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Wednesday, March 21

Nations of Ghosts

A wildly useless development scheme funded with stolen money is at the heart of Matt Dillon's hip suspense movie, City of Ghosts, which was filmed in Cambodia. In one scene, Harry the American Expat (in real life, Michael Hayes, the publisher of the Phom Penh Post), tells a newly arrived American, Jimmy, that he's a fool and doesn't know what he's getting into in Cambodia.

Jimmy is not exactly a fool. His father is a successful crook who taught him all the tricks of the flim-flam artist. But Jimmy survives his quest at the intersection of Cambodia's brutal government, Phom Phen's crime world, and Russian transnational crime only with help from his dad's cunning and a friendly local Cambodian with conscience.

I thought of City of Ghosts recently, when Indonesia's government announced what was already known in foreign aid development circles: most of the Western aid for victims of the Tsunami never reached the victims; it was stolen by Indonesians who were not victims of the flood. The biggest instances of theft will be traced to Indonesian officials if a serious investigation ever gets off the ground, which is doubtful.

City of Ghosts should be required viewing for every American with little understanding of what US aid and development projects -- and foreign policy initiatives based on aid and development -- face in the Third World.

I thought of the movie again when I came across comments at the World Bank's PSD blog regarding the World Bank Group's International Finance Corporation (IFC) report, Doing Business in South Asia:

Afghanistan has the most unfriendly business regulations in [South Asia], with low scores globally for registering property (most private land doesn't even have clear title); low scores for getting access to credit (there's no way to enforce collateral – legally); low scores for the red-tape required to trade -- in a country where up to 80% of firms import, it takes 88 days and 11 forms to ship in goods.

Overall [South Asia] scores worst on cost of firing and enforcing contracts. Small wonder, then, that India for example has only a jaw-dropping 8 million workers in formal employment [out of a work force of 458 million].

Try to imagine a government running a nation of a billion people where only 8 million of the citizens pay taxes. Realize that the rest of India's workers pay in other ways; they pay in bribes to the courts, the mobs, the crooked officials and the police. That means India's government is very limited in their efforts to modernize the country, which is why much of India is still a nation of ghosts -- ghosts of the colonial past.

The South Asia data are not the only figures available from the IFC report; click on the column headers to sort data for the real cost of doing business in all countries. Spend a few minutes playing with the data to give yourself a picture of what's wrong with many aid and development schemes launched in the poorest countries by the richer ones.

For Westerners who think that microfinancing is the answer, better read the Cato Institute's February report, A Second Look at Microfinance. PSD comments:

[The Cato study] considers the history of economic development and questions whether microcredit can do much to promote investment and growth. In it, author Thomas Dichter finds that economic growth usually comes first, and then credit becomes available more widely; even then, that credit is for consumption, not investment. From the conclusion:

"The average poor person in the past (and today) is not an entrepreneur, and when he or she has access to credit it is largely for consumption or cash flow smoothing. The average entrepreneur prefers to start with informal credit or savings rather than formal credit."
This is not to say that microfinance is useless; not by any means. However, what's downright counterproductive is the habit of seeing the New Promised Land in an economic development strategy that has limited application, then pouring huge amounts of money into the approach. That only attracts the kind of crooks Jimmy meets up with in City of Ghosts.

Americans are famous for the Promised Land approach to foreign development and aid, then there's always a backlash. We go gaga over a method of helping the world's poorest. Then Americans want to snap shut the checkbook when they find they've been taken for a ride. They call for the government to end foreign aid and pull out of the United Nations and the World Bank.

The bottom line is that development and aid, done correctly, are powerful tools in a government's foreign relations arsenal. So you can't fold your arms and say, "I won't play."

The European Union is the world's biggest aid donor, and the US is now in competition with China for influence in foreign countries via aid and development projects. Beijing does not mind funding schemes of the kind portrayed in City of Ghosts provided key officials in the target country are happy.

How to play it smart in the globalized era of corruption and crime? One way is for the US to gain greater control over development projects. A way to do this is to remain with the World Bank but follow the example set by the EBRD -- the European version of the World Bank. Of course several European countries are also members of the World Bank, but the Europeans set up a regional development bank to promote their interests on the continent. Note the strict control that the EBRD has over lending criteria:

The European Bank for Reconstruction and Development was established in 1991 when communism was crumbling in central and eastern Europe and ex-soviet countries needed support to nurture a new private sector in a democratic environment. Today the EBRD uses the tools of investment to help build market economies and democracies in countries from central Europe to central Asia.

The EBRD is the largest single investor in the region and mobilises significant foreign direct investment beyond its own financing. It is owned by 61 countries and two intergovernmental institutions. But despite its public sector shareholders, it invests mainly in private enterprises, usually together with commercial partners.

It provides project financing for banks, industries and businesses, both new ventures and investments in existing companies. It also works with publicly owned companies, to support privatisation, restructuring state-owned firms and improvement of municipal services. The Bank uses its close relationship with governments in the region to promote policies that will bolster the business environment.

The mandate of the EBRD stipulates that it must only work in countries that are committed to democratic principles. Respect for the environment is part of the strong corporate governance attached to all EBRD investments
[...]
A US version of the EBRD should keep it simple for the first decade and confine development loans to the Americas. That would shore USAID and other US foreign policy initiatives in Latin America.

The simple truth is that the farther a government gets from their base of operations, the harder it is to oversee development projects, and the less control they have over lending criteria -- a lesson that applies as well to microfinance.

In other words, the US should try something new for a change and work at getting development aid done right in the region nearest our shores. That does not mean abandoning multilateral development institutions or never doing aid and development outside the Western Hemisphere. It means playing it smart in this era.
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