Critics say developed countries have broken promises for international aid. Photo: UK Department for International Development (flickr)

With cause for concern about the future of international aid amid the financial crisis faced by rich countries, some developing nations find microfinance playing an increasing role in fueling local growth.

At last week's 4th High Level Forum on Aid Effectiveness in Busan, South Korea, powerful advocates including U.S. Secretary of State Hillary Clinton and U.N. Secretary-General Ban Ki-moon pressed for continued financial assistance from rich countries and better transparency for aid programs, according to the Washington Post.

But is "continued assistance" enough? Is it the kind of assistance that will lead to actual change? The European head of Oxfam International says the EU failed to take a leadership role at the summit, despite previous promises of aid allocation. Natalia Alonso says “donors are not on track to meet the Millennium Development Goals. In 2000, all rich countries recommitted to spend 0.7 percent of their national income as overseas aid by 2015, but a number of EU governments, such as Italy and Germany, are pretty far from this.” Oxfam found that amid the economic crisis, EU overall aid last year was just 0.43 percent of income, leaving a $65 billion shortfall to 56 poor countries.

It may signal more trouble for traditional international aid, the flow of cash or food aid transfers from richer to poorer countries. The economic crisis and criticisms of the summit leave the trajectory of aid in question.

As the world's wealth shifts to developing nations, some Western leaders want to be sure their aid is paying off. Former British Prime Minister Tony Blair wrote in a Washington Post opinion piece that “leaders of emerging economies must ensure that they are able to attract high-quality, sustainable investment.”

World Bank president Robert B. Zoellick also points to this shifting paradigm, stating that “the time has come to envision a world “beyond aid” – a world where the shift is from the paradigm of charity to one of mutual economic benefit.”

One way in which some developing countries are expanding local markets in the era of questionable international aid is through successful microfinance programs. While the long-term solvency of some forms of microfinance are in question, other examples point to successes engineered by both developing countries’ governments and private local banks.

Government funded cash-transfer programs in Mexico and Brazil have been recognized as quite effective at reducing poverty and spurring local market growth, The New York Times reports. These programs provide small infusions of capital to low-income residents for both entrepreneurial and cost-of-living expenses, feeding local economies. Indonesia’s state-owned Bank Rakyat has successfully demonstrated similar results in recent years through a mixed savings-credit model, according to Elisabeth Rhyne in her article, “Five countries where microfinance works,” for China Daily.

Rhyne also highlights Bolivia’s BancoSol, a for-profit bank dedicated to serving the poor that operates within a strict regulatory framework. Competition among similarly modeled microfinance banks has spurred growth with low interest rates in Bolivia. Cambodia and Mongolia are two countries where replication of the Bolivia model has allowed microfinance banks to be “market leaders and innovators,” according to Rhyne.

In Columbia, where 96 percent of businesses are small, demand for microfinance has grown fast in the years of the global financial crisis, according to IPS news. Microfinance in Columbia “grew at a steady rate of 15 percent between 2007 and 2010," states a Visión Económica study. Small companies fuel demand for microfinance because "they generally do not meet the requirements set by commercial banks,” Jorge Varón, the manager of the development credit fund of the Colombians Supporting Colombians (CAC) programme, told IPS. And in a country with so many small businesses fueling market growth, this is a divergent route from typical aid pathways.

The financial crisis hasn't killed international aid. But it has people talking about what's next. Microfinance looks like a big part of the answer.

Erik Mandell is a graduate of Middlebury College in Vermont. He is currently pursuing a master's degree in public administration and global leadership at Portland State. Read his other contributions to Global Envision.

Managing Director of the IMF Christine Lagarde meets China's Vice Premier Wang Qishan, Beijing, China. Photo: International Monetary Fund (flickr)

The global financial crisis has shaken up the international seating chart, and China may be vying for a better spot.

Though China was one of the International Monetary Fund’s original members, that invitation to the table didn’t mean it had a voice in the conversation. But last year, the World Bank and IMF both moved the country to third place. While the move changes the pecking order for Germany, the UK and France, traditional leaders, it matches China’s increasing position in the world economy with voting power.

Now, we wait to learn whether China will use its power to ease the Eurozone crisis. The IMF, typically the lender of last resort for sovereign states, needs more capital to provide the kind of liquidity Europe needs. China has that liquidity. In loaning to the IMF to play middleman, China can keep itself out of European politics, while keeping world economies - and important European trading partners - humming.

China’s funds would go far. Just last week, the New York Times reported, the IMF offered an additional short-term credit to “bystanders” - member nations feeling the “contagion" of regional and global default. One tool is a “precautionary and liquidity” credit line that would help countries approved by the Fund as having sound economic policies to meet short-term payments. The other new tool combines emergency disaster and post-conflict relief under a new rapid-financing instrument, which can now also be used after exogenous shocks like global financial crises.

The announcement immediately reversed earlier market slides the same day, showing the move boosted investor confidence, according to the Times. But if even a few countries take up the IMF on its offer, its account will soon run dry.

If that happens, China and its ocean of cash will be waiting. The country has shown signs that it’s at least willing to play, but it remains to be seen what rules it will follow. With Western economies looking increasingly desperate, China has the opportunity to play tough. Its decision could relieve the global economy, but it could also help put a new country at the head of the table.

Modern conflict reaches all parts of society. Photo: Cassandra Nelson/Mercy Corps

For developing countries, war is rarely "good for business." War can destroy what few possessions and opportunities the poor have, trapping them in an endless cycle of violence and economic misery. That's the idea driving the World Bank's new effort to fight poverty through conflict reduction.

Violence is becoming the primary cause of poverty, The Economist reports, citing information from the World Development Report. World Bank officials are calling for an international effort to break what is now being called the "violence trap" for 1.5 billion people in perpetual penury, rnw.nl reports.

The Economist specifically describes the experience of two small African states, Burundi and Burkina Faso. Pre-1990, the two countries had similar rates of growth and income, but in 1993 a bloody decade-long civil war began in Burundi, killing 600,000. Peaceful Burkina Faso is now 2.5 times richer.

All 39 countries experiencing civil wars since 2000 went through a previous civil war in the preceding three decades, The Economist writes—indicating a pattern of repeated violence. And wars are only one example of violence. Far more countries suffer from exceptionally high murder rates, political turbulence, organized crime, and low-intensity conflicts. In Guatemala, for example, more people are murdered annually (mostly by gangs) than died in the country's 1980s civil war. These cycles of political and criminal violence wreak havoc on poverty-reduction strategies. Comparing stable peaceful countries to their opposites found the latter suffered from:

• 20 percent higher poverty rates
• Twice the malnourishment rate
• Twice the infant mortality rate
• Three times the probability of a child's being out of school
• Far higher rates of forced displacement (42 million annually)

In fact, no poor, violent country has achieved a single millennium development goal, The Economist noted.

Escaping the violence trap is difficult because the economic damage caused by conflict sows the seeds of further upheaval. The Global Peace Index showed that economic factors are at the heart of unrest. According to a World Bank survey, 40 percent of youths join gangs and rebel groups due to unemployment, only 10 percent due to beliefs.

So, what's the answer?

The World Bank is focusing on government stability, legitimacy and effectiveness to break the violence trap. This reflects the reality that, as Reuters wrote in May, interstate conflict is decreasing while adverse relations between people and their governments (and chronic crime) is rising.

"Conflict [and] security are not conventional topics for the World Bank and other international development institutions," chief World Bank economist Justin Lin said in April, according to Agence France-Presse. "However, conflict and security are closely related to development."

A government deeply in debt is limited in it ability to implement public programs that would benefit the young and old by providing services such as education and health care. Photo: Matthew DeGalan/Mercy Corps

Recently, international creditors forgave almost $20 billion in foreign debt amassed by the Democratic Republic of the Congo. The debt was mostly accumulated under the former president, Mobutu Sese Seko, and is considered odious debt as the money was used for the President's personal amusement rather than for the benefit of the populace.

The timing of Congo's debt relief is fortuitous as the country's economy needs as much help as it can get. The country consistently lands near the bottom of the World Bank’s “Ease of Doing Business” rankings and is plagued by persistent internal conflict.

But maybe the DRC just got its big break: escaping the chains of debt may allow the country to take the first steps towards economic development and progress. The head of the central bank and monetary policy committee, Jean-Louis Kayembe wa Kayembe, certainly thinks so.

[The] cancellation of the debt which have a positive impact on central bank reserves and will also allow the state to create budgetary space...for the battle against poverty and for infrastructure, given a durable growth for the wellbeing of the population.

There are some concerns about corruption, governance and human rights abuses in the DRC. Critics argue that debt cancellation should have been used as leverage to encourage reform in the country. However, debt relief should allow for some improvements in the government's ability to implement more progressive and pro-poor policies.

Photo: James Pradhan/Mercy Corps

If you want to understand how to fight poverty, ask poor people what it means to be poor.

That philosophy underlies the new World Bank book Moving Out of Poverty in India: Empowerment and Democracy. The authors of the book collected the life stories of thousands of Indian villagers who have experienced poverty.

Among other findings, the authors found that aid agencies should stop looking at the total number of the poor as a diagnostic and start looking at the numbers of those entering and those leaving poverty.

The report’s core finding, as identified by the authors, is that aid agencies should not track the total number of poor as a measure for success. Instead, aid workers should focus on the number of people escaping poverty and the number of people descending into poverty. These separate processes drive the overall poverty level and their causes are different.

The study found that villagers frequently descend into poverty because events force them to sell off their assets. Villagers told tales of people falling sick, family members dying, education bills coming due, weddings — all of which required the selling off of precious land. With the loss of land, or other assets, the villagers were less well off, and less prepared for the next catastrophe.

Villagers often escape poverty because their family members are able to help them. Family support is essential because few report access to credit from the private or non-profit sector. Extending credit opportunities through building new microfinance programs, extending financial institutions into the rural sector, providing public sector jobs, or other means, can help those who lack wealthier family members.

The study found that focusing on the overall poverty level can lead aid workers to address the wrong problems. Using the overall rate as a measure for success in poverty reduction can also be misleading. A static overall rate can, for example, hide great changes in those becoming better off and those becoming worse off, which combined would cancel each other out and leave the net poverty level unchanged.

Photo: Atti-la (flickr)

Traditionally, government-sponsored social assistance programs usually follow a straightforward model of giving money to qualified citizens. But what if the programs asked for something in return?

Over the past decade, programs that offer funding to poor families based on certain conditions have sprung up all over the world, in countries like Brazil, Mexico, India, and Cambodia. These programs, called conditional cash transfers (CCTs), provide money to qualifying families only if the heads of household commit to certain requirements like sending their children to school or ensuring that their family members get regular health checkups.

According to a World Bank report released last week, CCTs have helped to reduce the number of families in poverty while increasing the rates of health clinic utilization and school attendance. Overall, this is good news. But the report also found that merely attending school or going for a checkup has not translated into better test scores, improved nutrition or more immunizations.

"To actually reduce child mortality or improve learning," the report says, "CCTs need to be complemented by higher-quality education and health services and a strong focus on giving children a head start, such as via better nutrition or preschool programs."

A new UN Food and Agriculture Organization report predicts that rising food prices will soon begin to slow. However the BBC decidedly reports that cheap food is a thing of the past:

[Food] prices will level off at a far higher average level than seen before the crisis erupted. The long era of cheap food is over.

The sharp rise in food prices over the past year have been felt all over the world but are particularly painful for the poor in developing countries. The World Bank recently estimated that higher food prices and food scarcity could force 100 million people to become impoverished. In response, The World Bank is allocating $1.2 billion for increased food aid. At least $200 million is designated for grants targeting "high risk" countries including Liberia, Haiti and Djibouti.

The World Bank has just published a statistical report on worldwide computer access and ownership, wondering, among other things, just how well developing countries are utilizing technological innovations. It found that

With [technology], labour and capital can be used and combined far more effectively. So it is good news that the bank finds that the use of modern technology in emerging economies is coming on in leaps and bounds.