Source: http://www.flickr.com/photos/imfphoto/7176494253/

Peter Bauer, a prominent developmental economist, argued “there would be no concept of the Third World at all were it not for the invention of foreign aid” (The Economist). He opposed the idea that development aid could provide the capital needed to kick-start economic growth and fight poverty (Kristof). Aid, he argued, politicized economies and more often than not ended up in the hands of government officials. Contrary to Bauer’s beliefs, foreign aid is not fundamentally ineffective. While in its current form it has little effect on economic growth and may even hamper a country, foreign aid can be effective in certain situations if reformed and managed correctly.

Recent studies suggest that foreign aid may hamper a recipient nation in the long run by weakening local institutions and adversely affecting the country’s competitiveness. In a paper published in 2005, Raghuram G. Rajan, former chief economist at the International Monetary Fund (IMF), and Arvind Subramanian, a former IMF researcher, offer compelling evidence that aid appreciates the real exchange rate of a country thereby decreasing competiveness (Rajan and Subramanian). This appreciation has two root causes. Aid increases the price of resources in short supply such as skilled labor and land, raising costs for local business owners and increasing unemployment (Ibid). An inflow of foreign capital appreciates the nominal exchange rate, making the currency (and in turn the nation’s exports) more expensive. The appreciation of the real exchange rate pushes countries away from “export oriented labor intensive manufacturing.” An export oriented economy encourages sensible government policy by providing the incentive of significant economic growth; foreign aid could potentially eliminate this incentive (Rajan and Subramanian). Therefore, governments must spend foreign aid very effectively in order to offset the fall in competitiveness.

In the case of countries like Somalia, current foreign aid provides temporary relief but does not tackle the root causes of the country’s problems: establishing security, providing food and encouraging business (The Economist). The government must limit the influence of jihadists and secure the Kenya-Somalia border, the site of much terrorist activity. Somalia is a hungry country; according to the U.N., 80,000 Somalis may have perished in last year’s famine (Ibid). Efforts must be made to stabilize food production by making it safe again for displaced farmers to return to their farms. In order to encourage local businesses, foreign donors must invest in industrial equipment, telecommunications, and livestock by supplying capital for loans to medium sized companies. Only then does Somalia have a good shot at success.

While most of academia has concluded that development aid is usually ineffective, there remains much discussion over humanitarian aid. In an editorial published in the New York Times, Carol Giacomo, a member of the Council of Foreign Relations, argues that humanitarian aid helps advance stability abroad by providing food and medicine (Giacomo). For example, U.S. foreign aid was cut by $6 billion, or roughly 11%, in 2011, with further cuts looming due to recent efforts by Republicans to trim our budget (Ibid). Giacomo warns that such budget cuts, which represent a tiny portion of our multi-trillion dollar federal budget, would be “hugely damaging.” Indeed, there is evidence that humanitarian aid has had an effect: in the past 50 years, the number of children who die annually has gone down by 60% (Gates). Furthermore in the last decade the cost of fighting HIV and AIDS has gone down significantly (Emanuel). Nicholas Kristof, a Pulitzer Prize winning columnist for the New York Times, tentatively concluded that one-time interventions such as bed-nets and vaccinations are more likely to be effective than sustained efforts (Kristof). Rajan and Subramanian, however, challenge the notion that humanitarian aid is as beneficial as it is purported to be (Raghuram and Subramanian). In fact, it’s just as ineffective as bilateral or multilateral aid because governments “seem to view all forms of aid as going to a common pot and act accordingly” (Ibid).

Perhaps the way foreign aid is administered is at fault. The Center for Global Development, a Washington think tank, put forth a scheme called “Cash on Delivery” (Rosenberg). The idea is simple: donor countries only pay for projects when something good comes out. For example, the United States and Malawi would draw up a five-year plan to improve primary schooling that specifies a set of payments and what must happen for Malawi to get them (Ibid). After the contract is drawn up, the funder takes a “hands-off approach” which allows the recipient nation the freedom to accomplish the requirements on its own (Center for Global Development). Theoretically, “Cash on Delivery” should garner more political support at home for foreign aid than traditional aid would and also create a sense of accountability in aid-dependent countries (Rosenburg). This method is still untried so we cannot know how successful it can be. And, at the risk of sounding cynical, the entire premise of the “Cash on Delivery” is contingent upon the fact that the foreign government (organization, business, etc) is organized enough to accomplish the set goals in a legitimate manner. Back to the Malawi example, if test scores were used to determine the effectiveness of an education program, it would not be impossible for interested parties to alter test scores and escape the scrutiny of foreign auditors. Yet despite skepticism about the effectiveness of “Cash on Delivery” and foreign aid in general, it’s encouraging to know that we have not abandoned the desire to alleviate poverty worldwide.

Assistant Secretary of State Jose Fernandex ’77

Nominated by President Obama in 2009, Jose W. Fernandez ’77 serves as the Assistant Secretary of State for Economic and Business Affairs. Fernandez oversees the bureau, which handles international trade, finance, policy, development, as well as economic sanctions and support for U.S. business abroad.

“Economics is a critical part of foreign policy, just as important as politics,” Fernandez said in an interview with the Dartmouth Business Journal.

A major focus during his tenure has been “economic statecraft,” a term coined by Secretary Clinton, which involves using economic policy to strengthen diplomacy abroad and in turn, using diplomacy to strengthen the U.S. domestic economy.

A key component of “economic statecraft” has been finding ways to get U.S. companies more involved abroad, according to Fernandez. “The U.S. benefits when our companies do well, and our companies are an extension of American power,” Fernandez said.

In addition to “economic statecraft,” Fernandez’s tenure has also been focused on dealing with “swing state countries,” which are also referred to as “multipliers.” These are typically emerging countries and markets with which the United States can potentially partner to benefit our economies, like Indonesia, Turkey, and Brazil.

In the realm of “economic statecraft,” Fernandez spoke about the need for countries in North Africa and the Middle East to follow positive economic polices which create jobs and promote growth. Fernandez cites countries like Algeria, which has staggering unemployment figures, and Tunisia that had an unemployment rate of 20-30 percent, and even higher for young citizens. “If you put it in the context of many other issues, you realize it is a revolution waiting to happen,” Fernandez said.

The solution, Fernandez said, is regional integration. Middle Eastern and African countries have the lowest interregional trade in the world at around 5-6 percent, however if they engaged in trade their GDP could grow 6-8 percent.

“They need to pursue economic polices that create jobs, foster innovation, and have Arab countries trading more and opening their borders,” Fernandez said.

Fernandez also focuses on areas where economics and development converge, and U.S. companies can, for example, build roads and power plants to contribute to infrastructure. “It is a great example of doing well by doing good: companies that can profit, but can also benefit societies they operate in and by extension help American foreign policy,” Fernandez explained.

The North Africa Partnership for Economic Opportunity (NAPEO) has been a key joint project between the Aspen Institute and the U.S. Department of State. The Aspen Institute is a nonprofit international organization focused on fostering leadership and dialogue through various programs. A main objective of NAPEO has been to build networks between the public and private sectors, encourage American business in the Maghreb region, and foster entrepreneurship and a positive business climate.

The Maghreb region of Northern Africa: an area of focus for Jose Fernandez

Another key project has been Domestic Finance for Development that creates partnerships to help countries mobilize their resources, improve transparency, and battle corruption. “Developing countries have to ultimately own their own development by collecting their own taxes and fund themselves,” Fernandez said.

When failed states cannot support their state apparatus, expected services like police and medical help cannot exist, according to Fernandez.

Tax administration and collection is critical and in many countries people do not pay taxes because “they think it will end up in a Miami bank account,” Fernandez said. This issue ties into corruption and in order to deal with corruption people need to be shown budgets, and there needs to be transparency, according to Fernandez.

Today, the pressing issues the bureau faces include intellectual property rights, treatment of US businesses abroad, state-owned enterprises, and sanctions.

Intellectual property is an issue that goes across borders and affects U.S. companies. The bureau tries to get countries to enforce their intellectual property rights laws, Fernandez said.

The equitable treatment of US businesses in foreign countries and competing with countries with “national champions,” or state owned enterprises, have recently rose as pressing issues.

“We are making sure we are getting a fair shake when [American] investors go to India or China, that [U.S. businesses] are getting an even playing field,” Fernandez said.

Fernandez also indicates Brazil as a well-known emerging market, highlighting the nation’s discovery of “enormous petroleum deposits,” and hosting the Olympics. Within Latin America, Fernandez also calls attention to Colombia, which is “growing by leaps and bounds,” and Peru, which has cut its poverty rate.

“Peru has managed to cut their poverty rates in half, from 54 to 28 percent,” Fernandez said. “In 15 years, that is a great achievement.”

Prior to his service at the State Department, Fernandez was a partner at Latham & Watkins in New York and was the Global Chair of its Latin American practice. After earning his J.D. from Columbia University School of Law, Fernandez worked across European countries and in the EU as it was consolidating. His later concentration in Latin America veered off into Africa, involving mostly corporate work in buying and selling, financing and restructuring companies. He said his experience at his varied practice best prepared him for his work at the State Department.

Fernandez finds the “intellectual aspect” of his work at the State Department to be his favorite but most challenging part.

“The intellectual aspect is fascinating; the ability to learn new things and go from a meeting on agriculture to a meeting on telecommunications, and talk about Algeria and move on to Russia,” Fernandez said. “The intellectual diversity is what makes it interesting and challenging.”

At Dartmouth, Fernandez was a history major with a concentration in Latin history and Russian history. Prior to his appointment at the State Department, Fernandez served on the Board of Trustees of the College.

Fernandez encourages students interested in international business, economics, and development to travel and study abroad. He advises students to be “willing to immerse yourself in other countries and cultures…and being able to put yourself in their shoes.”

Nigeria House of Reps

Captivated by the high rates of return, investors from all over the world have now set their sights on The Federal Republic of Nigeria. As Africa’s most populous country, Nigeria also boasts the continent’s second largest oil reserves and has a very promising growth outlook. Poised to eclipse Africa’s largest economy by 2015, Nigeria is becoming a rather worthy recipient of foreign capital, receiving anywhere from $10-$12 billion per year. However, in order to take full advantage of what foreign investment has to offer, Nigeria must first improve its economic and political climate.

For Nigeria, meaningful, long-lasting economic growth and development is almost entirely contingent upon securing substantial amounts of foreign direct investment. FDI, as it is called, is crucial for the Nigerian economy, as it permits the transfer of technology and facilitates improvements in productivity. Ultimately, this can help alleviate Nigeria’s widespread poverty by increasing per capita income and elevating overall standards of living.

To be sure, Nigeria has a difficult road ahead should it want to achieve the economic growth and stability that it seeks. Nigeria’s development plan is simple in theory, yet rather difficult in practice given its poor track record. Due to its long history of economic mismanagement, corruption, incompetent leadership, political instability, and poor infrastructure, Nigeria has numerous obstacles that collectively deter foreign investment. Thus, at a fundamental level, Nigeria needs to create an environment that is conducive to foreign investment and healthy economic growth.

To do so, Nigeria must address each of these impediments to growth through extensive political and economic reform. First, there must be a dramatic and comprehensive restructuring of Nigeria’s economy. Currently, petroleum and petroleum products account for 95% of Nigeria’s exports. Such a heavy reliance on rich mineral reserves makes Nigeria highly vulnerable to volatile economic fluctuations. A fall in commodity prices can have a potentially devastating impact on the country’s terms of trade, and thus on the economic well-being of the nation.

Therefore, in order to achieve greater macroeconomic stability and diminish its vulnerability to commodity prices moving forward, Nigeria must reduce its dependence on oil and natural gas. It would be best for Nigeria to develop and promote its non-energy exports, which include manufacturing, knowledge-based services, and agriculture. At this point, manufacturing and services accounts for only one-third of Nigeria’s GDP, as compared to upwards of 80% for other, more diversified African nations. With regards to agriculture, despite only accounting for 41% of GDP, the sector employs 70% of Nigeria’s population. Overall low productivity caused by poorly managed harvests, and failed preservation techniques have forced Nigeria to import food to feed its growing population. If it improves its efficiency in non-energy sectors like agriculture, Nigeria can begin to diversify its economy by exporting cash crops like cocoa, citrus, cotton, and peanuts.

Through a greater diversification of the economy, Nigeria can also diversify the distribution of the FDI it receives. Up until now, Nigeria’s FDI inflows have been almost exclusively in the natural resources sector, specifically in the oil and natural gas industries. However, such a concentration in FDI limits technology transfer and inhibits job creation, due to the capital-intensive nature of the extraction process. Should Nigeria attract FDI in other sectors, including manufacturing, tourism, consumer products, and construction, these new FDI projects could generate greater employment and create more balanced economic growth.

Next, should Nigeria seek to develop these other segments of its economy, it must address its infrastructure problem. Infrastructure in Nigeria is largely publicly owned, and thus poorly maintained. Inadequate telecommunications, power generation and distribution networks, ports, roadways and railways all deter investors, as well as push up unit labor costs, offsetting any potential comparative advantage Nigeria has in that particular industry. For Nigeria’s manufacturing sector to be efficient, sound infrastructure is needed in order to keep transportation costs low.

A reduction in inefficiencies within Nigeria’s prized oil industry will play a pivotal role in helping Nigeria realize its potential. Despite producing an average of 2.38 million barrels per day in 2011 and holding the title of Africa’s largest crude oil exporter, Nigeria is nowhere near its productive potential. Ironically, Nigeria has to import refined fuel, due to its unproductive and inefficient oil refineries that operate at just 25% capacity. In fact, estimates suggest that Nigeria could produce approximately four million barrels per day within 10 years. To do so however, requires a more efficient use of resources and thoughtful economic management that have been largely absent up until now. Improper handling of oil discoveries in the past has led to inflation, which caused an increase in the price of manufacturing goods. By making these goods less competitive on the world markets, the oil industry has effectively crowded out other export industries, reinforcing Nigeria’s over-dependence on oil.

Recently, Nigeria has also undertaken initiatives to reduce its reliance on fossil fuels in favor of renewable energy sources. Wind, solar, and geothermal power have all been identified as potentially promising areas for growth and investment. Nigeria’s first ever wind farm, consisting of 37 wind turbines, is set to go operational in July of 2012. Financed by a Japanese agency, the project should contribute approximately 10 MW of electricity. Similarly, Nigeria has also begun an 800kW solar panel project, which is expected to supply electricity to one of the nation’s universities.

In addition to programs on the part of individual nations, African nations are now allying with the European Union to further coordinate their efforts. Designed to keep each nation focused on reaching their fullest output potential, the Africa-EU Renewable Energy Cooperation Program and the Africa-EU Energy Partnership (AEEP) have established renewable energy targets for 2020. Again, meeting these goals requires substantial amounts of investment capital, further stressing the need for political and economic reform.

An ongoing skills deficit also poses a problem for African nations like Nigeria. Nigeria is in desperate need of educational reform, to improve the value of human capital, raise productivity, and ultimately increase wages. Nigeria’s labor force is growing rapidly, but with lagging literacy rates and the lack of necessary skills, investors remain wary. To be fair, however, Nigeria, as well as other African countries, is already making progress in this regard, as productivity is growing at a rate of 3% per year in Africa, which outpaces that of America by .7%.

The nature of African markets, namely the restricted movement of capital and human resources across borders, has also posed concerns for foreign investors. Because of this, trade is quite low between African nations, since on average, 80% of African exports go to non-African countries. To mitigate this, Nigeria, as well as other African nations, has begun to liberalize its economy by reducing tariffs, import restrictions, and other trade barriers. In doing so, Nigeria promotes increased competition and boosts intra-African trade. Perhaps more importantly, though, these measures allow more nations to reap the mutual benefits from trade, and attracts greater foreign investment now that African markets are more integrated.

Continued, institutionalized economic reform programs like the National Economic Empowerment and Development Strategy (NEEDS) will be essential for Nigeria moving forward. NEEDS seeks to liberalize the economy, promote private enterprise through increased privatization and lowering corporate taxes, reduce corruption, diversify Nigerian exports, improve education, develop sound infrastructure, and ultimately reduce poverty and increase standards of living. NEEDS provides a tangible agenda that helps Nigeria stay focused on reaching its development goals.

Political reform is paramount, as political stability will be a key component in attracting foreign investment in the future. With a fragmented, multi-cultural society consisting of 250 ethnic groups, rival factions competing for power oftentimes create a politically unstable climate. Meanwhile, Radical Islamist groups like Boko Haram, which has killed hundreds in violent attacks in the past year, further discourages investors by increasing political instability and jeopardizing the return on investment.

What’s more, Nigeria is considered one of the top 40 most corrupt nations in the world, particularly in its dealings with the oil industry. The most recent fuel subsidy scandal involving Nigerian oil companies and Nigerian officials, which lasted three years and cost the country $6.8 billion, is representative of the larger, omnipresent problems of corruption, weak leadership, and economic mismanagement. Overall, through strengthening its democratic institutions, Nigeria can help tackle corruption, maintain political stability, and make good governance a priority.

It is important to recognize that increased foreign direct investment is not limited to Nigeria alone. Rather, other African nations— among them Tanzania, Ghana and Mozambique—have also experienced a recent increase in capital inflows. As a whole, the African continent is inviting more and more FDI than ever before.

FDI in Africa is predicted to reach $150 billion by 2015, compared to just $84 billion in 2010. The vastly under- realized productive potential of many of these African nations, coupled with an expected GDP growth rate of around 6% over the next couple of years, makes Africa a very attractive prospect for investment.

For example, in Mozambique, U.S. energy companies are seeking investment opportunity in its energy industry, given its recent discovery of substantial offshore reserves in the Rovuma oil field. In fact, in an effort to penetrate this lucrative East African market, American oil giant, Shell, has just offered $1.6 billion to buy African oil explorer Cove Energy, who has an 8.5% stake in the Rovuma field. Italy’s biggest oil company has a $50 billion natural gas project in place in the area as well. Tanzania is also actively encouraging foreign direct investment, with the establishment of a gas-fired power plant and power transmission lines currently in the works. Likewise, the recent discovery of two giant oil fields in Ghana has caused a surge in investment, particularly from the Chinese. Foreign investors from Brazil, Turkey, Malaysia and India are also eagerly investing in Africa, primarily in the natural resource sector, but also increasingly in the manufacturing and service sectors.

Curiously, despite these efforts and a rather promising growth outlook, Africa attracts just 5% of global FDI projects. This further emphasizes the need to address the primary factors impeding foreign investment and to improve upon the key drivers of economic growth.

As evidenced by its complexity and the dynamic nature of a globalized economy, economic prosperity is not a simple task. Instead, it is a gradual progress requiring good governance, coordination, cooperation, and patience. Although Nigeria has emerged as a capable candidate for foreign investment, and has made great strides in the right direction thus far, the process is by no means complete. Whether Nigeria—and the rest of Africa for that matter—can attract a greater share of global investment and achieve these lofty ambitions in the long run still remains to be seen.

Ever since the 2008 global food crisis put agriculture back in the spotlight, the international development community seems to have zeroed in on three key themes—smallholder farmers, higher investment in agriculture, and increasing productivity.

Hardly is this approach more evident than Pepsi Co.’s involvement in chickpea production in Ethiopia, a project focused on increasing chickpea yields and helping smallholders get access to markets.

“What’s exciting about this is that in order to manufacture the product, they will buy from smallholders,” said Ertharin Cousin, the U.S. ambassador to the UN Food and Agriculture agencies in Rome.

“In those same places you have jobs being created that are off farm jobs that exist for unskilled labor that was previously unemployed. Those are the kinds of collective partnerships that smallholders benefit from and that the private sector helps drive.”

Yet if the Pepsi project is evidence of the increased attention to African agriculture, it also points to a fundamental problem: multinational corporations are able to legitimize their role in agricultural development by devoting their resources to boosting smallholders’ yields. But all this really does is perpetuate the myth that increasing yields will reduce hunger.

In fact, it is the large seed and agrochemical companies that benefit from the narrative that higher yields will solve world hunger—precisely because they can use that narrative to justify their highly technical approaches. These actors are able to gain acceptance by framing their initiatives as “development,” which inherently becomes associated with “goodwill” and “compassion.”

Yet despite the huge gains in productivity throughout the 20th century, there are nearly one billion hungry people in the world today—stark evidence that enhancing yields and ending hunger are not so closely correlated.

To me, this suggests the need for a fundamentally different vision for global agriculture. Most important, food systems must center on the multi-functionality of agriculture: nutrition objectives, rural livelihoods, climate change mitigation, and adaptation.

This vision was precisely emphasized by the International Assessment of Agriculture Knowledge, Science and Technology for Development (IAASTD) — considered the most comprehensive review of the current global agriculture situation. Altogether, IAASTD represents a stark rebuttal to the highly reductionist approaches that assume yields to be the sole factor in improving food security.

However, the U.S. government refused to endorse IAASTD, largely, I suspect, on the basis that the strategies embraced by IAASTD may pose a threat to U.S. economic interests—namely the large seed and agrochemical companies that the U.S. government believes should be beneficiaries of U.S. international development policies.

Thus the U.S. government’s failure to endorse IAASTD essentially says something more broadly about agricultural development: corporations’ agricultural approaches are incompatible with the equitable model of agriculture espoused by IAASTD.

The agricultural transformation needed today should be anchored by “food sovereignty”—the idea that local communities have control over their markets, their farming practices, and their nutritional adequacy. Locally-led agricultural innovations—relying on agro-ecology—should be at the forefront, rather than the technical approaches often propagated by multinationa corporations and the U.S. government. Beyond their inherent environmental sustainability, these local knowledge-based practices are more socially inclusive and pro-poor, in the sense that farmers aren’t dependent on external inputs. One recent effort to spotlight such small farmer-centered food systems can be seen in the Worldwatch Institute’s Nourishing the Planet Project, focused on sun-Saharan Africa.

“Part of my job with Nourishing the Planet has been to highlight the things that funders and donors don’t know about—the innovations that farmer organizations without fancy websites are doing to prevent soil erosion in Mali, the work being done by Prolinnova in Ethiopia to make sure water gets to crops, the market garden projects in Niger that have helped women boost their incomes from $300 per year to more than $1,500,” Danielle Nierenberg, co-director of the project, told me. “These innovations are overlooked and they have a lot of potential to be replicated and scaled up all over Africa and beyond into Asia, Latin America, and even the United States.”

The challenge now is to redirect agricultural investment away from merely increasing yields and toward the IAASTD report’s idea that agriculture has a wide array of objectives.

“One of the biggest things I learned is that agriculture and farmers are often blamed for things [such as] deforestation and climate change,” Nierenberg said. “I think we’re seeing this shift that agriculture is emerging as a solution to the world’s most pressing environmental and social challenges.”

The shift toward more pro-poor agriculture requires a fundamental rethinking of the neoliberal free market agenda that for decades has dominated the global food system. The result is that food systems are in some cases tailored more toward commodity production than toward guaranteeing food as a human right (this explains why some communities in Africa may export cocoa when they themselves are food insecure). Free market advocates assume that income generation will enable Africans to purchase food produced anywhere, and largely neglect the importance of food self-sufficiency. The fallacy inherent in this ideology came into sharp relief when the 2008 food price spike triggered riots in over 30 countries.

Indeed, the overemphasis on free market agriculture was embedded in European powers’ colonial structures in Africa, according to Macalester College geography professor Bill Moseley.

“The colonial powers in a sense changed local economies from ones largely based on subsistence or engaged in local regional trade, to ones that move away from subsistence production and start producing crops useful to the core powers,” Moseley said. “Related to this was the notion that colonies should be not a burden on imperial powers but be generating enough revenue to be self-sustaining. There was a big push for them to be more export-oriented.”

It appears that African countries’ subordination to Western powers, however, didn’t necessarily come to an end despite the dawn of independence. In response to the debt crisis plaguing many African countries in the 1980s, the World Bank and International Monetary Fund implemented structural adjustment programs, forcing African governments to slash their investments in the agriculture sector. “In theory governments had a choice, but if you wanted any access to international credit you had to adhere to this set of reforms—cutting back on government civil service, cuts to social services, and freer trade,” Moseley said.

The pitfalls of the structural adjustment programs have been acknowledged even by the World Bank itself. But at the same time, the ability for corporations such as Pepsi to legitimize their role in agricultural development suggests that the free market agenda underlying structural adjustment is still very much prevalent today.

That’s why we have to embrace a type of agriculture that suits the needs of the world’s poorest. This movement is going to have be bottom-up, led by African smallholder farmers who push their governments to make food a human right.