Book-Blogging: Dead Aid – Chapter Nine

This is part of my effort to read through a number of development-focused books. Previous chapters of Dead Aid: onetwothreefourfive/sixseven, eight

The final piece of the “Dead Aid Approach” is the narrowest, focusing mainly on intra-nation finance; Moyo breaks it into three components:  microfinance, remittances, and financial innovation. The question I asked throughout is “Why is this incompatible with the current aid approach?” and the answer I came up with is that it isn’t. In fact, one can bolster the other.

First up: microfinance. Microfinance wasn’t created by Muhammad Yunus (winner of the 2006 Nobel Peace Prize), but he popularized it and had the unique insight that social capital is capital, therefore turning microfinance into

“…a way to lend to the poorest of the poor who have no collateral – no house, no car, no tangible asset against which to borrow… The genius behind Yunus’s Grameen Bank… was in converting trust into collateral”

This would seem to solve one of the issues of abject poverty – the inability to access credit to improve one’s lot. And it’s a start, for sure, but not the silver bullet that was hoped for.* Just to be clear: it seems that there is a significant role for microfinance institutions when it comes to providing small amounts of capital to the poorest of the poor – we just shouldn’t expect it to do everything.

Moyo next touches on remittances, the sums of money that emigrants send back to their families at home; she estimates that Africans sent roughly $20 billion back in 2006 (though this figure wouldn’t count any “unrecorded channel”-sent remittances).

What happens to this money when it’s sent back? Pretty much what you’d expect:

“On a household level, remittances are used to finance basic consumption needs: housing, children’s education, healthcare, and even capital for small businesses and entrepreneurial activities… More fundamentally, more remittances means more money deposited in the bank, which means more cash that the banks have to lend”

In many ways, then, remittances are just a form of an unconditional cash transfer (the only condition being familial) – a type of aid. Moyo recognizes this, but argues that it’s superior to typical aid because “…at least some of the money is reaching the indigent and making its way to productive uses.” That’s not fundamentally different than aid, of course, but this tacks with what she’s been arguing. As an aside, it’d be interesting to see what the distribution of remittances is within a village or country; do the poorest receive the same amount of remittances as the comparatively well-off?

Last up, Moyo discusses access to banking. She starts off with a regrettable assertion (framed as a series of questions):

“…does Africa lack capital? Or might it be that there is a lot of cash in these poor countries – unseen, dormant cash, which simply needs to be woken? Could it actually be that the countless development agents and agencies and innumerable man-hours deployed to send cash to Africa have been for naught – attempting to address a problem that simply does not exist?”

This seems… unlikely to me. Yes, there are unnecessarily-illiquid assets, and those without access to banking would be forced to save their money outside the system; still, I doubt the issue is that Africans are much wealthier than is currently assumed -at least when it comes to a liquid access like cash. If access is a significant enough problem, an entrepreneur will find a way to get that money into a bank.

Which brings us to Moyo’s main point: “What Africa desperately needs is more innovation in the financial sector.” This is kind of overgeneralizing – South Africa needs something different than the Democratic Republic of Congo – but put that aside, and it’s sensible. Esther Duflo and Abhijit Banerjee’s excellent book Poor Economics walks through some of the most promising examples; Moyo mentions M-PESA, a cell-phone based banking and money-wiring platform used in Kenya.

Again: none of this is incompatible with the current approach to aid. Just the opposite: all three could bolster traditional aid, and make it more effective. USAID or the World Bank could lend expertise and technological platforms to improve access to banking, and could work within country-specific constraints to spur financial innovation.

*For a balanced take, see David Roodman’s piece in Foreign Policy. For more on specific types of microfinance, see Tyler Cowen and Alex Tabbarok’s great videos up at Marginal Revolution University

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