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Burgess Manuscripts
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New Wave for Development
Some Critical Reforms to Catalyze Socio-Economic Progress
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ABOUT SECTORS
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.
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Banking and Financial Services Overview
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.
An important sector for success
A broad range of banking and financial services help socio-economic
development progress. While these services are readily available to the rich and
in wealthy communities, they are not universally accessible, and the poor at the
bottom of the socio-economic pyramid are not well served at all.
In fact, the mainstream banking and financial service companies have either
retreated from service to the poorer segments or society, or have increased the
pricing of services that are used by poorer people. To add insult to injury
interest rates are high and fees are also high making the total cost of service
more like loan sharking than mainstream banking.
Community needs
In the last four decades rural banking has stagnated and in many
places has disappeared. Perhaps for the last 25 years there has been
some growth in microfinance, but this is a very limited subset of
banking and arguable not an important subset. The growth of micro
finance is progress, but it is not the single silver bullet that is going to solve all
the socio-economic development problems of the south. In any community,
there is a need for at least three main financing components:
- micro finance that serves the individual and micro-business;
- mini finance to satisfy the needs of the small and medium sized businesses; and,
- muni finance that provides financing for economically desirable community projects.
Commercial banking for enterprise
The Commercial Bank sector in Iraq either through national banks or in
association international banks has the ability to provide a full range of financial
services to major business enterprises. The challenge is to expand the service to
included smaller businesses and those that have the potential to grow, but not
the financial strength to grow.
Informal systems for financial services
Where the formal commercial banking and financial services sector is weak, a
range of informal systems for financial services are available. These systems are
very important to the local economy, especially the informal sector and the small
business. Some of the informal systems, however, while providing a needed
service, also exploit the poor in a very aggressive manner.
Public finance
The mainstream banking sector should be in a position to assist with the
financing of the public sector and be available to make funds more easily
available in areas distant from Baghdad.
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?
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.
Money and Liquidity
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.
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.
Funding ... 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.
Sovereign Wealth Funds
Investment Fund for Future Generations
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 Crisis
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:
- An investment of $100 million is going to be made
- foreigners bring in $100 million of mine machinery, almost certainly over-invoiced by a substantial amount, but that is not the main point;
- foreigners get plum jobs at the mine and extract minerals from a big hloe in the ground;
- local people get low paid dangerous jobs;
- 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;
- valuable minerals exported, profits exonerated from local taxes as part of the “investment deal”
- mine runs out of valuable minerals and is closed down;
- mining equipment now old and broken down;
- foreign investors go home and enjoy the wealth they have transferred out of the country;
- 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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