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Why Foreign Aid Is Hurting Africa

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The latest article in the Wall Street Journal proving the lamentable point that aid has hurt, not helped, Africa and the developing world.  “Evidence overwhelmingly demonstrates that aid to Africa has made the poor poorer, and the growth slower. The insidious aid culture has left African countries more debt-laden, more inflation-prone, more vulnerable to the vagaries of the currency markets and more unattractive to higher-quality investment. It’s increased the risk of civil conflict and unrest (the fact that over 60% of sub-Saharan Africa’s population is under the age of 24 with few economic prospects is a cause for worry). Aid is an unmitigated political, economic and humanitarian disaster … Money from rich countries has trapped many African nations in a cycle of corruption, slower economic growth and poverty.”

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Aid has proven harmful because it:

  • Fuels rampant corruption
  • Keeps inefficient or simply bad governments and leaders in power
  • Eliminates incentives to achieve
  • Fosters inflation and “Dutch disease” – large inflows of money kills off a country’s export sector, by driving up home prices and thus making their goods too expensive for export
  • Adds to political volatility and civil strife
  • Leads to malaise in preparing for and tapping into traditional capital markets

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Although Aid has a place, it is important to see the proper role of the public and private sector in order to lift these countries out of poverty.  Our work in microfinance and social investing does this at the ground level, tangibly effecting change for those living in poverty.

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http://online.wsj.com/article/SB123758895999200083.html#mod=djemITP

WSJ – Microfinance Safe, Jobs Created

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Check out this weekend’s WSJ article on global underground economies: http://online.wsj.com/article/SB123698646833925567.html

Approximately 95% of the loans that MFIs make are to street vendors, cab drivers, fish mongers, etc. – quoted “safe havens in a darkening financial climate.” I’m encouraged by the focus on this enormous, vital and poorly understood segment of world commerce.

A Social Solution, Without Going the Nonprofit Route

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A great article from the NYT.  The movement is growing.

http://www.nytimes.com/2009/03/05/business/smallbusiness/05sbiz.html?em

Inside The Meltdown

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As Microfinance continues to prove its non-correlation, everyone is still trying to understand how we got here.  To that end, Frontline just aired an excellent 1-hour documentary about the financial crisis:

http://www.pbs.org/wgbh/pages/frontline/story/2009/02/banking-at-the-brink.html

Not a ton of new information, if you follow the news like we do.  But, having everything put into a single narrative was helpful.

How Business Can Aid in the Fight Against Global Poverty

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How Business Can Aid in the Fight Against Global Poverty

by Kim Tan, Dec 12, 2007

Statistics on global poverty are as easy to find as they are numbing: Nearly half the world’s population lives on less than two dollars a day; eight-hundred forty million people worldwide suffer from hunger; ten million children die every year from preventable diseases; AIDS kills three million people every year, and contraction rates continue to climb; one billion people lack access to clean water; one billion adults are illiterate; approximately one-quarter of children in poor countries do not finish primary school. Meanwhile, the richest 20 percent of the world’s population owns 77 percent of the world’s wealth, while the poorest 20 percent own 1.4 percent.

These statistics present two problems: First, they make the problem of poverty, disease and hunger impersonal; Second, the scale is too vast to comprehend. How can we come to terms with hundreds of millions of people suffering each day from hunger? The problems seem insurmountable, with the result that people feel incapable of doing anything about them. Such difficulties are often compounded by reported accounts of failed aid projects, or the theft of funds by corrupt government leaders, or the flight of capital from poor regions, especially from Africa.

A recent UK-government white paper entitled Eliminating World Poverty noted that the number of people worldwide living on less than one dollar a day is falling, largely due to the rapid economic growth in Asia. Asian economic growth alone will result in halving by 2015 the number of people living in poverty. It is important to note that not all countries or regions will experience that poverty alleviation evenly, however; if current trends continue, by 2015 over 90 percent of the world’s poor will live in South Asia and sub-Saharan Africa.

The poverty of Africa is a scar on our conscience. In view of the disparity in wealth between rich countries and poor countries it is impossible to escape the conclusion that tackling poverty is a responsibility rich countries must accept.

For the past five decades the major approach taken by governments to tackle global poverty has been through government-to-government aid. William Easterly,  the former World Bank economist, estimates that US $2.3 trillion has been given in aid. While many suggest that aid can work when the appropriate government policies are in place, Easterly suggests that when examined over the long term there is no evidence that aid raises growth among countries with good policies. The conclusion, therefore, is that good governance and policies help economies grow and reduce poverty whether they receive aid or not. Aid is neither necessary nor sufficient to ensure sustainable development and poverty reduction in poor countries. Encouraging enterprise, however, is vital to achieving these goals.

As an example of what enterprise can do, consider just one example: SPOT Taxis of Bangalore, India. SPOT Taxis is the largest taxi franchise in Bangalore; it has over 300 taxis and operates 24 hours a day, seven days a week. It is the first commercial radio taxi operator in India and was started for social reasons in 1999, in particular to encourage the unemployed to seek employment and for drivers to become owners. One unique feature is that each driver is enabled to own his own vehicle with a structured loan over a three-to-four year period.

SPOT stands for Self Employment Programme for Organised Transport. It has a corporate entity that structures the loans for the vehicles, equips them with radios to a uniformly high standard, and trains and provides legal and ancillary support to the drivers. Through the corporate entity, it is able to negotiate vehicle leases with major banks like ICICI on behalf of the drivers, most of whom have no credit history and would not have access to credit on their own.

SPOT combines the management and financial strengths of a corporate entity with the entrepreneurial vigor of self-employment. Unlike other operators, SPOT’s fleet are driven by owners who operate as individual businesses linked by a common brand, system, processes and values. This, coupled with their reliability and high-quality service, differentiates them from other taxi operators.

It has been found that by running their own businesses drivers are more motivated, with the result that productivity is increased. In fact, some enterprising drivers now own more than one vehicle. In addition to the fact that SPOT helps the poor own their businesses and build a credit history, its model is easy to replicate.

Examples like SPOT indicate that enterprise can be a powerful anti-poverty tool. Micro-finance has shown the way forward in removing people from abject poverty to ‘normal’ poverty. The next step is increased investment through small and medium-sized companies in poor countries which yields both financial and social returns. The way forward consists of a number of steps.

First, encourage foundations, trusts, high-net worth individuals and companies, through their social responsibility budgets, to invest in social venture capital projects instead of simply making charitable donations.

Second, encourage governments to devote a greater proportion of their aid budgets to funding enterprise, and design tax policies that promote social venture investments.

Third, reduce trade barriers so that developing countries can increase both their exports and imports; if that fails, encourage countries to unilaterally liberalize their trading agreements.

There are no easy answers to the eradication of poverty. There is no ‘one size fits all’ or a single solution. Poverty will ultimately be solved when good governments are installed that will create the environment for vibrant economic activity to take place. It will not be solved by grand projects run by governments but which offer poor returns on their investments. An enterprise-based strategy will lay the groundwork for a better educated and resourced next generation, to transform their nations and make poverty history.

All opinions expressed in this piece are those of the author, and do not necessarily reflect the position of Beyond Philanthropy or its sponsors.


Kim Tan is the founder and chairman of SpringHill Management Ltd, which manages several private equity funds including the biotech VC fund, SpringHill BioVentures. He also is a trustee of the Transformational Business Network, a network of business people and corporate organizations that uses an enterprise approach to tackle global poverty and bring social transformation. Kim is a director of Active Capital Trust and a number of biotech companies in the UK, US, India and Malaysia. He is a Fellow of the Royal Society of Medicine. Kim is the initiator of the Kuzuko Game Reserve in South Africa, a conservation and social transformational project working in an area of high unemployment.

Banamex Starts Microlender Compartamos With Buy Rating

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Wall Street Journal

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January 2009

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MEXICO CITY (Dow Jones)–Citigroup Inc’s (C) Mexican banking arm Banamex has started coverage of microfinance lender Compartamos Banco SA (COMPART.MX) with a buy rating, citing the firm’s growth potential in low income segments of the population.

Microfinance Loan Documentary

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First European Microfinance Award in the Rural Tourism Sector

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In 2006 Moroccan institute, Fondation Zakoura received the first European Microfinance Award for work it undertook in promoting financial services in the rural tourism sector. The film, which shows the impact this award has on rural communities, traces the institution’s activities since receiving the award, with testimonies from recipients of the Fondation Zakoura’s services.

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Dire Forecast for Global Economy and Trade

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The article (attached below) reaffirms two important concepts – 1) emerging markets, while down, still offer higher growth rates than domestic markets; 2) this downturn will affect those in poverty more than the affluent as basic needs will not be met.  These two items are real and should drive more capital into global social investment, out of opportunity and goodwill toward men.

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December 10, 2008

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Dire Forecast for Global Economy and Trade
By MARK LANDLER, NYTimes

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WASHINGTON — The world economy is on the brink of a rare global recession, the World Bank said in a forecast released Tuesday, with world trade projected to fall next year for the first time since 1982 and capital flows to developing countries predicted to plunge 50 percent.

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The projections are among the most dire in a litany of recent gloomy forecasts for the world economy, and officials at the World Bank warned that if they proved accurate, the downturn could throw many developing countries into crisis and keep tens of millions of people in poverty.

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Even more troubling, several economists said, there is no obvious engine to drive a recovery.

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American consumers are unlikely to return to their old spending habits, even after the United States climbs out of its current financial crisis. With growth in China slowing sharply, consumers there are not about to pick up the slack from the Americans. The collapse in oil prices — a side effect of the crisis — has knocked the wind out of consumers in oil-exporting countries.

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“We know that the financial crisis now is likely to be the worst since the 1930s,” said Justin Lin, the chief economist of the World Bank, summarizing the projections.

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The bank forecasts the global economy will eke out growth of 0.9 percent in 2009, down from 2.5 percent this year and 4 percent in 2006. That is the slowest pace since 1982, when global growth was 0.3 percent. Developing countries will grow an average of 4.5 percent next year — a pace that economists said constituted a recession, given the need of these countries to grow rapidly to generate enough jobs for their swelling populations.

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“You don’t need negative growth in developing countries to have a situation that feels like a recession,” said Hans Timmer, who directs the bank’s international economic analyses and projections. He predicted rising joblessness and closed factories in many developing countries.

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The volume of world trade, which grew 9.8 percent in 2006 and an estimated 6.2 percent this year, will contract by 2.1 percent in 2009, the report said. That drop would be deeper than the last major contraction in trade: 1.9 percent in 1975.

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Net private flows of capital to developing countries are projected to decline to $530 billion in 2009, from $1 trillion in 2007.

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The loss of that capital will sharply constrict investment in emerging-market economies, the report said, with annual investment growth slowing to 3.5 percent in 2009 from 13.2 percent in 2007.

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Several countries are also being hurt by the decline in the prices of oil and other commodities — a phenomenon the World Bank characterizes as the end of a five-year commodities boom — though the decline in food and fuel costs has relieved the pressure on people in other countries.

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The sudden drop in capital flows poses a particular danger to oil exporters, some of whom have run up heavy debts.

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“They’ll have to roll over that debt, one way or the other,” said Simon Johnson, a former chief economist of the International Monetary Fund. “That’s going to put a huge squeeze on these countries.”

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Mr. Johnson said the calmer atmosphere in foreign markets belied the gravity of the situation. Spreads on credit default swaps — a common yardstick for whether a country’s government is in danger of default — continue to signal potential trouble for Ireland, Italy and Greece.

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The authorities in Greece are battling violent street protests in Athens and its suburbs, caused in part by the deteriorating economy.

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Reflecting what is by now conventional wisdom, the World Bank recommended that countries undertake large fiscal stimulus programs to cushion the downturn. The bank itself has committed up to $100 billion in aid to developing countries over three years.

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If there is a silver lining amid the gloom, it is the relief that lower food and fuel prices mean for poorer countries. While the prices of almost all commodities have fallen sharply since July, they remain higher than in the 1990s, which the bank says should prevent future supply shortages.

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As the World Bank’s experts struggled to find a historical analog for the slump, they said it had more in common with the Depression of the 1930s than with the severe recessions of the 1970s or 1980s.

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“It is not just a supply shock,” Mr. Timmer said. “It is not just a reduction in demand, but it is the lack of availability of credit.”

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Deutsche Bank, in a forecast issued this week, was even more pessimistic. It said global growth would drop to 0.2 percent in 2009, with the United States, Europe, and Japan in recessions of roughly equal severity.

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China, which grew 11.9 percent in 2007, will slow to 7 percent next year, the bank projects, and 6.6 percent in 2010, when the rest of the world is slowly recovering. “It’s not going to be the spark that reignites global demand,” said Thomas Mayer, the chief European economist for Deutsche Bank. “We’re almost in an air pocket, where we don’t have a new global driver of growth.”

The Time is Right for Creative Capitalism

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http://hbswk.hbs.edu/item/5988.html

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Bill Gates has it right. Business is the most powerful force for change in the world right now and gives the idea of creative capitalism real power, writes Harvard Business School professor Nancy F. Koehn.

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