Financial Markets

Emerging Voices features contributions from scholars and practitioners highlighting new research, thinking, and approaches to development challenges. This article is from Alfred Hannig, executive director of the Alliance for Financial Inclusion. Access to finance for low-income households can improve poor people’s income and overall wellbeing, and in turn spur macroeconomic growth. As International Monetary Fund Chief Christine Lagarde recently said, “inequality is hurting growth.” Realizing this, many central banks in developing countries now aim to use financial inclusion to spur economic growth and address inequality. As a global network of 117 central banks and financial regulators working in ninety-four developing and emerging countries, the Alliance of Financial Inclusion (AFI), where I serve as executive director, is closely tracking this issue. Fortunately, several developments that we’ve observed bode well for increased financial inclusion and global prosperity: 1. Developing countries are becoming financial innovators, particularly in digital financial services. In nine countries in Africa, more people have access to financial services through mobile technology than through bank accounts. And mobile financial technology is set to expand in coming years. 2. Faced with new technologies and regulatory challenges, financial policy makers are learning from each other more than ever. For example, a Chinese delegation of senior central bank officials recently traveled to Peru to learn about consumer protection and the regulation and supervision of nontraditional financial institutions. This is knowledge-sharing especially important as regulators play a critical role in the modern global market by ensuring consumer protection and encouraging competition. 3. Governments are setting ambitious national targets and implementing strategies for financial inclusion as part of their commitment to the Maya Declaration. The Declaration is the first global, measurable set of goals set by developing and emerging countries to unlock the economic and social potential of the 2.5 billion ‘unbanked’ population. More than ninety countries – representing more than 75 percent of the world’s unbanked population – have supported the Declaration. National targets are set through a bottom-up, consultative approach, which energizes stakeholders and strengthens their commitment to achieve the ambitious goals. 4. Public-private dialogues are strengthening policy making. As new products emerge, collaboration among financial service providers, mobile network operators, payment platforms, retail stores, and policy makers is critical to understanding opportunities and risks. Such partnerships help build robust financial systems that increase inclusion and guard against illicit activities. The latest G20 meeting in Sydney, Australia and the African Mobile Phone Financial Services Initiative meeting in Nairobi, Kenya were important steps forward on this front. 5. Global Standard Setting Bodies (SSBs) are recognizing developing country realities. For example, the Basel Committee for Banking Supervision and the Financial Action Task Force have a membership primarily comprised of advanced economies, but are now working with developing and emerging country policymakers. Historically, financial risks were believed to originate from developing and emerging countries with less rigid regulations. As a result, rules and standards prescribed by advanced economies tended to overlook developing country perspectives. But now, as innovative financial inclusion efforts develop and more financial service providers and products become available, SSBs have started to engage with financial inclusion regulators and advocates. In short, central banks have found a new common ground for international cooperation: financial inclusion. In the struggle to get the global economy back on track, fighting inequality is emerging as one of the best ways to spark economic growth.

According to Forbes, the first African ever has entered into the “top 25” of the world’s billionaires. He is Aliko Dangote, number 23. Forbes says that his net worth is now U.S. $25 billion up from $3.3 billion in 2007. His wealth is based on cement, but he is also investing in agriculture. Forbes identifies twenty-nine African billionaires, fifteen if the fourteen from North Africa are excluded. Of those fifteen, seven are South African and four (including Dangote) are Nigerian. The other four are one each from Angola, Swaziland, Uganda, and Tanzania. For the first time, there is also an African woman on Forbes’ list, Folorunsho Alakija, from Nigeria. Forbes estimates that her net worth is U.S. $2.5 billion. She is self-made; her fortune is based on fashion and oil. The wealth of the South African billionaires comes from real estate, retail, diamonds, media, pharmaceuticals, “investments,” and mining. Only one, Patrice Motsepe, appears to be a black African. The Nigerians’ wealth is heavily based on oil, telecommunications, and cement. It is no surprise that South Africa and Nigeria dominate the list. They are the first and second largest economies in sub-Saharan Africa. Most, but not all, of these billionaires are self-made. Nevertheless, sub-Saharan Africa still produces a tiny percentage of the world’s billionaires, whom Forbes estimates at 1,645 world-wide.

This is a guest post by Diptesh Soni. Diptesh is a master’s degree candidate at the Columbia University School of International Public Affairs (SIPA) studying economic and political development. You can read more by him at: https://dipteshsoni.contently.com/. Poor countries traditionally become more developed by expanding their manufacturing bases and increasing employment, moving from subsistence farming and the exportation of primary commodities to producing a greater share of services and manufactured goods. The African Transformation Report, released by the African Center for Economic Transformation (ACET) on March 3, provides a useful gauge of the successes and failures of African countries in moving up the development ladder. African economies, the report claims, need more than growth—they need growth featuring the five elements of DEPTH: “They need to Diversify their production, make their Exports competitive, increase the Productivity of farms, firms, and government offices, and upgrade the Technology they use throughout the economy—all to improve Human well-being,” claims ACET president K.Y. Amoako. Commodity prices are lower, growth in China is slower, and less easy money is coming from developed economies. Transforming economies  along DEPTH lines will mitigate the risk of shock for African countries and ensure more equitable and sustainable growth in the long term. The report compares a group of fifteen African countries to the performance of sub-Saharan Africa at large, as well as eight comparable countries that have already undergone economic transformations, six of them in Asia and two in Latin America. Overall, it shows how countries that previously transformed exhibited higher savings rates, higher levels of output per worker, greater diversity in exports, and higher levels of technology than is true in Africa today. The African Transformation Index, a ranking of countries based on the progress made in the five elements of DEPTH over the last decade, lists Mauritius, South Africa, the Ivory Coast, Senegal, and Uganda as the top five transformers. Among the twenty-one countries which have data, Burkina Faso has made the least progress, with Burundi, Nigeria, Rwanda, and Ethiopia following. But the debate surrounding economic transformation in Africa is contentious. Optimists cite rising wages in China and recent decisions by large firms such as H&M, Primark, and General Electric to set up factories in Africa as signs of change. They point to India’s economic boom on the back of services as a potential model for Africa. Others are less cheerful: Thandika Mkandawire of the London School of Economics and Dani Rodrik of Princeton believe there is much more work to be done. In line with their doubts, the African Transformation Report is a welcome check on the exuberance of the “Africa rising” narrative. To presume sustained growth in a weak and changing global economy is dangerously misguided. While better economic management, new technology, debt relief, and reduced conflict across the region have abetted growth in Africa, fully transforming the continent into a healthy, productive, and attractive destination for investment will require much-needed structural transformation.

Emerging Voices features contributions from scholars and practitioners highlighting new research, thinking, and approaches to development challenges. This article is from Benjamin D. Stone, director of strategy and general counsel at MicroCredit Enterprises and vice chairman of Indego Africa. Here he discusses Indego Africa’s experiences grappling with the tension between a social enterprise’s social mission and commercial goals.  Social enterprises enable people in the developing world to chart their own courses out of poverty by combining effective aspects of public and private sector ventures and harnessing market-driven forces. Yet, as I have learned through my work at the nonprofit social enterprise Indego Africa (IA), appropriately balancing a social enterprise’s social mission and commercial aspirations is immensely challenging. Based on my experience, when these prerogatives conflict, a social enterprise must ground decisions in a consistent long-term vision. Launched in 2007, IA partners with over 500 female entrepreneurs who operate within small for-profit businesses in Rwanda called cooperatives. IA connects these women with global markets by selling their jewelry, accessories, and home décor on IA’s online store, to boutiques and stores worldwide, and to major brands in the United States. The revenue covers IA’s operational costs, including raw materials, shipping, fair-trade wages for the artisans, and employee salaries. The remaining money is pooled with donations and grants to fund training programs for the artisans in business, literacy, and technology. IA has helped artisan partners put more of their kids in school, increase the number of meals their families eat per day, access running water, and more. But its mission goes beyond achieving temporary impact: IA aims to equip female artisans with the skills and confidence they need to compete in the global markets long term, without assistance. To achieve this ambitious goal, and balance commercial and social objectives, IA started out with two rules for choosing artisan partnerships. First, IA only partnered with women who were already members of a registered cooperative, so that these women would view IA as a business partner rather than co-founder. Second, IA only partnered with women who already knew basic artisan skills to ensure that, with minimal training, they would be capable of producing complex orders on tight timetables. These rules remained sacrosanct until 2010 when two NGOs, Survivor’s Fund and Foundation Rwanda, asked IA to help twenty-five remarkable women from the Kayonza district of Rwanda start an artisan cooperative. The women were all mothers of children conceived by rape that occurred during the 1994 Rwandan Genocide. Most were poor, illiterate, HIV positive, and did not know how to sew or weave. Even in the face of such difficult circumstances, these women were determined to give themselves and their children a better life. Despite its two rules, IA agreed to take on the challenge. IA helped the women build a cooperative, named Abasangiye, and conducted business and literacy training. IA also went beyond normal practice by subsidizing the cost of Abasangiye’s rent and transportation, and hiring women from another cooperative partner to teach Abasangiye artisans how to sew. The extra investment paid off: the women completed a stream of profitable orders for several major brands, including Nicole Miller, J.Crew, DANNIJO, and Anthropologie. Many started to learn English. Two of Abasangiye’s members were selected to attend the Goldman Sachs 10,000 Women program at Rwanda’s School of Finance and Banking and later joined seventeen other IA artisan partners as graduates of the school’s expedited MBA program. Out of the twelve cooperatives IA works with, Abasangiye remains the only one formed by IA because the financial cost and time required to launch it are too high to replicate. But making this exception to IA’s partnership rules reinforced the organization’s long-term vision. Although the women of Abasangiye still have many challenges ahead, they are increasingly engaging the global markets on their own terms as confident, empowered businesswomen. In other instances, IA has found it more sensible to uphold its self-imposed rules. In 2011, a prominent international retailer offered to make a large order that would have required IA to take a significant financial loss, but that would have allowed one cooperative partner to earn more money in one month then they might normally make in six. It was an enticing offer: great income for the artisans and terrific brand exposure for IA. Accepting the offer, however, would have damaged IA’s balance sheet and undermined its core vision by settling for a one-time profit for the women instead of taking a sustainable business approach to empowering entrepreneurs. IA declined the order, and its savvy artisan partners supported the choice. And the decision paid off. IA is now a renowned lifestyle brand facilitating profitable and consistent orders that give artisans the revenue and experience to achieve long-term success. Tension between a social enterprise’s social mission and commercial goals is a healthy byproduct of the public-private hybrid approach. During these times of ambiguity, social enterprises must rely on a consistent long-term vision for guidance. It is this approach that I hope will allow IA to have lasting impact that endures for generations.