Poor

The well intentioned negative effects of the language of development

There's a podcast called Planet Money that I listen to. I first heard about it trough another podcast, This American Life, which featured a reporting done on the origin of the 2008 banking crisis. This spoke to me in particular because I worked on the same securitization desks at Goldman Sachs who participated in the creation of the 'toxic' securitized products that sunk the economy. Since then I have been an avid listener to their stories ranging from use of BlockChain in prisons to the cow economy. A recent story about India's demonetization effort, where India eliminated 85% of their physical cash in favor of greater use of electronic money, which would favor increased savings by ordinary Indians, increasing deposits for banks and fostering greater capital formation of this massive economy, fell short of the standard of reporting I came to expect from Planet Money. Not that they didn't cover most of the bases, they did mention the rush to new technology platforms such as PayTM's mobile wallets and the increased uptake of payment cards, but their story revolved around the notion of India as a Poor country. That word, "Poor" is laden with negative and xenophobic associations. It is as much a pejorative as the word "developing" as in the developing world. These cliche terms -- Poor, Developing, Impoverished, Corrupt, 1 dollar per day -- with their associated negative connotations, cast aspersions as much as they describe. In the same breath, people with good intentions to promote the economic well being in these regions, throw countries under the bus and contribute to a distorted global picture, potentially impacting perceptions influencing the the flow of investment, without which no economy can thrive. This argument I make echoes the arguments that underlie the great economics book by Dambisa Moyo, Dead Aid, that Aid and the narratives used to promote aid, contribute in large part to the poor performance of economies and politics across the world. The Aid community relies on touching emotions to attract the flow of funds to their organizations. Speaking to the plight of children in rural communities, and the lack of access to basic infrastructures, is a great way of mobilizing public sympathies required to rationalize Aid spending and Philanthropic donation. Don't get me wrong, Philanthropy has its place even in large economies, where Universities, National Parks and other public goods are provided by wealthy donors. Dale Carnegie, a coal billionaire, founded Carnegie Mellon University, which is now leading the global effort to create autonomous vehicles. These aid organizations however, are competing for global pools of funding with the private sector. In a perfect world, they support the financing of public goods, without which, no-one will invest, due to the law of the "tragedy of the commons." But in reality, these aid organizations generate their own externalities which can negatively impact the economies they are looking to support. Not least of these externalities is the promotion of a Narrative that at once engenders global sympathies and loosens purse stings, but like the beggar on the side of the street, those donations come with a health dose of "though by the grace of God go I." Narratives, as is pointed out by Nassim Taleb, in his book Black Swan, are necessarily false. The narrative fallacy is the human tendency to rationalize using stories that sound good. But just as much as the Narrative sounds logical, it presents one particular side of a story. The pathway leading to an outcome is never unique. So, Narratives are never accurate. Saying that people live on a dollar a day, is a Narrative. Using a figure that people universally view as a small unit is an effort to use heuristics to capture the understanding of an audience. Saying, people live on less than 96 cents a day is less memorable. In addition to the use of necessarily deceptive heuristics, that notion is also false. People do not live on a dollar a day. People's incomes and wealth vary. In fact, the aggregate figure cited in poverty studies take GDP per capita, a measure of annual income, in aggregate over the entire country, overlooking the disparity between incomes in the cities and those in Rural areas. In Accra, the capital of Ghana, average incomes are five to ten times higher than the aggregate figure. Saying people live on a dollar a day distorts the perception of income, and it is false. Aid organizations use imagery that also promote false narratives. Images of Africa disproportionately portray rural people engaged in activities such as drawing water from wells and the like. This is certainly true, but it is true for only half of the African population who live rural lifestyles. The 500 million other people get their water from municipal utilities like everywhere else in the world. In as much as cities have evolved in human society to promote efficiencies leading to greater economic activity and prosperity, people living in cities in Africa tend to be more wealthy as well. Real estate prices in Dakar, the capital of Senegal have increased from 100 dollars per sq meter to over 600 dollars per square meter in just over a decade. Real estate is an indicator of the wealth of cities - people are willing to pay higher prices for rent and real estate because it brings them closer to sources of economic opportunities lying at the heart of cities. Real Estate prices in cities from Addis Ababa in Ethiopia to Abidjan in Côte d'Ivoire continue to appreciate at this same rapid trajectory. This is a prime indicator of the wealth of cities. Presenting images then only of rural Africa in the coverage of the continent does not show the entire picture. And even in rural society, income may be inaccurately measured, and it hides the impact of wealth. Wealth, the assets that are controlled by households includes their ownership of land, cattle in addition to their employment potential among other factors. Most rural Africans, where they have not been disenfranchised by colonial or government usurpation, own their own land. The average land holding of African households, to the extent that can be accurately measured is 1 hectare. 1 hectare of this earth, which is much more than most people in major economies own, has a non-negligible value which can be estimated based on the crop potential under optimal farming conditions in addition to the rental earnings potential for living and other activities. If farmers employ outdated or otherwise inefficient techniques, that does not affect the value of the land upon which they farm. Major infrastructure projects unlock land values, leaving previously poor land-owners suddenly much more wealthy than they considered themselves to be. A coastal highway built in Dakar, connecting the central VDN to the previously inaccessible banlieu suddenly makes beach front property in lower income areas prime real estate less than 20 Minutes away from the city center. A new toll road running from Addis Ababa to Awasa, financed through a partnership with the Chinese government, cuts traveling time from four hours to two hours. Good roads, replacing pot-hole ridden ones, which ravage truck tires and suspensions, enable less costly transport from more distant towns. You may argue that the roads are financed by Aid, but this is not necessarily the case. Government budgets supported by global borrowing on capital markets have been a major source of infrastructure spending. It should be noted that Government Bonds issued on global capital markets are an alternative source of capital from traditional donor organizations, and are free from the strings attached to donor grants and loans. Toll roads mean that ultimately the people pay for their own roads. But the point I am arguing is that the wealth of people who own the lands proximal to new infrastructures can be underestimated. In fact, these land owners-rural and low income as they may be, are not without wealth and should not be considered to be poor. Often poverty is presumed where in fact owned wealth is illiquid. The assets people own is not cash. On a visit to my ancestral village along the Senegal river forming the border with Mauritania, Mali and Guinea, as had been recommended to me in my first visits there, I brought gifts of cash. In order to disperse the cash amongst the myriad cousins, aunts and uncles, which is customary in gift giving, each person gets a share, they needed to break the bigger bills into smaller bills. After a two hour search, they were not able to produce the necessary liquidity. In the entire village there was not enough cash to make change. The irony of it all was that in a reciprocal gift, they sent me home with two goats that I brought back to Dakar in the back of my pickup truck. In village life, goats replace cash. Certainly there are those, and lots of them, who have neither wealth nor income. These people are properly described as poor. But their inherent earning potential is constrained by opportunity. In as much as people seek to immigrate to larger economies in Europe and the United States among others, rural people seek to improve their earnings possibilities by immigrating to cities. Urbanization across Africa outpaces population growth by more than two times. Children of rural households predominantly search employment or access to commercial opportunity in large cities. The underemployment that is characteristic of African cities, exemplified by road-side vendors of various goods, is typically due to the lack of formal job opportunity relative to those that have left the countrysides looking for greater incomes. In this way, investment is needed to sop-up the pools of labor created by flights to cities. Unfortunately, the rate of capital deployment often falls short of that required to give jobs to young people fleeing a rural lifestyle. Aid Economists believe that people's behaviors are influenced by monetary incentives. In other words, people do things for money. In this way, Aid flows represent new money coming into an economy, and create dependencies similar to those of petro-eonomies dependent on the inflow of money from the sale of oil. Petro-economies are characterized by a lack of diversification as returns from investment in petroleum related projects disproportionately attract investment in the economy. Other businesses are not built where petroleum dominates. Petroleum flows also resemble a phenomena in the monetary and capital markets called 'Hot Money,' where rapid insertion and withdrawal of investment capital in economies catastrophically impacts the money supply and leads to inflation and currency depreciation. Nigeria has recently experienced a 40% decline in the value of its currency simply because the price of oil, which accounts for 95% of foreign currency receipts, has also declined by over 50%. For reasons entirely external to the productive activity in the country, the economy has suffered from galloping inflation, a dramatically weakened currency, and recession. Aid flows have a similar impact in crowding out other sectors of the economy. Aid flows disproportionately attract the energies of talented Human Resources, and the attentions of economic actors who would otherwise focus on developing productive activity. Aid organizations tend to recruit from among the most well educated and promising professionals. The lifestyle enabled by globally benchmarked salary levels and perks such as corporate vehicles attracts the best and the brightest. Essentially the aid organizations compete with the private sector for talented Human Resources. Entrepreneurial organizations and small businesses struggle to retain top talent, who are whisked away to the security and higher pay at aid organizations. Consultants, lawyers, health care professionals and financiers focus on projects funded through aid organizations, making access to services by the local private sector a challenge. Global Aid, in this way distorts local labor markets and markets for professional services by competing with the private sector. For one company I am advising, in their efforts to secure investment, Fyodor Biotechnologies, makers of the only non-blood based test from tropical disease in South Asia, India, and Africa, struggles to successfully commercialize its urine based at home testing kits due to the distorted low prices from globally subsidized drugs and diagnostics in the Global Fight against Malaria. While Malaria is a serious disease requiring coordination to ensure the complete elimination of transmission vectors, and in this way can be considered to be a public good in as much as are vaccines against Polio, Fyodor Biotechnologies competes with global Aid. In reaction to this competition at the retail level, Fyodor is climbing the value chain to sell their proprietary antibodies to the providers of subsidized suppliers of anti-malarial drugs and diagnostics. Philanthropic organizations such as the Bill and Melinda Gates foundation provide hundreds of millions of annual budget in the fight against malaria. And these dollars compete with Fyodor Biotechnologies. It's better to join them if you can't beat them. The Money supply is also influenced by Aid. Governments maintain a ledger called the Balance of Payments, which measures the outflows of money from imports of goods and services against the inflows of money from exports, investment and foreign aid. Where the current account, which measures the weight of imports of foreign goods and services relative to the exports of locally provided goods and services, is in deficit, capital inflows are needed to ensure the balance of payments balances. A high current account deficit is associated with a weakening currency which makes imported goods more expensive for consumers. Foreign aid is often a prop against the depreciation of a currency as it provides a source of capital to offset current account deficits. In this way, it is just like the inflow from exports of oil, it keeps the currency stable. In the event those inflows decrease, the currency will go into decline, increasing costs of living for consumers and engendering deleterious inflation. Governments, who's political livelihood depend in large part on economic stability, encourage foreign aid, which in turn crowds out the private sector leading to decreased production of exportable goods and increased importation, in a vicious aid driven death spiral. Somalia In response to the humanitarian disaster in Somalia, celebrities and sports heroes advocated to mobilize emergency food and water. This was a laudable, human, response to an urgent crisis. But something didn't sit well with me. I grew up with images of Ethiopian famine. This became the stereotypical image of africa, making the continent a synonym for absolute poverty. Africa as a place of starvation entered into the lexicon of everyday speech. I asked my friend who is Somalian about the problem. I met him while working in Ethiopia with a fin tech company. Ethiopia, the second largest African country has also been amongst the fastest growing economies in the world, beating china and india's growth rate, surpassing 10% per year of GDP growth per year over the past 10 years. Ethiopia has the only tramway in Sub Saharan Africa thanks to investment from China who have made significant investments in Ethiopia. Ethiopia has 42 million mobile subscribers, nearly half of which are smartphone users. Ethiopia is a world leader in exports of fresh roses and coffee. Ethiopia is the hub of the African Union and the seat of a major African United Nations presence and holds influence over the continent. But the image of Ethiopia to this day in the USA is one of famine and poverty. Somalia, to be sure, is ungoverned. Lawlessness and violence make Somalia a basket case nation and make business a risky prospect. Migration from Somalia into Ethiopia, Sudan and Uganda has become a major burden to these neighboring countries. But Somaliland, which is an offshoot of Somalia seeking independence is a different story. Somaliland has one of the highest penetrations of mobile money in Africa. In addition to its telecoms success, Somaliland's economy is vital as rule of law enables the wealth generating private sector to do its thing. My friend said that the problem in Somalia is corruption. Aid money is diverted by and even props up illegitimate regimes. Instead of flowing into infrastructure, which could avert a potential famine, it goes into arms. My friend said that ground water is found at 200 meters of depth. I asked him if a drilling company could help. He said potentially yes, given that the existing companies are overstretched and, likely earn revenues from absent government spending. Clearly drilling for groundwater is a longer term solution to this short term crisis. Developing sustainable irrigated agriculture is even more difficult. And, as Ben Horowitz, Silicon Valley investor says, lead bullets, not silver, should be used on difficult problems. Dumping food, water into a company can hurt local agriculture, and potentially lessens the value of the services of the hypothetical groundwater company. Massive inflows of foreign water bottles can put the local water bottle companies out of business. God bless the celebrities who provided urgent emergency relief for people who need it and the progressive organizations like the Omidyar Network, who turned global attentions to the Somalia crisis. But the following year, I hope they come with drilling rigs. The Narrative Arguably the most harmful externality of Aid is the Narrative used to ensure a continual flow of funding to support the organizations and ensure continued support for their causes. Aid organizations, which feature high overheads for the payment and support of their executives, for which a low proportion of total funding reaches the purported destination, require funding to ensure their survival, and employ Narratives designed to elicit the sympathies partially underlying global donation. These Narratives inadvertently throw the economies they describe under the bus, negatively influencing perceptions of business opportunity which is the driver of flows of investment. The language of these narratives has been adopted by the development community, who represent the loudest voice within larger economies relative to the aid destination countries. We need to change the language in development circles if we really want to do more good than harm.