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Development Channel

The Development Channel highlights big debates, promising approaches, and new research and thinkers addressing opportunity and exclusion in the global economy.

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Mossack Fonseca law firm sign is pictured in Panama City, April 4, 2016.
Mossack Fonseca law firm sign is pictured in Panama City, April 4, 2016. Carlos Jasso/Reuters

Corruption Brief Series: How Anonymous Shell Companies Finance Insurgents, Criminals, and Dictators

The latest paper in the Corruption Brief series from the Civil Society, Markets, and Democracy program at the Council on Foreign Relations was published this month. In the brief, Dr. Jodi Vittori, senior policy advisor at Global Witness, addresses the myriad problems posed by anonymous shell companies – corporate entities with few or no employees and no substantive business, which offer a convenient way to privately move money through the international financial system.

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Wars and Conflict
UN Human Rights Council Calls for a Mission to Investigate ISIS Violations in Iraq
In the midst of an otherwise depressing news cycle on Iraq, the recent resolution out of Geneva from the UN Human Rights Council is a positive note. The resolution, adopted on Monday, requests the Office of the United Nations High Commissioner for Human Rights to dispatch a fact finding mission to Iraq to investigate alleged human rights violations committed by the Islamic State in Iraq and Syria (ISIS) and associated terrorist groups. It calls on the High Commissioner to establish the facts and circumstances of the abuses, with an eye to avoiding impunity and ensuring full accountability. The measure, introduced by France and supported by Iraq, was discussed at a special session. Special sessions are a relatively new tool, developed when the old UN Human Rights Commission was rechartered in 2006 as the more agile and effective Human Rights Council, which is comprised of 47 member states, currently including the United States. Scheduled when necessary, special sessions allow the UN to respond to urgent issues outside of normal, prescheduled meetings. Addressing this special session, Deputy UN High Commissioner for Human Rights Flavia Pansieri spoke about the abuses committed by ISIS and its associates. Among other things, Pansieri described the experience of Iraqi women, who have experienced severe restrictions and abuses by members of ISIS. In Mosul, women have been forced to veil their faces. As Pansieri pointed out, “Women are not allowed to walk in the street without the presence of a male guardian, and there are more and more reports of women being beaten for violating ISIS rules.” Pansieri emphasized that the Iraqi government has a responsibility to protect its citizens and address these issues. “Even though this conflict has severely reduced the Iraqi government’s control over large parts of its territory,” she said, “the government continues to bear primary responsibility for the protection of all persons on its territory, and must endeavour to implement its obligations.” She noted that, in fact, all parties to a conflict must respect international humanitarian law and international human rights law, stressing that the “international community and the government of Iraq must exert all efforts to ensure that any individuals who have participated in, or supported, the commission of these crimes are held accountable in accordance with the law.” Special Representative of the UN Secretary General for Children and Armed Conflict Leila Zerrougui also addressed the Human Rights Council.  She stated that 693 child casualties have been reported in Iraq since the beginning of this year, most of which result from indiscriminate attacks by both government and armed groups. Additionally, Zerrougui spoke of unverified reports of sexual violence, forced marriages, and the abduction of young girls from minority groups. Although the Human Rights Council’s resolution may be a small step, the decision of its member states to call for greater UN involvement to protect Iraqi women and children from current abuses provides some reason for optimism in a time where collective action via international institutions is often blocked.
Energy and Environment
How to Make Fuel Subsidy Reform Succeed
A few weeks ago, Yemen’s government took the bold – some might say foolhardy – step of winding down a fuel subsidy program that was costing it billions of dollars. Overnight, fuel prices in the country nearly doubled, sparking violent riots. For average Yemenis, the sudden end of one of the few tangible benefits they get from their government is bitter indeed, especially since 54.5 percent of the population lives below the poverty line. It’s no surprise that thousands of protesters have taken to the streets. But the change in policy didn’t have to occur this way. Fuel subsidies in Yemen have consumed more than 20 percent of government spending in recent years, straining public finances. The need to scale back the subsidy has hardly been a secret. But the government has done almost nothing to prepare the people for this change, to explain why it’s important, how grossly inefficient fuel subsidies are as a poverty alleviation tool, how regressive they are too, and to put in place alternative means of compensating those most hurt by the change. Yemen is not alone. Governments around the world are simply scared of leveling with their citizens about the true costs of fuel subsidy programs. The fear of consumer anger spooks them into inaction until fiscal pressures force them to remove price supports. But, as I argue in a new CFR publication, “How to Make Fuel Subsidy Reform Succeed,” there is an alternative. Rather than delay reforms until crisis erupts, governments should lay the groundwork for reform by directly communicating with citizens about the unintended consequences of fuel subsidies: about how they distort markets, strain government budgets, encourage overconsumption, foster corruption, and harm the environment. Perhaps most important from the perspective of the poor, governments should underscore that fuel subsidies do little to remedy inequality or stimulate development. While fuel subsidies are usually packaged as pro-poor, they are in fact highly regressive. The richest 20 percent of households in low- and middle-income countries use six times more subsidized fuel than the poorest 20 percent. To prepare for change, governments should clearly outline to consumers how they will implement alternative anti-poverty measures, such as targeted cash transfers, that can better protect the poorest in society from the hardships of higher fuel prices at much less cost. Having a targeted communications campaign to support reform plans is critical to the success of those plans, according to a 2013 International Monetary Fund study. Iran, which reformed its subsidy program in 2010, conducted a broad public relations’ campaign before reforms took effect; the government explained how consumers would be compensated for higher energy prices and the overall benefits to the country. Ghana’s efforts to phase out fuel subsidies were helped by publicizing an independent study that showed how the poor would benefit. The reality is that far too few governments recognize the value of laying the groundwork for reform. Moreover, there is no place for them to turn for a solution that combines technical expertise with marketing capabilities. This is reason to support the creation of a new public-private partnership, the Global Subsidy Elimination Campaign (GSEC). The agency would work with governments to execute country-specific communication programs to build the case for fuel subsidy reform among citizens; it could be housed within the World Bank but have its own board and budget – a model similar to that of the Consultative Group to Assist the Poor, giving the agency access to the Bank’s research capabilities while allowing it to act nimbly and independently. Over time, the GSEC’s marketing campaigns could be instigated by the World Bank in consultation with client governments or commissioned on a fee-for-service basis by richer countries. The U.S. should jump-start the establishment of the GSEC by providing half its initial funding. After all, curtailing subsidies is to the United States’ strategic benefit. Geopolitically critical countries such as Yemen and Egypt will not see robust economic growth and political stability in the absence of successful fuel subsidy reform. Funding could also come from others interested in the enormous potential of fuel subsidy reform. Such donors—including other countries, NGOs, the World Bank itself, and private foundations — should be motivated by an interest in poverty reduction and economic development, environmental concerns and strategic considerations. Host countries should be required to contribute at least 10 percent of their specific marketing campaigns as buy-in to the process. Of course, public awareness campaigns will work only if matched by credible government action to replace subsidies with other more effective investments, such as targeted cash transfers and productive health and education spending. But with governments spending more than half a trillion dollars a year on fuel subsidies, the upside of fuel subsidy reform is enormous. Even a 5 percent reduction in fuel subsidies would free up billions of dollars of public spending for more effective anti-poverty measures. The time is ripe to help governments make the case directly to citizens for fuel subsidy reform. To learn more, read “How to Make Fuel Subsidy Reform Succeed.”
Asia
Kerry Returns to Afghanistan; Women’s Rights Remain in Peril
This year marks a significant moment for Afghanistan: with the recent presidential election and the U.S. withdrawal of troops, the country will undergo both political and security transitions. However, these twin transitions are currently imperiled. The result of Afghanistan’s presidential election has yet to be settled. Last month, U.S. Secretary of State John Kerry struck a deal between the two candidates to recount the votes, but political squabbling unraveled the agreement. Kerry returned to Afghanistan yesterday, and just this morning, the rival presidential candidates issued a joint communiqué confirming they would sign last month’s Kerry deal, which had essentially collapsed. On the security front, the Taliban is ascendant, once again, in parts of the country. Earlier this year, a war weary President Barack Obama announced he would withdraw active U.S. troops by the end of this year and draw down all U.S. forces by the end of 2016. But as the United States steps back, the Taliban appears to be gaining control. Without adequately prepared security forces, Afghanistan runs the risk of becoming another Iraq—vulnerable to resurgent Islamic extremists—and the recent Taliban attacks indicate that this possibility is becoming more likely every day. If Afghanistan is to overcome these challenges—and maintain the strides it has made in improving the status of women and girls—then the United States must continue to support the struggling country through its transformations. A successful political transition is critical for women, rule of law, and democracy.  While President Hamid Karzai has taken some steps to support women—such as issuing the Elimination of Violence Against Women Law by Presidential proclamation—the next president needs to do more to protect and support women and girls. Both political candidates have emphasized the importance of women’s rights while campaigning and have expressed intentions to implement policies to benefit women and girls, but without a political resolution, neither is able to act on those promises. Security is also essential for women’s participation in public life; without it, women and girls’ ability to work outside the home, run for office, or seek an education is stymied. To ensure that women and girls are able to participate in their country’s future, the United States must finalize and implement a bilateral security agreement with Afghanistan in order to maintain a small contingent of U.S. forces in the country after 2014. Encouragingly, both presidential candidates have vowed to adopt such an accord. Washington can also support Afghanistan’s security transition with targeted funding. Currently, the United States provides assistance to Afghanistan through the Afghanistan Security Forces Fund (ASFF). As per the 2014 National Defense Authorization Act (NDAA), the ASFF is required to dedicate no less than $25 million to “programs and activities to support the recruitment, retention, integration, training, and treatment of women in the Afghan National Security Forces” (ANSF). This has already led to 13,000 women being trained in the ANSF. While this is a positive start, integrating women in larger numbers into the security forces and other key sectors is essential, not only because would advance gender equality, but because it would likely lead to less violence and greater economic growth and stability. Research demonstrates that investing in the educational and economic advancement of women and girls leads to more prosperous, stable, and secure societies. The 2015 NDAA, currently under review in the Senate, includes amendments to further support women and girls. Earlier this month, Senators Kelly Ayotte and Bob Casey proposed an amendment to ensure the “safety, security, and rights of Afghanistan’s women and children.” The amendment calls on the Obama Administration to work with the Afghan authorities to increase the number of women serving in the National Army, Nation Police, and ANSF; train police officers to combat gender-based violence and to work with victims of abuse; and support women to vote in the 2015 Parliamentary elections by adequately staffing polling stations with female officers.  The bill passed the House of Representatives in May, with another amendment from Representative Niki Tsongas, which calls upon the Secretary of Defense, the Secretary of State, and the Administrator of the United States Agency for International Development to support Afghan-led initiatives to prevent sexual and gender-based violence and ensure the rights of Afghan women and girls, their participation at all levels of government and decision making, and their integration into the ANSF. It is essential that Congress pass the 2015 NDAA with provisions that enhance Washington’s commitment to the women and girls of Afghanistan. After years of conflict and U.S. engagement, it is more important than ever that the United States ensure that Afghanistan does not backtrack on women’s rights.
  • Development
    Banking with Bitcoin
    Emerging Voices features contributions from scholars and practitioners highlighting new research, thinking, and approaches to development challenges. This article is by Sarah Martin, CEO of Boone Martin, a global communications firm that focuses on social impact investing. More than 50 percent of the world’s population lacks access to banks -- meaning nearly 2.5 billion people are cut off from financial services, such as credit, savings, and loans, needed to start new businesses, grow emerging markets, and tap into the global economy. Remarkably, however, more than one billion of the unbanked do have access to a mobile phone. The rapid rise of the mobile phone offers a platform to deliver services far beyond just calls. Money transfer businesses like Kenya’s M-Pesa piggyback on mobile networks to provide payment programs and basic financial services. With greater reach into previously neglected regions, mobile money offers market access to historically under-banked groups, including female, poor, and rural populations. Mobile money has spread because it’s convenient and easy to use, but remains limited by interoperability problems. Sending mobile money works only if both the sender and the receiver use the same service. This requires robust agent networks, customer coordination, or partnerships among providers. Scalability is also a challenge; mobile operators have yet to succeed in Nigeria. A new option is emerging that allows the same simple payment and banking services as mobile money, but without the cross-border friction and at a fraction of the cost: Bitcoin. Bitcoin has captivated world attention since its recent debut as an easy way to streamline global payments and transform existing financial services. Unlike traditional banking, Bitcoin does not require a central coordinator. Rather, it trades freely worldwide using a peer-to-peer network and a global digital currency. Anyone, anywhere can use Bitcoin to buy or sell goods and services, create contracts, and develop credit and savings. Users receive a personalized Bitcoin address (like an email address) to send money or scan as a Quick Response code from their mobile phone when shopping at local markets or paying local vendors. Consumers use the digital currency because it’s fast, easy, and more convenient - and secure - than carrying cash. Merchants like it because there are no transaction fees or chargebacks. This is especially helpful for small businesses trading in low-cost goods or micropayments who take a hit on 3-5 percent credit card and PayPal fees. Bitcoin also eases access to liquidity, credit, and savings to start and grow new ventures. Bitcoin’s promise is most evident in the remittances market. The World Bank estimates that $414 billion in remittances will reach the developing world in 2013, nearly three times the size of official development aid. Remittances not only impact individual family income, but also currency stability and GDP. India, one of the top recipients, collects more from remittances than earnings from IT exports. Wire services cost 9-12 percent in fees, whereas Bitcoin charges only 1-3 percent. This reduction can make a meaningful difference to overseas workers and home country recipients. In volatile economies, Bitcoin may also safeguard against currency fluctuation. Like gold, there is a fixed supply of the currency, meaning it is inflation-proof. Notably, Bitcoin has recently grown in popularity in Argentina, where economic conditions remain precarious and the alternative currency provides a way to protect against risk. Conceivably, Bitcoin could serve a similar function in other historically complicated economies, such as Venezuela or Zimbabwe. Although it is still early days for new currency, initiatives to leverage the new technology are moving at light speed. As mobile phones continue to spread throughout the developing world, Bitcoin may extend a new, global option for low-cost financial services. The hope is that it could free money services in the same way that email did for mail, Skype did for phone calls, and the internet did for information. With open access to anyone -- regardless of gender, income, or geography -- Bitcoin may equalize market opportunities and support more inclusive economic growth.
  • Market-Oriented Development  
    Emerging Voices features contributions from scholars and practitioners highlighting new research, thinking, and approaches to development challenges. This article is by Rodney W. Nichols, president and CEO emeritus of the New York Academy of Sciences. Most non-profit organizations working in developing countries are typically underfunded in relation to the scale of the major problems they aim to solve. Government budgets are tight; ideas change about what aid really works; and private philanthropists can be impatient. But a new approach to development aims to solve this chronic frustration. Some NGOs are rethinking their operations and reorganizing to become more financially self-sufficient and serve their missions more sustainably. The basic idea is that organizational success emerges best when organized “bottom up,” that is, by individuals who take the initiative to solve the problems they know best. In a social mission, this approach involves innovators perceptively observing needs and optimal channels for reaching them. To encourage this type of thinking, the Alliance for Global Good launched its Innovation Fund in 2011 to “increase nonprofit sustainability by providing venture philanthropy to implement innovations in mission-relevant revenue generating activity.” In 2012 and 2013, professionally refereed national competitions were conducted and grants, with matching conditions, were made to U.S.-based, stable, mid-sized nonprofits working in developing countries. Each had developed a revenue-earning business plan, but lacked the capital to get started. The Innovation Fund helped them go to market. Innovation Fund projects span Uganda to Kenya, Vietnam to Bolivia. In the Congo, for example, one organization, Sisters of Notre Dame de Namur, is using existing photovoltaic power and computers to create cyber cafes with minimal fees in remote areas. These hubs provide villagers with electronic communications – such as internet and phone recharging -- in order to generate the funds for scholarships for orphans at the elementary school run by the Sisters. Another example is the High Atlas Foundation, which is helping poor farmers in the Moroccan mountains build incomes through a new business in organic walnuts. Preliminary results are encouraging, yet mixed. Cyber cafes in the Congo were expanded and soon generated modest, positive cash flow; unexpected competition also emerged. Severe frost ruined the first harvest of organic walnuts, but the training of farmers and the international certification was accomplished for the second year’s effort. As Dr. Susan Raymond, Founding Director of the Innovation Fund, points out: “…market skills can be learned, but nonprofits seeking to diversify revenues need to consciously recruit or build those skills.” Some of the new social enterprises will fail. The Economist recently noted: “terror strikes young bosses when their beautiful business plans are shredded by aggressive competitors of by a lousy economy.” Failure will teach lessons that the next generation of market-oriented social entrepreneurs will exploit. Evidence is being gathered on the results of the Innovation Fund’s eight grantees. A conference will be held in the fall of 2014 to sort out the evidence, consider benchmarks from the development literature, and publish a summary of the experiences of the initial grantees.