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CommonwealthFinance MinistersReference Report 2009

Global Economic Situation

Millennium Development Goals

Effective Financial Management

Infrastructure for Development

Environmental Finance

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6 The Commonwealth Finance Ministers Meeting 2009

10 Forewords Charilaos StavrakisFinance Minister of the Republic of Cyprus

11 Kamalesh SharmaCommonwealth Secretary-General

14 Excess capacity in developing economies: the impact of the global recessionJustin LinSenior Vice President of Development Economics andChief Economist, The World Bank

18 The IMF response to the global crisis: meeting the needs of low-income countriesDominique Strauss-KahnManaging Director, International Monetary Fund

22 The Commonwealth and the economic crisisCyrus RustomjeeDirector of Economic Affairs, Commonwealth Secretariat

27 The Worst Crisis – and the best opportunityProfessor Muhammad YunusFounder, Grameen Bank

32 A global rethink for a rainbow recoveryDirk Willem te VeldeProgramme Leader, Overseas Development Institute

37 Foreign investment and development: the role of domestic policy and international investmentagreementsPaul CollierDirector of the Centre for the Study of African Economies,Department of Economics, Oxford University

42 Strengthening the campaign for developmentthrough to 2015Jamie DrummondExecutive Director and Co-founder, ONE

46 Maternal health – at the centre of developmentSarah BrownPatron, White Ribbon Alliance

52 Healthcare capacity building in fragile statesJosephine GarnemInternational Medical Corps

56 The silent crisis – why we need a globalframework for action on water and sanitationBarbara FrostChief Executive, WaterAid

61 Is the crisis over? Not the one that affects the hungryDame Barbara StockingChief Executive, Oxfam

65 Education: the other global crisisDr Pauline RoseSenior Policy Analyst, Education for All, Global MonitoringReport Team

70 Universities: essential for economic and socialdevelopmentProfessor John TarrantSecretary General of the Association of CommonwealthUniversities

75 Gender in the financial crisisSylvia WalbyUNESCO Chair in Gender Research at LancasterUniversity

79 Aid and AIDS: policy changes and responses inKenya, Malawi and ZambiaDr Degol HailuUNDP International Policy Centre

13 Section 1Global Economic Situation

Contents

41 Section 2Millennium Development Goals

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Cyprus, 30 September - 2 October 2009 7

84 The Commonwealth and reform of internationalinstitutionsJonathan OckendenHead, Finance Section, Economic Affairs Division,Commonwealth Secretariat

87 Reframing micro-finance: enabling small savingsand payments, everywhereIgnacio MasDeputy Director, Financial Services for the Poor, Bill and Melinda Gates Foundation

92 The importance of fostering entrepreneurs indeveloping countriesRichard BransonFounder and Chairman, Virgin Group

96 The last frontier: bringing financial services to Africa’s poorDr Helene GaylePresident and CEO of CARE USA andGeoffrey DennisChief Executive of CARE International UK

100 Market and technology trends in securedocumentsMichael ChamberlainChief Consultant, Pira International

104 Mobile banking: the potential to provide millionswith financial accessMike FosterParliamentary Under-Secretary of State, UK Departmentfor International Development

109 Public-private partnerships for infrastructure inthe Asia and Pacific region: priority issues andchallengesElaine GlennieSenior Capacity Building Specialist, Asian DevelopmentBank Institute

114 Infrastructure for economic growth anddevelopment: the financing gapDr Michael ReganBond University Mirvac School of SustainableDevelopment

120 Urban transport: moving from the 19th century to the 21st century concernsDinesh MohanCo-ordinator of the Transportation Research and InjuryPrevention Programme, Indian Institute of Technology

124 Non-conventional approaches to municipalinfrastructure financingMunawwar AlamAdviser, Commonwealth Secretariat

130 Tourism as a poverty reduction tool: strategies for small island statesDr Regina ScheyvensHead of the Institute of Development Studies, Massey University

136 Understanding the recent oil price volatility Abdalla Salem El-BadriSecretary General, Organization of the PetroleumExporting Countries (OPEC)

142 Green jobs: now is the timeJuan SomaviaDirector-General, International Labour Organization

145 Renewable energy: time to disprove the mythsDr Hermann ScheerGeneral Chairman of the World Council for Renewable Energy

149 Multiple global problems need integratedsolutions: applying the sustainomics framework

Mohan Munasinghe, Director General, SustainableConsumption Institute, University of Manchester;Chairman, Munasinghe Institute for Development(MIND), Sri Lanka; and Co-laureate 2007 Nobel Peace Prize

141 Section 5Environmental Finance

107 Section 4Infrastructure for Development

83 Section 3Effective Financial Management


Contents

ACODE...............................................................................148

Amalgamated Investments Ltd. ...............................................31

Arjowiggins Security SA ..........................................................5

Botswana Innovation Hub ......................................................82

Cyprus Investment Promotion Agency .................................IBC

Copperbelt Energy Corporation ..........................................106

Durban Investment Promotion Agency.................................IFC

East Caribbean Financial Holding Company Ltd.....................12

eGoli Bio Life Sciences Incubator .........................................140

Electricity Control Board, Namibia.......................................119

ETDP-SETA..........................................................................36

Foundation for Civil Society...................................................55

Freetown City Council .........................................................103

Gemalto (La Vigie)....................................................................9

Indian Institute of Technology, Roorkee .................................74

International Training Solutions (Pty) Ltd. ..............................26

Leeds University Business School............................................40

Mafikeng Local Municipality ..................................................95

Malawi Stock Exchange Ltd. ..................................................99

Management Development and Productivity Institute ...........108

Marine Mining Corporation ......................................112 & 113

Ministry of Petroleum, Pakistan.............................................139

Nevis Financial Services..........................................................86

Optaglio Ltd......................................................................2 & 3

Pakistan Petroleum Ltd. ........................................................138

Papua New Guinea Office of Higher Education .....................64

SAPPI............................................................................20 & 21

South African National Tuberculosis Association......................45

South African New Economics Network ................................17

South African Petroleum and Energy Guild ................134 & 135

South African National Traders Alliance ...............................123

Stop TB Partnership .......................................................50 & 51

Swaziland Tourist Authority ..................................................133

TATIS Ltd. ...........................................................................111

Thabazimbi Municipality........................................................91

University of Kwazulu-Natal ..................................................69

University of the South Pacific................................................78

UNRED ..............................................................................144

Urban Development Corporation ..............................128 & 129

Vaal University of Technology .................................................60

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Forewords

It gives me great pleasure to welcome senior financeofficials to the 2009 Commonwealth Ministers of

Finance Meeting, here in Cyprus.

Every year the Commonwealth Finance MinistersMeeting brings together almost one third of the world’sFinance Ministers in a forum to discuss matters ofcommon interest, exchange experiences and learn from each other; the ultimate objective being tocontribute towards improving the well being of theCommonwealth 1.8 billion inhabitants.

The Commonwealth Finance Ministers Meetingcomes at a very crucial time for the global economy and for the globally integrated nations of theCommonwealth. In this respect, the meeting in Cypruswill allow the Ministers to exchange views on theimpact of the current global economic crisis and theappropriate policy responses. Moreover, it will providethe opportunity of bringing our collective resourcestogether at the highest possible political level todeliberate on key issues of practical policy concern witha view to find solutions for the benefit of our respectiveconstituencies.

Cyprus constitutes an ideal venue for this meeting as itembraces a small open economy that has not been leftunaffected by the the global crisis, but is weathering thecrisis relatively well. Furthermore, our beautiful countrywill also allow the Ministers to interact at a social levelin a relaxed atmosphere and get to know each otherbetter.

The Cyprus economy, being a small and openeconomy, could not be left unaffected by the globalfinancial and economic crisis, being negatively affectedvia the external demand and the confidence channels.The fact that Cyprus has a sound financial sector,prudently supervised, in conjunction with the adoptionof the euro in early 2008, has protected it from theworse, and it is among the countries that have notrequired public capital injections into its financial sector.

I welcome the publication of the CommonwealthFinance Ministers Reference Report, which is theofficial publication of the Commonwealth FinanceMinisters Meeting. I believe that the Report can play animportant role as a central source of information for theFinance Ministers and their officials regarding macro andmicro – financial issues that affect the Commonwealthnations. I have no doubt that the publication, for thecompilation of which the editors spared no effort, will be of great value to the Ministers and support themin decisions they make regarding development policy,project initiation and daily management of theirMinistries.

I wish to express my warmest congratulations andappreciation to the editors for their effort.

Charilaos StavrakisFinance Minister of the Republic of Cyprus

WelcomeCharilaos StavrakisFinance Minister of the Republic of Cyprus

I believe that the Commonwealth Finance Ministers Reference Report can

play an important role as a central source of information for the Finance Ministers

and their officials regarding macro and micro – financial issues that affect

the Commonwealth nations.


This has been a momentous year for the globaleconomy.

Commonwealth Finance Ministers last met in StLucia in October 2008, just as the world was descendinginto the most intense financial crisis for over half acentury. twelve months on, the world is still grapplingwith the economic and social consequences.

The crisis has shown the fundamental inter-connectedness between economies and people. It hasalso shown that collaborative, multinational and inclusiveapproaches are essential to ensuring stability andprosperity for all the countries of the world.

The members of the Commonwealth have alwaysknown this, and have worked to embody these values inan organisation in which each member is supported, andthe voice of all is equally valued. The quality of thesolution is improved if one adds more voices to thedebate.

Now in Limassol, Commonwealth members –representing the spectrum of geographical andeconomical diversity – will share the policy lessonslearned from the crisis, and look towards shaping thefuture. The discussions should give Ministers threeoutcomes. First, insights from the experience of others

which can be translated into policy. Second, practicalways to support each other in meeting future globalchallenges. Third, a distinctive view on how theinternational community should react to the crisis, inthe long term.

There is demand for new ways of working andthinking in the global economy. CommonwealthFinance Ministers must exploit this opportunity to leadthe global debate – as previous Finance Ministers have,for instance on debt relief in the 1980s, and capitalaccount liberalisation in the 1990s.

This is no academic debate. Even as a global recoveryemerges, it is important to recall that the countrieswhich are least responsible for the crisis are bearing thebrunt of its ill effects. Sixty four million extra people –many of them our fellow Commonwealth citizens –have become abjectly poor as a direct result of this crisis.As always, the Commonwealth Finance MinistersMeeting is ultimately about people, not economics.

Kamalesh SharmaCommonwealth Secretary-General

There is demand for new ways of working and thinking in the global economy.

Commonwealth Finance Ministers must exploitthis opportunity to lead the global debate.

It has shown that collaborative, multinational and inclusive approaches areessential to ensuring stability and prosperity

for all the countries of the world.

Kamalesh SharmaCommonwealth Secretary-General

13




Excess capacity appears in an economy when thedemand for products falls below what the market is

equipped to supply. Once a certain threshold of excesscapacity is reached, economies can become trapped in avicious cycle in which firms have difficulty findingviable investment opportunities, investment demanddeclines, and some firms are forced into bankruptcy. Inturn, this threatens the income and job security ofworkers who then try to reduce spending, whichperpetuates the cycle. The recent convergence of asudden decline in global growth, rising unemployment,and a consequent drop in consumption sets the stage forsubstantial capacity underutilisation. This, paired withthe pre-crisis build-up of capacity in the real economy(particularly in the housing and manufacturing sectors),may leave developing economies acutely vulnerable evenafter the immediate crisis recedes.

Historically, some countries have been able to pull outof recession by using currency depreciation to increasetheir exports. However, this year the world faces thelargest global trade contraction since 1929, and no singlecountry can count on an export surge to improve theirsituation. Therefore, unless we create co-ordinated andfar-reaching policies to address the root issue of excesscapacity, the world may face a protracted slump.

Impact of the crisis on developingcountries When the financial crisis broke, it was generally thoughtthat developing countries would not be severely affectedbecause their financial sectors were not fully integrated in

the global financial system. But now, as problems in thereal sector have emerged, it has become clear that thedownturn is seriously impacting developing countries.Though developed countries are still experiencing someof the sharpest economic contractions, declining growthrates paired with high levels of initial poverty suggest thathouseholds in the developing countries are likely toexperience acutely negative consequences, both in theshort- and long-term.

Between 2002 and 2007, developing countries grewrapidly because of global trade expansion and the largeinflows of private capital, including foreign directinvestment (FDI), r ising remittances, and highcommodity prices. In fact, in 2007, private capital flowsto the developing countries amounted to US$1.2trillion, a six-fold increase compared to the beginning ofthe decade. This is thanks in part to the rise in FDI,which responded to the higher export earnings fromresource-rich developing countries. These higherearnings, in turn, were made possible by higher worldcommodity prices. Also, workers’ remittances tripled toUS$328 billion over the same period. Now, with thecrisis taking its toll, it is estimated that total FDI andprivate capital flows will decline from US$1.2 trillion in2007 to US$363 billion this year. As a result of decliningexports and reduced capital inflows, developingcountries may encounter a financing gap betweenUS$352 billion and US$635 billion. Moreover,remittances are likely to fall by 7.3 per cent in 2009 toaround US$305 billion.

The growth of gross domestic product (GDP) indeveloping countries in 2009 is forecast to drop to 1.2

Excess capacity indeveloping economies:the impact of theglobal recession Justin Lin

Senior Vice President of DevelopmentEconomics and Chief Economist,

The World Bank

These are challenging times for the world economy. As the scope and depth of this globalrecession come into sharper focus, it is evident that adequately addressing the crisis will be a

struggle on many fronts. Some developed economies are showing preliminary signs of stabilisation,but ensuring that recovery extends to emerging markets is vital to putting the world economy backon track. Throughout the crisis, policymakers have tended to focus on issues related to financial andbanking markets. However, the central challenge of this crisis has shifted from solving problems inthe financial sector to dealing with issues of excess capacity in the real economy – where goods andservices are created, bought, and sold.



per cent, down from 5.9 per cent in 2008. According tothe United Nations International Labour Organisation,this decline alone will cause more than 30 millionworkers to lose their jobs and, of course, poverty will rise.This could very well mean the beginning of a diresituation in many developing countries. New estimatesfor 2009 suggest that lower economic growth rateswould trap 53 million more people into extreme povertythan was expected prior to the crisis. If the US$2-a-daypoverty line is used, 65 million will stay trapped. Thesenew forecasts, along with the finding that sharply lowereconomic growth rates will significantly retard progressin reducing infant mortality, highlight the serious threatposed to achieving the Millennium Development Goals,which have a due date of 2015. Preliminary estimates for the 2009 to 2015 period forecast that an average200,000 to 400,000 more children a year, a total of 1.4 to 2.8 million, may die if the crisis persists.

As Robert B. Zoellick, World Bank Group President,has said: “The global economic crisis threatens tobecome a human crisis in many developing countriesunless they can take targeted measures to protectvulnerable people in their communities.”

Critical to protecting households in countries exposedto the crisis will be the ability of governments to financeprogrammes that create jobs, ensure the delivery of coreservices and infrastructure, and provide safety nets. Yetonly one-third of the exposed countries have the fiscalcapacity (that is, the ability to expand fiscal deficits) torender significant countercyclical spending. In countrieswith limited fiscal capacity, it is imperative that assistancebe provided via grants and concessional financingwherever possible. Moreover, one-third of the countrieswith a reasonable amount of fiscal capacity are aiddependent, and will also require external support tofinance increased spending. It is noteworthy, however,that several developing countries are navigating this crisisbetter than previous episodes. Having translated thelessons of previous crises into robust policy frameworksand stronger fundamentals, they are now capable ofimplementing counter-cyclical policies, whereas in thepast (for example, during the Mexican, East Asian, andRussian crises), the need for immediate stabilisation ledinevitably to contractionary policy frameworks torebuild confidence and credibility.

There is still a great deal of uncertainty, but some recentindicators show positive signs. Beginning in mid-March2009 amid signs of a recovery in the United States, andconfidence that no further major financial sector collapseswere in the works, markets began to strengthen andcapital flows to developing countries picked up. Equityflows to developing countries in the first two months ofthe second quarter exceeded the total for the first quarter,while bank lending and bond issuance both accelerated.Partly as a result, returns on emerging market assetssurged. Since mid-March, developing country markets areup 33 per cent as compared with only 19 per cent forhigh-income countries. Nevertheless, markets remainwell below pre-crisis highs.

Solving the global crisisThe current crisis is the first ‘synchronised’ crisis inalmost eight decades. While there have been someimprovements in segments of the financial systemtargeted for direct support by US authorities, in general,monetary policy in developed countries is unlikely tostimulate investment and consumption in excess capacitysituations. The global nature of the downturn means that no single country can pull out of the crisis. Instead,the international community as a whole must make aconcerted effort. In particular, countries with ambitiousfiscal stimulus programmes should resist ‘rushing to theexits’ over concerns about growing debt burdens. Evenas major fiscal stimulus packages are being implementedaround the world to complement monetary policy, it isclear that in environments where firms face large adverseshifts in demand, some fiscal policy features such as taxcuts and subsidies may have little effect.

Fiscal stimulus packages In their current form, the fiscal stimulus packages havetwo major limitations. First, most developing countriesare constrained by either fiscal space or foreign exchangereserves and thus, in many cases, will not be in theposition to implement counter-cyclical policies. Manylow-income countries entered the current crisisimmediately on the heels of the fuel and food crises,which led them to increase fiscal subsidies. Their fiscalpositions are already weak. Moreover, one-third ofdeveloping countries have already had current accountdeficits exceeding 10 per cent of their GDP. They willnot be able to finance the inevitable increase of importsdue to the fiscal stimuli.

Second, the proposed fiscal stimuli that are currentlyfeasible are in developed countries, where their impactwill be the least. In the current climate of uncertainty,households tend to put increased value on precautionarysavings. Thus, contrary to Keynesian wisdom, the impactof fiscal stimuli will be muted by the tendency ofhouseholds to adjust their consumption and savingpatterns on the basis of expectations about the future.

We can analyse Japan’s ‘lost decade’ in the 1990s forsome insight into this phenomenon. After the collapse ofthe equity and housing market in 1991 and theconsequent recession, the Japanese government wasquite aggressive in introducing fiscal stimulus. Thegovernment debt as a percentage of GDP was 60 percent in 1991 and, by 2002, it increased to about 140 per

Contrary to Keynesian wisdom, the impact of fiscal stimuli will be muted by the tendency

of households to adjust their consumption and saving patterns on the basis of

expectations about the future.

cent. Government spending increased but instead ofpumping money back into the economy, individualsavings also increased and the recession continued.

Developing country economies, on the other hand, areless susceptible to this problem since they face many morebottlenecks to growth. If the stimuli were used to invest inprojects that release these bottlenecks, productivity isbound to increase. If gains in productivity are largeenough, these investments may indeed be self-liquidating,ensuring that precautionary concerns and expected futuretax increases will no longer inhibit spending.

In 1998, because of the East Asian financial crisis,China encountered a situation very similar to thesituation now. In reaction, the Chinese governmentadopted a set of fiscal stimulus packages from 1998 to2002 that were used to release the bottlenecks ininfrastructure. In 1997, China only had 4,700 kilometersof highway. By 2002, it increased more than five times to25,000 kilometers. The transportation situation improvedgreatly for port facilities – airport, seaport – as well as forthe electric grid. With that kind of fiscal stimulus, Chinaaverage annual growth rate was maintained at 7.8 percent. More importantly, after the crisis, the growth rateaccelerated. In 1979 to 2002, the average annual growthrate in China was 9.6 per cent. However, from 2003 to2008, not only did the growth rate not decline, itincreased from 9.6 per cent to 10.8 per cent. As a result,Chinese government debt as a percentage of GDPdeclined over time. During the stimulus periods, the debtincreased from about 30 per cent of GDP to 36 per centin 2002. But because the growth was enhanced,government revenue increased and the economy becamemuch larger. By 2006–2007, the government debt as apercentage of GDP declined down to 20 per cent.

Thus, the key to solving the two problems outlinedabove is through investments in projects with rates ofreturn high enough to generate higher growth which, inturn, can generate enough revenues to pay for the costsof the fiscal stimulus itself. Bottlenecks, such as those inChina’s infrastructure sectors, tend to abound indeveloping countries. Clearly, some fraction of fiscalresources must be injected in developed countries thatare the epicenter of current crisis, but the main policyobjective should be to create demand as quickly andefficiently as possible. This can be done by channelinginvestment to where it can be most effectively utilised, byeliminating the bottlenecks to growth in the developingworld. Infrastructure in many developing countries, bothdomestic and regional, is the main bottleneck to growth.Increasing investments in infrastructure can increase theproductivity of the private sector, improve the businessenvironment, and generate high economic returns.

Moving forward with crisis responseWe are now observing some ‘green shoots’ pointing to abottoming-out of the crisis, but for those promisingtrends to continue and spread, developed countries andinternational institutions must make investments inemerging markets. With this in mind, Robert B. Zoellick

has called for the establishment of a ‘Vulnerability Fund’in which each developed country would devote 0.7 percent of its stimulus package to the fund for supportingsocial safety net, infrastructure investment, and small- and medium-size enterprises in developing countries.Sovereign wealth funds held by countries with largeforeign reserves could also devote one per cent of theirproceeds to contribute to infrastructure investment in Africa.

The World Bank Group is already committing greaterfunding to those countries that have been hardest hit bythe crisis. The Bank has committed about US$60 billionin fiscal year 2009 to support countries hit by the globalcrisis, which is a 54 per cent increase over the previousyear as well as a record high. The institution has thecapacity to make new commitments of up to US$100billion over the next three years and has put in place afast-track initiative to make US$2 billion available tohelp the poorest countries deal with the crisis. Inaddition, the Bank is ramping up support to the privatesector and providing increased technical assistance todeveloping countries to aid them in responding to amore demanding macroeconomic and financialenvironment. These steps, in concert with investment by other institutions and countries, will not onlyalleviate some short-term needs but also pave the wayfor sustainable, inclusive growth in the future.

In every crisis, there are seeds of opportunity. Even asthe global economic crisis exacts its toll – economic,social and environmental – we must work together tomitigate the adverse impacts, especially on the poor andmarginalised segments of our society. It is anopportunity that we should not waste, and the time foraction is now.

This piece draws from a speech given July 15, 2009 at theUniversity of South Africa, Pretoria.

Justin Yifu Lin is Senior Vice President of DevelopmentEconomics and Chief Economist of The World Bank, prior towhich he was Director of the China Centre for EconomicResearch (CCER) at Peking University. Mr. Lin received hisPhD from the University of Chicago. He is widely published,has won a number of distinguished awards, and has been activein a wide range of international fora and organisations over thepast 25 years, both globally and in Asia.

The World Bank is a vital source of financial and technicalassistance to developing countries around the world. We are not a bank in the common sense. We are made up of two uniquedevelopment institutions owned by 186 member countries – theInternational Bank for Reconstruction and Development(IBRD) and the International Development Association (IDA).

Justin LinDevelopment Economics Vice Presidency 1818 H St NW, MSN MC4-404Washington, DC 20433 United States





The IMF reform effortThe IMF reform effort is intended to provide the toolsto overcome the impact of a crisis that originated in theadvanced economies, and threatens the hard-woneconomic gains that many developing countries haveachieved over the past decade. Moreover, the reformeffort responds to the call by the internationalcommunity – as highlighted by the G20 heads of state attheir April 2009 summit – for swift policy action tomeet the needs of the developing world. Along with theprovision of new resources, the new lending architectureand interest rate relief, the reform has also streamlinedIMF loan conditionality.

The global financial crisis triggered a steep downturnin economic activity worldwide. This recession standsout not just for its depth, but for its breadth. A crisis thatbegan in the US housing market spread like wildfire;first among advanced countries, then among emergingmarkets, and lastly to the low-income countries. This‘third wave’ of the crisis hit LICs very hard just as theywere coping with the fallout from the food and fuelprice shocks that hit in 2007. With economic activityretreating everywhere, and with a sharp decline in worldtrade, the demand for exports from developing countrieshas dropped rapidly. Commodity prices have fallensharply. Foreign direct investment and remittance flowshave tapered off.

Six months ago, the IMF warned that the financialcrisis had created high financing needs that theinternational community would have to meet. Thosefindings also gave great urgency to the Fund’s efforts toassist LICs. The IMF now is working to help countrieskeep millions from sliding back into poverty.

IMF and Africa in partnership: The G20London Summit Extraordinary measures are required. In March 2009,Tanzania President Jakaya Kikwete and I convened aconference in Dar es Salaam to reinforce the partnershipof the IMF and Africa in responding to the global crisis.The IMF committed at the meeting to increase itssupport for Africa with more financing, greaterflexibility, enhanced policy dialogue, and a furtherstrengthening of Africa’s voice in the Fund. Thesecommitments were conveyed to the G20 LondonSummit, where I also asked the donor countries tofacilitate a major increase in the Fund’s concessionallending.

Delivering on its commitments, the IMF’s supportincludes the following measures:• The IMF is dramatically stepping up its financial

assistance to LICs. It will boost its concessional lendingcapacity to around US$17 billion through 2014.Lending in 2009 and 2010 alone is expected to reachup to US$8 billion, four times the historical level andexceeding the G20 call for additional lending of US$6billion over the next two to three years. The newresources will include revenue from envisaged IMFgold sales.

• This scaling up is already evident in the IMF’s countryoperations. In the first eight months of 2009, the Fundcommitted new concessional lending of about US$3.1

The IMF response to theglobal crisis: meeting the needs of low-incomecountries Dominique Strauss-Kahn

Managing Director, International Monetary Fund

Over the past six months, as the global financial crisis has swept from developed to developingcountries, the International Monetary Fund (IMF) has undertaken an unprecedented series of

reforms aimed at supporting low-income countries (LICs). This initiative culminated in July withthe announcement of significant new resources to assist those countries, interest rate relief on allconcessional loans through 2011, permanently higher concessionality of fund financing, and a newset of lending instruments designed to better meet the diverse needs of LICs.

The IMF now is working to help countries keep millions from

sliding back into poverty.



billion to LICs, compared with US$1.6 billion for allof 2008.

• Low-income countries will receive exceptional reliefon all interest payments due to the IMF through to theend of 2011 on credit under all concessional lendinginstruments.

• Future Fund financial support will include permanentlyhigher concessionality, with a mechanism for limitingfluctuations in concessional interest rates as globalinterest rates change.

• The Fund distributed about US$250 billion of SpecialDrawing Rights (SDRs) on August 28th to all membercountries according to their quotas in the IMF. Thisamounts to an allocation of over US$18 billion tobolster LICs’ foreign exchange reserves and helpalleviate financing constraints.

• Increased IMF financial assistance has been coupledwith programmes that include higher levels of pro-poor spending and a strengthening of social safety netsin a majority of cases. Fund programmes have providedfor increased fiscal deficits and often higher spending,as revenues have declined sharply.

• The IMF has introduced a new architecture ofconcessional financing facilities under the umbrella of anew Poverty Reduction and Growth Trust. The newinstruments will be more flexible, to address crises suchas the current one, and tailored to the increasingdiversity of LICs. The Extended Credit Facilityprovides flexible medium-term support; the StandbyCredit Facility addresses short-term and precautionaryneeds; and the Rapid Credit Facility offers emergencysupport with limited conditionality.

• The new architecture is coupled with a doubling ofaccess to financing under the facilities, which will helpmeet the needs of countries that have been hardest hitby the crisis. The policy is in line with a decision toincrease access limits for other IMF member countries.

• Conditionality in IMF programmes has beenstreamlined to focus on core objectives. This flexibilityapplies particularly to structural reforms, with the aimof putting more focus on reform goals and less onspecific time-bound measures.

• The IMF has also adopted a more flexible approach tosetting debt limits in fund-supported programmes tobetter reflect the considerable diversity among LICs interms of their debt vulnerabilities and macroeconomicand public financial management capacity.

Africa has been the central focus of the IMF’s scaled-upfinancial assistance to LICs. Additional assistance hasreached US$3 billion so far this year, nearly triple theamount extended in 2008. For example, in the wake ofhigher import prices and plummeting copper exports, anaugmentation of Zambia’s Poverty Reduction and GrowthFacility (PRGF) was agreed in May, enabling it to protectpriority social spending while safeguarding macro-economic stability. Tanzania and Mozambique tapped thehigh-access component of the Exogenous Shocks Facility,

providing them with a valuable foreign exchange cushionin support of their fiscal stimulus programmes. And Ghanasecured a new arrangement under the PRGF in July insupport of an economic adjustment programme to re-establish macroeconomic stability.

The IMF is also stepping up its technical assistance tolow-income countries to meet the policy demands of thecrisis. The Fund’s three regional Technical AssistanceCentres in Africa – in Gabon, Mali, and in Tanzania –have succeeded thanks to strong local ownership and deepfamiliarity with local circumstances. Two additionalregional centres are planned to open in the coming months.

The IMF alone cannot meet the needs of LICs. It isessential that the advanced economies follow through ontheir aid commitments – including the 2005 G7 promiseat Gleneagles to increase aid to Africa by US$50 billionby next year. Donors must act now so that this scaled-upassistance is reflected in their 2010 aid budgets. It is alsocrucial that the global community reject protectionismin trade and finance, and successfully conclude the DohaRound of trade talks. The world must also fight against‘back door’ protectionism in the form of inducements torepatriate capital.

The IMF is meeting its commitments to LICs to helpthem withstand the forces of global crisis. All countriesmust work to that end.

Dominique Strauss-Kahn assumed office as the tenthManaging Director of the IMF in November 2007. Prior tojoining the IMF, Mr. Strauss-Kahn was Professor of Economics atSciences-Po Paris. Between 2001 and 2007, he was elected thrice to the French National Assembly. From 1997 to 1999 Mr. Strauss-Kahn served as Minister of Economy, Finance andIndustry of France in which capacity he managed the launch of the Euro.

The International Monetary Fund (IMF) is an organizationof 186 countries, working to foster global monetary co-operation,secure financial stability, facilitate international trade, promotehigh employment and sustainable economic growth, and reducepoverty around the world.

International Monetary Fund700 19th Street, N.W.Washington D.C. 20431United States

Tel: +1 (202) 623-7000Fax: +1 (202) 623-4661

The IMF alone cannot meet the needs of LICs. It is essential that the advanced economies follow through

on their aid commitments.



Nature of the crisisNo Commonwealth country has escaped the currentcrisis. Global growth has been set back. In theCommonwealth’s smaller, poorer and most vulnerabledeveloping countries, this has been accompanied bysharp reductions in exports, workers’ remittances andaccess to finance; triggered declining fiscal revenues;increased demands for social service provision and themaintenance of social safety nets; and substantiallyincreased levels of unemployment. The followingexamples offer a snapshot of these impacts:

• GDP has declined in the advanced economies mostaffected by the financial crisis for the first time sincethe Second World War. In developing countries, theWorld Bank notes that average projected GDP growthis now about a quarter of its projected level before thecrisis. For these countries, the Bank estimates thatgrowth will decline to 1.6 per cent in 2009, from anaverage of 8.1 per cent in 2006–2007. In sub-SaharanAfrica, the worst affected region, growth is projectedto slow to 1.7 per cent in 2009 from 6.7 per cent in2006-2007.

• Declining global demand has severely curtailed globaltrade volumes and has brought to a close several yearsof consistent increases in commodity prices. Globaltrade levels have declined to their lowest level in 80years. Declining exports and falling export prices havedealt a devastating double blow to the smaller, poorereconomies in the Commonwealth. The combinedimpact on developing countries has been severe withexport revenues sharply contracting, employment inexport sectors declining substantially, and government’sfiscal revenues, an important part of which are sourcedfrom trade-related excise duties, reducing significantly.The smallest and most vulnerable Commonwealthcountries are especially exposed to the slowdown indemand from the advanced countries, which couldeliminate any prospect that living standards in thesecountries will rise in the short term.

• Declining global output has also impacted the level of workers’ remittances from abroad, on whichhouseholds in many developing countries are reliant.In many countries remittances have sharplydeteriorated, reducing household income andcontributing further to the fall in aggregate foreignexchange inflows. For unskilled workers, in particular,declining remittances have been accompanied by rising

The Commonwealthand the economiccrisis

Cyrus RustomjeeDirector of Economic Affairs,

Commonwealth Secretariat

It is well known that the current global economic crisis originated in the United States housingmarket and spread through the financial systems of the US and Western Europe. The crisis has had

an impact across the globe, but especially for the poorest. In developing countries the initial concernwas that the crisis would be transmitted from the advanced countries through the financial sectors.In fact, the greater effects have been on businesses and households as demand for goods and servicesfrom abroad slowed, negatively impacting employment and livelihoods.

Fact Box 1: What do the most affected countries have in common?

Our analysis shows that the following factors are present inthe worst affected countries:

• Little or no reserves• Little or no access to international capital markets• No fiscal space• A strong reliance on primary commodity exports• Weak financial systems• Weak social safety nets.

The smallest, most vulnerable Commonwealth countries are

especially exposed to the slowdown in global demand.



unemployment in cases where workers abroad havebeen retrenched and returned to their home countriesto seek new employment.

• The global crisis has reduced access to finance across allCommonwealth developing countries. There has beenconcern that official development assistance (ODA) willcome under threat, as major bilateral contributors – whohave been profoundly affected by the global crisis –experience substantial domestic fiscal pressure. Foreigndirect investment, particularly equity capital, as well ascommercial bank lending to developing countries andemerging markets have declined significantly as foreigninvestors and banks have sought to reduce their riskexposures. Trade finance has similarly deteriorated,further compounding the slowdown in trade volumes.The collective impact of declining commercial banklending, substantially reduced access to trade credits anduncertain access to concessional financial resources hascurtailed possibilities for developing countries to obtainexternal finance.

• Reduced access accompanied by increasing demandsfor fiscal spending to address the economic and socialconsequences of the crisis, has led to the emergence ofa large and persistent financing gap. The World Bankestimates that the crisis has created a financing gap fordeveloping countries of between US$270 and US$700billion. This excludes trade finance and represents theadditional amount needed for developing countries toaddress the impact of the crisis and to maintainexpenditure at pre-crisis levels.

• The crisis could increase unemployment substantially.The latest Global Employment Trends (GET) reportissued by the International Labour Office (2009)suggests that the global unemployment rate will rise to6.1 per cent in 2009 compared to 5.7 per cent in2007, increasing the number of unemployed by 18 million people in 2009, in comparison with 2007.In a worst-case scenario, the global unemployment ratecould rise to 7.1 per cent and result in an increase inthe global number of unemployed by more than 50 million people. Women have been hit hard by thecrisis. The ILO (2009) warned that, depending on thedepth and trajectory of the economic crisis, thenumber of unemployed women could increase by 22 million in 2009. Young people are at the greatestr isk of losing their jobs as they have the leastexperience and, with diminished prospects for newemployment, new entrants, particularly graduates, are

likely to wait longer to enter employment. The crisishas also had a detrimental impact on youthdevelopment, by curbing the establishment anddevelopment of small and micro enterprises (SMEs).Many of these can be categorised as ‘youth enterprises’based on the length of time in operation and therelatively young age of the management and/orowners. In the economic downturn, with very little toprovide as collateral for their long-term capital andshort-term financing requirements, SMEs havecomprised the majority of credit-starved businesses.Historical data suggests that as much as 80 per cent ofall SMEs fail within the first two years. The proportionis expected to increase as a consequence of the crisis.

What are the implications?The crisis has become unprecedented in its scale and itsreach at a global level. The implications are mostsignificant and adverse for small and vulnerablecountries, many of which are Commonwealth members.For them, recovery will take far longer than in the largereconomies with greater and easier access to sources ofcapital and to the global trading system. For thesubstantial majority of these vulnerable countries, thedownturn is more a profound economic and social crisisand far less a crisis either emanating in or impactingupon their financial sectors.

An end in sight?The crisis has depressed investor and consumerconfidence in both advanced industrial and developingcountries. Some signs have recently emerged of an end tothe recession in some of the advanced economies mostaffected by the crisis. But it is not clear whether thesesigns point to a sustained recovery in these countries. Theduration of the crisis will be far more pronounced indeveloping countries, which have had no fiscal space tostave off the first-round effects of the crisis and where thecrisis has undermined institutional resilience and capacity,and significantly increased poverty.

What is being done about it?Every government worldwide is concerned to help itseconomy recover, and multilateral agencies are also fullyengaged. For developing countries, the World Bank, theInternational Monetary Fund (IMF) and regionaldevelopment banks are key among these agenciesbecause of the significant resources at their disposal.

The Commonwealth responseThe crisis changes the context in which theCommonwealth’s ongoing work takes place and will

Fact Box 2: Falling Foreign Direct Investment

• According to UNCTAD (2009), Falling Foreign DirectInvestment (FDI) inflows to developing countries fell by 15 per cent in 2008.

• The World Bank (2009) projects a 30 per cent fall in FDIflows to developing countries in 2009, while the IMF (2009)expects a sharp slowdown of FDI to about a half of all low-income countries.

Fact Box 3: Negative or Zero Growth

According to the IMF (2009), 26 Commonwealth members willexperience either negative or zero growth in 2009.



shape its efforts to support its membership in meetingthe challenges they face. The crisis has signalled a shift inthe way in which the global economy is managed. Theneed for international co-operation and understandingacross a wide front is clearer than ever. While it does nothave the technical or financial resources of largerinternational organisations or the regional efforts to helpcountries affected by the global downturn, theCommonwealth is well placed to make a distinctivecontribution to this debate. Through the diversity of itsmembership – which ranges from the largest to thesmallest countries in the world – the Commonwealthworks to ensure inclusiveness so that all countries arefairly represented in decision-making that affects them.

This was the case when leaders from the world’s G20countries met in London in April 2009 and agreed aUS$1.1 trillion rescue package to bolster the ailingglobal economy. Before this meeting, CommonwealthSecretary-General Kamalesh Sharma called on leadersnot to forget the “G172”, the 90 per cent of the world’scountries that were not at the table. “It is our hope thatthe G20 addresses the challenges of more than its own ‘magic circle’”, he said in a joint statement withAbdou Diouf, Secretary-General of the OrganisationInternationale de la Francophonie.

Using its international presence to call for an inclusivesolution to a global problem, the Commonwealthprovides a platform for countries to come together andmake their voices heard. For example, following theNovember 2007 biennial summit of CommonwealthHeads of Government in Uganda, which called forreform of international institutions, 11 leaders met at theCommonwealth’s headquarters in London in June 2008,to outline guiding principles for reform. These guidingprinciples include an equal voice and fair representationfor all countries, and the stipulation that institutionsmust be transparent and accountable to theirmembership as well as the wider public. This was amongthe first occasions that the call for reform was made, andit has been picked up and taken forward by theinternational community.

As well as advocacy on behalf of its entire membership,the Commonwealth continues to help countries buildstronger and more equitable structures to provide forlong-term resilience against any future economic andother threats from an increasingly globalised world.

In terms of debt management, the Commonwealth’sDebt Recording and Management System has beenassisting countries record and manage their external and

domestic debt for nearly 25 years. Over 60 countries andterritories, including some non-member nations such asAfghanistan and China, have utilised this system torecord, monitor and analyse their positions on externaldebt totalling more than US$500 billion. As a result ofCommonwealth support in debt relief and debtmanagement, a number of Commonwealth countriesare better able to weather the current crisis than wouldotherwise have been the case.

The Commonwealth helps countries formulate,negotiate and implement their trade policies. Stepsinclude placing trade experts in government ministriesand regional organisations to help African, Caribbeanand Pacific countries to integrate into the global tradingsystem. These and other efforts are pre-emptive; lookingahead to unknown challenges as well as dealing withpresent ones.

In addition, the Commonwealth is contributing toalleviating the crisis by offering countries the practicalhelp they need to respond to the crisis, including advicein the design of any programme to reduce governmentexpenditure in the face of the crisis.

It is these activities – advocating inclusiveness andforward thinking, as well as reinforcing the practicalresponse of governments to their citizens – on whichthe Commonwealth must continue to focus during thiseconomic crisis.

The response of the internationalcommunityMultilateral agencies are better equipped than theCommonwealth to respond to the crisis, in terms ofhuman and financial resources as well as by mandate.

World Bank groupThe World Bank has responded quickly and substantiallywith both new funding and extensive analysis. A seriesof new funds and financing instruments have beencreated, utilising the Bank’s existing capital base.

The Bank has organised its crisis response in threethematic areas: protecting the most vulnerable againstthe fall-out of the crisis; maintaining long-terminfrastructure investment programmes; and sustaining thepotential for private sector-led economic growth andemployment creation, particularly through SMEs andmicro-finance. The thematic areas have been supportedby three separate financing mechanisms: a VulnerabilityFinancing Facility (VFF); an Infrastructure Recoveryand Assets (INFRA) platform; and a private sectorinitiative led by the International Finance Corporation.

Through the VFF and INFRA mechanisms, upwards ofUS$2 billion is being made available to eligible countries.Over half of that amount has already been allocated,including to a number of Commonwealth countries. Forexample, in Sierra Leone, 119 cash-for-work projects havebeen approved, providing 42,000 days of employment formore than 5,300 people. To meet the long-term needs ofdeveloping countries, the joint World Bank/InternationalFinance Corporation’s infrastructure facility will provide

The Commonwealth makes a distinctive contribution to the debate

through the diversity of its membership.

more than US$55 billion to infrastructure projects indeveloping countries over the next three years, includingmany Commonwealth member countries.

In addition to its financial resources, the World Bankhas also produced extensive analysis on the impact of thecrisis in developing countries. This analytical work,including a recent global monitoring report producedjointly with the International Monetary Fund (IMF),provides a detailed outline of the impact of the crisis in developing countries and the basis for a response by others.

International Monetary FundThe IMF has responded to the crisis in several ways. This includes significant adjustments to its lendinginstruments; agreement to substantially increase theresources available in its lending operations; and a widerange of analytical work on the crisis and on responsesin regions and member countries (2009).

Regional development banksThe regional development banks have emerged as animportant part of the global crisis response. These banksare close to their clients and able to adapt flexibly in theface of changed circumstances. For Commonwealthmembers, three are particularly important.

The Caribbean Development Bank (CDB) has increasedits loans and grants substantially from US$210 million in2007 to US$347 million in 2008. The less developedcountries of the Caribbean Community (CARICOM),including the members of the Organisation of EasternCaribbean States (OECS), received approximately 37 percent of the value of these facilities in 2008. The CDBhas played a major role in providing support for fiscalbudgets to Commonwealth member countries, notablyto Belize and St Kitts and Nevis; and made allocationsfor natural disaster relief and rehabilitation to fivecountries: Belize, Dominica, Haiti, Jamaica and the Turksand Caicos Islands. Looking forward, the CDB hasworked with the Inter-American Development Bank torespond further to the economic crisis by establishing aregional credit facility with a fast-track disbursingmechanism for the region’s member countries.

The African Development Bank (AfDB) has respondedcomprehensively to the crisis in the continent. To combatthe effects, the AfDB has proposed an emergencyliquidity facility of US$1.5 billion to provide financialsupport, introduced a new US$500 million trade financeline of credit and is considering committing a furtherUS$500 million to global trade finance liquidityprogrammes. The bank is also contributing to funds tosupport agribusiness and micro-finance, and is co-

ordinating a platform for co-financing projects in Africathrough the African Financing Partnership.

The Asian Development Bank (ADB) has seen its capitaldoubled as result of the crisis and has increased its non-concessional lending from US$17 billion before thecrisis to US$26 billion subsequently. This has includedlending through a new counter-cyclical facility, set upexplicitly to respond to the loss of liquidity in privatecapital markets, which will lend up to US$3 billion. Inaddition, the bank is being provided with the resourcesto allow for a 30 per cent increase in its lending to thepoorest members. In common with the other regionaldevelopment banks, the ADB is strengthening its supportfor the full range of activities in the private sector,infrastructure development and trade.

What next?The Commonwealth has a robust, ongoing, demand-driven and extensive programme of work in its membercountries. It is a programme built on the Commonwealth’sclose, trusted relationship with its members and refinedby many years of support to the most vulnerableCommonwealth countries, with the least resources,which are bearing the brunt of the long-termconsequences of the current crisis.

This programme will continue, adapting wherenecessary to the specific challenges brought on by thecrisis and constantly refining as members bring forwardnew requests for support. Two important events in thefinal quarter of 2009 – the Commonwealth FinanceMinister’s Meeting in Cyprus, in early October, and theCommonwealth Heads of Government Meeting inTrinidad and Tobago, in late November – are expectedto give new momentum to the Commonwealth’s effortsto support member countries during the crisis.

Dr Cyrus Rustomjee assumed his post as Director, EconomicAffairs Division, in January 2009. Previously he wasChairperson of South Africa’s non-bank financial sectorregulatory authority and of the Minister of Finance’s advisoryboard on financial policy and regulation. In 2007 Cyrus headedthe G20 Secretariat during South Africa’s term as G20 Chair.

The Economic Affairs Division is responsible for theCommonwealth Secretariat’s work in economic and financialsector development, trade, small states and the environment.

Economic Affairs DivisionCommonwealth SecretariatMarlborough House, Pall MallLondon, SW1Y 5HXUnited Kingdom

Tel: +44 (0)20 7747 6250Fax: +44 (0)20 7004 3581Email: [email protected]: www.thecommonwealth.org



The Commonwealth should continue toadvocate for inclusiveness and the practicalresponse of governments to their citizens.



The basic cause of this historic financial collapse hasbeen presented in various ways, such as: excessive

greed in the marketplace, turning the market into agambling casino, irresponsible capitalism, failure of theregulatory institution, and so on. Credit markets wereoriginally created to serve human needs – to providebusiness people with capital to start or expandcompanies. In return for these services, bankers andother lenders earned a reasonable profit. Everyonebenefited. In recent years, however, the credit marketshave been distorted by a relative handful of individualsand companies with a different goal in mind – to earnunrealistically high rates of return through clever feats offinancial engineering. They repackaged mortgages andother loans into sophisticated instruments whose risklevel and other characteristics were hidden or disguised.Then they sold and resold these instruments, earning aslice of profit on every transaction. All the while,investors eagerly bid up the prices, scrambling forunsustainable growth; and gambling that the underlyingweakness of the system would never come to light.

Globalisation had fuelled this financial tsunami all overthe world very quickly. Stock-markets all over the worldwere and still are reporting on a daily basis howcompanies and individuals are losing trillions of dollars.

But it is not the rich who will be the worst sufferersfrom this financial crisis; rather it will be the bottomthree billion people on this planet who are notresponsible in any way for creating the problem. Richpeople will lose a lot of their wealth, but they will still be left with a lot. Their life style will not beaffected mater ially. With the slow-down of theeconomy the bottom three billion people will face joband income losses.

The financial crisis was so shocking that the worldleaders and media forgot that 2008 was also the year ofseveral other crises. We have only seen the beginning ofthese; it is going to be a long and painful period ahead.Combined effects on the bottom three billion of thefinancial crisis, the food crisis, the energy crisis and theenvironmental crisis will unfold in the coming monthsand years.

World leaders’ overriding concern for the emergencysituation on the financial front is quite understandable.While the financial crisis should get the topmostpriority, it should not be considered as a problem ofhigh finance only. This narrow view of the financialcrisis is likely to create global social and politicalproblems. The human aspects of the financial crisis mustbe integrated into all policy packages. An appropriateanswer would be to treat all these crises as one, sincethey are all linked together. So far governments havekept themselves busy in coming up with super-size bail-out packages for the institutions that were responsiblefor creating the financial crisis; no bail-out package ofany size was even discussed for the victims of the crisis –the three billion bottom people and the planet.

I am repeatedly urging that this mega-crisis be takenas a mega-opportunity to redesign the existingeconomic and financial systems.

The Worst Crisis – and the bestopportunity Professor Muhammad Yunus

Founder, Grameen Bank

The past two years have been very eventful. They have added up to a warning sign – a wake-upcall to redesign our existing system of capitalism to one that is more inclusive of the welfare of

all classes of people. We had the food crisis, the oil price crisis, the on-going environmental crisis –and then came the crushing collapse of the US financial system. This crush had a domino affect thattraversed across the globe. Colossal financial institutions and respectable automakers are going downor being forced alive with unprecedented amounts of government bailout packages.

The financial crisis was so shocking that the world leaders

and media forgot that 2008 was also the year of several other crises.



Capitalism is a half-done structureEven if we can overcome the problems of the financialand food crises, we will still be left with energy and theenvironment, along with some fundamental questionsabout the effectiveness of capitalism in tackling manyother unresolved problems. In my view the theoreticalframework of capitalism that is in practice today is ahalf-done structure.

The present theory of capitalism holds that themarketplace is only for those who are interested inmaking money, for the people who are interested inprofit only. This interpretation of human beings in thetheory treats people as one-dimensional. But people aremulti-dimensional, as Adam Smith saw two and a halfcenturies back. While they have their selfish dimension,at the same time they can be selfless. Capitalism and themarketplace that has grown up around the theory makesno room for the selfless dimension of the people. If theself-sacrificing drive and motivation that exist in peoplecould be brought into the business arena to make animpact on the problems that face the world, there wouldbe very few difficulties that we could not solve.

The current structure of economics theory does notallow these dimensions of people to play out in themarketplace. I argue that given the opportunity, peoplewill come into the marketplace to express their selflessurges by running special types of businesses, let us callthem social businesses, to make a change in the world. Inthe absence of such market opportunities people expresstheir selflessness through charities. Charitable effortshave been with us always, and they are noble, and theyare needed. But we have seen that business is morecapable of innovation, of expansion, of reaching moreand more people through the power of the free market.Imagine what we could achieve if talented entrepreneursand business executives around the world devotedthemselves to ending, say, malnutrition in a businessformat – with the difference that these businesses willhave no aim of making money for their investors.

Social businessWith this in mind, I am proposing a different structureof the market itself; I am proposing a second type ofbusiness to operate in the same market along with theexisting kind of profit-maximising enterprise. I am notopposed to the existing type of business (although I callfor many improvements in it as many others do). I amproposing a new business in addition to the existing one.This new type can be called ‘social business’, because it isfor the collective benefit of others.

This type of business is one whose purpose is toaddress and solve social problems, not to make moneyfor its investors. It is a non-loss non-dividend company.An investor can recoup his investment capital, butbeyond that no profit may be taken out as dividends bythe investors. These profits remain with the companyand are used to expand its outreach, improve the qualityof the product or service, and design methods to bringdown the cost of the product or service. If the efficiency,

the competitiveness, the dynamism of the business worldcould be harnessed to deal with specific social problems,the world would be a much better place.

The concept of a social business crystallised in mymind through over 30 years of experience with theGrameen enterprises. Over this time Grameen created aseries of companies to address different problems facedby the poor in Bangladesh. Whether the company wasfounded to provide renewable energy, or to providehealthcare, or yet again to provide informationtechnology to the poor, we were always motivated toaddress the social need. We always designed thecompanies to be profitable, but only to ensure theirsustainability, so that the product or service could reachmore and more of the poor, and on an ongoing basis. Inall these cases social need was the only motivation; therewas no consideration at all to make personal money.That is how I realised that businesses could be built thatway, from the ground up, around the specific social need,without any motive for personal gain.

The concept of social business got internationalattention when Grameen launched a joint venture withDanone, a multinational company from France.Grameen teamed up with Danone to bring nutritiousfortified yogurt to the undernourished children of ruralBangladesh. The aim of this social business is to fill thenutritional gap in the diet of these children. We sell theyogurt to the poor children to make the company self-sustaining. The other goal of this social business is tocreate a cycle where the local economy is uplifted.Because of this factory, local milk is being purchasedand thus farmers and herders are being employed.Secondly, we have yogurt ladies who are selling theyogurt and thus creating employment for themselves.Beyond the investment capital, neither Grameen norDanone will make money from this venture, byagreement. We have one plant already operating inBangladesh, and we hope eventually to have 50 suchplants throughout the country.

We have built an eyecare hospital on social businessprinciples. We have created a joint venture with Veolia ofFrance to deliver safe drinking water in the villages ofBangladesh. With this company we are building a smallwater treatment plant in a rural part of Bangladesh tobring clean water to 50,000 villagers, in an area wherethe existing supply of water is highly contaminated witharsenic. We will sell the water at a very affordable priceto the villagers to make the company sustainable, but nofinancial gain will come to Grameen or Veolia. Now

Capitalism and the marketplace that has grown up around the theory

makes no room for the selfless dimension of the people.



more and more companies are coming forward topartner with us. We feel excited in creating a series ofexamples of social businesses, and we hope these willencourage others to join in.

Some people are sceptical. Who will create thesebusinesses? Who will run them? I always say that, tobegin with, there is no dearth of philanthropists in theworld, no dearth of donor countries giving grants.People give away billions of dollars. Donor countriesgive away billions of dollars. Imagine if those billionscould be used in a social business way to help people.These billions will be recycled again and again, and thesocial impact could be all that much more powerful.Company money designated for Corporate SocialResponsibility (CSR) could easily go into socialbusinesses. Each company can create its own range; andwe can create Social Business Funds to pool funds andinvest them in social businesses. The bottom line is thatwe are creating a self-sustaining system whereby thewhole economy is benefiting.

Business owned by the poorEven profit-maximising companies can be socialbusinesses if they are owned by the poor. Thisconstitutes a second type of social business. GrameenBank falls under this category of social business. It isowned by its poor borrowers. The borrowers buyGrameen Bank shares with their own money, and these shares cannot be transferred to non-borrowers. A committed professional team does the day-to-dayrunning of the bank.

Bilateral and multi-lateral donors could easily createthis type of social businesses. When a donor gives a loanor a grant to build a bridge in the recipient country, itcould create instead a ‘bridge company’ owned by thelocal poor. A committed management company couldbe given the responsibility of administration. The profitswould go to the local poor as dividend, and towardsbuilding more bridges. Many infrastructure projects suchas roads, highways, airports, seaports and utilitycompanies could be undertaken in this manner.

Once the concept of social business is included in theeconomic theory, thousands of people will comeforward to invest in these enterprises because they allhave social dreams in their hearts. We will need to create social stock markets to channel these funds toappropriate social businesses.

A social stock market To connect investors with social businesses, we need tocreate a social stock market where only the shares ofsocial businesses will be traded. An investor will come tothis stock exchange with the clear intention of finding a social business that has a mission of his or her liking.Anyone who wants to make money will go to theexisting stock market.

To enable a social stock exchange to perform properly,we will need to create rating agencies, standardisation ofterminology, definitions, impact measurement tools,reporting formats, new financial publications such as TheSocial Wall Street Journal, and new media such as SocialBloomberg. Business schools will offer courses andqualifications to train young managers to run socialbusinesses in the most efficient manner, and, most of all,to inspire them to become social business entrepreneursthemselves.

GlobalisationWe live in a globalised world, for better or for worse.What we do in one part of the world has a direct impacton another. We are now connected and interdependentin an unprecedented way. This can be a good thing, andthis can be a bad thing. Good waves spread quickly. So do the bad waves. Shock-waves from the collapse ofthe financial system in the USA is being transmittedglobally. The whole world now suffers for somethingthat happened in the USA.

Wrongdoings of the rich world impact on the lives ofthe poor people very heavily. The life style of the Northcan make lives in the South unsustainable.

The issue of climate change and how this will affectthe earth, and how human beings will continue tosurvive on this planet, is a very good example of this.

The world has many resources, but much of these arenon-renewable. We have to understand that the patternsof our consumption, and the path to development thatthe world is taking, could seriously endanger our futureon this planet. The food crisis is in part caused bychanges in climate patterns brought about, scientistsbelieve, by global warming.

My country, Bangladesh, is singled out very often as acountry that will be most affected, and most quickly, bythe effects of climate change. As we all live in the sameworld, we have to understand that we all have to sharethis world with everyone today, and also with futuregenerations.

Company money designated for Corporate Social Responsibility (CSR) could easily go into social businesses.

Each company can create its own range.

We live in a globalised world, for better or for worse. What we do in one part of the world has a direct impact on another.

We have to design a new global economic architectureto make sure one person’s enjoyment of life does nottake away the right of survival of another person.Similarly, the quality of life of one generation must notput another generation in peril.

Role of social businesses in globalisationI support globalisation and believe it can bring morebenefits to the poor than any alternative system. But it must be the right kind of globalisation. To me,globalisation is like a hundred-lane highway criss-crossing the world. If it is a free-for-all highway, its laneswill be taken over by the giant trucks from powerfuleconomies. Bangladeshi rickshaws will be thrown off thehighway. In order to have a win-win globalisation wemust have traffic rules, traffic police, and traffic authorityfor this global highway. The rule of ‘strongest takes it all’must be replaced by rules that ensure that the pooresthave a place and piece of the action, without beingelbowed out by the strong. Globalisation must notbecome financial imperialism.

Powerful multi-national social businesses can becreated to retain the benefit of globalisation for the poorpeople and poor countries. Social businesses will eitherbring ownership to the poor people, or keep the profitwithin the poor countries, since taking dividends willnot be their objective. Direct foreign investment byforeign social businesses will be exciting news forrecipient countries. Building strong economies in thepoor countries by protecting their national interest fromplundering companies will be a major area of interest forthe social businesses.

The worst crises provide the bestopportunitiesMost important, the current mega-crisis should not takeaway the resources of the donors and the attention oftheir leaders from the world’s search for long-termglobal solutions. Instead it should invite the attention ofleaders and donors to see this as a huge opportunity tointegrate and prioritise long-term problems in theirintegrated solution packages.

The current multiple crises offer us all a valuable lessonin the inter-connectedness of the human family. The fateof Lehman Brothers and the poor sisters working in thegarment factory in Bangladesh are linked together. Thefate of a rice farmer in Bangladesh, a maize farmer inMexico, and a maize farmer in Iowa are all intertwined;and while short-term trends may appear to benefit a fewof us at the expense of many others, in the long run the

only truly sustainable policies are those that will allow allthe peoples of the world to share in progress.

In the coming months the multiple crises will revealmore of their ramifications in economic terms andhuman terms. This is the time to bring the worldtogether to face this crisis in a well planned and wellmanaged way; to take this crisis as the best opportunityto design and put in place a new economic and financialarchitecture – in such a way that this type of crisis willnever recur again, long-standing global problems will beaddressed decisively, and the incoherence anddeficiencies of the current economic and financial orderwill finally be removed.

The most important feature of this new globaleconomic architecture will be to bring the half-donetheoretical framework of capitalism to completion byincluding a second type of business, the social business,in the marketplace. Once this is included in theframework, it can play very important roles in solvingthe financial crisis, the food crisis, the energy crisis andalso very importantly the environmental crisis.

It will be is the most effective institutional mechanismto resolve the unresolved problems of poverty and ill-health. Social business can address all the problems leftbehind by the profit making businesses; and at the sametime it can tone down the excesses of those motivatedby profit.

Professor Muhammad Yunus established the Grameen Bank in Bangladesh. His objective was to help poor people escape frompoverty by providing loans without collateral to support incomegenerating activities. From Professor Yunus’s personal loan of smallamounts of money to destitute basket weavers in Bangladesh inthe mid-70s, the Grameen Bank has advanced to the forefront of aburgeoning world movement toward eradicating poverty throughmicro-lending. Grameen Bank now has eight million borrowers, 97 per cent of whom are women, and has lent over US$8.26billion with a near 100 per cent repayment rate. Professor Yunus isthe recipient of the World Food Prize (1994) and the SydneyPeace Prize (1998). In 2006, Professor Yunus received the SeoulPeace Prize and the Nobel Peace Prize. On August 12, 2009Professor Yunus was awarded the Presidential Medal of Freedomby President Obama at a White House ceremony.

Yunus Centre, Grameen Bank Bhaban Mirpur-2, DhakaBangladesh

Email: [email protected]



The rule of ‘strongest takes it all’ must bereplaced by rules that ensure that the pooresthave a place and piece of the action, without

being elbowed out by the strong.

In the long run the only truly sustainable policies are those that will

allow all the peoples of the world to share in progress.



By the end of 2009, developing countries are expectedto have lost incomes of at least US$750 billion –

US$50 billion of which is from sub-Saharan Africa alone.The consequences include rising unemployment, povertyand hunger, and an additional 50 million people trappedin absolute poverty, with the number expected to rise to90 million by December 2010.

There are heated debates on how policy-makersshould respond. While it may seem only natural to focuson domestic agendas, the rise of protectionism at thisstage could jeopardise the prospects of sustainablerecovery, increasing the risks of a double dip and ofrepeated crises in the future. The crisis itself may havecreated a rare opportunity to re-think the financial andeconomic systems that have failed the poorest.

Research at the Overseas Development Institute(ODI), a leading international think tank ondevelopment issues, has mapped out the transmissionbelts that are carrying the crisis to developing countries,calculated the likely damage to their economies and, in

some cases, advised their ministers on appropriate policyresponses. ODI has led case studies in 10 developingcountries, working with local researchers to see how thefinancial crisis is playing out on the ground, six of themmembers of the Commonwealth: Bangladesh, Ghana,Kenya, Nigeria, Uganda and Zambia. The aim was topinpoint the measures needed to ensure sustainablerecovery, avoid volatility, and ensure that poor countriesare included in the recovery when it comes.

While all of the countries studied are very different,and will be affected differently, two things are clear: poorcountries have been hit harder than predicted, and 2009 is likely to be worse than 2008 (te Velde, D.W. et al (2009)The global financial crisis and developing countries– synthesis of the findings of 10 country case studies. ODI Working Paper 306. Overseas Development Institute 2009).

The economic impact Some countries are seeing the strong positive economicgrowth that lasted into 2008 sink into negative growthin 2009 (Figure 1). The ODI research revealed a generalslowdown throughout 2008, and there are sure signs thatgrowth in 2009 will be worse, in general, for low-income countries. Growth forecasts have been reviseddownward in all 10 countries, in stark contrast to theexcellent economic growth in developing countriesoverall in recent years. Kenya, for example, may achieveonly three to four per cent growth in 2009, down from7 per cent in 2007. Other countries, such as Zambia,have seen growth prospects falter less, despite the effectsof the crisis on the mining industry.

A global rethinkfor a rainbowrecovery Dirk Willem te Velde

Programme Leader, OverseasDevelopment Institute

The global financial crisis was born in the banks and stock markets of the rich, industrialisednations. As leaders rushed to contain the damage in the developed world – with mixed success –

the crisis spread to developing nations. Many countries that were already contending with graveeconomic and social challenges are now being hit by a crisis that was none of their making. Anddeveloping countries that had made great strides in economic growth and social development inrecent decades are seeing hard-won progress ebb away in the face of this financial catastrophe. Theworld’s many development success stories are in danger. The global financial crisis has not onlyhighlighted the weaknesses of the world’s financial, economic and governance systems, but paves theway for major changes.

While it may seem only natural to focus ondomestic agendas, the rise of protectionism at

this stage could jeopardise the prospects ofsustainable recovery, increasing the risks of a

double dip and of repeated crises in the future.



The ODI research suggested that net financial flowsto all developing countries may fall by as much asUS$300 billion over 2007-2009, equivalent to a 25 percent drop.

The value of trade is declining. Prices of commodities,including copper and oil, tumbled, affecting countriessuch as Nigeria and Zambia, although they haverebounded in recent months adding to the harmfulvolatile conditions. Portfolio investment slumped inmost of the countries studied in 2008, with large netoutflows in some cases. Equity markets have plunged,and there is evidence of tighter credit conditions forbank lending in Ghana and Zambia. Bond and equityissuances have fallen, with bond issuances put on hold inGhana, Kenya and Uganda, and the sell-off of risky assetsin developing countries.

Foreign Direct Investment (FDI) is one of the moststable external resources for developing countries,reaching a record US$500 billion in 2007, and has beenaffected less. Even so, the impact on FDI varies acrosscountries, and worsened in 2008, particularly in Africancountries that had enjoyed record increases in 2007.

Around 80 per cent of remittances to developingcountries come from high-income countries, makingthis often-vital source of household income vulnerableto economic crises. Such remittances reached a recordUS$251 billion in 2007, but have fallen in nearly allthe countries studied. Remittances to Kenya, largelyfrom Kenyans working in the USA, fell around 38 percent in the first eight months of 2008. In Tonga,remittances fell by 15 per cent between June 2008 andJune 2009. Jamaica experienced a drop of 14 per centin the first two months of 2009 – 18 per cent inFebruary alone. Overall, we estimate a fall inremittances to developing countries of between US$25and US$66 billion in 2009 (Table 1) (Cali, M.,Dell’Erba, S. (2009) The global financial cr isis andremittances: what past evidence suggests. ODI WorkingPaper 303. Overseas Development Institute).

Additional research by ODI suggests that small andeconomically open states are among the mostvulnerable to the crisis, not only through financialcontagion, but also through their high dependence onFDI, exports, remittances and aid (te Velde, D.W.,

Table 1: Prospects for remittances to developing countries

World Bank forecasts, March 2009 ODI forecasts, March 2009

Base case Low case Base case Low case

2008e* 2009f 2010f 2009f 2010f 2009f 2010f 2009f 2010f

US$ billion

Developing countries 305e 290 299 280 280 272A;282B 312 239A;270B 315

SSA 20 19 20 18 18 19 21 18 21

Growth rate (%)

Developing countries 8.8 -5 2.9 -8.2 0.2 -8A; 8B 5 -12A; -22B 8

SSA 6.3 -4.4 3.5 -7.9 0.0 -6 7 -9 10

Notes: *World Bank data based on the March 2009 data on remittances. ODI estimates are based on February 2009 data on remittances. ‘A’ estimates are based on outflows’ predictions. ‘B’ estimates are based on inflows’ predictions.

Figure 1. GDP per capita forecasts for 2009 (IMF and own calculations).

Massa, I., Cali, M. (2009) The Global Financial Crisis and Small States: supporting investment and promotingprivate sector development. Revised paper for theCommonwealth Secretariat, August 2009). They lack astrong voice on the world stage, and many fall outsidethe groupings of Least Developed Countries (LDCs) orLow Income Countries (LICs) that have preferentialtrade arrangements. They are experiencing fallingremittances and FDI, especially in sectors that fuelledtheir earlier economic growth: tourism, financialservices and real estate. In St Lucia, where many people depend on tourism, hotels were 80 per centempty during the peak tourist period in late 2008 andearly 2009.

While there is little evidence of a general aid pull out,and world leaders have reaffirmed their commitment tothe Gleneagles commitments, questions remain aboutaid quality and effectiveness in the face of such a severecrisis. Meanwhile, the US$50 billion in additionallending for poor countries pledged at the G-20 meetingin London in April is woefully inadequate when setagainst the US$750 billion of lost growth in 2009 and isno substitute for effective policy responses. There areconcerns that this additional lending is not flowingquickly enough to developing countries and that it isstill bound up in a straitjacket of conditionalities, despiterecent improvements.

The human impactThe human costs of the crisis are bound to be high.‘Back of the envelope’ calculations suggest that morehouseholds will fall into poverty than would otherwisehave been the case – as many as 300,000 in Bangladesh;233,000 in Uganda; and 230,000 in Ghana (one percent of the entire population). The International LabourOrganisation (ILO) anticipates an increase of between24 million and 52 million people unemployedworldwide, most of them in developing countries.

The ODI research bears this out. The number ofthose employed as a result of FDI in Ghana, forexample, dropped by around one third between the lastquarter of 2007 and the last quarter of 2008. In Kenya,the labour-intensive horticultural industry has suffered a35 per cent drop in exports of flowers, with inevitableknock-on effects on its workers, and in Zambia, nearlyone in four of the workers in the mining sector losttheir jobs in 2008.

According to the Food and Agriculture Organisation,the number of people suffering from hunger is alreadyup by 75 million to nearly one billion people – the firstrise in nearly two decades. And World Bank estimatessuggest that, if the impact of the crisis continuesunabated, there will be up to 2.8 million additionalinfant deaths by 2015.

The numbers conceal the individual tragedies: illness;missed schooling; broken families; and lost hope. A massof research confirms that it is the poorest – who hadleast responsibility for the global financial crisis – whoare paying the highest price.

Policy implicationsThe crisis, grim though it is, could be an opportunity tore-shape and reinforce the global economic institutionsand systems that have buckled under pressure. In theircurrent form, the International Financial Institutions(IFIs) have proved unable to deal with such massiveshocks, and it has been said that a crisis is a good time todrive through difficult changes. Clearly, no one wouldwish for a crisis of these proportions, but it does pave theway for reforms that might not otherwise have beenpossible. The Commonwealth could play a key role here.The ODI Development Charter for the G-20 suggests aset of key policy responses (Overseas DevelopmentInstitute (2009) A Development Charter for the G-20):

• First, a Global Poverty Alert System is needed tomonitor not only the economic impact of the crisisbut also its effects on people’s lives. A United Nationsthat works ‘above’ the smaller groupings of the G-20and G-8 is best placed to pioneer the systematicmonitoring of the crisis, and to host the global debateon the response.

• Better financial regulation and new financial rules areneeded to increase the transparency of capital flows,curb illegal transfers, and reduce the pro-cyclicality offinancial flows to developing countries, for example byadjusting capital adequacy ratios over the businesscycle, or promoting capital flows to developingcountries using innovative financing mechanisms. Thevexed question of bonuses, for example, could beresolved by rewarding efforts to pursue sustainableglobal growth and responsible investment abroad,rather than pure profit, drawing on lessons from theuse of incentives in development finance.

• A sizeable share of the (inadequate) US$50 billion inadditional lending pledged at the G-20 in London inApril and new grant aid should be channelled to a‘rainbow’ stimulus, bringing together the best of theblue of conservatism and market forces; the red ofstate interventionism; and the green of environmentalsustainability ahead of the Copenhagen summit laterthis year. This would help to address the medium-termimpact of the crisis, and foster a rainbow recovery,going hand-in-hand with social protection measuresto offset the immediate effects on the poor –particularly in Afr ica. By extension, developedcountries should support developing countries increating national crisis taskforces and implementingtheir own ‘rainbow’ policies to grow themselves out ofthe crisis.

• The particular vulnerability of small states needsrecognition, with better macro-economic managementof shocks that threaten to derail their economies. TheCommonwealth Secretariat could play a crucial role inmonitoring the challenges facing small states, gatheringthe solid information that leads to effective policies;

• A new kind of trade package is needed, moving awayfrom unrealistic expectations about a conclusion to theDoha Round to concentrate instead on preventing



‘beggar-thy-neighbour’ protectionism and bringingforward funding for Aid for Trade, especially forinfrastructure to bring long-term prosperity to Africancountries and their suppliers.

• As developed country leaders debate migrationcontrols and barriers to imports in response todomestic pressures, ODI research suggests that now isthe time to reverse labour protectionism, which hashardened in recent months. Migration restrictions hurtboth the countries from which the migrants come andthe countries that receive them.

• Aid should support national ownership, governmentplans and government budgets. There have been callsfor every developed country stimulus package toinclude a share for a vulnerability fund for thepoorest countries. But there has been less focus onhow any additional aid should best be used. Aid thathas no effect on economic and social activity withinthe next 18 months will do little to combat theeffects of the crisis.

• Effective reform of global governance systems is longoverdue, and should be based on new and effectivepartnerships with development countries. The UN, forexample, needs to establish its role in leading globaldebate on issues of worldwide concern. The crisis hasundermined the reputation of the rich economies andthe IFIs, as well as any belief that ‘the west knows best’(Evans, A., te Velde, D.W. (2009) Too little, too late? TheUN and the global financial crisis. Article in OpenDemocracy, 23 June 2009). In global terms, the UN isthe ‘last man standing’, but it must be stronger in co-ordinating debate and action on country-developmentmodels.

• The changes needed within the IFIs require nothingless than a sea change in attitudes and practice. Theyhave been diligent in reviewing the financial andeconomic policies of developing countries for years. To be truly effective, they now need to be as diligentin reviewing the policies of rich nations.

• The International Monetary Fund needs sufficientresources for low-income countries – beyond theUS$50 billion pledged to date, which pales intoinsignificance when placed alongside the US$1.1trillion of increased liquidity destined mainly formiddle-income countries. But in addition, grantsfunding is also needed through the World Bank andother institutions. The IMF’s technical assistance isvaluable, but its forecasts need to be improved at thecountry level.

• Reform of the World Bank is essential to ensure thatlow-income countries are included in any economicrecovery. The Bank needs to become morerepresentative by reforming its internal governancestructure, modernising its board and decentralising to where its clients are. It needs to develop newapproaches to risk and crisis, based on better analysisand partnerships, allowing it to be faster, stronger andmore flexible. And it needs to work more closely with

regional development banks, and more effectively withthe private sector, to support climate change initiatives,entrepreneurship and job creation in the poorestcountries (Evans, A. (2009) A bank for the world – remakingthe World Bank in a time of global financial crisis (5). ODI

blog, 6 March 2009. Overseas Development Institute).

• Finally, greater effort is needed to reduce globalimbalances. Many rich and emerging countries –including oil exporters – have surplus capital. Ratherthan investing such surpluses in other rich countries inrisky and complex financial products (the cause of theimbalances), better returns could be gained fromgreater investment in low-income countries, benefitingthe investors and helping to kick-start the recovery inthe south. The IFIs and Commonwealth could leveragesovereign wealth and other funds as a useful second-best policy after appropriate financial regulation.

Taken together, these suggestions would see thecreation of a new multilateral and economic model – amodel founded on the realities of economic growth anddevelopment at country level. This would be a systemcapable of providing more choice, more flexibility andmore accountability in response to today’s globaleconomic meltdown and to the unknown challenges ofthe future, paving the way for crisis-resilient growth.

Dirk Willem te Velde is Programme Leader for Investmentand Growth at the Overseas Development Institute (ODI). Heco-ordinates the ODI Crisis Task Force, which includes thestudy on the macro-economic effects of the crisis on 10developing countries. Te Velde has provided development policyadvice worldwide, to developing countries and UN agencies, theWorld Bank, the European Commission, the EuropeanParliament, the Commonwealth Secretariat and many others.

ODI is the UK’s leading independent think tank oninternational development and humanitarian issues. Its missionis to inspire and inform policy and practice which lead to thereduction of poverty, the alleviation of suffering and theachievement of sustainable livelihoods in developing countries.ODI locks together high quality applied research, practical policyadvice, and policy-focused dissemination and debate. ODI workswith partners in the public and private sectors, in both developingand developed countries.

Dirk Willem te VeldeOverseas Development Institute 111 Westminster Bridge RoadLondon, SE1 7JDUnited Kingdom

Tel: +44 (0)20 79 22 03 19Email: [email protected]: www.odi.org.uk/odi-on/financial-crisis/default.asp





Households and manufacturing firms:transmission mechanisms in the USA and UKIn the USA and the UK, the key transmissionmechanism behind the financial crisis was households.Irresponsible policies had induced asset bubbles whichencouraged households to increase consumption byexcessive borrowing. The financial crisis panicked theseover-extended households to begin rebuilding theirbalance sheets by increasing their savings rates, and firmsresponded by reducing investment. With rare exceptions,this pattern has not occurred in developing countries.Two seeming exceptions are Nigeria and Kazakhstan,both of which experienced spectacular bubble bursts inbank shares and property respectively. However, even inthese instances, the problems are more closely related tothe impact of the fall in the price of export commoditiesthan to contagion from the global financial crisis. Hence,the US-UK experience is of little pertinence fordeveloping countries.

The second route by which the financial crisismetastasised, which has been critical for a large group ofsuccessful developing countries, was via manufacturingfirms. The collapse of demand in the USA and the UKfor durables and investment goods has hit manufacturingproducers in the export economies: predominantlyGermany and East Asia. The collapse in the demand fordurables has been compounded by the drying-up offinance for international trade. The results have beenquite spectacular, with unprecedented sudden reductionsin demand being concentrated in particular sectors suchas vehicles and steel. This has had the paradoxical resultthat, because the export economies are concentrated onmanufacturing durables whereas the USA and UK arenow predominantly service economies, the transmissionof the financial crisis to the real economy has hit much

harder in the export economies than in the serviceeconomies in which the financial crisis originated. Thatsaid, I suspect that the softer landing of the USA and theUK compared to the export economies owes more totheir distinctive economic structures than to superiorpolicy responses.

Fortunately, however, over the past decade thegovernments of the export economies have generallybuilt up very strong fiscal and foreign reserve positionsand so are in a good position to address the shock bymeans of offsetting domestic policies. The archetypalcase is China where the government could fully offsetthe reduction in external demand by stimulatingdomestic demand. Hence, despite the severity of theshock in this class of economies, I do not see them asbeing the priority for international concern. Indeed, forthe sake of rectifying global imbalances, they need to beencouraged to find domestic solutions.

The final group, which will be my focus in this essay, isthe group of small, low-income, commodity-exportingcountries. Within this group there is a wide rangedepending upon the value of commodity exports. A fewfortunate countries such as Angola have such largeexport earnings per capita that they are effectivelyanalogous to the Middle East. My focus will be on thosecountries where, although industrial commoditiesdominate exports, the income per capita is not verysubstantial. Such countries include Zambia, SierraLeone, Guinea, Liberia, Niger, Chad, and Bolivia.

Governments and remittances:transmission mechanisms in small, low-income countriesThe small, low-income, commodity-exporting countriesinitially expected not to be affected by the crisis becausetheir financial sectors had not adopted any of the

The effects of theeconomic crisis on thepoorest developingcountries Paul Collier

Director of the Centre for the Study of African Economies, Department of

Economics, Oxford University

It is no longer meaningful to talk of ‘the developing countries’ and this is borne out by the impactof the global economic crisis. The impact of the crisis calls for a more differentiated approach. In

this article, we will examine how the initial financial crisis metastasised into economic crisis throughthree radically different transmission mechanisms, each applicable to a distinct group of countries.



sophisticated practices that had exposed the Organisationfor Economic Co-operation and Development (OECD)banks to problems, and they were not producingconsumer products. This expectation was spectacularlywrong; the key route by which the financial crisis hasbeen transmitted in small low-income countries has beenvia governments. The crash in demand for durablesknocked on directly to their inputs. Proximately, the keyaffected input was steel where Chinese production hascollapsed. However, remarkably rapidly, these demandeffects knocked on to industrial commodities, turningwhat had been the strongest commodity boom in historyinto a crash. It is worth noting why the transmissionmechanism was so rapid, and indeed why thecommodity-producing countries turned out to be on thefront line of the shock, being hit even earlier than themanufacturing exporters. This follows from theproduction practice of ‘just-in-time’ which hastransformed manufacturing in recent decades. Whereashalf-a-century ago, manufacturing firms produced output speculatively and retailers stocked this productionspeculatively, now both are linked much more closely toorders. Hence, if orders collapse, manufacturers at oncereduce purchases of raw material inputs even prior toreducing their own output. This is why in the fourthquarter of 2008, imports to China (which arepredominantly raw materials) declined, whereas the fallin exports did not really set in until the first quarter of 2009. Modern production methods have placed the commodity exporters at the front of the shocktransmission process whereas they had previously been at the rear.

The decline in the price of commodity exportsmatters for the low-income exporting countriespredominantly because it is the main source ofgovernment revenue. Commodity exports are taxed in avariety of different ways, some of which, such as importduties, are sufficiently indirect that the true source of therevenues is often not recognised. Many governments areconsiderably more dependent upon commodity exportsfor revenue than they realise.

While the fiscal shock is the predominant route bywhich these countries have been affected, there have alsobeen other transmission mechanisms.

Remittances have become massively more importantfor this group of countries over the past decade due toemigration to the OECD and the Middle East.Remittances are important for both distributional andmacroeconomic reasons. They directly reach ordinaryhouseholds and, since remitters have access to rapid

information of recipient circumstances, they can evenrespond to sudden changes in needs. At themacroeconomic level there is also some evidence thatremittances cushion declines in commodity prices, theexception being oil perhaps due to the correlateddecline in employment opportunities in the MiddleEast. Remittances have started to decline because the immigrants from these countries tend to be at the margin of employment and so lose jobsdisproportionately. However, overall, job losses have beenonly a few percentage points, and this may have beenoffset by increased remittances by those still inemployment: remittances appear to be quite sensitive tothe real exchange rate and so the strong appreciation ofthe dollar relative to the currencies of most commodityexporters has probably cushioned the flow. Hence,except in a few instances, I doubt whether theremittance decline will be severe. Overall, countries thatstarted the shock with large remittance inflows shouldfind this a source of cushioning rather than acompounding factor.

Collapse in FDI and aid as transmissionmechanismsA further transmission mechanism has been the collapsein Foreign Direct Investment (FDI). This is closelyrelated to the collapse in the commodity prices since,overwhelmingly, FDI in these economies was forresource extraction. The fall in commodity prices hasbeen compounded by a radical decline in the appetiteof investors for risk. These economies are regarded asthe riskiest on earth and so the changed view of riskhas induced flight. I suspect that this is an over-reaction.Three distinct sources of data (returns on US FDI;returns on equity; and returns on manufacturinginvestment using firm surveys) all show that in recentyears Africa has had higher returns than any otherregion (Warnholz, 2008). Since, even with the globalshock, Africa is still growing whereas most other regionsare in unprecedented decline, the regional risk rankingsmay need to be reassessed. The decline in FDI ispotentially very damaging since investment is alreadyfar too low.

The other form of private capital, portfolioinvestment, has been less important. Even at the peak ofthe commodity boom, private portfolio inflows to theselow-income countries were negligible and have nowdisappeared. The more serious concern is of outflows.

The fall in commodity prices has beencompounded by a radical decline in the appetite

of investors for risk. These economies areregarded as the riskiest on earth and so the

changed view of risk has induced flight.

The key route by which the financial crisis has been transmitted in small low-income

countries has been via governments.



The same flight to safety may well have induced anincrease in capital flight: by its nature, data on capitalflight tends to be weak and subject to lags so it isdifficult to tell what has been happening. In addition tothe conventional illicit forms of capital flight, anotherunfortunate by-product of the increased reliance ofthese small economies on foreign banks has been that,faced with difficulties in the home markets, many ofthese banks have repatriated capital.

The final transmission route may be a decline in aid.However, although conventional aid flows are likely to bereduced, at least relative to counterfactual, there is scopefor new forms of public capital flows arising from theLondon G20 so that the net effect may well be positive.

The combined impact of these transmissionmechanisms in the low-income commodity exportershas been sufficient to kill the growth acceleration of2003-2007, but has usually not turned growth negative.Overall, sub-Saharan Africa, where such economiespredominate, is set to grow at around 1.7 per cent in2009, implying a small decline in per capita income(IMF, 2009, Table 2.8). Hence, compared to both theUS-UK shock, and the export economies shock, theimpact has been less severe. Yet this is the group ofcountries where the international community should be most concerned to assist. This is because thegovernments of these low-income countries, which arebearing the brunt of the shock, are the least able towithstand large, unanticipated declines in revenue.

Finally, a few developing countries have not beensignificantly affected by the global crisis. The mostimportant of these unaffected countries is India. Since itdid not have an exposed banking sector and was not amajor exporter of either manufactures or commodities,none of the above channels have mattered to it. Indeed,as an importer of industrial commodities, India hasbenefitted from the crisis.

Discussion of the global crisis has been dominated by the experience of the OECD and East Asia. Thesetwo regions dominate the world economy, have beenhardest hit by the crisis, and virtually all economiccommentators are resident in them. Yet the small, low-income commodity exporters have been adverselyaffected by the crisis through distinctive routes – thepredominant one being the loss of government revenuedue to the fall in the price of commodities.

At the London G20, the international communitychose to assist these countries by the unconventional

channels of the International Monetary Fund (IMF) and the International Bank for Reconstruction andDevelopment (IBRD). This necessitates a rethinking oftheir rules for lending; potentially they could replicate thedevelopment agencies but, given the past record, thiswould risk future default. A more promising approach isto return to the original role of aid to low-incomecountries: finance for high-return investment. The failureof past approaches was not because this need wasmisconceived. Past lending had two fatal weaknesses: one macroeconomic the other microeconomic. Themacroeconomic failing was that the money was used forconsumption rather than investment. The microeconomicfailing was that the essential agenda of raising the returnon investment was ignored. In some low-income settings,these two problems are intractable, but in others there arerealistic prospects that they could both be addressed.

By doing so, low-income commodity exporters couldsafely borrow from both the IMF and the IBRD forproductive investment. The immediate need for a fiscalstimulus to aggregate demand could then be reconciledwith the structural need to raise long-term growth ratesso these economies would start to converge on the rest ofmankind.

Paul Collier is Professor of Economics and Director of theCentre for the Study of African Economies at OxfordUniversity.

The Centre for the Study of African Economies (CSAE)has been undertaking research on Africa for more than a decade,and has become one of the largest concentrations of academiceconomists and social scientists working on Africa outside thecontinent itself.

Centre for the Study of African Economies (CSAE)Department of EconomicsManor RoadOxfordOX1 3UQUnited Kingdom

Tel: +44 (0)18 65 27 10 84Fax: +44 (0)18 65 28 14 47Email: [email protected] Website: www.csae.ox.ac.uk

Although conventional aid flows are likely to be reduced, at least relative to counterfactual,there is scope for new forms of public capitalflows arising from the London G20 so that

the net effect may well be positive.

Misconceived. Past lending had two fatal weaknesses: one macroeconomic

the other microeconomic.

As the world’s economies battle through and emerge from the aftermath of the global credit crunch and resultant recession, theuniversity sector must mimic the business sector in adapting to the new economic reality.

Years of increased funding and growing numbers of international and domestic students have led to a university bubble, which maysoon be set to burst. The prospect of increased funding from the government has evaporated and the Armageddon scenario of majorcuts in higher education expenditure is now highly likely.

While many in academia may bemoan being punished for past private sector excesses, an increasing number of universities andacademic departments are recognizing that the current difficulties may be a catalyst for future innovation and development in theprivate sector.

Make no mistake, as student numbers grow and funding for teaching falls, the traditional model of detached professors lecturing fewhours and junior faculty taking a significant load will no longer be feasible.

There are two plausible ways in which the university sector may develop in the coming years. If the cap on undergraduate degreefees is lifted, money will enter the sector to maintain existing levels of resourcing. However, with increased personal investment comegreater demands for accountability. This will lead to a significantly stronger emphasis on teaching quality and an acute focus on therelevance of university degrees to the job prospects of the student. This has already happened in many universities where science,engineering and business have been supported to the detriment of social sciences, language, and arts.

An alternative future may arise where newer universities, who have not yet found their niche market, give up the ghost of doingresearch and focus only on providing teaching. This would be a return to the situation of the 1990s just before many polytechnics andcolleges changed their status to that of degree awarding institutions. However, this would not mean that Russell Group universitieswould be able to focus on research. Income from teaching has in many Russell Group university faculties become as, or even more,important than research funding. This is not going to change and so degrees that target the international fee paying student maybecome the norm for top faculties. High fee paying students demand the best researchers to lecture them.

Adversity encourages innovation and so it is likely that technology will become a dominant feature of future university programmes.Most universities have already adopted virtual learning environments where lecture materials and readings can be downloaded eachweek by students. However, other learning techniques, which minimize lecturer contact but enhance the student experience, willbecome more prevalent.

Fortunately, the tools are already available. Social networking phenomena, such as Facebook, Twitter, and MySpace, are secondnature to most students. With some creativity, lecturers can use these sites to promote discussion and a community of students, whichis currently impossible under the current system.

And this is the nub of the matter. The global economy has changed and the students have changed. For universities to survive andprosper over the coming years, the academics themselves will have to embrace new methods of teaching and engaging with students.Whether they like it or not, universities will have to adapt to this new environment, or be left behind for good.

We’re Going Through Changes…

Academics are going to have to change their ways of working or facebeing left behind, according to Professor David Hillier, Head ofAccounting & Finance, University of Leeds

Leeds UniversityBusiness School

Leeds University Business School, Maurice Keyworth Building, University of Leeds, Leeds LS2 9JTTel: +44 (0)113 343 6321 I Website: http://business.leeds.ac.uk

41




In recent years, smarter approaches to internationaldevelopment have helped to drive some real progress:

34 million more children have been through schoolsince 1999; four million more have been placed onantiretrovirals – more than three million of these inAfrica; and millions more have been protected from ortreated for malaria. There have also been significantreductions in infant mortality and major progress inbeating back specific infectious diseases such as polioand measles. Further, many of the countries that recentlyposted such strong economic growth have alsobenefitted from significant debt cancellation andincreases in smarter aid, though these were by no meansthe sole cause of economic improvements.

These successes are not sufficiently known to eitherdevelopment professionals or, more importantly, thewider public or policy-makers. However, there are stilltoo many failures or, perhaps, too many projects andprograms for which it is not clear whether they arefailures or not. To this end, the recent spate of criticismfrom Wrong, Hubbard, Glennie, Moyo, or Easterly,though some are poorly informed and factuallychallenged, are helpful in forcing the community onceagain to put transparency and accountability at the heartof the agenda. And I hope they will also spark furtherefforts towards efficiency and focus.

This piece will look briefly at the recent record ofdevelopment partners in making and keepingdevelopment promises; critically assess the politics ofpromise-making and propose some improvements to theprocess; as well as suggest some possible new partners,leaders, and paths forward to re-energize the drive fordevelopment, especially in the African context, between2010 and 2015.

Promises and the health of thedevelopment partnershipThe Millennium Development Goals (MDGs) launchedin 2000 are still a useful framework to structuredevelopment policy and advocacy, and to mitigateagainst politically driven ‘initiative-itis’ or zero-sumpledges which ‘rob Peter to pay Paul.’ It is important toremember this in the challenging years ahead, whentargeted initiatives may feel politically expedient butcome at a cost to the overall development drive.

In 2005 the Gleneagles communiqué, though not yetperfect, embodied a set of holistic promises by the G8covering most of the Millennium Development Goals,with a specific focus on African development anddemocracy. Through the annual DATA report, we atONE have been monitoring the delivery of thesepromises, particularly on development assistance levelsfor sub-Saharan Africa, which were promised to increaseby $25 billion in 2010 over 2005 levels. This last yearwas the most informative yet. One group of countries iseither meeting or exceeding their relatively modestpromises: Canada, Japan and the USA. Another group isstriving valiantly to meet far more ambitious promises:Germany and especially the UK, who have now set a clear and accountable plan to reach OfficialDevelopment Assistance (ODA) levels of 0.7 percent oftheir Global Network Initiative (GNI) by 2012 despiterecessionary pressures. But another pairing is far worse:France has barely increased its development aid since2005 and, in a shockingly poor effort, Italy currentlyplans to cut below its meagre 2005 levels. The G8 maydeliver between one half and two-thirds of their promiseby 2010 but almost the entire shortfall will come fromjust Italy and France. As criticism of the G8 mounts, it is

Strengthening the campaign fordevelopmentthrough to 2015

Jamie DrummondExecutive Director and

Co-founder, ONE

Just as the international development community has recently come under attack as it strives toensure the effective delivery of past promises by the leaders of developed and developing nations,

so the creation of a new generation of development pledges could be a great opportunity to buildon successes and learn from failures, revive the drive to beat poverty, achieve the UN’s MillenniumDevelopment Goals, and more.



the poverty of these nations’ performance that must bekept uppermost in the minds of critics.

Keeping aid quantity and quality promises are stillimportant to development. These have never been theonly driver – improving policies and governance are moreimportant. Furthermore, the G8 also made promises ontrade which they themselves have completely failed todeliver. Especially in the absence of progress on trade, aidincreases of an improving quality are essential if theMDGs are to be achievable, particularly given the recentglobal recession and the growing threat of climate change.Indeed if, development promises are not kept, in thecontext of threats to development caused by thedeveloped industrialized world (climate change and therecession) then a growing sense of injustice and a globalbreakdown of trust would be fully justified. In the contextof modern global challenges, this global trust is needednow more than ever. To this end, keeping our promises isa small price to pay.

It is in the interests of those sincerely committed to development to have a

better collective accountability system for promise-making and keeping.

Charter for a good promiseOne way to renew faith in global policy-makers is forthem to acknowledge the weaknesses of the pastcommitments and agree a clear and accountableframework for making and keeping promises. Thischallenge was recently exemplified by the L’Aquila FoodSecurity Initiative. ONE and other groups had beencampaigning for a multi-billion, multi-annual, multi-lateral initiative that would direct increased resourcestowards improved policies to boost agriculturalproductivity in developing regions such as Africa. In goodtime, the Obama administration announced an increase inresources and a considerably improved policy framework.They then laudably tried to multilateralize this initiativeand encourage others to do more. The rest of the groupslargely obliged by re-stating their current levels of aid toagriculture and multiplying these numbers by three,securing their provision of aid over the next three years.This resulted in a $15 billion initiative by the G8. Whilethis sounds like a lot, the only new money seemed to befrom the USA, with possible increments from the UK.

Then, at the last minute, a miraculous further $5billion was found to bring the total initiative to $20billion. But this sum was simply due to the addition ofnon-G8 OECD donors to the package with theirexisting aid levels for agriculture. To great fanfare, the G8announced a $20 billion initiative, but with perhaps onlya few billion of this over three years being new moneyand the vast majority of it flowing from the USA. In themedia, this caused confusion and skepticism. NGOsreacted lukewarmly and the new leadership of America

perhaps didn’t receive the applause their individual effortdeserved. It is in the interests of those sincerelycommitted to development to have a better collectiveaccountability system for promise-making and keeping.

The next time the G8 or G20 or some other illustriousgroup of world leaders announce a laudable additionalprogram to tackle a key development challenge – withinthe context of the overall drive for development, itwould be helpful if each individual nation clearly statedand adhered to the following standards:

• The baseline: the highlighted budget line item withinits overall development portfolio, showing the baselevel number and the base level of other developmentpriorities;

• Increases going forward and additionality: for each yearof the initiative going forward, the promise-makershould clearly indicate the increase over the baselineand also show levels for other development line itemsto indicate whether these are decreasing, which wouldindicate whether or not the flows are additional; and

• All new initiatives should have a clear timeline and aclear statement of outcomes and goals it is intending toachieve.

These suggestions may seem obvious but it isremarkable the degree to which compound multi-annualmulti-billion sums get launched into a media unfamiliarwith the source data, thereby leaving the public, themedia and commentators scratching their heads.

A guiding framework for 2010 to 2015Through the DATA Report, we have been trying toclarify baselines, additionality and annual increments bythe G8 for each of 2005-2009. But the promises madein 2005 as a compact for Africa expire in 2010.European leaders’ promise to increase ODA levels toreach 0.7 percent of their GNI and the collectivepackage that is the Millennium Development Goals areboth due in 2015. The Gleneagles framework has, forthe last 4 years, directed the international community’ssupport and specifically focused the delivery of aidincreases around the collective project of helping Africannations achieve the Millennium Development Goals. Sothe expiration of this framework in 2010 presents a realchallenge and opportunity for policy-makers to create anew guiding framework for the period 2010 to 2015.

A new process and some new partners,some old partnersThe process by which any new framework is constructedis critically important. The Commission for Africa was apositive process, but insufficiently African. This timearound, African intellectuals, corporate faith and youthleaders, as well as democratically elected politicians needto lead the process more than in the past. As these leadersstep up to lead a process, it is also important that thenations in the international community who can offerspecial political leadership do so.



• President Obama has many political challenges but hislending his weight to the process would be the bestboost possible. His speech in Accra was excellent andunderlined the importance of putting governance atthe centre of the compact.

• This new process should also help bring in otheremerging development partners, such as China, India,Brazil, and the Gulf states.

• Europe must also continue to play a leadership role, asit is still European promises that comprise the bulk ofpromised flows to Africa. The good news is that Spainhosts the presidency in the first half of 2010 and has agood record recently on development, and Zapatero ispersonally engaged. Furthermore, as the Europeannation closest to Africa, Spanish citizens are closer tothe challenges and opportunities of Europe’s massivecontinental neighbor.

• The next key partner in a new process is the G8 host,Canada. Though much ink has been applied to thedemise of the G8, this group remains the best collectionof major donors. It is evolving but, with whateverpermutation of players visits Ottawa in June 2010, thehost nation has an important role to play. The host hassent mixed messages. Canada has increased aid robustlyand now exceeds the modest levels they promised inGleneagles and before. But there have been indicationsthat interest will shift from Africa to Latin America, andthat aid levels may not be so robust going forward. Thiswould be a shame. Canada should be congratulated forrecent progress and encouraged to build upon this in2010. Canadian support for African think tanks throughthe IDRC may be a particular fulcrum for refocusingon African intellectual leadership.

• South Korea technically hosts the G20 and, with itsnew internationalist perspective (evidenced by aforeign minister now running the UN) and increasingaid levels, South Korea could be a helpful leader.

The ultimate goal is not necessarily some big new top-down push. But it should accept that Africa needs a globaldevelopment partnership to help spur its economicdevelopment, and that the contributions of theinternational community will be more efficientlymanaged and focused if there is an agreed overallframework through which to structure this support. It willundoubtedly underline the importance of governance, ofrule of law, and of attracting inward and internationalinvestment flows and encouraging private enterprise.Domestic and external public sector flows will be critical,and must increase, if growth and poverty reduction are tobe accelerated, and progress in health and education to bebuilt upon. A renewed focus on agriculture and ruraldevelopment, which learns from the mistakes of the past,is the most welcome recent development. Crucial alsowill be how the process may direct African advocacyaround a new global climate change deal, where there aregreat threats but also potential opportunities for Africa.

Above all, the framework can be based more in theconcerns and wishes of everyday African citizens’. In his

press work for the launch of our annual DATA report thisyear, our International Patron Archbishop EmeritusDesmond Tutu called for a new drive for Africandevelopment and democracy to be based in “what Africanswant.” Improved polling of citizens across the continentwould be a real boost to better direct development effortsas well as encourage better information for markets.Greater investments into grassroots citizens accountabilitymovements such as Twaweza in East Africa and AfricanMonitor in Southern Africa, as well as boostinginvestments into African social science research institutes,think tanks, and public interest advocacy groups and themedia would all help build demand for good governance,as investments in core government capacity should helpbuild the supply. In a similar vein, efforts like the ExtractiveIndustries Transparency Initiative and the Stolen AssetRecovery Initiative will help both weed out corruptionand deal with its consequences.

A new drive for African democracy and developmentcan contain these elements to ensure that the voices and concerns of African citizens drive their owndevelopment and direct the international community’ssupport appropriately through from 2010 to 2015 andthe Millennium Development Goals.

Jamie Drummond is Executive Director of ONE. He co-founded the advocacy organization DATA (debt, AIDS, trade,Africa) with Bono, Bobby Shriver, and others in 2002 and ONEin 2004. The two entities merged in 2008 under the nameONE. Drummond and his partners have helped persuade theBush Administration and bipartisan leadership in the USCongress to launch a series of initiatives for Africa including theMillennium Challenge Account, the President’s Emergency AIDSinitiative, the Malaria Initiative, Multilateral Debt Relief, and theAfrican Growth and Opportunity Act. Jamie was formerly globalstrategist for Jubilee 2000 “drop the debt” and, prior to that,worked at Christian Aid. He has travelled widely in Africa andAsia and has a Masters in Development from the London Schoolof Oriental and African Studies. In 2007, Jamie was elected aYoung Global Leader by the World Economic Forum.

ONE is a grassroots campaign and advocacy organization backedby more than two million people who are committed to the fightagainst extreme poverty and preventable disease, particularly inAfrica. Co-founded by Bono and other campaigners, ONE isnonpartisan and works closely with policy experts, African leaders,and anti-poverty activists to mobilize public opinion in support oftested and proven methods for tackling poverty through bothgrassroots mobilization and high-level engagement.

Jamie Drummond151 Wardour Street, SohoLondon, W1F 8WEUnited Kingdom

Tel: +44 (0)20 7434 7550Fax: +44 (0)20 7434 7551Email: [email protected]: http://one.org

THE TUBERCULOSIS THREATA summary by the SOUTH AFRICAN NATIONAL TUBERCULOSIS ASSOCIATION

The new millennium is facing a profound threat from an old adversary, tuberculosis (TB). The World Health Organization(WHO) has recognised that the alarming growth of drug resistant strains of TB could well become a global phenomenon,threatening the achievement of both health and economic goals.

In response to this, millions of dollars have been earmarked internationally for research. This research is for new vaccines,improved and faster diagnostic methods and new drugs for shorter treatment regimen and to combat drug resistant strains.New international non-profit organisations such as the TB Alliance and Stop TB Partnership have been established tospearhead these research efforts, but their results once achieved must still be tested, accepted and financed before roll-out.

In the interim drastic action is required, especially in the worst affected countries. As ever it would seem that basic infectioncontrol procedures practiced in the past have been quietly abandoned. This no doubt is the result of reliance on moderndrugs at the expense of tried and previously trusted prevention methods. These methods were effective, at least in part,before the advent of TB drugs in the 1950s. Why should they not still be effective, at least in part, against the new drugresistant TB strains?

The answer is that all known infection control practices must be rigorously enforced to at least stem the growing flood of TB.These practices include:

· Lots of sunlight and out-door (“fresh”) air, plus isolation whilst infectious · good/nourishing food with plenty of rest · medical support and advice · good hygiene, such as coughing, sneezing and spitting into paper or cloth, which is then burnt, boiled or disinfected· washing hands before and after eating· boiling and/or disinfecting crockery and cutlery· avoiding alcohol and substance abuse· sleeping alone

The re-introduction of these basic practices should help contain the TB pandemic while research continues into affordableand effective treatment. To this list must be added TB and HIV awareness and education campaigns, HIV testing andcounseling for all TB sufferers and TB testing for all HIV+ patients. The nutritional aspect also deserves specific emphasis,as this can assist in preventing latent TB becoming active and in maintaining the CD4 count in HIV+ people, thereby delayingthe necessity for ART.

SANTA’s Mission

“SANTA, as a dynamic, community-based voluntary association, is committed to serving communities and TB patients

throughout South Africa by providing preventative, curative and rehabilitative serices in partnership with other stakeholders”

Contact details: Mr John Heinrich, Private Bag X10030, Edenvale, South Africa, 1610

e-mail: [email protected]

Website: www.santa.org.za

Telephone: +27 11 454 0260

Fax: +27 11 454 0096



Women are at the heart of every community – andso women’s health, education and general

wellbeing is central to all development. It is womenwho run most small businesses, who dig the fields, put food on the table, make sure children go to school,and look after the old. Wise women also make greatleaders, from community to national and right up tointernational level.

According to the Department for InternationalDevelopment (DFID) in the United Kingdom, “in ruralAfrica it is women who carry two-thirds of all goodsthat are transported – not trucks or planes. In South-eastAsia it is women who provide 90 per cent of the labourfor rice cultivation.”

The forgotten Millennium DevelopmentGoal?To focus on women’s and girls’ health is to make themost sensible kind of investment in the future. To focuson pregnancy and childbirth – still the leading cause ofdeath for women of reproductive age in developingcountries – is the most effective use of resources. For notonly will each woman saved live to contribute to thehealth and well being of her society, but if she lives, herchild is ten times more likely to survive too.

To focus on pregnancy and childbirth –still the leading cause of death for women ofreproductive age in developing countries –

is the most effective use of resources.

Yet so far little progress has been made in reachingMillennium Development Goal 5 (MDG 5), to reducematernal deaths by two-thirds no later than 2015. Thisyear – as for decades past – half a million women will

die from preventable complications of pregnancy andchildbirth. Of the survivors, 15 million will suffer seriousand debilitating injuries. No wonder MDG 5 has beencalled ‘the forgotten MDG’.

Maternal health– at the centre of development Sarah Brown

Patron, White Ribbon Alliance

As the poverty goal that has seen no progress in 20 years, tackling maternal mortality must be apriority for all of us. It is an outrage that one in seven mothers can expect to die as a result of

pregnancy in countries like Sierra Leone, Niger and Afghanistan, compared with about one in 30,000in developed ones.

Women make up the sole workforce for more than 25 per cent of allhouseholds.



Making progressHowever, there are encouraging signs of change. As wepass the halfway mark between the millennium and2015, many more citizens are demanding change, andmany more leaders are sitting up and taking notice. TheWhite Ribbon Alliance, of which I am Patron, is aglobal movement, now with members in 118 countriesand growing fast. With members from every sector ofsociety across Africa and Asia, and increasingly inEurope, Australia, the USA and Canada, pressure isbuilding for better policies and better implementation ofthose policies, for greater and more sustained investmentin maternal health, and for greater integration withother health issues.

At the global level, the Maternal Mortality Campaign,of which many governments, NGOs, professional groupsand professional organisations are members, is makingheadway. The Maternal Mortality Campaign supportsthe introduction of a major new innovative financingmechanism to fund health systems, and to have financedhealth plans in place in 20 countries by 2010 in order tomeet the World Health Organization’s recommendedlevels of 2.3 workers per 1,000 people by 2015.

There is no ‘magic bullet’ for maternal health.Instead, broad, concerted and urgent

effort is needed at every level.

The campaign also aims to work more closely with theUnited Nations Secretary General, Ban Ki-Moon, tosupport national champions to mobilise action at anational level – and last but perhaps most significantly, toensure maternal mortality is recognised as a key indicatorof a functioning health system. Many groups aresupporting the campaign, comprising many organisationsas members, such as the White Ribbon Alliance, thePartnership for Maternal and Newborn Health, and theMaternal Health Taskforce. The highly influentialNetwork of Global Leaders was established in March2009 to help lead the global fight against MaternalMortality. Every global leader, organisation and individual

campaign supporter will seek to catalyse efforts at anational and international level to tackle the problem.

From political will to practical policiesThere is no ‘magic bullet’ for maternal health. Instead,broad, concerted and urgent effort is needed at everylevel. Political will for change is the first priority inending the needless deaths of millions of mothers andtheir babies. Historically, the most effective way toincrease political pressure has been through sustainedadvocacy – from the community to district level, fromnational to international – to promote and delivermaternal health within countries. This is now buildingfrom the grassroots up with the participation ofcommunities around the world. And in more and morecountries, leaders are responding to the needs of theirpeople by increasing budgets for maternal health.

Even today, when it is widely known that professional healthcare, especially midwifery,

is key to saving the lives of mothers andnewborns, almost half of women in the

developing world are still giving birth with no nurse or midwife.

Mothers play a vital role in the physical and economic health of theirfamilies and communities.

A woman and child in Sri Lanka, where maternal mortality rates have beenslashed following increased investment in health.

White Ribbon Alliance campaigners march in Dar-es-Salaam to a speech byPresident Kikwete in support of improved maternal health services.



Often, health ministers are keen advocates of maternalhealth, but they face budgetary pressures from all sides.Pressure from civil society can help health ministers intheir bids to increase the budget for maternal andnewborn health, especially when groups unite underone banner, such as that of the White Ribbon Alliance,and speak with one voice to government. For whenreproductive health is addressed, everyone benefits; notjust women themselves but their families, theircommunities, health systems and national economies.

A focus on health systemsEven today, when it is widely known that professionalhealthcare, especially midwifery, is key to saving thelives of mothers and newborns, almost half of women inthe developing world are still giving birth with nonurse or midwife. Every year, 60 million births takeplace in which the mother is helped only by a familymember or an untrained traditional birth attendant – orshe gives birth alone. All too often the result is disabilityor death. Unlike some health issues it is very hard topredict who is at risk; that is one reason why we needto make health systems themselves more effective if weare to make progress.

But there are many reasons. Reducing maternalmortality and morbidity cannot be done without a well-funded and well functioning health system – whichencompasses infrastructure, equipment and supplies,human resources and financing, and enabling processessuch as transport and communications. Indeed, there isincreasing agreement that the best measure of acountry’s health system is its maternal mortality ratio.

Most maternal deaths can be averted if women receive skilled

care during pregnancy and childbirth, and if this care is supported by a well functioning health system.

However, for many countries, measuring maternalmortality remains a major challenge. Only 30 per cent ofcountries have routine death and birth registration.Maternal deaths are often not recorded, let alone

investigated. The absence of data from countries withsome of the worst maternal mortality ratios makes ithard to assess progress in reducing deaths, and also hardto discover the most effective strategies to improvematernal health.

Within the health system, the priority is to train,employ and deploy skilled birth attendants (trainedmidwives, or doctors or nurses with midwifery skills), sothat they can provide health services close to wherewomen live.

Health professionals know what to do to preventwomen from dying, and the technologies involved arerelatively simple. About 15 per cent of all pregnancieswill have serious complications that could lead to death,but even the five ‘big killers’ – haemorrhage, infection,unsafe abortion, eclampsia and obstructed labour – canbe treated or prevented if births are attended by askilled health professional and emergency care is readilyavailable.

The key to success: the skilled birthattendantA skilled birth attendant is a nurse, doctor or midwifewho has received the training necessary to look after awoman during a normal birth and who, crucially, canalso recognise, manage and refer complications whenthey arise. Most maternal deaths – 74 per cent,according to the World Bank – can be averted if womenreceive skilled care during pregnancy and childbirth, andif this care is supported by a well functioning healthsystem that ensures necessary supplies and equipment areavailable. Indeed, the proportion of births attended by askilled health professional is one of the key indicators forassessing progress towards maternal mortality reduction.

And women must have ready access to the services ofhealth professionals – which usually means free or lowcost care, together with transport and referral systems –especially ensuring emergency obstetric care for everywoman in need of it.

Community participation

Community involvement and participation is fundamental todeveloping an effective health system. Participation by citizensis also vital to building the demand for health services; thepositive response of elected representatives to that demand iscentral to modern democratic nations.

Some practical examples from White Ribbon Alliance India:

• In Orissa, a checklist has been piloted in four districts totrack the implementation of policies and programmes,especially the provision of health facilities and skilled birthattendants.

• In Rajasthan, 226 health sub-centres were assessed and 607mothers interviewed about the services they received. Thesurvey found that less than a third of those health centreshad a health worker available round the clock, while mostdid not have the capacity for training of skilled birthattendants.

This advocacy campaign by civil society is bringing sustainedpressure to bear for achieving MDG 5.

Midwives providing post-natal care in Tanzania.



Crucial to progress is the recruitment of morehealthcare workers, making sure they have up-to-datemidwifery skills and training, the drugs and supplies they need to do their jobs properly, and decent pay andconditions – especially in remote and rural areas.

Crucial to progress is the recruitment of more healthcare workers, making sure they

have up-to-date midwifery skills and training, the drugs and supplies they need to do their jobs properly, and decent pay and conditions.

Fixing the health system may seem like a tall order,but the benefits extend to all citizens – and to theeconomy.

Empowering women: central to everynationThe empowerment of women is at once a means toreducing maternal death, and a positive result of doingso. For instance, family planning enables women to makedecisions about their reproductive lives, and this isimportant if women are to take their full part in society.Girls and young women must be able to complete theireducation or training, while older women have moretime and resources to devote to family and the widercommunity if they are able to decide on the numberand spacing of their children.

As well as being an important step towards women’sempowerment, the health benefits of good familyplanning are a direct move towards achieving MDG 5.

Improving maternal health can be done, and has been done, even in countries with

limited resources, when there is political will.

Women who have been educated are also less likely todie during childbirth because they tend to have fewerchildren, better knowledge of health services duringpregnancy and birth, as well as improved nutrition.Education also lowers the risk of contracting sexually

transmitted diseases including HIV/AIDS, and increaseswomen’s resistance to harmful cultural practices such asfemale genital cutting that can double the risk ofmaternal death.

The good news is that progress on MDG 5 iseminently achievable; improving maternal health can bedone, and has been done, even in countries with limitedresources, when there is political will and where thepeople of the country get together to demand theirrights to healthcare.

Sarah Brown has been the Patron of the White RibbonAlliance for Safe Motherhood since 2008. During the last year,she has been an international voice in the campaign to meet theMillennium Development Goal to reduce maternal mortality bytwo-thirds by 2015. She is married to Gordon Brown, PrimeMinister of the UK. In 2002, Sarah founded the charityPiggyBankKids which supports charitable projects that createopportunities for children and young people in the UK. It alsoadministers the Jennifer Brown Research Fund, which seekssolutions to pregnancy difficulties and to save newborn lives. TheFund was established in memory of Sarah and Gordon’s firstchild born in 2001. In March 2009, Sarah was asked to takeon a formal role in establishing a network of national andinternational champions for the issue of maternal health,working in close collaboration with the Global Leaders Networkunder the chairmanship of Norwegian Prime Minister JensStoltenberg. Working with co-chair Bience Gawanas, social affairscommissioner of the African Union, they will focus on supportingthe establishment of taskforces in developing countries, under theleadership of national champions, and in pushing forinternational support for the fight to reduce the number ofmaternal and infant deaths.

The White Ribbon Alliance for Safe Motherhood is aninternational coalition of individuals and organisations formed to promote increased public awareness of the need to makepregnancy and childbirth safe for all women and newborns in the developing as well as developed countries. The white ribbon isdedicated to the memory of all women who have died inpregnancy and childbirth. In some cultures, white symbolisesmourning and in others it symbolises hope and life. The whiteribbon represents this dual meaning globally.

White Ribbon AllianceOne Thomas Circle, NW, Suite 200Washington DC 20005USATel: +1 202 777 9758Fax: +1 202 775 9694

32-36 Loman StreetLondon SE1 OEHUKTel: +44 (0) 207-922- 7797Fax: +44 (0) 207- 922-7726Website: www.whiteribbonalliance.org

Maternal death is the leading cause of death for girls aged 15to l9 in the developing world – they are twice as likely to die inchildbirth as women in their twenties.

UK Department for International Development

Pregnancy intervals of less than six months are associatedwith a 150 per cent increased risk of maternal death.

International Planned Parenthood Federation

Preventing unplanned pregnancies alone could avert at least one quarter of maternal deaths each year, includingthe 68,000 that result from unsafe abortion.

UK Department for International Development



Fragile states represent a particular challenge for donorsand NGOs. A shocking example of this is that, while

accounting for 15 per cent of the world’s population,fragile states produce more than 40 per cent of childdeaths worldwide. What’s more, fragile states differ vastly,on issues of staff security and the potential for building upsustainable health systems within a particular politicalcontext. A current example of this would be that Liberiaand South Sudan seem more promising than the CentralAfrican Republic (CAR) or Darfur.

Because of the myriad challenges, one of the coreprinciples of donating to fragile states is staying engaged,even through the toughest of circumstances. It is notpossible to invest in health worker capacity withoutconsistent engagement.

Strengthening the public sectorMost least-developed countries have woefullyinadequate healthcare workforce and system capacity.Fragile states have additional burdens of politicalinstability and decayed health infrastructure. Due tothese factors, international NGOs working in fragilestates are called upon to transition from service providerto capacity builder.

When it comes to improving health systems, in termsof capacity building and human resources, there are noshortcuts to establishing effective health programmes

within a national framework. The transition from fragilityto functional health system takes many years. While thereare current donor and government commitmentsthrough the Global Health Workforce Alliance to addresshealth capacity over a decade-long timeframe, in fragilestates it may well take a decade or more to reach whatfor others would simply be a ‘starting point’.

This means that a transition approach – moving fromfragility to a strong foundation in the health sector – isimpacted by a country’s level of stability, whether it isembroiled in an emergency or is in the developmentprocess.

Because of the myriad challenges, one of the core principles of donating to

fragile states is staying engaged, even through the toughest of circumstances.

This does not mean delaying investment in healthworker capacity or in building up health systems. Forexample, the roles of health ministries may include arange of tasks such as regulation, policy framework,financing, allocation of resource priorities, managingcontracts, and monitoring and evaluation. In practice,ministries of health in fragile states may be able toperform only a few of these functions without externalstaffing support.

Approaches to improving health capacity do not workat a single level. It is necessary to invest in communityhealth workers, mid-level professionals, and governmentofficials. It also means recognising that capacity buildingis more than training – it requires ongoing mentoring

Healthcarecapacity buildingin fragile states Josephine Garnem

International Medical Corps

In fragile states, governments lack either the will or capacity (or both) to deliver serviceseffectively. Access to primary healthcare remains an elusive goal. Donors find it especially difficult

to operate due to weak government capacity, low levels of human resource skills, and uncertaintiesover the transitions from emergency to developmental assistance programmes. There is no officialinternational list of fragile states, although there is consensus on some clear-cut examples, such asZimbabwe, Somalia, and the Democratic Republic of Congo (DRC). The Development AssistanceCommittee, the principal body of the Organization for Economic Co-operation and Development,which focuses on co-operation in developing countries, defines fragile states as countries sufferingfrom deficits in governance that thereby make conditions for development difficult.

Fragile states account for more than 40 per cent of childdeaths and 15 per cent of the world’s population.



and regular programmes in professional developmentand in-service training. It also requires attention tostrengthening the Ministry of Health itself.

Cases in countries such as Afghanistan, Timor,Mozambique, and Cambodia point to the benefits ofprioritising the early development of a national healthemployment scheme. Three criteria for such a schemestand out:

• It must reflect the larger vision for the society• It must be budget-based• It must be realistic in terms of capacity and capacity

building options.

It is also essential to address the organisational culturesof ministries, as some offices may have resistance tocontracting with qualified service providers.

The key to building competent and accountable public health institutions

is ensuring that the state can have broad and effective oversight.

Because of the particularly broad and complex mix of NGOs, the strengthening of the public sector requiresa different set of approaches than, for instance, in education. The key to building competent andaccountable public health institutions is ensuring thatthe state can have broad and effective oversight. In healthmore than other sectors, the peculiar ‘new publicmanagement’ role of the state is notable, as some NGOsshould be connected formally to the different levels ofgovernmental health systems. In most fragile states therewill be a continuing dynamic between reducingimmediate vulnerability, achieving specific healthoutcomes, building a more lasting and equitable healthsystem, and building the capacity of health providers.

Implementing an integrated approachInternational Medical Corps (IMC) typically initiatesservices in a complex humanitarian emergency setting,for instance in the aftermath of a disaster, and thendesigns its programmes to provide support services andtraining to local communities and health institutions. Indoing so, it recognises that the phases of relief, recoveryand development and their transitions are not discretelyconsecutive but often overlap, depending on the specificregional or country context – something not regularlyrecognised by donors. IMC’s integrated approach factorsin two key linkages: first, between different phases ofprogrammes; and second, between different levels ofhealth worker capacity and health systems, such ascommunity health workers, mid-level health workers,local community-based partners, and ministries of health.

While IMC is widely recognised internationally as asignificant force in emergency relief to societies inconflict, its commitment to grassroots development intransitional societies and in contexts of post-conflictreconstruction garners less attention.

Frequently, Village Health Committees (VHCs)represent the link between healthcare services andbeneficiaries upon which IMC builds. These VHCs andother civil society organisations are vital to building aground-up understanding of and demand for democraticprocesses and good governance. IMC seeks to establish orreinforce VHCs in every transitional context in which itworks, including Liberia, Sierra Leone, Kenya, Uganda,and Burundi. In Somalia, where IMC has worked since1992, the VHCs are essentially the sole functioninghealthcare system – based around reproductive, maternal,and primary healthcare programmes. They exist within awider network of Village Development Organizations,which cut across multiple sectors, including education,water and sanitation, animal husbandry, and can be linkedto alternative livelihood programmes.

Community-based approachesCommunity-based approaches to healthcare also provideIMC with a primary point of access to the state at thedistrict and regional health levels – i.e. district healthofficers and clinical staff. In many such cases, nationalstaff are trained and deployed, using incentives wherenecessary, while a variety of technical, financial, andoperational support is provided to the state systems.

Community-driven development programmes canbuild social capital by strengthening local organisationssuch as community action groups, district health boardsand water user groups. Social funds can be used to givecommunities and user groups a voice in projectplanning, budgeting and supervision, while boostingcapacity for self-governance at the base.

Participant communities are involved in prioritisinglonger-term activities through participatory needsassessments before programme implementation. Whereintegrated activities recover livelihoods and securedisposable incomes, IMC has successfully establishedcost-recovery mechanisms and community financingschemes to assist communities to access health servicesafter it has left the community.

A participatory approachIMC’s participatory approach to community-basedprimary healthcare seeks to build capacity in poor ruralcommunities to provide sustainable health deliverythrough community mobilisation for training and jobcreation, as well as by linking district, regional, andnational health authorities in health policy forums.

For example, by employing a community-basedstrategy that focused on improvements to both thesupply and demand sides of the healthcare system inAzerbaijan, the gap between a fragile state’s availablesupport for the health sector and the local healthcareneeds of low-income families was successfully closed.

The project’s participatory approach to its planningand implementation stages with communitystakeholders – including Community Action Groupsand Community Health Management Committeesestablished by IMC – gives the entire programme apotential for replication anywhere in the world where



there is a need for improved healthcare infrastructure inthe context of limited economic resources and a dearthof healthcare financing opportunities.

By delivering training to local providers, mobilisingcommunities, and strengthening local institutions withinthis framework for capacity building, IMC is able tosignificantly strengthen the health sector and increaseaccess to quality health services in the long term.

Partnering with the Ministry of HealthInteraction with the Ministry of Health at a nationallevel is as vital as partnerships at the local level inbringing about change. By collaborating closely withthe Ministr ies of Health in Sri Lanka, Indonesia,Lebanon, Pakistan, and Sierra Leone at both regionaland central levels to influence practice and policy, IMCreinforced its mental health training activities for healthproviders at the local level. With the resulting localactivities, amendments to national policies to includemental health into basic primary health packages, andadditions to medical and nursing school curricula, thetraining programmes successfully served to createenduring mental health service delivery within theprimary care framework.

Building the capacity of local partnersIn keeping with its mission to promote self-reliance,IMC partners with local NGOs and community-basedorganisations and builds their management capacity toprovide appropriate results-oriented programmes in linewith best practice interventions.

These partnerships build local capacity by creatingstrengths that offset disaster-related vulnerability. Forexample, IMC provided technical and managementtraining to numerous Kenyan organisations followingthe bombing of the US Embassy in Kenya. Theseagencies included the St John Ambulance, KenyattaNational Hospital, Nairobi City Council AmbulanceService and Fire Brigade, and the Resuscitation Councilof Kenya. Following the Tsunami in Indonesia, IMCpartnered with a national first responder, Ambulan 118,to build the logistic and administrative systems thatwould allow it to deploy resources more rapidly –something it did very effectively following theearthquake in Yogyakarta in May 2006.

Building capacity in fragile statesBecause of their difficult context, fragile states requireconsiderable thought and planning when it comes toinvesting in and implementing relief and developmentwork. Engagement at all levels – from governmenthealth workers to the Ministry of Health and to localNGOs – and a long-term vision as to how theseactivities will play out from beginning to end are criticalto a programme’s success. In these environments, it willprobably take a long time to implement a given projectaccording to international standards, while some partnersmay not have the capacity to carry out key activities and

meet goals as expected. Despite these challenges,sustainable progress can be made, particularly if the focusis on providing immediate relief while enabling self-reliance through training and capacity building.

Josephine Garnem came to International Medical Corps in1999 when her country, Sierra Leone, was at civil war. Shejoined a small team that helped build and sustain one of thecountry’s most successful healthcare programmes, where survivorsof the conflict were offered basic healthcare and post-traumaticstress counselling, and child soldiers and young women couldreceive complex surgical interventions. The programme alsotrained traditional birth attendants in proper delivery methods,dramatically reducing the mortality rate for children and mothers,and most of the Ministry of Health nurses, many of whom arestill serving their communities. In 2001, deciding to spread herwings, Garnem worked in Pakistan and Afghanistan for nearlytwo years training young Afghans and Pakistanis in finance andhuman resource management. She then joined IMC USAheadquarters staff in January 2003 where her work continues tohave a global impact.

International Medical Corps (IMC) was established 25years ago by volunteer doctors and nurses as a non-profit,voluntary organisation. Its mission is to improve the quality oflife for vulnerable populations through health interventions andrelated activities that build local capacity in underserved areasworldwide. IMC provides healthcare through training,rehabilitates devastated healthcare systems and helps bring themback to self-reliance. Since its inception IMC has deliveredUS$969 million of assistance and health services to tens ofmillions of people in more than 50 countries.

IMC Headquarters1919 Santa Monica Blvd.Suite 400Santa MonicaCA 90404, USA

Tel: +1 310 826 7800Fax: +1 310 442 6622 Email: [email protected]: www.imcworldwide.org

Lessons learned

• Work with a long-term vision from the beginning of theengagement in health services.

• Engage the local government healthcare staff to provideinformation on priority health topics and provide medicalexpertise.

• Building partner capacity while implementing a projectaccording to international standards and requirements takesyears.

• Not all local partners have sufficient capacity to implementprojects effectively and meet key goals without additionalsupport and mentoring.



Water and sanitation are taken for granted by mostpeople. However, one in eight people around the

world do not have clean drinking water, some 900million people in total. Furthermore, one in three donot have anywhere safe to go to the toilet, a total of 2.5billion. This masks the fact that the only option foralmost half these 2.5 billion people is open defecation –in fields, gutters or bushes – a daily reality for 665million people in India alone.

Millennium Development Goal (MDG) 7, Target 10,outlines the global ambition to halve the proportion ofpeople without access to water and sanitation by 2015.

One in eight people around the world do not have clean drinking water, some 900 million people in total. Furthermore, one in three do not have anywhere safe to go to the toilet, a total of 2.5 billion.

However, at current rates of progress, in sub-SaharanAfrica the water target will not be met until 2035 andthe sanitation target will not be met until the 22nd century. This is a crisis compounded by rapidurbanisation. Nowhere is urbanisation happening as fastas in Africa, where by 2030 more people will be urbandwellers than rural dwellers. Because most Africancountries are not managing to keep up with risingdemand for housing and services, this is noturbanisation, but ‘slumisation’.

A gendered crisis that holds backprogress on health and educationIn much of rural Africa and South Asia, women and girlsspend on average 15 to 17 hours a week collectingwater, often from dirty, unprotected sources as thewoman in Burkina Faso in the photo on the right isdoing. Access to safe water near the home would endthis daily drudgery, but also allow women to increasetheir incomes by engaging in productive work. Onestudy from rural India suggests that reducing water

The silent crisis – why we need a globalframework for action onwater and sanitation Barbara Frost

Chief Executive, WaterAid

There is a silent development crisis gathering pace around the world today, including manyCommonwealth countries. It is silent, because it affects primarily those who have the least

power to speak up: women, children, and those living in extreme poverty. Every year, 1.4 millionchildren die from diarrhoea directly caused by unsafe water and poor sanitation, and hundreds ofmillions of children miss school as a result of being ill. This crisis is holding back human andeconomic development. The current response of the international community is inadequate. Toresolve this situation a ‘global framework for action’ is required.

Sophie Zongo collects water from a pond rimmed with animal faeces in hervillage of Bayandi Palogo, Burkina Faso.

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collection to one hour a day would enable a woman toearn an additional US$100 a year, a significant amountwhen many live on less than $2 a day.

Collecting water also impacts heavily on girls’education. In Tanzania, school attendance levels are 12per cent higher for girls in homes 15 minutes or lessfrom a water source, than in homes an hour or moreaway. Furthermore, UNDP estimates that about half thegirls in sub-Saharan Africa who drop out of primaryschool do so because of poor water and sanitationfacilities.

Often this water is not even fit for humanconsumption – it can spread diseases like diarrhoea andcholera. Every year, 1.4 million children die from

diarrhoea directly caused by unsafe water and poorsanitation. That is 4,000 children dying every day forwant of these basic human rights. Diarrhoea is thesecond biggest killer of under-fives around the world,and kills more children than AIDS, tuberculosis andmalaria combined. The associated costs of illness are alsosignificant. It is estimated that 443 million school daysare lost each year due to water-related diseases. Theseillnesses also hinder the health sector – at any one time,half of all hospital beds in developing countries are filledwith people suffering from water-related diseases. Theseavoidable costs equate to about 12 per cent of publichealth spending in sub-Saharan Africa.

Institutional fragmentation means that in many countries, responsibility for

delivering these essential services is split across several ministries.

Scarcity or inequitable distribution?Reading the global media in recent years, one wouldthink that climate change and water scarcity are theleading drivers of poor access. This is far from the case.While it is a serious problem that by 2030 more thanhalf the world’s population will live in high-risk areasof water scarcity, this is first and foremost a justiceissue. There is enough water to go around, if it isshared equitably. The photo above bears this out. Thegreen fairways of the Royal Nairobi Golf Club arenext to Kibera, a slum where one million people liveand where access to safe water is very low. Across theworld, there would be enough water for everyone if it

The irrigated Royal Nairobi Golf Club next to Kibera, a slum where onemillion people live with poor access to water.

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Relative aid levels to health, education and water and sanitation (five-year moving average).

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was shared in a fair way, climate change or no climatechange.

The cr isis in water and sanitation hits the poorhardest. Two-thirds of the 900 million people withoutwater live on less than US$2 a day. Furthermore, therichest 20 per cent in many Commonwealth countriesare three times more likely to use improved sanitationthan the poorest 20 per cent. This comes as no surpriseto poor people themselves. On the rare occasions thatthey get asked, poor people frequently put access tosafe water at the top of their priorities, ahead of healthand education.

Scandalously, the urban poor even pay more for theirwater than their richer neighbours. This is becausethey cannot afford the large fees required to beconnected to the network, and must therefore paywater vendors by the bucket. These vendors, with theirinefficient supply chains, sell poor people water fortypically around 10 times more than the networkedrate, litre for litre.

Looking at the distribution of aid by country also reveals worrying

trends, such as middle-income countriesreceiving the lion’s share of aid.

The World Health Organization has found that whenall the benefits of access to water and sanitation arequantified and added together, every dollar invested inwater and sanitation brings at least an US$8 return. Butit is the poor who are least able to finance their wayout of poverty. Particularly with water, there is amandate for governments to provide services for theircitizens. Without getting into debates about who paysand who provides, all can agree that governments needto fulfil this mandate. In line with this, the UNrecognised the right to water for personal and domesticuse in 2002.

The drivers of the crisisGiven the scale of the crisis, and the massive potentialbenefits of action, why is so little happening? There are amultitude of reasons, and the responsibility lies withboth developing country governments and donorgovernments. First of all, institutional fragmentationmeans that in many countries, responsibility fordelivering these essential services is split across severalministries. This is especially true for sanitation, whichoften falls between the gaps of ministries of water,health, education and environment. Accountability isfurther undermined by the fact that the burden of thecrisis is borne disproportionately by women, childrenand those in extreme poverty – the very people whohave least voice in key decision-making processes.

Analysis of sector expenditure often reveals that, inurban areas, money is often not going towards financingnew connections for the unserved, but towards

improving services for the non-poor who already haveconnections. An analysis of aid levels to the sector revealshow donor countries are complicit in the misallocationof financing, with roughly three times as much aid goingto ‘large systems’ rather than basic levels of service.Looking at the distribution of aid by country also revealsworrying trends, such as middle-income countriesreceiving the lion’s share of aid. For example, Jordan,Malaysia and Tunisia all received an annual average ofUS$80-100 million over 2002-2006, despite all havingaround 95 per cent water coverage. Guinea-Bissau,Liberia and Togo, with around 50-60 per cent coverage,received an average of US$1-2 million over that time.

A development narrative with a missinglinkPolitical leaders rarely extol the virtues of toilets. Healthand education are far easier ideas to sell. This neglect isreflected in aid levels over the last decade, as the graphshows. Since 2000, the proportion of aid to health andeducation has increased significantly, while theproportion for water and sanitation has declined andthen stagnated.

This approach, when compared to the success of Asian‘tiger’ states such as South Korea and Malaysia, appearsto pay little heed to history. In the 1960s, thesedevelopmental states front-loaded investments in waterand sanitation, leaving investment in health until afterthese building blocks had been laid. For example, SouthKorea made huge investments in water and sanitationduring the 1960s, when its per capita income was thesame as Ghana’s. During that decade, under-fivemortality more than halved, while the number ofmedical staff stayed virtually the same. Only in the late1970s did South Korea start investing in health systemsand increasing the numbers of medical staff, capitalisingon the fact that most of the population then had a safewater supply and access to toilets.

Since 2000, the proportion of aid to health and education has increased significantly,

while the proportion for water and sanitation has declined and then stagnated.

What would a global framework foraction achieve?The main problems identified have been low levels offinance, and the fact that the money is not going tothose countries that most need it. A global frameworkfor action would aim to solve both these problems bydoing two things. Firstly, it would catalyse more donorsupport for the sector. Secondly, it would provide amechanism for co-ordinating all financing, so the moneycan flow through to the places the water and sanitationcrisis is hitting hardest.



A global framework would ensure everybody is on thesame page, so no countries are ignored, and no effortsare duplicated. It would also bring clear lines ofaccountability for poor performance. There have been awhole host of international commitments in this sectorover the last decade, but they have failed for severalreasons. They have not been binding, and have consistedof vague platitudes instead of clear plans of action.

Drawing on successes from similar initiatives to co-ordinate action in the health and education sectors,WaterAid is calling for three key elements of a globalframework for action:

• An annual report to review progress

• An annual meeting of key people to act on the report’sfindings

• A commitment from donors that if a country has acredible plan for achieving the water and sanitationMDGs, they will not doom it to failure by notproviding enough money.

These three essential components are outlined inmore detail below.

Essential components of a globalframework for action

An annual review of the sector. This report wouldlook at how much money is being spent, and howeffectively progress is being achieved. Crucially, it woulddo this separately for water and sanitation, so the latter isnot left behind, as has often been the case in the past.The UN’s Global Annual Assessment on Water andSanitation (GLAAS) report provides a good startingpoint for this.

An annual high-level meeting. This annual meetingwould be attended by political representatives of donoragencies, and by government ministers from countriesin regions where the MDGs are likely to be missed. Atthe meeting, these people would jointly decide on keyactions based on the report’s findings. The aim wouldbe to build consensus, and ensure everyone is on thesame page.

No credible national plan should fail for lack offinance. One of the reasons for the lack of progress onwater and sanitation is poor planning and monitoringprocedures in many developing countries. Donorsshould help these countries to develop credible plans,which would include realistic annual targets withtimelines, and costed strategies for water supply andsanitation, as well as a system for monitoring the plan.Once a country has a credible plan, donors shouldcommit to providing the necessary financing to ensureit is successful.

A further aim of the high-level meeting would be toidentify which credible plans are not being properlyfinanced. Donors would then jointly decide on how toalign their money to finance those plans.

Tackle the crisis urgentlyThe water and sanitation sectors are among the weakestperforming MDG sectors, with sanitation trailingfurthest behind. The critical weaknesses in water andsanitation are down to a failure of leadership. Theinternational development community must nowurgently bring together high-level bodies that can targetresources at the areas of critical failure. Without aframework for action, we will continue to seeunbalanced financial inputs and diminished outcomes.

The water and sanitation sectors are among the weakest performing MDG sectors, with

sanitation trailing furthest behind.

The beginnings of a global framework for action arealready appearing, championed by the Dutch and UKgovernments. However, there is still a long way to go,and more high-level support is needed. This is whyWaterAid calls on governments to urgently tackle thecrisis by agreeing to a global framework for sanitationand water, including an annual review of the sector, anannual high-level meeting, and a commitment that nocredible national plan should fail for lack of finance.

Barbara Frost is the Chief Executive of WaterAid. She joinedWaterAid in September 2005 after nine years as ChiefExecutive at Action on Disability and Development (ADD).Barbara has previously worked in Africa for over seven yearswith ActionAid, Save the Children, and Community AidAbroad, managing programmes in Mozambique and Malawi.

WaterAid is a leading independent organisation which enablesthe world’s poorest people to gain access to safe water, sanitationand hygiene education. We work in Africa, Asia and the Pacificregion and campaign globally with our partners to realise ourvision of a world where everyone has access to these basic humanrights.

WaterAid47-49 Durham StreetLondonSE11 5JDUK

Tel: +44 (0)20 7793 4500Fax: +44 (0)20 7793 4545Website: www.wateraid.org



Hunger has a devastating effect on people fromcradle to grave. Poor nutrition is a contributory

factor to the deaths of more than 3.5 million mothersand children under five years of age each year (see box).

But numbers, however shocking, do not tell the fullstory of this crisis. Behind every statistic are real familiesstruggling to survive, such as the 10-year-old girl inMalawi removed from school to sell charcoal at the localmarket so her family could afford food; and the parentsin Pakistan who were forced to send their 12-year-oldson to work as a labourer because they could not repay a loan from moneylenders to feed their family. Women and children are hardest hit by the food crisis asthey are first to cut back on what they eat. Even womenof childbearing age are likely to give up food for their husbands.

East Africa is one of the regions bearing the brunt ofthe crisis. The area is on the brink of a humanitariancatastrophe, with more than 20 million people facing acritical shortage of food and water. The immediatecause, typical of hunger hotspots across the globe, is alethal cocktail of changing weather patterns, risingprices, conflict and displacement.

Many areas of Kenya, for example, have suffered threesuccessive failed rains, while violence and displacementafter the December 2007 election has further reducedfood production. In Nairobi, the price of maize is 70 percent higher than the normal level for this time of year,which is a level many people can barely afford. The UNhas described the situation in the country as the worstfor a decade.

Countries like Kenya need immediate emergency aid if suffer ing for millions is to be averted.Commonwealth leaders also have a duty to take longer-

Is the crisis over? Not the one thataffects the hungry

Dame Barbara StockingChief Executive,

Oxfam

Is the crisis over? It depends what crisis you’re talking about. While the rich world anxiously waitsto see if the green shoots of economic recovery take root, life continues to get tougher for

hundreds of millions of poor people across the Commonwealth and beyond. For them, the creditcrunch and economic crisis did not mark the end of the good times. Instead the recession made lifeharder still for those already struggling to cope with rising food prices that today have left over abillion people hungry – one in six of the world’s population. That food crisis remains as intense asever and the number of hungry people is still rising.

From cradle to grave: the human cost of hunger

Malnutrition destroys people’s immune system and increasestheir risk of dying from diseases such as diarrhoea, malaria,measles and respiratory infections. But different age groupsare also affected in different ways:

Pre-birth: 13 million children are born annually withintrauterine growth restriction meaning that stunting sets ineven before children are born due to the hunger experiencedby the mother.

Infants: The period from birth up to 2 years is crucial forchildren’s growth and development. Malnutrition at this stagecan lead to irreversible damage to physical and mentalgrowth/development of children.

Children: Children from families with insufficient money tobuy food face double damage to their education. First,malnutrition causes physical and intellectual impairments inchildren. Second, hunger forces families to stop sending theirchildren to school in order to save money to buy food.

Adults: Chronic malnutrition results in reduced capacity andenergy to work. The cycle between poverty and hunger is avicious one with poverty making people more susceptible tohunger and malnutrition, which in turn push people evendeeper into poverty – the ‘poverty trap’.

Parents: Lack of nutrition during pregnancy increases thechances of ill health at the time of pregnancy, childbirth andthe later stages of her life. More than 3.5 million mothers andchildren under five years of age die unnecessarily each yeardue to poor nutrition.

Elderly: Lack of adequate and appropriate food and access tohealth services means that by the time they enter old age,they are already in chronic ill health. The impacts of ageing insuch populations can be visible by the time people are 40years of age. This is particularly so for women who, after yearsof hard physical labour, poor nutrition and many pregnancies,are on the threshold of old age by the end of theirreproductive years.



term action to prevent this crisis continuing and toprevent future crises.

This is not just a problem for Africa. The situation inIndia, Nepal, Pakistan and Bangladesh is rated asalarming by the International Food Policy ResearchInstitute’s Global Hunger Index.

The uncomfortable truth is that without urgentaction, feeding the world is likely to become muchharder in the foreseeable future. The Feeding of the NineBillion, a report published in January by Chatham Houseand part-funded by Oxfam, found that the upwardspressure on food prices is likely to intensify in thecoming decade as the world’s population increases,climate change takes hold, and energy and water scarcitybecome increasing problems. The IntergovernmentalPanel on Climate Change warns climate change couldput between 40 and 170 million more people at risk ofhunger worldwide.

Already the effects of climate change are being felt.Farmers in developing countries report that changingseasons mean they no longer know when to plant theircrops, often with devastating consequences. Coffeeproduction in Uganda, for example, is down 40 per centin recent years.

Action to tackle climate change will be vital if futurecrises are to be averted, which essentially means richcountries reducing carbon emissions and providingmoney to help developing countries control their owncarbon footprints and to adapt to the climate changethat is already happening. Oxfam estimates thatworldwide, US$150 billion is needed annually inaddition to existing aid.

The current food crisisBut climate change is not the principal cause of thecurrent global food crisis. The story most often heard isthat this began in 2007, caused by a combination of highoil prices, rising demand, subsidised biofuels that tookland out of food crop production all aggravated byspeculation.

According to this version of events, the crisis followeda so-called ‘Goldilocks’ era when, it is argued, foodprices remained neither too high nor too low: priceswere high enough to support poor country farmers butlow enough to keep the number of hungry peoplerelatively stable.

But while this analysis is a good description of eventsfrom 2007 onwards, it ignores the fact that more than800 million people in the world suffered from chronic

hunger before prices began their steep upward path.That is more than the population of the United States,Indonesia and Brazil combined.

Donors’ attitude during this ‘pre-crisis’ period wascomplacent at best. Agricultural aid to developingcountries fell by 75 per cent between 1980 and 2008,from US$20 billion to just $5bn a year. Two-thirds of the world’s rural poor, particularly those living in remoteor marginal areas, did not benefit from the littleinvestment that was made.

Agricultural investment became unfashionable; foodwas just another commodity to be traded according tothe economic law of comparative advantage. Poorcountries, such as Haiti, were persuaded to slash tariffson foodstuffs, exposing domestic farmers to foreigncompetition. Countries whose farmers could notcompete with imports were encouraged to allow theiragriculture to wither on the vine.

The all-too predictable result was that when globalprices shot up, many poor countries were left helpless in the face of hunger. To make matters worse, thecombination of misguided or inadequate nationalagricultural policies, unfair trade rules and pooreconomic advice created a situation where big traders and supermarkets were the big winners fromhigher prices.

As prices peaked, the market power of Nestlé,Monsanto and Bunge among others allowed them todrive up profits at the expense of small farmers and consumers. Oxfam’s report Double-Edged Prices,published on World Food Day in October 2008, foundthat Bunge’s profits in the second fiscal quarter of 2008increased by US$583m, or quadrupled, compared withthe same period in 2007. Nestlé’s global sales grewnearly 9 per cent in the first half of 2008, and the seedcompany Monsanto reported a 26 per cent increase inrevenue to a record US$3.6bn in the fiscal quarter thatended May 31, 2008.

Even after global prices fell at the end of 2008, thecost of food at markets used by poor people remainsstubbornly high. Global prices are higher in September2009 than they were in November 2008 – below theirpeak in summer 2008 but around 25 per cent higherthan they were in 2006. In many African countries weakmarket integration means that prices are currentlyhigher than during the peak of the global food crisis.

The Intergovernmental Panel on Climate Change warns climate change

could put between 40 and 170 million morepeople at risk of hunger worldwide.

More than 800 million people in the world suffered from chronic hunger before

prices began their steep upward path. That is more than the population of the

United States, Indonesia and Brazil combined.



Intelligent investmentWhere free trade has failed, intelligent investment cansucceed. Agricultural aid can and should play animportant part in helping people to adapt to climatechange by providing drought resistant seeds, buildingirrigation systems and helping farmers to diversify their produce and manage risk. The solutions can beamazingly simple, for example swapping chickens forducks in parts of Bangladesh that are at risk of flooding.

Reducing dependency on mineral fertilisers, whoseprice tracks that of the oil used to make them, may bebad news for agribusiness but it will make farmingmore sustainable and reduce carbon emissions.According to research by the University of Michigan, aswitch to organic production could even boost yields in developing countries. At the same time – given theright incentives, which may emerge through theCopenhagen Climate Change Treaty – organicproduction could sequester carbon in soils and mitigatethe impact of greenhouse gases.

Increasing the local responseChanging the farming habits of vast swathes of the globewill take time, money and political courage. With theeconomic crisis undermining broader faith in freemarket fundamentalism, there is an opportunity for poorcountries to adopt a more active trade policy to protectdomestic food production, whether small-scale farmers,strategic agricultural sectors or emerging companies.

But trade measures must be considered andproportionate. Indiscriminate export bans on food stuffsare likely to do more harm than good: hurting poorpeople reliant on food imports and undermining trustbetween countries as they respond to the crisis.

The good news is that in Africa, leaders have madecommitments to increase their investments inagriculture, spending 10 per cent of national income onthe sector. Others should follow suit.

Improving the supply of food in developing countriesis a big part of the solution but more also needs to bedone to ensure that poor people are better able to

survive shocks such as food price rises. Poor people,particularly women, are vulnerable to changes in foodprices with many spending up to 80 per cent of theirincome on food. Developing countries should look toincrease social protection measures for vulnerablepopulations – including cash payments and employmentcreation schemes for those at risk of hunger.

Ready for international supportTo significantly increase agricultural investment, let aloneintroduce social safety nets, many countries will needoutside help. And there are welcome signs that richcountries are ready to learn from the mistakes of the past.

In July 2009, President Obama persuaded his fellowleaders to sign up to a US$20bn package of agriculturalinvestment at the G8’s annual summit in Italy, signallinga break from three decades of neglect and policy failure.The response may be little and late but the good news isthat the food security of hundreds of millions of poorpeople is finally being taken seriously at the highestlevel. Most of this money needs to go to supportsmallholder farmers, since they constitute the majorityof the world’s poor and they have the potential toengage better in markets and sell their surplus.

The bad news is that the G8’s $20bn fund is spreadover three years. Even if all was new money it would notbe sufficient to return agricultural investment to the1980 level, never mind meet the challenges of the future.

There is no doubt that the money can be found if thepolitical will is there. Even US$20 billion a year foragricultural investment would be a drop in the oceancompared to the $18 trillion mobilised for bank bailoutsto avert financial and economic collapse in the North.

Barbara Stocking is Oxfam’s Chief Executive. Barbara joinedOxfam GB as Director in May 2001. She was awarded aCBE in the 2000 Millennium Honours List for her previouswork at the NHS and in 2008 she was awarded DameCommander of the British Empire in the Queen’s BirthdayHonours. Barbara was born in Cambridge then moved toRugby. She studied at Cambridge University and now lives inOxford. She is married with two sons.

Oxfam has been fighting poverty and injustice for over 60 years,making it one of the most experienced international developmentagencies in the world. The NGO now works in more than 70countries responding to emergencies, campaigning for change andsupporting long-term development, including agriculture.

OxfamOxfam House, John Smith DriveCowley, Oxford, OX4 2JY United Kingdom

Tel (from UK): 0300 200 1300 Tel (worldwide): +44 (0)1865 47 2602 Website: www.oxfam.org.uk

Organic production could sequester carbon in soils and mitigate the impact

of greenhouse gases.

There is no doubt that the money can be found if the political will is there.

1. Central2. Simbu 3. Eastern Highlands 4. East New Britain 5. East Sepik6. Enga7. Gulf8. Madang 9. Manus10. Milne Bay

11. Morobe12. New Ireland13. Northern14. Bougainville Autonomous Region15. Southern Highlands16. Western Province17. Western Highlands 18. West New Britain 19. West Sepik20. National Capital District

The PNG Office of Higher Education Commonwealth Report 2009HIGHER EDUCATION & DISTRICT SERVICE

SETTINGAt present, the higher education community services in Papua New Guinea (PNG)are weak in the 89 districts and villages. The weak linkage is manifested in theshortage of appropriately trained skilled human resources and relevant programmesand monitoring systems. Community service is receiving new prominence in the lightof new impact projects such as the 30 year Liquefied Natural Gas (LNG) project, themain access roads to open up the hinterland for economic development and servicedelivery to the districts, including demands of the government’s vision of income takeoff for all by 2050. Effective service delivery, require curriculum reform andrealignment; expanding research and technology transfer through innovation.

FOCUS ON 89 DISTRICTSThe focal points of developing PNG are the 18 provinces, the National Capital Districtand the Autonomous Region of Bougainville. Major development projects are locatedin the 89 districts and the 10, 000 Local Level Government areas.

A viable service delivery policy means research and teaching and knowledge transferprogrammes focuses on professional teaching by user-driven research, and problemsolving institutions of higher education. The promotion of service class highereducation system is supported by a system of IHE performance rating on specifiednational objectives delivered through professional teaching of Agriculture;Engineering; Economics; Environmental climate science; Health sciences; Politics,anthropology and social studies and Statistics. These in turn will be supported bymanagement and leadership skills for implementation through courses incommunication and negotiation; human resource management; financialmanagement; monitoring and evaluation; project design and management andstrategic determination skills.

Thus by working with district authorities, the IHE is adding value to the role of highereducation as part of the whole of government service delivery system and similarly,districts are accessing higher education expertise and higher education are learningfrom the local level governments and benefit from synergies accruing from the impactprojects such the Liquefied Natural Gas, mining & petroleum; manufacturing andtrade; banking services; science and engineering, natural resources, agriculture,fishery, timber, medicinal drug, biology, climatic conditions agriculture, sociology andanthropology and Teacher preparation and certification.

District service is critical because it is contributing to border development throughinformation exchange system – a partnership that drives innovation, research andbusiness competitiveness within small-to-medium-sized companies in manufacturingindustries in the international border area, by aligning our programs to match theneeds for high impact programs.

We believe Higher education is equal peer in PNG’s service delivery and the largerole higher education plays within society makes the focus to district, the minimalobligation for higher education towards transforming the country. Our motto isExpanding the Frontier of Higher Education Service.

Director General2nd Floor Mutual Rumana, Waigani Drive,P.O. Box 5117, Boroko, Papua New GuineaEmail: [email protected]

Source: http://en.wikipedia.org/wki/file:PNG Provinces

Efficient transport system is needed to increase the movement of people andgoods to market destinations

Village small holder vegetable garden. Food production needs to increase involume and quality with large farming systems and management technology for

downstream to be viable

Source: PNG Office of Higher Education 2008



When financial systems fail, governments actbecause they know the cost of inaction. Unlike

failing banks, failing education systems don’t makeglobal headlines – but the costs are no less real. Unequalopportunities for education fuel poverty, hunger andchild mortality, and reduce prospects for economicgrowth. The human and financial damage created by theglobal crisis in education is enormous. Yet governmentsacross the world continue to drag their feet in dealingwith that crisis.

Education has the potential to act as a great levelleracross countries and within societies. The notion thateducation plays a vital role in equalising opportunity iscentral to the Education for All commitments made byworld leaders in 2000. In the Dakar Framework forAction, the international community adopted sixambitious targets for ensuring quality education for all children, youths and adults by 2015. The goalsencompass access to early childhood care and education,free universal primary education, putting girls and boyson an equal footing, improving the quality of education

provided for all children and expanding learningopportunities and literacy skills for those of all ages.

However, the 2009 edition of the Education for AllGlobal Monitoring Report documents that on currenttrends, many of these global commitments will not bemet by 2015. Though there has been remarkableprogress in education, with some Commonwealthcountries making the most str iking breakthroughs,progress has been too slow and uneven for many of theDakar commitments to be reached. The onset of theglobal economic crisis jeopardises the gains that havebeen made. The slowdown in economic growth willespecially hit many of the world’s poorest countries,whose governments do not have the fiscal capacity torespond to the crisis. With many poor householdssuffering losses in income, the improvements in humandevelopment and poverty reduction made over the lastdecade could be rapidly reversed.

Large opportunity gaps exposedThe extent of global inequality in educationalopportunity should make policy-makers pause forthought. While over one-third of children in richcountries complete university, a much smaller share evencompletes primary education in much of sub-SaharanAfrica (with just 5 per cent reaching university level). A child in the United Kingdom is twice as likely tocomplete university as a child in Uganda is to finishprimary education. One in three children in developingcountries (193 million in total) reach primary school agesuffering from malnutrition and impaired cognitivegrowth – a figure that rises to over 40 per cent in partsof South Asia.

Education: theother global crisis

Dr Pauline RoseSenior Policy Analyst,

Education for All,Global Monitoring Report Team

Since late 2008, Western countries have pulled together multi-billion dollar bailout packages fortheir ailing banking systems, in an attempt to keep the wheels of the global economy in motion.

Political leaders have acted decisively to protect financial systems and to set the scene for economicrecovery. The same determination, says the 2009 Education for All Global Monitoring Report,Overcoming Inequality: Why Governance Matters, is now needed to tackle a less visible but no less urgentchallenge – that of ensuring social justice, fairness and the right to educational opportunity for theworld’s most vulnerable population groups.

Unlike failing banks, failing education systems don’t make global headlines –

but the costs are no less real.



National disparities mirror global inequalities. InKenya, for example, more than half of children amongthe poorest 20 per cent of the population are out ofschool, while only a minute fraction of those from therichest families are not attending primary school. Otherdeeply entrenched barriers to education result fromgeographic circumstances, gender, language andethnicity.

The picture, of course, is not all bleak, and the 2009Report highlights some impressive national and regionalperformances. Tanzania and Ethiopia have both reducedthe number of children out of school by over 3 million,due to policies such as the abolition of school fees andambitious rural school construction programmes. InLatin America, several countries are enrolling andkeeping more children in school through innovativecash transfer programmes for the poorest households,with payments made conditional on school attendanceand health visits.

Global education deficits andCommonwealth performanceIf there is one statistic that encapsulates the shockingdivide in world education, it is the estimated 75 millionchildren of primary school age worldwide that arecurrently out of school. Projections suggest that manymillions will still be missing their right to an educationin 2015. Some Commonwealth countries are among thetop offenders: of Nigeria’s 8 million children out ofschool, only a small fraction of these have a chance toattend school by 2015. Pakistan has about 6.8 millionchildren out of school according to the latest data. Othercountries, such as India and Ethiopia, are making great str ides in getting their children into school.However, without concerted and sustained action, theinternational development target of universal primaryeducation by 2015 will move even further out of reach.

Many girls in developing countries are still unable tomake use of the opportunities offered by education. Girlsare still more likely never to enter school and are over-

represented among out-of-school children. Girls inCommonwealth countries are both in the best and worstof worlds – for example, Ghana, Nepal, Kenya andTanzania have all reached gender parity in primaryeducation. Bangladesh has seen particular progress, withstipend programmes increasing girls’ participation inschool, having positive impacts in declines in childmortality, better nutrition and better employmentopportunities for women. However, in Pakistan, there areonly 80 girls enrolled for every 100 boys at primary level.

Improving literacy is another global challenge. Fewwould deny that literacy is a key to education that alsoopens the way to better health, improved employmentopportunities and lower child mortality. Yet literacyremains a neglected goal. An estimated 776 millionadults, or 16 per cent of the world’s population, lackbasic literacy skills. Two-thirds of these are women. Fourof the planet’s most populous countries – India,Bangladesh, Pakistan and Nigeria – also have some ofthe highest numbers of adult illiterates in the world.Without greater political will, the vicious cycle ofilliteracy, inequality and exclusion will continue to be abarrier to reaching the Education for All goals.

The governance challengeAlthough the notion of ‘good governance’ in educationis debateable, the consequences of bad governance arereadily observable. They include underfinanced schools,service providers and government agencies that areunresponsive to local needs and unaccountable toparents; large disparities in school access, participationand completion; and low levels of learning achievement.

In recent years, the way in which education systemsare managed, policies developed, and resources allocatedhave come into the political spotlight. Good governancehas become a rallying call, with decentralisation, thedevolution of authority to parents and schools, andchoice and competition becoming recurrent themes inpolicy debates. But according to the Global MonitoringReport, governance reforms all too often fail to tacklethe inequalities that are holding back Education for All.

Wide-sweeping education reforms that give but apassing nod to local context, institutional capacityrequirements and equity-related issues are not havingthe desired impact. In fact the evidence shows thatimporting education blueprints from the north andapplying them uncritically elsewhere – a practice

Students Free Education Centre, Pakistan, established some 13 years ago topromote poor children of the area. Now more than 300 students study herein two shifts. Non-stop gunfire and gang warfare in the district have forcedteachers to hold classes on the rooftop of the building.

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Few would deny that literacy is a key to education that also opens the way to better health, improved employmentopportunities and lower child mortality. Yet literacy remains a neglected goal.



frequently encouraged by the development community– will not lead to long-term improvements in areas suchas education resource allocation, school managementand teacher recruitment.

The decentralisation of national education systems indeveloping countries offers a perfect example. In the1990s, such reforms undoubtedly brought educationplanning closer to school communities around theworld. However, at a time when many countries werecoping with a massive expansion in education provision,financial decentralisation left different regions with evenless resources to fund learning, school maintenance andteacher development. In Commonwealth countries, suchas Nigeria for example, the fiscal decentralisation has leftr icher regions with the lion’s share of governmentresources, with poorer regions getting left behind.Ghana, on the other hand, successfully created a schoolgrant scheme in deprived districts to replace lost incomeonce tuition fees were eliminated.

Competition and its corollary, choice, haven’t provedto be the antidote for the failings of public educationsystems as many expected. In the USA, the private sectorand civil society have been contracted into themanagement of public school systems under variousforms of public-private partnership (such as charterschools). However, the gains to efficiency and educationperformance have been uneven and remain inconclusive.

Another trend is the rapid growth in recent years oflow-fee primary schools in countries such as Ghana,India, Kenya, Nigeria and Pakistan. Although the extentof their expansion varies, low-fee private schools seemto be spreading in areas that serve some of the mostdisadvantaged populations, including children in slums.However, there is little evidence to suggest that theyoffer a genuine alternative to affordable, accessible, high-quality public education. Rather, they have grown bydefault, more a reflection of the poor quality ingovernment provision and shortage of public schoolsthan a positive development.

Education financing gaps: the dangers ofdwindling aidWhile national governments bear the greater share ofeducation costs, international aid plays a crucial role insupporting policies that have helped increase access,enhance equity and improve education quality. InTanzania, aid has supported an education sector strategy

that has cut the number of out-of-school children byabout 3 million. Without aid, many more childrenwould either be out of school or sitting in even morecrowded classrooms, without books or desks.

Although aid is vital in many countries to help meeteducation and other development goals, global trends inaid are a serious cause for concern. Even before theonset of the financial crisis, the donor community wasfalling short of its commitment that no credible nationaleducation plan would fail for want of finance. Whileoverall development assistance and aid to education hasincreased since 2000, there are still major funding gaps.The Report has estimated a shortfall of about US$7billion annually needed to finance a handful ofeducation goals in low-income countries. Multilateralaid frameworks for supporting Education for All, such asthe EFA Fast Track Initiative, are also failing to meetexpectations. Inadequate donor support means thatcountries with approved plans will face an FTI shortfallof US$2.2 billion by 2010.

The threat that the current financial crisis poses foreducation and other social sectors is undeniable. In richcountries, aid development budgets are coming underincreased pressure. National governments in middle- tolow-income countries are being faced with toughchoices, with lower growth putting fiscal pressure onsocial sector budgets, resulting in freezes in new schoolconstruction and teacher recruitment and salaries. Sotoo are households. Lessons from the East Asia crisis ofthe 1990s show poor families often having to withdrawchildren from school and put them into child labour

Even before the onset of the financial crisis, the donor community was falling short of its commitment that no credible national

education plan would fail for want of finance. Mother walking to Mazimbu school with her children, Tanzania.

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when faced with financial shocks. There is a real dangerthat much of the progress made since 2000 in humandevelopment and poverty reduction could be erased as aresult of the current crisis.

UNESCO is calling on governments to invest insafety net and social protection programmes to safeguardthe poor and vulnerable from the worst effects of thecrisis and to enable children to pursue their education. It is critical that fiscal packages with a strong educationfocus be adhered to in developed countries, as seen inthe United States. Singapore is another model to follow.The Singaporean Ministry of Education is predictingthat education spending will increase by 25 per cent in2013. According to UNESCO, there is no justificationfor reductions in national spending and international aidto education.

Ending inequality’s ‘lottery by birth’The circumstances into which children are born, theirgender, the wealth of their parents, their language or thecolour of their skin should no longer define theireducational opportunities. Ending education’s ‘lottery bybirth’ is perhaps one the greatest global challenges of the21st century. The challenge is one that concerns allnations, since in a globalised world poverty and sufferingdo not remain confined within borders, but spill over inthe form of conflict for scarce resources, mass migrationand environmental degradation.

The response to the financial crisis demonstrates what governments can accomplish when faced withextraordinary times. But if governments continue to fail

to tackle deep and persistent inequalities in education,targets set by the international community will be missed– in some cases by spectacular margins. Most importantly,millions of children around the world will continue to beconsigned to lives of poverty and diminished opportunity.

The opinions expressed in this article are solely those of theEFA Global Monitoring Report team and do not necessarilyreflect those of UNESCO.

Dr Pauline Rose is a Senior Policy Analyst with theEducation for All Global Monitoring Report team. She is anexpert in educational policy and practice and socio-economicdevelopment issues, specializing in financing and governance,democratization and aid. Based in the University of Sussex, Dr Rose worked on numerous education research projects in sub-Saharan Africa and South Asia before joining the report team.

The annual Education for All Global Monitoring Reporttracks progress towards the six international Education for Allgoals, adopted by 164 countries at the World Education Forumin Dakar (Senegal) in 2000. It assesses how well countries andregions are doing in reaching these goals, which aim to improvelearning opportunities for children, youth and adults. Preparedby an independent team based at UNESCO, Paris, the reporttracks progress, identifies effective policy reforms and best practicein all areas relating to Education for All, draws attention toemerging challenges and seeks to promote international co-operation in favour of education. The report is based on the latestglobal statistics, case studies and commissioned research. Mr Kevin Watkins is currently the report’s Director.

The United Nations Educational, Scientific and CulturalOrganization (UNESCO) promotes international co-operation among its 192 member states and six associatemembers in the fields of education, science, culture andcommunication. UNESCO is working to create the conditionsfor genuine dialogue and peace based upon respect for sharedvalues and the dignity of each civilisation and culture. Today,UNESCO’s principal priority is Education for All, which isseen as the foundation for sustainable human development andthe building of knowledge societies.

7, place de Fontenoy75352 Paris 07 SPFrance

1, rue Miollis75732 Paris Cedex 15France

Tel: +33 (0)1 45 68 10 00 Fax: +33 (0)1 45 67 16 90Emails: [email protected]

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Hagara Elementary School in Port Moresby (Hanuabada). Papua New Guineahas over 800 different languages and children can begin their learningexperience in their mother tongue.

If governments continue to fail to tackle deep and persistent inequalities in

education, targets set by the internationalcommunity will be missed – in some

cases by spectacular margins.

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In 2005, public expenditure per head on highereducation in Ghana was US$5,041, compared with

$309 at primary level. Very low enrolment rates – onlyabout 5 per cent of the relevant age cohort enrolled inhigher education in sub-Saharan Africa in 2006 – meantthat higher education opportunities were very restricted.

It was not therefore surprising that the MillenniumDevelopment Goals focused on universal primaryeducation, and that higher education was excluded.

While the formulation of the MillenniumDevelopment Goals was important in targetingdevelopment efforts onto those areas where need was,and remains, urgent, the low priority given to higher education, or even positive hostility to it, failedto recognise the essential role of higher education ineconomic and social development. While highereducation does provide individual benefits, it is also avital public good.

Universities: essentialfor economic and socialdevelopment Prof John Tarrant

Secretary General of the Associationof Commonwealth Universities

For much of the 1980s and 1990s, higher education in developing countries was seen as thepreserve of highearning elites. It was allocated a very low priority by agencies and governments

providing development assistance. This was justified by the high rate of return to individualinvestment in higher education. Higher qualifications brought economic opportunities to graduateswhich greatly outweighed the costs of higher education to those individuals and to their families. Thisview of higher education was compounded by its high cost relative to other education sectors. Fromthe late 1990s it has become more accepted, however, that higher education is an important publicgood. The author reviews the current situation and details the progress of some significant initiatives.

The Partnership for Higher Education in Africa

The Partnership for Higher Education in Africa was launched in May 2000 by the Carnegie Corporation of New York, the FordFoundation, the John D and Catherine T MacArthur Foundation, and the Rockefeller Foundation. They were joined in 2005 by theWilliam and Flora Hewlett Foundation, and in 2007 by the Andrew W Mellon Foundation and the Kresge Foundation. While maintainingeach foundation’s unique strategic focus, the foundations agreed to work together towards accelerating the processes ofcomprehensive modernisation and strengthening of universities in Ghana, Mozambique, Nigeria, South Africa, Tanzania, and Uganda.

Table 1. Foundation grants by the Partnership for Higher Education in Africa

Year Joint initiatives Individual foundation grants Grand totals

1999-2000 607,272 18,763,526 19,370,798

2001 3,627,537 32,377,040 36,004,577

2002 3,036,574 39,938,176 42,974,750

2003 1,848,932 25,665,092 27,514,024

2004 1,147,957 27,661,033 28,808,990

2005 12,218,607 44,223,210 56,441,817

2006 4,847,662 50,654,809 55,502,471

2007 6,855,699 44,119,138 50,974,837

2008 6,193,700 29,031,422 35,225,122

Totals 40,383,940 312,433,446 352,817,386

Note: The seven Partnership foundations also support higher education activities in non-Partnership countries, thus more support than is shown in thetable is being channelled to African higher education.



A much broader view emerged in the late 1990s andwas widely accepted following the publication of‘Constructing Knowledge Societies: New Challenges forTertiary Education’ by the World Bank in 2002.Development assistance from most developed economiesnow includes specific policies for the encouragement ofhigher education, as do those of the internationaldevelopment banks. The African Development Banklaunched a higher education development strategy in 2007. The major Foundations are also playing asignificant role.

Why has there been this dramaticchange?It is now widely accepted that higher education is bothan important public as well as a private good. Many, ifnot all, strategies for economic and social developmentare frustrated by a lack of attention to higher education.

An acute shortage of teachers and verylimited curriculum development The expansion of primary education remains severelyconstrained by a chronic shortage of qualified teachersand the lack of a modernised curriculum. The situationis critical in sub-Saharan Africa where there is a need for600,000 additional teachers between 2004 and 2015. Inaddition, the majority of the existing teachers remainunqualified. Although the development of open learningand open schools will help to better use the scarce

resources of qualified teachers, it is in the educationdepartments of universities and teacher training collegesthat both the increase in the supply of teachers and themodernised curriculum will be developed.

As the goal of universal primary education isapproached, it is leading to an explosive growth in thedemand for secondary education. Here, again theshortage of qualified teachers and the need for anappropriate curriculum must be urgently addressed withthe help of higher education.

Girls into Science and Technology in Rwanda

In 2006, the Kigali Institute of Education in Rwanda began apartnership with the National University of Rwanda, the KigaliInstitute of Science and Technology, and the University ofAberdeen, UK, developing a ‘Girls into Science and Technologyin Rwanda’ project. With £60,000 allocated by the UKDepartment for International Development through theDelPHE (Development Partnerships in Higher Education)scheme, the project was designed to encourage greater take-up by female students in science programmes at an advancedlevel, and to help sensitize teachers, lecturers, seniormanagers and decision-makers in issues of gender equity. Tothis end, the project has involved research into barriers thatgirls face in pursuing science courses, and interventions at theprimary and secondary school levels to encourage take-up byfemale students. At the lead institution, the project has alsoinvolved the delivery of a master’s degree programme ineducational and social research, with 25 participantsgraduated so far. This enables further research intounderstanding the factors preventing more girls from pursuingcareers related to science and technology.

IT for Improving Public Health Systems in RuralKarnataka, India

In 2007, the DelPHE partnership for Improving Public HealthSystems in Rural Karnataka began, led by the India Institute ofManagement Bangalore, with the partnership of the LondonSchool of Economics (LSE) and Imperial College London. Theoverall goal of the project has been to determine theeffectiveness of district-level public health managementinformation systems for improving evidence-based decision-making in rural health in the Indian state of Karnataka. Thishas led to the establishment of a master’s-level module inHealth Information Systems in Developing Countries at LSE,workshops on health management information systems at thelead institution in India, and training sessions in healthmanagement information software, customised for healthcareprofessionals, doctors, NGOs, and senior policy makers inKarnataka. Ongoing research initiatives by the project teaminclude developing more effective health informationmanagement software suited for primary healthcare needs,and the implementation of information systems to incorporatethe software that has been developed.

Making chemical science more responsive to people’sneeds in Ethiopia

Addis Ababa University in Ethiopia, and the University ofNottingham, UK, began work on a DelPHE partnership in2006. Titled ‘Making Chemical Science More Responsive toPeople’s Needs in Ethiopia’, this project focuses on buildingcapacity for education in sustainable chemistry anddeveloping research to support sub-Saharan Africa’s rapidlygrowing chemicals sector. The project involves an assessmentof indigenous flora, the involvement of traditional medicineand sourcing indigenous knowledge in developingpharmaceutical research, and has also spawned a series oflectures on ‘green chemistry’ and environmentally sustainablechemicals research. The lecture series, a self-standing studymodule, is now planned to be rolled out to other universitiesin Ethiopia. Research generated from this project has beendisseminated widely, and formed a central plank to the firstannual conference of the Federation of African Societies forChemistry in Addis Ababa in 2007.

Development assistance from most developed economies now includes

specific policies for the encouragement of higher education, as do those of

the international development banks.

The expansion of primary education remains severely constrained by a chronic

shortage of qualified teachers and the lack of a modernised curriculum.



A skilled workforce for developmentIt is not only in primary and secondary education thathigher education helps to create the skilled workforcenecessary for the process of development. The deliveryof poverty reduction programmes, public healthdevelopments, environmental sustainability, programmesfor the encouragement of small businesses, agriculturaldevelopment and all other aspects of economic andsocial development require an educated cadre ofdevelopment staff to formulate the programmes, toimplement them and to evaluate their success.

Research, outreach and policy analysisUniversities are an important potential resource forresearch and policy analysis. Although governmentministries have some research capacity, this is usually very

limited and often results in over-reliance on externalconsultants with little experience of local circumstances.Young academic staff, returning from overseas doctoraltraining, are a resource that many developing countriescould make better use of for research and policy analysis.Universities are also a source of extension workers whocan take ideas developed in universities out into the field.This extension work is most common in agriculture, butit is growing also in the areas of small business andentrepreneurial development.

Social and cultural development and civilsocietyIt is important that social and cultural development goesalongside economic development. The contribution ofuniversities in these areas is easily underestimated. It isalso in universities that the Commonwealth’s agenda forrespect and understanding can be nurtured. TheCommonwealth university tradition of academicfreedom and enquiry encourages the free expression andsharing of ideas, open access to information, and the development of understanding based onevidence rather than on prejudice and ignorance. Theseare the underpinnings of democracy. It is no coincidencethat, at times of failure in democracy, universities areearly targets for restriction and closure.

A widening gapAll developed nations have encouraged rapid growth inparticipation in higher education. For example, theAustralian government has announced an intention toincrease the proportion of population aged 25 to 34years with a bachelor’s degree from 32 per cent to 40per cent by 2025. This will require several hundredthousand additional graduates. The fundamentalimportance of higher education in allowing countries tocompete within the world knowledge economy is thecornerstone of a policy of encouraging this sector. Manytransition economies are now also rapidly expandingtheir higher education.

Higher education in India

The Indian government plans to increase the higher educationenrolment rate from 11% currently to 21% by the end of2014. It intends to do this in ways which reduce the existingconsiderable regional disparities within India and improvesquality.

Table 2. Higher education indicators in India – Qualitymeasures

Measures per Average of Benchmark as inuniversity all Indian A-graded Indian

universities universities

No of departments 29 34

No of faculty positions 287 432

% of faculty positions

vacant 25 0

% of faculty with PhD 55 100

Planned new higher education institutions (HEIs)

2008 2014 (1)

Central universities 25 55

State Universities 230 380 (2)

Deemed universities 113 n/a

Private universities 29 n/a

HEIs of national importance (centre) 33 83

HEIs of national importance (state) 5 55 (2)

Affiliated colleges of state universities 8,800 9,170 (3)

(1) From the Special Higher Education Plan incorporated into the 11 and tobe rolled forward into the 12 National Plan.

(2) 50 new centres for technology training and research in border areas.

(3) Action by central government only – state governments may do more.

Table 3. Tertiary education: gross enrolment rates

1990/91 2006

Low income countries 5 9

Middle income countries 13 27

High income countries 47 67

Source: World Bank Development Reports.

The fundamental importance of higher education in allowing countries

to compete within the world knowledgeeconomy is the cornerstone of a policy

of encouraging this sector.

All aspects of economic and socialdevelopment require an educated cadre of development staff to formulate the

programmes, to implement them and to evaluate their success.



If similar growth cannot be achieved in the lessdeveloped countries then the economic gap betweenthe rich and the poor countries will only get wider. If alldeveloped and most middle- income countries regardinvestment in higher education as essential to the futureof their economies and societies, then it should beessential also for the poorer countries.

Most universities in the less developed countries are in a very poor state. They have suffered from a lack ofinvestment in human and physical capital, partly as aresult of being ignored within development funding forso long. Expansion of student numbers, sometimes morethan doubling, has been imposed while investment hasremained static or declined. In many countries of Africathe HIV/AIDS pandemic has wrought its owndevastating havoc on universities. The urgent need forinternational aid to reconstruct the once greatuniversities of Africa is now recognised.

Additional investments will be necessary but notsufficient. The expansion of higher education in the lessdeveloped countries cannot be achieved by more of thesame. We must harness technology to make better use ofscarce resources, both through the provision of distancelearning and also in the traditional face-to-faceuniversities. We have to enable the adoption of the newpedagogy which puts information and learning materialsin the hands of students and frees teachers from thepassing of more and more information to ever-growingclass sizes. We must allow the teachers to act as guidesand advisors in the learning experience, rather than asinstructors.

The opportunities are there with an explosion of opensource learning materials. Reliable and fast connectivityto the World Wide Web, along with reliable electricitysupply, are now the largest problems. The use of suchmaterial also requires great changes in the way in whichwe prepare university teachers as well as in what weexpect of them. As the need for well-qualified universityteachers is so great, we have to re-examine theappropriateness and practicality of continuing to aim forthe PhD as the entry-level qualification.

Past neglect has made increasing and wideningparticipation in higher education in the less developedworld a Herculean task. It is, however, essential for

economic and social development. The improvement ofhigher education infra-structure and human capitalneeds investment and aid. The priority must be to investin new ways of learning because this is the only way inwhich we can reach the large numbers that are needed.Putting the learning into the hands of the learners willalso better prepare those learners to prosper in aninformation- rich world.

Professor John Tarrant, PhD, DL, was appointed SecretaryGeneral of the Association of Commonwealth Universities inMay 2007. His previous posts include assistant lecturer ingeography, University College, Dublin 1966-68; lecturer, schoolof environmental sciences, University of East Anglia from 1968dean, school of environmental sciences 1974-77, 1981-84; provice chancellor 1985-88; deputy vice chancellor 1989-95; vicechancellor, University of Huddersfield 1995-2006; visitingprofessor of geography, University of Nebraska 1970; visitinglecturer in geography, University of Canterbury (New Zealand)1973; visiting research associate, International Food PolicyResearch Institute (Washington DC) 1977-78; visiting scholar,Stanford University 1978; Harris visiting professor, Texas A &M University 1989.

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We must harness technology to make better use of scarce resources, both through the provision of distance learning and also in

the traditional face-to-face universities.

If all developed and most middle income countries regard investment in

higher education as essential to the future of their economies and societies, then it should

be essential also for the poorer countries.



IntroductionThe failure of the governance of finance is producingcatastrophic effects in the real economy and forpeople’s lives. There is now vigorous discussion as tohow best to secure reform of finance, with proposalsfrom the United Nations, the G20, and the EUCommission, among others. These involve greatertransparency, increased regulation and reform ofinstitutions. This governance is in part affected byflawed gendered assumptions and goals underlyingfinancial and macroeconomic policy-making and theuneven gender composition of decision-makers. Theconsequent economic cr isis has uneven effects onwomen and men because of the gendered segregationand structuring of the wider economy. The policies toaddress the crisis are in danger of replicating, evenexacerbating, gender inequality because of flawedunderstanding of the gendered economy. Not only dothese processes detrimentally affect women, but theyalso lead to the failure of wider financial and economicgoals. The lack of women in finance distorts decision-making; the failure to engage successfully with allaspects of the economy in policies for renewal is to thedetriment of all.

Three aspects of gender in finance are addressed here:gender in the financial architecture; the impact of thepost-crisis recession; and the gender implications of thepolicy responses.

Gender in the financial architectureThe gender dimensions of the financial architectureinclude: the composition of the governing bodies offinance; the underlying assumptions and knowledge used by decision-makers about the economy; the

redistributive effects of taxation; and the principles andgoals of financial institutions.

Gender composition of decision-makingThere is a huge under-representation of women infinancial decision-making. Both the extent of thepresence of women in financial governance and theirposition in the decision-making hierarchy are importantfor the nature of the decisions taken. Increasing diversitymay increase innovative critical thinking; reduceexcessive risk-taking; increase the priority of long-termover short-term thinking; widen the range of relevantstakeholders and increase democratic engagement.

The inclusion of women may have prevented thedevelopment of the ‘herd’ mentality, such as was foundamong financial decision-makers in the run up to thecrisis by enforcing diversity. The well-documentedmacho culture of the finance workplace leads to atendency for excessive risk-taking and a disregard forwider considerations such as ethical stance, regulatorycompliance, and long-term as opposed to short-termviews. In so far as women in financial decision-makingare linked into the networks and interests of otheremployed women, they tend to have different prioritiesand practices, such as more positive views towards public

Gender in thefinancial crisis

Sylvia WalbyUNESCO Chair in Gender Research

at Lancaster University, UK

The financial crisis has gendered causes and gendered consequences. Gender inequality in thefinancial architecture contributed to the failure of financial governance. Gender relations

mediate the outcome of the economic recession following the financial crisis. Policies to address thecrisis have gendered implications. Gender is thus present, though often indirectly and invisibly, inmany aspects of the financial crisis. This paper makes the gender dimension explicit. It outlines thebenefits that mainstreaming gender into policies to address the financial crisis could bring. Theseissues affect not only gender relations, but also wider economic goals.

Millennium Development Goal 3:To promote gender equality

and empower women.



service provision. As Joseph Stiglitz commented in hisproposals for financial reform in 2009: “If those who aresupposed to regulate the financial markets approach theproblem from financial markets’ perspectives, they willnot provide an adequate check and balance.”

There are different ways of increasing the proportionof women in financial decision-making. Some politieshave increased transparency and knowledge, forexample, the European Union has a database to supportmonitoring of the percentage of women in economicdecision-making; other countries have introducedquotas, for example, Norway has introduced a 40 percent quota for the inclusion of women in the boards ofdirectors of companies.

Models of economic growth are genderedThe knowledge base used in finance is gendered. One ofthe goals in the governance of finance is to increaseeconomic growth. But the models of economic growthused by those who govern finance are often out-of-datein their understanding of the linkages between genderrelations and economic growth. For example, it is nowauthoritatively established by World Bank studies thatincreasing the education of girls has a positive impact onthe economic growth rate. Increasing expertise on theimplications of gender relations for the economy canimprove the likelihood that decisions are effective insupporting economic growth.

Tax is a gender issueTax is a form of redistribution of funds carried out by governmental bodies. Tax is a gendered issue partlybecause men pay more tax than women because menearn more and possess more wealth than women, andpartly because state expenditures disproportionatelybenefit issues of great concern to women, includingchildcare, health and education. Hence tax evasion andtax avoidance are gendered issues. Thus reducing taxevasion and tax avoidance is a gender equality issue.

Goals of financial governanceAll institutions of financial governance have aims andgoals. Finance has become governed by itself in its owninterests, rather than in the interests of the wider economyand society. Its goals have prioritised the requirements offinance capital at the expense of the wider paid economyand also at the expense of domestic economies.

Gender inequality matters both in itself and for itscontribution to economic growth and wider social

justice. There are agreed international principles relevantto this issue that could be included within the principlesof bodies of financial governance. These include: theUniversal Declaration of Human Rights (especiallyArticles 22-25 on economic issues); the UN Conventionfor the Elimination of Discrimination Against Women;the UN Beijing Platform for Action 1995; and theMillennium Development Goals, especially Article 3 ongender equality.

Impact of the post-crisis recessionThe economic recession caused by the financial crisis isincreasing poverty, especially through an increase inunemployment and reduced access to health, education,food, credit, and housing. These effects vary betweenwomen and men from country to country.

Unemployment The International Labour Organisation in GlobalEmployment Trends for Women 2009 builds scenarios for2009 on expected increases in unemployment. At aglobal level, the projected increases in unemployment for2009 are similar for women and men, although womenstart from an average unemployment level in 2008 higherthan that of men (women 6.3 per cent; men 5.9 percent). There are significant differences by region: in thedeveloped economies, the European Union, Central andSouth East Europe and the Commonwealth ofIndependent States, the gender differences are small. InEast Asia, women had a lower rate of unemploymentthan men in 2008; and lower rates of increase in each ofthe three scenarios in 2009. In Latin America, there was ahigher rate of unemployment among women than menin 2008, and larger rates of increase among women thanmen for each of the scenarios for 2009. In other regions,such as the Middle East, the picture is more mixed.Although varying across the scenarios, the changes are onaverage worse for women than men in North Africa andin sub-Saharan Africa.

Some differences between global regions are due tovariation differences in the gender composition ofindustrial sectors at different levels and forms ofdevelopment. In the global North, women are morelikely to be in public employment in education andhealth, while men are more likely to be in construction.In the developed countries and EU, there is a tendencyfor the construction industry to suffer early reductionsin activity and employment, with disproportionateconsequences on the large number of men employed in this sector. If there are cuts in public expenditure at a later stage of the crisis, it may be that women willbecome increasingly affected by job losses. In someregions in the global South, women’s paid employmentis disproportionately in less stable economic sectors thanthat of men and, consequently, women suffer job lossesat an earlier stage of the recession.

The crisis has reduced global flows in goods, servicesand people, with different effects for women and men.Women’s income will be disproportionately reduced by

“If those who are supposed to regulate thefinancial markets approach the problem fromfinancial markets’ perspectives, they will notprovide an adequate check and balance.”

Joseph Stiglitz



a decline in export-oriented industries where womenare disproportionately concentrated, and will beaccompanied by a drop in remittances on which womenare disproportionately dependent. The financial crisis islikely to affect the provision of micro financedisproportionately used by women.

Poverty and gender Poverty is increasing unevenly for men and women. A decline in the income of women tends to have greatereffects on the well being of families than that of menbecause, according to the World Bank in 2009, women’sincome is more likely to be spent on children than thatof men.

Health outcomes will decline. Negative economicshocks are harmful to infant mortality and are worse forgirls: a one unit fall in gross domestic product increasesaverage infant mortality for girls by 7.4 and for boys by1.5 deaths per thousand births (World Bank 2009).Educational programmes are endangered. In countrieswith already low rates of female schooling, girls aremore likely to be pulled out of school when householdsface declining income (the effects are less genderdivided in other countries). There is also a global food crisis, and access to food varies by gender as well asby country and region. The collapse in housing marketsin some more developed countries is increasinghomelessness among those who are dependent on sub-prime loans, disproportionately women and minorityethnic groups.

Long-term impactThe impact of the economic crisis following thefinancial crisis is gendered as a consequence of genderedemployment, financial and welfare practices. Theeconomic crisis will have long-term as well asimmediate effects on welfare since a reduction inexpenditure on education and nutrition for children willhave implications for the rest of their lives. Humancapital is more fragile than fixed capital. Any decline inthe education of girls and women has long-term effectson economic development because of the importance(demonstrated in World Bank studies) of the educationof girls and women for economic growth. This has long-term consequences not only for gender equality but alsofor economic development.

Gender implications of policy responsesThe policy responses to the crisis have genderimplications. These are often indirect so are invisibleunless specifically investigated. Techniques to makevisible this gendering draw on practices of genderauditing and gender-sensitive budget analysis.

Bank bailoutsThe transfer of funds from citizen taxpayers to financialinstitutions is usually a transfer from a constituency inwhich men are slightly more the contributors ascompared with women to institutions that arepredominantly male in their high paying personnel and receivers of dividends. These policies could

be accompanied by various forms of genderedconditionality, such as the gender composition of BoardRooms and senior staff; limitation on the highestremuneration in wages and bonuses which went almostentirely to men; and the inclusion of gender equalityprinciples into corporate goals.

Fiscal and monetary policies Several countries created a fiscal boost to the economy;however, not all countries have the fiscal room for this.The history of austerity measures as the policy responseto financial turmoil is one in which the poor andwomen have often emerged as the losers, as state fundededucation and health programmes are cut back andwomen bear the burden of this work in other ways. Anexpansionary fiscal policy is better than an austeritypolicy for the poor and women.

Tax cuts In most instances, state expenditure is to women’sadvantage, so tax cuts redistribute away from women.While men typically pay more tax than women,different types of taxes have varied effects. Income taxusually redistributes money from men to women sincewomen have smaller earned income than men due todomestic work and the gender pay gap. A cut in incometax thus typically redistributes money from women tomen. The gender redistributive effect of sales taxes, suchas Value Added Tax (VAT), often depends on the natureof the exemptions: if there are none, then it may hit thepoor and women most. But if the items on whichwomen spend most money, such as food, are exemptedthen this does not occur. A cut in wealth taxes mostoften benefits men, since men are more likely thanwomen to own wealth.

Support for education In most countries the rise in unemployment isconcentrated among the young and disadvantaged. Theexpansion of educational provision may address this, withgendered effects dependent on whether it is focused ontraining for jobs disproportionately held by men or not.

Support for employers The implications for women of supporting majoremployers depend on the gender composition of theworkforce of those employers. For example, if funds aregiven to construction or car companies, they are morelikely to support men than women.

Income support Funds to support the poor and vulnerable are gendered.It may be paid to insured workers (disproportionatelymale) or to households (if to heads of households, thendisproportionately to men). The implications of fundsflowing to women rather than men are that they aremore likely to be spent on children. Public works, such asconstruction, are more likely to provide employment formen, while support for educational and health projectsare as likely to involve women. Projects that are orientedtowards human capital are oriented to the future; humancapital is more easily damaged than fixed capital.

Reducing excessive financialisation The tendency towards the financialisation of economiclife has contributed to the instability of the financialand economic system, with the development of assetprice bubbles as in housing. Definancialisation,especially of basics such as housing, promotes stabilityand protects the vulnerable including women.

ConclusionThe UN, G20, OECD and EU have begun stepstowards reform of the governance of finance, especiallyon issues of transparency. Including the principles ofgender equality already endorsed by the internationalcommunity in the Millennium Development Goals,the UN Convention on the Elimination ofDiscrimination Against Women, and Beijing Platformfor Women into the reforms of financial governanceand the policies to address the recession would havepositive effects not only for women, justice, well-beingand human rights, but also for economic growth andfinancial stability. The Commonwealth is wellpositioned to take a lead on these issues, drawing on itslegacy and expertise in gender budgeting and gendermainstreaming.

Sylvia Walby is UNESCO Chair in Gender Research atLancaster University UK. She received an OBE for services toequal opportunities and diversity in 2008 and is President ofthe International Sociological Association’s ResearchCommittee on Economy and Society. She is author of‘Globalisation and Inequalities’ (Sage 2009) and many otherpublications.

The UNESCO Chair in Gender Research supportspolicy-oriented research on gender issues at national, regionaland global levels. It was established in 2008. Projects include:gender and the financial crisis, for UNESCO; the quality ofgender equality policies, for the European Union Commission;measuring gender-based violence, for the UN; and gender andthe knowledge economy (GLOW).

UNESCO Chair in Gender ResearchDepartment of SociologyLancaster UniversityLancaster LA1 4YT United Kingdom

Tel: +44 (0)15 24 59 34 42Email: [email protected]: www.lancs.ac.uk/fass/sociology/profiles/34/



Amajor cause for international concern is how farHIV and AIDS related external aid can be fully

spent and absorbed. By absorption we mean theutilisation of foreign exchange, for instance, in importinggoods and services. Spending means the utilisation of the domestic counterpart of aid for governmentconsumption and expenditure. When aid is absorbed thebalance of payments current account deficit (excludingaid) increases. This could be because of imports orincreased domestic demand reducing what is exported.When aid is spent, the fiscal deficit (excluding aid)increases. This is due to either higher governmentexpenditure or lower domestic revenue.

A 2008 paper by the International Monetary Fund(IMF) entitled The Macroeconomics of Scaling Up Aidargued that scaling up aid will put moderate to sizeablepressure on inflation and exchange rates for Benin,Niger and Togo. Due to fears of such macroeconomicimbalances, countries are advised to restrain their fiscalexpansion. This means macroeconomic concernsoverride public spending programmes aimed atachieving the Millennium Development Goals (MDGs).Is such a policy stance justified?

The answer is no. There is an urgent need for large-scale, broadly targeted government programmes torespond to the HIV and AIDS crisis. First, fiscal andmonetary policies have to be expansionary in order torespond effectively to the epidemic. Second, fullspending and absorption of aid must be encouraged.Third, micro-projects need to be co-ordinated withgreater efficiency to stimulate supply responses.

Fear of absorption and spending of aidIf fears of macroeconomic instability lead to less than fullabsorption and spending of aid, it is useful to look at thecases of Malawi, Zambia, and Kenya. Between 2001 and

2005, Kenya, Malawi and Zambia had HIV and AIDSprevalence rates of about 14 per cent each among theadult population, defined as those in the 15–49 agegroup. By 2005 Kenya’s prevalence rate had fallen to 5.9per cent. Nonetheless, controlling HIV and AIDSremains a pressing issue in this country. These threecountries are facing a human development crisis, andwhile external aid has been flowing, particularlyearmarked for HIV and AIDS control, aid has not beenutilised fully, as shown in Tables 1, 2 and 3.

In Kenya, 33 per cent of the aid was absorbed and 22per cent was spent. The remaining balance was utilisedto settle domestic debt and build up internationalreserves. The inflation rate fell and the exchange rateappreciated. While all of the aid was absorbed in Malawi,only 59 per cent was spent through government fiscalexpansion,a resulting in low international reserves. Thereal exchange rate depreciated and the inflation rate fellby 15.4 percentage points. In Zambia, 39 per cent of theaid was absorbed and 6 per cent was spent. Internationalreserves increased and the inflation rate declined, leadingto an appreciation of the real exchange rate.

What the ‘before and after’ aid surge story shows is that full absorption of aid in Malawi did not lead to macroeconomic instability. The restr ictivemacroeconomic stance in Zambia did not stop theexchange rate from depreciating. We can safely conclude

Aid and AIDS: policychanges and responsesin Kenya, Malawi andZambia

Dr Degol HailuActing Director, UNDP

International Policy Centre

About 4 million people are estimated to be living with the HIV virus in Africa. Life expectancy isreduced by about 20 years because of the disease, while the number of orphaned children has

reached 12 million. The urgency of controlling the disease is beyond doubt. However, there is a debateabout how effective the aid is allowed to be by the fiscal rules and conventions that surround it.

There is an urgent need for large-scale, broadly targeted government programmes

to respond to the HIV and AIDS crisis.



that there are other factors in play. For instance,plummeting copper prices in Zambia explain changes inthe exchange rate. In Malawi, full absorption withoutmacroeconomic instability was possible through the useof aid for importing goods and services − the economyhas a high import propensity.

The low level of aid spending is often a direct result ofconditions imposed as part of loan programmes withinternational financial institutions. A typical loanprogramme limits public sector deficits to less than 3 percent and sets inflation targets around 5 per cent. Forinstance, ceilings on central government wages andsalaries are often imposed.

In Malawi, the target for the overall fiscal balance wasless than 1 per cent of GDP, while the target for inflation

was under 5 per cent. In Zambia, the fiscal deficit targetwas to achieve a value under 2 per cent of GDP with aninflation target of less than 5 per cent. These were to beachieved by reducing domestic borrowing to less than 1per cent of GDP and increasing international reserves. InKenya the inflation target for 2005–2007 was 3.5 percent. The overall deficit target was set below 3.2 percentof GDP.

These macroeconomic targets mean that total publicexpenditure on health is lower than what is needed totackle the HIV and AIDS epidemic. For instance, tomeet Kenya’s National HIV and AIDS Strategic Plan(KNASP) targets, spending on HIV and AIDS needs toincrease from the 2005/06 amount of US$228 millionto US$605 million by 2009/2010.

Table 1. Kenya: aid spending (ratios expressed as a share of GDP)

Periods compared Amount of aid absorbed Amount of aid spent

Before aid surge (1995-99) vs. aid surge period (2000–04) 33% 22%

Relevant aggregates Relevant periods

Inflation Before aid surge 6.4%

Aid surge period 4.5%

Real effective exchange rate Before aid surge 69.9%


Average reserves level ($US million) Before aid surge 735

Aid surge period 1,244

Table 2. Malawi: aid spending (ratios expressed as a share of GDP)








Average reserves level ($US million) Before aid surge 213.3

Aid surge period 182.2

Table 3. Zambia: aid spending (ratios expressed as a share of GDP)








Average reserves level ($US million) Before aid surge 322.1

Aid surge period 373.3



Will micro-absorption help?If fears of macroeconomic instability constrain utilisationof aid, there may be a possibility to increase micro-absorption with improved management of projects andprogrammes. This in turn may increase the productivityof the overall economy to stave off inflationary pressuresand lessen the fears associated with macroeconomicinstability. The idea is simple, as discussed by Serieux and others in 2008 in a paper prepared for the United Nations Development Programme (UNDP) −Addressing the Macro-Micro Economic Implications ofFinancing MDG-Levels of HIV and AIDS Expenditure. Ifthe programmes and projects are responsive to needs(enterprising); efficiently implemented; able to meetexisting needs (effective); and co-ordinated with otherinitiatives (to avoid duplication and encourage positiveexternalities), then the necessary supply response willoffset macroeconomic instability, if any.

What is counterproductive is a pre-emptive policystance whereby macroeconomic targets are set that limitthe availability of resources for HIV initiatives.Productivity will be acheived if policy-makers adopt aproactive stance. The four possible outcomes are shownin Table 4. The ideal outcome is where policy-makersplay proactive roles ensuring the external resources arefully absorbed and spent. Project and programmemanagers in turn ensure proper co-ordination, planning,as well as efficient and effective implementation, referredto as outcome (1) in Table 4. If projects and programmesare not implemented in such a way, bottlenecks andreplication will curtail positive supply response. Thisleads to macroeconomic instability and triggers policy-makers to introduce pre-emptive actions to restrict fullspending and absorption of resources.

What do we know from country case studies? InMalawi, problems of co-ordination and efficiency inmanaging HIV and AIDS projects and programmes

are found. There is lack of clarity on the overall co-ordination of national initiatives. The National AIDSCommission (NAC) lacked the strength to effectivelyiron out the various duplications, leading to disjointednational and district level responses. Various donor-financed projects are scattered outside the nationalframework.

Complex donor reporting requirements in Zambiacompromised national ownership of HIV and AIDSprojects and programmes. Poor co-ordination is also aresult of scarce human capacity. In Zambia, it isestimated that about 68 per cent of the vacancies in thehealth sector are unfilled. Kenya’s Assistant Minister forHealth stated that the country urgently needs 10,000new health workers, the lack of which compromisesmanagement of programmes and projects.

Conclusion and recommendationsAs the three country cases demonstrate, funding for HIVand AIDS control seems to be available. The problem isrelated to less than full absorption and spending of thefunds due to fear of macroeconomic instability. Policiestend to focus on pre-emptive inflation-targeting andrestrictive government spending. At the same time, poormicro-management of projects and programmesexacerbate the conservative policy stance. The followingtwo simple recommendations may be useful:

• Relaxing the policy space for countries to adoptcounter-cyclical and expansionary fiscal policies; and

• Improving co-ordination, efficiency and effectivenessof HIV and AIDS programmes and projects.

Dr Degol Hailu is currently the acting Director of UNDP’sInternational Policy Centre in Brasilia, Brazil. Prior to that, he worked for the School of Oriental and African Studies,University of London. He obtained his PhD in Economics fromthe same university.

The United Nations Development Programme (UNDP) is the UN’s global development network, an organisationadvocating for change and connecting countries to knowledge,experience and resources to help people build a better life.UNDP is on the ground in 166 countries, working with themon their own solutions to global and national developmentchallenges. As countries develop local capacity, they draw on thepeople of UNDP and its wide range of partners.

United Nations Development ProgrammePoverty Group, Bureau for Development Policy304 E, 45th Street, 10th FloorNew York, NY 10017 USA

Tel: +1 212 906 6471 Fax: +1 212 906 5000Email: [email protected]: www.undp.org/poverty

Table 4. Macro and micro management responses toincreased aid flows (for funding HIV and AIDSinitiatives) and likely outcomes.

Macro managers

Proactive Pre-emptive

Enterprising (1) Greatest potential (2) Response toEfficient for an effective HIV and AIDSEffective response (to HIV likely to beCo-ordinated and AIDS) and little inhibited by the

possibility of macro- volume andeconomic instability. reliability of

funding.

Not enterprising (3) Supply response (4) Responses toInefficient likely to be inhibited HIV and AIDSIneffective by the range, efficacy challenges areUnco-ordinated and efficiency of likely to be

projects. Macro- ineffective as welleconomic instability is as insufficient. a distinct possibility. Macroeconomic

instability is possible.

Mic

ro m

ange

rs


83



The core of the current system of internationalinstitutions – the IMF, United Nations and World

Bank, joined later by the World Trade Organization –owed their origins to a reaction to the global economicand security crisis of the Second World War and theGreat Depression. The lesson drawn from that periodwas that co-operation, not competition, between nationsis essential to peace and prosperity.

Nothing in the subsequent 60 years has changed therelevance of that basic insight. As the world has becomemore economically integrated, the need for countries to work together to tackle common problems hasincreased. International institutions exist to supportmembers in finding those shared solutions as well asproviding technical and financial support to countries inmeeting these challenges.

Why the Commonwealth caresCommonwealth countries have a particularly stronginterest in the effectiveness of international institutionsin delivering their mandates. First, over half ofCommonwealth members are small states. Internationalinstitutions – by ensuring that all members operatewithin a system of rules – should provide a betteropportunity for all countries to shape the system than a world of unco-ordinated bilateral arrangements.Second, in the economic sphere, as a group,Commonwealth countries are proportionately moredependent on trade for their livelihoods than othercountries. As a result, the co-operation necessary forcontinued stability of the global economy and tradingsystem is particularly important for Commonwealthcountries. Finally, with a shared commitment toopenness of economies and societies, Commonwealthcountries have an established tradition of multilateral

co-operation. The result is that members of theCommonwealth are strong supporters of themultilateralism that the institutions embody.

Commonwealth views on reformHowever, in 2007 Commonwealth Heads ofGovernment recognised that the idealistic impulse of1945 was not enough to guide the institutions of the21st century. They called for a re-evaluation of the role,governance and activities of international institutions tofit them for contemporary challenges.

Following this call, a small representative group of Commonwealth leaders met in London in June 2008 to examine what distinctive contribution theCommonwealth could offer to strengthen internationalinstitutions. This group set out a number of principles toguide reform (see below).

The Commonwealth andreform of internationalinstitutions

Jonathan OckendenHead, Finance Section Economic Affairs Division,


International institutions – and the system of international co-operation they support – touch thelives of every Commonwealth citizen. These impacts can be direct; for example, the finance

provided to countries in response to the economic crisis, or indirect, through the framework ofinternational law which governs global security. But however it is felt, for all countries, internationalinstitutions matter.

In their statement after the meeting in June 2008,Commonwealth leaders said that international institutionsshould be:

• Legitimate in the eyes of member states to commandconfidence and commitment of members to the institution’sgoals.

• Characterised by fair representation for all countries.• Responsive to the needs of all members, especially the

smallest and poorest. • Flexible in responding to new challenges, national priorities

and the specific circumstances of member states, andchanging global realities.

• Transparent and accountable to the entire membership andthe wider public.

• Effective through being capable of addressing today’s globalchallenges.



The crisis and the case for reform As well as setting out the principles of reform, themembers of the small group went on to call for a globaldebate about the need for fundamental reform in theBretton Woods Institutions – among other policy areas.

This is no longer a radical position. Events in theglobal economy over the past year have increased thenumber of those echoing this call. This economic andfinancial crisis has identified a number of fault lines inthe international system. The process of global economicintegration – accelerated in recent years – has meant thatthe impacts of one country’s policies on others havebecome more profound and have been transmittedrapidly between countries. The mechanisms ofinternational co-operation were lacking in a number ofdimensions. On the global macroeconomy, imbalanceswithin and between countries contributed to theconditions for the crisis. In regulation, the mismatchbetween a global financial system and national systems ofregulation created weaknesses before and during thecrisis. In crisis response, the institutions initially foundtheir instruments and approach struggling to meet thescale of the task.

All this is now well understood. Where theCommonwealth process differs is that the call for reformpreceded the crisis, rather than following it.

Commonwealth Finance Ministers endorsed theprinciples set out in the Marlborough House Statementat their meeting in St Lucia in October 2008. They alsoemphasised their desire that the Commonwealth shouldplay a role in the reform of the institutions, whilestressing the need for any Commonwealth activity tocomplement – and not undermine – the reformprocesses in the institutions themselves.

Developments in the subsequent year have beenextraordinary by any standards. Events in the globaleconomy have been mirrored by an accelerated reformprocess, especially in the Bretton Woods Institutions. It isworth considering how the Commonwealth hascontributed to this reform process to date; how far thereforms have been consistent with Commonwealthprinciples; and what the next steps may be followingFinance Ministers’ considerations in Cyprus.

The Commonwealth and reformThe Commonwealth is not the decision forum for anyspecific reforms. But it can support the processesdeveloped in other organisations by providingperspective and channelling the views of those whoseopinions are frequently neglected, notably the smallermembers of the Commonwealth.

Through the offices of the Secretary-General, theCommonwealth has fed its views into the representativesof the UN system and the international financialinstitutions (IFIs) to ensure these views are now widelyunderstood in the international community. A stepchange has also taken place in 2009 in the role played by the G20 as a forum of global co-operation and driver

of global reform. The Secretary-General has worked to ensure that all its members are aware of theCommonwealth’s position and to encourage theCommonwealth members of the G20 to reinforce theseviews. Finally, the Commonwealth has advocatedstrongly the need for reform to recognise the views ofall countries, not just the largest or most powerful.Inclusiveness has been a Commonwealth watchword.

The Commonwealth has been one of many voicesseeking to influence reform of the IFIs. But it was oneof the first to call for fundamental reform, and set out acoherent set of principles for improvement. Many ofthose principles, especially those of effectiveness,legitimacy, accountability and inclusiveness, are nowcommon currency.

Assessment of reformReforms within the institutions – especially in the IMF– have been deep and rapid. How far have they met theobjectives which the Commonwealth, both leaders andFinance Ministers, set for them?

The reforms have gone a long way to establishing theflexibility and responsiveness of the instruments of theIMF. Changes that have long been sought byCommonwealth Finance Ministers among others havebeen implemented. Reforms have taken place to theamount of finance which can be provided for countries’needs; recognition of the needs of countries with strongpolicy frameworks; changes to make conditionality lessrestr ictive; and a range of changes to the Fund’sapproach to programme design and the flexible use ofinternational finance to meet development needs. Ineach of these areas Commonwealth Finance Ministershave been among those calling for change. Specifically,Ministers have been particularly keen to see reform ofthe instruments of the IMF, stating in 2008 the desire tosee “... a review of IMF instruments to re-establish theircoherence and relevance.”

The World Bank has seen less dramatic changes.Nevertheless, lending has increased substantially. Also, consistent with long-standing concerns fromCommonwealth Finance Ministers, there is greateremphasis on finance for large-scale investment whichthe private market has turned its back on, especially in infrastructure.

What next for the Commonwealth inreform of the IFIs?The Commonwealth’s principles have played a part inshaping the debate on reform of the InternationalFinancial Institutions. The reform undertaken by theinstitutions in response to the crisis has also respondeddirectly to long-standing Finance Minister concerns.Looking forward, there are three particular areas inwhich the Commonwealth may wish to act further.

Firstly, in governance of the institutions, responsivenessand flexibility have been well served (among theCommonwealth principles). Reform of governance in



both the World Bank and the IMF will be a continuingdebate. There is an opportunity for the Commonwealthto develop the concepts of legitimacy and fair voicefurther to examine specific proposals for governancereform. This is particularly true given the state of thecurrent debate within the IMF.

Secondly, a significant proportion of theCommonwealth’s membership are borrowing from theIMF and the World Bank. There is a possible role forthe Commonwealth in ensuring that the reforms ofthe past year deliver change in reality. There is also arole in supporting members in deliver ing on theunfinished business of reform. Above all, the needs ofthe smallest countries and their access to concessionalfinance in the face of global finance is a particularconcern.

Finally, and more broadly than the territory of FinanceMinisters, the Commonwealth collectively has anopportunity to define how it should interact as a groupin the new circumstances where the G20 is a real forcein the global system. The G20 is not a global institution.It consists of only a subset of the internationalcommunity. But it has shown its potential to drivereform of institutions. The question for Commonwealthmembers – especially the 48 who are not members ofthat group – is what role the Commonwealth could playin shaping the G20’s future role and agenda to harnessits strength for the whole of the global community.

A remarkable yearThis has been a remarkable year in the reform of theinternational institutions. The pace of change has beenmuch greater than could have been anticipated even 12months ago. The Commonwealth has helped shape thisreform process. But there remains unfinished businesswithin the IFIs and elsewhere in the international system.The Commonwealth Finance Ministers’ Meeting willdetermine how that unfinished business should be tackled.

Jonathan Ockenden is currently Head of the Finance Sectionin the Economic Affairs Division of the CommonwealthSecretariat. He is on a career break from the UK Treasury andhas worked in the UK Foreign and Commonwealth Office, theRoyal Institute of International Affairs and BP.

The Economic Affairs Division of the CommonwealthSecretariat provides analysis and support to Commonwealthmembers across the full range of economic issues. It is organisedin four sections dealing with finance, trade, the environment andSmall States issues.

Jonathan OckendenAdviser and Head, Finance Section, Economic Affairs Division Commonwealth Secretariat, Marlborough HouseLondon, SW1Y 5HZ, United KingdomTel: +44 207 747 6260 Email: [email protected]



The micro-finance movement started as aninnovative model to extend credit to poor people.

It now stands for a grassroots model of povertyalleviation in which large numbers of poor people aregiven financial tools that empower them to seek outnew and better livelihood opportunities.

This broader vision calls for a reassessment of the corechallenges of micro-finance. In particular, there needs to be a greater emphasis on delivering savings options to poor people. The ability to put money away and to access it as and when needed is a fundamentalmechanism through which households can manage theirwell-being and productive capacity. There needs to be ascalable model that makes savings services available to all,in a way that is both affordable for poor people andcommercially viable for providers.

The value of savings to poor peopleMost people save in order to invest. Their daily orweekly savings are akin to a self-defined instalment planon their productive assets, life cycle family expenditures(such as marriage or funerals), children’s education, orbuffers against shocks (crop failure, illness). Householdsthat fund their entrepreneurial and livelihood activitiesthrough their own savings can keep a greater share oftheir business returns than if they fund their investmentwith credit. Savings may not have the built-in disciplinemechanism that is embodied in credit, but putshouseholds more in control of their cash flows.

Like credit, saving helps households turn a sequence ofsmall amounts into useful lump sums. But in more casesthan not, households prefer to save rather than borrowbecause it is cheaper and gives them more control over

their lives. Borrowing is a high-stakes decision for poorfamilies. Savings is a safer approach, and one that isappropriate for all families.

Academic researchers are now starting to quantify theimpact of savings in poor people’s welfare. Early resultsfrom randomised control studies in Western Kenya revealthat poor people (specifically farmers and women micro-entrepreneurs) find it difficult to conserve cash withoutaccess to appropriate savings mechanisms. With access toa savings account, they were able to accumulate largersavings balances which could then be used to make lumpsum investments in their business. Those who had greateraccess to savings show a higher level of daily expendituresincluding on food than those in the control group.

The daunting challenge of savingsOnly about one-quarter of households in developingcountries have any form of financial savings with formalbanking institutions. Even in countries that haveexperienced substantial development over the lastdecade or two, this statistic remains stuck stubbornly at alevel that would not be acceptable for any other measureof socio-economic development: 10 per cent in Kenya,20 per cent in Macedonia, 25 per cent in Mexico, and32 per cent in Bangladesh.

Reframing micro-finance: enabling smallsavings and payments,everywhere Ignacio Mas

Deputy Director, Financial Services for the Poor,

Bill and Melinda Gates Foundation

Micro-finance aims to provide financial tools for people to be able to invest in their productiveactivities and stabilise their expenditures in food, health and education. Micro-credit is one such

tool, but not always the most appropriate. Everyone should have the option to use formal, safe savingsinstruments to save up for such purposes. Savings services must be available close to where poor peoplelive, which requires going beyond bank branches and delivering services securely in neighbourhoodshops. Linking savings accounts to electronic payment networks makes the accounts particularly usefulfor poor people to access their funds, manage their micro-enterprises and support distant relatives.

The ability to put money away and to access it as and when needed is a fundamental mechanism through which households can manage their well-being and productive capacity.



In order for formal savings services to be relevant topoor people, formal financial institutions need to be ableto capture these savings ‘at source’, that is, right when andwhere the money is earned. Every time a poor personearns money there is a potential savings opportunity.People must be able to deposit (and withdraw) moneynear the places where they live and work.

Many financial institutions, especially largecommercial banks, find it too costly to reach out to poorcustomers despite the strong latent demand for savings.Current business models do not handle the ‘tr iplewhammy’ of low savings balances, small transaction sizesand large numbers of customers. Financial institutionsfind it difficult to justify commercially the roll-out of a broad-based retail infrastructure to serve poorhouseholds. They therefore pass on the cost of access topoor customers, directly through high fees and indirectlyby requiring them to spend time and money to travel todistant branches.

In turn, many poor people reject financial institutionsthat seem focused on serving wealthier customers. Theydon’t trust them to treat their less lucrative depositorsfairly, and don’t feel welcome.

Meeting the savings challengeA couple of decades ago, few believed that the poor –who face unstable income streams and often lack legaltitle to assets – were good subjects for formal credit:credit spreads would need to be beyond what poorpeople could afford. But innovations around thestructuring of micro-credit products and deliverymechanisms have shown that despite the adversity facedby poor people they incur low default rates.

Now we face a similar challenge around savings: howcan we deliver low-balance savings services sustainablyto poor people? Specifically, how can we make savingsprofitable, without necessarily tying the provision ofsavings to the use of credit?

The following section provides an overview of thesavings discussion around four key elements thatunderpin the viability of formal micro-savings offerings:the competition from informal savings mechanisms, the

importance of formal trust-building through brandingand marketing, the problem of distribution, and thecomplementarity between savings and payment services.

Understand your competition: frominformal to formal savings productsDeveloping micro-finance opportunities is aboutcreating a compelling proposition that beats the informaloptions that poor people have traditionally used. This isharder for savings than for credit: informal credit is oftenavailable from very few sources, and is extremelyexpensive and risky. But poor people save small balancesthrough a variety of informal mechanisms: hiding cash athome, loaning funds to relatives, participating in savingsgroups with their neighbours, buying livestock orjewellery. This surprising diversity of savings mechanismsreflects the fact that none meets the full range of needsof poor people.

A major limitation to informal savings mechanisms is that they operate str ictly within the family orcommunity where the saver lives, and hence require thesaver to rely on other poor people in similarcircumstances. This introduces an unhelpful covariancebetween a household’s condition and its ability to drawvalue from savings: the household’s savings will be leasteffective when they are needed the most. Informalarrangements tend to be short-term, as people need tocontinuously test the trustworthiness and liquidity oftheir savings arrangements. Local informal savingsarrangements also tend not to be portable, making itdifficult to transfer one’s savings to another community(e.g. when seeking employment in another city). Manyinformal savings options like livestock are not divisible,and hence not useful to meet daily needs.

Thus, financial institutions need to figure out howpoor people save today, and identify the specific ways inwhich their offering will be more convenient, morereliable or cheaper. Photos 1 and 2 (above) depict verydifferent user experiences from informal savings-ledgroups and bank-based services in Tanzania; bankcustomers must clearly bear a burden of time andaggravation to avail themselves of the formal services.

Photo 1: An informal savings-led group in Tanzania: tapping into communitytrust.

Photo 2: A bank branch in Tanzania: maybe safer, but certainly a lot lessconvenient.

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Informal savings must be seen as part of the competitivelandscape by financial institutions wanting to mobilisesubstantial deposits in poor communities.

Earning the trust: the importance ofbrand and scaleFinancial services are fundamentally about managinginformation and trust. Extending credit involves thefinancial institution trusting their clients, but savingsreverses the direction of trust. Therefore, in the case ofsavings, the financial institution needs to be able totransmit to their clients the notions of financialprudence, liquidity and permanence (your funds are safeand readily available). When they issue savings accounts,the product financial institutions sell is reassurance.Therefore, shifting from a system based on credit to onebased on savings entails a large investment in brandbuilding. This requires creating a clear positioning for the brand, driving awareness and maintaining acontinuous presence in people’s minds.

As a result, the economics of savings and credit arequite different. The savings model entails significantfixed costs around brand marketing and branding,while credit entails more localised loan officers andhence is much less subject to economies of scale.Therefore, micro-finance institutions wanting to tacklethe savings challenge for poor people will need tooperate at a substantially larger scale than what mostmicro-credit institutions have achieved to-date, andacquire much stronger branding and marketing skills.

The problem of distribution: bankingbeyond branchesFinancial institutions’ main barrier in offering savings isthe high cost and limited territorial reach of theirbranch-based distribution. Bad product features (e.g.high minimum account balances or monthly fees) aremore often than not the result of poor economics for

the financial institution. If the distribution problem issolved, one can expect financial institutions to be betterable to innovate and market the right products to abroader set of customer segments, including poorhouseholds.

Financial services might benefit from the extensiveindirect distribution channels that most other productsenjoy, which allows them to be present in a broad arrayof local shops. This would allow poor people to conducttransactions securely at a shop near where they live orwork, without having to count on their financialinstitution establishing a bricks-and-mortar presencethere. Depositing and withdrawing money from youraccount should be just another product that your localstore offers, along with toothpaste and mobile prepaidcards. Photos 3 and 4 (above left and centre) show retailoutlets at which poor people in Brazil and Kenya cancash into and cash out from their accounts.

We can now use technology to ensure that banks andtheir customers can interact remotely in a totally trustedway through local retail outlets. Customers can beissued bank cards (whether physical or embedded intheir mobile phones) with appropriate security features,and the local store can be equipped with a point-of-saledevice (a dedicated terminal or a mobile phone)

If the distribution problem is solved, one can expect financial institutions to be

better able to innovate and market the rightproducts to a broader set of customersegments, including poor households.

Photo 3: A retail banking agent in Brazil. Photo 5: Three ways to send a paymentdomestically in Kenya.

Photo 4: An M-Pesa agent in Kenya.

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controlled by and connected to the bank via a telecomsnetwork. If a customer wishes to make a deposit at a store, swiping his card puts him in directcommunication with the bank. The bank automaticallywithdraws the equivalent amount from the store’s bankaccount to fund the deposit, and issues a receipt to thecustomer through the point-of-sale device. The storekeeps the cash in compensation for the amount takenout of its bank account.

If the next customer wishes to make a cashwithdrawal, the opposite happens: the store provides cashfrom the till, but is compensated by an equivalentincrease in its bank account. Of course, the storemanager will at some point need to go to the bank tobalance the till. In effect, the bank customers have‘delegated’ to the store manager the bothersome (and, insome cases, risky) job of having to go to the bank tobalance the community’s net cash requirements, and forthat the store gets a commission per transaction.

Making savings useful: payments as adriver for formal savingsSavings accounts have most value when they areconnected to payments systems. In the same way asaccess to clean water is more than being able to buy abottle of water, access to finance is more than being ableto get the occasional loan. Much like the national grid,access to finance really involves being connected to anational payments system.

Once people have a transactional account in a‘payment grid’, they can receive and repay loans, save upand withdraw from a savings account, and use theproceeds to pay for what they need in a more flexible,convenient way. And it enables financial serviceproviders to offer a broader range of services to them at lower cost. Photo 5 (previous page, right) showscompeting mobile money transfer services in Kenya: thebank-based Postbank, the mobile phone account-basedM-Pesa, and the non-account-based Western Union.

Can this model work?This vision – of banking beyond bank branches – is nowcoming true. Brazil has seen 37,000 such retail ‘bankcorrespondents’ (stores offering deposit and withdrawalservices on behalf of banks) open up, most in the last five

years, with the result that all municipalities are nowcovered by the formal banking system. In Kenya, the M-Pesa mobile money service in its origins relied on a mobile operator’s broad prepaid card distributionnetwork to double up as cash in/cash out points. Suchmodels also exist in the Philippines, South Africa, Peruand Colombia, and are being piloted across manycountries in Africa.

To achieve universal access, new banking systems areneeded that work for the poor and yet are commerciallysustainable. These systems need to be built on low-value,high volume platforms, leveraging retail infrastructuresthat already exist. Low-value transactional savingsaccounts – which are merely the gateway to a range ofbanking services for the poor – should involve lighterregulation because of the lower risks and the relativesimplicity of the product. If these models provesufficiently replicable and scalable, it will be possible formillions of people to make small deposits into their bankaccount through a variety of cash handling outlets rightin their neighbourhood, on a daily basis, as and whenmoney is earned. This will enable poor people tomanage more effectively their productive activities anddaily cash flows, build up assets, and handle health orlivelihood shocks.

Ignacio Mas is Deputy Director and leads on research, policyand financial infrastructure work in the Financial Services for thePoor programme at the Bill & Melinda Gates Foundation. Hiscareer spans roles in policy (with CGAP and the World Bank),the private sector (Vodafone and Intel Capital) and academia(University of Chicago).

Guided by the belief that every life has equal value, the Bill &Melinda Gates Foundation works to help all people leadhealthy, productive lives. In developing countries, it focuses onimproving people’s health and giving them the chance to liftthemselves out of hunger and extreme poverty. The FinancialServices for the Poor initiative aims to increase the poor’s accessto a range of low-cost, high-value financial services that betterenable them to meet daily needs, cope with risk, and lead healthyand productive lives.

PO Box 23350SeattleWA 98102USA

Tel: +1 206 770 2120+1 206 709 3100

Email: [email protected]; [email protected]

Website: www.gatesfoundation.org



To achieve universal access, new banking systems are needed that work for the poor and yet are commercially sustainable.

THABAZIMBI LED VUNA AWARD STATEMENTThabazimbi Municipality is excelling in living up to its mission of promoting, implementing and ensuring the financially andenvironmentally sustainable and development of the Municipality with a diversified and viable economy that provided anenvironment and services that benefit all.

The Municipality is one of the country’s most progressive developmental institutions, offering unsurpassed business,industrial and tourism development. It has demonstrated its tremendous economic growth prospects through the existenceof its diverse economic potential, therefore affording the Municipality an opportunity of being the national Vuna Awardwinner for Local Economic Development in 2008. The Agricultural–Tourism–Mining development value chain positions theMunicipality to be one of the prominent economic hubs in South Africa.

Critical to the success of local economic development of Thabazimbi Municipality is the comprehensive facilitation of thisfast growing economy, which encompasses upgrading of current infrastructure, improving business skills for SMMEs, andpractically closing the development gaps for communities education and employment. Strong co-ordinated efforts doprevail amongst different Stakeholders in addressing these economic challenges.

Existing pillar sectors like Mining, for instance, partake in sound processes towards addressing job creation, Municipalinfrastructure backlogs and capacity constraints.

The development activities in Thabazimbi take strong cognizance of planning that is in line with the national and provincialgovernment policies and initiatives(eg NSDP, PGDS, ASGISA etc). While we strengthen the Municipality’s long termeconomic competitiveness, these legislative mandates and guidelines serve as yardsticks through integrated developmentprocesses. The Municipality has a sound Integrated Development Plan, Local Economic Strategy, Spatial DevelopmentFramework, Land Use Management System that are all core to the current systematic economic growth within theMunicipal area.

While we embrace our visible and self explanatory achievements, we are also aware that there is still a long road towardsachieving our vision of being the leading municipality offering quality services in the most economic, affordable, equitableand sustainable manner. Some of the critical challenges still facing the Municipality include lack of land for ever growingdevelopment, poverty and skills development. With this dedication staff and leadership the Municipality is going for muchgreater heights.

CONTACTMunicipal Manager: TSR NKhumise

THABAZIMBI MUNICIPALITYWORKING TOGETHER FOR PROSPERITY

Tel: (+27) 14 777 1525E-Mail: [email protected]

Fax: (+27) 14 777 1531Web: www.thabazimbi.gov.za



Virgin Unite: a revolution from withinWhile technology continues to improve the standard ofliving for millions in the developed world, there are stillmany millions more in Africa and Asia living in abjectpoverty. I find it hard to accept that half the planet liveson less than US$2 a day or that tens of thousands ofpeople die every day from preventable, treatable diseaseslike AIDS, TB and malaria. Conflicts continue todevastate across the globe, leaving far too many peoplewith no education, no democracy, no government, noenforceable legal system – and often no simple choicesto lead to a better life. Even in wealthier countries likethe UK, the US, Canada and Australia, millions of youngpeople face homelessness and unemployment, withoutthe skills or education to help them out of this situation.

We believe the only way we can address the scale andurgency of these challenges is by coming together. Weneed a revolution. A revolution in the way we thinkabout the world. A revolution in the way we worktogether for common interest, and a revolution in ourapproach to tackling tough social and environmentalproblems.

We’ve never shied away from a challenge at Virgin, but despite there being some 50,000 of us in ourbusinesses across the Group, we know that we cannot doit all by ourselves. Collaboration is essential. That’s why

in 2004, we launched Virgin Unite, the non-profitfoundation of the Virgin Group. Working in the UK, the US, Canada, Australia, South Africa and several other African nations, the aim is to revolutionise the way businesses and the social sector work together. Toachieve this, we are uniting people to tackle tough socialand environmental problems with an entrepreneurialapproach.

Microfinance: the entrepreneurialapproachWhat is an entrepreneurial approach? I think being anentrepreneur is about seizing opportunities and takingmeasured risks. It is about challenging convention andbeing bold. It is about thinking differently and beingprepared for occasional setbacks. Entrepreneurs do notaccept the status quo; they create the change they wantto see. They work extremely hard, learn from theirmistakes, reap the rewards and, I hope, also have a littlefun along the way.

The importance offostering entrepreneursin developing countries

Richard BransonFounder and Chairman,

Virgin Group.

Several years ago, I realised that if Virgin really wanted to make a difference in the world, then wehad to harness the talent, skills and entrepreneurial energy from across the Group, and to embed

social and environmental impact at our core. In short, our businesses had to become a force for good.

Amos Mtsolongo and Musa Maphongwane surrounded by young peopleattending Gaming Zone.

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.We need a revolution. A revolution in the waywe think about the world. A revolution in theway we work together for common interest,and a revolution in our approach to tacklingtough social and environmental problems.



I believe that by encouraging entrepreneurship inpoverty-stricken countries, we can help foster a newgeneration of entrepreneurs and business builders toenergise their communities and create lasting growthand, most importantly, jobs. Entrepreneurs are not onlythe business leaders of the future but they are alsoemployers, and they will play a crucial role in stimulatingeconomic growth.

Some of the most innovative ideas I have encounteredduring my career emanate from those working tirelesslyon the frontlines to support their families and improvetheir local communities. Often the key to success inthese situations is the opportunity for these buddingentrepreneurs to access small amounts of cash to getthem started.

One such example was a lady from the village nearour game reserve Ulusaba in South Africa, whoapproached me for US$300 to buy a sewing machine tohelp set up her business. She told me she would repayme within 3 months and would be employing sixpeople within a matter of months. I was impressed byher determination and single-minded approach, but didnot think I would see the money again.

How wrong I was! Three months later on my returnto Ulusaba, I was met by six women carrying beautifulpillows and tribal clothes they had made, and to mysurprise they returned the US$300. When I asked wherethe original seamstress was, they replied she was at themarket selling their products.

I’ve often thought of her since that day and remainstruck by her confident and responsible approach andher desire to use that sewing machine to improve herlife and that of others.

This approach, more formally known as “micro-finance,” has been championed by Professor MuhammedYunus, who has been developing entrepreneurial ways oflending money in developing countries since the mid-1970s. He founded his Grameen Bank in 1976 toprovide small amounts of low interest loans to peoplewho could not obtain money from traditional banks.

By keeping the rates low he has been able to foster awhole new cadre of entrepreneurs and has transformedthe lives of millions of people. The bank now has 2,400

branches and 7.5 million borrowers. The default rate of2 per cent is lower than those of any other bankingsystem. In 2006 he won the Nobel Peace Prize for thispioneering economic system.

Professor Yunus is a strong believer in “social business”– where business has a strong role to play in generatingprofits to further the greater good of the communityand the business person as well. In fact, we hold the verysimilar view that capitalism, if practiced properly, canmake a lasting difference.

The Branson School of EntrepreneurshipAs we studied the market, we found there were agrowing number of microfinance organisations andlarge-scale investment funds for developing countries;but there was still a growing need for support to catalysesmall- and medium-sized businesses that often fuel thegrowth of an economy.

In response, we established The Branson School ofEntrepreneurship in South Africa in 2006 to supportand educate budding entrepreneurs and incubate theirbusinesses by equipping them with skills and seedfunding. The School is aimed at providing young SouthAfricans access to an environment, which they wouldnot otherwise have, where entrepreneurial talent has thechance to flourish. It has been incredible to watch howthese young people, when given a chance, buildinnovative businesses that not only transform their lives,but the lives of their families and their communities.

Linked to the Branson School, we’ve also set up amentoring programme where successful entrepreneursfrom all over the world can share ideas and connectresources to the budding new entrepreneurs.

We now have plans to expand this initiative to otherparts of the world including Kenya, the Caribbean, theUK and the US. In each market, it will be tailored to thelocal needs of the community and built to createopportunities for young people.

Entrepreneurship is not only about starting businesses,but also just often about adding a new twist to an idea.This spirit is alive and well in many developingcountries of the Commonwealth and often all we needto do is listen and learn from the people most impactedby issues.

For example, many organisations are doing great workby putting health workers on motorbikes. When wespoke with some of the riders, they wanted to becomeentrepreneurs and to use their bikes not only forhealthcare delivery, but also as a business. This struck usas a great solution to how to fund a rural transportsystem and build a sustainable future.

Young People attending Gaming Zone.

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Capitalism, if practiced properly, can make a lasting difference.



Following on from these discussions we set up theRural Transport Network, which works with partners toprovide motorbikes to health workers in rural Kenya.These health workers literally save lives by deliveringessential medicines and health education to people inisolated areas, and they are also entrepreneurs. They haveused their motorbikes to start up their own localtransport businesses, such as a taxi or delivery services,enabling them to earn a livelihood for themselves, theirfamilies and communities.

Some of my colleagues have also just come back fromZimbabwe where we are working with local andinternational entrepreneurs and businesses, the UnityGovernment and a host of other partners to establish aTrust to help get investment flowing back into thecountry to stimulate growth and help a new generationof entrepreneurs to access capital, partners and support.It is still at an early stage but we are determined tobring together these disparate parties and to make alasting difference.

These are just a few of the initiatives that we believedemonstrate how business can be a force for good.Businesses and successful entrepreneurs have aresponsibility to increase their positive contribution inlocal, national and global communities. I believe that byworking together, learning from each other andcombining our strengths, we can achieve far greaterimpact. We all have an important part to play and I amoptimistic about the future because, by bringing togetherthe right bunch of people, we can achieve anything.

Gaming Zone: a case studyGaming Zone is just one of the businesses that theBranson School has fostered and invested in. After comingup with the business idea in 2006, Musa Maphongwaneand Amos Mtsolongo teamed up to launch their venture:a video arcade franchise housed in repurposed shippingcontainers. The business offers deprived children inSoweto and East Johannesburg safe access to the internetand access to the latest computer games technology.

During their time at The Branson School, thededicated entrepreneurs were taught how to maintainmonthly accounts, manage a customer database and howto identify when to invest in the expansion of theirbusiness. They received business advice from diverseprofessionals, business leaders and entrepreneurs whovisited the School to mentor the students.

Gaming Zone is not only profitable, but has had amajor social impact on the areas in which it has beenbased, all of which have high levels of crime. Childrenare able to have fun, socialise and even learn in amonitored setting after school has finished – up to 120children visit each day.

Gaming Zone currently employs 15 people and hasseven containers. The business has been so successful thatthey have received an additional R250,000 (US$32,000)capital investment to support their future growth. Thisinvestment has enabled them to upgrade their internetconnection, buy the latest games and acquire more sitesacross South Africa. Musa Maphongwane believes that,“What makes entrepreneurs different from other peopleis that they are self motivated and self driven. They canidentify opportunities that others cannot see and theyalso want to create employment and help the society.”

Sir Richard Branson is Founder and Chairman of the VirginGroup. Virgin is one of the world’s most recognised and respectedbrands and has expanded into many diverse sectors from air andground travel to telecommunications, health, space travel andrenewable energy through more than 200 companies worldwide,employing approximately 50,000 people in 29 countries. In2007, Richard and his close friend, Peter Gabriel, collaboratedwith Nelson Mandela to help bring together a group of ‘globalelders’. Founded with the support of Virgin Unite and a greatgroup of partners, The Elders comprises 10 visionary leadersincluding Graça Machel, Archbishop Desmond Tutu, KofiAnnan and President Carter. They work both publicly andbehind the scenes, collectively and individually, in areas of conflictsuch as Kenya, Cyprus, Darfur and Zimbabwe, and also workon a number of global issues, such as health and gender equality.

The Branson School of Entrepreneurship was established inJohannesburg in 2006 to nurture budding entrepreneurs andequip them with the skills and seed funding to launch successfulbusinesses of their own. The students receive intensive mentoringand are also given exposure to successful local and internationalentrepreneurs. Virgin Unite is the non-profit foundation of theVirgin Group. It works closely with CIDA City Campus(South Africa’s first virtually free university for young peoplefrom economically disadvantaged backgrounds) and otherpartners, including several Virgin businesses, to train more than800 young people each year. The School can incubate up to 35businesses for a 12-month period and a seed fund has supported19 businesses, employing 175 people to date.

Virgin Unite, The School House, 50 Brook Green,Hammersmith, London, W6 7BJ, United KingdomTel: 0203 126 3962 Fax: 0203 126 3980

Gaming Zone founders Musa Maphongwane and Amos Mtsolongo.

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The story of Africa today is often told in grimstatistics. Three-quarters of those living on less than

50 cents a day are in sub-Saharan Africa; it has 11percent of the world’s population, but 60 percent of theworld’s people living with HIV/AIDS, and average lifeexpectancy is actually decreasing in some places.

But there is a different story unfolding on thecontinent as well: the story of women and families insome of the poorest communities in the worldendeavoring to change their own lives. It is a story ofhope, not despair. Meeting these women and girls is oneof the great joys of our work. We’ve seen firsthand whatCARE’s experience shows: empowered, financiallyliterate women and girls are among the world’s mostpowerful forces in the fight against global poverty.

The power of financial servicesNearly four decades of global microfinance experiencehave shown that when poor people have access tofinancial services – secure savings, credit, insurance andother products – they can change their lives and buildstronger, more prosperous communities. They investwisely, not only in income-generating activities, but alsoin the welfare of their families. And these are not isolatedstories of success; the trend is evident whenever theimpact of microfinance is assessed. Increased householdincome for women translates directly into increasedlevels of health and education for the entire family.

In a small village in Malawi called Chipanga, CAREhelped 11 women create a savings group. Eachcontributed 19 cents a week to a common fund so theycould give one another loans and begin realizing theirdreams. Here is what they have done with their money:

A woman named Eneles opened Chipanga’s first grocerystore; her friend Nelia bought the first TV in town andruns a community cinema; and a woman namedPatience earned enough money to raise 19 pigs and 10goats. Last year, Patience generated more than $350 insavings – that means she has almost a year’s income savedaway to give her and her family financial security.

Today, over 90 women in the village participate insavings groups, following the example of the first 11.More than just securing a loan, these women areachieving financial freedom – saving their money,planning for their future and, most importantly, buildinga new awareness that self-worth is more important thannet worth.

Pulling from CARE’s State of the Sector Report:Bringing Financial Services to Africa’s Poor which willbe published in the fall, we would like to examine whymicrofinance overwhelmingly benefits indigent women;why Africa is now on the brink of its own microfinancerevolution; and finally, how CARE’s own innovativecontribution to microfinance – the Village Savings andLoan – may be introduced.

Why does microfinance focus on women?Since microfinance began in the early 1970s,approximately 70 percent of the clients of microfinanceinstitutions (MFIs) – and often 100 percent – have beenwomen. The reason for this is deliberate and strategic.Women are the best conduit for ensuring thatmicrofinance confers the greatest possible benefit on thegreatest number of people.

Throughout the world, women are responsible for thewell-being of their families. Most girls are obliged to

The last frontier:bringing financialservices to Africa’s poor Dr Helene Gayle

President and CEO of CARE USA andGeoffrey Dennis

Chief Executive of CARE International UK

Since the 1970s, a microfinance revolution has taken hold in Asia and Latin America. Thesemicrofinance interventions have evolved into strong, countrywide and regional networks serving

the poor. This is not so in Africa, where investment has been small, fragmented and insufficient togrow and sustain services among dispersed populations separated by vast distances. Decades afterthe first experiment in microcredit was launched in Bangladesh, financial services are at lastreaching their final frontier – the remote villages and teeming slums of Africa.



start performing household chores at an early age –sometimes as soon as they can walk – and this fosters inthem a work ethic and a sense of responsibility asnurturers, caregivers and educators of their youngsiblings. When women earn money, they invariablyinvest their earnings in improving the lives of theirchildren and families with better food, clothing, shelter,health care and educational opportunities. When womenearn, everyone benefits.

Until very recently, the cost of bringing financial services – even microfinance services – to remote

parts of Africa has been prohibitive, and the logistics of doing so daunting.

Moreover, poor women who have access to financialservices have proven themselves to be highly credit-worthy. Anecdotal evidence indicates that women repaytheir loans more consistently than men. Necessity hasmade women careful strategists who plan for the future, shrewd risk-takers with an eye for economicopportunities and hard workers who put their families’welfare first. Investing in the earning power of womenpays big dividends for families, for society and for MFIs,enabling them to serve more and more clients.

Thanks to microfinance, married women often gaingreater control over household assets, a more equal sharein family decision-making and greater freedom toengage in income-generating activities. Moreover,women involved in microfinance groups are moremotivated to take action to improve their lives and thoseof their families, and are more likely to engage in socialand political activities.

The effectiveness of microfinance is also evident in theextraordinary efficiency of the transactions. Typicalmicrofinance loans can be as small as $50 or even less –which is one reason why banks have not been interestedin microfinance: such small amounts are simply notprofitable for banks – yet these tiny sums can have anamazing impact on people’s lives.

Why focus on Africa?In Africa, microfinance has caught on more slowly thanin other regions of the developing world. While it hasmade some inroads, primarily in urban areas, the greatmajority of Africans who live off the land and in smalltowns and villages have yet to be reached. Until veryrecently, the cost of bringing financial services – evenmicrofinance services – to remote parts of Africa hasbeen prohibitive, and the logistics of doing so daunting.

In Africa’s vast rural areas, where the world’s poorestpeople eke out a living in sparsely populatedcommunities, lack of infrastructure and untenably highcosts per transaction have kept MFIs away. The low levelsof savings and demand for credit generated by suchclients are usually not viable, even for nimble MFIs thatoperate efficiently. Reaching the poorest of the poor has been limited because the scale and structure ofmicrofinance programs have been defined by the needto build healthy institutions and a commitment toprovide services to the enormous population ofunserved rural poor.

In densely populated areas of Asia and Latin America,providing credit has been the driving force ofmicrofinance because there are many opportunities toinvest in income-generating activities. Up to now, mostefforts have been focused on overcoming the obstaclesinvolved in bringing banking and microfinance toAfrica’s poor. Rural Africans have been left out mainlybecause they have been hard to reach and their bottom-rung economic status makes savings very difficult.

In 2006, Consultative Group to Assist the World’s Poor(CGAP) conducted a global survey of formal institutionsthat offer savings and credit services to lower incomepeople including MFIs, postal savings banks, state-ownedbanks, rural banks, credit unions and financial co-operatives. Sub-Saharan African countries accounted foronly four percent of the global total, with an average offour savings or loan accounts per 100 people, comparedwith 17 accounts per 100 people in Asia and the Pacific.In rural Niger for example, there is one bank branch forevery 844,000 people.

CARE’s innovative contribution tomicrofinanceCARE has developed a radically different approach tobuilding the financial health of Africa’s poor. It has founda way to enable isolated, often illiterate women to betheir own bankers. CARE’s experience has shown thatthe answer is not necessarily to bring banks or MFIs toAfrica’s poor but, instead, to make it possible for Africa’spoor to create their own basic Village Savings and LoanAssociations (VSLAs) without any outside funding.

By mobilizing small amounts in savings and interestaccrued from loans, CARE’s VSLAs are already laying afoundation of economic security and expandingeconomic opportunities for 1.2 million Africans. InNiger, the world’s poorest country and the site of the firstVSLAs, nearly 200,000 women have collectively amassed$14 million in savings. Moreover, 60 percent of the

Women are the best conduit for ensuring that microfinance confers thegreatest possible benefit to the greatest number of people.

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money saved by these groups is loaned out to members.The rest is redistributed to members with interest.

Since 1991, CARE has implemented VSLAs in 16African countries. The approach is based on savings andproviding financial services such as savings, credit andinsurance to women and subsistence farmers in the sub-continent’s least developed regions. CARE’s VSLAs buildtheir assets, and disburse credit, solely from membersavings. The self-managed, flexible system enables VSLAmembers to take advantage of economic opportunitiesthat present themselves and to respond to unforeseenchallenges such as illness that would otherwise drivethem into a cycle of uncontrollable, unpayable debt.

The VSLAs are not in competition with MFIs, butcomplementary to them. Over time, VSLAs help createpools of clients who advance to use MFI services.CARE estimates that between 20 and 30 percent ofVSLA members will pursue a greater array of financialservices than those offered by VSLAs alone.

VSLAs impact on communitiesWhile systematic studies of the impact of CARE’sVSLAs are still ongoing, extensive anecdotal evidencegathered by observers on the ground indicates that theirimpact has been significant and far-reaching. One suchobserver is Rahila Mamane, a former VSLA facilitatorand trainer with CARE Niger. In the 18 years since shetrained women in CARE’s first VSLAs in six villages inNiger, she has witnessed marked improvements in thelives of the people in these communities.

“The women tell me that, since we started these groups,

their lives have completely changed.”

All of the groups that CARE established in 1991 arestill functioning. Members are accumulating largeamounts of savings, and taking and repaying loans withinterest. In fact, following the women’s lead, men inthese villages have now started their own VSLAs as well.Moreover, young people who 18 years ago were infantsand toddlers have also started VSLAs of their own.

When Ms Mamane visits these villages today, she iswarmly welcomed. “The women tell me that, since we started these groups, their lives have completelychanged. Before, they used to cook one meal and it hadto last three days. Now, everybody cooks every day. Inthe past, people didn’t take their children to the hospital.Now they do. In the past, almost all of the women wereilliterate and many children did not attend school. Today,many women have joined literacy groups and they insistthat their children go to school. In the old days, most ofthe houses were made of straw. Now, lots of people havebuilt brick houses. Some people have bought goats,some have bought calves and these things multiply. I metone woman who has seven milk cows – all because of asavings group. It is really amazing.”

The way forwardThe potential benefit of reaching out to the poorestpeople in remote rural areas and city slums is becomingincreasingly apparent. CARE’s VSLAs reach clients thatformal financial institutions are unable to serve: poorwomen and men who are able to save as little as 10 centsa week. But providing financial services that will enablethe poor to lift themselves out of poverty requiresinstitutions like VSLAs, MFIs and traditional banks, aswell as technological innovations and improvements inpublic policies to expand their capacity.

After more than 30 years of supporting microfinanceand nearly 20 years of nurturing VSLAs, CARE andother development organizations have reached aconsensus: the poor need access to an array of flexible,cost-effective and sustainable financial products andservices. They need a durable structure – a sustainablegroup where they can benefit from solidarity and theopportunity to learn new skills, solve problems andtackle a myriad of development-related issues. Thismodel will help them build strong, prosperouscommunities and benefit the entire world.

Dr Helene D. Gayle, MD, MPH, is President and CEO ofCARE USA. Dr Gayle is an internationally recognized experton global health and development issues. Before joining CARE,she held top leadership positions at The Centers for DiseaseControl and the Bill & Melinda Gates Foundation.

Geoffrey Dennis joined CARE International UK as ChiefExecutive in 2004. He had previously served as chief executiveof Friends of the Elderly, international director at the BritishRed Cross and Head of South Asia with the InternationalFederation of the Red Cross.

CARE is a leading humanitarian organization fighting globalpoverty. Last year, CARE programs improved the lives of morethan 55 million people in 66 countries. CARE places specialemphasis on working alongside poor women because, whenequipped with the proper resources, women have the power tohelp whole families and entire communities escape poverty.

To pre-order a copy of CARE’s State of the Sector Report:Bringing financial services to Africa’s poor please email:[email protected]

People have bought livestock through CARE’S VSLAs scheme.

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The current growth in the security printing industryhas been set in motion by a range of new

circumstances. These include the issue of the new e-passports driven by the International Civil AviationOrganization (ICAO), an increase in economic crime,illegal immigration, ID theft and international terrorismfunded by fraud. Increased tracking and surveillancerequirements for ‘people products’ and documents hasled to the development of sophisticated electronicinfrastructures. Almost all such systems need a referencenumber – whether it is the MRZ on a passport or thebarcode on a clothing tag. All these physical items needsome form of physical security feature ranging fromholograms to microprint to DNA tagging.

Technology trends in secure documentsTrends in tecnology introduced in recent years include:

• The use of lasers to permanently inscribe portraitssignatures and personal data into plastic cards andpassports, especially using tactile effects and perforatedimages which change their appearance according toviewing angle

• The use of nanotechnology in optically variabledevices (OVDs), enabling unique machine readablecodes to verify the origin of materials

• Affordable 3D holography through the use of newphotopolymers, successful in reducing or eliminatingthe sales of counterfeit mobile phone batteries

• Machine readable systems for taggants and 2D codes,resulting in easier detection of counterfeit tobaccoproducts at ports of entry

• Radio frequency identification (RFID) for tracking orreading secure documents

• The widespread use of OVDs in currency,demonstrating the versatility of this technology.

Applications for security printtechnologyTraditional security applications can be grouped asfollows:

• Financial: banknotes, cheques, traveller’s cheques, bondsand share certificates. The use of cheques is decliningglobally but there are still some areas, particularly inAfrica, where they are widely used. Australia and NewZealand were leaders in the use of polymer banknotesand a new generation of security features.

• Identity: passports, ID cards, visas, driving licences andbirth certificates. Of the Commonwealth countriesMalaysia was the first to issue an e-passport in 1996.Australia was one of the first countries to issue anICAO-compliant e-passport in 2005 and Singaporeand the Bahamas followed in 2006. Brunei is currentlytrialling e-passports and India has just started to issuethem.

• Tickets: travel, sports events, lotteries, transport andentertainment

• Brand protection: industrial products, clothing,cigarettes tobacco and pharmaceuticals

• General security: including postage and revenuestamps. Tax stamps are a favourite target ofcounterfeiters and brand owners have often failed torealise the impact of diversion or counterfeits on theirsales until it is too late. However some spectacular gainsin tax revenue have been realised by governmentdepartments who assist brand owners in eliminatingillegal trade in alcohol and cigarettes.

Market and technologytrends in securedocuments

Michael ChamberlainChief Consultant, Pira International

The importance of security printing has never been as great as it is now. The threat from identityand brand theft, and the increased mobility of global citizens makes it necessary for personal

credentials or evidence of genuineness to be produced in greater numbers than ever. The US FederalBureau of Investigation described counterfeiting as ‘the crime of the century’. It is estimated thatthe loss to world trade due to counterfeiting and piracy was over US$500 billion in 2006. In recentyears we have seen the integration of physical document security and electronic security through theintroduction of product tracking systems and databases AND biometrics in ID cards and passports,and it seems the prospects for growth of the security industry are bright.



Market size of the security printing industryThe total market value for security printing in Europe isestimated to grow from € 1.3 billion in 2002 to € 1.85billion in 2012 (Table 1). The compound annual growthrate (CAGR) was 3 per cent for 2002-07 and is forecastat 4.1 per cent for 2007-12.

The financial end-use (currency) market had aCAGR of 3.1 per cent for 2002-07 and is forecast tohave a CAGR of 5.2 per cent for 2007-12, due to theintroduction of the euro in the new member states andthe launch of new euro banknote designs. Identity andbrand protection end-use markets are forecast to haveCAGRs of 4.2 per cent and 4.6 per cent, respectively,for 2007-12.

Technology growth areas can be grouped into seventopics: DOVIDS, watermarking, taggants, secure inks/coatings, biometrics, substrates and print processes(Figure 1).

DOVIDsDOVID stands for Diffractive Optically Variable ImageDevice and was a term introduced in 1995 (by IanLancaster) to describe all security devices that are basedon the diffraction of light by fine gratings. It includes 3D holograms and flat artwork like Kinegrams® andAlphagrams®. Kinegrams were first used in Swisscurrency in 1988.

Catpix I diffraction gratings were first used astransparent patches on the 1988 Australian plastic A$10banknote. Catpix, later known as the Pixelgram (1991),was developed by the Commonwealth Scientific andIndustrial Research Organisation (CSIRO) which usedelectron beam lithography to create diffractive fringeelements. These were less dependent on illuminationthan the early holograms.

In 1996 the first use was made of dot matrixholographics in security. This technique made hologramscheaper and more available to the label market. Thefollowing five years saw a boom in the production ofholograms and OVDs. Despite market consolidation,OVD patent activity continues to grow, with 31 patentsbeing published in 2007 compared with 15 in 2003 andnine in 2001. One recent example is the ‘zero pointzero’ in-register demetallised OVD from Kurz.

WatermarkingWatermarking is the incorporation of hidden datawithin digital image files. Driven by the need to stopcopying of banknotes on photocopiers by the CentralBank Counterfeit Deterrence Group (CBCDG) thetechnology is used in ID cards, document authenticationand in the protection of copyright.

Counterfeit deterrence systems: taggantsTaggants are trace markers detectable in lowconcentrations by chemical or physical reaction, often byillumination with invisible radiation. These are used incurrency, but also driven by track and trace requirementsfor criminal and civil law, and brand protection, adoptingaffordable machine readable technology

Table 1: European forecasts for security printing.

Security printing by end use, 2002-12 (€ million)2002 2007 2012

Financial 600 700 900

Identity 275 325 400

Tickets 100 115 120

Brand protection and packaging 200 240 300

General 125 130 130

Total 1,300 1,510 1,850

Figure 1. Estimated market forecasts for technology growth areas.



Secure inks and coatingsThe range of inks and coatings available to the securityprinter is vast. The latest colour shift pigments change colourdepending on the angle of view, and provide an easilyverifiable signal of authenticity if properly used. Othersystems can convert light up or down the visible spectrum.Markets are driven by currency ID and brand protection.

BiometricsThis is probably the fastest growing sector at present.Methods of facial image printing include laser, thermaltransfer and inkjet, but the capture of biometric datarequires deployment of equipment and systems includingencryption software and data logistics and storage.

SubstratesSubstrates for security printing are principally paper forcurrency. The market is forecast to grow from € 255m to€283m by 2012. New technology includes the use ofwindows in banknotes enabling transmission effects aswell as reflection. The use of polarised screens to detecthidden images is also increasing. In brand protection, anew development is a subtly embossed board with apattern seen only by a hand-held decoding lens.

Printing processes Increasing use of digital printing technology enables the production of personalised documents but thetraditional intaglio litho and screen processes are stillwell established.

Identity (ID) cards and e-passportsFor ID card production, the user’s biometric template isstored on a secure smart card or e-passport. In use, thetemplate is compared to the live biometric characteristicsand a match is confirmed in the card or reader. Facialbiometrics predominate (ICAO also endorses fingerprintand iris; the introduction of two biometrics in Europeane-passports has already started with fingerprints inGermany).Virtually all ID documents include multiplesecurity features. Note that a ‘dead’ chip does notinvalidate a passport – it still continues to have all theoriginal security features.

The number of e-passports in circulation continues togrow (Figure 2); 54 countries have now issued them andby the end of 2009, it is expected that this will increaseto 90. This will then make the number of ePassportsbeing issued worldwide equal to 70 to 80 percent of the

total annual volume of passports now issued, or around120 million documents.

Durability for 10 years is still a worry for many issuersand test labs such as Pira are working on ways ofpredicting lifetimes

Technology trends to 2012A personal prediction is that we shall see more growthin three-dimensional OVDs, with the eventualproduction of 3D portraits in ID documents. Polymerelectronics will start to replace silicon, bringing costsdown and opening up the smart packaging market.There will be more interactive documents andelectronics, particularly multifunctional mobile phones,and e-banking will mean that e-cash cards will replacelow note and coin denominations. Security printing willcontinue to be a major requirement of governmentagencies and service providers.

This article is based on a presentation given at ‘SecurityPrinting & Alternative Solutions in Central/Eastern Europeand Russia/CIS’ in Slovenia, January 2008. Reference:IntertecPira, ‘The Future of European Markets for SecurityPrinting III.’

Michael Chamberlain is a Chief Consultant at PiraInternational UK. He joined Pira from Wiggins Teape R&D in1989 as Head of Technical Investigations, and was until 2003responsible for technical, consultancy and expert services inprinting and paper technology. He is now responsible for Pira’stesting and consultancy activities in the field of DocumentSecurity and Brand Protection and maintains an active interestin security technologies for personal ID, document authenticationand secure packaging. He was a UK nominated expert on theISO committee JTC/SC17 (e-Passport durability) and nowserves on the ISO card standards committee.

Pira International was established in 1930 as a ResearchAssociation to carry out technical research for governmentdepartments and industry partners. Pira is now a well-knowncommercial consultancy, testing and media business whichspecialises in providing information and technical services to thepackaging, paper, plastics, printing, publishing and electronicmedia industries. In March 2004, Pira International wasacquired by Ciba Specialty Chemicals, now owned byBASF.This development enabled Pira to expand its globalpresence as part of a multinational services business whilstretaining its wellrespected independence and neutrality.Pira’s next Security Printing Conference will be in Prague26th-28th January 2010.

Pira InternationalPira House, Cleeve Road, LeatherheadSurrey KT22 7RUUnited Kingdom

Website: www.piranet.com

Figure 2. Estimated number of e-passports in circulation, 2006-11.

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Freetown City Council fcc.gov.sl

Freetown City CouncilBi-Centenary House, 17 Wallace Johnson Street, Freetown, Sierra Leone.Tel: 232 22 225045 I Mob: 232 77 628971 I Email: [email protected]

Why should you join visitors and investors coming to Freetown,Sierra Leone?POLITICAL CAPITAL� Government of H.E. Ernest Bai Koroma’s Agenda for change focusing

on power, agro-business, transportation, social capital – education, health, etc

� Now politically stable a decade after end of civil conflict� Moved from peace building to development.� A tradition of exemplary democratic transitions.� Big and ongoing improvements in ‘doing business’ climate

http://www.visitsierraleone.org/sierra_leone_news/view.asp?ID=606� Major Judicial reform on track� Bold new leadership in nation’s capital city Freetown – (fcc.gov.sl) blazing a trail of urban

renewal and local economic development, to place the oldest Municipality south of the Saharaback on the map.

ECONOMIC CAPITAL� One of the friendliest people on earth – incredibly hospitable� Abundant affordable labour� Abundant natural resources - Gold, Gems, Petroleum, Rich marine life varieties and delicacies� Vast arable lands, very high fertility in one of the heaviest rainbelts in the world � Eco-tourist’s paradise – makes the Carribean a dress rehearsal� World’s second Largest natural harbor� New Hydro-power making the difference� Freetown and beyond a treasure trove of history – ruins and remains of a forgotten past,

uncovering African-American roots; building blocks of Europe and the Americas (The Slave Trade);and cradle of modern education and civilization in black Africa, once known as ‘Athens of Africa’

His Worship theMayor of the Municipalityof Freetown,Herbert AkieremiGeorge-Williams

Mr BowensonF. Phillips, ChiefAdministrator,Freetown City Council



This is an anxious time for the global financial systemand for the world economy as a whole. What began

as a financial crisis has become a global economicdownturn. Many trillions of dollars have literallydisappeared from the global economy.

Given this, it may seem an unusual time to talk aboutextending financial services to the 2 billion peoplewithout them.

Those without access to banks But I would argue that the financial crisis has shown usprecisely how vital banks are to any economy – be it inAmerica, Europe, Africa or Asia. It is because the banksmatter so much to all of us – as savers, as householdersand as business people – that governments and othershave stepped in to safeguard them against collapse. Yet for 2 billion people these basic tools of financialmanagement are out of reach. This lack of access to finance in some parts of the developing world stiflesentrepreneurship, stunts development, and leaves peopletrapped in a poor, cash-only society.

Yet advancements in technology that have changedour lives over the past 10 years have the potential toeven more powerfully transform the lives of the world’spoorest people.

Mobile phones – transforming lives While many of the world’s poorest people remainwithout access to finance, there has in recent yearsbeen an extraordinary explosion in the number ofmobile phones in developing countries. 10 years ago,just eight per cent of the world’s population had accessto mobile phones. Today that proportion has risen to

more than half the worlds’ population – some fourbillion people.

Africa has the highest growth in mobile phonesubscribers anywhere in the world at more than 50 percent a year over the past five years alone. And mobilephones, by enabling people in developing countries to‘leapfrog’ crumbling or non-existent infrastructure, arealready transforming lives for the better.

A recent study out of Harvard tracked fishermen offthe coast of Kerala in southern India, and found thatwhen they started using mobile phones to call aroundprospective buyers while they were still out at sea, theirprofits went up by an average of eight per cent – whileprices in the local marketplace actually went down byfour per cent. Mobile phones didn’t just result in a betterdeal for producers – they led to a better deal forconsumers as well.

And mobile phones – along with other technologiessuch as smart cards and biometrics – are beginning tooffer the opportunity of giving financial services to themany millions of people who have never had a bankaccount.

Mobile banking – domestic andinternational opportunities Vodafone and Safaricom’s mobile money transfer servicein Kenya – M-PESA – was launched two years ago withsupport from the UK’s Department for InternationalDevelopment. M-PESA allows customers to effectivelymake payments by text message and then access anetwork of agents in petrol stations, supermarkets orsmall stores across Kenya to deposit or withdraw cash.

In just over two years since it was launched, M-PESAhas over six million subscribers, which means that there

Mobile banking: thepotential to providemillions withfinancial access

Mike FosterParliamentary Under-Secretary

of State, UK Department forInternational Development

More than a third of the world’s 4 billion mobile phone users live in developing countries andmany of those lack access to basic financial services. Mobile banking can dramatically reduce

the cost of delivering financial services to the poorest by up to 50 per cent and increase the outreachof financial services to poor people. However, for this to happen there have to be changes in bankingregulation, industry models and commercial strategies by financial service providers. The majorchallenge is that policy makers and regulators are struggling to develop effective regulation for thisnew and fast-changing environment, which is at the convergence of technology and financial services.



are more M-PESA customers in Kenya than there arebank accounts.

There is a huge opportunity across the developingworld to replicate this kind of success. In Pakistan, just25 million people have bank accounts, while 70 millionhave mobile phones. There is a clear market need thatshould to be served. An example of this happening is inPakistan where Telenor Pakistan, the second largestmobile provider in the country, took a controlling stakein Tameer Microfinance Bank with a view to enteringthe mobile banking market.

But this opportunity does not just exist withincountries. For as people move across the world in evergreater numbers, they want to find ways to move theirmoney too. Last year, the total flows of remittancesaccording to the World Bank were over $300 billion.

As the economic downturn takes hold, the WorldBank predicts global remittances will fall by as much aseight per cent as migrant workers find it harder to sendmoney home. But when money is tight, it is even moreimportant that people are able to send money home ascheaply as possible. Mobile phone remittances offer theprospect of cutting the transaction cost to the customerby half – a saving that could go directly into the pocketsof many of the poorest people in the world.

It is not just mobile phone technology that offers newbanking opportunities. One pilot scheme in India isusing smart cards to bring down the costs of transactionsby 90 per cent. In Latin America, banks have used card-swipe and barcode technology to establish more than105,000 virtual branches in shops and post offices inparts of the country that, just seven years ago, had noform of banking at all.

The opportunities of this technology-enabled‘branchless banking’ are clear. But, and rightly so, thereare also concerns at the rapid pace of change in thismarketplace.

Regulators Policy makers and regulators are trying to developeffective regulation for this new and fast-changingenvironment at the convergence of technology andfinancial services. Making policy and law is a difficult

process in terms of providing the right level ofregulation that will determine not only whetherbranchless banking is permitted, but also to what extentit can safely realise its potential to reach previouslyunserved or underserved poor people.

At the beginning of 2009 the UK Department forInternational Development launched a new three-yearproject, Facilitating Access to Financial Services throughTechnology (FAST, see box) to support developingcountry governments and regulators to shareexperience, learn from where others have gone beforeand in so doing, help expand the availability of thistechnology across the developing world.

Private sector supportGovernments and regulators alone will not be able todetermine whether branchless banking can transformthe lives of millions of people around the world. Thatcan only be achieved with the time, expertise andinvestment of telecoms companies, financial providers,analysts, retailers and civil society.

Some might argue that in these tough economictimes, there is no scope for such investment in a growtharea such as this. Others would say that if theopportunity is right, and there are literally millions ofcustomers waiting for a product, then it is an area thatshould not be missed.

It is only by working together – governments, privatesector and civil society – that we can help millions ofpeople to lift themselves out of poverty, by puttingopportunity in the palm of their hands.

Mike Foster is the Parliamentary Under-Secretary of State forthe UK Department for International Development.

DFID, the Department for International Development, leadsthe UK government’s fight against world poverty. One in fivepeople in the world today, over one billion people, live in povertyon less than one dollar a day. In an increasingly interdependentworld, many problems – like conflict, crime, pollution, anddiseases such as HIV and AIDS – are caused or made worse bypoverty. DFID supports long-term programmes to help eliminatethe underlying causes of poverty. DFID also responds toemergencies, both natural and man-made. DFID’s work aims toreduce poverty and disease and increase the number of childrenin school, as part of the internationally agreed UN MillenniumDevelopment Goals.

Abercrombie HouseEaglesham RoadEast KilbrideGlasgow, G75 8EAUK

Tel: +44 (0) 1355 84 3132 Fax: +44 (0) 1355 84 3632 Email: [email protected] Website: www.dfid.gov.uk

FAST

The Facilitating Access to Financial Services throughTechnology programme, or FAST as it has come to be known,will support this growth area in three ways:

• Providing research and diagnostic support for regulators andpolicy makers

• Supporting development of industry standards related tobranchless banking, and

• Supporting development of a policy framework andpromoting adoption of new technology based government toperson payment channels that can help increase efficiencywhile promoting financial inclusion.

Copperbelt Energy Corporation (‘CEC’)transmits and supplies energy in theZambian Copperbelt, the economicheartland of this developing country. CECoperates around 900km of transmissionlines, 38 high voltage substations and80MW of thermal generation, and transmitsand supplies around 800MW of power toZambia’s strategic mining sector and thesurrounding province. CEC has alsospearheaded an information revolutionthrough the installation of optical fibre in themain commercial centres in Zambia.

Formerly part of the mining parastatalZambia Consolidated Copper Mines(ZCCM), CEC was privatized in 1997 andsold to a bidding consortium comprisingNational Grid of the UK and Cinergy of theUSA. The international shareholders soldtheir shares to a consortium of local and

international power investors in 2006 andCEC was subsequently listed on the LusakaStock Exchange in January 2008 in orderto source new debt and equity funding fromlocal and international capital markets.

The current shareholding comprises abalance of stakeholders from the ZambianGovernment that has retained a strategic20% interest through ZCCM InvestmentHoldings; more that 3,000 individualshareholders; local and internationalpension funds and the development banksDBSA and FMO.

The capital market presence provides anadditional source of funding for a sectorthat has often relied totally on Governmentfor financial support. The CEC model is asuccessful example of how to structure aninvestment vehicle that can be attractive to

the capital markets. It has taken years ofeffort to reach this stage, through theestablishment of modern and efficientmanagement practices, and prudentfinancial management leading to a ten yearprofit history.

The Zambian Government has played itspart through the establishment of anindependent regulator, and theimplementation of legislation that hascreated a legal framework for thesuccessful operation of private powerutilities that can co-exist with a state ownedutility, that still takes overall responsibility forthe management of electricity supply.

The Zambian economy has survived theworst of the international credit crunch,with a rapid improvement in the price ofcopper during the second quarter of 2009,and steady growth in other sectors of theeconomy such as construction,communications, agriculture and services.However, the recent power shortages inthe country and Southern Africa generallypose a threat to achieving continuedsustained growth. Furthermore, the lack ofaccess to grid power in many parts of thecountry is hindering development in anumber of provinces.

CEC is responding to the power shortagesin the country and the region by initiatinginvestments in new hydro generation andtransmission. For example, the Companyis completing a detailed feasibility studywith a view to developing the 33MWKabompo Gorge hydro plant in the North-Western Province of Zambia, the regioncontaining the source of the great ZambeziRiver, a previously remote part of thecountry that is currently attracting investorsin mining and tourism.

CEC is also co-operating with SNEL, theutility operating in the Democratic Republicof Congo (DRC), for the construction of anew dual circuit 220kV interconnectorbetween Zambia and the DRC that will becapable of supporting up to 550MW of firmpower trades between the two countries.This is a priority project for the SouthernAfrican Power Pool (‘SAPP’) that is focusedon encouraging a regional approach toinvestment in new power infrastructure.The interconnector will facilitate mutualsupport between different countries instabilizing electricity supplies, and facilitatelong term international power trading.

Further information on CEC can beobtained from the Company’s website:

www.cecinvestor.com

FROM PARASTATAL TO ENTREPRENEUR IN THE ZAMBIAN ENERGY SECTOR

www.cecinvestor.com


107

MANAGEMENT DEVELOPMENT ANDPRODUCTIVITY INSTITUTE (MDPI)

www.mdpi-ghana.org

ESTABLISHMENT AND OBJECTIVESThe Management Development and Productivity Institute (MDPI) was incorporated by Legislative Instrument, LI 1077 of

June 23rd, 1976 as a parastatal to develop best management practices and to promote increased efficiency and

productivity in all sectors of the Ghanaian Economy.

VISIONThe vision of MDPI is to be “A market leader in productivity improvement strategies development and promotion of best

management practices”.

ACTIVITY AREASThe MDPI has two broad activity areas, namely Management Training and Development division and the National

Productivity Centre (NPC).

■❙ The management Training and Development Division conducts between 75 and 85 off-the-shelf managementtraining courses annually which are designed based on a survey of the training demand from potential clients.

These courses are advertised in a training brochure published annually.

■❙ The National Productivity Centre (NPC) on the other hand, features the following programmes and services:

�Customized courses based on demands of customers

�Consultancy Services

�Productivity Measurement and improvement programmes

�Productivity improvement promotion strategies and techniques

�Research and publication

CURRENT FOCUSTop of the programmes of the MDPI is productivity improvement by means of productivity awareness creation, training

and strategy development and productivity measurement at national, industry and enterprise levels.

SELECTION OF EXPERIENCEManagement Training and Development Courses

Practice of Supervision, Office Management and Administration; Administrative Management Skills; Senior Executive

Development; Total Customer Service and Care; Creativity Techniques for marketing; Management of Credit Schemes;

Records Management; Internal Auditing; Computer Application Packages for Businesses; Facilities Management;

Managing Occupational Health and Safety and Workplace Improvement for Safety and Productivity improvement.

National Productivity Centre Activities

■❙ Customer Relationship Management for the Gambia Telecommunication Company Ltd; Banjul – The Gambia

■❙ Improved Supervision: A Team Approach in response to emerging issues – UNFPA

■❙ Management Development Programme for the Ghana Irrigation Development Authority under the sponsorship of theAfrican Development Bank

■❙ Rehabilitation Project Management for Sight Savers International

■❙ Impact Assessment of Small Scale Irrigated Agricultural Project for the Ghana Irrigation Development Authorityunder the sponsorship of the Japan International Cooperation Agency (JICA)

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It is estimated that developing economies worldwideneed to invest 6-7 per cent of their GDP annually on

infrastructure. With current expenditure for infrastructureat about half that level, there are increasing demands onthe private sector to address the significant financing gap.In addition, with greater fiscal pressures faced bygovernments globally, engaging private sector innovationand management expertise is essential to achievinggreater value for money.

Regional setbacksBefore the 1997-98 Asian financial crisis, the privatesector played an important role in financinginfrastructure development in Asia. In the mid-1990s,private investment accounted for as much as 20-25 percent of total infrastructure financing in the region. Withthe onset of the 1997 Asian financial crisis and thecollapse of a number of domestic financial markets, therewas a serious decline in private investment ininfrastructure. Strengthening of regional financialinstitutions and their regulatory oversight, andestablishing enabling frameworks for private sectorparticipation contributed to the recovery process.Immediately prior to the current global financial crisis,private sector investment was estimated to have returnedto 10-13 per cent of total infrastructure financing inAsia, or about half its peak rate.

The current global economic downturn, driven byshattered confidence initially in the financial market inthe United States that then cascaded to Europe and otherdeveloped countries worldwide, has again stemmed theflow of investment to the region. With uncertainty andvolatile market conditions, private sector investors andlenders are exercising increased caution, retreating tomore familiar domestic markets, and requiring higher

returns for risk. Raising funds for new projects and forrefinancing has become increasingly difficult and theenvironment for private participation in infrastructure israpidly becoming even more challenging in developingand developed countries globally.

PPP essential frameworkFor public-private partnerships (PPPs) in emergingmarkets, the establishment of an effective PPPinstitutional framework is even more critical in thisdifficult climate – a framework that is firmly backed bypolitical support and supported by transparent guidelinesand processes for competitive bidding processes. Privatesector investors are carefully evaluating their investmentchoices with even greater emphasis being placed onfundamentals – a welcoming business climate, a fair andconsistent legal and regulatory framework, a transparentand predictable procurement process, and attractive,financially viable, long-term investment options.

Setting in place an effective PPP framework is veryimportant to ensuring a strong response from the privatesector. The private sector needs to know: • What are the public sector’s objectives for pursuing

PPPs• Who in the public sector they are to deal with• Who specifically will make the critical approval,

selection and contracting decisions, and• What criteria and evaluation guidelines will be used

for assessing project proposals.

The private sector also needs to be able to rely onwell-defined procurement guidelines to be able to assessthe cost and the time commitments of preparing aproposal. Prior to engaging in a long-term contractualobligation, the private sector will also need to be assured

Public-private partnershipsfor infrastructure in theAsia and Pacific region:priority issues andchallenges

Elaine GlennieSenior Capacity Building Specialist,Asian Development Bank Institute

Infrastructure is essential for economic growth and poverty reduction, yet access to basicinfrastructure services still remains out of reach for many in the world. In the Asia and Pacific

region about 2 billion people do not have access to electricity. In many countries across the regionpiped water reaches fewer than one in five and in some countries fewer than one in 10 has access toadequate sanitation. Addressing these significant gaps in infrastructure service delivery will becritical to achieving development objectives across the region and globally.



of the effectiveness of legal contractual arrangements andthe reliability of contractual dispute processes.

Equally important is the public sector’s ability toeffectively manage the PPP process to achieve cost-effective delivery of the services it requires. PPP projectprocurement, with its output-based contracts, is typicallymore complex, more resource-intensive, and requiresdifferent skill sets than that of traditional procurement,which is typically input focused. Thus there is theinstitutional challenge of setting up appropriatearrangements and determining the specific roles andresponsibilities of dedicated PPP units vis-à-vis theexecutive and line ministries, and national and subnationalagencies. In addition, the public sector will need toaddress PPP skill and capacity issues, and determine whattechnical advisory services will need to be commissioned.

India’s PPP lead Progress in establishing effective PPP frameworks acrossdeveloping Commonwealth countries in the Asia andPacific region and globally has been led by India. Overthe last decade India has rapidly expanded its PPPprogramme, launching over 200 PPP projects with anestimated value exceeding US$15 billion. India’s PPPprojects are primarily in roads, with significant projectsin other transport sectors – specifically ports, airports,and rail. To achieve this acceleration, the Government ofIndia has successfully addressed a number of criticalchallenges including:

• Establishing a policy framework that has given theprivate sector confidence to invest in PPP projects ininfrastructure while ensuring public sector socialobjectives and due diligence can be maintained.

• Implementing an institutional structure to lead,manage, and fast-track the development of a PPPpipeline of commercially viable projects.

• Adopting uniform guidelines for the formulation,appraisal, approval, and procurement of PPP projects.

Efforts are also underway in other Commonwealthcountr ies in the Asia and Pacific region includingBangladesh, Pakistan, Sr i Lanka and Papua NewGuinea. The Government of Bangladesh, encouragedby successful PPP projects in the power, gas, andtelecom sectors, has taken steps to adopt a number ofimportant policies and guidelines, and establish anational committee to oversee the implementation of the guidelines. Pakistan has begun to structure a comprehensive PPP programme, with theestablishment of a PPP Task Force that reports to thePrime Minister, and an Infrastructure ProjectDevelopment Facility, which provides PPP technicalassistance and offers complementary financingmodalities that support r isk sharing such as creditguarantees and long-term local currency financingoptions. In Sri Lanka, the government’s PPP effortshave been recently revitalised and it is in the process ofstrengthening its PPP institutional framework andreviewing its procurement guidelines. Papua New

Guinea, at the end of 2008, finalised a new PPP policy.The development of the policy, undertaken withextensive consultation with key stakeholders, isexpected to be approved by Cabinet in 2009.

Attractive investment opportunities stillin demandWhile efforts to establish the important elements ofeffective PPP frameworks are proceeding across theregion, these are now set against the backdrop of one ofthe most serious global economic and financial criseswitnessed in recent history. However, even in difficulttimes, capital markets still need to find viable investmentopportunities and infrastructure investment that canoffer lower risk and longer-term returns. Fiscal stimulusprogrammes being implemented worldwide and focusedon infrastructure expenditure may also offer PPPinfrastructure opportunities that need to be exploredand evaluated.

While the impact of the global financial crisis on PPPsfor infrastructure is still being assessed, the fundamentalcomponents of PPPs, delivery of quality service,capturing efficiency gains, and sharing risks, will be asimportant as ever. In this challenging environment it iseven more important for the lessons learned frommature PPPs worldwide, including leading programmesin the United Kingdom, Australia and Canada, to be shared with those embarking on, or in the early stagesof launching, their PPP projects.

The Asian Development Bank initiativesAs a committed partner in the concerted global responseto the crisis, the Asian Development Bank (ADB) isaggressively supporting its member countries in theregion. ADB is actively engaged in the global dialogue,bringing together global experts and policy makers tostrengthen its policy guidance, and to extend its regionalco-operation support. ADB is tr ipling its lendingprogramme to assist in the rapid delivery ofinfrastructure projects that are part of stimulus packagesbeing implemented across the region. An innovativerange of credit enhancements and risk mitigationmeasures will be offered as part of ADB’s AsianInfrastructure Initiative, together with additionalfinancial and technical expertise through partnershipswith the Public Private Infrastructure Advisory Facility(PPIAF) and the Private Infrastructure DevelopmentGroup (PIDG). This will help prepare a pipeline ofinfrastructure projects to attract private sectorinvolvement across the Asia and Pacific region.

The Asian Development Bank Institute (ADBI), with amandate for development research and capacity-buildingfor the Asia and Pacific region, has also programmed anumber of complementary initiatives in response to thecrisis. In addition to closely co-ordinating with ADB onthe global dialogue, ADBI is conducting research to studyimplications for sustaining inclusive growth beyond thecrisis. ADB and ADBI’s flagship study on infrastructureand regional co-operation will provide specific policy



guidance on infrastructure, which is now an importantfocus for stimulus programmes across the region. ADBI isalso implementing a global PPP for an infrastructurecapacity-building program in collaboration with theWorld Bank Institute and the Multilateral InvestmentFund of the Inter-American Development Bank. TheMultilateral PPP for Infrastructure Capacity Buildinginitiative seeks to improve PPP policy development andproblem-solving skills to address capacity constraints thatimpact the ability of developing countries to effectivelydesign and execute PPPI programmes; and by doing soaccelerate PPPs for infrastructure. Through these steps,

ADB and ADBI are proactively working to catalyse whatis needed to stimulate an early recovery, with a focus onaccelerating infrastructure development, to ensure theregion remains on its path for sustained growth andpoverty reduction.

Elaine Glennie is Senior Capacity Building Specialist, ADBI.She has worked in over 20 countries, strengthening policyenvironments to improve governance and enable greater privatesector participation to ensure cost-effective delivery of governmentservices. She has played a key role in the development of majorinvestment programmes to support private sector and financialmarket development, fiscal management and publicadministration reform, and improvement of basic physical andsocial infrastructure services.

The Asian Development Bank Institute (ADBI) is locatedin Tokyo and was established to identify effective developmentstrategies, and to improve capacity for sound developmentmanagement of the agencies and organisations in the AsianDevelopment Bank’s developing member countries. As a providerof knowledge for development, ADBI serves a region stretchingfrom the Caucasus to the Pacific islands.

Asian Development Bank Institute, Kasumigaseki Building 8F,3-2-5 Kasumigaseki, Chiyoda-ku, Tokyo 100-6008, JapanTel: +81 3 3593 5500 Fax: +81 3 3593 5571Email: [email protected] Website: www.adbi.org

Fiscal stimulus plans focus on infrastructure

Fiscal positions strengthened by fiscal prudence over recentyears are enabling some Asian economies to respondimmediately to the global economic crisis with stimulus plans.Significant programmes of more than 5 per cent of GDP havebeen announced by three Commonwealth countries in theregion, namely Malaysia, Papua New Guinea and Singapore.Stimulus measures across the region primarily focus oninfrastructure, and support the strengthening of social safetynets and increasing job creation in countries where fiscalspace allows. In India Rs400 billion has been approved to beraised to support the financing and refinancing of PPPinfrastructure projects across the nation. OtherCommonwealth countries in the region, notably Malaysia,Singapore, Sri Lanka and Papua New Guinea, also featureinfrastructure as part of their policy response to the crisis.



Infrastructure offers important benefits in regional anddeveloping economies and has been the subject of

popular research interest for a decade or more. Theevidence is extensive and spans developed, developingand regional economies using single nation andinternational panel data. The results can be broadlysummarised in several propositions.

First, infrastructure investment has a significant andcausal relationship with an economy’s productivecapacity, output and growth, productivity performance,incomes and employment. For developing economies,there are convergence effects which induce acceleratedgrowth impacts initially stabilising over time to thegrowth rates of major trading partners.

Secondly, investment in infrastructure is most effective in the presence of strong institutionalframeworks (access to direct foreign investment, capitalmarkets, effective regulation); improvements in humancapital (life expectancy, health standards, gender equalityand universal primary education); and favourablegovernment policy frameworks (fiscal management,trade openness and state share of GDP).

Thirdly, growth is unevenly distributed across industrysectors with evidence supporting high social returns fortelecommunications and land transport industries, andlow return for metropolitan transport and those servicesattracting greater levels of community serviceobligations or non-market pricing.

Infrastructure is a component of complex and oftenregulated supply chains, and several factors other thanthe level of investment assume importance. Central toproductive infrastructure investment is long-term

planning, the effectiveness of distribution networks andindustry supply chains, procurement practices, the levelof private sector investment and efficient management atthe enterprise level.

Two forms of infrastructureInfrastructure has essentially two highly differentiatedforms. First, there are assets that deliver economicservices such as roads, ports, railways, water and energy.Many of these assets are delivered by government –although in recent years, privatisation of governmentbusiness enterprises and shortage of state capital has ledto greater private participation. Performance is generallymeasured at two levels. At the macroeconomic level,government can measure productive capacity, output andgrowth, productivity and industry cost structures. Thismay involve physical as well as financial measures ofinvestment. At the microeconomic level, the measuresinclude enterprise profitability, short and long-termchanges in employment and incomes, and evidence oftrade intensity and improved competitiveness.

A second group of services, described as public goodsor social infrastructure, refers to services in health,education and public buildings such as police stations,court buildings and public housing. Social infrastructureservices are generally measured by the contribution thatthey make to human capital development usingindicators such as educational outcomes, life expectancy,health standards and labour participation rates. Recentinnovations have broadened these measures to includevalue-for-money analysis, qualitative measures of publicservice delivery and public value.

Infrastructure foreconomic growth anddevelopment: thefinancing gap Dr Michael Regan

Associate Professor of Infrastructure andProgramme Director, Bond University

Mirvac School of Sustainable Development

Infrastructure is one of the most important tools for accelerating economic development indeveloping and transition economies. However, the benefits are not always uniform across nations,

the results vary significantly between industries, and improved social returns from additionalinvestment have more to do with the procurement method and operational efficiencies than theamount of money that is employed. A solution exists with better use of institutional and policyframeworks to deliver new investment and improve operational efficiencies at both industry andenterprise levels. This article provides a review of the role that infrastructure plays in strengtheningeconomic development and poverty reduction and reducing trade costs to support improvedregional co-operation and integration in Commonwealth countries.



Infrastructure as an asset classInfrastructure is a capital-intensive asset class, requiringlong investment horizons and, with limited exception, it is generally a wasting asset. That is, investmenteconomics are determined by the economic life of theunderlying asset that produces the service. Infrastructurealso exhibits low fixed and variable cost structures and itsoperational effectiveness is generally measured andfinanced on a lifecycle basis. Accordingly, infrastructurerequires large amounts of capital, involves high sunkcosts and there is an inherent mismatch between thefinancial economics of these services and the politicalcycles that influence the policy directions ofgovernment. Around 90 per cent of infrastructure isprovided by the state in developing economies, althoughinnovative procurement methods over the past 20 yearshave led to greater private investment using theoutsourcing of non-core state services, public-privatepartnerships, and relationship or alliance contracting.

Infrastructure is essentially a counter-cyclical assetclass. In capital markets, it demonstrates a negativecorrelation with most other asset groups and leadingeconomic indicators. Accordingly, it offers a goodhedge for portfolio investors and fund managers. InAustralia, fund managers make up around 72 per centof listed infrastructure investments, well above theaverage 56 per cent for other asset classes. Infrastructureis also an attractive investment for private consortia inunlisted form, which accounts for around 67 per centof new investment in developed economies. Indeveloping economies, infrastructure as an asset class isattractive to foreign investors and offers geographicaland asset class diversification to international andsovereign portfolio investors.

Investment performanceInfrastructure improves a country’s productive capacityand output. Its role in economic growth is less clearwith evidence of reverse causation running betweengrowth and infrastructure investment. Nevertheless,international research over the past 20 years suggeststhat causation predominantly runs from investment togrowth. Economies with good infrastructure willgenerally grow faster than those without. Other benefitsinclude medium-term improvement in regionalindustry development and trade specialisation, exportfacilitation, competitiveness and employment. Theevidence from regional economies in developingnations suggests that those possessing better landtransport and communications infrastructuresdemonstrate better sustained growth performance thanregional economies less well endowed. Further, studiesof regional economies on the sub-continent suggestthat economies with inferior infrastructure will loseinvestment and skilled workers to neighbouringeconomies with good infrastructure, further wideningthe development gap over time.

Infrastructure has been shown to make a direct and positive contribution to growth, productivity

performance, reduced private sector costs, employmentand incomes. The growth effects may also be indirectand improve efficiency through capital deepening andgreater private investment. The indirect benefits areenhanced where there are complementary state policysettings in areas such as business regulation andencouragement of regional trade co-operation.

The results are highly differentiated between sectors,with the highest social returns generally associated withtelecommunications, roads and destination freight rail,especially services serving ports and the resourcesindustry. This evidence suggests that the asset allocationdecisions of government and the choice of procurementmethod will have a significant impact on investmenteconomics and overall national competitiveness.However, there are several additional factors thatinfluence the rate of return including:

• The level of private sector participation in assetprovision and its management;

• Policy settings favouring trade liberalisation, access tocapital markets and expedient regulatory oversight;

• The capacity and efficiency of networked supplychains.

There remains some uncertainty about thesustainability of infrastructure investment growth rateswith evidence of diminishing returns and conditionalconvergence to regional growth performance averagesover the long-term. Nevertheless, sustained growth isevident in regional economies that undertake long-terminfrastructure investment programmes where the stateoutsources management of government businessenterprises, and greater use of supply-led or strategicapproaches to state investment. An example would bethe integration of the urban and infrastructure planningprocess. The reforms should also consider widening ofthe state’s project procurement options, including use ofpublic-private partnerships, and greater rigour in theevaluation and ranking of state investment proposals.

Table 1. The contribution of infrastructure to growth.

Infrastructure investment contribution to growth (% GDP)

1990 2000 2008 est.

South East Queensland 1.3 1.5 2.7

Australia 0.9 1.4 1.7

United States 0.9 1.2 1.4

Hungary 0.8 2.4 2.8

Romania 0.5 1.1 3.2

India 1.8 3.1 5.2

China 1.7 3.9 7.2

Trinidad 1.3 1.5 1.6

Fiji 0.5 0.6 0.6

Source: EBRD 2006, WDF 2007, Regan 2008



Economic growth and economicdevelopmentThe international research examining the effects ofinfrastructure investment employs quantitativeperformance measures including growth in grossdomestic product per capita (economic growth) andproductivity. However, economic growth in itself is notalways a suitable proxy for economic development andfails to take into account uneven distributional outcomes.Leading development economists argue that economicdevelopment is a wider concept embracing self-sustaininggrowth, structural changes in patterns of production,technological improvements, social, political andinstitutional modernisation and widespread improvementin human conditions. These results are only captured indata over long time intervals, thereby limiting short-termpolicy feedback and delaying timely responses.

In recent years, alternate measurement mechanismshave become available through a more scientificapproach to infrastructure procurement. Themechanisms include value-for-money tests in place oflowest procurement cost, the use of output in place ofinput specifications, the integration of design, constructand management processes, and the lifecycle costing ofinfrastructure services. Value-for-money evaluationoffers both quantitative and qualitative measures ofinvestment performance and provides government withdirect responses against economic and socialdevelopment criteria.

Optimising returns from infrastructureinvestmentThere are a number of ways for developing nations togain significant returns from infrastructure investment.Many of these improvements will be derived from betterinstitutional and policy performance including initiativesto strengthen regional trade complementarities andopportunities, support for local and regional capitalmarkets, direct foreign investment and entrepreneurship.These changes can achieve sustainable results ifintroduced incrementally, and after significant work onadapting organisational culture. The reforms also createan institutional framework conducive to growth.

At the industry and enterprise level, infrastructuredevelopment creates short-term employment, andfacilitates on-the-job training and technology transfer anddecentralisation. International experience suggests thatnew infrastructure delivering low-cost and reliable energy,water and transport services with proximity to majorpopulation centres will attract complementary privateinvestment. Firms will seek out collocation opportunities,industry specialisations and lower transaction costs offeredby improved infrastructure services.

Recent studies also point to improved social returnfrom improved efficiencies at the enterprise level. In manydeveloping nations, infrastructure services are provided bygovernment business enterprises and delivered as publicor quasi-public goods. These services attract high levels ofcommunity service obligations, costs frequently exceed

revenues and output pricing is not always referenced to costs of production. This is a recurring theme indeveloped and developing economies, and presents aconundrum for government. Enterprise performance canbe improved without removal of service obligations if thegovernment directly reimburses their cost and improvesservice delivery efficiency. The tools for this include:

• Outsourcing enterprise management

• Privatisation or corporatisation of the service vehicle

• Public-private partnerships.

Case studies identify a strong relationship between thereform of government enterprises, improved micro-economic efficiency and regional competitiveness. Inthose nations where this was achieved in the early 1990s,the results included an increase in trade intensity, bettergrowth performance via productivity and reducedstructural unemployment, with flow-on benefits forimproved human capital and poverty reduction.International comparative studies by the World Bankand the World Economic Forum confirm that theseinitiatives are improving the economic and socialbenefits of infrastructure investment in developed anddeveloping nations.

Specific structural improvements that can improve theperformance of infrastructure investment are describedin the following sections.

Efficient supply chainsAs a highly networked group of assets, infrastructureservice delivery is as efficient as the weakest link in thesupply chain. This is most evident in the energy, portland transport and communications sectors, where thereis strong reliance on efficient delivery of services againstagreed pricing benchmarks, and on just-in-timedistribution networks that minimise production costsand optimise delivery times. There is ample evidence ofthe high cost resulting from supply chain bottlenecksand poor regulation, and the disincentive that this createsfor complimentary investment. Bottlenecks may becreated by underinvestment in support services, amismatch of public and private asset ownership, delayedor restrictive regulatory interventions, and frequentlylack of co-operation between government departments,government business enterprises and provincialauthorities. A solution to this lies in policies designed toimprove competition, long-term infrastructure planningand alternative procurement methods, which can beachieved with the development of local capabilities andindustry specialisation.

Regional trade agreements and capital marketsLocal capital markets offering bond and equity securitiesprovide opportunities for local companies to participatein the infrastructure market, creating access to long-termfinance at lower cost, facilitating foreign investment andregional cross-border transactions. This is most effectivewhen coupled with broader regional co-operation toreduce trade barriers and policies favouring industryspecialisation and foreign investment.



Better regulationImproved microeconomic performance can be achievedwith efficient regulation, policies that favour competitionpolicy and improved planning of future infrastructureservices. Alternate procurement methodologies such asalliance contracting and public-private partnerships haveshifted away from adversarial traditional contracting toreasonable regulatory frameworks that provide a balancebetween incentives for above-average performance andabatements and liquidated penalties for performancebelow agreed benchmarks. Recourse to litigation in theevent of disputes has given way to proactive contractmanagement, mediation and arbitration. The change inregulatory approach has made a significant contributionto the improved value-for-money outcomes beingachieved with these approaches to infrastructureprocurement.

Private sector investmentEvidence from developed and developing economies overthe past 30 years confirms that infrastructure investmentand operations management undertaken by governmentagencies and business enterprises generates suboptimalperformance outcomes at the enterprise level with flow-on adverse effects for the broader economy. Theexplanation is well documented in the public choiceliterature and can be attributed to failure to achievecomparative performance benchmarks, the lack ofincentives, community service obligations and whenoutput pricing is not determined on the basis of costs of production. An additional factor is public sectorborrowing in local and international debt markets whichcrowds out or reduces the pool of capital available toprivate firms. However, in relation to state infrastructureinvestment, it has the opposite effect and ‘crowds in’ orstimulates private investment in supporting infrastructures,property development and supporting services.

Private sector investment in infrastructure – in theform of build-own-operate-transfer (BOOT), build-operate-transfer (BOT) and outsourcing contracts –provides lower cost services to government than thosegenerated by traditional procurement or governmentbusiness enterprises. Alternatively, private investments inthe form of medium-term service concessions are builtaround incentives for sustainable performance which canbe measured against benchmark return criteria. Privateinvestment may also be used to encourage skills transfer,vocational training and local employment quotas.Contracts that involve these conditions will assist

development of local capabilities and bring importantmultiplier effects to the local economy in serviceexports, employment and incomes.

Procurement methods The poor track record of traditional procurement hasbeen evident for a long time in both developed anddeveloping economies. For infrastructure projects, it isassociated with cost overruns, late delivery and poorservice delivery outcomes with consequential impactson supply chains and infrastructure service charges. Mosttraditional procurement is adversarial in nature andcosted around a detailed state input specification inwhich the agency defines the exact design parameters,dimensions, plant content and finishes of the asset. Littlethought is given to lifecycle costing and qualitativeservice outcomes. More recent procurement optionssuch as asset franchises (or BOOT contracts),outsourcing, alliance contracting and public-privatepartnerships adopt a non-adversarial contracting formfeaturing an output or service specification that leavesthe choice of delivery method up to the bidders. Avalue-for-money approach is used for bidder selectionwhich is based on lifecycle costing and quantitative andqualitative measures of service outcomes.

Alliance contracting is a collaborative approach toprocurement with a state agency and private firmentering into an agreed price contract with sharing ofproject r isk. This is structured as a combination ofincentives and penalties with cost overruns and costsavings shared between the parties. However, unlikepublic-private partnerships, alliances are assetprocurement and do not always include lifecyclemanagement obligations under the same contract.Internationally, both methods of procurement are widelyused to deliver infrastructure in more than 85 countries.

Procurement methodology that brings a rigorous risk-weighted approach to major projects using a competitivebid process, private sector expertise and innovation isachieving qualitative and quantitative benefits to thestate not available with traditional procurement. Public-private partnerships in particular are achievingsignificant improvements in efficiency, lower costs andimproved service delivery. A wide body of evidencesupports the following findings:• Public-private partnerships are bringing forward the

delivery of major projects.• The model is achieving value for money, reducing

procurement costs and delivering more projects ontime and within budget than traditional methods.

• Public-private partnerships are improving the scienceof state procurement and have led to wider applicationof gateway review and alliance contracting methodswith significant user benefits.

• There is certainty with lifecycle costing.• Improved quantitative and qualitative user and service

outcomes are available. • High levels of construction and design innovation and

new technologies can be accessed.

Table 2. Performance of traditional and PFI (PPP)procurement 2002-04.

Traditional PFI-PPP

(a) (b) (a) (b)

Cost overruns 24-51% 73% 2% 22%

Late delivery 4-39% 70% –16% 24%

Source: (a) Mott McDonald, 2004; (b) NAO, 2003.



Public-private partnerships also bring opportunitybenefits and permit government to increase investmentlevels as well as improvements in performance at theenterprise level.

The international evidence for developing economiessuggests that investment in economic infrastructure hasimportant direct impacts on national and regionaleconomies. Benefits at the macroeconomic level includeimproved productive capacity, output growth, increasesin multi-factor productivity with flow-on effects tohigher standards of living. Investment in socialinfrastructure improves human capital, especially healthand educational standards and vocational training.Infrastructure investment brings improvements at themicroeconomic and industry levels in the form of betterprofitability, employment and incomes. Infrastructureinvestment also generates positive and sustainableexternalities including poverty alleviation andspecialisation, and in some cases enhances regional trade.

The challenge for emerging economies is toidentify appropriate programmes to integrate

the planning and infrastructure supply activitiesof government, procurement practices, and

creation of a favourable environment.

The evidence suggests that the benefits are greaterwhen accompanied by institutional and policyframeworks that entrench property rights, regional tradeco-operation, the development of local capital markets,and the dismantling of regulatory impediments toprivate investment and trade. The challenge for

emerging economies is to identify appropriateprogrammes to integrate the planning and infrastructuresupply activities of government, procurement practices,and creation of a favourable environment for both localand foreign infrastructure investment and management.

Dr Michael Regan heads the Infrastructure Managementgraduate programme at Bond University following a career ininvestment banking. He was formerly Director of the AustralianCentre for Public Infrastructure at the University of Melbourne.He specialises in infrastructure, major project procurement and economic development. He is Program Director for theCommonwealth Secretariat-Bond University PPP LeadershipProgramme, researcher and speaker at national and internationalforums.

Bond University School of Sustainable Development, inpartnership with Mirvac, is dedicated to fostering a new breed ofinnovative, imaginative and inventive professionals, fired with theambition to create buildings, towns and, most importantly,communities that will serve as a lasting legacy for futuregenerations.

School of Sustainable DevelopmentBond UniversityPO Box QLD 4229QueenslandAustralia

Tel: +61 7 5595 1024Email: [email protected]: www.bond.edu.au

Table 3. Procurement performance, 1999-2005.

Survey of procurement outcomes (a)

On budget On time User benefits (b)

Traditional procurement (e) 25% 34% 27%

(d) 27% 30% 35%

(f) 55% 63% 55%

Gateway programmes (d) 69% 73% 65%

Alliance contracting (e) 77% 78% Refer notes

PFI (UK) (f) 78% 76% n/a

PPP (Australia) (g) 79% 82% 74%

UK defence contracts (h) 17% (14%) 8% (24%) Met requirements

Source: MR 2008Notes:(a) Sources as noted. Sample sizes vary. Parenthesis denotes average overruns for sample. (b) Qualitative assessment from independent NAO 2004, 2006 reports. Defect reporting.(d) 2000-01 results: NAO 2001 Modernising Construction. Delivered on or under time and price.(e) 1999 results: NAO 2005 Improving Services Through Construction Part B.(f) 2004 results: NAO 2005 Improving Services Through Construction Part A.(g) Fitzgerald 2005; Audit Office Reports Victoria & NSW 2004-08; IPA 2007.(h) NAO 2004, 2006 MOD Defence Contracts.

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Electricity Regulation in Namibia

Current Challenges and Achievements

INTRODUCTIONRegulation involves the act of balancingopposing consumer and investorinterests. Electricity regulation in Namibiais still in its infancy. Despite the ElectricityControl Board (ECB), Namibia’s electricityregulator, posting phenomenalachievements to date there still remainsmany challenges to overcome.

THE ECB OVERVIEWThe ECB is the electricity regulator ofNamibia. It was established in 2000 bythe Electricity Act (Act 2 of 2000) thatwas repealed in 2007 by the ElectricityAct (Act 4 of 2007). The objectives of theAct giving the ECB its mandate include:to exercise control over and regulate theprovision, use and consumption ofelectricity in Namibia, to oversee theefficient functioning and development ofthe Namibian energy market and securityof supply, to ensure efficient provision ofelectricity, to ensure a competitiveenvironment, to promote private sectorparticipation, all in accordance withprevailing Government policies. Thus theECB activities are also guided by the1998 White Paper on Energy Policy.

CURRENT CHALLENGESCurrently Namibia, and the SouthernAfrican Development Community (SADC)region as whole, is facing a shortage ofgeneration capacity. Lack of investmentin generation infrastructure over the pastyears resulted in the erosion of surplusgeneration capacity. To avert disaster theECB is assisting with the creation of aconducive environment for investment inthe electricity sector. Namibia isundergoing reforms, in line with theEnergy White paper policy documentmentioned above, that includesestablishment of Regional ElectricityDistributors (REDs). Finalisation of REDsprocess stalled due to the need forfurther consultations with stakeholders.Three out of five have already been

established and operationalised, anddiscussions for the remaining two oreongoing. Namibia is also establishing asingle buyer market, as part of thereforms. NamPower, the main utility is adefacto single buyer. The ECB isfacilitating discussions to formalise themarket. One model being considered isthe modified single buyer wherebyIndependent Power Producers (IPPs) willbe allowed to sell to Large Power Usersas well as export to neighbouringcountries. All the above reforms arehampered by resistance to changeamongst the stakeholder. This is furtherexacerbated by substantial humanresources shortage. The ECB has beeninvolved in assisting the industry withcapacity building. Although the ECB hassuccessfully developed regulatory toolsincluding Tariff Methodologies, GridCode, Safety Code, Quality of Supply andService Standards, their fullimplementation remains a challenge.

ACHIEVEMENTSDespite the above challenges the ECBthrough its strategic plans has achievednotable successes. These include but arenot limited to: For effective regulation,the ECB developed a comprehensivelicensing regime leading to the licensingof all entities to be licensed in theindustry. As mentioned above, it alsodeveloped various regulatory toolsincluding the tariff methodology GridCode, Safety Code, Quality of Supply andService Standards. Despite the challengesmentioned above, the ECB has as part ofthe reform process managed to establishthree REDs. These have successfullyoperated and are viable. There is ongoingassistance from the ECB to ensure theirsuccess through capacity building andeffective regulation. It is thanks to theabove achievements that the ECB hascome to be a well-respected regulatornot only in Namibia but also regionallyand internationally.

CONCLUSIONIn all of its activities the ECB takesguidance from policies of the Governmentof the Republic of Namibia, as expressedin the White Paper on Energy Policy,National Development Plan 3(NDP3) andVision 2030. The ECB will always be thereto protect and balance interests of boththe consumer and supplier. As a dynamicorganisation, we will always strivetowards our VISION namely

to be recognised as a leadingregulator for achievingoptimum viability andcompetition in the Namibianenergy industry.

and MISSION namely

to regulate and control theNamibian ESI in the interest ofall stakeholders with regard toprice, quality and reliability.

CONTACT DETAILS:

Mr. Siseho C SimasikuChief Executive OfficerElectricity Control Board

Tel: +264 61 374300Fax: +264 61 374305Email: [email protected]: P O Box 2923,

Windhoek, Namibia

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IntroductionFor many millennia human beings had to limit theirgreed because excess consumption demanded moremanual labour. This limited their travel, the size of housethey could build, clothes they could own and food theycould eat. The industrial revolution changed all that. Our machines provide us with ready-to-cook food,manufactured houses, clothes and effortless travel,changing the concept of needs and greed. The worldviewhas changed into a belief that there are endless resources,and that science and technology have solutions to everyemerging problem without constraint. Most of theresponses to the Intergovernmental Panel on ClimateChange (IPCC) warnings have this belief as their base.

Unending problems of traffic congestion, CO2production, road traffic injuries (RTI) and pollution inevery single city of the commonwealth countries hasforced us to re-evaluate both our theories and practices.Professor Hermann Knoflacher of the Technical Universityin Vienna warns us that: “Car traffic is cooling socialrelationships by heating up the atmosphere!” Voices likehis are not alone or new. Professor Banister of OxfordUniversity holds that: “The belief that technology providesthe solution is misplaced, as technological innovation canonly get us part of the way to sustainable transport.Significant reductions of CO2 emissions in transport canonly be achieved through behavioural change. There islittle sign that people are aware of the scale of thechallenge, or prepared to make the necessary changes.”

IssuesTheir concern arises from the fact that even cities inhigh-income countries have not been able to solve the

problems that all of us have to deal with in the nearfuture. Almost all cities in the world face severecongestion on arterial roads. During peak times, carspeeds average 10-15 km/h in cities like London, Dhaka,Accra, Delhi, Nairobi, Kuala Lumpur, Lagos and Karachi.Evidence from cities like London, Montreal andMelbourne indicates that public transport use is greaterthan 60 per cent only in the small inner core whereparking is very limited and roads are perpetually full. Inthe rest of the city, car use is generally more than 60 percent as roads are less crowded and there is easy availabilityof parking. Detailed studies from these cities point outthat car owners generally shift to public transport onlywhen no parking is available at the destination andaverage car speeds are less than 15 km/h. Empiricalevidence suggests that car use (not ownership) is lowonly when walking and bicycling trips form a significantproportion of all trips in cities like Amsterdam.

Urban transportation policy reports prepared byconsultants in most countries assume that car use can bereduced just by providing more public transport facilitiesand assert that, if their prescriptions are followed, 70-80per cent of the trips would then be taken by publictransit. The fact is that no city in the world hasaccomplished this feat. In the richest cities of India,Mumbai and Delhi, recent estimates suggest that cartrips constitute less than 10-15 per cent of all trips. In allother Indian cities, this proportion would be lower.Additionally, the share of public transport in these twocities is certainly higher than most of the cities inEurope or North America. Therefore, it is difficult toimagine how car and motorcycle use can be containedas we get r icher if the international experience is

Urban transport: movingfrom the 19th century tothe 21st century concerns

Dinesh MohanCo-ordinator of the Transportation Research

and Injury Prevention Programme, Indian Institute of Technology

Most countries in the Commonwealth are involved in planning urban transportation futures tocombat climate change. The proposed technical alterations will have little impact unless urban

transportation planners resist the move toward infrastructure development that fixes our future tohigh energy use and CO2 emissions. Pressure for changing policies will be successful if the majorityof city residents can be convinced that their current and future mobility/accessibility needs can bemet at lower risk levels, at lower costs and with wider availability of choices by providing streets thatare safer from crime and road traffic injuries.



anything to go by. Obviously, business as usual andcopycat emulation of rich cities is not going to help.

Old versus new citiesMost cities in the 21st century are growing under verydifferent conditions from those that matured before the20th century. Most large cities in high-income countries(HIC) grew to their present size between 1850 and1950. Technological developments were critical inchanging the shape and form of the city. Cities that havegrown after 1950 do not have the characteristics ofstrong central business districts (CBD) in any part of theworld. Car ownership started increasing in the 1920s butmost families did not own a car until the middle of the20th century. By then, the essential land use andtransportation patterns of large cities in HICs were wellset with large CBDs. This encouraged building of highcapacity grade separated metro systems and, in turn, thetransport system encouraged densification of CBDs aslarge numbers of people could be transported to thecentre of the city. The non-availability of the car to themiddle class decided the widespread use of publictransport and city form.

Cities in most commonwealth countries have expandedafter 1960 and most have multiple business districts. In thepast two decades, motorcycle ownership has increasedsubstantially in many cities, and as a result a significantproportion of families own a car or a motorcycle at a verylow per capita income level of about US$1,400 per year.Such high levels of private vehicle ownership did nothappen until incomes were much higher in HIC cities.Therefore, the high ownership of motorcycles, non-availability of funds to build expensive grade separatedmetro systems and official plans encouraging multi nodalbusiness activity in a city has resulted in the absence ofdense high population CBDs and city forms whichencourage ‘sprawl’ in the form of relatively dense citieswithin cities.

Changes in technology and declining demand forpublic transportation Most middle-class families in HICs did not own air-conditioned cars with stereo systems before 1970. Thecars were noisy and occupants were exposed to trafficfumes as windows had to be kept open. Under suchconditions, the train was much more comfortable. On theother hand, brand new, quiet, stereo-equipped, air-conditioned cars are being sold in countries like India at

prices as low as US$4,000-5,000, and used ones for aquarter of the price. This has made it possible for themiddle-class first-time car owner to travel in cars withcomfort levels Europeans had not experienced till the late20th century. Air-conditioned, comfortable, safe and quiettravel in cars with music in hot and tropical climatescannot be matched by public transport. Owners of suchvehicles would brave congestion rather than brave theclimate on access trips and the jostling in public transport.

Availability of motorcycles has further reduced themiddle-class demand for public transport. In addition, ithas pegged the fare levels that can be charged by publictransport operators. It appears that public transport cannotattract these road users unless the fare is less than themarginal cost of using a motorcycle. At current prices, thisamounts to less than US$0.02 per km. The only optionavailable is to design very cost-efficient public transportsystems that come close to matching this price.

Cities in low- and middle-income countries that havegrown after the 1950s seem to be different in characterwith multiple business districts, mixed land use (largelyby default, illegally), relatively short trip distances and alarge share of walking and public transport, even if thelatter is not provided by the city authorities. Whenpublic transport is not provided officially, informalsystems using mini-buses, three-wheelers and vansoperate semi-legally or illegally and provide a majorityof the motorised trips. No low- or middle-income cityis without such systems. It is also clear that no city in alow- or middle-income country has been able build ametro system that attracts a majority of public transportpassengers. This is partly because no city that has grownafter 1950 has a large and dense central business district.

New megacities and climate change

Current situationAlmost every country and major city government isinvolved in planning for the future in view of thepressure put on us by fears of climate change. It must beensured that urban transportation planners do not movetoward infrastructure development that will fix our future to high energy use and CO2 emissions. Thischange will not be easy, as traditional mobility planningembedded in textbooks promotes capital intensiveprojects that are also attractive as a symbol of progress and profitable for large consultancy/contracting/manufacturing corporations worldwide. Pressure forchanging policies will be successful only if the majorityof city residents can be convinced that their current andfuture mobility/accessibility needs can be met at lowerrisk levels, at lower costs and wider availability of choices.

Way forwardIssues outlined will have a greater degree of successfulimplementation in the future if the following factors areaddressed in theory and design: traffic safety; design forinformal activity on roads; reduction of cr ime bydesign; and equal spread of low- income people in allparts of the city.

When public transport is not provided officially, informal systems using mini-buses,three-wheelers and vans operate semi-legally

or illegally and provide a majority of themotorised trips. No low or middle-income

city is without such systems.



Road safetyOne of the greatest factors influencing and forcingpeople to adopt personal modes of mechanised transportis their perceived risk of road traffic injuries in travel.The high risk of injuries as pedestrians and bicyclists alsodeters people from using public transport if their incomeis high enough to own personal vehicles. Therefore,ensuring safety of non-motorised modes of travelbecomes a pre-condition for encouraging publictransport use, and ultimately cleaner air in our cities.

City structure, modal share split, and exposure ofmotorists and pedestrians may have a greater role indetermining fatality rates than vehicle and road designalone. With the same proportion of land devoted to roadspace, we can have large blocks with fewer arterial roadsor smaller blocks with a larger number of arterial streets.In the former type of cities, the avenues would be widerthan the latter type of cities. If the arterial streets arewide, it encourages high speeds during off-peak hoursresulting in high pedestrian and bicycle crash rates. Highpedestrian and bicycle fatality rates discourage the use ofnon-motorised modes and public transport.

When a majority of commuters are dependent onmotor vehicle use for their essential needs, the systemcreates a political demand for greater provision of motorvehicle facilities and road space. This in turn can make itdifficult for the political system to be harsh on drivers interms of speed enforcement and controlling drinkingand driving. In this situation, not only do people tend touse motor vehicles for short trips, but they also demandfacilities that reduce trip time for long trips. It seems thatif we have to promote walking, bicycling and publictransport use we will have to make traffic safety apriority along with city structure designs thatincorporate the following: (a) street design ensuringsafety of non-motorised modes; (b) vehicle speedcontrol by street design and ultimately ITS control onvehicles; (c) denser layout of through traffic streets withnarrower cross sections; and (d) smaller size of residentialneighbourhoods.

Crime and transportCrime and fear of crime affects travel choice significantlyand acts as a major barrier to the use of public transport,cycling and walking. It is also clear that just dependingon more aggressive street policing is not very effective inreducing crime in neighborhoods or in reducing theperception of risk especially among women. Forty-sevenyears ago, in her book The Death and Life of Great

American Cities, author Jane Jacobs suggested that crimecould be reduced by having “eyes on the street.” By “eyeson the street”, Jacobs meant shops on ground floorsabutting the side walk, abundance of kiosks and cafes, anda vibrant walking atmosphere.

However, street design in many cities does not allowfor shops and businesses abutting the sidewalk. On theother hand, we have “eyes” on all those streets wherehawkers and vendors are able to exist in our cities. Thesevendors also serve a huge social need and provideemployment and nutrition to city dwellers. Withoutthem, our streets would not provide the relative crime-free atmosphere we have. These vendors then becomeessential as a part of our transportation planning process.It is not very difficult to plan for them as every roadneeds a treeline which occupies a corridor of 1-1.5metres of space on the pedestrian path. Vendors onlyneed 1-1.5 metres and they can occupy spaces betweentrees without bothering pedestrian traffic. It is importantto develop street design standards incorporating streetvendors as an essential component.

Reviews of the environmental criminology literatureindicates that more permeable residential street networksare associated with higher levels of crime than lesspermeable configurations such as cul-de-sacs. Mixed-usedevelopments with the rich and poor living in closeproximity have also been associated with reduced levelsof crime. Many new urbanists, street furniture and publicfacility planners are also working on designs thatautomatically reduce incidents of crime and perceptionsof risk by all road users. Much more attention needs tobe given to this aspect of urban space design andplanning as it will ultimately lead to greater adoption ofsustainable forms of transport.

Dinesh Mohan is Co-ordinator of the Transportation Researchand Injury Prevention Programme at the Indian Institute ofTechnology, Delhi. A biomedical engineer, he has worked onepidemiology and biomechanics of road traffic crashes for the last30 years. Concerned with mobility and safety of people outsidethe car, he is trying to integrate these issues within a broaderframework of sustainable transport policies and people’s right toaccess and safety as a fundamental human right.

The shared vision of researchers at the TransportationResearch and Injury Prevention Programme is to produceknowledge that reduces the adverse health effects of transport byintegrating mobility, safety and environmental concerns specific toIndia, in particular, and other less motorised countries in general.

Dinesh Mohan, PhD, Volvo Chair Professor and Co-ordinatorTransport Research and Injury Prevention ProgrammeWHO Collaborating Centre, Indian Institute of Technology DelhiRoom 808, 7th Floor Main Building, Hauz KhasNew Delhi 110016, India

Tel: +91 11 26 59 11 47 Fax: +91 11 26 85 87 03Email: [email protected] Website: www.iitd.ac.in

Pressure for changing policies will be successful only if the majority of city

residents can be convinced that their current and future mobility/accessibility needs can be met at lower risk levels, at lower costs

and wider availability of choices.

THE SOUTH AFRICAN NATIONAL TRADERS ALLIANCE

The South African National Traders Alliance (SANTA) is an independent representative alliance for hawkers and

informal traders. SANTA was established in 2002 in the context of increased harassment of informal traders by

law enforcement agencies in most South African cities, and is recognised by traders and policy-makers as a

mouthpiece for the concerns of informal traders. Initially established to represent the voice of traders in the

development and enforcement of trading by-laws, the alliance has increased its mandate over the past five years

to include legal consultative support, business support services and micro-credit to the informal sector.

In line with national government's policy initiatives to strengthen the so-called 'second economy' and to

graduate the people who operate in this sector into the formal economy, SANTA has recognised it's own role

in providing business skills and growing the economic base of the informal sector in South Africa. In 2005

SANTA was registered as a not-for-profit company in terms of section 21 of the South African constitution, and

in 2006 it also registered a closed-corporation (CC) to generate investment capital for the informal traders.

SANTA Investment Pty is a black-owned and managed company, and is staffed by a team of qualified business

professionals with substantial experience in the informal sector, formal business sector and public management.

SANTA is looking to partner with national and international donor agencies and private sector investors

(through a 49 per cent/51 per cent partnership scheme) to expand the skills base and the business potential of

this sector. With a membership base of over 30,000 SANTA has access to an entrenched and expanding

distribution base and untapped advertising medium.

Contact:Livingstone Mantanga, CEOSouth African National Traders Alliance, 85 Sauer Street, Germiston 1400, South AfricaMobile: +27 83 476 3782 - Email: [email protected]



IntroductionThe ‘finance follows function’ is a cardinal principle ofdecentralisation although, in practice, the extent of fiscaldecentralisation has not kept pace with administrativeand functional decentralisation in most developingcountries. Ideally, operational expenditures of LGs aretypically expected to be met by locally raised revenues,whereas capital expenditures are supposed to be financedby intergovernmental transfers, grants and externalfunds. On the other hand, historically, borrowing at thelocal level has not been favoured, as the traditional thesisof capital financing professes that local governmentborrowing is not responsible, viable or sustainable due topoor income generation capacities. It is mainly becauseof this thinking that donors tend to lend to LGs only ifbacked by sovereign guarantees.

In the Commonwealth, the pace and prospects ofdecentralisation, including fiscal decentralisation variesacross countries. Coupled with this, the differences insizes and economic prospects of cities have resulted in awide diversity of sub-national fiscal structures acrossdeveloping countries. Table 1 summarises the typical taxbases by level of government.

As LGs are chronically short of resources, severaldeveloping countries are trying to enhance traditionalsources of municipal finance by mobilising alternatemarket-based sources of funding. Recent trends toenable municipalities to raise market-based finance havebeen justified on several grounds, including:

• Recognition that public and donor finances areinsufficient to meet the needs to build newinfrastructure or to repair and refurbish existinginfrastructure;

• ‘Intergenerational equity’ – where the ‘lumpy’ costs ofinfrastructure investments should be spread over theuseful life of the asset, and serviced through a regularstream of municipal income and project revenuesresulting from the investment; and

• Exposing a city’s development financing, where viable,to the rigours of ‘market discipline’ and therebymobilising domestic savings for long-term growth-oriented infrastructure needs.

It is important that the policies to foster sustainablemunicipal finance markets are supported by a robustregulatory framework that ensures prudent borrowing,

Non-conventionalapproaches to municipalinfrastructure financing

Munawwar AlamAdviser,


Until 2030, it is expected that most of the increase in the world’s population will be concentratedin urban areas. As urban growth continues unabated, an increasing number of Commonwealth

(developing) countries are assigning greater autonomy and responsibility for infrastructure andservice provision to local governments (LGs). Decentralisation and urban growth can put the localauthorities’ financial and institutional capacities under severe strain. For example, in Africa and Asia,up to 50 per cent of the urban population do not have adequate water supplies and about 60 percent lack adequate sanitation. In view of this, the LGs need to address present and future demandsfor municipal infrastructure financing and service provision through conventional and non-conventional approaches.

Table 1. Tax base

Level of government Tax base Tax base mobility

Central Capital income High

Intermediate (state/provincial) Consumption/labour income Medium

Local/municipal Real property Low

Source: Ebel and Valliancourt (2001)



accountability and financial discipline. In manycountries, the traditional thesis of ‘local governmentborrowing being irresponsible’ is now been reviewed tofacilitate ‘responsible’ local borrowing within theenabling environment and fiscal decentralisationframework prescribed by the central government.

The non-conventional options include borrowingfrom financial institutions and development banks,accessing capital markets or soliciting private sectorparticipation through contracts, leases and concessions.However, many municipal services like water supply andsanitation, sewerage and solid waste management are notattractive to private financiers due to the limited costrecovery, high risk and long gestation investments.Furthermore, few municipal governments in developingcountries have a strong financial position and theirprojects are most often not commercially viable. On theother hand, banks and financial institutions are onlywilling to offer shorter tenure loans, typically up to fiveto seven years, and often require sovereign guarantees forlocal lending.

In contrast to developing countries, sub-nationalgovernments of North America and Western Europehave a long-standing record of harnessing private debtfor urban infrastructure. The credit models championedby these blocs are instructive in their diversity – whileNorth America relies mainly on municipal bonds,Western Europe has developed its home-grownmunicipal banks (examples include Dexia Credit Localof France; BNG of the Netherlands; Banco de Creditoof Spain; and Credit Communal Belgique of Belgium).Some of the approaches that have been adopted toaccess alternate private financing for infrastructureinvestments at the sub-national level are discussed below.

Borrowing from development banks andfinancial institutionsWestern Europe pioneered the concept of municipalbanks and financial institutions to mobilise long-termsavings and government contributions for municipalinfrastructure needs. In the context of developingcountries, some municipalities may have borrowed frombanks to meet their working capital requirements.However, borrowing larger sums for long-gestationcapital investment projects is more difficult. This isbecause banking regulations limit the banks’ ability tolend for long tenors, since their deposit liabilities areshort-term and volatile. Furthermore, most banks lackthe expertise to evaluate the risks of a municipal financeinvestment and therefore they either refuse to lend, or

charge exorbitant interest rates while demandingsignificant amounts of collateral. Moreover, otherpotential sources of long-term credit, such as mutualfunds, insurance and pension funds, are still nascent inseveral developing countries.

Despite these constraints, some developing countrieshave established development banks or non-bankingfinancial institutions to provide long-term credit forinfrastructure projects. Two examples of developmentfinancial institutions are described below:

• Infrastructure Development Finance Company(IDFC), India: a non-banking financial company thatprimarily offers debt for promoting infrastructureprojects in India; and

• The Development Bank of Southern Africa (DBSA):offers loans, grants and technical assistance to publicand private entities with the aim to promoteinfrastructure development and overall socio-economicgrowth of South Africa and the Southern AfricaDevelopment community (SADC) region.

Direct borrowing from capital markets –municipal bondsThe world’s most advanced municipal bond market is inthe United States. Basically, a municipal bond is a debtobligation issued by a (sub-national) borrower, with theundertaking to repay the bond principal with interest ata specified payment schedule. There are two commoncategories of bonds – revenue and general obligation(GO) bonds. As the names suggest, revenue bonds areserviced by the revenues of the particular investment, for example, toll roads. Typically, these are ‘limitedobligations’ and do not have recourse to themunicipality’s revenues or assets. On the other hand, GObonds are serviced from the general revenues – taxes andother income – of the municipality. Because of theirnature, revenue bonds typically finance ‘bankable’projects that have some charging mechanisms for costrecovery, while GO bonds may be used for investmentsthat are not revenue generating.

Pooled financing bondsLarge municipalities with a strong economic base andpredictable revenue streams can raise finance from capitalmarkets through municipal bond issues as describedabove. However, this may not be the case for small andmedium-sized municipalities that are financiallyconstrained and cannot develop projects that arecommercially tenable (for example, water and sanitationprojects in small towns). Transaction expenses like bond

It is important that the policies to foster sustainable municipal finance markets

are supported by a robust regulatory framework that ensures prudent borrowing

accountability and financial discipline.

Some developing countries have established development banks or non-banking

financial institutions to provide long-term credit for infrastructure projects.



issuance fees, underwriting and credit rating chargesinvolved in capital market access would constitute a high proportion of project costs for these smallermunicipalities.

In this context, an innovative approach to tap marketfinance is that of ‘pooled financing’. This means anumber of municipalities and projects being combinedtogether for financing, so as to improve cost effectivenessand to share the risks involved. This improves their creditworthiness, and thereby ensures the inclusion of weakermunicipalities and relatively small but essential projects.

Specialised municipal intermediaries In recent years, several sub-national governments haveset up specialised financial intermediaries or funds todevelop infrastructure projects. These funds have oftenbeen instituted (and in some cases, part financed) by theWorld Bank and other donors. Broadly, there are twotypes of such intermediaries:

• Municipal funds and facilities that provide fundedproducts – debt and/or equity; and

• Facilities that offer contingent products – guarantees orinsurance.

Public-private partnerships Broadly, public-private partnerships (PPPs) are defined asrisk-sharing relationships between the public and privatesectors based on a shared aspiration to bring about aparticular public policy outcome. PPPs can be of varioustypes ranging from simple service contracts to jointventures and full privatisations. Typically, the publicsector is the purchaser of services, let on a short-,medium- or long-term contract. Depending on thenature and specifications of the contract, the privatesector is generally the provider of services and shares riskin terms of delivery (costs and benefits). In some cases,the private sector is also responsible for financing – forexample, in the case of private financing initiatives (PFI)in the UK, or joint ventures between the public andprivate sectors.

It is much more challenging to execute PPPs formunicipal services, given the affordability and non-bankability issues of these projects. Therefore, mostsuccessful subnational PPPs have been of the formercategory – where the private operator is contracted foronly the provision of defined municipal services and thepublic sector is responsible for financing investments andowns the assets.

Measures to promote alternate privatefinancing for municipal infrastructureThere are some lessons derived from successful exampleswith respect to the pre-requisites of developing localcredit markets. We classify these measures into‘fundamental’ and ‘credit enhancing’ factors:

Fundamental (financial and institutionalstrengthening measures)

• Enabling policy environment: Suitable centralgovernment policies and legislation often underpin the ability of municipal governments to borrow orcontract with the private sector. For example,following the example of the US, the Indiangovernment issued tax-free status to certain municipalbonds to mobilise domestic saving for urbaninfrastructure financing.

• Appropriate legal and regulatory regime: Criticalaspects of the enabling environment for localgovernment borrowing include:

• Financial prudence norms and bankruptcy laws toprotect the interests of lenders;

• Basic PPP or other laws, which inter alia define theroles of the contracting parties;

• Streamlined government arrangements which enablethe speedy establishment of a financial intermediaryor fund, or an infrastructure project special purposevehicle or company, or the sanction of capital marketissues;

• An impartial regulator, making decisions free frompolitical pressure, or else a government commitmentto back-stop any regulatory commitments so that anybreach of contract would be protected against.

• ‘Balanced’ books at the municipal level: A keydeterrent to municipal borrowing is their inability torepay the debt on account of poor financial strength.As a minimum, municipalities should strive to ‘balance’their books through a combination of revenueenhancement and cost containment measures.Particularly, municipal agencies seeking to issue generalobligation bonds need to ensure that they can servicethe debts with their own revenues and/or allocatedportions of the intergovernmental transfers. In order toderive comfort regarding the timely servicing of debt,lenders would typically assess the key financial ratios ofthe municipality such as its liquidity ratio, debt servicecoverage ratios, the overall surplus or deficit andcollection efficiency of key own-source revenues.

Depending on the nature and specifications of the contract, the private sector is generally

the provider of services and shares risk in terms of delivery (costs and benefits).

As a minimum, municipalities should strive to ‘balance’ their books through acombination of revenue enhancement

and cost containment measures.



• Financial management and accounting reform:Most municipalities that have accessed capital marketshave transitioned to accrual-based double-entryaccounting. This is important to understand themagnitude of the municipality’s future liabilities andreceivables. For example, the issue of municipal bonds by the Ahmedabad Municipal Corporation inthe state of Gujarat in India was preceded by severalfinancial management reforms to improve budgeting,accounting and overall financial reporting. This is alsoone of the considerations that credit rating agenciesevaluate in rating a municipality or bond issue.

• Structuring bankable projects: One of the biggestchallenges of accessing private finance for municipalinfrastructure is that the projects are seldom revenuegenerating. Affordability and public/social goalsimpede charging for most municipal services on acost-recovery basis. Given the debt servicing demands,there is a high-opportunity cost of not promptlydeploying borrowed funds into projects that are readyfor financing. Delays as a result of political pressures or,for example, land clearance issues, can be very costly.

‘Credit-enhancing’ measuresCredit-enhancing measures are undertaken to increasemarket confidence amongst potential lenders to financemunicipal projects and to improve the terms andconditions of financing. These include:

• Credit rating: In cases where LG is financiallystrong, it may choose to obtain a credit rating from arecognised international or local credit rating agency.Alternatively, the bond instrument may be creditrated. Several urban local bodies have obtained a creditrating primarily to lower the cost of borrowing. Fewinvestors have the specialist expertise or skills toevaluate the risks of a local government entity orinfrastructure project. For example, the purchasers ofmunicipal bonds are likely to be pension, providentand mutual funds, and insurance companies, who aretypically looking for long-term assets to match theirlong-term liabilities. Their main requirement,however, is that such assets are investment grade –both from a prudence perspective, but also becausethe institutions involved do not understand theunderlying risks of the infrastructure investment.Therefore, it is particularly beneficial if themunicipality and its bonds are credit rated asinvestment grade by a reliable credit agency.

• Risk mitigation instruments such as guaranteesor insurance: In an undeveloped financial market, thebond issue may need to be backed by risk mitigationinstruments to attract subscription. There are severaltypes of credit enhancements available.

This paper is based on a study commissioned by theCommonwealth Secretariat to assess municipal infrastructurefinancing status in selected Commonwealth countries. The studyundertaken by Cambridge Economic Policy Associates (CEPA),UK focussed on Uganda, Tanzania, Bangladesh and Pakistan.A full report of this study is being published by theCommonwealth Secretariat under the title of ‘MunicipalInfrastructure Financing: Innovative Practices from DevelopingCountries’ (ISBN 978-1-84929-003-6). Also see ‘FinancingLocal Government’ (ISBN: 978-0-85092-853-2 ). Fordetails, visit www.thecommonwealth/publications. The Secretariatwishes to acknowledge the valuable contribution of CEPA.

Munawwar Alam is an international civil servant currentlyworking for the Governance and Institutional DevelopmentDivision of the Commonwealth Secretariat as Adviser at itsheadquarters in London. Munawwar’s focus of work is sub-national government and administration. His first degree was inMedicine, after which he changed his orientation and joinedpublic service in Pakistan where he served in different ministries.During his journey from conventional to international technicalbureaucracy, Munawwar has written on contemporary governanceissues for the Commonwealth Secretariat and international peer-reviewed journals, and is also the editor of many books. He holds a Masters Degree in Administrative Sciences (MAS),an MBA from the University of Birmingham and an M.Phil.He is a Fellow of LEAD Europe (Leadership in Environmentand Development).

The Governance and Institutional Development Division(GIDD) of the Commonwealth Secretariat helpsCommonwealth developing countries strengthen their structuresof governance and administration. GIDD’s work covers the fullspectrum of public sector administration and management, aswell as working to strengthen civil society and private sectorinstitutions with public responsibilities. GIDD provides a rangeof technical assistance to help governments improve their publicservices. Programmes are tailored to country, regional, and pan-Commonwealth needs. GIDD implements some 70 publicsector development projects annually.

Commonwealth SecretariatGovernance and Institutional Development DivisionMarlborough House, Pall MallLondon, SW1Y 5HXUnited Kingdom

Tel: +44 (0)20 77 47 65 00Email: [email protected] Websites: www.thecommonwealth.org

www.thecommonwealth/publications

Affordability and public/social goals impede charging for most municipal

services on a cost-recovery basis.



Tourism is the world’s largest industry and has beenan integral component of economic development

strategies in developing nations for over half a century.Torres and Momsen, in ‘Progress in DevelopmentStudies’ (2004 p.294-5), pointed out that “The industry’spotential to generate foreign exchange earnings, attractinternational investment, increase tax revenues andcreate new jobs has served as an incentive for developingcountries to promote tourism as an engine for macro-economic growth”.

In many small island developing states (SIDS), tourismis the only sector to have seen growth over recent yearsas the real value of traditional primary export productshas been declining or they are losing their preferentialmarkets, as for example among the banana and sugarexporters of the Caribbean. A number of researchers thusidentify tourism as being the industry offering greatestpotential to SIDS, and this seems to be supported by theWorld Bank 2005 figures, which show that nine of thetop 10 performers measured by international tourismreceipts per capita in 2002 were SIDS.

The growth of interest in pro-poor tourism (PPT) islikely to offer a number of benefits to SIDS, but theyalso face a range of constraints. Overcoming these willrequire clear policies and plans by island governments.The final section of this article discusses a number ofstrategies which could assist in ensuring that tourismcontributes to poverty reduction.

The pro-poor tourism approachThe term ‘pro-poor tourism’ (PPT) was coined in 1999and in the short period since then it has been rapidlyadopted by a wide range of development agencies. PPT

is an enticing concept as it promises that tourism canplay a significant role in reducing poverty. PPT emergedout of UK-sponsored research on sustainable livelihoodsconducted in southern Africa, and further work wascarried out through the Pro-Poor Tourism Partnership(see www.propoortourism.org.uk).

The PPT Partnership stresses that PPT is not aproduct or a niche sector of tourism but is an approachto tourism which seeks to bring a wide range of benefitsto the poor, including social, environmental and culturalbenefits in addition to economic benefits. PPT does notaim to expand the size of the sector but, in the words ofCaroline Ashley and her colleagues in ‘Pro-Poor TourismStrategies’ (ODI 2001 p.13), to “unlock opportunitiesfor the poor within tourism, at all levels and scales ofoperation”. Thus, it extends beyond community-basedtourism where, for example, villagers might beencouraged to establish cultural tourism home stay orcraft ventures, to an approach suggesting that a widerange of stakeholders, from local entrepreneurs togovernment officials, hotel and resort managers, andinternational tour companies, will need to makeconcerted efforts if poverty reduction is to occur.

Tourism as a povertyreduction tool:strategies for smallisland states

Tourism is a major contributor to economic development in many small island developing states(SIDS) and often it has been the only industry in these countries to consistently demonstrate

growth in recent years. However, growth of tourism in SIDS is by no means synonymous withpoverty reduction. If tourism is to contribute significantly to the reduction of poverty, governmentsof SIDS will need to establish an effective policy environment, play a stronger regulatory role, anddevelop plans both to encourage private sector actors to support poverty reduction and facilitate theinvolvement of wider sectors of society in tourism development.

Dr Regina ScheyvensHead of the Institute of

Development Studies, Massey University

In many SIDS, tourism is the only sector to have seen growth over recent

years as the real value of traditional primary export products has been declining or they are losing their preferential markets.



Proponents of PPT Interest in tourism as a mechanism for poverty reductionhas since been taken up by a wide range of interestgroups from the World Tourism Organization(UNWTO), which initiated the ST-EP Project:‘Sustainable Tourism – Eliminating Poverty’, to donors(such as the Dutch bilateral aid agency SNV, and theGerman agency GTZ), multilateral organisations (e.g.the Asian Development Bank, World Bank, and WorldTrade Organization), and tourism organisations (e.g. thePacific and Asia Travel Association).

Proponents of PPT argue that there is significantpotential to deliver more benefits from tourism to thepoor, as tourism is a significant or growing economicsector in most developing countries with high levels ofpoverty. For 50 of the world’s poorest countries tourismis one of the top three contributors to economicdevelopment (UNWTO 2000). In 1998 UNCTADreferred to tourism as the “only major sector ininternational trade in services in which developingcountries have consistently had surpluses”. It is arguedthat tourism as a sector ‘fits’ nicely with pro-poor growthbecause “it can be labour-intensive, inclusive of womenand the informal sector; based on natural and culturalassets of the poor; and suitable for poor rural areas withfew other growth options” (Caroline Ashley and DilysRoe, Development Southern Africa 19, 2002 p.61).

Constraints facing SIDS While PPT offers a great deal of promise, SIDS offer aunique context which presents some challenges to achieving pro-poor outcomes and overcoming

inequality. Broad contextual challenges may include thecolonial heritage of most SIDS, economic dominance offoreign tourism multinational corporations, ethnicdiversity, and low levels of education. There are also anumber of constraints specifically related to tourismdevelopment, including economic and environmentalchallenges, which are outlined in Table 1.

Strategies to reduce poverty throughtourism in SIDS If tourism is to be considered a legitimate avenue forreducing poverty in SIDS, specific strategies will need tobe put in place. Governments will need to play a guiding

Tourism businesses can contribute significantly to local livelihoods byestablishing procurement practices that prioritise use of local goods andservices, such as produce supplied by this Samoan farmer.

Table 1: Constraints facing SIDS involved in tourism

Key constraints Explanation

Carrying capacity Small land size of SIDS intensifies the impacts of tourismSmall economies Diseconomies of scale, limited resources, narrow economic baseSmall populations Small domestic market, lack of appropriate skills, difficult to generate local capitalRemoteness Isolation from major markets, inadequate transport linksLow resistance to external shocks Natural disasters, political upheavals, terrorist threats and health scares (e.g. SARS, swine flu) can

lead to a significant downturn in tourist numbersNarrow economic base Heavy dependence on tourism revenues leads to vulnerability in the face of shocksScarce resources Competition for resources (e.g. beach space and fresh water) can undermine local livelihoodsReliance on external investors Foreigners can gain increasing control over the tourism industry; profits repatriatedEnvironmental hazards Sea level rise; salt water intrusion; natural hazards; beach erosion.

Sources: based upon the work of Briguglio 1996, Harrison 2003, Hoti 2005, and Milne 1997 and others.

Governments will need to play a guiding role if PPT is to offer more

than simply another way of expanding tourism with benefits for the major

players in this sector.



role if PPT is to offer more than simply another way ofexpanding tourism with benefits for the major players inthis sector. Too often governments of SIDS focusnarrowly on earning more tourism revenues andincreasing tourist arrivals, rather than being concernedwith the impacts of tourism, socially, environmentally,and economically. In his chapter in ‘The DevelopmentProcess in Small Island States’ (1993 p.103), RobertPotter argued that ‘externally-oriented, growth-maximising’ paths to development have resulted inincreasing levels of inequality among local populationsin many Eastern Caribbean states. He assets that in fact‘the needs of the poor should be met in priority toexternally-oriented growth imperatives’ (p.97).

The onus is thus on the governments of SIDS to stepforward and develop appropriate pro-poor policies andplans for tourism development. Some useful strategies forgovernments which could help reduce poverty include:Pro-poor infrastructure. Ensuring that when costlyinfrastructural projects are undertaken to support growthin tourism, the needs of the poor are not overlooked.For example if new roads or water systems are to bebuilt, the former should provide local access to marketsas well as tourist access to resorts and both local residentsand hotels should be connected to the latter.Reducing leakages and maximising multipliereffects by ensuring that national development planshighlight linkages between tourism and other economicsectors such as agriculture, fisheries and transport. Forexample, in many cases economic opportunities forsmall farmers are being lost because of inadequatelinkages between them, agricultural extension officersand hoteliers. Supporting small-scale entrepreneurs byencouraging the use of local supplies and ensuringprovision of training and credit to all tourism businesses,such as producers of souvenirs. For example, MacNaultyexplained in a 2002 WTO report on The EconomicImpact of Tourism in the Islands of Asia and the Pacific,that in some cases governments have provided 100 percent tax relief schemes for families who wish to upgradetheir bed and breakfast style accommodation, and a 50per cent subsidy for training costs.

Providing incentives to private sector stakeholdersto promote PPT, for example, tax breaks or awards fortourism businesses that do some of the following: providein-house training to people from poorer backgrounds;implement procurement practices which prioritiselocally-produced goods and services, as shown in thephoto of the Samoan farmer; encourage the philanthropyof guests and establishing a community development fundin conjunction with local actors. As an instance of this, inNegril, Sandals resort operates a local elementary school,provides scholarships for local students, provides seeds andtechnical support for local farmers, and purchases theirproduce at guaranteed market-value prices. Meanwhile,management staff from the exclusive Turtle Island Resortin Fiji have mentored local entrepreneurs by assisting an association of backpacker tourism providers withmarketing, administration, service, and quality control.Facilitating a stronger role for communities inplanning for tourism development by activelyseeking out their voices on tourism planning mattersand responding to their concerns through appropriateprocesses. As Maurizio Carbone argues, “tourismplanning should be based on ‘bottom-up globalisation’,which engages in distributive justice by entrusting moredecision-making power in local communities”(European Journal of Development Research, 17(3),2005). There are some very good examples of localcommunities exerting considerable power over thetourism development process and consequently gaininga number of benefits, for instance the traditionallandowners living near to Mana Island resort, Fiji. Raising awareness among the local population intourism destination areas, both about the benefits oftourism as well as potential problems that they may needto anticipate and seek to control. Residents cannot goon to contribute to community tourism monitoringforums, planning committees or the like without suchinformation.

An effective policy environmentSmall island states are a highly sought-after tourismdestination, and many commentators argue that thetourism industry provides an excellent avenue fordriving poverty alleviation in SIDS. However, there are anumber of challenges to realisation of the pro-poortourism ideal in small island states: the growth oftourism in SIDS is by no means synonymous withpoverty reduction. Nevertheless, if governments arewilling to direct tourism development in ways which

Fiscal stimulus plans focus on infrastructure

Fiscal positions strengthened by fiscal prudence over recentyears are enabling some Asian economies to respondimmediately to the global economic crisis with stimulus plans.Significant programmes of more than 5 per cent of GDP havebeen announced by three Commonwealth countries in theregion, namely Malaysia, Papua New Guinea and Singapore.Stimulus measures across the region primarily focus oninfrastructure, and support the strengthening of social safetynets and increasing job creation in countries where fiscalspace allows. In India Rs400 billion has been approved to beraised to support the financing and refinancing of PPPinfrastructure projects across the nation. OtherCommonwealth countries in the region, notably Malaysia,Singapore, Sri Lanka and Papua New Guinea, also featureinfrastructure as part of their policy response to the crisis.

If governments are willing to direct tourism development in ways which reflectboth local and national interests, there can be a genuine improvement in the spread of benefits from tourism development.

reflect both local and national interests, there can be agenuine improvement in the spread of benefits fromtourism development.

If tourism is to contribute significantly to thereduction of poverty, governments of SIDS will need toestablish an effective policy environment, play a strongerregulatory role, and facilitate the involvement of widersectors of society in tourism development. Appropriateroles of governments can include establishing effectivepolicies and legislation (e.g. to protect local rights toland and to encourage joint venture arrangements, aswell as ensuring adequate environmental standards areadhered to), and supporting local entrepreneurs byproviding information, credit facilities, and training.They can also provide incentives for the private sector toadopt strategies that contribute to poverty reduction,including procurement of local goods and services, in-house training schemes, and mentoring of owners ofsmall-scale tourism enterprises. Such strategies need tobe given serious consideration if sustainable, equity-enhancing tourism is to emerge in SIDS.

Dr Regina Scheyvens is Associate Professor and Head of theInstitute of Development Studies, Massey University. Herresearch focuses on tourism, sustainable development,empowerment and poverty alleviation and she has conductedfieldwork in a number of island states including Samoa, Fiji,Solomon Islands, and the Maldives.

The Institute of Development Studies, Massey University, isconcerned with the understanding and analysis of processes thatare transforming people’s lives throughout the world. DevelopmentStudies is an approach that seeks to understand differences,examine key development issues and ideas, and develop skills tohelp solve development problems. Massey University, in 1989,was the first in New Zealand to offer courses leading torecognised qualifications in Development Studies.

Dr Regina Scheyvens, School of People, Environment andPlanning, Massey University, PB 11222Palmerston NorthNew Zealand

Tel: + 64 6 3505799Email: [email protected] Website: www.massey.ac.nz





It is clear that the recent oil price volatility has led tosignificant uncertainties in market behaviour. The

price of West Texas Intermediate (WTI) almost doubledover the year to July 2008, and since the middle of thesame month it has dropped by around US$100. In anyindustry, these rapid price movements would sendshivers through investors. And in one which is global,such as the oil industry, where short-term stability isimplicitly linked to the medium and long terms, this is especially apparent. It has created a climate ofnervousness, and much unease for both producers andconsumers. Volatility is not conducive to a well-functioning market, something all stakeholders strive for.

It is difficult to compartmentalise the stories behindthe rise and then the fall in the oil price. The twostories overlap, and it is impractical to explain onewithout touching on the other. It is evident there hasbeen some diversity of views as to the reasons behindsuch movements. This perhaps comes as no surprise. Itreflects the nature of the global body politic and itsinteraction with the complexities and dynamics of theinternational oil industry – and all of this set in thecontext of oil’s ubiquitous role in the global economy.However, it does mean that the facts can sometimesbecome lost and misconstrued; it is important that theseare laid out in detail.

The oil price riseThere is no one who would consider 2008’s high pricesto have been reasonable. They were too extreme. It isapparent, however, that these high oil prices were not anindication of a shortage of oil. The results of every studythat the OPEC Secretariat and many other energyinstitutions undertook during this period of rising prices

showed that the market was well supplied with crudeand stock levels were for the most part above the five-year average.

There is evidence that such issues as geopolitics, thefluctuating value of the US dollar and downstreamtightness played various roles. But by far the leadingplayer was the speculative investments flowing in andout of the futures markets. There was a total disconnectbetween physical and futures markets and between priceand fundamentals.

The emergence of oil as an asset class saw the ratio ofpaper barrels traded on the New York MercantileExchange (NYMEX) to the physical barrels actuallysupplied increase exponentially. In 2003, for eachphysical barrel, six paper barrels were traded; that ratio inearly 2008 had risen to more than 1:18 – three times ashigh. And these ratios would have been even higher ifthe London and Singapore futures exchanges, theunregulated Atlanta-based Intercontinental Exchange, aswell as over-the-counter transactions, index trading andderivatives products were taken into account.

It is unmistakable that the significant expansion in thetrade in paper barrels coincided with the upward pricetrend. In fact, research carried out by the OPECSecretariat shows a clear relationship between the increasesin money flows into crude oil futures since 2003 and theprice. In particular there is evidence that movements andchanges in speculative positions led to price movements.

For more than a year, OPEC has recommendedgreater regulatory oversight of commodity futurestrading. This has gained traction in some parts of theworld, but it is important that this is not forgotten andpushed to one side because prices have fallen from lastsummer’s highs. It is vital to learn lessons from whathappened during this period.

Understandingthe recent oilprice volatility Abdalla Salem El-Badri

Secretary General, Organization of the PetroleumExporting Countries (OPEC)

In summer 2008, oil prices rose to almost US$150 a barrel. Since then, prices have dropped by morethan 70 per cent, to around US$40 a barrel. This volatility is unprecedented and should concern us

all. With this in mind, it is important to put forward a number of pertinent questions. Firstly, what wasactually behind the spiralling oil price rises? Secondly, why have prices fallen back so much since themiddle of last year? And, finally, is the present oil industry and price environment conducive to makingthe investments required in the longer term? In this article the author underscores the main drivers ofthe oil market in recent times, and offers views on how to bring about more market stability.



The oil price fallIn July 2008, no-one could have predicted that oil priceswould be below US$40 a barrel at the start of 2009.Predicting a fall of this nature would have been greetedwith raised eyebrows and comments that this couldnever happen. Yet it has. The financial crisis, worseningreal economies and the massive redemptions in thespeculative funds industry have had a massive impact onthe oil price and the industry in general.

This is evident when reviewing at oil demand, withgrowth turning into negative territory and projectionsfor 2009 almost continuously being revised downwards.In March, OPEC forecasts revised down world oildemand in 2009 by 0.4 million barrels a day (mb/d), toshow a decline of 1.0 mb/d from the previous year.From OPEC’s perspective, the demand for OPEC crudein 2009 is expected to average 29.1 mb/d, a drop of 1.8 mb/d from the previous year.

The recent revisions reflect the fact that the financialcrisis, which has its roots in the advanced economies, is advancing its footprint to emerging and developingcountries including the poorest ones – those who areleast responsible for this crisis. OPEC member countriesare no exception. The Organisation has had tosignificantly adjust downward its output to restoremarket stability, and the upshot is that it has left manyOPEC countries with large levels of idle capacity,sometimes only recently put on stream. They also facelarge losses in their equity markets, lower economicoutput and dramatic declines in oil export earnings.

Under these exceptional circumstances, OPEC, as anorganisation, is still trying to maintain its commitmentto ensuring stable supplies of crude to the market at alltimes, and help escape a repetition of the past, wherelow oil prices led to low investments and thus to ashortage of capacity when the economy recovered. Inthe medium term, there are still significant OPECmember country investments committed, both for theupstream and downstream. However, there are increasingconcerns about the impact of the ongoing crisis and thesteep decline in oil prices on the longer-term outlook.

The key question is: how will this challengingenvironment impact the investments in capacityexpansion projects? It is a question that concerns us all –not just those involved in the oil industry or from oil-producing countries.

The investment conundrum When and how the global economy recovers arequestions being discussed the world over. It is clear atthis time that there are no firm predictions, never minddefinitive answers, but all of us know that the economywill return to growth at some point in the future, andthis will lead to expanding energy demand.

Yet, at present, current oil prices are not at levels tosustain the industry. They are considerably below the levelrequired to attract industry-wide investments and ensuresufficient production capacity to meet future demand.

Current prices threaten the very sustainability

of planned investments – by both international andnational oil companies – and put future crudeproduction at risk. It is a situation that no-one desires,and is clearly not a position from which the world’sbusinesses, consumers or economies will benefit.

It is important to find a stable and realistic price – onethat takes into account energy supply, demand andinvestments, including such core issues as costs and theneed to find, hire, train and keep talented people in theindustry, for the short, medium and long terms. And this is obviously true across the broad spectrum of theenergy industry. Each energy source, each technology,and each project, has a price when it is viable – and aprice when it is not.

Demand in the longer termThere is clearly enough oil to meet this demand. The world has plenty of resources. The end of oil hasbeen talked about since the very beginning of the oil agemore than 100 years ago. However, it has never come topass, and since the early 1980s, ultimately recoverablereserves of conventional oil worldwide have doubled andthe figure continues to rise. So when talk turns to long-term oil demand, the issue is not one of ‘availability’. It isof ‘deliverability’ and ‘sustainability’. And in this context,these two words often seem shrouded in haziness.

The large amount of uncertainty that exists aboutfuture oil demand requirements is standing in the way ofturning resources into supply and implementing soundinvestment strategies. This is a major challenge for oilproducers in general and OPEC member countries inparticular. On the one hand, there is the willingness toinvest in sufficient capacity to ensure that futureconsumers’ needs are met, including the provision of anappropriate level of spare capacity. On the other hand,however, like in any sound business, there is noeconomic logic in committing vast amounts of capital todevelop production capacities that may not be needed.

The need for a clear view of the futureThe current financial crisis is obviously impactingdemand, but it is important also to look beyond this, tothe significance of predictable energy policies, and reliable signals from the market and consuming countries.

OPEC welcomes diversity in the overall energy mix,as well as the push to develop renewables and nuclear,but we need to give careful thought to how we proceed.

For example, ambitious targets for biofuels have sentconfused signals concerning oil industry investmentneeds, and their appeal is also being questioned due tounforeseen impacts in such areas as food prices and thediversion of land use. In addition, US fuel economystandards and the European Union’s climate change andrenewable objectives have the potential to further reduceestimates for future global oil demand.

To put the overall demand risks in some context, somefigures demonstrate the uncertainty. OPEC scenarios showthat demand for OPEC crude by 2020 could be as low as29 mb/d or as high as 38 mb/d. This is a huge range.

Ways forwardSo what can be learnt from all this? Firstly, that extremeoil price volatility is not good. Secondly, that the highprices were caused in the main by speculativeinvestments, not a misalignment of supply and demandfundamentals. Thirdly, that the fall in prices can in generalbe attributed to the overall impact of the financial crisis,as well as speculators liquidating their positions andfleeing the market. And finally, in an industry with suchbig, costly and lengthy undertakings, security of demandneeds to be clear, and reasonable prices need to prevail.

Pointing a way forward is never an easy task, and this isparticularly true at present. Yet it is apparent that there isa need for:• Market transparency and shared industry data• Improved regulation of commodity futures trading, and • Better predictability in energy policies.

So it is important we chart a path, and possibly the key to this is opening our eyes to the opportunitiesbefore us, particularly concerning the enhancement ofco-operation.

OPEC has long recognised the importance ofadopting a multilateral approach to dialogue and co-operation with other influential, interested parties, as it tries to faithfully pursue its mission of ensuring stable,secure and reasonably priced crude.

And in today’s environment it is essential that allstakeholders sit down to look at such issues as theprojects on the table, the investments, the costs, the

various timeframes, the policy targets, market regulationand demand. The goal is to have a better understandingof each other and to provide a more stable setting inwhich investments and expansion flourish, economieswitness stable growth, and where better access toreliable, affordable, economically viable, sociallyacceptable and environmentally-sound energy serviceshelp make energy poverty a thing of the past.

Abdalla Salem El-Badri is Secretary General of OPEC. He was President of the OPEC Conference in 1994 and1996-97. In his native Libya, he has, among other roles, been Minister of Petroleum, Chairman of the National OilCompany and Deputy Prime Minister.

OPEC’s mission is to co-ordinate and unify the petroleumpolicies of member countries and ensure the stabilisation of oilmarkets in order to secure an efficient, economic and regular supplyof petroleum to consumers, a steady income to producers and a fairreturn on capital to those investing in the petroleum industry.

Organization of the Petroleum Exporting CountriesObere Donaustrasse 93A-1020 ViennaAustria

Email: [email protected]: www.opec.org



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Green jobs – that is, jobs that contribute to preservingor restoring the environment – are an important

element in the design of a fairer and more sustainableworld. In times when the mounting costs of energy-intensive production and consumption patterns are widelyrecognised, it is timely to move towards a high-employment low-carbon economy. Green jobs hold thepromise of a triple dividend: sustainable enterprises;poverty reduction; and a job-centered economic recovery.

This emphasis comes at a time when the world isbeset with vast job losses and major questions are raised as to the sustainability of past policies beratingregulation and overrating the market. InternationalLabour Organization (ILO) estimates suggest thatunemployment could rise by more than 50 million in2009 compared with 2007, with a particularly worryingrise in joblessness for youth and women (www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/documents/publication/wcms_103456.pdf). The numberof working poor is expected to rise dramatically.

Decisive and urgent action is required if we are toavoid a prolonged and severe global jobs crisis.

The ILO recently examined the fiscal stimulus policiesbeing implemented in some 40 countries, including allmembers of the G20. The study notes that the stimuluspackages lean heavily toward financial bailouts and taxcuts instead of job creation and social protection

( w w w. i l o. o r g / p u b l i c / e n g l i s h / bu re a u / i n s t /download/tackling.pdf). It also found that fiscal stimuluspackages for the real economy are five times smaller thanfinancial bailout packages. However, it is encouraging tosee that an increasing number of economic stimuluspackages include the greening of economies and thecreation of ‘green’ jobs. There is reason to believe thatthey can and should be a vital and crucial element ofany recovery plan.

Already in November 2008, the ILO’s GoverningBody – the executive body of the organisation –identified six key priority policy actions thatgovernments and employers’ and workers’ organisationsshould focus on to address the crisis, includingsupporting productive sustainable enterprises,particularly small enterprises and co-operatives,employment-intensive investment and green jobs. Theglobal jobs crisis is expected to dominate discussionsduring the International Labour Conference in June2009, which will consider an ILO proposal for a GlobalJobs Pact.

The Green Jobs reportEvidence of how green jobs can help stimulate aneconomy is provided in the recent ILO report, ‘GreenJobs: Towards Decent Work in a Sustainable, Low-Carbon World’ (www.unep.org/ pdf/A_Global_Green_New_Deal_Policy_Brief.pdf). Published under theGreen Jobs Initiative sponsored jointly by UNEP, theILO, the International Trade Union Confederation(ITUC) and the International Organization ofEmployers (IOE), the report examines green jobs in a global context for the first time. It represents the best available knowledge and forward-looking thinking on how to bolster green job creation in theglobal economy.

Green jobs: nowis the time

Juan SomaviaDirector-General, International

Labour Organization

The global financial and economic crisis is prompting us to rethink values, policies and businesspractices that have led to millions of unemployed worldwide, increasing poverty and

inequalities, and the constant disregard of the environment. This is the time to move towards a moresustainable development path in which the regulatory role of the state, the creativity of the marketand the dignity of persons find a new balance.

Green jobs hold the promise of a triple dividend: sustainable enterprises; poverty reduction; and a job-centered

economic recovery.



Energy efficiency in buildings and construction, intransport and in industry, and clean energy supply, inparticular from renewable sources, as well as agricultureand forestry, will all be important in terms of theirenvironmental, economic and employment impact.Clean technologies are already attracting increasingamounts of venture capital: this has more than doubledin recent years.

Millions of green jobs already exist: millions more arein the making. They contribute to preserving orrestoring the quality of the environment; help cutconsumption of energy, raw materials and water; de-carbonise the economy and reduce greenhouse gasemissions; minimise waste and water pollution; andprotect and restore ecosystems and biodiversity.

Albeit only a nascent sector, renewable energy alreadygenerates more jobs than oil production and refiningworldwide. Half of these new jobs are in developingcountries and projected investment could create at leastanother 20 million more by 2030. Even bigger potentialfor job creation is found in energy efficiency, in publictransport, in recycling and waste management and in therestoration of environmental capital such as productiveagricultural soils, watersheds and forests.

Green jobs: a hope for a better futureAdjusting production and consumption patterns will be a major challenge in all countries. This is a globalchallenge that will affect enterprises and work places allover the world.

Meeting the challenge will hinge on adjusting existingjobs and workplaces, and on investing in newtechnologies generating new sources of growth,enterprise creation and jobs. To lift millions of workerssurviving on less than US$2 per day out of poverty, weneed green jobs that are also what we, in the ILO, calldecent work: jobs that provide adequate incomes, socialprotection, respect workers’ rights and give workers a sayin decisions that will affect their lives.

A shift to sustainable economies needs political willand public support. That means helping to diversifyeconomies, assisting enterprises and workers to adapt,ensuring social protection is in place, and that there aretraining programmes to dispense the new skills needed.The best way to make a just transition is by ensuringthat those who are most directly involved, employers andworkers, have a say in it. We need effective socialdialogue to help us grow into a greener economy.

Are green jobs a viable hope for the world’senvironmental and economic future in times of sharplylower growth and social recession? The answer isdecidedly yes. Huge opportunities exist to create themthrough energy, industrialisation, transport andagricultural policies that reduce environmentalfootprints. They can provide decent work and incomesthat will contribute to sustainable economic growth andhelp lift people out of poverty. They are central to thepositive link that needs to be established between climatechange and development.The million solar panels being

installed in rural villages in Bangladesh, the energyefficient social housing in the United Kingdom and inSouth Africa and the highly effective recycling systems inBrazil are examples of this. There are many more.

Crucially important, green jobs are a practicable andeffective option for reviving economies and for quicklycreating large numbers of jobs. A growing number ofcountries have already adopted economic packages thatpromote green job growth as a short-term way ofrebuilding and renewing infrastructure and facilities tomake them more energy efficient, and as a long termsolution to unemployment. These measures can generatejobs in urban as well as in rural areas and across thespectrum from manual to highly skilled occupations.Similarly, the major investments to adapt to climatechange could provide many new and better jobs for lowincome people. For a more detailed discussion, see forexample: ILO, ‘The financial and economic crisis: adecent work response’ and UNEP, ‘The Green NewDeal, a policy brief ’.

If invested wisely, the resources to overcome theeconomic crisis could leave a legacy of energy efficientinfrastructure, rehabilitated ecosystems, renewable energysources, and enterprises and workplaces more resilient toclimate change. And they could lay the foundation for agreener economic future that is environmentally sound,economically productive and socially sustainable. If everthere was a time for the Green Jobs Initiative to takehold, this is it.

Juan Somavia is the Director-General of the InternationalLabour Organization, first elected in 1999. A Chileannational, Mr Somavia has worked in public life as a diplomat,an academic and within the United Nations. He has chaired theUN Security Council and the UN Economic and SocialCouncil. He organised the UN Summit for Social Developmentin 1995. Through his involvement in social development,business and civil organisations, Mr Somavia has forged a visionof the need to secure decent work for women and menthroughout the world.

The International Labour Organization (ILO) is devoted toadvancing opportunities for women and men to obtain decent andproductive work in conditions of freedom, equity, security andhuman dignity. Its main aims are to promote rights at work,encourage decent employment opportunities, enhance socialprotection and strengthen dialogue in handling work-related issues.

International Labour Organization4, route des MorillonsCH-1211 Geneva 22Switzerland

Tel: +41 22 799 7912Fax: +41 22 799 8577Email: [email protected]: www.ilo.org


Environment Finance

When talking about renewable energies, there alwaysfollows – like a pavlovian reflex – the question of

costs. The basic assumption still predominates thatrenewables are not affordable; that they cost too much incomparison with conventional energies. In other words,there is a negative economic myth about renewableenergy. This assumption serves as a permanent excuse notto adopt a grand strategy to actively deploy renewableenergy. It is argued that the time for renewables has notyet come. Investments in the field of renewable energyare considered an economic burden that no-one iswilling to shoulder. Those arguments are short-sighted,superficial and highly misleading.

They are short-sighted because they ignore thefundamentally different economic prospects ofconventional energies on the one hand and renewableson the other. It is obvious that conventional energieswill become more and more expensive over time,whereas the costs for renewables steadily decrease.Rising fuel costs from depleting resources (oil, naturalgas, coal, uranium) inevitably result in increasing costsfor the conventional energy supply. Extraction costs willrise because the remaining resources become harder andharder to extract, necessitating complex technical efforts.What is more, due to the depletion of conventionalenergy resources, the fuel supply is coming from fewerand fewer sources in an decreasing number of countries,which increases the monopolisation of resources.Suppliers of conventional fuels gain more and moreopportunities to raise prices.

The inevitable price rises apply to oil, natural gas, coaland uranium. They evolve in escalating wavemovements. At present – in the year 2009 – we are onceagain in a downswing compared with 2008, but thisresults from the critical global economic situationtriggered by the financial crisis. These comparatively low

fuel prices are only short-lived and not permanent. Themid-term trend of fuel prices is undoubtedly pointingupwards.

Extra cost factorsAnother factor that must be taken into consideration isprice increases when erecting new large energyproduction facilities. Because there only exist a fewproducers of the necessary materials and holders of therelevant know-how, the large number of developingcountries with rising energy consumption rely on thesefew producers. And last but not least, r ising costsassociated with climate protection measures resultingfrom international liabilities (Kyoto I and in the futureperhaps Kyoto II) that will be reflected in energy prices.

Many countries are faced with additional costs:investment will be necessary to provide for cooling waterin nuclear and fossil power plants in countries that haveinsufficient water resources. Those countries where thedistribution of mains electricity does not cover the wholeterritory (roughly 2 billion people) are facing high costsassociated with the extension of a grid infrastructure.

Seeing the whole picturePrices for renewable energy are decreasing constantly, onthe other hand, because – with the exception of biomass– only costs for technology are relevant. These declinedue to mass production of renewable energy installationsthat comes about by mobilised market introduction andcontinuous technological improvements. Sinceinstallations producing renewable energy (in particularwind and photovoltaics) can be directly set up in those regions that need it, a widespread transmissioninfrastructure will be superfluous. What is more: windand solar – except in the case of concentrated solar

Renewable energy:time to disprovethe myths Dr Hermann Scheer

General Chairman of the WorldCouncil for Renewable Energy

Among the many myths about our energy supplies, one of the most insidious is the high price ofrenewables. If all energy alternatives are too expensive, the argument runs, then the world

should continue on its course of dependence on fossil-based sources. In this article the authordebunks this myth and explains why we must keep developing the renewables, describing how eachaffected industry can make the most of the new opportunities.



power (CSP) power plants – do not need water forcooling and produce no emissions. The conclusion isinescapable: investments in renewable energy today arethe only chance to reach a cost-effective energy supplyfor everyone everywhere.

The negative myth of high costs that accompany theuse of renewables is superficial and misleading because it does not differentiate between micro- andmacroeconomic assumptions – that is between expensesfor a single investor on the one hand and for the wholenational economy on the other. However, thisdistinction is crucial for the question of whethergovernments stick to conventional energies or decide toorient their activities towards renewable energies.

The comprehensive economic benefits accompanyingthe switch to renewable energy are manifold and evident– especially so if the renewables that are employed areharvested nationally, that is, if they are indigenousresources that do not have to be imported. Themagnitude of these social benefits results from themacroeconomic costs of the conventional power supply,which can be avoided by employing renewables.

From a macroeconomic perspective, the step towardsindigenous renewable energies boasts advantages.Nevertheless, macroeconomic benefits do not necessarilybring microeconomic benefits for all producers andconsumers. This results in the imperative to translate themacroeconomic benefits with the right politicalinstruments into microeconomic incentives forproducers. These instruments have to aim at regulatingprices to the advantage of renewable energies. The bestinstruments are:

• Tax-differentiation between renewable and conventionalenergies. That means a lowering of taxes for renewables,possibly down to complete tax-exemption policies. Itwould be optimal to this end to generally replacetaxation on energy by taxation on pollution. Like this,only polluting energies will be taxed.

• Low or zero interest rates for renewable energyinvestment credits. The result of this investment will bethat the state only covers the difference betweennormal interest rates and the interest rate reduction. Asa result, the investment creates benefits for the wholesociety and its economy.

• Feed-in tariff regulations in grid-connected areas witha priority access for power produced from renewablesources and a guaranteed fee. This results in an ever-increasing contribution of renewable energy,substituting conventional energies.

Unexpected potential winnersThe spectrum of potential winners from a shift inenergy, however, goes well beyond the producers ofrenewable energy technologies. It also encompasses thevast majority of all other businesses, only a few of whom(admittedly) have recognised that they have a self-interest in achieving independence from theconventional energy business. Many companies wouldappear to be substantially more fitted for a role of theirown as renewable energy technology producers than arethe big corporations of the energy business.

Thus, it is in the interest of the car industry toovercome its 100-year alliance with the petroleumindustry. Cars and, by extension, their manufacturers areregarded as an environmental danger largely because ofthe fossil fuels used to drive them.

When it comes to bottlenecks and price explosions asa result of scarce petroleum in the near future, this willaffect the car industry immediately – in contrast to thepetroleum suppliers, which have profited from everyprice increase so far. In the interest of securing theirlong-term existence, therefore, the car companies needto become a driving force pushing for the use ofrenewable energy. In their hand they hold a trump cardthey can use to facilitate this reorientation, namely byproducing and marketing energy-saving cars that can be

Table 1. Characteristics of energy sources

Fossil Nuclear Solar Solar PV Wind Biomass Renewable Small Large energy fission thermal thermal (waste (biomass hydro hydro

heat electricity crops) plants) plants plantsUnlimited availability � � � � � � � � �

Reduce CO2 � � � � � � � � �Reduce heat emissions � � � � � � � � �Avoid danger of major accident � � � � � � � � � �Reduce administrative costs � � � � � � � � � �Relieve balance of payment � � � � � � � � � �Reduce international conflicts � � � � � � � � � �Social acceptance � � � � � � � � � �Reduce public transport costs � � � � � � � � � �Create new jobs � � � � � � � � � �Support regional economic � � � � � � � � � �structuresDecrease risks to health � � � � � � � � � �Decrease water consumption � � � � � � � � � �Creating jobs � � � � � � � � � �

�=no �=yes �=yes, if correctly applied �=not always �=not always and everywhere �=few �=many


Environment Finance

driven with biofuels and/or electricity. This trump canhelp the car companies clear the way for society toundertake the shift to renewable energy.

To do this they need to use their economic weight tocreate political parameters that will facilitate introducingbiofuels into the market. Even more, the car industrymight even become a producer of stationary motorpower plants, whether we are dealing with communalheating plants, motors operated using fuel cells, or withStirling or compressed air motors. Not only can the carindustry contribute its experience in motordevelopment; it can also bring in its experiencemarketing decentralised installations using a wide-reaching network of dealers and workshops. For thisreason too, the car industry should no longer leave thedesign of energy laws exclusively to legislators in theelectricity companies’ sphere of influence. The more thatenergy laws favour the introduction of decentralisedfacilities for producing electricity, the greater the marketopportunities for motor manufacturers, including thesmall power station market.

The electrical and information technology industryshould not have to wait for government to pass lawspromoting its participation in renewable energy. It isalready within its power to optimise electricity storagebattery technologies, to develop new ones and putthem up for sale. It is not just the market for existingrenewable energy plants (a market that grows faster asstorage technologies become better and less expensive)that awaits these new products; they are alsoanticipated by the market for improvements in theway today’s electricity supply systems are serviced.Extra costs that might be incurred will hardly play arole in this group’s purchasing decisions. Suchadditional costs can only be small, and it is easy toconvey to the users of these devices that savings inelectricity costs make up for the added expense. Sowhat is this industry waiting for?

It is in the interest of the railway companies and therail vehicle industry to make a commitment todeveloping locomotives operated with fuel cells. Thisopens up the possibility for powering locomotives withelectricity produced on board, so that overhead trainwires would no longer be needed. This would help savesubstantially on infrastructure and maintenance costs inrailway operations.

It would be in the interest of airline companies andthe aircraft industry to prepare intensively for the timewhen fossil aircraft fuels will be subject to taxation orperhaps no longer even be available. Aircraft also need afoundation in renewable fuels. In light of the importanceof freight transport by air, moreover, it isincomprehensible that neither the air travel industry northe airline companies have shown more interest inreviving the dirigible. It is also in the self-interest of theshipbuilding industry and of ocean shipping companiesto convert to renewable energy. Many seagoing shippingcompanies would have already introduced biofuels tooperate their ship motors if fossil fuels had not been

available to them tax-free. Large passenge and transportships can also avail themselves of special opportunities toproduce renewable energy on board, whether it be fromwind power, which can also be used for electricityproduction without free-standing rotors, or from solarelectricity devices integrated into ship roofs or into wallson board. Hydrogen electrolysis on board is also atechnical option.

Agriculture also has a unique opportunity to reviveand turn itself into the economy’s most importantresource base. Farming has this chance for a revival(something once deemed inconceivable) through theintegrated cultivation of plants for foodstuffs, energyand raw materials – a ‘three-field economy’. In thecultivation of plants for raw materials, there lies achance to ‘ecologise’ the chemical industry for afundamental ‘metabolism’. Plants will replace petroleumas the diverse basic material of the future. In my book‘The Solar Economy’ (under the heading ‘Forwards:towards the primary economy’) I descr ibed thefundamental importance of this development as areorientation whereby agriculture’s marginalisationsince the industrial revolution will be permanentlyended, and a sociological decentralisation (in place offurther centralisation) will be introduced into ourmega-cities. Opportunities for a natural second line ofbusiness and for increased productivity will also openup for the foodstuffs industry if it proceedssystematically and vigorously to commercialise itsbiological residues and waste – to produce electricityon its own or to produce and market bio-fuels.

Next to agriculture, it is the construction business,including the building materials industry, that willexperience the largest upswing if it seizes theopportunities provided by solar construction. Numerousnew building materials and construction methods –from glass that insulates as it produces electricity toenergy-saving wood constructions – could be employed.If every building is going to be capable of using cost-freesolar energy optimally for heating and cooling purposes, it needs to adapt these new materials and methods to theconditions of the local topography and bio-climate –each with its own special solar plan. Solar retrofitting ofthe existing building stock plus new solar buildings are agoldmine for the construction trades, architecture andbuilding engineers.

And, finally, there is the municipal (or localgovernment) and regional energy business, which istaking electricity production back into its own handsand, as a partner for regional agriculture, is discoveringthe production and marketing of biofuels as a new lineof work. The same holds true for the ‘energetic’marketing of organic waste in cities and localgovernments. On the basis of local governmentmarketing of all energetically useful biomass and wastematerial, as well as on the basis of direct utilisation of thelocal potential for solar radiation energy, wind, water,terrestrial and atmospheric heat, it is possible to come upwith integrated utilisation plans that have short routes



from production to consumption, plans with which acentrally organised energy business (with all theexpensive outlays for its wide-ranging infrastructure)cannot compete.

In these local schemes, the public’s energy outlaysremain in circulation inside municipal and regionaleconomic channels. Even large energy corporationsmight be able to reconcile themselves with renewableenergy by transforming themselves into holdingcompanies for independently operating enterprises atthe local and regional level; this way, they would also beable, in the words of Joseph A Schumpeter, “to avoid …coming down with a crash”, and instead “turn a rout …into orderly retreat”. As matters stand, however, they willprobably be the last to attempt this.

In short, not only will new industrial enterprisesemerge when renewable energy prevails, renewableenergy will also open up opportunities for oldbranches of industry. The more autonomousinvestments flow into renewable energy, the faster oldplant and equipment will be replaced by a newgeneration of decentralised energy facilities – and thebetter it will be for the industrial economy. What theenergy business exper iences as the destruction ofcapital breathes new life into industry and reinforcesthe economy at large.

Dr Hermann Scheer, member of the German Parliament,founded the non-profit European Renewable Energy AssociationEUROSOLAR in 1988, and in 2001 the non-profit WorldCouncil for Renewable Energy (WCRE), serving as Presidentand General Chairman, respectively, of the two non-governmental organisations on an honorary basis. Through theseinstitutions Dr Scheer elaborated his original policy concepts forrenewable energy disseminations, and initiated legal frameworksin Germany and the European Union. He has been the maindriving force behind the establishment of the InternationalRenewable Energy Agency (IRENA) in January 2009.Mandated by governments worldwide, IRENA will be the mostimportant actor to globally promote a rapid transition towards thewidespread and sustainable use of renewable energy.

The World Council for Renewable Energy (WCRE) is theglobal voice for Renewable Energy. It operates independently andfree of the vested interests of the present global energy system. Asa non-profit and non-governmental globally workingorganisation it is focused on developing policies and strategies forrenewable energy. Its mission is to bring renewable energy intothe mainstream of world economy and lifestyle.

World Council for Renewable Energy (WCRE) c/o EUROSOLAR e.V., Kaiser-Friedrich-Str. 11Bonn 53113, GermanyTel: +49 30 2277 3836 Fax: +49 30 2277 6528 Emails: [email protected]; [email protected] Website: www.wcre.org


Environment Finance

Economic, Social and EnvironmentalBubblesThe most urgent and visible problem is the economiccollapse. Figure 1 shows how a greed-driven asset bubblerapidly inflated the value of financial instruments wellbeyond the true value of the underlying economicresource base. The collapse of this bubble in 2008 causedthe global recession. It is estimated to contain about $100trillion of “toxic” assets (twice the annual global GDP).

Meanwhile, a social bubble based on poverty andinequity continues to undermine the benefits of rapideconomic growth of recent decades, excluding billionsof poor from access to productive resources and basicnecessities, like food, safe water and sanitation, energy,health care, shelter, and a clean environment. In 2000,the top 20 percentile of the world’s population byincome, consumed 60 times more than the poorest 20percentile. Poverty is now exacerbated by the economicrecession, which is worsening unemployment and accessto survival needs. This bubble cannot be ignoredindefinitely, without grave consequences for humanity.

Finally, mankind faces the bubble of environmentalexternalities, whereby myopic economic activitiescontinue to severely damage the natural resource baseon which human well being ultimately depends. Beyonddegradation of local air, land and water resources, climatechange is the ultimate global manifestation of this threat,where carbon dioxide emissions which have drivengrowth since the industrial revolution will result incatastrophic impacts that will undermine progress forcenturies to come. Ironically, the worst impacts ofclimate change will fall on the poor, who are notresponsible for the problem.

And what are our current priorities as we face thesechallenges? Governments have very quickly found overfour trillion dollars for stimulus packages to bail out richbankers and revive shaky economies. However, onlyabout 100 billion dollars per year is devoted to helpbillions of poor people, and far less to combat climatechange. Furthermore, the recession is further dampeningenthusiasm to address more serious long term povertyand climate issues.

The immediate way forwardThe ongoing economic crisis has provided opportunitiesfor world leaders to move in new directions, as theyimplement unprecedented stimulus packages and seek to co-ordinate policies. Prompt action includingappropriate investments, social safety nets, and pricepolicies, can yield multiple dividends.

Multiple global problemsneed integrated solutions:applying the sustainomicsframework Mohan Munasinghe, Director General, Sustainable

Consumption Institute, University of Manchester, UK;Chairman, Munasinghe Institute for Development(MIND), Sri Lanka; and Co-laureate 2007 Nobel

Peace Prize (Vice Chair, IPCC-AR4)

The world is facing multiple economic, social, and environmental threats, best characterised by a“bubble” metaphor based on false expectations, where a few enjoy immediate gains while the

vast unsuspecting majority will pay huge “hidden” costs in the future. These threats can interactcatastrophically, unless they are addressed urgently and in an integrated fashion, by applying thesustainomics framework for making development more sustainable. Piecemeal responses will beineffective, since the problems are interlinked and feed on one another.

Figure 1. Multiple global crisis and human priorities.

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First, leaders need to invest a bigger share of the fiscalpackages in key areas of green infrastructure (like energy,water, transport and agriculture) and social development(typically education and health), which will stimulate the economy, increase employment, and protect the environment. They must resist pressures to use theincreased spending merely to protect currentexpenditures (especially wasteful subsidies and bailouts).

Investments in green and carbon saving technologieswill boost the development of renewable energy. Gainsin energy efficiency are possible in major sectors likeenergy, industry, transport, construction and agriculture.Finally, reversing global deforestation could boostsustainable livelihoods while absorbing atmosphericcarbon and protecting the local environment.

Leaders need to invest a bigger share of the fiscal packages in key

areas of green infrastructure.

Second, the developing world is too big to be allowedto fail – it contributes over 47 per cent to the $55tnworld economy, produces more than half OECDimports, and contains three billion people living on lessthan $2.50 a day. Donors need to expand povertyreduction efforts, because hundreds of millions morepeople are likely to slip into poverty. Financial packagesneed to focus on investments with a high potential forjob creation, sustainable livelihoods and access to assetsfor the poor.

Sound social safety nets can protect the vulnerable.Mexico, Brazil and other countries have shown howconditional cash transfer programs could provide incometo the poorest families, while encouraging them toinvest in the health and education of children. Devotingabout one per cent of GDP for such efforts can make ahuge difference.

Third, pricing policies need to be reformed. Energysubsidies – a quarter trillion dollars in 2005 worldwide –represent energy wastage, a fiscal drain and harm tonature. Although they are aimed at the poor, the bulk ofthe gains do not reach their target. These subsidies need

to be phased out, while targeted safety nets protect thebasic needs of the poor (see below). Other areas forprice reforms include water, fertilizer and chemicals,where subsidies amount to several percentage points ofGDP in many countries.

Improvements in global governance should includemarket regulatory reforms, giving more weight to thedeveloping world within the IMF/World Bank, makingthe UN system more responsive, and shifting emphasisfrom G7 to G20. It may be useful for the G20 to createtwo advisory bodies – B20 and C20, consistingrespectively of business and civil society leadersnominated by the G20.

A long term visionBased on the foregoing, a longer term vision for thefuture is summarised in Figure 2. The top rowrecognises that our current focus is on surface levelissues like poverty, inequity, exclusion, resourcescarcities and conflict, mis-governance andenvironmental harm. These problems are dr iven by powerful forces including globalisation andunconstrained market forces, based on the “WashingtonConsensus”. Present trends could lead to a breakdownin global society, due to the ineffectiveness ofgovernments seeking to cope with multiple, interlinkedcr ises, using myopic, reactive and unco-ordinatedresponses. A recent example is the futile attempt toalleviate oil scarcities by promoting corn-ethanol,which meanwhile worsened food security arising froma drought-driven worldwide grain shortage.

The second row shows that a transitional step forwardis possible today, by influencing key common drivers ofchange, including consumption patterns, population,technology and governance. This will help address abroad range of issues in an integrated manner, shapingglobal trends and managing market forces. Theimmediate way forward, described earlier, is a key part ofthis transition.

More broadly, using existing experience and tools thatmake development more sustainable today, business andcivil society could help governments move proactivelytowards the ultimate goal of sustainable development.The emphasis is on early action, to overcome the hugeinertia of “supertanker earth”, and begin steering it awayfrom its risky current path towards safer waters.

The third row follows on from the successfulimplementation of the second (transition) row. Here, ourchildren and grandchildren might pursue their longterm goal of a truly global sustainable developmentparadigm. They would need to work on deep underlyingpressures linked to basic needs, social power structure,values, choices, and knowledge base. Fundamentalchanges are necessary, driven by social justice and equityconcerns, through inspired leadership, a networked,multi-stakeholder, multi-level global citizens’ movement,responsive governance structure, improved policy tools,advanced technologies and better communications(including the internet).

Figure 2. A vision for the future.

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Environment Finance

SustainomicsTo facilitate this transition, a comprehensive practicalframework called “sustainomics” was proposed by authorat the 1992 Rio Earth Summit, which has been widelyapplied since then (Munasinghe 1992, 2009). It involvesthree basic principles:

• First, making development more sustainable (MDMS)becomes the main goal, while sustainable developmentis defined as a process (rather than an end point) forimproving the range of opportunities that will enableindividual human beings and communities to achievetheir aspirations and full potential over a sustainedperiod of time, while maintaining the resilience ofeconomic, social and environmental systems. MDMS isa step-by-step method that is more practical andpermits us to address urgent priorities without delay,because many unsustainable activities are easier torecognise and eliminate (like conserving energy andreducing pollution).

• Second, the three elements of the sustainabledevelopment tr iangle need to be given balancedtreatment. These elements include the social (focusingon equity, inclusion, empowerment and values), theeconomic (dealing with growth, efficiency andstability), and the environmental (concerned withnatural resource degradation and pollution).

• Third, the thinking should transcend traditionalboundaries (involving disciplines, space, time, andstakeholders). Trans-disciplinary analysis is essential,since issues and solutions cut across conventionalacademic disciplines. Problems like climate change alsospan the whole planet, play out over centuries, andconcern every human being on earth.

The sustainomics framework also provides policymakers with a variety of practical tools. They help to notonly identify and implement the most desirable “win-win” climate policies that simultaneously yieldeconomically, environmentally and socially sustainablepaths, but also resolve trade-offs among conflicting goals.

At the national level, tools include macro- and sectoralmodeling, environmentally adjusted national income

accounts, poverty analysis, and the Action Impact Matrix(AIM – described below). At the project level, otheruseful methods are available for sustainable developmentanalysis – like cost-benefit analysis, multicriteria analysis,and environmental and social assessment. At all levels, thechoice of appropriate sustainable development indicatorsis also vital. The range of policy instruments includespricing, taxes and charges, regulations and standards,quantity controls, tradable permits, financial incentives,voluntary agreements, information dissemination, andresearch and development. Ethical, moral and humanrights considerations also play a key role.

Global level application – climate changeresponsesFigure 3 shows how the sustainomics approach could beapplied to reconcile long-term development aspirationsand climate change responses. On this stylised curve ofenvironmental risk against a country’s developmentlevel, poor nations are at point A (low GHG emissionsand low GNP per capita), rich nations are at point C,and intermediate countries are at point B. The followingelements are essential for a workable global compact:

• Industrial countries (already exceeding safe limits)should mitigate and follow the future growth path CE,by restructuring their development patterns to makeboth production and consumption more sustainableand delink carbon emissions from economic growth;

• The poorest countries must be provided an adaptationsafety net, to reduce vulnerability to climate changeimpacts;

• Middle income countries could adopt innovativepolicies to “tunnel” through (along BDE – below thesafe limit), by learning from past experiences of theindustrialised world;

• Developing countries should receive technical andfinancial assistance, to simultaneously continue todevelop (and grow) more sustainably, by following aless carbon-intensive growth path that also reducesclimate vulnerability.

Country level applicationsA recent example of macro-analysis shows the complextrade-offs involving economic, environmental and socialgoals, while using complementary measures to resolveproblems. In West Africa, growth inducing macropolicies(including structural adjustment) interacted withimperfections in the economy to increase GHGemissions and worsen climate impact vulnerabilities. Suchimperfections (like policy distortions, market failures, andinstitutional constraints) make private decisions deviatefrom socially optimal ones. Macro-modeling showed thatrapid aggregate economic growth, promotion of timberexports, subsidies for land-clearing, and open accessforests, have combined to cause accelerated deforestation,thereby exacerbating rural poverty, harming the local environment, increasing GHG emissions andundermining adaptation. Implementing complementary

Figure 3. Reconciling development aspirations with climate changeresponses.

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measures (like eliminating land-clearing subsidies andenhancing forest protection) helped to address theproblems and improve mitigation and adaptationprospects – most importantly, without reversing thegrowth-promoting macro-policies. In Figure 3, thehighly peaked path ABCE could result from economicimperfections and environmental externalities. Correctivepolicies would help to reduce such distortions andpermit movement through the sustainable tunnel BDE.Such a tunnel path is also more economically optimal(e.g., like a “turnpike” growth path).

Another sector-based example involves energy pricing.It would be economically efficient to set energy prices atmarginal cost. Adding environmental externality costs(appropriately valued), including a carbon tax, wouldfurther reduce energy use and mitigate GHG emissions.From the social viewpoint, it would be equitable toearmark some of these tax revenues to help the poorwho cannot afford to meet their basic energy needs, andto fund their adaptation efforts. Otherwise, simply raisingprices could become a way of rationing energy in favourof the rich, while worsening the plight of the poor.

Agriculture, food and water sector issuesin Sri LankaAmong the various sustainomics tools mentioned above,the Action Impact Matrix (AIM) is a unique method thatshows how to practically integrate climate change andsustainable development. This approach also has beenused successfully in several other countries. It identifiesand prioritises the two-way interaction: how (a) the mainnational development policies and goals affect (b) the keyadaptation and mitigation options; and vice versa. Itdetermines the priority macro-strategies in economic,environmental, and social spheres that facilitate theimplementation of climate change adaptation andmitigation policies.

The AIM methodology uses a fully participativestakeholder exercise, including development and climatechange experts from government, academia, civil societyand business. This collaboration helps participants to better understand opposing viewpoints, resolvesconflicts, promotes co-operation and ownership, andfacilitates implementation of agreed policy remedies.

Application of the AIM approach in Sri Lanka showedmajor climate vulnerabilities arising from food security,agriculture and water. A more detailed agriculture modelwas applied to identify how past output changes inimportant crops like rice and tea had depended onnatural variations in temperature and rainfall. Then, adownscaled regional climate model was used to makedetailed temperature and precipitation predictionsspecific to Sri Lanka. The combined results of bothmodels showed significant adverse impacts on future ricecultivation (almost 12 percent yield loss by 2050) –affecting poor farmers in the dry zone, where incomesare lowest. Meanwhile, the wet zone, where tea is grownand incomes are higher, would experience gains (+3.5percent yield by 2050).

These findings raised several important policy issues.Rice is the staple food and rice farming a major sourceof employment. Thus, adaptation measures are essentialto protect national food security, protect livelihoods andreduce vulnerabilities of the rural poor in the dry zone.Meanwhile, the differential impacts of climate change onpoor farmers and richer (wet zone) landowners havetroubling income distributional and equity implications.Finally, potential population movements from dry to wetzones need to be considered.

ConclusionsMultiple, interlinked crises currently pose a seriouschallenge to humanity. Fortunately, we know enough toconfront these problems together, and take the first stepstowards making development more sustainable, that willtransform the risky “business-as-usual” scenario into asafer future. Humanity can and must plan, co-ordinateand implement the necessary responses on a global scale,with business and civil society supporting governments.This is a unique opportunity to progress on all fronts.More than ever, the well being of future generationsdepends on our choices today.

Further ReadingMunasinghe, M. (2009), Sustainable Development inPractice: Sustainomics Framework and Applications,Cambridge Univ. Press, London, UK.

Prof. Munasinghe shared the 2007 Nobel Peace Prize(IPCC-AR4), and is also Chairman, Munasinghe Institute forDevelopment, Colombo; Director-General, SustainableConsumption Institute, Manchester University, UK; andHonorary Senior Advisor to the Sri Lanka Govt. He has 6post-graduate degrees and several honorary doctorates inengineering, physics and development economics. He has servedas Senior Energy Advisor to the President of Sri Lanka, Advisorto the United States Presidents Council on EnvironmentalQuality, and Senior Advisor/Manager, World Bank. He hasauthored 92 books and over three hundred technical papers.

The Munasinghe Institute for Development (MIND) is aprivate, non-profit organisation, seeking to make developmentmore sustainable by integrating the economic, social andenvironmental dimensions of sustainable development. MINDprovides scholar-ships to university students, and promoteseducation, training, and research. MIND has undertakenprojects in many countries and is a UN recognised Asian Centreof Excellence for climate change and sustainable development.

Mohan Munasinghe10 De Fonseka Place, Colombo 5Sri Lanka

Tel/Fax: +9411-255-1208Email: [email protected]: www.mindlanka.org www.globalbioenergy.org

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