Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa (20 page)

Of course, other entrepreneurs, seeing how his business has flourished and recognizing the ever-present demand for mosquito nets, would venture into the market, thereby lowering the cost of the nets over time, and of course improving quality.

What should Dongo do?

The extension of financial services to people who otherwise have no access to banks dates as far back as when municipal savings banks began in Europe in the eighteenth century, and when German groups based on the self-help principle and called savings and credit cooperatives were first organized by Herman Schulze-Delitzsch and Friedrich Raiffeisen in the middle of the nineteenth century.

In more recent times, micro-credit organizations were developed in the 1960s to serve Africa and Asia’s needs for agricultural support, yet most Africans today still have very limited access to financial markets. In Ghana and Tanzania, for example, only about 5–6 per cent of the population has access to the banking sector, although some 80 per cent of households in Tanzania would be prepared to save if they had access to appropriate products and saving mechanisms.

The oldest private, worldwide, fully commercial micro-finance investment fund is the Dexia Micro-Credit Fund. It is managed by Blue Orchard Finance, a micro-finance investment consultancy, and finances some fifty micro-finance institutions in twenty-four countries. It has investments of US$77 million. However, it was really not until Grameen Bank’s success that micro-finance really took off.

Today, micro-finance brings groups of people into the economy for the first time, by offering the poor a range of saving tools. Beyond the direct capital injection it puts into a borrower’s pockets, it can also be a powerful development tool. Even small loans can boost business productivity gains and contribute to job creation and raise family living standards (better nutrition, better health and housing, more education).

By some estimates some 10,000 organizations (from nongovernmental organizations to registered banks) today offer over US$1 billion worth of micro-finance loans annually to many millions of customers around the world; projections are that this amount will have to grow twenty-fold (to US$20 billion) over the next five years to meet projected demand. But in more extreme forecasts, some predict even more exponential growth. Vijay Mahajan, a micro-finance practitioner, puts potential annual micro-credit demand in India alone at US$30 billion, 10 per cent of the estimated global US$300 billion.
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According to an April 2006 survey by McKinsey Consulting, India has the potential to become a US$500 billion market by the year 2020.

Growth in most emerging-market regions has been meteoric: For example, the Bangladeshi organization BRAC signed up 5,000 customers in Afghanistan, just six months after setting up there; two Cambodian organizations (Acleda and EMT) each have over 80,000 customers; Banco do Nordeste in Brazil has become the second-largest micro-finance operation in Latin America, with 110,000 clients in just a few years; and Compartamos, in Mexico, has nearly doubled the number of its clients in the past year to become the largest Latin American programme, with over 150,000 clients.

Despite all this expansion, the industry has yet to reach 5 per cent of the customers among the world poor. Even according to the Grameen Foundation USA’s more optimistic estimates that 10 per cent of a potential US$300 billion micro-finance market has been penetrated, there is plenty of scope for development financing through micro-lending. It’s about time Dongo, and the rest of Africa, got involved.

The UN estimates that there are around 33 million Africans living outside their country of origin. Nigerians and Ghanaians principally move to the United States, Malians and Senegalese settle in France, and the majority of Congolese make their home in the Netherlands. Some 30 per cent of Mali’s population lives elsewhere. In total, emigrants represent almost 5 per cent of Africa’s total population, and they are yet another source of money to help fuel Africa’s development.

Remittances – the money Africans abroad sent home to their families – totalled around US$20 billion in 2006 (remittances were US$68 billion and US$113 billion in Latin America and Asia, respectively). According to a United Nations report entitled
Resource Flows to Africa: An Update on Statistical Trends
, between 2000 and 2003 Africans sent home about US$17 billion each year, a figure that even tops FDI, which averaged US$15 billion, during this period. What is more, according to the World Bank, the figures on Africa’s remittances are most likely grossly under-valued, as a lot of money makes its way to the continent through unrecorded channels (Freund and Spatafora estimate informal remittances are 35–75 per cent of the official flows); so much so that remittances may possibly be the largest source of external funding in many poor countries. At US$5 billion, Nigeria receives the greatest amount of remittances in Africa, followed by South Africa (US$1.5 billion) and Angola (US$1 billion). They accounted for roughly 40 per cent of Somalia’s 2006 GDP, the same year that six out of fifty-three countries received remittances in excess of US$1 billion. Quite clearly remittances are (and increasingly should be) a significant piece of many African countries’ financing puzzle.

In July 2006, the UK’s Department of International Development published a report,
The Black and Minority Ethnic Remittance Survey
, which revealed that within black communities 34 per cent of Africans send money home to relatives. Perhaps more startling
was the fact that of the almost 10,000 minority households interviewed across the UK, Black Africans were found to remit money (an average of around £910 annually, or almost US$1,800; the global average per capita is around US$200 per month) more frequently than any other group.

Like the other forms of private capital flows already discussed, the benefits of remittances are far-reaching.

Although the actual remittance sums taken individually are relatively small, taken collectively the remittance amounts flowing into African nations’ coffers (banks, building societies, etc.) are enormous. The US$565 million that flowed into Mozambique and the US$642 million that went to Uganda in 2006 most certainly contributed to bolstering their economies.

Remittances can play an important part in financing a country’s external balances, by helping to pay for imports and repay external debt. As remittances tend to be more stable than other capital flows, in some countries banks have used them to securitize loans from the international capital markets – that is, to raise overseas financing using future remittances as collateral, thereby lowering borrowing costs. Banco do Brasil raised US$250 million in 2002 by using future dollar- or yen-denominated worker remittances as collateral.

An April 2008 World Bank publication entitled ‘Beyond Aid: New Sources and Innovative Mechanisms for Financing Development in Sub-Saharan Africa’, estimated that sub-Saharan African countries can potentially raise as much as US$1–3 billion by reducing the cost of international migrant remittances, US$5–10 billion by issuing diaspora bonds (a bond issued by a country (or even a private company) to raise financing from its overseas diaspora), and US$17 billion by securitizing future remittances – not small change. Incidentally, India and Israel have raised as much as US$11 billion and US$25 billion, respectively, from their diaspora abroad, showing that these schemes can work, and work very well if executed efficiently.
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On a household level, remittances are used to finance basic consumption needs: housing, children’s education, healthcare, and
even capital for small businesses and entrepreneurial activities – the heart of an economy. More fundamentally, more remittances mean more money deposited in the bank, which means more cash that the banks have to lend. In Latin America, deposits-to-GDP ratios (a key indicator of a country’s financial development) markedly improved as a result of high remittances. Naturally, the most direct channel through which remittances have an impact on GDP is by increased spending by the recipient households.

Remittances make an important and growing contribution to relieving poverty. According to a paper by World Bank economists, evidence shows that a 10 per cent increase in per capita remittances leads to a 3.5 per cent decline in the proportion of poor people. Household surveys in the Philippines indicate that a 10 per cent increase in remittances reduced the poverty rate by 2.8 per cent by increasing the income level of the receiving family but also via spillovers to the overall economy. Moreover, this 10 per cent increase led to a 1.7 per cent increase in school attendance, a 0.35-hour decline in child labour per household per week, and a 2 per cent increase in new entrepreneurial activities.
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All of this is good news, but there is a price to be paid – and one that potentially constrains the growth of remittances to the continent. For every US$100 sent to Africa, only US$80 gets there – the middleman takes the rest – while from the US to Mexico US$85 gets home (that is, a 15 per cent charge), and from the UK to India as much as US$96 (just a 4 per cent tax) reaches its destination.

This form of higher ‘taxation’ on monies sent to Africa throws up a double-whammy: it encourages those abroad to send money secretly and can ultimately discourage them from sending any money at all. In a survey, remitters said that they would send 10 per cent more money if costs were 50 per cent cheaper.

The bulk of the transfer cost for remitting money from the sender abroad to the recipient at home is determined in the private markets. Therefore, the high remittance costs can really only be reduced by increasing access to banking and strengthening competition in the remittance industry.

However, there is scope for African governments to encourage greater remittance flows by offering cheaper ways for money to be sent home. In Latin America, for example, the International Remittance Network facilitates remittance flows from the United States to Latin America. Similar initiatives in Africa would undoubtedly do the same. It is encouraging to note that innovative mobile phone technology is making it both cheaper and quicker for people to send and receive money. In April 2007, a money transfer system called M-Pesa was launched in Kenya enabling subscribers to send large sums of money in an instant transaction. Within just two weeks of the launch over 10,000 account holders were registered and more than US$100,000 had been transferred. At the moment the M-Pesa programme only facilitates money transfers within the country’s borders, usually from richer urban dwellers to their poorer rural relations. However, there are plans underway to roll the scheme out on an international basis, not only tapping the billions of international remittances Kenyans regularly send home, but doing it in the most competitive way – that is, getting more cash into the recipient’s pocket.

Remittances are, of course, in some sense a form of aid (the recipient is essentially getting something for nothing). And like other forms of aid, there is the inherent risk that remittances encourage reckless consumption and laziness. In 2006, Jamaica’s finance minister, Dr Omar Davies, expressed concern that the multimillion-dollar flows of remittances to Jamaicans were instilling a culture of dependency over achievement.

Perhaps this is true, but at least some part of the money is reaching the indigent and making its way to productive uses. And unlike aid it does not increase corruption. Indeed, Giuliano and Ruiz-Arranz, and Toxopeus and Lensink, conclude that remittances do have a positive impact on growth.

In April 2005, two young boys stumbled upon US$6,000 while playing football in Maiduguri, in north-east Nigeria. Maiduguri is not Nigeria’s bustling capital city of Abuja or its largest commercial city of Lagos; nor, for that matter, is it Nigeria’s third, fourth or fifth business hubs (those honours go to Port Harcourt, Kano and Ibadan). Yet it was here, in Maiduguri, that the US$6,000 was found.
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This money hadn’t been lost. As it turns out, in the absence of a credible, formalized banking system the owner of the cash had opted to neatly wrap his savings in a black plastic bag and hide his stash near a rubbish dump.

This incident raises a fundamental question: does Africa lack capital? Or might it be that there is a lot of cash in these poor countries – unseen, dormant cash, which simply needs to be woken? Could it actually be that the countless development agents and agencies and innumerable man-hours deployed to send cash to Africa have been for naught – attempting to address a problem that simply does not exist? That, in fact, the core problem with Africa is not an absence of cash, but rather that its financial markets are acutely inefficient – borrowers cannot borrow, and lenders do not lend, despite the billions washing about.

In
The Mystery of Capital
, the Peruvian economist Hernando de Soto suggests that the value of savings among the poor of Asia, the Middle East and Africa is as much as forty times all the foreign aid received throughout the world since 1945. He argues that were the United States to hike its foreign-aid allocations to the 0.7 per cent of national income (as prescribed by the United Nations at Monterrey), it would take the richest country more than 150 years to transfer to the world’s poor resources equal to those that they already have.

Evidence from India would seem to add weight to this theory. By some estimates, as much as US$200 billion worth of untapped investment potential is privately held in gold in India.
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In 2005,
India introduced a policy which allowed Indians to exchange their physical gold holdings (often held in jewellery and coins) into ‘paper’ gold in denominations as low as US$2. Estimates suggest that this policy unlocked as much as US$200 billion worth of untapped investment potential privately held. The initiative promised to bring the poorest 700 million villagers, who purchase about two thirds of India’s gold, into the more formalized banking system. Moreover, this gold policy injected more money into the economy than the total FDI India received in 2004 – in that year Indians poured about twice as much money into gold (around US$10 billion) as the country received from foreign investors. With more than half of India’s savings tied up in physical assets, such strategies can bring millions of poor into the banking system, offering credit access to many Indians, and inject capital into the economy.