Caveat emptor: the Graduation Approach, electronic payments and the potential pitfalls of financial inclusion


By Paulo L dos Santos and Ingrid Harvold Kvangraven

The Graduation Approach to poverty reduction is inextricably bound up with programmes promoting financial inclusion. Proponents for the approach see it guiding a series of interventions that encourage poor households to ‘graduate’ into ‘mainstream development programmes’ which are centred on the provision of credit and other financial services (BRAC 2014). Indeed, the approach has been presented as a way to address the needs of those “too poor for microfinance services” (UNHCR 2014). The presumption is that the development and poverty reduction needs of ‘graduates’ will be well served by financial inclusion initiatives.Read More »

The Financialization of Africa’s Development


Financial development has gained prominence in Africa. Only with slight reservation around the regulatory environment, most country and regional studies of financial development paint a strikingly positive picture of its impact on growth, poverty and inequality. [i] This optimism with finance in Africa is corroborated with increase in financial flows, expansion of commercial bank branches, growth of regional banks, rise in microcredit institutions and success of mobile payment systems. [ii] However, poverty and inequality remain persistently high. There are more poor people in Africa today than in 1990, and 7 of the 10 most unequal countries in the world are in Africa. [iii] Hardly has any progress been made in addressing a most obstinate infrastructure gap unsettling the continent. In addition, Africa’s most recent average growth of 1.5 per cent is at its lowest in two decades. As such, the underscored belief in financial development as a driver of progress is exaggerated, since it seems to disregard the immediate needs of the people on the continent.

For these reasons, a growing body of literature now demonstrates wariness with the financial development narrative. An aspect of this literature reveals that the success story of microfinance in Africa is not quite what the proponents claim it to be. There is evidence of how the poor were plunged into a crisis of over-indebtedness in South Africa, through microfinance lending. By 2012, the country’s debt amounted to a staggering 75 per cent of disposable income. [iv] This experience contradicts the proposed poverty alleviating effects of microfinance. Like other forms of finance, its dominant motivation has been found to be profit seeking rather than poverty alleviation. Similar caution has been expressed about the celebrated rise of electronic payment systems,[v] prominent in Kenya, Nigeria and Uganda. Yet, more than just caution is needed to ensure that the proliferation of finance does not continue to wield detrimental effects on economic development in African countries.Read More »

How Racist Rhodesia Did It And ‘Independent’ Zimbabwe Is Getting It Wrong: Comparing Currency and Finance Under Sanctions

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Although Zimbabwe was the victorious outcome of a nationalist struggle against Rhodesia, there were significant continuities in the country’s economic structures in the first two decades of independence. The government exhibited limited commitment to land reform and economic indigenisation. Even though the ZANU PF government needed to be tactful not to upset historical structures of Zimbabwe’s economic inheritance, it needed to strike a delicate balance and undertake some form of transformation to maximise the country’s future prospects. However, limited progress was achieved in terms of economic transformation in the first twenty years of independence, resulting in political disaffection in the 1990s.

To retain political support at the turn of the twenty first century, the state undertook sudden and radical measures aimed at transforming the racial structure of the economy, resulting in the Fast Track Land Reform Programme. However, the racial undertone and process of this overdue exercise was problematic. Moreover, land reform did more than destabilise race relations. Although a steady decline had started in the early 1990s under the weight of the Economic Structural Adjustment Programme (ESAP), land reform prompted rapid economic collapse. The most visible symptom of this was inflation. With its Special Drawing Rights (SDR) suspended at the World Bank and with its government officials facing European Union and American sanctions, these challenges ushered in a deepening political and economic crisis. By comparison, Rhodesian history had also been characterised by political conflict and international sanctions between 1966 and 1979.Read More »

Using Minsky to Better Understand Economic Development – Part 2


The work of Hyman Minsky highlighted the essential role of finance in the capital development of an economy. The greater a nation’s reliance on debt relative to internal funds, the more “fragile” the economy becomes. The first part of this post used these insights to uncover the weaknesses of today’s global economy. This part will discuss an alternative international structure that could address these issues.Read More »

Using Minsky to Better Understand Economic Development – Part 1


This year the global system has seen two major shocks: Brexit, and Trump. What these events have in common is their populist rhetoric that promised to bring back jobs, while also making xenophobic statements. These elections have tapped into growing anxiety over job security, which has not been addressed by most governments and has given room for demagogues to tap into the anger of the people. They reflect a problem that transcends the boundaries of any single nation: the global economy has been in a slump for almost a decade. Governments need to create jobs, and public fiscal stimulus is the way to do so. To allow it, we must rethink that system.

To understand why we have to consider the international system in which nation states currently operate in. Its current characteristics present challenges for developed and developing economies alike. There are two important features to consider: first, the system creates a deflationary bias by requiring recessionary adjustments and hoarding of the international mean of payment (i.e. dollars). Second, it lacks mechanisms to offset the chronic surpluses and deficits between nations, thus breeding financial instability. In a nutshell, it leads to poor creation and distribution of demand that is managed through capital flows. Instead of propping up demand, the global economic system props up debt.

This post will be split into two parts. This first part will employ the theories of Hyman Minsky to explain the features of our current global economy. Next week, we will follow up to discuss  an alternative system that would allow for a better distribution of demand among countries and would support emerging economies’ development by freeing them from the swings of international markets.

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The Trouble with Sub-Saharan African Debt

By Aleksandr V. Gevorkyan and Ingrid Harvold Kvangraven

Over the past decade, the Sub-Saharan African countries’ ability to draw on new debt in international capital markets has become a central characteristic of their development experience. Yet, the determinants of their borrowing costs are driven by external factors where investor perception plays a key role. This raises concerns over the sustainability of the current development model.

In the mid-2000s, 30 African countries received substantial debt reduction through the International Monetary Fund (IMF) and World Bank’s Heavily-Indebted Poor Country (HIPC) Initiative. Only a decade later, many of the same countries are again facing debt distress. The African Development Bank recently warned its members of the dangers of rising debt obligations, while the IMF has called for an “urgent need to reset” the region’s growth policies.

In our new paper entitled “Assessing Recent Determinants of Borrowing Costs in Sub-Saharan Africa” in the November 2016 issue of the Review of Development Economics, we trace the latest round of borrowing back to 2006 with Seychelles as the first sub-Saharan African (SSA) country to issue a sovereign bond, with the exception of South Africa, in 30 years. Since then, DR Congo, Gabon, Ghana, Côte d’Ivoire, Senegal, Angola, Nigeria, Tanzania, Namibia, Rwanda, Kenya, Ethiopia and Zambia have all followed suit, accumulating over $25 billion worth of bonds, with a principal amount of more than $35 billion (see Figure 1 for totals by country).Read More »