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Corporate Citizenship > Bachelor Scholarship > Winning Scholarship Essay Spring 2008

Winning Scholarship Essay Spring 2008

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	Sherryl Muthuwady (scholarship winner 2008) with Shari Temple (Aidmatrix Foundation)“

iving a fish to someone who is hungry is a good deed, but what he really needs is to be taught how to fish so that he will have food for life. This well-known saying could be an ideal application to the problems with which we are faced in developing countries.

Extreme Poverty in Africa

Africa is made up of 52 countries and this continent has a remarkable culture with a rich heritage. However, according to the World Bank, the amount of people living in extreme poverty in Sub Saharan Africa has doubled since 1981 to 313 million people in 2003 (World Development Indicators).

Not all countries within Africa suffer with hunger and limited resources. South Africa thrives with private sector businesses and earns a large portion of its income from tourism. South Africa in the past also suffered from extreme poverty, but since the intervention of the World Bank, the situation has improved. The World Bank supported South Africa by providing assistance and advice on business development issues to support the private and the public sectors of the country.

In spite of these developments, most countries within Africa still suffer from extreme poverty where basic human needs such as water, food, clothing and shelter cannot be fulfilled. One in two people in Africa is forced to survive on less than one dollar a day. (The World Bank)

Africa is in need of many things. Food for survival is the priority. But as well, this continent needs to be developed with infrastructure and its private sector must flourish in order to maintain a healthy economy similar to that of Europe. Africa must be able to produce enough food for its population and must improve its medical infrastructure and must invest in the education sector.

Two hundred million people are chronically undernourished and dying from starvation in Africa. (BBC World Service press. 02.02.2006) We feel guilty when we look at the luxuries that we enjoy in our day-to-day lives and we want to reach out and help, the result usually being development aid. But is this the best method to tackle poverty in Africa?

“In fact, from a rational standpoint, doubling aid money is a bad idea. Development aid including that which is directly targeted to the poor, has not reduced poverty in any lasting way, and more money will not make it work any better in the future. So, I have a modest counter proposal to offer. Cut aid in half, send more than half of the `experts` home, close down or shrink most of the hundreds of the organisations in the business, and use the money that’s left strategically and intelligently ( Dichter T.,  May 2005). I agree with Thomas Dichter that development aid spent on Africa for the past 60 years has accomplished little.

Development aid to Africa has been a necessity for those countries to date, as they could not survive without these funds from the west. In some countries in Africa, like Tanzania, Rwanda and the Mozambique, almost 90 percent of the gross national product consists of development funds and debt. (Mramba P, International Monetary Fund)

However, development aid has also left many farmers in Africa jobless. “It is axiomatic that flooding the market with food drives down the prices of food for local farmers.” (W. Easterly, 2006). James Shikwati explains that aid can encourage misguided policies, where in Ethiopia farmers are not even allowed to own land.

The History of Financial Aid to Africa

Over the past 20 years, the financial aid given to Africa has doubled, with many European countries trying to compete with one another over the amount of aid that they give. America has increased direct development and humanitarian aid to Africa to more than $4 billion a year from $1.4 billion in 2001, according to the Paris-based Organization for Economic Cooperation and Development. (Washington post, December 2006)

“Last year, Swiss technicians drilled seven deep wells in the southern Sudan, each of which cost 7000 Euros. In the meantime, five have already run dry. Despite enormous financial investment, the provision of water in parts of the Sahel region has not improved at all.”  (Wiedermann, Thielk, “Der Spiegel”, May 2005) Based on such facts, I believe it does not make sense to carry on with this type of investment if African cannot reap the benefits in the long-term.

The United Nations also plays an important role in developing Africa, but according to the UN Regional Inter- Agency Coordinate Support Office, the distribution of these funds are not even. “While the food sector has received 49% of the funding required, only 8% has been received for water and sanitation, just 15% for health and 27% for agricultural support”. (United Nations)

The above statistics clearly indicate that the equal distribution of financial aid to Africa is problematic. While the food sector receives the majority of the funding, agriculture and health support receive the lowest levels. For the development of the continent, these sectors are vital and must be improved. The current development aid is not sufficient to fulfil these demands. The point has been reached where Africa no longer needs financial aid but rather a system which would help the continent to stand up on its own feet. As many economists within Africa, including James Shikwati, point out, financial aid does not help the situation but only worsens it in the long run.

“The intentions of the west to eliminate hunger and poverty in Africa have been damaging the continent for the past 40 years. If the industrial nations really want to help the Africans, they should finally terminate this awful aid. The countries that have collected the most development aid are also the ones that are in the worst shape. Despite the billions that have poured into Africa, the continent remains poor.”  (Shikwati , 2007)

James Shikwati believes that financial aid has been damaging to Africa and that Africans are no longer motivated to work hard to support themselves. He believes that Africa has become a ‘beggar nation’ and that for the solutions to all its problems, it has become accustomed to turning to the west for help.

Since the objective here is the economic growth of Africa, we must determine whether financial aid has actually brought about such growth. I do not think aid is the best tool for economic development.

The history of economic growth in developing countries shows the importance of getting all the inputs right.  Aid provides one input among many others, including good governance, market access, foreign investment and the development of appropriate policies designed to take advantage of Africa’s comparative advantage in producing goods that they can produce most efficiently with the given resources. Thus, the focus on aid, like the focus on trade reform, stresses the question as to `how` Africa might develop, rather than `what` is the economic basis that will employ integrative trade tools or that will emanate from aid expenditure. Put differently, what will be Africa’s future economic drivers?  (Dichter T, 2006 ) 

As Thomas Dichter has clearly explained, aid will not bring about development if it is not combined with other mechanisms, one of which is the reformation of trade policies.

Trade policies will help to strengthen the market conditions of Africa. These policies should not be too rigid and promote African goods in the international market. Foreign development projects are equally important for long-term growth. For example, the mobile phone projects in Africa have become very beneficial for traders enabling them to reach wider markets. In my opinion, these policies should be aimed at long-term projects that would create new markets, develop job opportunities and attract foreign investment.

Political Corruption in Africa

In most countries, the strength of the economy and the welfare of its people lie to a great extent in the hands of the leaders of the country. The wealth of a nation is partly dependant on the quality of the government. As Dichter describes, good governance is also a key development tool. It is clear that many African countries lack this important mechanism.

Most African countries suffer from unstable governments. Therefore, it is clearly not a wise decision to give funds to such an unstable entity. Any amount of development aid will be wasted in the hands of a government of corruption, greed and selfishness.

Upon closer examination, we can see that the best option available is to develop the country rather than give aid. Completely cutting aid is not the solution, but measures must be taken so that in the initial years, with the help of financial aid, new methods are introduced to build the economy. Development aid is a temporary measure, whereby Africa needs a long term plan to be able to support economic growth and to solve existing problems. One such method is micro financing.

Micro Financing

Micro financing is the process of extending loans to the poor. It is a method to help financially disadvantaged individuals who neither qualify for a bank loan nor are able to provide collateral to be able to start up a self employment project, by providing loans with minimum interest charges. Micro financing helps to reduce poverty and supports individuals in gaining financial independence based on self-employment projects. These projects in turn are also beneficial for the private sector by providing jobs.

Although micro financing dates back to the 1970´s, awareness of the theory grew after Professor Muhammad Yunus won the 2006 Nobel Peace Prize for further developing and promoting the concept. Micro financing has proven to be successful in many third world countries such as India, Indonesia and Bangladesh. According to the United Nations statistics for micro financing, there are over 3000 micro financing institutions in developing countries. Micro financing institutions work together with commercial banks and the World Bank to help overcome poverty in the developing world.

Micro financing institutions not only extend credit but also give advice and support to individuals in managing and financing their businesses in the long-term. Though the institutions were initially set up to help mainly women, they now have extended their operations in the African countries to help the poor in general to maximise their limited resources.

Micro financing has proven to be an ideal growth tool for many countries, though it cannot reach out to every individual suffering from extreme poverty. According to the State of Microcredit Summit Campaign Report 2005 (www.unitus.com), micro financing institutions were able to increase their poorest client base of 7,6 million in 1997 to 66,4 million in 2004. These statistics show the extreme demand for credit in the developing world.

According to reports of the International Monetary Fund, micro financing has helped most African countries. (Basu A, Blavy R, Yulek M 2004). In Sub Saharan African countries like Ghana and Tanzania there is limited access to banking facilities. “The existence and growth of cooperative banking and combined savings and credit institutions in the Micro finance sector in Sub Saharan Africa reflects the growing demand for both savings and credit facilities.” (Basu A, Blavy R, Yulek, M 2004)

Since the beginning of this decade, real GDP growth in Sub Saharan Africa has averaged a little over 4.5 percent per year - the strongest seven-year period since the beginning of the 1970´s while output, variability has declined. These developments have raised hopes that Africa has entered a period of strong and sustained growth that will begin in to make deeper inroads into the extremely high poverty rates that still plague the continent.   (World Economic Outlook, 2007)

Further, according to the International Labour Organization statistics, it is estimated that “three fourths of all Africans work in the informal sector, comprising of over 40 percent of the continents’ overall gross domestic product. Barred from access to more traditional banking tools, these individuals – hair cutters, taxi drivers, farmers, and merchants - are forced to live on a cash basis.”

If not for micro financing, these entrepreneurs would not be able to continue their businesses or to expand. With the help of micro credit, they are able to invest money to develop their businesses. Micro credit also has the so called ‘ripple effect’. For example, when micro credit is given to a family to start a business, it indirectly helps the children in that family to be able to obtain required education. Thus, it also helps to educate the nation.

Currently most of the African countries do not have the capabilities to compete in foreign markets. This happens when aid supplies become cheaper than locally produced goods. Therefore, the best solution available for the African countries is to develop their private sector and engage in more trade activities with the rest of the world.

Micro financing will take time to bring in profits for the country. However, in the meantime, it is an opportunity for the people who are suffering to gain independence, reap their own earnings and develop a sense of pride while doing so.

Conclusion

As I have discussed above, dealing with the African economy is not an easy task. We can, however, help this continent to slowly gain independence, which would be the greatest help of all. This is possible with much patience, encouragement and education.

Africa suffers from underdeveloped roads, ports, rail and telecommunication systems. The cost of telephone connectivity in Africa is higher than anywhere else. African freight costs as a percentage of total import value are 13 percent compared to 8, 8 percent for developing countries elsewhere and 5, 2 percent for industrial countries. In Kenya the average cost to import, one container is nearly 2500 dollars or five times more than the cost in Singapore. The operating cost per kilometre of using two axle trucks in Tanzania is two and a half times the cost in Indonesia or Pakistan. (International Business Times)

As the above statement testifies, Africans can no longer sit in the dark. They need to come out and take action and actively pull their country out of its situation. As we can see, trade related costs are very high in Africa. The only way to overcome these barriers would be new investments and more small scale businesses. Micro financing is the most viable alternative to develop the African continent.

“Poverty does not belong in civilized society. It belongs in museums. We are committed to building a world in which our children and grandchildren will have to go to museums to see what poverty looked like.”  (Yunuz M., December 2006)

Bibliography

Bozyk.P 2006, Newly industrialized countries, Globalisation and the transformation of foreign economic policy. Ashgate publishing.

Basu A, Blavy R, Yulek M, September 2004, Experience and lessons from selected African countries Report.

Yunuz M , December 2006, International Herald Tribune.
http://www.iht.com/articles/2006/12/08/opinion/edyunus.php

Dichter T 2005, “Give less aid a chance”, Saiia’s Electronic Journal.

Mramba P., International Monetary Fund Report, Smart Partnership, September 2005, Volume 42 Number 3.

Easterly.W, 2006, BBC New online edition by H. Astier

The Washington Post, December 31 2006,
http://www.washingtonpost.com/wp-dyn/content/article/2006/12/30/AR2006123000941.html

Van den Berg. M, Chief election monitor for the European union.
www.time.com/times/world/article/0,8599,1613615,00.html

United Nations, “Funding shortfall hampering aid in Southern Africa”, 07.11.2002   www.un.org

Shikwati J, Spiegel interview 04 July 07.                www.spiegel.de/international/spiegel/0,1518,363663,00.html

World Economic Outlook, Work, economic and Financial surveys, April 2007. International Monetary Fund.

“Africa to benefit from free trade”, International Business Times, 24th September 2007.