Monthly Archives: February 2012

The Link Between Poverty and Terrorism

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The link between poverty and terrorism is well-known.  In theory, one of the purposes of organizations like USAID is to complement the other “D’s” of the foreign policy apparatus – diplomacy and defense – to improve conditions for people most likely to be driven to desperation: the poor.  It is not surprising that the hotbeds of terrorism today – Afghanistan, Yemen, Somalia, Pakistan, Indonesia – happen to be some of the poorest countries in the world.  Nor is it surprising that many of these countries receive the lion’s share of foreign aid from the U.S. government, despite their apparent animosity toward the country.  The Nesaji cotton-and-wool factory in Kandahar is a perfect metaphor for the complex forces working against development efforts.  Built by Iran and the Soviet Union in 1971 and maintained by a motley crew of warlords and foreign countries, including its current steward, the United States, the factory has operated for only 60 days throughout its 40-year history. Governments are not the only ones concerned about the causal relationship between poverty and terrorism.

Here in Kenya, an organization called Nuru International, founded by former special ops marine Jake Harriman, is pilot-testing a holistic community-based development model.  Its mission is to end terrorism by ending extreme poverty. The connection is not difficult to make.  For people living hand-to-mouth, life is a series of struggles often ending in tragedy.  Anger, resentment, and despair are a volatile combination in the minds of young men and women who see little hope for escaping their situation.  For recruiters of organizations like Boko Haram and the Al-Shabab – literally translated as “The Youth” – these young minds can be manipulated to pick up arms.  By stoking latent frustrations at the injustice of poverty and promising a sense of a community, brotherhood, and commitment to a higher cause, a recruiter can more easily convince a teenager to become a suicide bomber.

A member of Boko Haram.

This anger and frustration is compounded by a sense of injustice.  When the gap between rich and poor is vast, the impoverished majority are more likely to consider their situation as a function of either indifference or criminality by those controlling the wealth.  It is under these circumstances that the fledgling Nigerian terrorist group, Boko Haram, has grown.

Boko Haram has killed more than 900 people since 2009, including perpetrating a massacre last month that left 300 people dead in Kano, the capital of the Kano state in Northern Nigeria.  As an Islamic fundamentalist group with ties to Al-Qaeda in the Islamic Maghred, the North African faction of the jihad organization, Boko Haram is a growing concern for Western security analysts.  But according to some on the ground in Kano, the group’s motivations are simpler.  In an article titled, “In Nigeria, a Deadly Group’s Rage Has Local Roots,” Adam Nossiter explains the situation on the ground:

For now, Boko Haram’s targets remain largely local, despite its bombing of a United Nations headquarters in Abuja, the capital, last summer. The Nigerian state is typically the enemy, and many analysts see the nation’s enduring poverty as one reason. This month figures were released in Abuja indicating that poverty has increased since 2004, despite the nation’s oil wealth; in the north, Boko Haram’s stronghold, about 75 percent of the population is considered poor. Overall, 60 percent live on less than $1 a day. Every citizen appears aware of the glaring contrast between his or her own life and those of the elite.

Ado Ibrahim, a 22-year-old sugar cane vendor wearing a yellow soccer jersey, suspected more violence could be ahead. “Injustice, and misgovernance by officials,” he said, adding, “It’s possible, as long as injustice persists, it’s possible to have another flare-up.”

Down the street, squatting in his open-air stall where he sells cooked yams, Abdullahi Dantsabe had a similar point of view. Why had the attacks occurred? “Injustice,” he said. “The leaders are not concerned about the common man.”

A Yemeni man sits by the wreckage of tourists' cars at the site of a suspected al-Qaeda car bomb attack in Marib in July 2007. Photograph: Khaled Abdullah/Reuters

Nigeria is one of the most corrupt countries in the world.   The Corrupt Perceptions Index, which is a measurement of how people view their government, ranks Nigeria 143 out of 180.  A Nigerian friend of mine once explained to me the concept of “bunkering,” which is when a businessman – usually someone with military connections at the highest levels or a general himself – connects a pipe to a much larger oil pipeline in order to siphon the product and sell it on the black market.  Add to this dynamic massive income inequality and ethnic tensions throughout the country (but mainly on situated on a north-south divide), and the elements that typically fuel the growth of groups like Boko Haram seem to be in place.

In fact, most of the countries today where Islamic fundamentalism is on the rise are generally poor and massively unequal with highly corrupt governments.  In Africa, Chad (168), Sudan (177), Niger (134), and Somalia (180), which holds the dubious distinction of last place, are all areas where for terrorist organizations have flourished.   In the Middle East and South Asia, Pakistan (134) and Yemen (164) are considered some of the most dangerous countries in the world.

I am not saying that terrorist organizations develop due to circumstances alone.  At the highest levels of these organizations are typically rich and educated planners, who are misguided, at best, or sociopathic.  Osama bin Laden was the son of a wealthy Saudi construction magnate, and many of Al-Shabab’s top leadership hail from countries outside Somalia – including one, Omar Hammami, AKA Abu-Mansoor al-Amriki, who grew up in Alabama. But the soldiers – the grunts on the ground who are blowing themselves up along with innocents around them – are disproportionately drawn from the poor underclass, the idle youth with few prospects for employment.

It is these people who economic development programs aim to help.  Whether they are successful is a different question.   In the case of the Nesaji cotton-and-wool factory in Kandahar, the answer is clearly no.

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Pushing Back on the Millenium Villages

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When you want to know how someone in international development views the world, there is no surer way than asking them whether they identify with Jeffrey Sachs and Bill Easterly.  On this blog, your correspondent has made his proclivities known on multiple occasions – even once being persecuted from doing so by a former employer and being recognized by Mr. Easterly himself for his martyrdom.

Jeffrey Sachs, the pre-eminent economist, is generally associated with the top-down school of development economics, advocated substantial public investment to improve the broader systems – water, health, sanitation, education, etc. – that contribute to poverty.  In contrast, Bill Easterly, the roguish author of The Elusive Quest for Growth and White Man’s Burden, supports bottom-up interventions, preferring to search for solutions that develop organically and take into account local contexts.  Most people find themselves on one side or the other, except for the deliberators in the middle, like Abhijit Banerjee and Esther Duflo.  If Bill Easterly is 50 Cent, then Jeffrey Sachs is surely Ja Rule.

The flagship of the Sachs camp is the Millenium Villages project, a $150 million, multi-country intervention that exemplifies the concept of “the big push.”  The systems that underlie the poverty trap are extraordinarily complex, layered, and multi-faceted.  According to the top-down school of thought, it is possible to change the entire system only by changing its key components.  The Economist explains the thinking behind the idea:

In development, it seems, you cannot do anything until you can do everything. That is the idea behind the “big push” theory. Outlined by Paul Rosenstein-Rodan in 1943, this says that even the simplest activity requires a network of other activities and that individual firms cannot organise such a large network, so the state or some other giant agency must step in.

The big push came to grief in the 1970s and 1980s as evidence accumulated that, in Africa at least, public investment and foreign aid had produced no perceptible change in productivity, not least because so much of it was stolen. Recently, though, the idea has come back into vogue. The UN talks constantly about its millennium development goals (eight goals, 21 targets). Jeffrey Sachs of Columbia University argues that if public investment and foreign aid are big enough, they will boost household incomes, spurring savings and boosting local investment. They should also “crowd in” external investment by improving infrastructure.

In order to do anything, you have to do everything.  Being on the ground, you see the complexities of the system at work.  Everything is interrelated and connected in a complex web.  Change an input here or there and you can transform the system.  But, more often, well-reasoned tweaks to the system have unintended consequences.  What is more, it is question whether even the smartest economists can truly comprehend that sheer magnitude of the forces at play.  They are, after all, global by nature.

These are the criticisms of Sachs and his “big push” school.  Today, randomized controlled trials – the same tests used by the pharmaceutical industry to test the efficacy of new drugs – can actually tell us a lot about whether interventions like the Millenium Villages actually work.  And, according to recent studies, it appears that they don’t.  Back to the Economist:

Now a Kenyan economist, Bernadette Wanjala of Tilburg University in the Netherlands, has raised further doubts about the project. She interviewed 236 randomly selected households in Sauri who had been offered the benefits and 175 randomly selected ones who had not. In a study with Roldan Muradian of Radboud University, she concluded the first group had raised their agricultural productivity by an impressive 70%. Yet she found that the impact on household income was “insignificant”, and that there had been little extra saving or investment. The villagers had grown more food—and eaten it. They became better nourished, but this did not affect the wider economy.

Better nutrition is important, of course. But the aim of the project is to boost income, investment and economic diversification. It is not clear that these goals are being achieved. For $60 per person per year (which increases the income of the poorest villagers by well over 25%) the project has improved village life only a little more than it would have improved anyway. So far, the project provides little evidence that “big push” development—advancing on all fronts, flags flying—is better than the alternative: gradual, step-by-step changes to remove specific barriers to growth.

The answer, as Easterly puts it, is elusive.  But certain interventions – providing an affordable education by lowering operating costs or leveraging social networks to distribute capital – affect the systems that influence poverty in a very real way.  And these, to me, are the most exciting interventions of all.

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Design for Social Innovation at the iHub

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When I moved to Nairobi, I did not really know what to expect.  I’d been here once before and moved on a whim.  Fortunately, in the first week, I discovered the iHub.  The iHub was started a few years ago by Eric Hersmann, the founder of Ushahidi, a crisis mapping organization whose roots can be traced to the post-election violence that rocked Kenya in 2008, and a TED Global fellow.  It is a co-working space for software developers, entrepreneurs, researchers, and others who want to utilize the space.  More importantly, it is a vibrant community of innovators, technologists, and ambitious folks who like being surrounded by a fast-moving and intellectually-stimulating environment.

After working at the space for a few months, I was lucky enough to be accepted as a green member, allowing me to use the space whenever I want.  Today, on a Saturday morning, I came to the iHub to sit at the Pete’s Coffee bar and crank out some work.  And I was pleasantly surprised to see a group of speakers leading a workshop on “Design for Social Innovation,” a topic I find interesting.  The speakers included Cheryl Heller, a communication design strategist, Just a Band, a super-creative Kenyan house/funk/disco band, and others.  The topic du jour was how to apply design thinking to innovate in the social sector.

Design thinking is sort of a nebulous concept.  Here is how Wikipedia describes it:

Design Thinking refers to the methods and processes for investigating ill-defined problems, acquiring information, analyzing knowledge, and positing solutions in the design and planning fields. As a style of thinking, it is generally considered the ability to combine empathy for the context of a problem, creativity in the generation of insights and solutions, and rationality to analyze and fit solutions to the context.

I actually think that these principles are not only intuitive, but really fundamental to solving any problems.  In a social innovation context, the most basic example of how design thinking is not applied is in stereotypical top-down development projects that seek to apply theoretical generalities in addressing a problem, while ignoring the local context.  Some might claim that Millennium Villages project is the ultimate example this concept:

It is an approach to ending extreme poverty and meeting the Millennium Development Goals–eight globally endorsed targets that address the problems of poverty, health, gender equality, and disease. Initiating a paradigm shift, the Millennium Villages promote an integrated approach to rural development, using evidence-based technologies and strategies in each sector, with sufficient investment over a sufficient period. This approach also combines a critical cost-sharing and planning partnership with local and national governments, and rural, African communities, while focusing on capacity building and community empowerment. By improving access to clean water, sanitation and other essential infrastructure, education, food production, basic health care, and environmental sustainability, Millennium Villages ensures that communities living in extreme poverty have a real, sustainable opportunity to lift themselves out of the poverty trap.[1]

The idea is good in principle, but, in practice, there are a lot of idiosyncrasies about community dynamics and macro-economic factors that lead to unintended consequences.  So you can invest in training people and giving them skills, like sewing or carpentry, to become an entrepreneur.  But without a market for their products, they won’t be able to monetize those skills.  This is a classic example of applying a solution to problem without actually thinking through the consequences.

Design thinking is similar to systems thinking, which entails looking at individual problems and components as part of a larger system:

Systems Thinking has been defined as an approach to problem solving, by viewing “problems” as parts of an overall system, rather than reacting to specific part, outcomes or events and potentially contributing to further development of unintended consequences. Systems thinking is not one thing but a set of habits or practices[2] within a framework that is based on the belief that the component parts of a system can best be understood in the context of relationships with each other and with other systems, rather than in isolation. Systems thinking focuses on cyclical rather than linear cause and effect.

Again, this is something that seems intuitive to me.  Nothing happens in isolation, so we should not try to solve problems in isolation.   Still, it is worth thinking about these principles when you are trying to develop solutions to difficult problems.

Brain Gain: The Upside of Losing Talent Abroad

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Human capital flight – otherwise known as “brain drain” – presents a challenge for developing countries.  In countries with a lower per-capita GDP, wages are also typically lower.  So highly-skilled labor immigrate to richer nations where their specialized talents yield a salary several times what they could earn in their home countries.  Frequently, these professionals – doctors, lawyers, computer scientists – have been educated at the expense of the government, and losing them is a big hit to the country.  For this reason, people often see brain drain as a problem, and try to incentivize top talent to stay in-country.

But there is another theory about international labor mobility that posits the opposite.  The Economist explains the thinking behind “brain gain”:

Several economists reckon that the brain-drain hypothesis fails to account for the effects of remittances, for the beneficial effects of returning migrants, and for the possibility that being able to migrate to greener pastures induces people to get more education. Some argue that once these factors are taken into account, an exodus of highly skilled people could turn out to be a net benefit to the countries they leave. Recent studies of migration from countries as far apart as Ghana, Fiji, India and Romania have found support for this “brain gain” idea.

The most obvious way in which migrants repay their homelands is through remittances. Workers from developing countries remitted a total of $325 billion in 2010, according to the World Bank. In Lebanon, Lesotho, Nepal, Tajikistan and a few other places, remittances are more than 20% of GDP. A skilled migrant may earn several multiples of what his income would have been had he stayed at home. A study of Romanian migrants to America found that the average emigrant earned almost $12,000 a year more in America than he would have done in his native land, a huge premium for someone from a country where income per person is around $7,500 (at market exchange rates).

Living in the Philippines, where international remittances from Asia, the Middle East, and the United States have brought an incredible amount of foreign exchange into the country, I saw the dramatic effect Filipinos abroad had (and still have) on the economy.   I have also met many Kenyans, Ghanaians, and Filipinos who pursue degrees in engineering and computer science to develop a competitive skillset for a global economy.  Most of them want to go to the U.S. or Europe to make a small fortune.  And once they have had enough of the rat race and have built up a nest egg that will allow them to buy a house and raise a family comfortably, many want to return to their country of origin and spend the rest of their lives back home.

Putting aside the fact that global diasporas are good for the world, I want to discuss a benefit that the Economist article leaves out.  When skilled talent from developing countries move abroad to work for international companies, they gain valuable work experience that they could not get in their home countries.  When a software engineer comes to Seattle to work for Microsoft, he or she experiences work in a fast-paced environment, surrounded by talented people with different skills, managers who become valuable mentors throughout their careers, and, most importantly, a demand for quality that is often absent from companies that do not compete in a global marketplace.  After 10-15 years in this type of environment, they return to their home countries, where they mentor a new generation of young talent, teaching them the Microsoft way.

Microsoft is only one example.  The company and industry are secondary to the work environment, which emphasizes the importance of intangibles, like time management, prioritization of tasks, and quality control.  Working for an American company like General Electric, for example, might teach someone the importance of optimization in manufacturing, while working for Target shows them the importance of customer service in maintaining client relationships.  Then, when they return to their home countries and start their own business, they bring with them those industry-specific best practices.  As a result, they are more competitive in the domestic market, forcing competitors to either adapt or die.  Ultimately the economy becomes stronger and more competitive.

This is not simply a theoretical framework for the benefits of brain gain.  I see it in action every day.  Senior software developers in Kenya have often spent years working for tech companies in the United States.  Leading managers in nearly every type of business, from coffee shops to breweries, manufacturers to telecoms, have spent some time working in Europe, Asia, Canada, or, most often, the United States.  Often, they are the decision-makers.  And decision-makers drive innovation in any industry.

Clearly, brain drain is not ideal

I am not trying to say that brain drain is necessarily a good thing.  Most immigrants probably choose not to every return to their home countries.  For most, leaving the comfort of a well-paying job, a decent healthcare system, and a Western education for their children is not an appealing option.  But, I will say that experience working for a multi-national, or, frankly, any company, in the U.S is going to teach any young professional – including Develop Economies – a thing or two about how to succeed in business.

In a perfect world, financial incentives would keep talent from moving abroad.  Unfortunately, that simply is not the case.  But the upside of this movement is that, when they do come back, returning ex-patriates are far more capable than they would have been had they decided to stay.

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Mitigating Political Risk for Investors in Africa

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Cote D'Ivoire, one year ago.

According to the global thought leaders in finance, Africa is primed for growth.  McKinsey, the global management consultancy, released a report a few months ago titled “Lions on the Move” highlighting the collective buying power of the continent – $1.6 billion, or roughly equivalent to the GDP of Brazil or Russia – and its uniform growth, with 27 out of the 30 largest economies growing quickly.  The Economist is quick to point out that, in its projections, seven out of ten of the fastest-growing economies between 2011 and 2020 will come from Africa.  Africa, according to Citigroup’s managing director for Europe, Africa, and the Middle East, is becoming “more and more competitive.”

A confluence of inter-connected forces over the last decade explains the continent’s growth spurt.  Better leadership and more transparent governance have led to more effective allocation of resources and greater domestic investment.  Regional cooperation, in terms of labor, trade, and security, through economic blocs like ECOWAS in the West and the EAC in the East has created mutual benefits for markets.  Innovations in technology have improved communication and access to information by orders of magnitude.  Ten years ago, you were lucky to have a cell phone signal in a city in Africa.  Today, mobile phones are ubiquitous and the myriad technologies that have piggy-backed on their success, like mobile money and Internet, have changed the way people do business.  Lastly, in-kind infrastructure loans from China in exchange for access to minerals and other natural resources are changing transportation (roads, bridges) and energy (hydro-electric dams) on the continent.

These changes have not been lost on China and India, which see economic opportunity in Africa where others see conflict and disease.  Both countries have invested heavily in the continent, while the West has relied on foreign aid to build influence.  If Africa “is a wonderful place to make money,” in the words of entrepreneur Mo Ibrahim, then why do so few private equity firms and investment funds in the West have a presence here?  There are a few explanations – few viable investments beyond natural resources, too few mature companies to purchase.  But one main reason is political instability.  Let me explain.

I have lived in Africa now for a year and change.  When I lived in Ghana, I had friends to the West in Cote D’Ivoire who were evacuated after the election that saw Laurent Gbagbo unseated turned violent.  To the north, I had other friends who left Burkina Faso when riots erupted after President Compaore failed to quell a mutiny.  To the east in Nigeria, Boko Haram, the fundamentalist Islamist group began bombing churches in the Northern part of the country.  Since I moved to Kenya, 36 people were killed in an attack on a bar in Burundi, and violent protests marred the recent elections in the Congo.  And, in the coup de grace, the country in which I currently reside, Kenya, recently invaded Somalia, otherwise known as the most dangerous place on earth.

China’s state-run capitalism allows it to play the long game.  It has the size to negotiate with the worst dictators in Africa.  It doesn’t matter which party is in power – both have an interest in maintaining cordial economic ties with China.  A private equity firm, on the other hand, has no such clout.  Not even the oil companies have been able to find a way not to be nationalized (though Shell has come pretty close in Nigeria).  So, when there is a threat that they might not just lose their shirt, but their entire wardrobe, investors look for more stable risky plays in other parts of the world.

But now, there is a solution to that problem, compliments of the Overseas Private Investment Corporation, the development finance arm of the U.S. government.  Led by Elizabeth Littlefield, a veteran microfinance leader who I used to read and write about on this blog, OPIC has created a political risk insurance product for investors wary of the threats to their investments in historically unstable places, like Africa.  The East African has the story:

A new insurance product has been launched to cover private equity fund investments in Africa and other emerging markets against political risk.

It aims at shielding investors from the political uncertainty that characterises doing business in the emerging markets and damages arising from violence related to political activity.

East Africa has, in recent years, witnessed several incidents of politically instigated chaos leading to destruction of property.

Besides providing protection against such eventuality, the new product also targets offering cover from other unforeseen circumstances that may affect deals.

“For example, OPIC is developing insurance products for the renewable resources sector, specifically to protect investors against a government’s change in the feed-in tariff that the investor has relied upon to structure its project; and to cover investment in forestry projects, including Reducing Emissions from Deforestation and Forest Degradation (REDD) projects,” PIC said in a statement.

Now, funds can hedge against those risks by purchasing insurance.  This is great news from both an economic development perspective and that of the United States and its position in the world.  The longer the West delays, the more China will secure a political and economic foothold in the region.  And with more money flowing into the continent, the capital constraints that held back growth will be freed up.

Hopefully we will see a boom in investment from Western investment funds in Africa.  But, with ample untapped investment opportunity in Latin America, Southeast Asia, North Africa, and other regions, Sub-Saharan Africa may be at the end of a long line.

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