Category: Finance and Economics

Size Matters: Macro vs Micro Finance in Africa

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Tale of Two TED Talks

First by young entrepreneur Sangu Delle on how large-scale finance would lead to large-scale impact across the African continent. Second one by Joy Sun, who advocates for microfinancing as a means of allocating funds efficiently.

Going Big

Think the Marshall Plan … for Africa. After the devastation following World War II, Europe was not rebuilt using small microloans. Delle discusses this by first dispelling the misconception that every African is an entrepreneur – or at least a subsistence farmer.

This is a powerful idea, one I’ve discussed with friends at length; that most people in fact just want jobs. They become entrepreneurs in the absence of industries which could provide decent work.

So why wasn’t there a Marshall Plan in Africa?

I’m not going to get into the nuances of our complicated relationship as a continent with the West ; See The Internet for More. However one thing that made the difference between the success or failure of the Marshall Plan was the presence of strong institutions.

The Marshall Plan saw the formation of the Organisation for European Economic Co-operation, which was the predecessor to the OECD and the European Union. This body allocated financial aid from the United States to countries across the region. Loans were made to private businesses and the repayments were used by governments to in turn fund infrastructure projects.

A favourite factoid in the area of development is how the economies of South Korea and Ghana were roughly the same size in the 70s, but the Korean economy powered ahead while Ghana faltered. Korea had the Marshall Plan-type aid programme, Ghana did not. If you need to grow quickly, you need to think a bit bigger than giving every household just enough money to buy a goat. You need to build industries and nurture the industrial titans that come with them.

Something for Everyone

Microfinance is about financial inclusion. Many people in developing countries who would otherwise not have access to financing are now able to gain access to financial services. Microloans have been a powerful tool in alleviating poverty across the developing world.Like macro-finance, the success of micro itself lies within disproving another popular fallacy; “Poor people are poor because they can’t make good decisions”

In this talk Joy Sun goes out to dispel the myth, with some interesting insights.

She explains that empirical evidence shows that in many cases, individuals had repurposed aid given to them; that is, sold donated goods for cash. This cash was used to actually improve their lives. It’s sometimes a cruel thing we do by taking away the autonomy of those we seek to help.

Sun showed that people who received cash were able to work harder while the costs of cash transfers were much lower than regular aid.

The success of microfinance in Africa, and the perhaps the failure of macro, could be attributable again to state of institutions on the continent. It is in a way going around many governments who have been known to misappropriate foreign financial aid. It this achieves a significant degree of efficiency in the developing world. Mobile technology on the continent has also made it a lot cheaper and easier make funds available to individuals.

Sangu Delle and Joy Sun weigh in on how to best provide financial assistance in Africa

Sangu Delle and Joy Sun weigh in on how to best provide financial assistance in Africa

I saY we go big

I am one for the grandiose. I’m an idealist who believes we could clean up our act and push towards macro-finance as Delle suggests. I think that small transfers are only palliative, and a reaction to a failed system. We need a Samsung, VW or Airbus. We need a Marshall Plan for Africa.

I cannot discount the good microfinance has done across the world. What’s your take on the issue?

Das Mensch (Human) Kapital

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I recently wrote a piece on the proposed National Minimum Wage (NMW) in South Africa. Although mention of the wage floor was limited in both this year’s State of the Nation Address and the Budget Speech, it is no less a hot topic. In my research I looked at patterns of inequality, unemployment and wage policies in South Africa and other developing nations.
After going through the evidence, I leaned towards arguments that supported the institution of a minimum wage – however, I conceded that such a policy would only be a palliative intervention. There was a particular issue that piqued my interest, but was unfortunately beyond the scope of my analysis, which was human capital development. The unlettered man’s interpretation of Marx’s Das Kapital would take away that amongst all the forms of capital available, in land/nature, finance and labour amongst others, labour or human capital was the one form most vulnerable to technological and economic flux. Talk of redistributive justice and redress of ownership patterns that came about from the colonial and Apartheid regimes often focus on physical capital, I would like to argue that perhaps we should spend more time thinking about human capital and unlocking returns on this first form of capital every person owns.

Before I delve deeper into the subject I’d like to describe the current state of the South African economy specifically focussing on issues of inequality, unemployment and poverty. Here are a few takeaways:

  • The story of income inequality is not so simple. While South Africa exhibits one of the highest Gini coefficients, the figure quoted is often before taxation and social welfare transfers. The post-taxation and social transfer coefficient is well below 50%.
  • Too few people work. While taxation and welfare have some effect on inequality, they don’t have a significant effect on distributional changes, simply because wealthier people are often better at protecting their wealth than lower income individuals. Work income has a greater impact on inequality, but with an unemployment rate of between 25%-35% depending on the definition mean that many are dependent on government support.
  • Human Capital Deterioration. The South African economy is the most industrialised on the African continent and is progressively moving away from primary industries. The mining industry is passed its peak, even in cases like platinum where the country may boast some of the world’s largest reserves it is mechanising. Where human capital should be accumulated in order for labour to acquire the skills necessary to function in a rapidly industrialising nation, it has often lagged or even gone the opposite direction. This has created a significant skills mismatch in the labour market.
  • Human Capital Accumulation is critical to igniting and sustaining growth.  The unemployed are often unskilled and inexperienced. Returns on human capital are difficult to measure, companies are reluctant invest in comprehensive skills programmes as they may not be able to recognise the full benefit of the investment. It would seem that government has to step in and provide support to this regard. Even if more skilled labour may be more expensive, it is often the case that they are much more efficient.

I concluded that any minimum wage intervention would be palliative, and that it has to be coupled with a comprehensive retraining programme. This is where we begin. I would would like to dig a bit deeper into the idea of developing people as a source of capital.