Damn the Aid

I was recently directed to what is probably the most damning opinion on foreign aid I’ve come across in a while (hat tip Jodi and Tracy.)

Here’s the bottom line:
Over the past 60 years at least $1 trillion of development-related aid has been transferred from rich countries to Africa. Yet real per-capita income today is lower than it was in the 1970s, and more than 50% of the population -- over 350 million people -- live on less than a dollar a day, a figure that has nearly doubled in two decades.

The point the author makes is that Africa (and I would add other developing nations) needs investment and not aid. When you accept investment, be it equity or debt, there is significant responsibility attached to provide a return. In other words, you need to make the money work so you can pay back your investors.

Hopefully the money you make with the investment is more than what you need to pay back. If so, you have economic growth and that is good.

It’s not a perfect system, but it seems to work in places like India, SE Asia and more recently in Latin America (the Economist gushed on Brazil in its cover story a few weeks back.)

I’ve touched on this point before, but my view is that the world is awash with capital trying to find its way into places like Africa. Yes, I know there is a credit crunch going on but I think the view still holds.

African countries could start by issuing bonds to raise cash. To be sure, the traditional capital markets of the U.S. and Europe remain challenging. However, African countries could explore opportunities to raise capital in more non-traditional markets such as the Middle East and China (whose foreign exchange reserves are more than $4 trillion). Moreover, the current market malaise provides an opening for African countries to focus on acquiring credit ratings (a prerequisite to accessing the bond markets), and preparing themselves for the time when the capital markets return to some semblance of normalcy.

I would also add multilateral institutions and development banks as potential partners. Yes they have been part of the problem in the past, endlessly financing non-returning projects. But there are factions within these organizations that are now demanding a return and reform for their development financing dollars, and that is a good thing.

Corporations are eager to invest in developing country as well. The problem is there aren’t any good projects to invest in. There is a lot of money sitting on the sidelines waiting for the right time to enter Africa (I’m talking about investment in things other than resource extraction).

So what is everyone waiting for? Institutional reform for one (or even institutional creation in some instances)

Governments need to attract more foreign direct investment by creating attractive tax structures and reducing the red tape and complex regulations for businesses. African nations should also focus on increasing trade; China is one promising partner. And Western countries can help by cutting off the cycle of giving something for nothing. It's time for a change.

I would disagree with the point on China. Yes, China is pouring money into Africa but it is doing so to buy up resources and it is hard to see China making the demands for reform an outside investor has to make on Africa. Recent news from Dubai may make the Middle East a less active investor as well.



Why Foreign Aid Is Hurting Africa - WSJ.com

BRIC? BIIC?

Nouriel Roubini questions whether Russia is solid enough to be a BRIC. I have to admit, I've had the same reservation (not that anyone noticed/cared.)

He makes an case for a number of other countries that should be included in the most famous acronym in the emerging markets; Turkey, Mexico and so on. All good choices, Turkey especially.

He also makes this point:
Indonesia, moreover, has shown resilience not only economically, but also as a nation. In spite of its diverse ethnic makeup and far-flung island territory, the country has made a quick transition from military dictatorship and has recovered from myriad challenges and setbacks, including the 1997 Asian financial crisis, the tsunami in 2004, the emergence of radical Islam, and domestic unrest. While Indonesia’s per capita GDP remains low, it is a country’s potential that matters in economic affairs, and here Indonesia shines.

I couldn't agree more.

News tries to Bing Google... may get Bonged

So play this WSJ/Bing drama out in your head (which is what I’m doing past midnight, so please forgive any fatigued leaps of logic)…

Bing pays NewsCorp some amount of money to be the exclusive search engine for its news properties, including the WSJ. It probably wouldn’t be a huge amount because Murdoch has it in for Google and being a thorn in the Googlers’ side is probably payment enough.

What happens next? WSJ traffic drops because about 75% of the searching population can’t find it? Maybe.

Or maybe other newspapers try to get a piece of the goods and start demanding either Bing or Google shell out some dough to search their sites.

If all the newspapers band together and demand payment for search from Bing or Google, that would be pretty powerful. That is a pretty big if, to assume that all media outlets would bandy together like that. Maybe the market would fracture and WSJ would go with Bing and NYT would go with Google.

Take this thought process one step farther and you have Bing as the conservative search site and Google as the liberal one. This may be stretching the thought process a bit but if this happens, it would royally suck and instead of the internet being a free forum of ideas, it would be bifurcated into two enormous echo chambers. But I digress….

Anyway, back to earth …. So Bing and Google begin to recoup their additional costs by charging advertisers a premium for placement on news related.

Of course, then some cottage industry would spring up of mirroring stories across the Net so any exclusivity to Bing or to Google would really only last a very short while. Like 2 seconds. That would lessen the incentive for advertisers to pay premium ad rates for exclusive content that isn’t really exclusive.

Anyway, you could continue to game this out back and forth in your head until you’re exhausted (as I was, when I first started this ramble.)

Bottom line, content is still king. You can play around with these funny web restrictions but ultimately, it is hard to imagine how they will work in a scalable fashion. The music industry tried all sort of “too-clever-by-half” legal and technical means to try to stop music pirating. Ultimately, they came to the realization of “hey, why don’t we give the customer what they want in a form they want it?” (epiphany courtesy Mr. Jobs)

This NewsCorp/Bing deal has the same feel to it. Instead of giving people the news in a manner and format that is of value to them (ie, that they will pay for) large companies with more money than savvies are trying to come up with ways to restrict content in the online world, which inherently defies restriction.

But then again, Rupert has shown his online chops by making MySpace such a success….

Bing Tries To Buy The News - washingtonpost.com

Climbing out of the Aid Trap

Although I would probably disagree with Glenn Hubbard about a lot of things, I am very eager to read his new book questioning the efficacy of past international aid initiatives.

The simple truth is that billions have been spent on aid, and billions are still left in poverty. Something clearly isn’t working. I understand that Hubbard looks at the post WWII Marshall Plan for inspiration on what could be done in the 21st century to address global poverty. Interesting idea.

Here’s a great quote talking about why microfinance isn’t enough. I’ll pre-empt the quote to say that I agree. Microfinance is great in certain instances, the rural poor for example, to help people on the path to economic development. But microfinance doesn’t really help SMBs and there is a real gap in the market there. Often SMBs are too big for microfinance, but too small for a regular bank loan, so they’re stuck. Happily, this gap seems to be filling in in many countries

Microfinance can be a catalyst for entrepreneurship up to a certain stage of business development, but the businesses launched through microfinance need to develop into full-fledged small businesses if they are to promote greater economic growth. Small and medium-sized businesses are the source of growth in all countries. Eighty percent of China’s employment, for example, is in small business — not in microfinance.

The barriers to growing past micro-entrepreneurship are formidable. Starting a formally-recognized business can require months of waiting, and paying enormous fees — including bribes — as the Doing Business rankings show. An example we use in the book is Mozambique, where starting a business requires forms 12 government agencies; you also have to pay bribes to each of the 12 government employees who stamp your documents. When you have 12 stamps, you can — at last — run your business without fear of being shut down. Similar hurdles in other countries mean that micro-entrepreneurs have a very difficult time becoming a political or economic force strong enough to challenge the status quo.

The bright spot is that micro-lenders are increasingly expanding their loan programs to serve not only individuals, but also established small and medium-sized businesses. Our proposal includes provisions for supporting existing small and medium-sized businesses through microfinance institutions.

Climbing out of the Aid Trap

Woman passes 950th driving test

Valuable lesson in persistence. She narrowly beats my record for most driving tests attempted.

BBC NEWS | Asia-Pacific | Woman passes 950th driving test