Download Africa Is there economic hope

Capitalism, Economic
Freedom, Investment,
Foreign Aid, Connections,
and Growth
Focusing on Rwanda Africa
Africa’s Core problems
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History
Poverty
Our own miserable record with aid
• We did them more harm than good
• The debt burden is partly our fault
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Population and dependency issues
• Health care
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AIDs, tropical diseases, famine
Questions
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Why are the three most indebted
nations in Africa also the 3 largest oil
exporters?
• The resource curse
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Why does Nigeria, the largest oil
exporter also have the largest
disparity of wealth?
Why is Zimbabwe rapidly moving
toward the cellar?
2005 Index of Economic Freedom
1. Hong Kong
2. Singapore
3. Luxembourg
4. Estonia
5. Ireland
6. New Zealand
7. UK
8. Denmark
9. Iceland
10.Australia
11. Chile
12. Switzerland
13. U S
23 Lithuania
28 Latvia
37 Botswana is best African country
40 Japan
56 South Africa
Economic Freedom
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8% of people in World enjoy
economic freedom
16% mostly free
72% mostly un-free
4% repressed
What is poor?
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There is a huge difference between
$1 a day and $2 a day
• 4 bn people live on less than $2 a day
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In Rwanda, most people live on
$250/year
At $3 day, people can afford
computers, phones, tv, get loans to
buy vehicles
Solution?
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No country or region ever developed
thanks to aid alone.
The best way to eradicate poverty is to
deal with the poorest people in the
world in terms of a market
Innovation to deliver products and
services to poorest people
• Primarily in cost structures
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These entrepreneurs have an incentive
to operate profitably
• NGO’s do not want to or need to innovate
on the cost structure as that is where they
get their money
Africa: Land Of Opportunity or Lost
Continent?
There are serious problems
• Famine
• Aids
• Income disparity
However, you can see a functioning
economy in just about any part of Africa
• Illness, poverty, famine exist, but not
dominant in most African countries
• Much of what people see in the news
encourages them to simply ask the
government to give more aid
On the Turning Away
On the turning away from the pale and downtrodden
And the words they say which we won't understand
Don't accept that what's happening Is just a case of others'
suffering
Or you'll find that you're joining in the turning away
It's a sin that somehow Light is changing to shadow
And casting it's shroud Over all we have known
Unaware how the ranks have grown Driven on by a heart of
stone
We could find that we're all alone In the dream of the proud
On the wings of the night As the daytime is stirring
Where the speechless unite In a silent accord
Using words you will find are strange And mesmerized as they
light the flame
Feel the new wind of change On the wings of the night
No more turning away From the weak and the weary
No more turning away From the coldness inside
Just a world that we all must share
It's not enough just to stand and stare
Is it only a dream that there'll be
No more turning away?
Development and Growth Strategies
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Harrod Domar growth model
Structural Transformation
• Lewis Dual Sector Model
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Rostow Economic Growth Model
• Traditional, transitional, growth, maturity, mass consumption
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Aid
• Loans
• Humanitarian and military
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Government: bi lateral or multi lateral
intergovernmental agency
NGO
Trade
Export Promotion
Import Substitution
Market economics (as opposed to government intervention)
• Foreign Direct Investment
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MNC
• Private capital investment
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Entrepreneurship venture capital
• Micro credit
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Grameen Bank and others
Development Strategy:
Aid
What is Aid?
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Mostly loans
• by one government to another government for
development
• Subsidized loans are key part of loan package
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Still has to be paid back
Grants for development
Money/supplies for disease prevention and
alleviation
Food transfers for poverty and hunger
alleviation
Transfer of military goods
Does aid help?
Or are we wasting our money?
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Foreign aid OFTEN does not help
recipient country
World Bank assessment of own
policies and results
• Aid did not always help
• Critical linkage
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Quality of governance of recipient
Why doesn’t it seem to work?
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Aid is given for non-development
purposes
Aid is tied to the giving country
Aid generates rent-seeking behavior
Aid functions in a top down manner
Aid tends to go to large projects
Aid undermines the functioning of
the existing economy
Governance Characteristics Affects Efficacy of Aid
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Poor Governance
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No respect for property rights
Inflationary policies
Haphazard but significant land redistribution policies
Corrupt
Basically stupid policies and activities
Mediocre Governance
• Too much inflationary pressures
• Middle of road governance
• Sort of like property rights, but do not provide protection of
property rights
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Good Governance
• Property rights respected
• Legal system, banking system
• reasonably strong fiscal and monetary policy
Who gives Aid?
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Government Transfers through Red Cross
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United States
UK
Switzerland
Netherlands
Sweden
Canada
Norway
Germany
Japan
Finland
232 million Swiss Francs
114
91
48
37
32
30
24
19
14
US is biggest giver because of war in Iraq
• This money spent is considered aid
• in the past we have been way down the list
Aid: Loans
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Very little foreign aid is anything
other than a loan
• less than 10% of foreign aid is cash or
transfers in kind.
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Most foreign aid is expected to be
paid back
Generates a debt burden
Debt Forgiveness: Live 8
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Live 8 was a concert series to raise
awareness, not raise money for aid
Key Focus: Debt Forgiveness by G8
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Issues
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• Who incurred the debt?
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Did the individual in power create the waste and debt?
• If so, debt should not be forgiven
• If not, if the current ruling party did not create the debt and
waste, debt should be forgiven
• Who benefited?
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Did we give the aid to benefit the country or to benefit our
own corporations (Bechtel)?
• We should forgive the debt if it was really corporate welfare
• Does it generate moral hazard?
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This is the question Bono has to answer.
• Will it help?
Review: Development Strategies
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Harrod Domar growth model
Structural Transformation
• Dual sector
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Aid
• Loans
• Humanitarian
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Government, intergovernmental agency, NGO
Trade
Export Promotion vs Import Substitution
Market system/Capitalism
• Direct Foreign Investment
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MNC
• Private capital investment
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Entrepreneurship venture capital
• Micro credit
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Grameen Bank and others
Aid as Loans:
Servicing the external debt
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Requires Export activities
• Nigeria’s debt is funded in $US
• The only way to get the dollars necessary to
pay back the debt plus interest is to export
something
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This creates export dollars flowing into their economy
Made difficult by overvalued exchange rate
Use of foreign earnings to cover payments
on non-productive aid projects precludes
use for current development/productive
projects
Aid: Loans from World Bank
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International Bank for Reconstruction
and Development (IBRD)
• Focus: Loans to middle income
countries for development projects
• Loans primarily aimed at government
sponsored and funded projects
• Debt resold on private market
Aid: Loans from World Bank
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International Development Association
(IDA)
• Focus: loans to low income countries
• Loans primarily aimed at government
sponsored projects
• Government funds; private banks not involved
• Debt typically held by World Bank as loans are
heavily discounted
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This debt cannot be sold to private market
Reasonable risk that loan will not be repaid
Aid: Loans from World Bank
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International Finance Corp
• Focus: Private sector loans
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Negotiated between private entities/banks
and the World Bank
• Profitable loans that can be paid back
• Government not involved
• Debt commonly resold on private
market
Aid: Assistance from World Bank
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Multilateral Investment Guarantee
Agency
• Coordinates loans from private sector to
low- and middle-income countries
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Mortgage broker type of activity
Terms of loans, oversight, information for
approval
• Provides repayment guarantee
Aid: World Bank
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International Centre for Settlement
of Investment Disputes (ICSID)
• Aids in debt consolidation and
restructuring and reduction negotiations
Governance / Aid linkage
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Poor governance
• For each dollar given/transferred, reduce
GDP by .30
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They are worse off after transfer than they were
prior to transfer
• Our aid actually makes things worse for them
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Mediocre
• For each dollar given, no change
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We give them a dollar and they get nothing back
It does not reduce anything but has zero effect on
quality of life
• We do no harm, but we also do no good with the
aid
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Good
• For every dollar given, .50 gain in GDP
Development Strategy: Trade
Advantages of International
Trade
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Pursue comparative advantage
Allows for exploitation of economies of
scale
Historical evidence in east Asia indicates
that it is growth promoting
• Competitive pressures matter
• Technology transfer
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Buy, develop, or steal
Lack of international connections slow that
technology transfer
Africa’s Position on Trade
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Exchange rates
• About 40% over-valued
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Tariffs
• 20%
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Non tariff barriers (to tariff
equivalent)
• 46%
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Tends to remove an opportunity for
improvement
Concerns
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Immiserizing growth
• This is where growth results in exactly the
opposite what you had hoped for
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Primary goods trade
• Resource extraction activities; minerals, raw
resources
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Infant industry argument
• WTO rules; if you are a developing country
you have few sophisticated manufacturing
plants in the country
• If you want to give these new industries a
foothold, they need protection in the
international market
Development Strategies:
Market solutions
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Micro credit
• Grameen Bank
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Capital Investment
• Loans from local banks for business
infrastructure
• Enable/enhance entrepreneurship
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Foreign Direct Investment
• Foreign ownership of local assets
• MNC
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Inward investment
Grameen Bank
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Founded by Muhammed Yunis
• From Bangladesh
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Studied at London School of Economics
• What is a better way to help his poor country move toward
development?
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Figured out a way to get around the lack of collateral
Innovation on the cost structure
He enforced a group ethic/ethos to ensure
repayment
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Repayment rates over 90%
• Higher than any type of loan in US
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during the 1990's East Asian financial crisis, a large
Indonesian bank suffered nearly 100 percent default rates
in its corporate portfolio, but only 2 percent in its
microfinance portfolio
Banks
Essentially non existent in rural Rwanda and most LDC
in the world
 world's poor desperately need access to a broader
range of financial services — microfinance is the
more apt term — to improve their living standards.
 The staggering flows of money sent home by
migrant workers are a case in point.
• The Inter-American Development Bank estimates that
remittances from Mexicans working in the United States this
year will total $14.5 billion
more than Mexico earns from tourism or foreign investment.
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what the recipients of payments from abroad or
proceeds of micro loans need most is a place to put
their money.
established microlending organizations can help fill
the void in ways that encourage private saving and,
equally important, enlarge development capital in
poor communities.
Foreign Direct Investment
"long-term investment by private
multinational corporation in countries
overseas."
Facts about FDI:
usually consists of new plants in foreign countries
sometimes there are mergers with domestic firms
there are 70,000 multinational corporations
(MNCs) operating with 690,000 affiliates around
the world.
In the past, most FDI was from one rich country
to another
In 2004 36% of FDI went to developing
countries, China received 9.4% of the total,
while Africa only received 2.8%
The US is the largest recipient of FDI with
14.8% of total
Why do multi-national corporations (MNCs) invest
in developing countries?
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natural resource extraction
domestic market potential
cheap labor - lower production costs
loose government regulations and
standards - lower production costs
Foreign Investment
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Foreign Direct Investment
• Outside group purchases ownership and
control of productive asset
• Foreign company sets up plant
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Long term capital flows
• Purchasing ownership of foreign asset, but not
control
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Buying stock in Microsoft
Short term capital flows
• Buying US treasury bonds which have maturity
of less than a year
Concerns about foreign
investment
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Loss of domestic control
Instability generated by short term
capital flow fluctuations
• This can be very destabilizing
• Free to go into and out of an economy
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Over 3 months or less
Advantages of foreign
investment
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Replaces the need for domestic savings to
fund growth
• Home mortgage loans stay inexpensive this way
• We can borrow from foreign fund managers to
get capital to build new factory
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Partially replaces the need to develop
domestic financial capital markets
• Financial markets totally intangible; easy to
commit fraud
• We can do this easier for them than they can do
for themselves
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Encourages technology (knowledge) transfer
• Encourages substantial growth in the economy
Private Investment Model
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Thousand Hills Venture Fund
Private Capital Investment
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$50,000 to $500,000 for business
endeavors in Rwanda
Equity investors
• Take shares of stock in company in
return for investment
• Take active role in management
• Sell shares to someone else
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It is difficult to sell these African shares
How do you exit the investment
Focus on Rwanda
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Per capita GDP = $250
Most densely populated; 8m
Smallest country; about the size of Maryland
One language, one culture, plenty of intermarriage
between ethnic groups
When genocide ended in 1995, government outlawed any
identification of ethnic groups
Agriculture is about 40% of GDP; supports 90% of the
people
Mobile phone penetration: 2%
Electricity penetration: 5%
Literacy rate: 60%; higher in men by about 10%
60% of population under 20
5 to 10% in rural; 15 to 20% in city
Life expectancy: 45 years old
Infant mortality:11%
Highest level of elected positions held by women in the
world
• 40% of elected officials are women
Why so few entrepreneurs?
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Imagine you are poor Rwandan. How
would you go about getting wealthier? You
look around
• One way to get significant increase in income
is to get one of the jobs involved with an NGO
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Knowing the right people rather than having a better
idea
• Cozy up to NGO
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Similar to what happens in our own urban
environments with the young drug entrepreneurs.
• Get the salary
Agricultural economy
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Mostly subsistence farming
• Few cash crops
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Currently moving toward specialty coffee
• Inherent problem trying to sell perishable
products
• Related to very limited transportation network
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How to sell the product outside of the limited walking
distance of neighbors?
Very fertile but hilly
• most are terraced to grow crops
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Two predictable rainy seasons
There was never really a time when there
was a dominant colonial presence
• No appreciable resources to extract
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Bananas
• Largest crop
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But we don’t buy them
• they are not ‘normal’ size and color
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Heavier, relatively cheap
Little market
Coffee
• New emphasis
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Kasava
• Root crop
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high in nutrients, but little market for flour
basically a subsistence crop rather than cash crop
Coffee and Hope Grow in Rwanda
At the washing stations, or wet mills, farmers clean, sort, pulp and dry
coffee cherries — the bright red berrylike fruit produced by coffee trees.
Then the beans, or seeds, that they contain can be sold to the lucrative
specialty market, where demand and prices remain relatively high even
when conventional coffee prices dip.
New York Times, Sunday Aug 6, 06
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By improving the quality of their coffee, about
40,000 of Rwanda’s 500,000 coffee farmers have
at least doubled their incomes,” said Kevin J.
Mullally, who runs the office of the United States
Agency for International Development, or A.I.D.,
in Kigali, the Rwandan capital. “Coffee has played
a crucial role in the positive changes in Rwanda.”
Since 2001, A.I.D. has invested $10 million in
helping Rwandans improve the quality of their
coffee, mainly by providing farmers’ cooperatives
and small entrepreneurs with financing for
washing stations and training in their use. The
Rwanda government’s goal is to make all coffee
produced in the country specialty coffee by 2008.
(New York Times, Aug 6, 06)
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The big canned coffee companies
currently pay about $1 a pound for
C-grade coffee beans, while the
higher-grade specialty coffees
preferred by Starbucks, Green
Mountain and other chains generally
fetch about $1.50 a pound or more.
In Rwanda, premium roasters will
pay as much as $3.50 a pound for
the best beans. (New York Times, Aug 6, 06)
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When these prices are paid to
cooperatives, instead of to private dealers,
the profits go directly to farmers, 20
percent of whom are widows and orphans
because of the genocide. In the United
States, gourmet coffee has generally
accounted for 15 percent of the market,
but 40 percent of the revenue (currently
$11 billion, up from $7.6 billion in 2000),
so roasters are eager to develop
relationships with cooperatives that can
deliver consistently high-quality coffee.
(New York Times, Aug 6, 06)
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Until the 1990’s, coffee accounted for 60
percent of total exports, but that declined
to about 20 percent in 2001 because of
the economic devastation of the genocide
and a worldwide crash in coffee prices.
Since then, the government has focused
on increasing the volume and quality of
coffee exports as it tries to revive the
economy; coffee now accounts for 30
percent of exports, totaling $35 million,
which is expected to double this year, Mr.
Mullally said. (New York Times, Aug 6, 06)
Cooperatives
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Improve transaction costs
• 30 people represent 1m farmers
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Owned by the farmers
• Shareholders are also employees
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Ties together incentives nicely
Market Linkages
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No way for farmer to test the market
prices
Transportation non existent
• Even if they want to sell the crop and
even if there might be market for their
crop
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Up to 9 hour walk
Don’t know what the price is until they get
there
No way to store the product
Property rights
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Technically, all land is owned by
government
They possess their land
• But they have no ability to tap into this
possession of land
• Banks won’t lend on this land
• Very limited transfer of land
• Cannot be allocated to its best use
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For more information on this problem, read
“Mystery of Capital” by Hernando DeSoto
Food Processing
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The easiest way to get wealth into these
rural areas is to get them to sell crops
The easiest way to get wealth into the
country is to process the crops into a
different foodstuff
• Add value and/or changes the perishability
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Dried fruit/bananas rather than fresh bananas
Fruit juice concentrate
Tomato paste and sauce.
Changes the transportation economics as
well
• Reduces weight, removes the perish ability so
can use slower, cheaper transportation
One of the Problems with
processing idea
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Electricity is not dependable; no
infrastructure
Economically, manufacturers must have
dependable supply of power in order to
keep the capital assets engaged
• The unreliability makes it very difficult to
compete
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What do they do?
• Some businesses and wealthy people buy
diesel generators
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Essentially privatize on their own
Very expensive
Other Processing Problems
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Consistent, high quality supply
• So many small farmers result in a wide range of quality
• High transactions costs of buying from small holder farmers
Food standards non existent
• This requires a huge investment
 Especially if you have not and cannot identify a market for
the product
Packaging and labeling for shelf ready agricultural products
• There is no capacity for this whatsoever
Need to have economies of scale in their production sufficient
for distribution
• Historically coffee has been largest export
 The problem is that they cannot produce enough coffee
for Starbucks
• So it really does not matter; is it worth it for Starbucks
to deal with Rwanda even if the quality of the coffee is
higher and the price is lower?
Reasons for Hope
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Small holder farmers are more
productive on per acre basis than
large plantation type farmers
• They ‘own’ the property
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They are not working for someone else
Any yield goes to them, not the boss
• Cheaper labor, mainly in the form of
family
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Kids and relatives work during the peak
times
Reason for Hope
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Potential for wealth creation:
• There is significant potential for profit through
this agricultural base if the market linkages
and processing to value added non perishable
products can be created.
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Small scale, low cost agricultural
processing
• Located closer to the farmer, rather than
getting the product to a central processor
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Solar fruit dryer
Other problems
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American protectionism
• US farmers are subsidized
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African farmers have genuinely lower cost
structures
• OXFAM says that if Africa could increase
its ag exports by 1%, it would increase
the per capita GDP by $100 per year
Other Problems
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In Rwanda, the problem is not
corruption, it is more lack of
regulatory enforcement
They do not pay bribes and won’t
accept bribes nor will they pay bribes
to others
• They will shut down the operation first
Micro finance
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tiny business loans extended to poor
people in developing countries
is a proven development strategy
Benefits 100 million of the world's poorest
families
Loans from $20 to $2000
Essentially transform lives
• Buy chickens, start a chicken farm, lay eggs,
cash crops
• Chickens also keep away the snakes
Other Possible Solutions?
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So what if we give store value debit
cards to everyone?
• Has nothing to do with a physical bank,
or currency, or savings, or checking
accounts
• Creates an entirely new economic
infrastructure