The Rise of Turkey’s Development Aid: A Guarded Optimism
In the light of budget cuts in the EU and US, the world is longing for alternative non-traditional donors to fill in the void and Turkey fits right in. In fact, when all the “heavy-weight” donors such as the US, EU and Japan are financially struggling and slashing their spending, Turkey is planning to increase foreign aid, which is currently at the rate of 0.13% of its GNI. As the “new guy on the block” in the global aid donor group, Turkey has stepped up its aid spending 27 fold in recent years, amounting to approximately $2.3 billion in 2011 alone.
The nominal value and percentage, however, is not the most significant aspect of Turkey’s development aid. Indeed, the traditional OECD/DAC donors are still responsible for a large chunk of the global aid giving, committed to over $125 billion, around 55 times larger than Turkey’s single contribution. It is, on the other hand, the potential to dissolve the monopoly of traditional donors that emerges as the pivotal attribute of the rise in Turkey’s assistance, as illustrated by a report published by the German Marshall Fund. Furthermore, GMF notices that Turkey’s involvement, alongside other emerging nations, might serve as a catalyst for a new vision that will reshape the traditional development agenda.
And the aid’s marching on…but not in full force
In the initial stage of its official development assistance program, Turkey’s foreign aid was targeted towards countries with similar religious and cultural trajectories, as most of the destination countries were those with links to the Ottoman Empire in Europe. This strategy is arguably the manifestation of Turkey’s national interest of becoming a key regional player. The independence of countries in Central Asia and the Caucasus in the early 1990’s further appeased this regional interest and led to the creation of the Turkish Cooperation and Coordination Agency (TIKA).
First, with Turkey’s growing role of brokering peace in the Middle East, development assistance has been largely pouring into countries in the aforementioned region, with Afghanistan being the major destination, tapping around $400 million between 2005 and 2009. This staunch evidence corroborates Turkey’s interest as well as capacity of being a major and influential player among Islamic nations.
Second, the Turkish government has nurtured the intention to increase its involvement beyond neighboring countries to subsequently “address proactively other pressing global issues.” This view has been the impetus for Turkey to begin its extensive reach to Africa, in which 2005 was subtly framed by the government as the “Year of Africa.” Their support for Africa has in turn been reciprocal as Turkey was elected as the non-permanent member of the UN Security Council in 2009 – 2010 largely due to votes from African countries. Furthermore, according to a survey conducted by Pew, 78% of Egyptians believe that Turkey is promoting democracy in the Middle East, in comparison to 37% for the US. Concurrently, Turkey has also been the front-runner in non-OECD/DAC countries in pushing forwards issues pertaining to least developed countries, in which they hosted the Ministerial Meeting on “Making the Globalization Works for LCDs” in 2007 and 2011.
“When we had famine, nobody listened to us, nobody came to us in order to help. [Turkey's] Prime Minister [Recep Tayyip Erdoğan] came with his family and cabinet, brought us that help which uplifted us. It was such a change for the Somali people which we will never forget…We are very grateful.” – Somali Foreign Minister
Albeit being lauded for its increasing commitment in foreign aid provision and development assistance, Turkey has also been facing criticism. First, the British parliament’s International Development Committee reprehends the fact that Turkey is sending foreign aid while the country itself is still one of the major aid recipients, thus undermining the EU’s efforts to support more underdeveloped countries. Turkey indeed received net ODA of US$1.36 billion in 2009 alone, with the European Union, Japan, France, Germany and Spain being the largest donors.
Second and more important, Turkey’s development assistance has been criticized for lacking a comprehensive strategy says another GMF report. In more details, the holistic approach has not yet to maximize private-public partnership through a wider range strategy, in which “TIKA works with only a handful of Turkish NGOs in a limited aid coordination capacity.” This inability to engage civil society and local NGOs is also profound in Turkey’s development programs in recipient countries.
The road ahead
In moving ahead, Turkey should imminently and incrementally resolve the impediments that are hindering the effectiveness of its nascent development assistance program. First, GMF suggests that in addressing the aforementioned lack of public-private partnership, Turkey through TIKA should create spaces for private organizations, both profit and nonprofit, to discuss the development strategy and further engage local organizations in its targeted countries to help implement the strategy. In creating its own framework of a public-private partnership, TIKA might refer to existing models, such as the one developed by the Canadian Council for Public-Private Partnerships, or cooperate with the European PPP Expertise Centre.
Second, Turkey might consider building partnerships with either OECD/DAC donors or other emerging nations in carrying out its development assistance. The bilateral or multilateral partnership will be a platform for members to learn from the experience of other donors, particularly crucial for Turkey in augmenting their development strategy.
Third and more incremental, Turkey can opt to employ a program that builds an alliance between domestic NGOs and their counterparts in recipient countries. They might model the program from the scholarship provision for eligible students from least developing countries by inviting and funding local society leaders or NGO workers from recipient countries to learn from the experience of the NGOs in Turkey.
In general, Turkey’s development venture provides a viable alternative for both sources of aid and development vision. Their engagement with Africa, for instance, encapsulates a vision that the Turkish government claims differ from the perspective of traditional and more advanced global players, in which they promote mutual respect. With their established presence in the Muslim world and increasing influence in least developing countries, Turkey’s development aid, nonetheless, is ready to soar, but it has to be guarded with improvements in the holistic strategy to prevent it from freefalling.
Standing By For the African Standby Force
Basic security and political instability have been significantly impeding African development despite the decades of aid flows to the continent. Security is necessary for sustained economic growth, but it alone does not produce development, rather its absence prevents long term growth from taking place. This, combined with political instability, undermines productivity and prevents the accumulation of private wealth and public sector growth.
Formed in 2002, the African Union is an organization composed of 53 African member states whose ambition is to foster economic integration and regional security among independent African countries. Alongside plans to create an African central bank, human rights commission, and a single African currency by 2023, the AU is also tasked with providing security to the region capable of combating the political instability and security concerns that have historically plagued the continent.
Africa’s integration is reliant on a three pronged approach of development, local governance, and collective security. At the center of the African Union’s collective security apparatus is the African Standby Force. The ASF is being designed as a continental peacekeeping system of both civilian and military components, with the goal to create a 30,000 troop force from five contributing regional areas-East, West, Central, North, and South Africa-able to deploy and intervene in cases of conflict and instability across the country. Unlike a standing army, the ASF would consist of a quick response unit able to effectively and rapidly move in to prevent the emergence, or scale, of African conflicts that have historically engulfed the continent and prevented the conditions necessary for foreign investment and stable economic growth. This ‘African solution to African problems’ would remove the over reliance the continent has long had on UN and Western powers to intervene in African conflicts. 
Originally designed to be operational in 2008, it was pushed back to 2010, then 2013, and most recently given a timeline of 2015, leaving reason to believe this deadline may go unmet as well. But recent events in Mali have served as a wakeup call for the African Standby Force. While the international community and African leaders were largely quick to praise French action in the region, it served to highlight Africa’s inability to secure its own interests and again rely on outsourcing its internal security to outside actors. Foreign intervention can provide the immediate on the ground security and law and ord
er necessary for development to occur, but it alone is not equipped to offer the political stability and good governance conditions critical to future African integration. Political governance can only be attained when those in power are seen as legitimate-the governed are willingly governed by their own-and this must come from African forces. French boots on the ground in the former French owned African lands cannot provide for legitimacy in local systems, and is an unsustainable process for achieving real African development moving forward.
Nkosazana Dlamini-Zuma, the new chairperson of the AU commission, has called for new ways to address this old problem of African insecurity and instability, both with the formation of an ASF, as well as a more holistic approach which deals with the root causes that plague the nation and drive the ongoing conflict and stagnant economic climate.
The idea of an African peacekeeping force able to police its own is nothing new. Before his ousting, Muammar Gaddafi of Libya was an early proponent of an African Army, and even offered to provide the location and resources to house and train African army forces. This invitation was rejected by the African Union, with many leaders suspicious of the eccentric leader’s motivation to create such an instrument of force in his own backyard. One could imagine how differently the Arab Spring might have turned out in Libya had Gaddafi been in control of such a force at his immediate disposal.
The continued presence of conflict across the war torn nation has proven both an impediment against, and catalyst for, creating the momentum of political will to establish the ASF. To date, the inability to meet operational deadlines for its implementation has exposed a myriad of problems in Africa’s first attempt at creating a rapid response, collective security apparatus. “The problems are legion, but the two biggest revolve around decision-making and funding.”
Regarding the decision making problem, many of the problems haunting the ASF are those which complicate any type of collective security arraignment. Who does the decision making? When and where will the ASF deploy, what is the threshold for cause of action, and in what circumstances require action of force? Will troops from one region really want to risk their lives and fight for a far off problem in a wholly separate African region? Do individual countries supplying the ground troops have any say in the matter, and who funds such an ambitious challenge?
Which leads us to the problem of funding.
Mirroring Africa itself, the African Union simply does not have the resources necessary to fund these types of large scale organizational and operational commitments. This means they will continue to be largely dependent on Western donors to finance its missions. Peace in Africa, kept by Africans, funded by Foreigners? This creates a myriad of problems for the security organization moving forward, not the least of which is what influence will these foreign donors have on decision making in the country? Is it likely that outside countries would be willing to freely give hundreds of millions of dollars to fund African military forces without demanding some say in when and where these forces are used? The inability of the AU to finance its own security is likely to prevent it from acting independently in pursuit of African interests. It is a problem that has already prevented the development of the ASF, and is not likely to change in the near future. “Africa will never in the foreseeable future be able to fund large peacekeeping operations on its own.”
2015 is the latest target date for an operational African Standby Force, and we are entering a pivotal stage in determining the future success of the continent’s collective security efforts. It is clearly in the region’s interest to successfully be able to meet and respond to its own challenges, and break its dependency on foreign control and funding. What remains to be seen is if the ASF is the answer they are looking for.
“History has placed these responsibilities in front of us. We need to take them up.”
The Surge of Foreign Investment in Myanmar: Raining Gold or Acid?
As the military junta relinquished their power in Myanmar, the world became hopeful for the country’s growth under democracy and a liberalized economy. This has sent a signaling effect to staunch critics and investors around the world that Myanmar can now be discerned as the new field of opportunities.
And so, the quest for growth begins. What seemed elusive in the past is not so distant now. Like many other newly liberalized countries, it is not surprising to see that Myanmar has been growing rapidly in recent years since the democratization and economic liberalization. In fact, the country’s GDP growth rate remarkably soared from -0.5% in 2003 to 5.5% in 2011. This rapid growth is captured in Solow Economic Model that explains how developing countries usually have lower capital to labor ratio, indicating that there is a high marginal product of capital in which the capital has not experienced depreciation or diminishing returns and will in turn boost the economic growth to a higher rate.
“Under the core scenario…which assumes that the military-backed Union Solidarity and Development Party (USDP) maintains its grip on political and economic power while orchestrating superficial reforms to win international legitimacy,(Myanmar’s) GDP growth for the period 2016-2020 will rise to an average of 7.7% per year.”
Investment is a condiment for “Catch-Up Growth”
As Myanmar opened up, capital accumulation has been increasing due to the external influx. Consequently, Myanmar holds optimism for “catch-up growth”, a state where developing countries’ per capita income will rise as a byproduct of a high growth rate. In the long run, the per capita income of a developing country, provided that it can sustain the growth rate, is expected to converge to the level of per capita income in developed countries.
To many, foreign investment is seen as a crucial channel for such capital accumulation and growth. It also provides positive spillovers, such as technology and skills transfer for the receiving end. Myanmar, too, believes in such a notion. Following the lift of economic sanctions on Myanmar placed by several countries during the military-led government period, the highly anticipated and lauded Myanmar Foreign Investment Law was signed in November 2012. The reformed Law contains significant changes, such as the improved easiness to register foreign companies and a tax holiday.
This green light has catalyzed many multinational firms, such as General Electric and Pepsi, to vie for opportunities in tapping into this potential market of 60-million people. Currently, there are approximately 30 foreign companies “active in the onshore exploration” and this number is projected to keep growing. Underdeveloped sectors, such as property, healthcare and other businesses are primarily sought by the firms and companies.
In addition to the surge of private capital inflows, Myanmar has also held hands with multinational organizations and foreign governments. World Bank has recently stated that they are prepared to disperse financial and technical assistance to support augmenting economic stability, and more importantly to assist the improvement of electricity. Meanwhile, Japan through its development agency, Japan International Cooperation Agency (JICA), and some of its finest corporations, are cooperating with Myanmar’s government and entrepreneurs to develop the Thilawa Economic Zone.
Overwhelmed, Myanmar still needs “Midas Touch”
Caveats, however, should be applied when reviewing Myanmar’s future growth and investment environment. Both Myanmar’s government and foreign investors should tread cautiously in managing the rate of current investment.
“Some investors…worry that the political and economic risks in Myanmar are still too big, and that asset prices are getting pushed beyond reasonable levels.”
Although Myanmar has undertaken reforms, the country still needs a “Midas Touch” to turn the murkiness of capital inflows management to long-term sustainable growth. With the current government’s enthusiasm, this transformation is highly possible. First, there needs to be banking system reform. With the current “rudimentary banking system,” it is futile to expect significant extension of foreign investment as it is “limiting the ability of investors to cash out of their investment through local markets” as the Wall Street Journal reports. A sound banking system will concurrently ensure a legal protection for foreign investors and their funds, explains the WSJ.
Second, in regards to “uncertain regulatory ” concerning the Investment Law, Myanmar should ease the ambiguous restriction for investment in manufacturing. This sector is currently categorized as one of the 11 sensitive sectors whose foreign ownership ratio shall be determined by Myanmar Investment Committee (MIC). This will, nonetheless, beget the MIC substantial power that some fear will create inefficiency and rent seeking.
With around 13 million people between the ages of 15-28, Myanmar is destined to be a powerhouse in the manufacturing sector in Southeast Asia. However, underdeveloped manufacturing, receiving only 0.3% of the total FDI inflows, is in dire need of new technology and skills enhancement. This gap can be filled by the presence of foreign companies in the aforementioned sector. Concurrently, developing Myanmar’s manufacturing sector can stop the brain drain – flow of workers that mostly migrate to Thailand in search of better jobs and wages. Most importantly, manufacturing should be sought as an alternative path to growth as Myanmar cannot exclusively rely on its extractive industry, as the former option has more potential in creating middle class and “wage appreciation” and the latter has the risk of being exhaustive.
Third, to sustain the positive spillover effects, such as skills transfers, the government should encourage foreign investors to employ and train local populations and possibly provide preferential treatment or rewards to those who comply with the “employ and train” policy. A similar strategy catapulted the Bangladeshi garment industry in the late 80s.
Fourth, with many of the projects soon to take off, Myanmar needs to imminently resolve land rights issues that will not only potentially drive investors away, but also create internal repercussions. In Thilawa, for instance, farmers have been protesting a land acquisition scheme. They were reportedly forced to sell the land for $20 per acre, an abysmal amount of settlement in comparison to the current price of $10.000 to $20.000 per acre.
Finally, as the surge is arguably creating an economic bubble, Myanmar needs to tread warily before this gold-rush bubble bursts into acid rain. Overall, a more people-focused and inclusive economic development agenda should be put forward by the government, especially in attempting to “reduce disparity, inequality and conflict with ethnic minorities.”
Post-2015 Debate: A “Neo-Geostrategic” Approach
“The Millennium Development Goals Work!” — says UN in the 2010 New York UN Summit.
In recent years, we have seen Africa’s economic growth, and the reduction of new HIV infections and AIDS-related deaths. The world starts to generate its post-2015 goals while celebrating the victory. Global scholars, activists and politicians hotly debate whether the international community should ascend its priority from eliminating extreme poverty to advanced objectives, such as tackling climate change and establishing healthy governance in each country.
So what is our post-2015 strategy? According to the Brookings Institution, four major typologies were launched in response to the post-2015 debate: “conservative” — persistent focus on extreme poverty; “upgrading” — poverty plus one or two global challenges, either social or environmental; “geostrategic” — concentration on emerging economies; “comprehensive” — resolve every country’s poverty and social problems simultaneously while confronting environmental issues together.
Each typology has its pros and cons. This blog does not aim to criticize any of them but put forward another approach to the global challenges — “neo-geostrategic”: keep relieving extreme poverty as the baseline, while improving governance specifically in the poverty-afflicted regions; while geostrategically targeting on emerging economies for resolutions to environmental concerns.
- Poverty as the baseline with concentrated regional governance improvement
The world’s extreme poverty occurs in the most impoverished continent, Africa and in sporadic areas in other regions. Although Africa’s economic growth reached around 5 percent in 2010 and 4.9 percent for Sub-Saharan Africa in 2011, critics argue that its current growth rate is less than satisfactory. As African Development Bank indicates, Africa’s overall poverty reduction rate between 1990-2008 is “nearly twice and three times lower at 9% relative to Asia’s 15% and Latin America’s 24%.” Meanwhile, the high unemployment rate and prevalence of malnutrition are still torturing the continent. On the other hand, Africa is facing significant foreign aid cuts from developed countries due to the global economic crisis. For instance, EU decided to cut €34 billion out of its total budget for the next seven years. 
In the mean time, evidence shows countries that are struggling through extreme poverty always suffer from poor governance and corruption. For example,in Kenya where approximately 46% of the population lives under the poverty line, Kenya’s MPs each earn a £82,000 annual income and still attempt to raise their salaries. Their incomes were quadrupled in 2003 and increased again by 25 percent in 2010. The effort of eradicating extreme poverty should be equipped with advancing political system and national governance, in order to better tackle the existing poverty struggles and prevent its retreat.
- Geostrategic focus on emerging economies
Environmental concerns, including climate change, need immediate address and long-term commitment. However, the emerging economies have more imminent needs to confront these challenges. Countries like China, Brazil and India, often embrace considerably big populations, which consume a large amount of energy and natural resources. Further, emerging economies tend to rely on exports of their natural resources to cushion the fast-growing economy.
Look at Brazil, where the world’s biggest rain forest is located. Over the past 12 months, almost 200,000 km2 clear cutting occurred in the Amazon, according to the National Institute for Space Research, a research unit of the Brazilian Ministry of Science and Technology. China with its CO2 emissions has long surpassed USA’s to be the world’s #1 since 2006, as suggested by PBL Netherlands Environmental Assessment Agency. Due to the dependency of emerging economies on resource export and the use of fossil fuels, it is reasonable to consider them as a geostrategic focus for the post-2015 plan to alleviate environmental problems. However, it’s not realistic to ascribe all obligations to the governments of these emerging economies. The whole international community can offer integrated assistance to these governments, including circumventing home country’s companies from engaging in anti-environment economic activities.
Nevertheless, each country has its unique circumstances that affect which issue it chooses to be its priority. African countries might need to take the extreme poverty into priority, while most Asian countries might pay more attention to social inequity.
A Growing Gazpro(m)blem
Russian energy giant Gazprom has a growing problem. One of the most profitable corporations in the world sits in the cross hairs of a burgeoning shale gas boom that threatens its monopoly over European gas markets and Russian preeminence in energy geopolitics. The advance of technology, economic success of natural gas development in the US and estimates of untapped gas reserves in Europe and elsewhere, could revolutionize the politics, and power, of energy. Traditional energy politics has been dominated by a few exporters in oil rich countries (Saudi Arabia, Russia) and a host of import-dependent consumer nations. Suddenly, most EU countries have some degree of domestic shale gas reserves, and if allowed for commercial development, will increase global oil and gas supplies, diversify national energy policies, decrease the value of energy as a commodity, and thus reduce the influence of energy geopolitics.
“Right now, the only thing keeping the shale gas revolution from hitting Europe as it has in the US is technology: the shale reserves in Europe are on land that is more
inaccessible, there is a lack of necessary infrastructure and fracking equipment, and protests against the environmental impact of fracking are more serious. But the biggest problem is Gazprom.”
Gazprom is the world’s largest producer of natural gas, but the shale revolution underway in America, and the potential growth in European gas production, threatens Gazprom’s energy monopoly in the region. Gazprom’s challenge is to prevent the spread of a potentially 2.7 trillion dollar shale boom from taking off on a commercial scale in Europe. Gazprom delivers about 25 percent of the continent’s gas needs, and this number is much higher in many former Soviet countries and Eastern Europe. Gazprom’s challenge is to combat this economic gas boom and prevent its emergence on a commercial scale in EU countries.
The energy battle being waged is more political than economic. The economic benefits are great for a country to develop its own cheap, domestic energy production. The Kremlin has long used its energy power as a political tool, and its continued efforts to disrupt, prevent alternative oil markets, control the delivery of oil, and delay the development of natural gas in the European market give Russia time to adapt to the changing global oil market and natural gas boom by consolidating power within Europe, and seeking new markets outside the region -including China-a country whose energy consumption continues to rise, and must either meet these energy demands through increased oil imports from countries like Russia, or themselves embrace the natural gas reserves and production they possess.
As such, Putin and Gazprom have become champions of other countries’ environments, helping organize and fund environmental opposition to fracking in EU countries and rallying populations to oppose such measures in Eastern/Central European countries like Bulgaria and the Czech Republic where Russian influence continues to be very real. Opposition to fracking in France, Bulgaria, and the Czech is important for geopolitical rather than economic reasons. These countries do not account for a large part of Russian oil revenues, rather their opposition is significant in creating momentum to achieve Gazprom’s larger and final goal-an EU ban on fracking. The more countries that adopt such measures, the more likely that Brussels adopts an EU ban that would apply to all member states such as Poland and some non-member states like Ukraine. Both of these countries desperately want alternative energy practices to break the Russian monopoly. 
But the EU is fighting back. To combat these heavy handed measures by Gazprom, the EU has sought alternatives through various fronts. They are looking to decouple energy supply from delivery, as Gazprom owns the one-way delivery pipelines into the region, and continue in their efforts to construct pipelines able to deliver gas from other places (Turkey, Iraq, etc). Diversity of delivery is a proper strategy for future energy independence, but does nothing in the short term. In the mean time, the EU has launched a probe into Gazprom practices and is challenging the company through the legal system-with allegations the company is illegally meddling to prevent any competition in the delivery and production of alternative energy sources. Further they are investigating the structure of contractual agreements which force long term contracts and fix gas prices to oil prices.
Market forces are producing a cheaper alternative on the global market for consumers than Gazprom’s long term, costly contracts. In response, Gazprom has been forced to reduce the price of doing business with them, giving discounts to Poland, Germany, and others. The effect is diminishing revenue for a State reliant on its primary export: oil and gas. As a Russian energy policy dependent on anti-competitive/monopoly structures is forced to adapt to a new global market and increased production of natural gas from US, European, and Asian markets, the only truly viable long term solution for Russian economic growth is to diversify their economy from gas exports, or discover new markets to sell their natural resources.
Pulled by Gravity: Brazil’s Investment Ventures to Africa
As Africa is seen as the “next frontier of growth,” the world’s focus on their economic engagement with the region has tilted. Now, investment is the buzz word. Foreign governments and companies are venturing in this new race to what was once considered as an elusive development.
“Africa is no longer an object of our fears or hopes or pity.”
Brazil has emerged as one of the key partners of trade and investment with Africa since the Portuguese empire era. Their economic partnership has flourished as trade between this largest nation in South America and the African region expanded from $4 billion in 2002 to $20 billion in 2010. Although it remains a fraction of Brazil’s total international investment, the country’s investment outflow to Africa has significantly increased within the last decade. The African Development Bank reports that Brazil’s total investment in Africa surpassed $10 billion in 2009.
High Returns of the “Historic Debt”
The former president of Brazil, Lula Da Silva, once postulated that his country has “historic debt” to Africa, referring to the Portuguese empire’s transatlantic slave trade that once linked Africa and South America. Bearing this in mind, a question arises of whether such benevolence is the drive behind the increasing number of trade and investment with African countries. Common presupposition might juxtapose the causality with the abundant endowment of natural gas and oil that Africa contains. However, Brazil is already a resource-rich country and a major exporter of oil itself. Thus, what are the possible alternative explanations behind such an engrossment?
Based on the renowned Gravity Equation, it seems like Brazil’s investment falls into the right place. Gravity theory in economics posits that the decision of a country to trade and invest at both intensive and extensive margins is influenced by market size and location between the trading countries. Although for generations we have been accustomed to perceiving Africa as merely “a quagmire of famine and genocide”, some of the countries in the region have actually been growing rapidly. In fact, six out of the 10 fastest growing economies in the world from 2001 – 2010 are the African nations. These countries have exponentially augmented their market size and diversified the sectors. Home to a growing middle class, Africa is projected to have 1.3 billion consumers by 2030, with $1 trillion-worth expenditure by 2020. For Brazil, this growing market is only at the other side of the South Atlantic Ocean.
In addition, Brazil has a strong cultural trajectory with Africa, as it is the largest country outside of the region to host Afro descendants. Like Brazil, many African countries were colonized by the Portuguese, and today, this cultural affinity has been capitalized by Brazil as most of the inroad works in Africa have been conducted in Portuguese-speaking countries, such as Angola and Mozambique.
One equally important explanation is more political in nature. Africa can serve as a platform for Brazil to expand its global influence. Under the leadership of Lula, Brazil remarkably opened 17 new embassies on the continent. The former president of Brazil also extensively visited 21 countries during his tenure. Furthermore, Brazil has carefully constructed their public profile in Africa in order to avoid being labeled as a “resource-hungry” imperial power, in which both former president Lula and current president Rousseff have criticized China’s approach in engaging with Africa.
“Resuscitating Africa”: Can Brazil venture the high seas with a small boat?
If Brazil can profit through investing in Africa, can such benefits be reaped mutually by the receiving end? Although Brazil’s investment, if compared to China’s, seems like a blip in the radar, it can potentially deliver auspicious gains for the people where Brazilian companies locate or invest in Africa.
First, Brazil has a commitment to employ local population, as stated by Rousseff during her trip in Angola. A World Bank report suggests that Brazilian corporations are hailed due to their approach in doing business in Africa, in which they tend to “develop local capacity”. Odebrecht, a giant company from Brazil, for instance, is currently one of the largest employers in Angola. The corporation has also been lauded for their HIV/AIDS awareness program in the aforementioned country.
Second, it allows for transfer knowledge in which Brazil can be a model for Africa in its efforts of reducing poverty and developing their agribusiness sector. Brazil is renowned for its cash transfer payment, Bolsa Familia program which some argue has supported Brazil in lifting 20 million people out of poverty. In addition, Brazil’s success story of “integrating key agricultural value chains” can be an inspiration for Africa’s agribusiness sector to emulate.
The future of this dynamic engagement remains to be seen. Tensions in some countries, such as Mali, posit a real threat to Brazilian investors within the country and might have negative spillovers to other countries on the continent, but might well not be enough to brush the Brazilian juggernaut away. Also, it will be interesting to see who will come out “victorious” in the investment race as more and more players are vying into this opportunity despite the potentially high risk. However, coming with a sensitive strategy that emphasizes local engagement, Brazil’s small boat might not only be welcomed with open arms, but one day, it might also sail ahead of the others, including China’s flagship.
Remittances to Africa Squeezed by High Transaction Costs
It’s undeniable that the money sent from the African diaspora to their families on the world’s most impoverished continent contributes significantly to Africa’s battle with poverty. African diaspora is large, with 30.6 million people 50% of which are intra-Africa migrants, according to Anne W. Kamau and Mwangi S. Kimenyi of the Brookings Africa Growth Initiative. The World Bank estimates that about $60 million remittances were sent to Africa in 2012. Those remittances support millions of Africans. Unfortunately, sending money to Africa specifically costs more than to anywhere else — transaction expenses are almost 3 percent higher than the global average. The African diaspora “could save US $4 billion annually” by making such costs 5% lower.
Data from Send Money Africa (SMA) report, World Bank. Jan. 2013
The figures above are from the Send Money Africa (SMA) remittance prices database, which belongs to the African Institute for Remittances (AIR) Project organized majorly by the World Bank and the African Union Commission. According to the SMA, the intra-Africa corridors are the most expensive money transfer avenues in the world, while South Africa, Tanzania and Ghana featured as the most costly sending countries with 20.7 percent, 19.7 percent, and 19.0 percent cost respectively.
But the actual costs might be even higher, says Ismail Ahmed, the founder of World Remit, an online money transfer service provider.
“There are costs associated with going to a branch,” Ahmed comments, “In Africa, in many cases banks are in the cities, so people have to travel there, queue up, wait and then collect small amounts of money.” – The Guardian
Data from Send Money Africa (SMA) report, World Bank. Jan, 2013.
The lacks of transparency and competition in the African money transfer market are to be blamed for the elevated prices, according to a recent SMA report. The report underlines that the transparency problems surface in banks at a much higher rate than other remittance service providers (RSPs). 63 out of 77 providers that are considered non-transparent in the SMA’s fourth quarter 2012 survey are banks. As explained by the SMA, these non-transparent RSPs often fail to provide multiple service options for the customers. Wire transfer, which usually charges customers at a higher fee, is often the only choice available to the senders. Furthermore, a considerable number of banks do not disclose important information on money transaction services. For example, the exchange rate, which to a large degree,influences the costs of sending money, is not disclosed. Generally speaking, banks turn out to be the priciest RSPs in Africa.
Compared to the Gulf region, the cheapest market with high-level competitiveness for money transfer services, Africa is prevailed with the “monopolies” of banks and money transmitter operators (MTOs). “Sending Money Home Africa”, a 2009 study by the International Fund for Agricultural Development of UN (IFAD) and The African Development Bank (ADB) stresses that in most African countries, banks are the only institutions allowed to payout remittances, due to the restrictions of countries’ regulations. In order to maintain a guaranteed business flow, most banks sign exclusivity agreements with Western Union and MoneyGram, two pioneer MTOs in the world’s money transfer market. As a result, Western Union and MoneyGram occupied “65 percent of all remittance payout locations” in Africa, according to the IFAD’s report.
Apparently, the “monopolies” of banks and MTOs strangle the competition in the African market and skyrocket the prices of sending money to Africa. On the other hand, what’s interesting is that South Africa, Ghana and Tanzania, three countries that are proved to be the most expensive remittance sending countries according to the SMA, are also the representative fast-growing economies in Africa, based on UN’s 2011 statistics.
Data from Send Money Africa (SMA), World Bank. Jan, 2013
Regardless of what causes such dilemma in Africa, how can the problem of high costs be fixed? How can a healthy money transfer market develop? Kenya gives its own solution — mobile money transfer. As the World Bank reveals, Kenya is the cheapest African country to send money to, with 9.2 percent cost compared to the approximate average of 12% of African countries. Kenya’s mobile money (even though it’s not the first one to initiate it) undoubtedly contributes to its lower price in the market. By clicking keys on the phone, one can avoid spending money and hours on trains or buses to the banks by simply walking to a close agent store, paying cash for mobile credits. Kenya might be a model for other African countries to emulate.
Other solutions involve fixing the regulatory environment. Massimo Cirasino, the Manager of Financial Infrastructure Service Line at the World Bank, suggests in his article that “comprehensive reforms that address transparency; competition; the removal of legal barriers; the development of a better payment-system infrastructure; and the improvement of the governance and risk management of remittance-service providers” should be launched to improve the current situation in Africa.
According to Cirasino, the G8 and G20 have shown support to the World Bank’s “the 5×5 Objective”, which targets at 5% as the average global remittance cost by 2014, which could provide some solutions in the future.
