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Date: 2019-03-23 Page is: DBtxt001.php bk010140000


Burgess Manuscripts
New Wave for Development
Some Critical Reforms to Catalyze Socio-Economic Progress

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CHAPTER 14
MONEY AND BANKING
There has been a massive increase in financial wealth since World War II while at the same time a dangerous growth in inequality and a catastrophic degradation of the environment. This is not sustainable, and a train-wreck waiting to happen.

Economic Services: Financial Services
Financial services

What money and finance is available? How can salaries and suppliers be paid? What is the business model to generate positive cash flow? What are revenues? Is it market driven? Is it government budget? Is it grant based? Is it fee based? Is it mixed? Many of the problems of development are blamed on lack of money and financial resources. What ways can money and liquidity be created to support development progress. How can money get where it is needed in the best possible way. What about transparency and accountability?

Money: Not enough of it!

Of course there is not enough money. There never is. But that is not serious analysis, just lazy knee jerk response. Sadly, it has been a driver of a lot of debate and policy deliberation, when it has had nothing much at all to do with the problems and their solution.

Microfinance

It is working capital that microfinance often aims to fund. But usually only for the very small enterprise, and in these cases surplus of the enterprise may not translate into a surplus for the family.

Though microfinance has done some good things, for some reason it has not been expanded to satisfy anything like the need that exists.

One reason for this is that the organizations involved with microfinance are poorly run, and do not have a business model that allows them to get financing to support the growth that is needed

Money

The world is not short of financial capital, but capital is concentrated where the perception of risk is low and the opportunities for gain are maximum. We need real alternatives to the World Bank and the IMF. Having these institutions and their clones as the dominant financial institutions in global development is no longer the best way.

Why is it that the IMF and the World Bank have become so important in development, and why is it that there are no alternatives to these institutions to drive development in developing countries? The IMF and the World Bank have their supporters, and in development career terms, working for the World Bank or the IMF is success.

But a number of things have happened over the years that is cause for alarm. Other institutions have “cloned” the procedures and the processes of the World Bank and the IMF so that almost exactly the same results are being achieved by other international financial institutions (IFIs). Copying good procedures and high performance processes would be good. But copying procedures and processes that are ineffective is a problem.

But the problem is bigger than this. A lot of organizations want the World Bank and the IMF to be engaged in a country before they will become engaged themselves. So not only do the IMF and the World Bank have a direct role in a developing country's development, they also add leverage to the situation. The IMF and the World Bank sit on top of the world as an imperial monopoly. And monopoly is rarely good for all the stakeholders.

Capital markets

Financial capital is very mobile, and very conservative. But capital is put at risk where the potential for rewards are high. Though capital may be highly regulated, it is very much market driven and offers great possibilities for reform of financing for development.

The history of cross border financing has been mixed. In the 19th century international finance was very important, and in fact played a key role in the industrialization of the United States and the prosperity of Europe prior to the First World War. It was only during WWI that the United States started to be a lending nation rather than a borrowing nation.

And while international investment did well, there were some notable problems. The problem of sovereign debt did not happen for the first time in the 1980s, but was already a problem more than 100 years before.

The problem is that financial capital is market driven, and markets are driven by expectations. In turn expectations are driven by what is seen to be possible because it has already happened, and what might now be possible because of potential. Sadly, the underlying assumption of economic behavior at the operational level tends often to be rather different from the capital manager's view.

But markets are best when the information is good. It will be possible to mobilize capital as soon as the information shows that capital is making money supporting development. And investment in development can be as rewarding as investment in a lot of other vehicles, but the investment must be seen to be successful, and the investment must not “crash” immediately the area of finance is no longer “fashionable”

Financing development must not be complex. But financing development must be secure.

Everything that relates the financing and the use of funds must be well organized, and the systems for accounting and accountability must be first class. In order for capital to be attracted to development, there has to be prior success, and this success must be visible.

Showing success in financial terms is not about economic data and economic reports, but about financial reports, and respected audits and audit reports. In order for capital to be mobilized there is a need for intermediary institutions and organizations. Organizations like the World Bank and the regional development banks serve as intermediaries for transfer of global capital from the capital markets to development. Instead of proposing reform of their processes which is very difficult, a new series of intermediary organizations is needed.

These new organizations will be technology based so as to be low cost in operation, but very efficient in terms of financial accounting, accountability and analysis.

And these new organizations should be able to focus so as to facilitate a clear understanding of what works and what does not. In development, scarce resources should not be allocated to activities that do not work, and do not add economic value.

Public Finance in Africa

I have not been quiet about the need for better financing for government in developing countries such as the following posted to the AFRO-NETS list in October 2002

AFRO-NETS: HIV/AIDS through Unsafe Medical Care (8)
Dear AFRO-NETS colleagues,
Thank you Agnes Moses for your reference to labour wards. When I first got concerned about the HIV/AIDS crisis in Africa and started to try to understand the issues..... one of my friends.... who sadly has full blown AIDS.... told me of her concern about the procedures that are commonplace in labour wards in Africa including not only the re-use of 'single use disposable' syringes but also the use of latex gloves over and over again during the birthing of infants.
All of these practices are easy to correct..... BUT ONLY IF THERE ARE THE RESOURCES TO DO IT RIGHT.
BUT..... there is not a health ministry in Africa that has the resources to do it right.
Public finance is in complete chaos after 40 years of international assistance and prioritization of African economies and now more than 20 years of structural adjustment. The human capacity to do much better exists. The financial capacity in the SOUTH to do much better does not.
Sincerely,
Peter Burgess


Money is Important

Money is important, but mere money does not solve the problems of society. Money needs to be used in a constructive manner.

Money and greed can easily end up making a good situation intolerable. Money, it is said, can buy anything ... and in situations where there is secrecy about financial transactions and no transparency whatsoever, then money is used in all sorts of inappropriate ways.

Reference has already been made to the idea of “small is beautiful” and this has application with money as well. Big money doing bad things in secret almost inevitably ends up with a bad outcome.

The success of the United States had a lot to do with great natural resources, an entrepreneurial spirit and adequate money derived from creative financing. In time it became possible to get the country organized with a government that was too its liking ... but only after a revolutionary war and years of arguing about how the government should be organized.

In Iraq the problem is not the lack of money, but what the money is being used to do. It is not at all clear what money is being used for ... neither the local money derived from the oil industry, nor the funds that are coming from the outside to fund the deployment of coalition forces, rebuilding and development. Money ... should not be a gift

Money is not a gift, but something that is being used to facilitate socio-economic progress. What this means in practical terms is that money is loaned and not given to the communities to facilitate their socio-economic progress. Some of the organizations that are engaged in the international relief and development sector consider the accounting for small loans to be an excessive burden and have decided to use their resources as grants rather than loans. This is, in my view, a mistake, and encourages a culture of dependence that has all sorts of undesirable consequences.


Requirements for Money

Many needs

There are many needs including: (1) funds for public purposes; (2) funds for private investment; and, (3) funds to invest for future generations. Public purposes includes funding the programs of government and funding investment in the national infrastructure.

Programs of government include the funding of the army and the police, and the funding of development initiatives.

Financing development initiatives

The argument has already been made that development initiatives are best implemented at the community level, with pull from community leadership rather than push from a central planning authority.

Many types of development financing are required to support community centric development including: (1) financing to help at the individual level – micro-finance; (2) financing to help the small to medium sized enterprise; and (3) financing to help the community itself. The three financing components work together to facilitate the economic activities needed for a vibrant community.

Financing infrastructure

The building of infrastructure has two components: (1) the money to pay for the work; and (2) the capacity to do the work. In Iraq, there is capacity to do most, if not all, the work needed for infrastructure construction, and there is money to buy whatever equipment is needed from anywhere in the world. To the extent that there is not enough current cash, Iraq should be able to raise finance with relative ease on financial markets.

But in fact, Iraq may not be in such a good position. It is not at all clear to what extent the regime of Saddam Hussein mortgaged the future and borrowed and spent in quite profligate ways.

It is also not clear how much physical damage was done to the infrastructure in Iraq in the course of the initial military operations that led to the fall of the regime and the fall of Baghdad.

Control of the Money

An absolutely rock solid system for accounting for the money is needed ... and with accounting there can be control.

Secret systems for money control

There are systems for control of money that are complex and secret. The systems are not widely known about. This may be as it should be ... but it also facilitates grand scale diversion of funds and nobody any the wiser.
Cabin Trunks of $100 Bills
I have seen cabin trunks with millions of dollars worth of $100 bills that I was told were stolen from a banking institution in the middle of a civil war. Each of the bills was stamped with a mark that made these bills easy to identify ... and I was shown a chemical process that removes the mark from the bills to enable them to be circulated openly. I have seen airtight packages in army green containing large amounts of US currency ... chemically treated to disintegrate when exposed to air unless the treatment is nullified by another chemical cleansing.
These funds were in the possession of people who probably had no business whatsoever having them. They seemed to know how the system works, and I have little doubt that they would find a way to use these funds in spite the advanced chemical systems being used to protect the US currency.
This experience predates the Afghanistan and Iraq war where people talk a lot about the huge bundles of US currency that were being used all over the place with little or no oversight, accounting and accountability. These secret systems for the control of money are useful for the funding of war and funding in an emergency crisis. They are not, however, a reasonable way of funding a program of national rebuilding and controlling the money. Secrecy is a characteristic that correlates strongly with inappropriate use of money. It would be very much better to have much more public knowledge about fund flows. From this it starts to be possible to have some reasonable knowledge about what is going on and to be able to establish accountability.

Accounting for fund flows

The accounting for fund flows should have two main dimensions: (1) the accounting within an organization; and, (2) the accounting between organizations. At the present time it seems that both of these are inadequate, and given the scale of the fund flows this is absolutely inexcusable. It should be quick and easy to follow money ... fund flows ... from the origin as a budget authorization, through the responsible agency of the donor government to each of the recipients of disbursed funds ... and then to track the use of these funds through program activities and eventually to the results being achieved. None of this is anything more than lists of transactions with a certain amount of key data ... and added up in a logical manner. If the organizations involved cannot do this, then they should be held to account for incompetence.

Check the spending ...

Spending needs not only to be authorized ... but it also needs to be worth doing. A good way to verify this is to check the spending so that all the disbursements result in something of value.

Checking a proposal about a future disbursement is a step, and an important step in ensuring that spending money results in valuable outcomes ... in fact all it does is to authorize the spending and pretty much hopes that there will be a good outcome.

Checking that the actual disbursement actually produced something of value is a true reality check. Where this checking is routine results are usually very good ... and where this checking is infrequent or never, results are frequently terrible.

Actual Far More Important than Plan

I was once told that if the company added up all the cost savings that would result from proposals we would be making all our production for nothing.

In fact the company was totally out of control ... and it was not until there was strong measurement of actual that things got under control. And as soon as there was control ... there was improvement.

Micro-Credit ... for the Individual

Financing for the individual

Micro-credit has been popularized over the past 30 years by Mohammed Yunus, founder of the Grameen Bank in Bangladesh. Though informal credit schemes can be tracked back a long time in history, they were not embraced by development experts until after the Grameen Bank had come on the scene.

The Grameen Bank experience showed, inter alia, that poor people could make valuable use of small amounts of money, and that they could be trusted to pay it back. The conventional wisdom in the commercial banking community is that borrowers cannot be trusted and therefore all lending should be heavily secured ... and the corollary, no security, no loan.

I also observed in my own work that small loans were able to be repaid more easily than big loans ... big loans held out the promise of bigger success or bigger failure, and when the failure happened, there was no way for the loan to get repaid.

I also observed that in the micro-credit space there are two types of lending ... there is social micro-credit and there is enterprise micro-credit. In the case of enterprise micro-credit the borrower makes money and the loan can be repaid without too much difficulty. In the case of social micro-credit ... lending because of personal or family difficulties ... there is much less capacity for repayment, and a higher proportion of the loans can never be repaid.

Community micro-credit

Most communities can benefit from both enterprise and social micro-credit. In many communities there are already some form of self help group or other way of extending credit within the community. In some cases it is a “money lender” that is able to profit substantially, and many would say, excessively, from the unsatisfied need for money.

Funded from the development fund

Community level micro-credit initiatives should be funded from a development fund, and there should loan administration and accounting so that the development fund can be sustainable.

Mini-Credit ... for the Business

Financing the small and medium scale enterprise

There is a need to have access to financing for the small and medium scale enterprise. These are the organizations that are best able to accelerate job creation, but they need access to financing for growth.

These organizations need finance for working capital ... they need to be able to buy inventory and pay salaries before they get paid for their products or their services. Growth requires working capital, and few small businesses have the working capital to grow.

These organizations also need finance to buy production equipment and vehicles, or to expand their space. The financing of this equipment needs to be available on terms that allow the business to prosper. Equipment leasing or rental might be the appropriate modality. Expansion of a building may need some form of real estate based financing.

These financing modalities are bigger than micro-finance and more sophisticated. I will argue for community based financing that has a component of trust and group responsibility over a strategy that simply relies on asset based security.

Muni-Credit ... for the Community

The municipal finance equivalent

There needs to be financing accessible to the community that will help the community have local contractors supply or build things the community needs. I refer to this as muni-finance. Municipal finance is a very big component of the capital markets in the “north” ... a micro-community version of this is needed for the “south”. Most poor communities finance themselves. It is the only way. There is usually little money in the community, and there is no formal banking and financial service access. People in communities do the best they can. Communities impose taxes and levies to raise money for things that are wanted by the community. Some of these are substantial efforts, and can serve as important sources of funds for community needs. My experience in Yei in South Sudan is an example of this.
My Experience in Yei, South Sudan
Yei is a small agricultural town in South Sudan to the west, about 150 miles from Juba. When I was in Yei in the 1980s there were about (as far as I can remember) 150,000 refugees in the area, all engaged in small scale agriculture, and assisted in the first instance by UNHCR. With decent agricultural land, good weather and hard work, Yei had become a thriving little town with a good surplus of food.
I knew the “administrator” of the town of Yei ... a friend of a friend of a friend of my wife's from college days who was interested to find an accountant in the middle of a UN refugee review. He showed me with a lot of pride the “books” of the town that documented all the financial transactions of the town, and showed in summary form the monthly history of the town finances over the past several years.
The refugees were generating a lot of agricultural produce and the petty taxes collected at the local level to pay for local needs had increased with the success of the refugees. Now the town had some money for some of its priority needs. The school got a locally paid teacher, and the electric generator got some fuel. All of this carefully recorded in the books, just as it should be.
What is the lesson? Local success can be used to generate some local revenue that can be used for some local priorities. Sustainability that is real.

Few of the big cities in the global “south” have structures so that they are able to raise money through existing formal channels. Smaller communities are constrained from borrowing in the formal municipal finance markets because they do not have a formal sector economic base and the tax revenues to support external formal finance. Some small communities, like Yei, have potential to be prosperous, while others do not have much potential.

Organization ... at the Community Level

Funding community activities

Development funds can be the primary mechanism for delivering development resources into the community and engaging the private sector in ways that can encourage socio-economic progress. Growth of private sector activities is a powerful way for income generation and jobs to be created that engage a large part of the community. The private sector needs resources for expansion, but should use these for profitable expansion and increased earnings, from which the development fund should be paid back. Development funds can be used as an efficient modality for delivering incremental resources to the area economy. There are to be many small development funds each with clear development objectives and areas of operation. A fund will be rewarded with additional resources if the performance of the fund in terms of development benefit and in terms of timely repayment have been good. Keeping the funds separate will help in determining what funding areas should be supported on a continuing basis and which should not.

Many short term small loans

The development funds will be used to provide financial support on a short term loan basis for activities that are requested by the community, either as micro-credit, as mini-credit or as muni-credit. The implementing group may purchase items that the group would not normally be able to afford and allow the group to go ahead with some works that they consider important. Typically the group will provide labor and local material, with the funds being used to purchase non-local material and possible rent equipment. The funds can be reused by the community if the loans are repaid to the fund. As an incentive to repayment, funds will be augmented if the repayment track record is good. Groups that do not repay development fund loans will be penalized by the permanent diminution of the loan fund resources.

Fully commercial basis

The management and operation of the development funds will be on a fully commercial basis with fees charged for the use of the money, the administration involved and loan losses. The development fund has many of the characteristics of the lending operations of a business bank. There is no reason why the development fund operations cannot evolve into a full banking operation, and become part of the much needed community level banking and financial services sector.

Though experience over the past 30 years with Development Banks established with a similar objective was not good, the primary reason for failure was misappropriation of the resources. There were usually very clear errors made in the management with too much grandiose lending to politically motivated ventures and failing public enterprises. The capacity for economic and financial analysis of proposals was poor with politics more important than financial analysis. On top of all of this, there was usually a complete lack of accounting, accountability and oversight management.

Central Bank and Government Treasury

The purpose of a Central Bank

A Central Bank serves1 as the anchor institution for the financial sector. But a Central Bank also serves as an active component of the national governance framework, and a controller of the economy.

The Central Bank is the treasury for the country.

The Central Bank also acts as the intermediary between the national currency and the currencies of other countries, including the US dollar and the European Euro.

The purpose of the Government Treasury

The Government Treasury is a unit of government and is responsible for the moneys that are managed by government.

Most government treasury units around the world are organized around the principle of the single treasury account, a system where all receipts of government are deposited into the treasury account and become under the control of the treasury. The only disbursement from this account has to be under the authority of the government through legislation ... usually called the budget legislation.

What this means is that the government is responsible for the use of the funds received by government, and usually there is a requirement that the treasury prepare and publish periodic reports and the income and expenditure of government.

In some countries the treasury reports are prepared daily and distributed to key people in government, and then a full report is prepared monthly for presentation to the legislative assembly. Each year there is an audited report that is presented to the legislature and they are called upon to approve this report. Informing the Public

The Iraqi public is the primary stakeholder in the management of government and national resources, and they should be able to see and understand what is being done in connection with the resources of the country and the operations of the government.

This is an area where there is a need for huge improvement. The information that is easily available to the public about the national and the government accounts could be and should be very much better.

Investment Fund for Future Generations

A mechanism to invest for the future

Oil rich countries have an opportunity to convert their present income from exploitation of their oil and gas assets into a source of perpetual income for the future. Some oil rich countries have done this with great success, notably Kuwait and the United Arab Emirates.

The value proposition for Iraq is something of great moment. In the short run, there is a lot of oil, and it should be of huge value for the people of Iraq and of value to a world that is hungry for energy ... primarily oil.

But Iraq oil's potential has little meaning if it is squandered by doing nothing more than funding local chaos and mayhem. ... or it becomes hostage to anyone, including the global “north” and the international oil oligopoly.

More than anything else the financial dimension of the Iraq oil sector needs to be made visible to an interested public so that there is an equitable sharing of the value of these resources between Iraq's society and the investors and developers of these resources.

Possible models for a development fund have already been demonstrated in the investment funds of Kuwait and the UAE.

Third World Debt

The Jubilee Movement
The Jubilee Movement is one of the biggest with debt cancellation as its primary goal. They are worldwide and have a huge following and are very clear about the economic damage to development that has arisen because of the debt story.

The debt crisis

If borrowed funds are being invested in projects that are not generating positive cash flow for government and the nation, it follows naturally that there is going to be a debt crisis. Walter Wriston when he was head of CitiBank in the late 1970s is reported to have said that lending to developing countries was good banking because they needed the money, they were paying good interest rates, and they could not go bankrupt. He was of course only half right with his last parameter. While it may be true that in law a sovereign nation cannot go bankrupt, the accounting or economic reality is that there is effective bankruptcy when the bills cannot be paid. Rotten lending by both commercial and ODA institutions for a period of several decades is going to create de facto bankruptcy, and it has done so.

Foreign Direct Investment

Is it really a good thing.

When colonialism ended, newly independent countries took the opportunity to end the era of colonial direct investment. The results were generally unsatisfactory. The enterprises no longer produced “colonial” profits, but they did not produce local profits either. Most were not structured to be profitable in the real economics of a post-colonial economy.

But putting back cross border companies through foreign direct investment is seriously problematic. Equity capital is very expensive, and especially in situations where the investors assess the investment as risky. Investors in developing countries want a big retrun and want it now. They want an “exit” strategy, which really means that the value of the investment coming into the country at some point in the quite near future is going to result in a negative impact, and potentially the negative will be a log bigger than the positive. I have never been able to understand why “experts” in development economics are so enthusiastic about foreign direct investment. I have never been able to see much real value benefit in froeign direct investment. From my analytical perspective ... as an accountant ... I see investment by foreigners in a mine as having these characteristics:
  1. An investment of $100 million is going to be made
  2. foreigners bring in $100 million of mine machinery, almost certainly over-invoiced by a substantial amount, but that is not the main point;
  3. foreigners get plum jobs at the mine and extract minerals from a big hloe in the ground;
  4. local people get low paid dangerous jobs;
  5. local community totally disrupted by the mine and its activities, including quite possibly horrible polution of water sources, bawdy behavior in the community, and so on;
  6. valuable minerals exported, profits exonerated from local taxes as part of the “investment deal”
  7. mine runs out of valuable minerals and is closed down;
  8. mining equipment now old and broken down;
  9. foreign investors go home and enjoy the wealth they have transferred out of the country;
  10. local people left with a big hole devoid of mineral value, polluted environment and depressed community.
At a more sophisticated level I found it ironic that the Ashanti Goldfields company in Ghana went bankrupt when the international price of gold went up.
This happened in 2000 (I think).
The company had struggled along for years and its productivity and profits were going up gradually. The company was getting top priced advice from London based experts, and was engaged in quite sophisticated financial hedging. The price of gold goes up. The company goes bankrupt. The shareholders of Ashanti Goldfields lost out big time .. at the time it represented 80% of the capitalization of the Ghana Stock Exchange. The London advisors who got everything wrong were protected. Local shareholders lost out and a new community of international investors came in and took over at a bargain price.


Stakeholders

The dominant stakeholders in any corporation are the owners. If the owners operate the company in a way that creates a financial crisis, then creditors may get to become the controlling stakeholder. If the owners operate the company in a businesslike way they may choose to include the customers as stakeholders NORTH customers rarely choose to influence company behavior. As long as they get what they perceive to be good value, that is enough. Customer boycotts can influence company behavior considerably, but it hardly ever happens. In good times company staff can influence company behavior, but when profits are in trouble, then staff are secondary and so are community oriented good works.

But for all practical purposes what might be a reasonably balanced set of stakeholders in the context of the NORTH, in the SOUTH this is far from being the case.

My view of the situation is simple. The company has one stakeholder and that is the owner, and the owner wants the most profit and wants it now, and does not feel the need for any good corporate citizenship that detracts from profit. And anything goes in order to maximize profit, including activities that would be considered illegal and unethical in the NORTH. And if any corporate activities in the SOUTH are illegal or unethical, it does not matter. As long as the company can get away with it and it won't appear in the NORTH media, the company can get corners to maximise profit and return to the stockholders.

I wrote the following for a corporate governance discussion group early in 2002.
Profitinafrica@aol.com Fri Mar 29 2002 - 14:25:12 EST
My name is Peter Burgess. I am a long time development consultant, but also a former Chief Financial Officer of a US based international corporation.
The concept of a stakeholder is helpful in simplifying what is extremely complex, but it is also a simplification that can easily go badly wrong. What has become absolutely clear to me in practice, after some time in corporate management, and a long time involved with industry on an international basis, is that there is really only ONE stakeholder, and that is the owner of the corporation. Every other stakeholder is NOT important in the ultimate decision making for the corporation.
The OWNER stakeholder make choose to involve other stakeholders in the process of moving the the owner's agenda forward, but these other stakeholders are only 'pawns' in the process. They are used as needed in the OWNER's grander strategy. The grand strategy is maximizing value adding from the OWNER's perspective. PERIOD.
In the United States, the people have considerable power because the success of a corporation depends almost entirely on the marketing dimension of the business. It is not easy to sell products into a market where the people have a low opinion of the company and its products. Even industrial companies are under pressure to be good citizens because of the adverse publicity that blossoms when corporate misbehavior comes to light. The same goes for all the NORTH. The public as a stakeholder in the NORTH has some importance. So do employees, because they have the power to adversely affect the value of the organization.
But in the SOUTH, it is a different story. There is no public of importance. People have no power whatsoever relative to corporate behavior. Employment conditions for people all over the SOUTH that produce raw materials for corporate organizations in the NORTH would not be tolerated for one day by the people (and the Unions) in the NORTH, but it is off the radar screen. Neither the public at large, nor the employees have any stakeholder power. Nor do corporate stakeholders (subsidiary level) have any influence on the OWNER stakeholder when the abuse is outside the immediate responsibility of the corporate entity.
The public of the NORTH in general do not have enough factual information to make the links about corporate responsibility and irresponsibility in a coherent way. Oil industry pollution in the SOUTH is acceptable, but pollution in the NORTH must be addressed ..... and as a public we are sold on the environmental performance of the oil industry by ads costing say $5 million where the damage is maybe $100 billion (orders of magnitude ..... I do not know actual figures).
And there is SPIN. We need to be very careful with corporate pronouncements from the top about how good the corporation is ........ when the top knows perfectly well that there is nobody in the body of the corporation that is actually working on doing the good deeds .... they are all working on the agenda of the OWNER .... which is simply maximizing economic value adding of the corporation ..... a complex mix of agendas maybe, but high cost good deeds do not figure in the equation unless there is equally high value change associated with the good deeds or lack of good deeds.
What all this boils down to is quite simple. In order to socially responsible investment to have 'teeth' and to become mainstream and push out socially irresponsible investment, it must have a 'VALUE' impact on the OWNER(S) of the corporation. This is starting to happen, but it has a long way to go. And it is not well served by histrionics and the ambulance chasing approach that often emerges as soon as corporate irresponsibility is uncovered.
This is already too long a post ..... I hope these remarks will resonate with some of the participants in this discussion. There is a lot more to these matters. Maybe another time.


Avoiding scams

Scams are a huge problem. They have all sorts of manifestations.

At the top of the list are scams involving the ORDA community. It can be argued that ORDA organizations are operating a huge scam. They raise money for relief and development, and the need for relief and development goes on and on and on. Now, with the active support of luminaries like Professor Jeffrey Sachs, they now ask for massive increases in fund flows. Is this really to solve the problem, or to fund the scam?

Some time ago I got an e-mail message from someone running a local NGO in Africa. I thought the original message was interesting and I asked for some clarifying information. The reply was very well prepared, and I was very much in the mindset that it should be supported. In fact, however, I had nothing to confirm that this is a valid program that could not have been written easily by a good scam operator. It was because of this that Tr-Ac-Net started to seek out a reliable solution to this problem. Bottom line is that everything that worth funding should be “on the record” and have been validated in some effective way by an independent reliable entity.
2003 Jun 1, 09:51 Dear Peter
Thank you very much for your message.
First you said you are interested to know how I come to learn about you. I have picked your e-mail among many others that pass through my computer. It looks like some body who know you and also know me passed a message to all of us. I have developed interest to chat with all I get their e-mail address on my computer. It is interesting because yours was picked among many I had received this time. This is how friendship begins. in case you visit Africa, we can meet. And also if I visit New York as I do so often we can also meet. I was also happy to learn through your message that you are pro-peace, pro-SOUTH and also pro-community efforts at the local level because this is what we do.
I am interested on your services to offer an internet based funding system. Our motto has been the best accounting and accountability. Let me share in brief who we are and what we need to carry on our activities.
Peace building, Healing and Reconciliation Programme (PHARP) started in 1994 after Rwanda genocide, with aim of helping people who were facing trauma, especially women and children. In 1996, PHARP held a regional consultation that recommended the extension of its activities in other war torn countries in Africa. Since then, the programme meets the great need for peace, trauma healing and reconciliation in the Great Lakes Region of Africa and Horn of Africa. Following the work done in various countries, there are people with increased level of awareness, and knowledge of peace building, healing reconciliation and development efforts to help others. Trust has been built between different groups or ethnic groups, leading to a decrease in the level of violent conflicts.
There has been a willingness of refugees and displaced persons to resettle in their former homes due to the work done in refugee camps and there has been the willingness of their neighbors to welcome them. Our programmes are: capacity building, Women and Children, youth programme, refugee programme and relief and medical supply.
Our methodology:
In most of the conflicts on our continent, today the greatest need is not to be told what to do. We believe that the greatest contribution we may make is not telling people how to solve a conflict or how to trust or how to be reconciled, but it is a main means to bring about understanding and the determination to change.
In our training we seek to initiate and facilitate dialog that promotes reflexion on the knowledge and experience that participants already have. We seek not so much to give new knowledge as to bring about new understanding which leads to new decisions, actions and relationships. Our materials strive to accomplish some of the same things only in a more individually focused way. Our children's literature is not just to entertain, but to help child care givers the opportunity to begin a dialog about important issues in a way that a child can understand.
Mediation: Through dialog and encouragement we seek to provide an atmosphere where issues can be discussed and a way forward discovered. Trauma healing: The feelings, thoughts and body sensations that people have been experiencing are entirely normal. They are natural, human, reaction to extreme stress. Through therapy you will come to understand how this happens, and you will learn ways of dealing with your up setting thoughts and feelings, and gaining perspective on the trauma and how it has affected you. This will help you to take the heat out your memories and to put the trauma in the past, where it belongs. Development: There is no peace without development and no development without peace. This is why we should help communities work for self-reliance.
The needed resources to do the above in one year:
  • Training: Conflict management, Trauma healing, Counseling and HIV/AIDS: at least train 100 people a year: 100x$25x 5 days=$12,500 (To train one person we need $25 and this include accommodation and some materials)
  • Facilitation: $150x4x3= $1,800
  • Relief and medical supply: $3,000 for about 30 families
  • Production of materials: $10,000 a year
  • Community development work: $ 4,000 for about 40 families.
  • Administration: $ 2,000 a year.
In case we do the above a year we believe we have done some thing in the community. And if it is done for 5 years we believe there will be a tremendous change and transformation in the community.

In case your organization is willing to pick one of the items above and fund it, please let me know. In case you know some organization to fund the above, please let me know.
I hope the above shed some light on what we do and some of our needs. I am looking forward to hear from you.
Felicien Nemeyimana Executive Director,
Peace building, Healing and Reconciliation Programme (PHARP)
P.O.BOX 15324 00 100 NAIROBI GPO, KENYA Tel: 254-2-2723468 or 254-2-0722851674 E-Mail: fnemeyimana@pharp.org

With the Tr-Ac-Net information system, it is possible to find out something more about an organization that just what an e-mail message says. In general, there needs to be information feedback from the local community.

But as we thought this through further, we realized that many projects were being written up with the mindset of the donor community. They were being written up from a donor and funding perspective and had a lot about what they were going to do, and how much value there was going to be ... but next to nothing about what funding had been received in the past and what had been accomplished with these funds.

What we really needed to know was missing.

As things have been in the past, this support opportunity would probably have gone no further. In order to validate this organization and this program it would have been just too much effort and too much hassle. BOX


Historical Note

Public finance as constraint on development

Public finance has become a major constraint on development. Everyone is aware of the massive “need” for investment in infrastructure. Everyone is aware of the shortage of social services, particularly human resources development. But public sector financial resources are just not available. This is not a new problem. It has been a problem since before independence, but it has become even more difficult in recent years.

The situation around independence

The public finance situation in the 1960s for most of the newly independent developing countries was difficult. The rhetoric about colonial exploitation and the promise of economic wealth with independence had little foundation on economic reality. The former colonial titans, Great Britain and France were financially near bankrupt and the ODA support was rather limited. The financial situation in developing countries was aggravated by the widespread commitment to public sector operation of economic activities, especially those that had previously been the drivers of the economy in the colonial investment model.

Aggravated in the 1970s

By the early 1970s a dialog was evolving that encouraged more ODA support for developing countries. The World Bank stepped up its international assistance. The project form of organization became the standard for ODA supported projects. Then the oil shock created massive global economic disruption.

Developing countries were faced with dramatically increased costs and declining demand for their products. The stage was set for great economic difficulty. The problem was delayed and aggravated in the mid to late 1970s by the major money center banks recycling their massive surplus liquidity arising from “petrodollar” deposits into developing country “sovereign” loans.

Institutions like Chase Manhattan and Citibank were in the forefront of recycling petrodollars. Walter Wriston, as head of Citibank had the philosophy that sovereign loans were good banking because the borrowers needed the money, paid high interest charges and could not go bankrupt. Much of the financing was used for prestige projects with little economic justification, and to a large extent the economies of Africa emerged from the 1970s worse than they had been at the end of the 1960s.

Made worse in the 1980s

Private capital withdrew from developing country sovereign debt lending as soon as it was realized that the loans could not be repaid. In most developing countries the underlying economic performance could never support the debt service. And with reduced liquidity banks needed repayment and not perpetual roll-over. In the 1980s debt crisis had arrived and crisis management dominated development finance thinking for several years to the detriment of sustainable development solutions. Few economists in the early 1980s seemed to understand that the World Bank / IMF solutions, especially development investment and government retrenchment coupled with a major focus on declining export driven production sectors was a formula for socioeconomic disaster.

Even worse in the 1990s

The 1990s saw the end of the cold war that had dominated the international agenda since the end of the Second World War. The peace “dividend” that was anticipated has never materialized, and a more complicated international arena has emerged. Development has been a casualty of the new world order.

Development is no longer an important element of the “national interest” of most NORTH countries, especially the United States. In the 1990s the public finance situation in most developing countries has been disastrous. There are a few notable exceptions, but mostly countries have had to face the situation where new funding is hard to get. Debt service, payment of interest and repayment of principal have become a significant part of the government’s total expenditure, as well as being a significant part of the balance of payments and use of scarce foreign exchange. Though debt service has grown dramatically from the 1960s to the 1990s, the government revenue base has grown little and in many cases has even significantly declined. Official Development Assistance (ODA) declined in the 1990s and the least developed countries lost even further ground in global competitiveness. Development assistance no longer has a high priority for most taxpayers and donors reflect the position of their taxpayers.

Major development institutions are losing their sources for funding as many governments in the “rich” countries are suffering from their own public finance crises.

Public finance for development

There is little capacity to raise funds for development in less developed countries through the mechanisms of public finance and capital markets. While the available capital markets can raise substantial amounts for rich countries, these same markets are not able to raise funds for least developed country programs. Funds can be raised to flow through the development banks (African Development Bank, World Bank, etc.) but these funds are then subject to the development conditionality of these institutions. END BOX

International competition

The international economy is market driven and very competitive. Good products manufactured at low cost will achieve market share and poor products at high prices will lose market share. Technology also makes it possible for almost any natural product to be replaced by a synthetic substitute. Almost all primary products have declined in price compared to high added value manufactured products. Least developed countries with a preponderance of primary production have suffered a major deterioration in their international terms of trade. The Asian tigers invested in manufacturing and were able to convert their economies to take advantage of the US and European markets for low cost manufactured items. Only Mauritius among African countries made this transition.

Export driven development

Most countries have followed a strategy of export driven development. This has resulted in expansion of export agricultural crops such as coffee, cocoa, etc. and broadly speaking a global surplus of these crops and declining prices.

Meanwhile the agriculture sector has failed to keep up with the local demand for food for an expanding local population.

An alternative to export driven development

There needs to be an alternative to export driven development. The United States is not based on an export driven model for economic development and growth, but is based on “confidence” and the willingness of the world to trust that the United States will eventually make good on its massive overseas debt which grows dramatically every month. Less developed countries need a development model that encourages them to do for themselves everything that they can do, and funds them so that they have the resources to satisfy their needs through their own

Politics not markets determine priorities

Government is one institution that is always “outside” the market economy. This results in priorities being set by political and administrative processes rather than market driven processes. This is the way government should work. But economic priorities and the allocation of resources to business and economic activities should be driven by market forces with the least interference of government. To the extent that business abuses the consumer and the market, it is a legitimate role of government to exert a regulatory influence to achieve a common good.

Currency issues

Currency exchange rates have had an important role in creating and sustaining socioeconomic crisis. Sadly, the World Bank and regional development banks (AfDB, AsDB, IADB, EBRD, etc.) and other major institutions engaged in sovereign lending all require loan repayment in hard currency (US dollars, German DM, French francs, Japanese Yen, etc.). Projects are financed at exchange rates of one time, and repayment must then be made at rates prevailing at an another time. Failed projects in operational terms became dramatically more problematic when combined with deterioration in the currency exchange rates

Multilateral financial institutions

The World Bank and IMF and the ODA community, in broad terms, are effectively constrained by their mandate from being successful in Africa. That is not to say that they do not have a very important role to play, but that role is not to be the leaders in socioeconomic development planning and the establishment of national policies and priorities, but to be an efficient source of financial resources for the public sector.

The IMF is another powerful institution, and its role in Africa has been to use monetary thinking and currency exchange rates as their foundation for policy formulation and macro-economic stabilization. In economic environments where most of the poverty is outside the monetary environment it would have been better for the World Bank and the IMF to have put more emphasis on engineering and production economics rather than exchange rates adjustment policy and currency devaluation. For Africa, a large part of the debt burden arises from local currencies losing value dramatically against hard currencies.

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