinakailangang kagamitan. Sa
Banda Aceh, bilang halimbawa, ay may mga naiulat na pagkalat ng simptomas ng tigdas sa mga batang tatlong beses nang nabakunahan ng iba't-ibang
Kayang-kaya naman at kailangang na kailangang talagang galingan pa lalo ang pagtulong sa Pilipinas kaysa sa dalawang halimbawang ito. Sa ngayon, mukhang
mayroong pag-asa sapagkat mas maunlad na ang paggamit ng teknolohiya at telekomunikasyon upang paigihin ang pagresponde sa kalamidad, mahigit na sa
larangan ng crisis-mapping. Ang mga pag-unlad tulad nito ay siguradong makakatulong sa Pilipinas sa mga parating na linggo. Ngunit hindi kakayanin nang
mag-isang solusyonan ng mga aktibong crisis mappers ang mga problema sa sistemang humanitarian. Nararapat na maging susunod na hakbang ay
ang paglalathala ng mga humanitarian organizations at aid agencies ng mga detalye ng kanilang pina-planong at nagawa nang proyekto at
pag-gasta sa paraang madalian, bukas, at computerized. Ang simpleng hakbang na ito ay makakatulong sa iba pang mga organisasyon sa pag-alam ng mga
kakulangan o pagdodoble-doble ng mga proyekto, at makakatulong na rin sa pag-alam ng madla kung saan nga ba napupunta ang mga pondo.
Maaari na itong simulan ng USAID--ang organisasyong malamang na magbibigay ng pinakamalaking halaga sa Pilipinas--sa pamamagitan ng mas mainam nitong
pagbantay ng mga gastusin. Sa ilalim ng batas ng Estados Unidos, ang USAID ay kumpolsadong nang mag-ulat ukol sa mga aktibidad ng kanyang mga contractors.
Ngunit ang tunay na aksyon naman ay nanggagaling sa mga subcontractors. Sa isang banda, obligado rin namang mag-ulat ng datos ang mga subcontractors,
ngunit sa kabilang banda ay hindi naman nila ibinabahagi sa publiko ang impormasyong ito. Madali lang ito solusyunan: dapat i-anunsyo lamang ng USAID na
simula ngayon, kinakailangan nang magsumite ng datos ukol sa mga proyekto ang mga contractors sa paraan ngang computerized at madalian. Ito ay
makakatulong sa pag-iwas ng pagdo-doble o pagkukulang ng mga proyekto sa madaliang panahon at--sa mas malayong kinabukasan--ito ay makakatulong din para sa
paghanda para mga darating pang kalamidad.
Mayroon nang tatlong paraang pang-internasyonal upang mamahagi ng impormasyong ukol sa humanitarian response: ang the Financial Tracking System (FTS) ng United Nations Office for Coordination
of Humanitarian Affairs (OCHA), ang International Aid Transparency Initiative (IATI), at ang European Disaster Response Information System (EDRIS). Ang mga patakaran ng
mga paraang ito ay mayroong bahagyang pagkakapareho upang mapadali ang pagtutulungan sa pagitan ng tatlo. Kailangan lamang bilisan ang pagkakabit-kabit ng
mga sistema itong at bigyan rin ng suporta ng mga pulititko. Habang hindi pa ito naisasagawa, mabuti nang mag-ulat ang lahat ng mga gobyero athumanitarian organizations sa FTS ukol sa kani-kanilang mga proyekto sa detalyadong at agad-agarang paaraan upang maging malaki ang epekto ng humanitarian aid.
Ang mga kalunos-lunos na pangyayaring dulot ng bagyong Haiyan ay inaasahang manghimok lalo ng suporta para sa lumalakas na panukalang paigtingin ang
pag-oorganisa ng humanitarian relief at reconstruction sa paraang mas epektibo at mas bukas sa pamimigay ng impormasyon. At habang
inaantay ito, kami ay nakikiramay sa mga biktima nitong teribleng kalamidad at inaalala na rin ang mga magigiting na humanitarian workers na tiyak
na magseserbisyo sa lahat ng oras sa mga parating na araw at linggo.
China’s presence in Africa is, beyond dispute, large in both trade and what can be called official finance to Africa. But how large, exactly? A new database from the College of William and Mary brings additional resources to help answer the question. This paper describes the new database, its key findings, and its possible applications and limitations of the data, which is being made publicly available for the first time.
The World Food Programme has world-class logistics, but its ability to manage financial risk is extremely limited. The WFP should consider implementing a targeted hedging pilot strategy for increased predictability. Greater commitments of untied cash from donors and support for the proposed Food Security Trust Fund at the World Bank would help.
Money laundering, terrorism financing and sanctions violations by individuals, banks and other financial entities are serious offenses with significant negative consequences for rich and poor countries alike. Governments have taken important steps to address these offenses. Efforts by international organizations, the US, UK and others to combat money laundering and curb illicit financial flows are a necessary step to increase the safety of the financial system and improve security, both domestically and around the world. But the policies that have been put in place to counter financial crimes may also have unintentional and costly consequences, in particular for people in poor countries. Those most affected are likely to include the families of migrant workers, small businesses that need to access working capital or trade finance, and recipients of life-saving aid in active-conflict, post-conflict or post-disaster situations. And sometimes, current policies may be self-defeating to the extent that they reduce the transparency of financial flows.
Two years ago, a 7.0 magnitude earthquake struck Haiti, plunging an already poor and unstable country into complete and utter chaos. In the days and weeks that followed, international responses and donations were overwhelming. Yet almost all of the assistance provided to Haiti has bypassed its government, leaving it even less capable than before. Humanitarian agencies, NGOs, private contractors, and other non-state service providers have received 99 percent of relief aid—less than 1 percent of aid in the immediate aftermath of the quake went to public institutions or to the government. And only 23 percent of the longer-term recovery funding was channeled through the Haitian government. Figure 1 shows the breakdown of relief aid from all donors to Haiti, by recipient.
Haiti is often called the “Republic of NGOs.” Because of the limited capacity of the Haitian government and weak national institutions, NGOs have risen to play a very prominent role, one equivalent to a quasi-privatization of the state. One study found that even before the January 2010 earthquake, NGOs provided 70 percent of healthcare, and private schools (mostly NGO-run) accounted for 85 percent of national education. Charities and NGOs have become the main thoroughfare for foreign assistance as a result of the immense volatility in Haitian politics and U.S. reluctance to give aid directly to the Haitian government. NGOs are seen as more stable and can be held more accountable to international donors than the government. International nonprofit organizations also bring much-needed expertise and a stable stream of funding to the country.
Yet this situation is a Catch-22. The dominance of international NGOs has created a parallel state more powerful than the government itself. NGOs in Haiti have built an alternative infrastructure for the provision of social services, creating little incentive for the government to build its capacity to deliver services. A “brain drain” from the public sector to the private, nonprofit sector is also observable, pulling talent away from government offices and resulting in the Haitian concept of the “klas ONG” (NGO class). Even quantifying the number of NGOs operating in Haiti is a hurdle: the number is estimated to be anywhere from 343 to 20,000.
In a forthcoming paper, we discuss some of the options for improving the relationship between NGOs and the Government of Haiti, with a view to building public institutions and government capacity. We recommend that NGOs working in Haiti be asked to sign the equivalent of the Paris Declaration for aid donors—one that would require registration, coordination, and cooperation with the government. Mary Kay Gugerty, an expert on voluntary regulation and accountability programs in the NGO community, presents three solutions that African countries have used to manage NGOs. These may be relevant to Haiti:
National guilds that set national mandatory membership requirements for NGO registration. An NGO code of conduct might also be developed on the basis of aspirational goals rather than strict guidelines. Penalties can vary from a fine to a suspension or de-listing for organization found to be in violation of the code.
NGO-led clubs with high standards for membership, similar to certification or accreditation. Membership acts as a signal of quality, often providing member organizations access to donor funding or other services. The code itself may be a mix of cardinal values and specific practices such as providing annual reports or audited financial statements.
Industry codes, which are the most common form of voluntary self-regulation. Similar to guild requirements, these standards usually reflect broad values and goals that are set at an industry level, typically through an industry association or other third party. Although they would apply to all NGOs, monitoring and enforcement may be weak.
A system for registration of NGOs would be a good start, especially as the government still has limited capacity. Eventually, the government might be able to monitor NGO activities and ensure coordination. The most comprehensive directory of NGO registration so far, with almost 1,000 organizations profiled, is headed by the Office of the UN Special Envoy for Haiti. Its template can be used to make registration a national requirement. The Office of the UN Special Envoy might also facilitate the creation of a more in-depth accreditation and evaluation process, along the model of an NGO-led club.
Meanwhile, the government (and the international donor community, which is committed at least on paper to supporting the government) should focus on core functions, in particular “core governance”: security, civil service, core infrastructure, legal and regulatory reforms, and public financial management and corruption. These are areas where NGOs cannot provide services but are vital for any sustained recovery. This focus would ensure that the state does not remain completely dependent on charities. NGOs, meanwhile, could continue to provide valuable services, especially in the social sector.
Haiti’s challenges are enormous and there are no easy answers. However, a two-pronged strategy—registration and monitoring of NGOs and a governmental and donor focus on “core governance”—may be a good start.
CGD does not have data on how much public and private aid is responding to the Haiti earthquake. (But see this.) As background, here are a charts on recent patterns in Haiti's aid, debt, and remittance receipts. Post comments to request others. The graphs and data shown here are in this spreadsheet (2006--08 version). Aid figures come from the Paris-based Development Assistance Committee (DAC), which collects its data from donor governments. The latest aid figures---just released---are for 2008.
The graph above shows "Net Official Development Assistance" (Net ODA), the standard DAC measure of aid quantity. Source: DAC Table 2a. 2006--08 version
The graph above compares total foreign aid from governments to "remittances," mainly money sent home by Haitians living abroad. Sources: DAC Table 2a, World Bank. Figures are adjusted for inflation, into dollars of 2008.
Most of the remittances must come from the United States:
For more on the significance of migration for Haitians, watch CGD fellow Michael Clemens.
The graph above shows "gross disbursements" of aid. It is from a different data set, which is less comprehensive but more detailed. So aid totals do not match those in the previous graph. This one shows government aid channeled through private charities, but not true private charity, for which data are unavailable. Data are also missing for two large donors, the Inter-American Development Bank and the IMF. Source: CRS. 2006--08 version
The graph above returns to the "Net ODA" measure. DAC defines humanitarian aid as "assistance designed to save lives, alleviate suffering and maintain and protect human dignity during and in the aftermath of emergencies." Source: DAC Table 1. 2006-08 version
Also in the spreadsheet, but hard to embed here, is a table on aid giving to Haiti by sector (health, education, etc.).
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.
Many countries in Africa suffer high rates of underemployment or low rates of productive employment; many also anticipate large numbers of people to enter the workforce in the near future. This paper asks the question: Are African firms creating fewer jobs than those located in other parts of the world? And, if so, why?
Africa’s industrial progress has been disappointing. Part of the reason is that labor costs are higher than one might expect, given GDP per capita. Alan Gelb, Christian Meyer, and Vijaya Ramachandran distill the policy lessons.
China’s presence in Africa is, beyond dispute, large in both trade and what can be called official finance to Africa. But how large, exactly? A new database from the College of William and Mary brings additional resources to help answer the question. This paper describes the new database, its key findings, and its possible applications and limitations of the data, which is being made publicly available for the first time.
The U.S. military has become substantially engaged in the development and stabilization space and will likely continue to operate in this space for some time to come. This paper proposed five policy changes for the military to improve its development activities.