Money is Important
Not the complete answer
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 to 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
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 serves 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.
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